AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 2003
REGISTRATION NO. 333-105134
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 4841 84-1288730
(State Or Other Jurisdiction Of (Primary Standard Industrial (I.R.S. Employer
Incorporation Or Organization) Classification Code Number) Identification No.)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(720) 875-5400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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CHARLES Y. TANABE, ESQ. MARC A. LEAF, ESQ.
LIBERTY MEDIA CORPORATION BAKER BOTTS L.L.P.
12300 LIBERTY BOULEVARD 30 ROCKEFELLER PLAZA
ENGLEWOOD, COLORADO 80112 NEW YORK, NEW YORK 10112
(720) 875-5400 (212) 408-2500
(Name, address, including zip code and (Name, address, including zip code and
telephone telephone
number, including area code, of agent for number, including area code, of agent for
service) service)
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement and upon the
effective time of the merger of a newly formed subsidiary of the registrant with
and into Ascent Media Group, Inc., a subsidiary of the registrant, which is
expected to occur on the twentieth business day following the mailing of the
notice/prospectus included in this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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AMETHYST MERGER SUB, INC.
NOTICE TO STOCKHOLDERS OF ASCENT MEDIA GROUP, INC.
OF AVAILABILITY OF APPRAISAL RIGHTS
---------------------
LIBERTY MEDIA CORPORATION
PROSPECTUS
We are sending you this notice/prospectus to describe the merger between
Ascent Media Group, Inc. ("Ascent"), a subsidiary of Liberty Media Corporation
("Liberty Media"), and Amethyst Merger Sub, Inc. ("Merger Sub"), a newly formed
subsidiary of Liberty Media. Unless indicated otherwise, as used in this notice/
prospectus, "we," "us" and "our" refer to Liberty Media. Ascent has not reviewed
or approved this notice/prospectus.
If we complete this merger, Merger Sub will be merged with and into Ascent
and, unless you validly exercise appraisal rights in accordance with Delaware
law, your shares of Ascent Class A common stock will be converted into shares of
Liberty Media Series A common stock. Pursuant to the merger, for each share of
Ascent Class A common stock you own at the effective time of the merger, you
will receive 0.1147 of a share of Liberty Media Series A common stock. We will
not issue fractional shares of Liberty Media common stock in the merger.
Instead, we will round the total number of shares of Liberty Media Series A
common stock you are entitled to receive down to the nearest whole number of
shares, and you will receive a cash payment for any fraction of a share to which
you would otherwise be entitled.
Liberty Media has authorized the merger of Merger Sub with and into Ascent
for the purpose of acquiring the minority interest in Ascent currently held by
the public. Delaware law generally permits the merger of a corporation and its
subsidiary, without a vote by the stockholders or board of directors of the
subsidiary, so long as the parent corporation owns at least 90% of each class of
the subsidiary's outstanding voting stock. As of the effective time of the
merger, Merger Sub will be the record holder of approximately 92% of the Ascent
Class A common stock outstanding and Ascent will not have any other class of
outstanding voting stock. Accordingly, no action by Ascent's board of directors
or stockholders will be necessary to complete the merger as described in this
notice/prospectus. WE ARE NOT ASKING YOU FOR A PROXY TO VOTE YOUR SHARES, AND
YOU ARE REQUESTED NOT TO SEND US A PROXY TO VOTE YOUR SHARES. We expect that the
merger will be completed on the 20th business day following the mailing of this
notice/prospectus.
This notice/prospectus is Liberty Media's prospectus for the shares of
Liberty Media Series A common stock that will be issued to Ascent stockholders
in the merger. It also constitutes a notice by Merger Sub to the stockholders of
Ascent as to the approval of the merger and the availability of appraisal rights
under Delaware law. Ascent Class A common stock trades on the Nasdaq National
Market under the symbol "AMGIA", and Liberty Media Series A common stock trades
on the New York Stock Exchange under the symbol "L". On May 23, 2003, the last
reported sale price for Ascent Class A common stock was $1.29, and the last
reported sale price for Liberty Media Series A common stock was $11.78.
PLEASE CONSIDER CAREFULLY ALL THE INFORMATION IN THIS NOTICE/PROSPECTUS
REGARDING ASCENT, LIBERTY MEDIA, THE MERGER AND THE AVAILABILITY OF AND
PROCEDURES FOR EXERCISING APPRAISAL RIGHTS, INCLUDING IN PARTICULAR THE
DISCUSSION UNDER THE HEADING "RISK FACTORS" ON PAGE 13.
As soon as practicable after completion of the merger, you will be provided
with appropriate documentation for exchanging your shares of Ascent Class A
common stock for shares of Liberty Media Series A common stock. PLEASE DO NOT
SEND ANY CERTIFICATES REPRESENTING SHARES OF ASCENT CLASS A COMMON STOCK AT THIS
TIME.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES OF LIBERTY MEDIA
SERIES A COMMON STOCK TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS
NOTICE/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This notice/prospectus is dated May 27, 2003, and is first expected to be
mailed to Ascent stockholders on or about June 3, 2003.
ADDITIONAL INFORMATION INCORPORATED BY REFERENCE
This notice/prospectus "incorporates by reference" important business and
financial information about Liberty Media and Ascent from documents that are not
included in or delivered with this notice/ prospectus. You may obtain documents
incorporated by reference in this notice/prospectus without charge by requesting
them in writing or by telephone from Liberty Media at the following address:
INVESTOR RELATIONS
LIBERTY MEDIA CORPORATION
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
TELEPHONE: (877) 772-1518
UNDER DELAWARE LAW, AN ASCENT STOCKHOLDER SEEKING TO EXERCISE APPRAISAL
RIGHTS MUST MAKE A WRITTEN DEMAND FOR APPRAISAL TO ASCENT WITHIN 20 DAYS AFTER
THE MAILING OF THIS NOTICE/PROSPECTUS. ACCORDINGLY, IF YOU WOULD LIKE TO REQUEST
DOCUMENTS INCORPORATED BY REFERENCE IN THIS NOTICE/PROSPECTUS, YOU SHOULD MAKE
YOUR REQUEST FOR DOCUMENTS BY JUNE 16, 2003, TO BE SURE OF OBTAINING SUCH
DOCUMENTS BEFORE THE DEADLINE FOR DEMANDING APPRAISAL. For a more detailed
description of the information incorporated by reference into this
notice/prospectus and how you may obtain it, see the section entitled "Where You
Can Find More Information" of this notice/prospectus on page 11.
NOTICE/PROSPECTUS ACCOMPANIED BY ASCENT'S
LATEST ANNUAL AND QUARTERLY REPORTS
The Annual Report on Form 10-K of Ascent Media Group, Inc. for the year
ended December 31, 2002, as filed with the Securities and Exchange Commission on
March 27, 2003 ("Ascent's Annual Report"), Ascent's latest Form 10-K and the
Quarterly Report on Form 10-Q of Ascent Media Group, Inc. for the three months
ended March 31, 2003, as filed with the Securities and Exchange Commission on
May 15, 2003 ("Ascent's Quarterly Report"), Ascent's latest Form 10-Q, accompany
this notice/ prospectus as Annex B and Annex C, respectively.
ii
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY OF THE MERGER....................................... 3
SELECTED SUMMARY FINANCIAL INFORMATION...................... 7
WHERE YOU CAN FIND MORE INFORMATION......................... 11
RISK FACTORS................................................ 13
Factors Relating to the Merger............................ 13
Factors Relating to Liberty Media......................... 13
Factors Relating to our Series A Common Stock............. 18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 19
THE COMPANIES INVOLVED IN THE MERGER........................ 20
Liberty Media Corporation................................. 20
Ascent Media Group, Inc. ................................. 20
CERTAIN TRANSACTIONS BETWEEN LIBERTY MEDIA AND ASCENT....... 22
THE MERGER.................................................. 28
Background of the Merger.................................. 28
Previous Inquiries Received by Liberty Media Regarding
Ascent................................................. 30
Reasons for and Purpose of the Merger..................... 31
Conflict of Interest of Liberty Media..................... 31
Interests of Directors and Officers....................... 32
Structure of the Merger; Merger Consideration............. 32
Exchange of Ascent Stock Certificates for Shares of
Liberty Media Series A Common Stock.................... 33
Treatment of Ascent Stock Options and Warrant............. 34
Accounting Treatment...................................... 34
Material U.S. Federal Income Tax Consequences............. 34
Regulatory Matters........................................ 35
Restrictions on Sales of Shares by Affiliates of Ascent
and Liberty Media...................................... 35
Listing on the New York Stock Exchange.................... 35
Appraisal Rights.......................................... 36
Delisting and Deregistration of Ascent Common Stock After
the Merger............................................. 38
COMPARISON OF STOCKHOLDER RIGHTS............................ 38
EXPERTS..................................................... 40
LEGAL MATTERS............................................... 41
ANNEX A -- Section 262 of the Delaware General Corporation
Law ("Appraisal Rights")
ANNEX B -- Annual Report on Form 10-K of Ascent Media Group,
Inc. for the year ended December 31, 2002, as
filed on March 27, 2003
ANNEX C -- Quarterly Report on Form 10-Q of Ascent Media
Group, Inc. for the three months ended March 31,
2003, as filed on May 15, 2003
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE MERGER?
A: The merger is the merger of Merger Sub, a newly formed indirect wholly owned
subsidiary of Liberty Media, with and into Ascent, also a subsidiary of
Liberty Media. Ascent will be the surviving corporation in the merger and
will become an indirect wholly owned subsidiary of Liberty Media. As a
result, stockholders of Ascent who do not properly exercise appraisal rights
will have their shares of Ascent Class A common stock converted into shares
of Liberty Media Series A common stock.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Following the consummation of the merger, you will receive 0.1147 of a share
of Liberty Media Series A common stock in exchange for each share of Ascent
Class A common stock that you hold on the effective date of the merger,
unless you properly exercise your appraisal rights. We will not issue
fractional shares of Liberty Media common stock in the merger. Instead, we
will round the total number of shares of Liberty Media Series A common stock
you are entitled to receive down to the nearest whole number of shares, and
you will receive a cash payment for any fraction of a share to which you
would otherwise be entitled.
If you want to seek appraisal rights, see below "Q: Am I entitled to
appraisal rights?"
Q: WILL THE EXCHANGE RATIO OR THE VALUE OF THE SHARES I RECEIVE CHANGE BETWEEN
NOW AND THE TIME THE MERGER IS CONSUMMATED?
A: The exchange ratio (which affects the number of shares you will receive)
will not change. The market value of the shares you receive may fluctuate
between the date of this notice/prospectus and the completion of the merger,
based upon changes in the market price for Liberty Media Series A common
stock.
Q: WILL I RECOGNIZE A TAXABLE GAIN OR LOSS FOR U.S. FEDERAL INCOME TAX PURPOSES
IN THE MERGER?
A: Yes. The merger is intended to be a taxable transaction and, for U.S.
federal income tax purposes, will generally be treated as a sale of your
shares of Ascent Class A common stock in exchange for the consideration you
receive in the merger, valued as of the date of the merger. For a more
complete description of the tax consequences of the merger, see the section
entitled "The Merger -- Material U.S. Federal Income Tax Consequences" of
this notice/prospectus on page 34.
Q: WHAT IS THE PURPOSE OF THE MERGER?
A: The purpose of the merger is for Liberty Media to acquire, through an
indirect wholly owned subsidiary of Liberty Media, all of the outstanding
shares of capital stock of Ascent that are not already owned by Liberty
Media and its wholly owned subsidiaries.
Q: WHY IS THERE NO STOCKHOLDER VOTE?
A: Liberty Media beneficially owns (and Merger Sub holds directly of record)
more than 90% of the outstanding common stock of Ascent. Under such
circumstances, Delaware law permits Merger Sub to effect the merger with
Ascent without any action by Ascent's board of directors or any vote by the
stockholders of Ascent. This is called a "short form merger." Liberty Media,
Merger Sub and certain other subsidiaries of Liberty Media have entered into
an agreement that provides for Merger Sub to be merged with and into Ascent
pursuant to a short form merger under Delaware law. Delaware law governs the
merger because both Ascent and Merger Sub are Delaware corporations.
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Under Delaware law, which governs the merger, you have the right to
seek appraisal of your Ascent Class A common stock. In order to exercise
appraisal rights, you must, within twenty days after the date of mailing
this notice/prospectus, demand in writing from Ascent appraisal of your
shares of Ascent Class A common stock. Your right to seek appraisal requires
strict compliance with the procedures contained in Section 262 of the
Delaware corporate statute. Failure to follow any of these procedures may
result in
1
the termination or waiver of your appraisal rights. The mailing date of this
notice/ prospectus is stated on the front cover page. See the section
entitled "The Merger -- Appraisal Rights" of this notice/prospectus.
Q: WHAT DO I NEED TO DO NOW?
A: Nothing, unless you intend to seek appraisal of your shares of Ascent Class
A common stock. Otherwise, after the merger is completed, you will receive
written instructions and a letter of transmittal for exchanging your shares
of Ascent Class A common stock for shares of Liberty Media Series A common
stock and receiving your cash payment in place of any fraction of a share of
Liberty Media Series A common stock. If you want to exercise your appraisal
rights, see above "Q: Am I entitled to appraisal rights?"
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. As soon as practicable after the merger is completed, Liberty Media will
send Ascent stockholders written instructions for surrendering their share
certificates in exchange for the merger consideration to which they are
entitled, together with a letter of transmittal for such certificates.
Q: WILL I HAVE TO PAY ANY FEES OR COMMISSIONS?
A: If you are the record owner of your shares, you will not have to pay
brokerage fees or incur similar expenses. If you own your shares through a
broker or other nominee, your broker may charge you a fee. You should
consult your broker or nominee to determine whether any charges will apply.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: You should call our information agent, D.F. King & Co., at (800) 628-8532
with any questions about the merger.
You may also obtain additional information about Liberty Media from
documents filed with the Securities and Exchange Commission by following the
instructions in the section entitled "Where You Can Find More Information"
of this notice/prospectus on page 11.
2
SUMMARY OF THE MERGER
This summary highlights selected information from this notice/prospectus
and may not contain all the information that is important to you. To better
understand the merger, you should read this entire document carefully, including
the documents to which we refer you. In addition, we incorporate by reference in
this notice/prospectus important business and financial information about
Liberty Media and Ascent. You may obtain the information incorporated by
reference into this notice/prospectus without charge by following the
instructions in the section entitled "Where You Can Find More Information" of
this notice/prospectus on page 11.
THE COMPANIES (SEE PAGE 20)
ASCENT MEDIA GROUP, INC.
520 BROADWAY, FIFTH FLOOR
SANTA MONICA, CALIFORNIA 90401
TEL: (310) 434-7000
Ascent provides technical and creative services to the entertainment industry.
Ascent's 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 content. Ascent's
assets and operations are primarily comprised of ten companies acquired during
2001 and 2000. The combination and integration of these acquired entities allow
Ascent to offer its clients a complete range of services, from image capture to
"last mile" distribution. Ascent offers outsourcing solutions for the technical
and creative requirements of its clients.
LIBERTY MEDIA CORPORATION
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
TEL: (720) 875-5400
Liberty Media owns interests in a broad range of video programming, broadband
distribution, interactive technology services and communications businesses.
Liberty Media and its affiliated companies operate in the United States, Europe,
South America and Asia. Liberty Media's principal assets include interests in
Starz Encore Group LLC, Ascent, On Command Corporation, Discovery
Communications, Inc., UnitedGlobalCom, Inc., Jupiter Telecommunications Co.,
Ltd., QVC, Inc., Court Television Network, Game Show Network, AOL Time Warner
Inc., USA Interactive, Sprint PCS Group and The News Corporation Limited.
THE MERGER (SEE PAGE 28)
The merger will be effective on the filing of a certificate of ownership and
merger in Delaware, which is expected to occur on the 20th business day
following the mailing of this notice/prospectus. However, Liberty Media may
elect not to proceed with the merger at any time prior to the filing of the
certificate of ownership and merger if it determines that the merger is no
longer in its best interests. Unless you validly exercise your appraisal rights,
each share of Ascent Class A common stock you own will be converted into 0.1147
of a share of Liberty Media Series A common stock. We will not issue fractional
shares of Liberty Media common stock in the merger. Instead, we will round the
total number of shares of Liberty Media Series A common stock you are entitled
to receive down to the nearest whole number of shares, and you will receive a
cash payment for any fraction of a share to which you would otherwise be
entitled. In connection with the merger, a total of approximately 1,456,285
shares of Liberty Media Series A common stock will be issued or issuable in
exchange for outstanding shares of Ascent Class A common stock and upon exercise
of options and a warrant to acquire shares of Ascent Class A common stock
outstanding at the time of the merger.
You will receive detailed instructions regarding the surrender of your stock
certificates from Liberty Media's transfer agent, EquiServe Trust Company, N.A.,
promptly following the effective date of the merger. As soon as practicable
after the transfer agent receives your Ascent stock certificates and other
required documents, you will receive statements indicating book-entry ownership
of Liberty Media Series A common stock and directions as to how you may obtain
stock certificates representing such shares. Please do not send any stock
certificates to Ascent or Liberty Media or the exchange agent until you receive
these instructions.
FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 34)
The receipt of Liberty Media Series A common stock and any cash in lieu of a
fractional share of
3
Liberty Media Series A common stock in exchange for Ascent Class A common stock
in the merger will be a taxable transaction for U.S. federal income tax
purposes. In general, you will recognize capital gain or loss in an amount equal
to the difference between (i) the sum of the fair market value of the Liberty
Media Series A common stock received and the amount of cash received and (ii)
your tax basis in the Ascent Class A common stock exchanged in the merger. This
capital gain or loss will be long-term capital gain or loss if you held the
Ascent Class A common stock for more than one year as of the date of the merger.
Your holding period in the Liberty Media Series A common stock received in the
merger will begin on the day after the date of the merger. You should consult
your own tax advisor for a full understanding of the merger's tax consequences
to you. Please read the section entitled "The Merger -- Material U.S. Federal
Income Tax Consequences" of this notice/prospectus for further discussion of the
tax consequences of the merger.
NO ASCENT STOCKHOLDER APPROVAL REQUIRED (SEE PAGE 28)
We are not asking you to vote on the merger. The board of directors of Liberty
Media has approved a plan to acquire the minority interest in Ascent held by the
public. Liberty Media intends to acquire this minority interest by merging its
indirect wholly owned subsidiary, Merger Sub, with and into Ascent. In
anticipation of the merger, Liberty Media caused Merger Sub to hold directly of
record more than 90% of the outstanding common stock of Ascent. Because Merger
Sub will own at least 90% of the common stock of Ascent outstanding at the time
of the merger, the resolution of the board of directors of Merger Sub and the
consent of Merger Sub's sole stockholder will be sufficient to authorize the
merger under Delaware law, and no vote of the stockholders of Ascent will be
required.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS OF ASCENT (SEE PAGE 36)
Delaware law permits you to have the "fair value" of your shares of Ascent Class
A common stock determined by a court and paid to you in cash rather than
accepting the consideration you would otherwise receive in the merger. This
value may be more or less than the market value of the 0.1147 of a share of
Liberty Media Series A common stock issuable for each share of Ascent Class A
common stock in the merger. See the section entitled "The Merger -- Appraisal
Rights" of this notice/prospectus.
If you wish to exercise appraisal rights and obtain appraisal of the fair value
of your shares, you must demand in writing from Ascent appraisal of your shares
of Ascent Class A common stock within twenty days after the date of mailing this
notice/prospectus. The relevant provisions of Delaware law concerning the
exercise of appraisal rights are technical in nature and complex. You may wish
to consult promptly with legal counsel because the failure to comply strictly
with these provisions may result in waiver or forfeiture of your appraisal
rights.
EFFECT OF THE MERGER ON ASCENT STOCK OPTIONS AND WARRANT (SEE PAGE 34)
Liberty Media will assume outstanding stock options issued under the Ascent
(f/k/a Liberty Livewire Corporation) 2001 Incentive Plan, the 2000 Nonemployee
Director Stock Option Plan of Ascent (f/k/a Liberty Livewire Corporation) and
other stock options not issued under those plans, and the warrant issued to
ACTV, Inc., in each case with respect to Ascent Class A common stock, on the
effective date of the merger. Assumed stock options and the warrant will be
exercisable with respect to the number of shares of Liberty Media Series A
common stock determined by multiplying the number of underlying shares of Ascent
Class A common stock on the effective date of the merger by the 0.1147 exchange
ratio, rounded up to the nearest whole share. The exercise price per share of
Liberty Media Series A common stock issuable under each assumed option and the
warrant will be calculated by dividing the exercise price of such option or
warrant before the merger by the exchange ratio, rounded down to the nearest
whole cent.
REASONS FOR AND PURPOSE OF THE MERGER (SEE PAGE 31)
The purpose of the merger is to acquire the publicly held minority interest in
Ascent. In deciding to undertake the merger, which will result in Ascent ceasing
to be a public company,
4
Liberty Media considered the following factors, among others:
- Ascent's need for additional capital resources to develop its business;
- the trading price volatility of Ascent common stock caused, in part, by its
limited public float;
- recent capital market trends, which have adversely affected the ability of
companies situated similarly to Ascent to access capital;
- the costs associated with operating Ascent as a separate public company,
including costs and expenses associated with Securities and Exchange
Commission reporting, communicating with stockholders and related legal and
accounting fees, which Liberty Media anticipates could result in savings of
approximately $2 million per year, if eliminated;
- challenging economic conditions impacting film and television post production,
sluggishness in the advertising market reducing television advertising
production spending and lower spending from larger clients for traditional
media services;
- Ascent's outstanding debt, including Ascent's greater cost of borrowing as
compared to Liberty Media's and the restrictive covenants contained in
Ascent's debt agreements; and
- the impact on Liberty Media's own common stock of the issuance of Liberty
Media shares to Ascent's stockholders.
CONDITIONS TO THE MERGER (SEE PAGE 33)
Although Liberty Media is under no obligation to complete the merger, it is
expected that the merger will be effected on the 20th business day following the
mailing of this notice/prospectus. In addition, the merger is subject to certain
customary closing conditions, including:
- Merger Sub must own directly of record at least 90% of the common stock
outstanding of Ascent;
- the continued effectiveness of the registration statement of which this
notice/prospectus forms a part; and
- the shares of Liberty Media Series A common stock that will be issued in the
merger must be authorized for listing on the New York Stock Exchange, subject
only to official notice of issuance.
CONFLICT OF INTEREST OF LIBERTY MEDIA (SEE PAGE 31)
In setting the exchange ratio, Liberty Media's financial interest was adverse to
the interest of the public stockholders of Ascent. Liberty Media determined the
exchange ratio without negotiating with Ascent and makes no representation or
warranty in this notice/prospectus as to the fairness or adequacy of the
consideration to be paid in the merger. Under Delaware law, which governs the
merger, you have the right to seek appraisal of the "fair value" of your Ascent
shares and receive cash instead of the consideration you would otherwise receive
in the merger. See the section entitled "The Merger -- Appraisal Rights" of this
notice/prospectus for a description of the appraisal process.
INTERESTS OF DIRECTORS AND OFFICERS (SEE PAGE 32)
You should be aware that some officers and directors of Ascent have interests in
the merger that are different from, or in addition to, yours. These interests
include:
- ownership of Liberty Media common stock and options to acquire Liberty Media
common stock; and
- indemnification obligations between Ascent and its directors and officers.
In addition, some of the officers and directors of Liberty Media and/or Merger
Sub are also officers and directors of Ascent and have interests that are in
addition to, or different from, your interests.
ACCOUNTING TREATMENT (SEE PAGE 34)
The merger, if completed, will be accounted for as a "purchase" of a minority
interest, as such term is used under accounting principles generally accepted in
the United States of America, for accounting and financial reporting purposes.
FEDERAL AND STATE REGULATORY REQUIREMENTS (SEE PAGE 35)
Except for filing a certificate of ownership and merger in Delaware and
compliance with federal and state securities laws, Liberty Media is not aware of
any material United States federal or state or foreign governmental regulatory
requirement necessary to be complied with, or approval that must be obtained, in
connection with the merger.
5
RESTRICTIONS ON THE ABILITY TO SELL LIBERTY MEDIA SERIES A COMMON STOCK (SEE
PAGE 35)
All shares of Liberty Media Series A common stock received by you in connection
with the merger will be freely transferable unless you are considered an
"affiliate" of Ascent under the Securities Act of 1933 at the time of the
transaction or you are an affiliate of Liberty Media. If you are an affiliate of
Ascent, then you may transfer your shares only pursuant to an effective
registration statement or an exemption under the Securities Act. This
restriction will generally lapse at the end of one year unless you are an
affiliate of Liberty Media.
DIFFERENCES BETWEEN YOUR RIGHTS AS AN ASCENT STOCKHOLDER AND AS A LIBERTY MEDIA
STOCKHOLDER (SEE PAGE 38)
There are differences between the rights you have as a holder of Ascent Class A
common stock and the rights you will have as a holder of Liberty Media Series A
common stock. For a description of these differences, see the section entitled
"Comparison of Stockholder Rights" of this notice/prospectus.
6
SELECTED SUMMARY FINANCIAL INFORMATION
LIBERTY MEDIA
The following table provides you with selected historical consolidated
financial data of Liberty Media. From August 1994 to March 1999 Liberty Media
was a wholly owned subsidiary of Tele-Communications, Inc. ("TCI"). On March 9,
1999, AT&T Corp. ("AT&T") acquired TCI in a merger transaction and changed TCI's
name to AT&T Broadband. For financial reporting purposes, the merger of AT&T and
TCI is deemed to have occurred on March 1, 1999. In connection with that merger,
the assets and liabilities of Liberty Media were adjusted to their respective
fair values pursuant to the purchase method of accounting. For periods prior to
March 1, 1999, the assets and liabilities of Liberty Media and the related
consolidated results of operations are referred to below as "Old Liberty," and
for periods subsequent to February 28, 1999, the assets and liabilities of
Liberty Media and the related consolidated results of operations are referred to
as "New Liberty." Also, in connection with that merger, TCI effected an internal
restructuring as a result of which certain net assets and approximately $5.5
billion in cash were contributed to Liberty Media. On August 10, 2001, AT&T
effected a split-off of Liberty Media and, as a result of that transaction,
Liberty Media is no longer a subsidiary of AT&T. We derived the historical
consolidated financial data from our consolidated financial statements. It is
important that when you read this information, you read along with it the
consolidated financial statements and accompanying notes of Liberty Media
incorporated by reference into this notice/prospectus. For a list of documents
incorporated by reference into this notice/prospectus, see the section entitled
"Where You Can Find More Information" of this notice/prospectus on page 11.
NEW LIBERTY OLD LIBERTY
------------------------------------------------ ------------
DECEMBER 31
MARCH 31, ---------------------------------- DECEMBER 31,
2003 2002 2001 2000 1999 1998
----------- ------- ------ ------ ------ ------------
(UNAUDITED)
(AMOUNTS IN MILLIONS)
SUMMARY BALANCE SHEET DATA :
Investments in affiliates................ $ 7,835 7,390 10,076 20,464 15,922 3,079
Investments in available-for-sale
securities and other cost
investments............................ $13,666 14,369 21,152 16,774 27,906 10,539
Total assets............................. $40,713 39,685 48,539 54,268 58,658 15,783
Long-term debt........................... $ 5,478 4,316 4,764 5,269 2,723 1,912
Stockholders' equity..................... $24,459 24,682 30,123 34,109 38,408 8,820
NEW LIBERTY OLD LIBERTY
-------------------------------------------------------------------- ---------------------------
THREE MONTHS ENDED TEN MONTHS TWO MONTHS
MARCH 31, YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
------------------------- ------------------------- DECEMBER 31, FEBRUARY 28, DECEMBER 31,
2003 2002 2002 2001 2000 1999 1999 1998
----------- ----------- ------- ------ ------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue.................... $505 513 2,084 2,059 1,526 729 235 1,359
Operating income
(loss)(1)................ $ 10 52 (184) (1,127) 436 (2,214) (158) (431)
Share of earnings (losses)
of affiliates, net(2).... $ 31 (394) (453) (4,906) (3,485) (904) (66) (1,002)
Nontemporary declines in
fair value of
investments.............. $(21) -- (6,053) (4,101) (1,463) -- -- --
Realized and unrealized
gains (losses) on
derivative instruments,
net...................... $188 756 2,122 (174) 223 (153) -- --
Gains (losses) on
dispositions, net........ $ 70 120 (415) (310) 7,340 4 14 2,449
Net earnings
(loss)(1)(2)............. $132 (1,563) (5,330) (6,203) 1,485 (2,021) (70) 622
Basic and diluted net
earnings (loss) per
common share(3).......... $.05 (.60) (2.06) (2.40) .57 (.78) (.03) .24
7
---------------
(1) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill And Other Intangible Assets ("Statement 142"),
which among other matters, provides that goodwill and other indefinite-lived
assets no longer be amortized. Amortization expense for such assets
aggregated $627 million, $598 million and $438 million for the years ended
December 31, 2001 and 2000 and the ten months ended December 31, 1999,
respectively, and was not significant in prior periods.
(2) Included in share of losses of affiliates are other-than-temporary declines
in value aggregating $148 million, $2,396 million and $1,324 million for the
years ended December 31, 2002, 2001 and 2000, respectively. In addition,
share of losses of affiliates includes excess basis amortization of $798
million, $1,058 million and $463 million for the years ended December 31,
2001, 2000 and the ten months ended December 31, 1999, respectively.
Pursuant to Statement 142, excess costs that are considered equity method
goodwill are no longer amortized, but are evaluated for impairment under APB
Opinion No. 18.
(3) The basic and diluted net earnings (loss) per common share for periods prior
to our split off from AT&T is based upon 2,588 million shares of our Series
A and Series B common stock issued upon consummation of the split off.
ASCENT
The following table provides you with selected historical consolidated
financial data of Ascent, formerly known as Liberty Livewire Corporation
("Liberty Livewire"), and The Todd-AO Corporation ("Todd-AO"). A predecessor of
Liberty Livewire was incorporated as a wholly owned subsidiary of Liberty Media
for the purpose of acquiring Todd-AO. That predecessor merged with and into
Todd-AO on June 9, 2000 (the "Todd Merger"), in a transaction accounted for as a
purchase. The financial data in the following table is derived from the
consolidated financial statements of Ascent. It is important that you read this
information along with the consolidated financial statements and accompanying
notes of Ascent contained in Ascent's Annual Report accompanying this
notice/prospectus as Annex B and Ascent's Quarterly Report accompanying this
notice/prospectus as Annex C, and in the documents incorporated by reference
into this notice/prospectus. For a list of documents incorporated by reference
into this notice/prospectus, see the section entitled "Where You Can Find More
Information" of this notice/prospectus on page 11. The financial data for the
seven months ended December 31, 2000, and thereafter represent the financial
data of Ascent after giving effect to the Todd Merger. For financial statement
purposes, Todd Merger is deemed to have occurred on June 1, 2000. See Note 1 to
the Consolidated Financial Statements of Ascent.
ASCENT TODD-AO
---------------------------------------------------------------------- ------------
THREE MONTHS ENDED SEVEN FIVE
MARCH 31, YEAR ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2003 2002 2002 2001 2001 2000
----------- ----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues...................... $121,439 135,383 539,333 592,732 253,099 53,243
Net income (loss)................. $ (9,339) (26,366) (135,186) (436,289) (9,793) (1,675)
Income (loss) per share of common
stock:
Basic............................. $ (0.16) (0.66) (3.07) (11.52) (0.28) (0.16)
Diluted........................... $ (0.16) (0.66) (3.07) (11.52) (0.28) (0.16)
Total assets...................... $772,981 -- 793,326 919,691 1,175,845 159,448
Long-term debt and capital lease
obligations...................... $380,704 -- 588,355 608,241 492,573 61,210
Cash dividends per share:
Class A........................... $ -- -- -- -- -- --
Class B........................... $ -- -- -- -- -- --
Weighted average shares
outstanding:
Basic............................. 56,635,541 39,742,265 43,971,836 37,858,123 34,463,373 10,768,773
Diluted........................... 56,635,541 39,742,265 43,971,836 37,858,123 34,463,373 10,768,773
TODD-AO
--------------------------------------
FOUR YEAR YEAR
MONTHS ENDED ENDED ENDED
DECEMBER 31, AUGUST 31, AUGUST 31,
1999 1999 1998
------------ ---------- ----------
Net revenues...................... 43,261 118,517 102,614
Net income (loss)................. 449 1,313 3,419
Income (loss) per share of common
stock:
Basic............................. 0.05 0.14 0.34
Diluted........................... 0.04 0.13 0.33
Total assets...................... 162,004 153,180 135,366
Long-term debt and capital lease
obligations...................... 65,866 65,520 44,654
Cash dividends per share:
Class A........................... -- 0.05 0.06
Class B........................... -- 0.04 0.05
Weighted average shares
outstanding:
Basic............................. 9,927,077 9,570,187 9,987,429
Diluted........................... 10,656,340 9,832,614 11,218,051
8
UNAUDITED COMPARATIVE PER SHARE DATA
The table below provides you with Liberty Media's and Ascent's historical
per share information as of and for the three months ended March 31, 2003 and
for the year ended December 31, 2002. The column labeled "Ascent Pro Forma
Equivalent" presents the per share data set forth in the column labeled "Liberty
Media Pro Forma" multiplied by the exchange ratio of 0.1147. It is important
that when you read this information, you read along with it the consolidated
financial statements and accompanying notes of Liberty Media incorporated by
reference into this notice/prospectus. It is also important that when you read
this information, you read along with it the consolidated financial statements
and accompanying notes of Ascent contained in Ascent's Annual Report
accompanying this notice/prospectus and Ascent's Quarterly Report accompanying
this notice/prospectus, and in the documents of Ascent incorporated by reference
into this notice/prospectus.
ASCENT LIBERTY MEDIA ASCENT PRO
LIBERTY MEDIA HISTORICAL PRO FORMA FORMA EQUIVALENT(4)
------------- ---------- ------------- -------------------
Book value per common share as of March
31, 2003.............................. $ 9.11 $ 1.02 $ 9.11(1) $ 1.04
Book value per common share as of
December 31, 2002..................... $ 9.18 $ 1.19 $ 9.18(2) $ 1.05
Basic and diluted earnings (loss)
attributable to common shareholders
per common share for the three months
ended March 31, 2003.................. $ .05 $ (.16) $ .05(3) $ .01
Basic and diluted loss attributable to
common shareholders per common share
for the year ended December 31,
2002.................................. $(2.06) $(3.07) $(2.06)(3) $ (.24)
---------------
(1) The pro forma book value per common share is based upon 2,474 million shares
of Liberty Media Series A common stock and 212 million shares of Liberty
Media Series B common stock. Such amounts represent the number of shares
that would have been outstanding if the merger of Ascent and Merger Sub had
been completed on March 31, 2003.
(2) The pro forma book value per common share is based upon 2,478 million shares
of Liberty Media Series A common stock and 212 million shares of Liberty
Media Series B common stock. Such amounts represent the number of shares
that would have been outstanding if the merger of Ascent and Merger Sub had
been completed on December 31, 2002.
(3) The pro forma net earnings (loss) per share is based upon 2,690 million and
2,591 million weighted average shares outstanding for the three months ended
March 31, 2003 and for the year ended December 31, 2002, respectively. Such
amounts represent the number of weighted average shares that would have been
outstanding if the merger of Ascent and Merger Sub had been completed on
January 1, 2002.
(4) The Ascent pro forma equivalents have been determined by multiplying the
Liberty Media pro forma amounts by the exchange ratio of 0.1147 of a share
of Liberty Media Series A common stock for each shares of Ascent Class A
common stock outstanding.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Shares of Ascent Class A common stock are traded on the Nasdaq National
Market. Shares of Liberty Media Series A common stock are listed on the New York
Stock Exchange. Public trading of Liberty Media Series A common stock commenced
on August 10, 2001, the date of Liberty Media's split off from AT&T, under the
symbol "LMC.A". On January 2, 2002, the trading symbol for the Liberty Media
Series A common stock on the New York Stock Exchange was changed to "L". Prior
to June 9, 2000, when Ascent, then known as The Todd-AO Corporation, was
acquired by Liberty Media in a merger and had its name changed to Liberty
Livewire Corporation, Ascent Class A common stock was traded publicly on the
Nasdaq National Market under the symbol "TODDA". On June 9, 2000, the trading
9
symbol for Ascent Class A common stock on the Nasdaq National Market was changed
to "LWIRA", and on November 20, 2002, the trading symbol for Ascent Class A
common stock on the Nasdaq National Market was changed to "AMGIA". No trading
market exists for Ascent Class B common stock.
The following table sets forth, for the fiscal quarters indicated, the high
and low sale prices for a share of:
- Ascent Class A common stock, as reported on the Nasdaq National Market;
and
- Liberty Media Series A common stock, as reported on the New York Stock
Exchange Composite Transaction Tape.
ASCENT
CLASS A LIBERTY MEDIA
COMMON STOCK SERIES A COMMON STOCK
------------ ---------------------
HIGH LOW HIGH LOW
----- ---- ------ ------
Year Ended December 31, 2002
First Quarter................................... $7.60 5.56 15.03 11.90
Second Quarter.................................. $6.00 2.63 12.80 7.70
Third Quarter................................... $3.15 1.33 9.60 6.16
Fourth Quarter.................................. $3.74 0.87 10.75 6.29
Year Ended December 31, 2003
First Quarter................................... $1.86 0.83 10.38 8.45
Second Quarter (through May 23, 2003)........... $1.37 0.99 11.79 9.52
Liberty Media's fiscal year ends on December 31 of each year, and Ascent's
fiscal year ends on December 31 of each year. Cash dividends have never been
paid with respect to Liberty Media Series A common stock. It is the current
intention of Liberty Media to retain future earnings to finance operations and
expand its business. Liberty Media does not anticipate paying any dividends on
its common stock in the foreseeable future.
The following table sets forth the closing prices per share of Ascent Class
A common stock as reported on the Nasdaq National Market, and the closing prices
per share of Liberty Media Series A common stock as reported on the New York
Stock Exchange Composite Transaction Tape, on:
- April 25, 2003, the last full trading day prior to the public
announcement of the merger; and
- May 23, 2003, the last full trading day for which closing prices were
available prior to the printing of this notice/prospectus.
The table also presents, under the heading "Equivalent Per Share Price," an
amount equal to the closing price of a share of Liberty Media Series A common
stock on the applicable date multiplied by 0.1147, which is the fraction of a
share of Liberty Media Series A common stock to be issued in the merger for each
share of Ascent Class A common stock. These equivalent per share prices reflect
the market value of the Liberty Media Series A common stock you would have
received for each of your shares of Ascent Class A common stock if the merger
had been completed on the specified dates. Because the market price of Liberty
Media Series A common stock may increase or decrease before the merger is
completed, we urge you to obtain current market quotations.
ASCENT
CLASS A LIBERTY MEDIA EQUIVALENT PER
DATES COMMON STOCK SERIES A COMMON STOCK SHARE PRICE
----- ------------ --------------------- --------------
April 25, 2003........................ $1.05 $10.42 $1.20
May 23, 2003.......................... $1.29 $11.78 $1.35
10
WHERE YOU CAN FIND MORE INFORMATION
Liberty Media and Ascent each file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
Liberty Media and Ascent file at the Securities and Exchange Commission's public
reference room at the following location:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
Additional public reference rooms are located in Chicago, Illinois and New
York, New York. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Securities and Exchange Commission maintains an internet site that contains
reports, proxy statements and other information regarding Liberty Media and
Ascent. The address of the Securities and Exchange Commission web site is
www.sec.gov. Information contained on any web site referenced in this
notice/prospectus is not incorporated by reference in this notice/prospectus.
Liberty Media's and Ascent's Securities and Exchange Commission filings are also
available to the public from various commercial document retrieval services and
web sites.
Liberty Media filed a registration statement on Form S-4 to register with
the Securities and Exchange Commission its Series A common stock to be issued to
Ascent stockholders in the merger. This notice/ prospectus, which forms part of
the registration statement, does not contain all the information you can find in
the registration statement or the exhibits to the registration statement. You
should refer to the registration statement, including its exhibits and
schedules, for further information about Liberty Media and Ascent and our Series
A common stock being issued in the merger.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this document, which means that we can disclose
important information to you by referring you to other documents filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is an important part of this notice/prospectus, and is
deemed to be part of this notice/ prospectus except for any information
superseded by this notice/prospectus or any other document incorporated by
reference into this notice/prospectus. Any statement, including financial
statements, contained in Liberty Media's Annual Report on Form 10-K for the year
ended December 31, 2002, as amended by Amendment No. 1 to the Annual Report on
Form 10-K/A for the year ended December 31, 2002, or Ascent's Annual Report on
Form 10-K for the year ended December 31, 2002, shall be deemed to be modified
or superseded to the extent that a statement, including financial statements,
contained in this notice/prospectus or in any other later incorporated document,
modifies or supersedes that statement. This notice/prospectus incorporates by
reference the documents set forth below that have previously been filed with the
Securities and Exchange Commission. These documents contain important
information about each company and its financial condition.
LIBERTY MEDIA
The following documents filed by Liberty Media (File No. 000-20421) are
hereby incorporated by reference into this notice/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2002, filed on
March 25, 2003, as amended by Amendment No. 1 to the Annual Report on
Form 10-K/A for the year ended December 31, 2002, filed on April 9, 2003.
- Quarterly Report on Form 10-Q for the three months ended March 31, 2003,
filed on May 14, 2003.
- Current Report on Form 8-K, filed on March 3, 2003.
- Current Report on Form 8-K, filed on April 11, 2003.
- Current Report on Form 8-K, filed on May 7, 2003.
11
- The description of Liberty Media's capital stock contained in Annex A to
our Form 8-A filed under the Securities Exchange Act of 1934 on July 24,
2001, and any amendment or report filed for the purpose of updating that
description.
ASCENT
The following documents filed by Ascent (File No. 000-01461) are hereby
incorporated by reference into this notice/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2002, filed on
March 27, 2003.
- Quarterly Report on Form 10-Q for the three months ended March 31, 2003,
filed on May 15, 2003.
Ascent's Annual Report on Form 10-K for the year ended December 31, 2002
accompanies this notice/prospectus as Annex B and Ascent's Quarterly Report on
Form 10-Q for the three months ended March 31, 2003 accompanies this
notice/prospectus as Annex C.
All documents filed by Liberty Media, pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, and by Ascent, pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, subsequent to the
date of this notice/prospectus and prior to the effective date of the merger are
incorporated by reference into and are deemed to be a part of this
notice/prospectus from the date of filing of those documents.
You may request a copy of any and all of the documents incorporated by
reference in this notice/ prospectus at no cost, by writing or telephoning the
office of:
Investor Relations
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: (877) 772-1518
This notice/prospectus incorporates by reference documents of Liberty Media
which include information concerning Ascent, On Command Corporation, OpenTV
Corp., Liberty Satellite & Technology, Inc. and UnitedGlobalCom, Inc., among
other public companies. All of these companies file reports and other
information with the Securities and Exchange Commission in accordance with the
requirements of the Securities Act of 1933 and the Securities Exchange Act of
1934. Information incorporated by reference into this notice/prospectus
concerning those companies has been derived from the reports and other
information filed by them with the Securities and Exchange Commission. Those
reports and other information are not incorporated by reference into this
notice/prospectus. You may read and copy any reports and other information filed
by those companies with the Securities and Exchange Commission as set forth
above.
You should rely only on the information contained in (including the Annexes
attached hereto) or incorporated by reference into this notice/prospectus or to
which we have referred you. We have not authorized any person to provide you
with different information or to make any representation not contained in this
notice/prospectus. This notice/prospectus is dated May 27, 2003. You should not
assume that the information contained in this notice/prospectus is accurate as
of any date other than that date, and neither the mailing of this
notice/prospectus to stockholders nor the issuance of Liberty Media Series A
common stock in the merger shall create any implication to the contrary.
12
RISK FACTORS
If you hold your shares of Ascent Class A common stock on the date of the
merger and do not properly exercise your appraisal rights, you will receive
shares of our Series A common stock and will become a stockholder of Liberty
Media. In addition to the other information we include in or incorporate by
reference into this notice/prospectus, you should consider the following risk
factors in deciding whether to exercise your appraisal rights.
FACTORS RELATING TO THE MERGER
There was no formal valuation determining the fairness of the merger
consideration.
The merger consideration was not determined by arms' length negotiation,
and there was no formal valuation of us or Ascent by an independent third party.
Neither we nor Ascent has obtained a fairness opinion by an investment banking
firm or other qualified appraiser. Because the merger is being effected pursuant
to Delaware's "short form" merger statute, the board of directors of Ascent has
not considered or made any determination as to whether the terms of the merger
are fair to, or in the best interests of, the holders of Ascent Class A common
stock other than us and our subsidiaries.
The value of our Series A common stock you receive in the merger may fluctuate.
The number of shares of our Series A common stock you receive in the merger
will not be adjusted based on changes in the market price of our Series A common
stock. Accordingly, because the market price of our Series A common stock may
fluctuate, the value of the consideration you receive when we complete the
merger will depend on the market price of our Series A common stock at that
time. We cannot assure you as to the market value of the merger consideration
you will receive when the merger is completed.
The price of our Series A common stock may be affected by factors different from
those affecting the price of Ascent Class A common stock.
When we complete the merger, you will become a holder of our Series A
common stock. Our businesses are much broader than the businesses of Ascent, and
the results of our operations, as well as the market price of our Series A
common stock, may be affected by factors different from those affecting Ascent's
results of operations and the market price of Ascent Class A common stock. As a
result, factors that had little or no effect on the price of Ascent Class A
common stock may adversely affect the price of our Series A common stock.
FACTORS RELATING TO LIBERTY MEDIA
We depend on a limited number of potential customers for carriage of our
programming services.
The cable television and direct-to-home satellite industries are currently
undergoing a period of consolidation. As a result, the number of potential
buyers of our programming services and those of our business affiliates is
decreasing. Until August of 2001, we were a subsidiary of AT&T Corp. AT&T's
cable television subsidiaries, which operated under the name AT&T Broadband,
were parties to a combination with Comcast Corporation on November 18, 2002. At
the time of that combination, AT&T Broadband was one of the two largest
operators of cable television systems in the United States and, together with
its cable television affiliates, was the largest single customer of our
programming companies. With respect to some of our programming services and
those of our business affiliates, this was the case by a significant margin.
Today, the combined companies operate the largest number of cable television
systems in the United States. Many of the existing agreements between the former
AT&T Broadband cable television subsidiaries and affiliates and the program
suppliers owned by or affiliated with us were entered into with
Tele-Communications, Inc., prior to its merger with AT&T in March of 1999. We
were a subsidiary of TCI at the time of that merger. There can be no assurance
that our owned and affiliated program suppliers will be able to negotiate
renewal agreements with those cable television subsidiaries and affiliates on
commercially reasonable terms or at all. Although AT&T agreed to extend any
existing affiliation agreement of ours and our affiliates that expires on or
before March 9, 2004 to a date not before March 9, 2009, that agreement is
conditioned on mutual most favored nation terms being offered and the
13
arrangements being consistent with industry practice. In addition, we cannot
assure you as to what effect, if any, the combination of AT&T Broadband and
Comcast will have on our programming arrangements with the cable subsidiaries
and affiliates of the former AT&T Broadband. We are currently engaged in
litigation with Comcast concerning certain of these programming arrangements.
The liquidity and value of our interests in our business affiliates may be
adversely affected by shareholder agreements and similar agreements to which we
are a party.
We own equity interests in a broad range of domestic and international
video programming and communications businesses. A significant portion of the
equity securities we own is held pursuant to shareholder agreements, partnership
agreements and other instruments and agreements that contain provisions that
affect the liquidity, and therefore the realizable value, of those securities.
Most of these agreements subject the transfer of the stock, partnership or other
interests constituting equity securities to consent rights or rights of first
refusal of the other shareholders or partners. In certain cases, a change in
control of our company or of the subsidiary holding our equity interest will
give rise to rights or remedies exercisable by other shareholders or partners,
such as a right to initiate or require the initiation of buy/sell procedures.
Some of our subsidiaries and business affiliates are parties to loan agreements
that restrict changes in ownership of the borrower without the consent of the
lenders. All of these provisions will restrict our ability to sell those equity
securities and may adversely affect the price at which those securities may be
sold. For example, in the event buy/sell procedures are initiated at a time when
we are not in a financial position to buy the initiating party's interest, we
could be forced to sell our interest at a price based upon the value established
by the initiating party, and that price might be significantly less than what we
might otherwise obtain.
We do not have the right to manage our business affiliates, which means we
cannot cause those affiliates to operate in a manner that is favorable to us.
We do not have the right to manage the businesses or affairs of any of our
business affiliates in which we have less than a majority voting interest.
Rather, our rights may take the form of representation on the board of directors
or a partners' or similar committee that supervises management or possession of
veto rights over significant or extraordinary actions. The scope of our veto
rights varies from agreement to agreement. Although our board representation and
veto rights may enable us to exercise influence over the management or policies
of an affiliate and enable us to prevent the sale of material assets by a
business affiliate in which we own less than a majority voting interest or
prevent it from paying dividends or making distributions to its shareholders or
partners, they do not enable us to cause these actions to be taken.
Our business is subject to risks of adverse government regulation.
Programming services, cable television systems, satellite carriers and
television stations are subject to varying degrees of regulation in the United
States by the Federal Communications Commission and other entities. Such
regulation and legislation are subject to the political process and have been in
constant flux over the past decade. In addition, substantially every foreign
country in which we have, or may in the future make, an investment regulates, in
varying degrees, the distribution and content of programming services and
foreign investment in programming companies and wireline and wireless cable
communications, satellite and telephony services. Further material changes in
the law and regulatory requirements must be anticipated, and there can be no
assurance that our business and the business of our affiliates will not be
adversely affected by future legislation, new regulation or deregulation.
We may make significant capital contributions and loans to our subsidiaries and
business affiliates to cover their operating losses and fund their development
and growth, which could limit the amount of cash available to pay our own
financial obligations or to make acquisitions or investments.
The development of video programming, communications and technology
businesses involves substantial costs and capital expenditures. As a result,
many of our business affiliates have incurred operating and net losses to date
and are expected to continue to incur significant losses for the foreseeable
future. Our results of operations include our, and our consolidated
subsidiaries', share of the net earnings (losses) of affiliates. Our results of
operations included $31 million, $(394) million, $(453) million,
14
$(4,906) million and $(3,485) million for the three months ended March 31, 2003
and 2002, and the years 2002, 2001 and 2000, respectively, attributable to net
earnings (losses) of affiliates.
We have assisted, and may in the future assist, our subsidiaries and
business affiliates in their financing activities by guaranteeing bank and other
financial obligations. At March 31, 2003, we and our consolidated subsidiaries
in the aggregate had guaranteed various loans, notes payable, letters of credit
and other obligations of certain of our subsidiaries and business affiliates
totaling approximately $294 million. In addition, we have guaranteed certain
film rights obligations of one of our subsidiaries. Such guarantee aggregated
$722 million at December 31, 2002.
To the extent we make loans and capital contributions to our subsidiaries
and business affiliates or we are required to expend cash due to a default by a
subsidiary or business affiliate of any obligation we guarantee, there will be
that much less cash available to us with which to pay our own financial
obligations or make acquisitions or investments.
If we fail to meet required capital calls to a subsidiary or business affiliate,
we could be forced to sell our interest in that company, our interest in that
company could be diluted or we could forfeit important rights.
We are parties to shareholder and partnership agreements that provide for
possible capital calls on shareholders and partners. Our failure to meet a
capital call, or other commitment to provide capital or loans to a particular
subsidiary or business affiliate, may have adverse consequences to us. These
consequences may include, among others, the dilution of our equity interest in
that company, the forfeiture of our right to vote or exercise other rights, the
right of the other shareholders or partners to force us to sell our interest at
less than fair value, the forced dissolution of the company to which we have
made the commitment or, in some instances, a breach of contract action for
damages against us. Our ability to meet capital calls or other capital or loan
commitments is subject to our ability to access cash. See "--We could be unable
in the future to obtain cash in amounts sufficient to service our financial
obligations" below.
We are subject to the risk of possibly becoming an investment company.
Because we are a holding company and a significant portion of our assets
consists of investments in companies in which we own less than a 50% interest,
we run the risk of inadvertently becoming an investment company that is required
to register under the Investment Company Act of 1940. Registered investment
companies are subject to extensive, restrictive and potentially adverse
regulation relating to, among other things, operating methods, management,
capital structure, dividends and transactions with affiliates. Registered
investment companies are not permitted to operate their business in the manner
in which we operate our business, nor are registered investment companies
permitted to have many of the relationships that we have with our affiliated
companies.
To avoid regulation under the Investment Company Act, we monitor the value
of our investments and structure transactions with an eye toward the Investment
Company Act. As a result, we may structure transactions in a less advantageous
manner than if we did not have Investment Company Act concerns, or we may avoid
otherwise economically desirable transactions due to those concerns. In
addition, events beyond our control, including significant appreciation or
depreciation in the market value of certain of our publicly traded holdings,
could result in our becoming an inadvertent investment company. If we were to
become an inadvertent investment company, we would have one year to divest of a
sufficient amount of investment securities and/or acquire other assets
sufficient to cause us to no longer be an investment company.
If it were established that we were an unregistered investment company,
there would be a risk, among other material adverse consequences, that we could
become subject to monetary penalties or injunctive relief, or both, in an action
brought by the Securities and Exchange Commission, that we would be unable to
enforce contracts with third parties or that third parties could seek to obtain
rescission of transactions with us undertaken during the period it was
established that we were an unregistered investment company.
15
Those of our business affiliates that operate outside of the United States are
subject to numerous operational risks.
A number of our business affiliates operate primarily in countries other
than the United States. Their businesses are thus subject to the following
inherent risks:
- fluctuations in currency exchange rates;
- longer payment cycles for sales in foreign countries that may increase
the uncertainty associated with recoverable accounts;
- difficulties in staffing and managing international operations; and
- political unrest that may result in disruptions of services that are
critical to their businesses.
The economies in many of the operating regions of our international business
affiliates have recently experienced recessionary conditions, which has
adversely affected the financial condition of their businesses.
The economies in many of the operating regions of our international
business affiliates have recently experienced moderate to severe recessionary
conditions, including Argentina, Chile, the United Kingdom, Germany and Japan,
among others, which has strained consumer and corporate spending and financial
systems and financial institutions in these areas. As a result, our affiliates
have experienced a reduction in consumer spending and demand for services
coupled with an increase in borrowing costs, which has, in some cases, caused
our affiliates to default on their own indebtedness. We cannot assure you that
these economies will recover in the future or that continued economic weakness
will not lead to further reductions in consumer spending or demand for services.
We also cannot assure you that our affiliates in these regions will be able to
obtain sufficient capital or credit to fund their operations.
We have taken significant impairment charges due to other than temporary
declines in the market value of certain of our available for sale securities.
We own equity interests in a significant number of publicly traded
companies which we account for as available for sale securities. We are required
by accounting principles generally accepted in the United States to determine,
from time to time, whether a decline in the market value of any of those
investments below our cost for that investment is other than temporary. If we
determine that it is, we are required to write down our cost to a new cost
basis, with the amount of the write-down accounted for as a realized loss in the
determination of net income for the period in which the write-down occurs. We
realized losses of $21 million, $6,053 million, $4,101 million and $1,463
million for the three months ended March 31, 2003 and the years ended December
31, 2002, 2001 and 2000, respectively, due to other than temporary declines in
the fair value of certain of our available for sale securities, and we may be
required to realize further losses of this nature in future periods. We consider
a number of factors in determining the fair value of an investment and whether
any decline in an investment is other than temporary. As our assessment of fair
value and any resulting impairment losses requires a high degree of judgment and
includes significant estimates and assumptions, the actual amount we may
eventually realize for an investment could differ materially from our assessment
of the value of that investment made in an earlier period.
We could be unable in the future to obtain cash in amounts sufficient to service
our financial obligations.
Our ability to meet our financial obligations depends upon our ability to
access cash. We are a holding company, and our sources of cash include our
available cash balances, net cash from operating activities, dividends and
interest from our investments, availability under credit facilities,
monetization of our public investment portfolio and proceeds from asset sales.
We cannot assure you that we will maintain significant amounts of cash, cash
equivalents or marketable securities in the future.
We obtained from one of our subsidiaries net cash in the form of dividends
in the amount of nil, $8 million, $23 million and $5 million in the three months
ended March 31, 2003 and in calendar years 2002, 2001 and 2000, respectively.
The ability of our operating subsidiaries to pay dividends or to make other
payments or advances to us depends on their individual operating results and any
statutory, regulatory or contractual restrictions to which they may be or may
become subject. Some of our
16
subsidiaries are subject to loan agreements that restrict sales of assets and
prohibit or limit the payment of dividends or the making of distributions, loans
or advances to shareholders and partners.
We generally do not receive cash, in the form of dividends, loans, advances
or otherwise, from our business affiliates. In this regard, we do not have
sufficient voting control over most of our business affiliates to cause those
companies to pay dividends or make other payments or advances to their partners
or shareholders, including us.
We are subject to bank credit agreements that contain restrictions on how we
finance our operations and operate our business, which could impede our ability
to engage in transactions that would be beneficial to us.
Our subsidiaries are subject to significant financial and operating
restrictions contained in outstanding credit facilities. These restrictions will
affect, and in some cases significantly limit or prohibit, among other things,
the ability of our subsidiaries to:
- borrow more funds;
- pay dividends or make other distributions;
- make investments;
- engage in transactions with affiliates; or
- create liens.
The restrictions contained in these credit agreements could have the
following adverse effects on us, among others:
- we could be unable to obtain additional capital in the future to:
- fund capital expenditures or acquisitions that could improve the value
of our company;
- permit us to meet our loan and capital commitments to our business
affiliates;
- allow us to help fund the operating losses or future development of
our business affiliates; or
- allow us to conduct necessary corporate activities;
- we could be unable to access the net cash of our subsidiaries to help
meet our own financial obligations;
- we could be unable to invest in companies in which we would otherwise
invest; and
- we could be unable to obtain lower borrowing costs that are available
from secured lenders or engage in advantageous transactions that monetize
our assets.
In addition, some of the credit agreements to which our subsidiaries are
parties require them to maintain financial ratios, including ratios of total
debt to operating cash flow and operating cash flow to interest expense. If our
subsidiaries fail to comply with the covenant restrictions contained in the
credit agreements, that failure could result in a default that accelerates the
maturity of the indebtedness under those agreements. Such a default could also
result in indebtedness under other credit agreements and certain debt securities
becoming due and payable due to the existence of cross-default or
cross-acceleration provisions of these credit agreements and in the indentures
governing these debt securities.
As of March 31, 2003, the subsidiary of our company that operates the DMX
Music service was not in compliance with three covenants contained in its bank
loan agreement, under which it has $89 million outstanding. Although the
subsidiary and the participating banks have entered into a forbearance agreement
whereby the banks have agreed to forbear from exercising certain default-related
remedies against the subsidiary through March 31, 2004, we cannot assure you
that the subsidiary will be able to regain covenant compliance or refinance the
bank loan or that the banks will not eventually seek to exercise their remedies.
17
FACTORS RELATING TO OUR SERIES A COMMON STOCK
Our stock price may decline significantly because of stock market fluctuations
that affect the prices of the public companies in which we have ownership
interests.
The stock market has recently experienced significant price and volume
fluctuations that have affected the market prices of securities of media and
other technology companies. We own equity interests in many media and technology
companies. If market fluctuations cause the stock price of these companies to
decline, our stock price may decline.
Our stock price has fluctuated significantly over the last year.
During the past year, the stock market has experienced significant price
and volume fluctuations that have affected the market prices of our stock. In
the future, our stock price may be materially affected by, among other things:
- actual or anticipated fluctuations in our operating results or those of
the companies in which we invest;
- potential acquisition activity by our company or the companies in which
we invest;
- issuances of debt or equity securities by us to raise capital;
- changes in financial estimates by securities analysts regarding our
company or companies in which we invest; or
- general market conditions.
It may be difficult for a third party to acquire us, even if doing so may be
beneficial to our shareholders.
Certain provisions of our restated certificate of incorporation and bylaws
may discourage, delay or prevent a change in control of our company that a
shareholder may consider favorable. These provisions include the following:
- authorizing a dual class structure, which entitles the holders of our
Series B common stock to ten votes per share and the holders of our
Series A common stock to one vote per share;
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- classifying our board of directors with staggered three-year terms, which
may lengthen the time required to gain control of our board of directors;
- limiting who may call special meetings of shareholders;
- prohibiting shareholder action by written consent, thereby requiring all
shareholder actions to be taken at a meeting of the shareholders; and
- establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that can
be acted upon by shareholders at shareholder meetings.
Our chairman, John C. Malone, holds the power to direct the vote of
approximately 44% of our outstanding voting power, including the power to direct
the vote of approximately 94% of the outstanding shares of our Series B common
stock. Dr. Malone holds a portion of his voting power over our Series B common
stock pursuant to a shareholders agreement with the Estate of Bob Magness, the
late Kim Magness, Gary Magness and certain limited liability companies
controlled by the Magnesses.
Section 203 of the Delaware General Corporation Law and our stock incentive
plan may also discourage, delay or prevent a change in control of our company
even if such change of control would be in the best interests of our
shareholders.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This notice/prospectus, including documents incorporated by reference
herein, contains forward looking statements concerning future events that are
subject to risks, uncertainties and assumptions. These forward-looking
statements are based upon our current expectations and projections about future
events. When used in this notice/prospectus and in our incorporated documents,
the words "believe," "anticipate," "intend," "estimate," "expect" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. These forward-looking
statements are subject to risks, uncertainties and assumptions about us and our
subsidiaries and business affiliates, including, among other things, the factors
described above under the "Risk Factors" section of this notice/ prospectus and
the following:
- general economic and business conditions and industry trends;
- spending on domestic and foreign television advertising;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband industry;
- uncertainties inherent in new business strategies, new product launches
and development plans;
- rapid technological changes;
- the acquisition, development and/or financing of telecommunications
networks and services;
- the development and provision of programming for new television and
telecommunications technologies;
- future financial performance, including availability, terms and
deployment of capital;
- the ability of vendors to deliver required equipment, software and
services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or our failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests, and the overall
market acceptance of such products and services; and
- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this notice/prospectus. In light
of these risks, uncertainties and other assumptions, the forward-looking events
discussed in this notice/prospectus might not occur.
19
THE COMPANIES INVOLVED IN THE MERGER
LIBERTY MEDIA CORPORATION
Liberty Media owns interests in a broad range of video programming, media,
broadband distribution, interactive technology services and communications
businesses. Liberty Media and its affiliated companies operate in the United
States, Europe, South America and Asia. Liberty Media's principal assets include
interests in Starz Encore Group LLC, Ascent, On Command Corporation, Discovery
Communications, Inc., UnitedGlobalCom, Inc., Jupiter Telecommunications Co.,
Ltd., QVC, Inc., Court Television Network, Game Show Network, AOL Time Warner
Inc., USA Interactive, Sprint PCS Group and The News Corporation Limited. For
more detailed information on the business of Liberty Media, see the section
entitled "Where You Can Find More Information" of this notice/prospectus on page
11.
ASCENT MEDIA GROUP, INC.
Ascent Media Group, Inc., which changed its named from Liberty Livewire
Corporation on November 20, 2002, was incorporated in Delaware in 1952 and
provides creative and technical media services to the media and entertainment
industries. Ascent's 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, corporate, educational, industrial and advertising content. Ascent's
assets and operations are primarily composed of the assets and operations of ten
companies acquired during 2001 and 2000. The combination and integration of
these acquired entities allow Ascent to offer integrated outsourcing solutions
for the technical and creative requirements of its clients, from content
creation to distribution of the final product.
Ascent has organized its facilities and operations into three business
segments or groups. Each business segment 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 business segment to focus on its
particular set of services and client base, while Ascent's centralized corporate
functions facilitate implementation of financial and operational controls across
the organization. Ascent's business segments are described below. In addition to
the following discussion, for more detailed information on the business of
Ascent, see Ascent's Annual Report on Form 10-K, accompanying this
notice/prospectus, Ascent's Quarterly Report on Form 10-Q, accompanying this
notice/prospectus, and the section entitled "Where You Can Find More
Information" of this notice/ prospectus on page 11.
ASCENT CREATIVE SERVICES
Ascent's Creative Services Group provides services necessary to complete
the creation of original content including feature films, television shows,
movies of the week/mini series for television, television commercials, music
videos, promotional and identity campaigns and corporate communications
programming. Ascent's services begin after principal photography and cover a
wide range of services necessary to complete a project. This may include film to
video tape transfers, color correction, creative editorial services, graphics
and title sequences, electronic assembly, two-dimension compositing, creation of
computer generated images, sound editorial, sound mixing, music composition,
sound design and integration of interactive program elements. The Creative
Services Group has three divisions: Entertainment Television, Commercial
Television and Audio.
ASCENT MANAGEMENT SERVICES
Ascent's Media Management Services Group optimizes, archives, manages and
repurposes media assets for global distribution. Ascent provides access to all
forms of content, duplication and formatting services, language conversions and
laybacks, restoration and preservation of old or damaged content, mastering from
motion picture film to high resolution or data formats, digital audio and video
encoding services and digital media management services for global home video,
broadcast, pay-per-view, video-on-demand, streaming media and other emerging new
media distribution channels.
20
ASCENT NETWORK SERVICES
Ascent's Network Services 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. Ascent's
Network Services Group primarily provides dedicated facilities and resources
designed for specific client requirements on the basis of contractual
agreements.
21
CERTAIN TRANSACTIONS BETWEEN LIBERTY MEDIA AND ASCENT
The following is a description of certain material transactions between
Liberty Media and Ascent, or their respective affiliates. Liberty Media ceased
to be an affiliate of AT&T Corp. in August 2001. Please see the general
descriptions of Liberty Media and Ascent in the section entitled "The Companies
Involved in the Merger" of this notice/prospectus on page 20, in Ascent's Annual
Report on Form 10-K accompanying this notice/prospectus, Ascent's Quarterly
Report on Form 10-Q accompanying this notice/prospectus, and in the documents
incorporated in this notice/prospectus by reference, as described in the section
entitled "Where You Can Find More Information" of this notice/prospectus on page
11.
THE TODD MERGER; ACQUISITION OF FOUR MEDIA COMPANY AND CERTAIN OTHER
ACQUISITIONS
As noted above, the assets and operations of Ascent consist primarily of
the assets and operations of ten companies combined during 2001 and 2000. In
several instances, a component company was acquired by Liberty Media and
subsequently contributed by Liberty Media to Ascent, in exchange for Ascent
Class B common stock, convertible subordinated notes of Ascent, or other
consideration. In other instances, Ascent financed all or a portion of the
purchase price of its acquisition by borrowings under the subordinated credit
agreement between Ascent and Liberty Media described under "Liberty Subordinated
Credit Agreement and Related Transactions" below.
The Todd Merger. On December 10, 1999, Ascent (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, entered into a merger agreement, as
amended on March 6, 2000, which provided for the acquisition by Liberty Media of
a controlling interest in Todd-AO. At the time of the Todd Merger, Todd-AO
provided sound, video and ancillary post production and distribution services to
the motion picture and television industries in the United States and Europe. In
connection with the Todd Merger, which was consummated on June 9, 2000, the
following transactions occurred:
- a reclassification of the existing common stock of Todd-AO;
- the merger of B-Group Merger Corp. with and into Todd-AO; and
- the change of Todd-AO's name to Liberty Livewire Corporation.
In the Todd Merger, AT&T issued approximately 5.5 million shares of Liberty
Media Group Class A common stock, par value $1.00 per share (taking into account
a two-for-one stock split effected on the Liberty Media Group Class A common
stock on June 9, 2000), to acquire approximately 6.5 million shares of Todd-AO
Class B common stock, representing 60% of the equity and approximately 94% of
the voting power of Todd-AO. AT&T then contributed such shares of Todd-AO to
Liberty Media through a series of contribution agreements with affiliated
entities.
Four Media. 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, the
assumption of 4MC stock options which were converted into stock appreciation
rights to purchase 1,936,778 Liberty Media Group Class A common stock valued at
$52.9 million, and the assumption of a warrant to an investor which was
converted into a warrant to purchase 354,838 shares of Liberty Media Group Class
A common stock valued at $7.8 million. Immediately following the closing of the
Todd Merger, Liberty Media contributed to Ascent 100% of the capital stock of
Four Media Company in exchange for approximately 16.6 million shares of Ascent
Class B common stock, pursuant to a previously existing agreement between
Liberty Media and Ascent. The Four Media Company provides technical and creative
services to owners, producers and distributors of television programming,
feature films and other entertainment products both domestically and
internationally.
SounDelux. On July 19, 2000, Liberty Media purchased all of the assets
relating to the post production, content and sound editorial businesses of
SounDelux Entertainment Group for $90 million in cash, and transferred such
assets to a newly formed limited liability company, and contributed the sole
ownership interest in that limited liability company to Ascent, in exchange for
approximately 8.2 million additional shares of Ascent Class B common stock,
pursuant to a previously existing agreement between Liberty Media and Ascent.
22
Video Services Corporation. On December 22, 2000, Liberty Media acquired
Video Services Corporation, also referred to as VSC. The total consideration
paid by Liberty Media was valued at $119.7 million, comprising $38.0 million in
cash paid to the shareholders of VSC, $46.5 million of indebtedness of VSC paid
or assumed by Liberty Media, 1,441,212 shares of Liberty Media Group Class A
common stock issued to the shareholders of VSC, and options to purchase 119,666
shares of Liberty Media Group Class A common stock issued in exchange for VSC
stock options, which shares of Liberty Media Group Class A common stock and
options had an aggregate estimated fair market value of $35.2 million.
Immediately following the closing of that transaction, Liberty Media contributed
100% of the outstanding capital stock of VSC to Ascent in exchange for
convertible subordinated promissory notes in the aggregate principal amount of
$92.5 million issued under the subordinated credit agreement between Ascent and
Liberty Media described under "Liberty Subordinated Credit Agreement and Related
Transactions " below, the assumption by Ascent of Liberty Media's obligations
with respect to the stock options originally granted by VSC, the payment of $9.6
million in cash by Ascent to retire debt of VSC, and Ascent's agreement 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.
Group W Network Services and Asia Broadcast Centre. On February 1, 2001,
Ascent acquired from Viacom, Inc. and certain of its subsidiaries substantially
all 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. (collectively referred to as "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. Ascent funded
$82.0 million of the purchase price for GWNS through borrowings under its
subordinated credit agreement with Liberty Media described under "Liberty
Subordinated Credit Agreement and Related Transactions " below and other
borrowings from an affiliate of Liberty Media evidenced by additional
non-convertible subordinated notes in the aggregate amount of $13.8 million (the
non-convertible subordinated notes were repaid in full in 2001).
Stock Option Fulfillment Agreement. As a result of the Todd Merger, all
outstanding stock options of Ascent (then known as Todd-AO) became options to
purchase a combination of shares of Ascent Class A common stock and Liberty
Media Group Class A common stock. The options were also extended, so that they
expired on December 10, 2000. On June 10, 2000, Ascent and Liberty Media entered
into a Stock Option Fulfillment Agreement, to provide a mechanism for Ascent to
fulfill its obligations under those options exercisable for Liberty Media Group
Class A common stock by funding purchases of Liberty Media Group Class A common
stock by Ascent. However, that mechanism was never utilized by Ascent and
Liberty Media. Rather, at the request of Ascent, Liberty Media from time to time
advanced funds to Ascent, based on the difference between the exercise price of
each such option exercised between the closing of the Todd Merger and December
10, 2000, and the market price of the Liberty Media Group Class A common stock
on the date of exercise. Such advances totaled approximately $5.1 million.
Liberty Media and Ascent subsequently amended and restated the Stock Option
Fulfillment Agreement to provide for the issuance to Liberty Media, in
consideration of such advances, of 296,039 shares of Ascent Class B common
stock.
ASCENT NETWORK SERVICES
On January 5, 2001, Ascent entered into an Ownership Interest Purchase
Agreement with ANS Acquisition Sub, Inc., its wholly owned subsidiary, and
Ascent Entertainment Group, Inc. ("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 ("LNS"), a
newly-formed and wholly owned subsidiary of AEG. AEG then transferred a one
percent ownership interest in LNS to Ascent in exchange for $300,000 in cash. In
connection with the Ownership Interest Purchase Agreement between Ascent and
AEG, AEG and LNS executed a Contribution and Assumption Agreement pursuant to
which LNS assumed all
23
liabilities, obligations and commitments of AEG relating to the business of
Ascent Network Services, whether before or after January 5, 2001.
Ascent also became a party to the LNS Operating Agreement with AEG. Under
the LNS Operating Agreement:
- Ascent became the manager of LNS as of January 5, 2001;
- Ascent received $800,000 per month from available cash of LNS as a
guaranteed payment to compensate Ascent for its managerial services;
- 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 capital account 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
- Ascent entered into a put-call option with AEG, with respect to the
remaining 99% interest in LNS.
On September 6, 2001, Ascent exercised its call option and acquired the
remaining 99% interest in LNS for a purchase price of $31.3 million (net of
approximately $425,000 of cash acquired), which was equal to AEG's capital
account including the preferred return on the closing date of such purchase.
Ascent financed such purchase price through borrowings under its subordinated
credit agreement with Liberty Media described under "Liberty Subordinated Credit
Agreement and Related Transactions" below.
LIBERTY SUBORDINATED CREDIT AGREEMENT AND RELATED TRANSACTIONS
On June 10, 2000, Ascent entered into a subordinated credit agreement with
Liberty Media whereby Liberty Media agreed to lend Ascent up to $125.0 million
in convertible subordinated loans from time to time for working capital,
acquisitions and general corporate purposes. No loans were made under this
original subordinated credit agreement. On December 22, 2000, Ascent and Liberty
Media amended and restated their original credit agreement. Pursuant to the
amended and restated credit agreement, Liberty Media agreed to make convertible
subordinated loans to Ascent in an amount up to $206.2 million, to fund the
acquisitions of Video Services Corporation, GWNS and Ascent Network Systems. The
amended and restated credit agreement between Ascent and Liberty Media also
provided for up to $100 million in additional availability, which may be
borrowed from time to time by Ascent with the consent of Liberty Media, on such
terms as Liberty Media and Ascent may agree in connection with any such
borrowing. We sometimes refer to such borrowings in this notice/prospectus as
"supplemental borrowings". Liberty Media has agreed to subordinate its loans to
Ascent under the subordinated credit agreement to the prior payment of Ascent's
senior indebtedness, including Ascent's senior bank credit facility and a
separate senior credit agreement between Ascent and Heller Financial Leasing,
Inc. Ascent's senior lenders have agreed, with respect to up to $25 million of
supplemental borrowings under the amended and restated credit agreement, to
permit the repayment of such funds to Liberty, under certain circumstances, with
the proceeds of any new equity contributions to Ascent by Liberty or any of its
other affiliates.
The convertible subordinated notes issued in respect of the first $206.2
million of acquisition funding under the amended and restated credit agreement
are convertible at the option of Liberty Media at any time prior to maturity
into shares of Ascent Class B common stock at a conversion price of $10.00 per
share. If not earlier converted, such convertible subordinated notes will become
due and payable on June 30, 2008. Interest accrues on the convertible
subordinated notes at a rate of 10% per annum, payable quarterly either in cash,
shares of Ascent Class B common stock or a combination thereof, at Ascent's
election, subject to certain limits. Shares of Ascent Class B common stock
issued as payment for interest thereunder are valued at 95% of the ten-day
trailing average closing price of shares of Ascent Class A common stock on the
interest payment date.
During the year ended December 31, 2002, Ascent entered into three
supplemental agreements under its subordinated credit agreement with Liberty
Media. Supplement No. 1, dated as of June 28, 2002, and
24
Supplement No. 2, dated as of July 24, 2002, together provided for supplemental
borrowings of $8.8 million, convertible into Ascent Class B common stock at
$3.50 per share. Proceeds from such supplemental borrowings were used for
certain capital expenditures and to fund the award in an arbitration matter with
Paul Dujardin.
On August 13, 2002, Ascent entered into Supplement No. 3 to the
subordinated credit agreement with Liberty Media under which Ascent may draw up
to $25.0 million, as needed, at Liberty Media's option:
- through subordinated convertible loans under the supplemental borrowing
provisions of the credit agreement with a conversion price per share
equal to 115% of the average market price of Ascent Class A common stock
for the five most recent trading days ending on and including the date
which is two business days prior to the date of the borrowing;
- through sales of Ascent Class B common stock to Liberty Media at a
purchase price per share equal to the average market price of Ascent
Class A common stock for the five most recent trading days ending on and
including the date which is two business days prior to the date of the
stock sale; or
- through any combination of the above.
Draws under Supplement No. 3 were subject to, among other conditions,
stockholder approval of the issuance of shares of Class B common stock to
Liberty Media thereunder. That consent was obtained at a meeting of Ascent's
stockholders on January 23, 2003. Proceeds of the loans or stock sales under
Supplement No. 3 must be used for capital expenditures, payment of the principal
amount of loans made under the Senior Credit Agreement or working capital.
On September 30, 2002, Ascent received $17.2 million under Supplement No. 3
in consideration for Ascent's issuance to Liberty Media of:
- a convertible note in the amount of $5.3 million that is convertible into
Ascent Class B common stock at $1.94 per share; and
- 7,070,000 unregistered shares of Ascent Class B common stock, at a
purchase price of $1.69 per share or $11.9 million in total.
On October 17, 2002, Ascent borrowed an additional $4.0 million under
Supplement No. 3 and issued a convertible note in the same amount that is
convertible into Ascent Class B common stock at $1.56 per share.
The proceeds of such loans and stock sales were used to repay borrowings
under the Senior Credit Agreement, for capital expenditures and for working
capital.
At March 31, 2003, $224.3 million was outstanding under the subordinated
credit agreement with Liberty Media and $81.9 million was available for future
supplemental borrowings with the consent of Liberty Media on such terms as
Liberty Media and Ascent may agree in connection with any such borrowing.
CONTRIBUTION OF LIBERTY LIVEWIRE, LLC BY LIBERTY MEDIA TO ASCENT; HYPERTV
AGREEMENT; ACTV WARRANT
Pursuant to a contribution agreement dated December 22, 2000, Liberty Media
contributed to Ascent 100% of the outstanding limited liability company interest
of Liberty Livewire, LLC, by which Ascent acquired Liberty Livewire, LLC's
rights under the Cooperative Venture Agreement, dated April 13, 2000, by and
among HyperTV Networks, Inc., Liberty Livewire, LLC and HyperTV, in which
Liberty Livewire, LLC and HyperTV Networks, Inc. agreed to jointly market
HyperTV.
HyperTV Networks, Inc. is a subsidiary of ACTV, Inc. ACTV is a digital
media company that provides technical and creative services, tools and
proprietary applications for digital television and enhanced media. HyperTV is a
suite of patented processes that enhance a television program, advertisement or
other video programming of any kind, and from any source, with related and
synchronized content delivered through the Internet. By virtue of the
Cooperative Venture Agreement, Ascent received the non-exclusive right to use
certain patented technologies of ACTV in providing turnkey
25
convergence services, including application hosting, web authoring services,
data management, e-commerce and other value-added services for advertisers,
television programmers, studios and networks. On September 26, 2002, a
subsidiary of Liberty Media entered into an Agreement and Plan of Merger for the
acquisition of ACTV, which is expected to close in the second quarter of 2003.
In consideration for Liberty Media's contribution to Ascent of its
ownership interest in Liberty Livewire, LLC, Ascent assumed Liberty Media's
obligation under a stock purchase warrant issued by Liberty Livewire, LLC to
ACTV pursuant to the terms of the Cooperative Venture Agreement. This warrant
gives ACTV the right to acquire 2,500,000 shares of Ascent's Class A common
stock, at an exercise price of $30.00 per share, from Liberty Livewire, LLC. The
warrant, which expires in June 2015 and includes certain registration rights,
vests ratably over five years, beginning April 13, 2001.
STOCK SALES TO LIBERTY MEDIA
On July 24, 2002, Ascent sold 440,981 unregistered shares of Ascent Class B
common stock to Liberty Media for $3.05 per share, for proceeds of approximately
$1.4 million. The closing price of Ascent Class A common stock on The Nasdaq
Stock market was $1.95 per share on July 24, 2002. The proceeds of the stock
sale were used to fund part of the arbitration award payable by Ascent to Paul
Dujardin.
OTHER STOCK ISSUANCES TO LIBERTY MEDIA
During the three months ended March 31, 2003, Ascent issued 4,109,305
shares of Ascent Class B common stock to Liberty Media and its affiliates in
payment of $5.5 million in quarterly interest under the subordinated credit
agreement with Liberty Media. During the year ended December 31, 2002, Ascent
issued 10,436,853 shares of Ascent Class B common stock to Liberty Media and its
affiliates in payment of $21.3 million in interest under the subordinated credit
agreement. From December 29, 2000 through December 31, 2001, Ascent issued
2,780,614 shares of Ascent Class B common stock to Liberty Media and its
affiliates in payment of interest under the subordinated credit agreement. For
details on the subordinated credit agreement between Ascent and Liberty Media,
see "Liberty Subordinated Credit Agreement and Related Transactions" above.
TAX SHARING AGREEMENT BETWEEN LIBERTY MEDIA AND ASCENT
In November 2000, Ascent and Liberty Media became parties to a tax
liability allocation and indemnification agreement, whereby with respect to
joint tax returns, Ascent is obligated to make a cash payment to Liberty Media
in each year that it (taken together with its applicable subsidiaries) has
positive taxable income, determined as if Ascent and its subsidiaries filed a
separate return for the applicable federal, state, local or foreign
jurisdiction. The amount of the payment would be equal to the amount of that
positive taxable income multiplied by the highest applicable corporate tax rate.
In the event that (1) Ascent and its subsidiaries, when treated as a separate
group, have a net operating loss or are entitled to a net tax credit for a
particular year, and (2) Liberty Media is able to use such loss or credit to
reduce its tax liability for any year, Ascent would become entitled to a credit
against current and future payments to Liberty Media under the agreement. If
Ascent ceases to be a member of Liberty Media's affiliated group prior to the
time that Ascent is able to use such credit, Ascent would be entitled to a
payment from Liberty Media at the earlier of the time that (a) Ascent
demonstrates to Liberty Media that Ascent and its subsidiaries could have used
the net operating loss carryforward or net tax credit to reduce their own
separately computed tax liability or (b) the aggregate voting power of Ascent
stock held by Liberty Media and members of its affiliated group falls below 20%
of Ascent's outstanding voting power. Notwithstanding the foregoing, the
agreement allocates to Liberty Media certain deductions arising from
compensation arrangements for Ascent's employees, officers or directors that are
funded by Liberty Media. Ascent has the right to participate in the defense of
claims of the Internal Revenue Service that might affect its liability under the
agreement, and to participate in tax refunds paid to Liberty Media where such
refunds are due in part to its operations.
26
SERVICES RECEIVED FROM LIBERTY MEDIA
Liberty Media allocates salaries, benefits, business insurance and certain
other general and administrative expenses (including a portion of the salary of
William R. Fitzgerald, Ascent's President and Chief Executive Officer) to
Ascent. In addition, Ascent reimburses Liberty Media for certain expenses, such
as employee medical costs, paid by Liberty Media on behalf of Ascent. Ascent has
determined the allocated and reimbursed amounts to be reasonable and equal to
the fair value of the expenses charged. Amounts allocated from Liberty Media to
Ascent totaled $15.4 million, $14.1 million, $5.4 million and nil for the three
months ended March 31, 2003 and the years ended December 31, 2002, 2001 and
2000, respectively. The increase in such amounts is primarily attributed to
medical insurance being purchased through Liberty Media starting in fiscal year
2002.
SERVICES AGREEMENTS WITH ON COMMAND CORPORATION
Effective October 1, 2002, Ascent entered into a short-term agreement with
On Command Corporation ("On Command"), a controlled subsidiary of Liberty Media,
pursuant to which Ascent is supplying On Command with uplink and satellite
transport services at a cost to On Command of $180,000 through March 31, 2003.
On Command has been utilizing Ascent's services to test the satellite delivery
of content updates to On Command's downlink sites at various hotels. Ascent has
also executed a Content Preparation and Distribution Services Agreement, dated
March 24, 2003, with a wholly owned subsidiary of On Command, under which Ascent
will provide uplink and satellite transport services for a monthly fee of
$36,000, subject to adjustment, for a period of five years and content
preparation services at a negotiated rate for each use of covered services for a
period of five years at On Command's request. The parties are also negotiating
an agreement for the installation by Ascent of satellite equipment at On
Command's downlink sites at hotels for a set fee per installation completed.
27
THE MERGER
Liberty Media is furnishing this notice/prospectus to you in connection
with the intended merger of Merger Sub, a newly formed indirect wholly owned
subsidiary of Liberty Media, with and into Ascent, also a subsidiary of Liberty
Media. Ascent has not reviewed or approved this notice/prospectus. The purpose
of this notice/prospectus is to provide you with certain information regarding
the merger, the parties to the merger, the shares of Liberty Media Series A
common stock that you will receive in the merger and the availability of
appraisal rights in connection with the merger. Your vote is not required for
the merger.
In the merger, each outstanding share of Ascent Class A common stock will
be converted into 0.1147 of a share of Liberty Media Series A common stock. We
will not issue fractional shares of Liberty Media common stock in the merger.
Instead, we will round the total number of shares of Liberty Media Series A
common stock you are entitled to receive down to the nearest whole number of
shares, and you will receive a cash payment for any fraction of a share to which
you would otherwise be entitled, equal to the market price per share of Liberty
Media Series A common stock on the date the merger is consummated, times the
relevant fraction of a share.
BACKGROUND OF THE MERGER
From time to time, management of Liberty Media has considered whether or
not it was advisable for Ascent to continue as a separate public company. During
the second quarter of 2002, Liberty Media's management discussed with the
management of Liberty Satellite & Technology, Inc., known as LSAT, the
possibility of a transaction in which LSAT would acquire all of the outstanding
stock of Ascent. LSAT is a majority owned subsidiary of Liberty Media. Neither
Liberty Media nor LSAT made any formal proposal to Ascent or its board of
directors regarding such a transaction; however, certain executive officers of
Liberty Media are also directors of Ascent, and William R. Fitzgerald, a senior
vice president of Liberty Media and director of Ascent, became chief executive
officer of Ascent in May 2002. See "Interests of Directors and Officers" below.
After informal discussions with the independent directors on LSAT's board,
LSAT's management concluded that an acquisition of Ascent was not in the best
interests of LSAT and informed Liberty Media in June 2002 that LSAT was not
interested in pursuing such a transaction.
During the first quarter of 2003, Liberty Media's management developed a
proposal for the acquisition by Liberty Media directly of the publicly held
shares of Ascent. At a meeting held on March 25, 2003, the board of directors of
Liberty Media considered a proposal to acquire the minority publicly-held
interest in Ascent through a merger of Ascent with another subsidiary of Liberty
Media, in which the shares of Ascent Class A common stock held by the minority
stockholders of Ascent would be converted into shares of Liberty Media Series A
common stock. Liberty Media's board of directors determined that such a merger
was advisable and in the best interests of Liberty Media, subject to approval by
the executive committee of the Liberty Media board of the terms and conditions
of such merger, including the exchange ratio upon which shares of Ascent Class A
common stock would be converted in the merger into shares of Liberty Media
Series A common stock.
Liberty Media's board authorized Liberty Media management: (i) to calculate
and report to the executive committee an appropriate exchange ratio for the
merger, taking into account among other things the relative trading ranges of
the Liberty Media Series A common stock and Ascent Class A common stock over
such trading periods as management should deem appropriate; (ii) to begin
preparing the necessary documentation for the merger; and (iii) to determine if
the required majority of lenders under Ascent's senior credit facility would be
willing to waive the existing covenants under such facility regarding mergers
and transactions with affiliates so as to permit the consummation of the merger,
if Liberty Media were to determine to proceed with it. Representatives of
Liberty Media's management subsequently presented the Liberty Media executive
committee with their recommendations and analysis.
On April 25, 2003, the executive committee of Liberty Media's board of
directors approved the merger and related transactions, including the
preparation of the registration statement of which this notice/prospectus forms
a part. The resolutions adopted by the executive committee authorized the
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acquisition of the publicly held minority interest in Ascent through a taxable,
stock-for-stock merger of Merger Sub with and into Ascent, and fixed the ratio
upon which shares of Ascent Class A common stock held by Ascent's minority
stockholders would be converted into shares of Liberty Media Series A common
stock at 0.1147 of a share of Liberty Media Series A common stock for each share
of Ascent Class A common stock surrendered in the merger. Among other factors
considered in setting such exchange ratio, the Liberty Media executive committee
noted that, based on the closing prices of Liberty Media Series A common stock
and Ascent Class A common stock on April 24, 2003, on the New York Stock
Exchange and The Nasdaq Stock Market, respectively, the proposed exchange ratio
represented a 10% premium over the market price of the Ascent Class A common
stock.
On April 25, 2003, Liberty Media notified Ascent of Liberty Media's plan to
effect the merger and issued a press release announcing such plan. On April 25,
2003, based on the closing prices of shares of Liberty Media Series A common
stock and Ascent Class A common stock prior to the announcement of the merger,
the proposed exchange ratio represented a 13.8% premium over the market price of
the Ascent Class A common stock. Thereafter, Liberty Media entered into an
agreement with the required majority of lenders under Ascent's senior credit
facility providing for the requested waiver of certain covenants under such
facility and filed the registration statement of which this notice/prospectus is
a part under the Securities Act.
At a regularly scheduled meeting of the Ascent board of directors on May 5,
2003, Ascent's management presented and discussed certain material non-public
information regarding the operations of Ascent, including information about
Ascent's current work-in-progress and backlog, as well as industry factors
anticipated to affect demand for Ascent's services during the remainder of 2003.
Ascent's management also presented a revised operating forecast for Ascent's
2003 fiscal year. The forecast, which is subject to various risks and
uncertainties, projected that Ascent would generate Adjusted EBITDA, as defined
below, of $94.0 million in 2003, an increase of $2.8 million, or 3.1%, from
2002. The forecast projected total revenue for 2003 of $518.2 million for
Ascent, a decrease of $21.1 million, or 3.9%, from 2002.
According to Ascent's Quarterly Report, Ascent defined Adjusted EBITDA as
earnings before interest, taxes, depreciation and amortization, and excluding
non-cash compensation expense, restructuring charges, gain (loss) on disposal of
assets, asset impairment and other non-cash charges, other income (expense) and
changes in accounting principle. According to Ascent's Quarterly Report,
Ascent's management uses Adjusted EBITDA as a measure of the current operating
performance of Ascent's business segments and, accordingly, the primary measure
for determining the incentive compensation of individuals in charge of such
segments and assisting management in strategic planning and allocating corporate
resources. Adjusted EBITDA should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. Please see note 10 to the financial statements
included in Ascent's Quarterly Report for a reconciliation of Ascent's total
segment Adjusted EBITDA, as defined by Ascent, to Ascent's net loss, as
determined in accordance with generally accepted accounting principles. Please
also see Ascent's Quarterly Report, as well as Ascent's Annual Report, for
discussions of the risks and uncertainties to which any forecast of future
operating results by Ascent is necessarily subject. Copies of both reports
accompany this notice/prospectus.
The Ascent directors present at the May 5, 2003 board meeting included
certain officers and/or directors of Liberty Media. See "Interests of Directors
and Officers" below. Liberty Media did not rely on the forecasts or other
information presented by Ascent's management at such board meeting in
determining to acquire the publicly held shares of Ascent or in setting the
exchange ratio in the merger, which was established by Liberty Media prior to
May 5. Liberty Media makes no recommendation to the stockholders of Ascent as to
the degree to which such stockholders should rely on the forecasts by Ascent
management described above.
As of May 8, 2003, Liberty Media beneficially owned more than 92% of the
outstanding equity securities of Ascent and more than 99% of the voting power of
Ascent in the form of voting common stock. At that date, such securities were
owned of record by Liberty Media and its subsidiaries Liberty LWR, Inc., Ascent
Media Debt, Inc. (then both direct wholly owned subsidiaries of Liberty Media),
and
29
Liberty Livewire Holdings, Inc. (then a majority owned subsidiary of Liberty
LWR). We refer to Liberty Livewire Holdings, Inc. as "Livewire Holdings" in this
notice/prospectus. On or about May 8, 2003, Livewire Holdings was dissolved, all
its assets were distributed to Liberty LWR, as holder of all the outstanding
shares of preferred stock of Livewire Holdings, and Liberty Media, Liberty LWR,
Ascent Media Debt and Merger Sub entered into an Agreement and Plan of
Contribution and Merger. Pursuant to the Agreement and Plan of Contribution and
Merger, Liberty Media caused all shares of Ascent common stock then held of
record by Liberty Media, Liberty LWR, and Ascent Media Debt to be transferred to
Merger Sub. As a result, Merger Sub became the direct holder of more than 92% of
the Ascent common stock outstanding.
Merger Sub is an indirect wholly owned subsidiary of Liberty Media formed
in April, 2003. It does not have any assets or liabilities and has never
conducted any business or activities, except for activities incidental to its
formation and the transactions described in this Notice/Prospectus. The sole
stockholder of Merger Sub is Liberty LWR, Inc., a Delaware corporation and a
wholly owned subsidiary of Liberty Media. The board of directors of Merger Sub
has adopted resolutions providing for the merger of Merger Sub with and into
Ascent and the sole stockholder of Merger Sub has consented to the merger.
Prior to its dissolution, Livewire Holdings had both preferred stock and
common stock outstanding. Liberty LWR held 100% of the preferred stock and over
80% of the common stock of Livewire Holdings. The remainder of the common stock
was held by (i) William R. Fitzgerald, who is Ascent's president and chief
executive officer and the chairman of its board of directors, as well as a
senior vice president of Liberty Media, (ii) Larry E. Romrell, who is a director
of both Ascent and Liberty Media, and (iii) an executive officer of Liberty
Media who is neither an executive officer nor a director of Ascent. In
connection with the dissolution of Livewire Holdings, its board of directors
determined that the aggregate fair value of the assets of Livewire Holdings at
the time of such distribution (which consisted entirely of shares of Ascent
Class B common stock and a participation interest in convertible subordinated
indebtedness of Ascent) was less than the aggregate liquidation preference of
the outstanding preferred stock of Livewire Holdings (that is, the aggregate
amount to which the holder of such preferred stock is entitled to receive upon a
liquidation of Livewire Holdings, before the common stockholders receive any
distribution on their common stock). Accordingly, all the assets of Livewire
Holdings were distributed to Liberty LWR in connection with the dissolution, and
the common stock of Livewire Holdings was cancelled for no consideration.
The merger will be effective upon the filing by Merger Sub of a certificate
of ownership and merger in Delaware, which is expected to occur on the 20th
business day following the mailing of this notice/prospectus. No vote of
Ascent's stockholders will be required under Delaware law.
This notice/prospectus constitutes a prospectus of Liberty Media, which
forms a part of the registration statement on Form S-4 filed by Liberty Media
with the Securities and Exchange Commission under the Securities Act in order to
register the shares of Liberty Media Series A common stock to be issued to
Ascent's stockholders in the merger. The total number of shares of Liberty Media
Series A common stock to be issued in the merger, based on the number of shares
of Ascent Class A common stock outstanding on March 31, 2003, is approximately
555,029. Up to 901,256 additional shares of Liberty Media Series A common stock
included in such registration statement will be reserved for issuance upon the
exercise of options and a warrant for Ascent common stock outstanding on the
effective date of the merger or upon the conversion in the merger of any shares
of Ascent common stock issued upon any exercise of such outstanding options or
warrant prior to the effective date of the merger. This notice/prospectus also
constitutes a notice to the stockholders of Ascent pursuant to Section 262(d)(2)
of the Delaware General Corporation Law, as to the availability of appraisal
rights in connection with the merger.
PREVIOUS INQUIRIES RECEIVED BY LIBERTY MEDIA REGARDING ASCENT
On November 11 and November 26, 2002, Liberty Media received letters from a
private equity investment firm, indicating that firm's interest in acquiring
Ascent. The November 26 letter stated that the investment firm's preliminary
assessment of the enterprise value of Ascent, based on publicly available
financial information and subject to further investigation, was in the range of
$500 to $600 million. The letter stated that the investment firm was working
with Robert Walston, former chief executive officer of
30
Ascent, in connection with its assessment of Ascent. On November 27, 2002,
Liberty Media responded in writing to such expression of interest, stating that
Liberty Media did not consider the Ascent assets to be for sale, that any
interest Liberty Media might have in considering a sale of Ascent would be
predicated on realizing an attractive valuation for the business, and that the
investment firm's initial valuation range was inadequate, in that it suggested a
value representing 67% to 80% of the current market enterprise value of Ascent
(that is, the number of shares of Ascent common stock outstanding, times the
then current market price of the Ascent Class A common stock, plus outstanding
debt), and was in fact less than Ascent's outstanding debt.
On February 1, 2003, Liberty Media received a letter from David P. Beddow,
Chairman and CEO of Technology Equity Associates and former chief executive
officer of Ascent, stating an offer to acquire Ascent or its assets, at a price
based on "a six-times multiple of EBITDA". The offer was subject to due
diligence and negotiations. The letter also stated that the offer was "backed by
the resources of" the same private equity investment firm referred to above. On
February 5, 2003, Liberty Media responded in writing to Mr. Beddow's letter,
stating that Liberty Media did not consider the assets of Ascent to be for sale,
that any interest Liberty Media might have in considering a sale of Ascent would
be predicated on realizing an attractive valuation for the business, and that
the valuation of six-times EBITDA indicated in Mr. Beddow's letter was
inadequate, in that it suggested a value representing 77% of the then current
market enterprise value of Ascent and 85% of Ascent's outstanding debt.
Liberty Media has not received any further communications on behalf of the
private equity investment firm referred to above or Technology Equity Associates
and did not conduct any negotiations with either such party to determine if it
would be willing to increase its offer to acquire Ascent.
REASONS FOR AND PURPOSE OF THE MERGER
The purpose of the merger is to acquire the publicly held minority interest
in Ascent. In deciding to undertake the merger, which will result in Ascent
ceasing to be a public company, Liberty Media considered the following factors,
among others:
- Ascent's need for additional capital resources to develop its business;
- the trading price volatility of Ascent common stock caused, in part, by
its limited public float;
- recent capital market trends, which have adversely affected the ability
of companies situated similarly to Ascent to access capital;
- the costs associated with operating Ascent as a separate public company,
including costs and expenses associated with Securities and Exchange
Commission reporting, communicating with stockholders and related legal
and accounting fees, which Liberty Media anticipates could result in
savings of approximately $2 million per year, if eliminated;
- challenging economic conditions impacting film and television post
production, sluggishness in the advertising market reducing television
advertising production spending and lower spending from larger clients
for traditional media services;
- Ascent's outstanding debt, including Ascent's greater cost of borrowing
as compared to Liberty Media's and the restrictive covenants contained in
Ascent's debt agreements; and
- the impact on Liberty Media's own common stock of the issuance of Liberty
Media shares to Ascent's stockholders.
CONFLICT OF INTEREST OF LIBERTY MEDIA
In setting the exchange ratio, Liberty Media's financial interest was
adverse to the interests of the public stockholders of Ascent. Liberty Media
determined the exchange ratio without negotiating with Ascent and makes no
representation or warranty in this notice/prospectus as to the fairness or
adequacy of the consideration to be paid in the merger. Under Delaware law,
which governs the merger, you have the right to seek appraisal of your Ascent
shares as provided for under such law. Please see the section entitled "The
Merger -- Appraisal Rights" of this notice/prospectus for a description of the
appraisal process.
31
INTERESTS OF DIRECTORS AND OFFICERS
Certain directors and officers of each of Liberty Media, Merger Sub and
Ascent have one or more of the following interests that may be deemed to be
different from, or in addition to, the interests of Ascent stockholders
generally. In the case of directors of Liberty Media and Merger Sub, these
interests presented actual or potential conflicts of interest in determining the
exchange ratio and the other terms of the merger:
- ownership of shares of Liberty Media common stock;
- ownership of options, warrants or other securities exercisable for or
convertible into shares of Liberty Media common stock; and
- indemnification obligations between Ascent and its directors and
officers.
Officers and directors of Liberty Media, Merger Sub and/or Ascent who own
shares of Ascent Class A common stock at the effective time of the merger will
receive shares of Liberty Media Series A common stock on the same terms as the
public stockholders of Ascent. Officers and directors of Ascent who own options
with respect to shares of Ascent Class A common stock at the effective time of
the merger will have such interests assumed by Liberty Media on the same basis
as any other outstanding stock options exercisable for shares of Ascent Class A
common stock. Assumed stock options will be exercisable with respect to the
number of shares of Liberty Media Series A common stock determined by
multiplying the number of underlying shares of Ascent Class A common stock on
the effective date of the merger by the 0.1147 exchange ratio, rounded up to the
nearest whole share. The exercise price per share of Liberty Media Series A
common stock issuable under each assumed stock option will be calculated by
dividing the exercise price of such option before the merger by the 0.1147
exchange ratio, rounded down to the nearest whole cent.
The following table identifies those directors and executive officers of
Ascent who are also directors or officers of Liberty Media, Merger Sub and/or
other affiliates of Liberty Media, and the positions held by such individuals
with Liberty Media and Ascent. Messrs. Bennett, Howard, Romrell and Fitzgerald
do not receive any compensation for their services as a member of Ascent's board
of directors. Liberty Media allocates a portion of Mr. Fitzgerald's salary and
benefits, including 401(k) contributions, to Ascent.
NAME AFFILIATED ENTITY POSITION(S) HELD
---- ----------------- ----------------
William R. Fitzgerald...... Ascent Chairman of the Board, President, Chief
Executive Officer and Director
Liberty Media Senior Vice President
Robert R. Bennett.......... Ascent Director
Liberty Media President, Chief Executive Officer and
Director
Gary S. Howard............. Ascent Director
Liberty Media Executive Vice President, Chief Operating
Officer, Director
Larry E. Romrell........... Ascent Director
Liberty Media Director
STRUCTURE OF THE MERGER; MERGER CONSIDERATION
Merger Consideration. At the effective time of the merger, each holder of
shares of Ascent Class A common stock who has not properly exercised appraisal
rights will be entitled to receive 0.1147 of a share of Liberty Media Series A
common stock for each share of Ascent Class A common stock held immediately
prior to the merger. The number of shares of Liberty Media Series A common stock
stockholders receive in the merger will be appropriately adjusted for any stock
splits, combinations and other similar events that occur between the date of the
resolution of the executive committee of the board of directors of Liberty Media
authorizing the merger and the effective date of the merger. We will not issue
fractional shares of Liberty Media common stock in the merger. Instead, we will
round the total number of shares of Liberty Media Series A common stock you are
entitled to receive down to the nearest
32
whole number of shares, and you will receive a cash payment for any fraction of
a share to which you would otherwise be entitled, equal to the product of such
fraction times the closing price per share of the Liberty Media Series A common
stock on the New York Stock Exchange on the date the merger is consummated, as
reported in the Wall Street Journal (or, if no such closing price is so
reported, times the fair market value per share of the Liberty Media Series A
common stock on such date, as determined by the board of directors of Liberty
Media), without interest.
Effective Time of the Merger. The merger will become effective when a
certificate of ownership and merger is filed with the Delaware Secretary of
State or at a later time as may be specified in the certificate of ownership and
merger. The effective time of the merger will occur as soon as practicable after
the last of the conditions described under "-- Conditions to the Merger" below,
has been satisfied or waived by Liberty Media. We expect the merger to become
effective on the 20th business day following the mailing of this
notice/prospectus. However, because the merger is subject to certain conditions,
the merger may occur on any date thereafter, or not at all. LIBERTY MEDIA MAY
ALSO ELECT NOT TO PROCEED WITH THE MERGER AT ANY TIME PRIOR TO THE FILING OF THE
CERTIFICATE OF OWNERSHIP AND MERGER IF IT SHOULD DETERMINE THAT THE MERGER IS NO
LONGER IN THE BEST INTERESTS OF LIBERTY MEDIA.
Conditions to the Merger. The merger is subject to certain customary
closing conditions, including:
- Merger Sub must own directly of record at least 90% of the common stock
of Ascent outstanding at the time of filing the certificate of ownership
and merger in Delaware;
- Liberty Media's registration statement relating to the merger must be
effective and must not be subject to any stop order or proceedings
seeking a stop order; and
- the shares of Liberty Media Series A common stock that will be issued in
the merger must be authorized for listing on the New York Stock Exchange,
subject only to official notice of issuance.
EXCHANGE OF ASCENT STOCK CERTIFICATES FOR SHARES OF LIBERTY MEDIA SERIES A
COMMON STOCK
As soon as practicable after completion of the merger, the exchange agent,
EquiServe Trust Company, N.A., will mail to you a letter of transmittal and
instructions for use in surrendering your Ascent stock certificates in exchange
for the registration, by electronic book-entry, of the shares of Liberty Media
Series A common stock to which you are entitled, and cash in lieu of fractional
shares. When you deliver your stock certificates to the exchange agent along
with a properly executed letter of transmittal and any other required documents,
your stock certificates will be cancelled and you will receive statements
indicating book-entry ownership of Liberty Media Series A common stock
representing the number of full shares of Liberty Media Series A common stock to
which you are entitled. In addition, you will receive payment in cash, without
interest, in lieu of any fractional shares of Liberty Media Series A common
stock which would have been otherwise issuable to you as a result of the merger.
At such time, you will also receive instructions from the exchange agent
advising you of the procedures whereby you may, upon request, obtain stock
certificates representing your shares of Liberty Media Series A common stock.
You should not submit your Ascent stock certificates for exchange until you
receive the transmittal instructions and a form of letter of transmittal from
the exchange agent.
You are not entitled to receive any dividends or other distributions on
Liberty Media Series A common stock until the merger is completed and you have
surrendered your Ascent stock certificates.
If there is any dividend or other distribution on Liberty Media Series A
common stock with a record date after the date on which the merger is completed
and a payment date prior to the date you surrender your Ascent stock
certificates in exchange for Liberty Media Series A common stock, you will
receive the dividend or distribution with respect to the whole shares of Liberty
Media Series A common stock issued to you promptly after they are issued.
Liberty Media will only issue Liberty Media Series A common stock or a
check in lieu of a fractional share in a name other than the name in which a
surrendered Ascent stock certificate is registered if you present the exchange
agent with all documents required to show and effect the unrecorded transfer of
ownership and show that you paid any applicable stock transfer taxes.
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TREATMENT OF ASCENT STOCK OPTIONS AND WARRANT
Liberty Media will assume outstanding stock options issued under Ascent's
2001 Incentive Plan and the 2000 Nonemployee Director Stock Option Plan of
Ascent, and other stock options and stock appreciation rights not issued under
such plans, and the warrant issued to ACTV, Inc., in each case with respect to
Ascent Class A common stock, on the effective date of the merger. Assumed stock
options and the warrant will be exercisable with respect to the number of shares
of Liberty Media Series A common stock determined by multiplying the number of
underlying shares of Ascent Class A common stock on the effective date of the
merger by the 0.1147 exchange ratio, rounded up to the nearest whole share. The
exercise price per share of Liberty Media Series A common stock issuable under
each assumed stock option and the warrant will be calculated by dividing the
exercise price of such option or the warrant before the merger by the 0.1147
exchange ratio, rounded down to the nearest whole cent.
ACCOUNTING TREATMENT
The merger will be accounted as a "purchase" of a minority interest, as
such term is used under accounting principles generally accepted in the United
States of America, for accounting and financial reporting purposes. Accordingly,
the consideration paid for the acquired Ascent shares will be allocated to the
assets and liabilities of Ascent based on their respective fair values.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes certain material U.S. federal income
tax consequences of the merger that are applicable to U.S. Holders (as defined
below) of Ascent Class A common stock. This discussion is based on and subject
to the Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury regulations, administrative pronouncements and court decisions each as
and in effect as of the date hereof, and all of which are subject to change or
differing interpretation at any time, possibly with retroactive effect. Any such
change or differing interpretation could affect the continuing validity of this
discussion. This discussion assumes that you hold your shares of Ascent Class A
common stock as capital assets within the meaning of Section 1221 of the Code
(generally property held for investment). This discussion is not a complete
analysis of all potential tax effects relevant to the merger.
This discussion does not address all aspects of U.S. federal income
taxation that may be applicable to you in light of your particular circumstances
and does not address special classes of holders of Ascent Class A common stock
that may be subject to special treatment under the Code, such as dealers in
securities, banks, insurance companies, financial institutions, partnerships or
other pass-through entities, tax-exempt organizations, certain expatriates,
non-U.S. persons, stockholders who acquired their shares of Ascent Class A
common stock pursuant to the exercise of options or otherwise as compensation,
or stockholders who hold their stock as part of a hedge, constructive sale, wash
sale, straddle or conversion transaction. This summary does not address the
effect of any state, local or foreign tax laws that may apply or the application
of the U.S. federal estate and gift tax or the alternative minimum tax.
Moreover, the tax consequences to holders of Ascent options and the warrant are
not discussed. We urge you to consult your own tax advisors concerning the U.S.
federal, state, local and foreign tax consequences of the merger that may be
applicable to you.
For purposes of this discussion, a "U.S. Holder" is a beneficial owner of
shares of Ascent Class A common stock that is, for U.S. federal income tax
purposes, (1) a citizen or resident of the United States, (2) a corporation, or
other entity taxable as a corporation, that is organized under the laws of the
United States or any political subdivision thereof, (3) an estate the income of
which is subject to U.S. federal income tax without regard to its source, or (4)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or if the
trust has a valid election in effect to be treated as a U.S. person.
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If a partnership holds shares of Ascent Class A common stock, the tax
treatment of a partner generally will depend on the status of the partner and on
the activities of the partnership. Partners of partnerships holding Ascent Class
A common stock should consult their tax advisors.
CONSEQUENCES OF THE MERGER TO ASCENT STOCKHOLDERS
The receipt of Liberty Media Series A common stock and any cash in lieu of
a fractional share of Liberty Media Series A common stock in exchange for Ascent
Class A common stock in the merger will be a taxable transaction for U.S.
federal income tax purposes. In general, you will recognize capital gain or loss
in an amount equal to the difference between (i) the sum of the fair market
value of the Liberty Media Series A common stock received and the amount of cash
received and (ii) your tax basis in the Ascent Class A common stock exchanged in
the merger. This capital gain or loss will be long-term capital gain or loss if
you held the Ascent Class A common stock for more than one year as of the date
of the merger. Long-term capital gains of certain non-corporate taxpayers
generally are taxed at lower rates than items of ordinary income. The
deductibility of capital losses is subject to limitations.
Your aggregate adjusted basis in the Liberty Media Series A common stock
received in the merger generally will be equal to the fair market value of such
stock as of the date of the merger. Your holding period in the Liberty Media
Series A common stock received in the merger will begin on the day after the
date of the merger.
YOU ARE STRONGLY URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF
U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN VIEW OF YOUR
PARTICULAR CIRCUMSTANCES.
REGULATORY MATTERS
We are not aware of any material regulatory requirements applicable to the
merger under any U.S. state or federal law or regulation, other than any
requirements under applicable federal and state securities laws and regulations
and Delaware corporate law.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF ASCENT AND LIBERTY MEDIA
The shares of Liberty Media Series A common stock that will be issued in
the merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, unless you are considered an "affiliate"
of Ascent within the meaning of Rule 145 under the Securities Act, or if you are
an affiliate of Liberty Media within the meaning of Rule 144 under the
Securities Act.
Persons who may be deemed to be affiliates of Ascent include individuals or
entities that control, are controlled by or are under common control with,
Ascent and may include an officer or director of Ascent. Any person deemed to be
an affiliate of Ascent at the time of the merger may not sell shares of Liberty
Media Series A common stock acquired in the merger except pursuant to an
effective registration statement under the Securities Act covering the resale of
those shares or an applicable exemption under the Securities Act. Rule 145
generally requires that, for specified periods, sales be made in compliance with
the volume limitations, manner of sale provisions and current information
requirements under Rule 144 under the Securities Act. This restriction will
generally lapse at the end of one year from the date the merger is consummated
unless you are an affiliate of Liberty Media, in which case your shares will
remain subject to Rule 144 under the Securities Act. Liberty Media's
registration statement, of which this notice/prospectus forms a part, does not
cover the resale of shares of Liberty Media Series A common stock to be received
by affiliates of Ascent or Liberty Media in the merger.
LISTING ON THE NEW YORK STOCK EXCHANGE
Liberty Media will use reasonable efforts to cause the shares of Liberty
Media Series A common stock that will be issued in the merger to be authorized
for listing on the New York Stock Exchange, subject to official notice of
issuance, before completing the merger. The merger will not be completed before
the authorization is obtained.
35
APPRAISAL RIGHTS
If the merger is consummated, a holder of record of Ascent common stock on
the date of making a demand for appraisal, as described below, will be entitled
to have the fair value of those shares appraised by the Delaware Court of
Chancery under Section 262 of the Delaware General Corporation Law and to
receive payment for the "fair value" of those shares instead of the merger
consideration. In order to be eligible to receive this payment, however, a
stockholder must (1) continue to hold such stockholder's shares through the time
of the merger and (2) strictly comply with the procedures described in Section
262.
THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY
OF THESE PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS
UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF
SECTION 262.
The following summary is not a complete statement of Section 262 of the
Delaware General Corporation Law, and is qualified in its entirety by reference
to Section 262, which is incorporated in this notice/prospectus by reference,
together with any amendments to the laws that may be adopted after the date of
this notice/prospectus. A copy of Section 262 is attached as Annex A to this
notice/prospectus.
Notice Requirements. Under Section 262, where a merger is accomplished
pursuant to Section 253 of the Delaware General Corporation Law, either a
constituent corporation before the effective date of the merger or the surviving
corporation within ten days after the effective date of the merger, is required
to notify each stockholder of Ascent entitled to appraisal rights of the
approval of the merger and that appraisal rights are available to the
stockholder. Such notice must also include a copy of Section 262 and, if given
on or after the effective date of the merger, specify the effective date of the
merger. THIS NOTICE/ PROSPECTUS CONSTITUTES YOUR NOTICE OF APPRAISAL RIGHTS AS
REQUIRED UNDER SECTION 262. IT WILL BE MAILED TO THE STOCKHOLDERS OF ASCENT ON
JUNE 3, 2003.
Demand for Appraisal. In order to exercise appraisal rights, a stockholder
must, within twenty days after the date of mailing of this notice/prospectus,
which serves as notice, demand in writing from the surviving corporation,
Ascent, an appraisal of such stockholder's shares of Ascent common stock. Such
demand will be sufficient if it reasonably informs Ascent of the identity of the
stockholder and that the stockholder intends to demand an appraisal of the fair
value of such stockholder's shares of Ascent common stock. Failure to make such
demand on or before the expiration of such twenty day period will foreclose a
stockholder's rights to appraisal. All demands should be delivered to Ascent and
addressed as follows: Ascent Media Group, Inc., c/o Liberty Media Corporation,
12300 Liberty Boulevard, Englewood, Colorado 80112, Attention: Corporate
Secretary.
Only a record holder of shares of Ascent common stock on the date of making
a written demand for appraisal who continuously holds those shares through the
time of the merger is entitled to seek appraisal. Demand for appraisal must be
executed by or for the holder of record, fully and correctly, as that holder's
name appears on the holder's stock certificates representing shares of Ascent
common stock. If Ascent common stock is owned of record in a fiduciary capacity
by a trustee, guardian or custodian, the demand should be made in that capacity.
If Ascent common stock is owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be made by or for all owners of
record.
An authorized agent, including an agent for one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
If a stockholder holds shares of Ascent common stock through a broker who in
turn holds the shares through a central securities depository nominee such as
Cede & Co., a demand for appraisal of such shares must be made by or on behalf
of the depository nominee and must identify the depository nominee as record
holder.
A record holder such as a broker, fiduciary, depository or other nominee
who holds shares of Ascent common stock as a nominee for more than one
beneficial owner, some of whom desire to demand appraisal, may exercise
appraisal rights on behalf of those beneficial owners with respect to the shares
of
36
Ascent common stock held for those beneficial owners. In that case, the written
demand for appraisal should state the number of shares of Ascent common stock
covered by it. Unless a demand for appraisal specifies a number of shares, the
demand will be presumed to cover all shares of Ascent common stock held in the
name of the record owner.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS WITHIN TWENTY DAYS
AFTER THE MAILING DATE OF THIS NOTICE/PROSPECTUS, WHICH CONSTITUTES YOUR
STATUTORY NOTICE.
Filing of Petition. Within 120 days after the effective date of the
merger, any stockholder who has complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from Ascent a
statement setting forth the aggregate number of shares of common stock with
respect to which demands for appraisal were received by Ascent and the number of
holders of such shares. Ascent must mail this statement within ten days after it
receives the written request or within ten days after the expiration of the
period for the delivery of demands as described above, whichever is later.
Within 120 days after the effective date of the merger, the surviving
corporation or any stockholder who has complied with the requirements of Section
262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Ascent common stock held by all
stockholders seeking appraisal. A dissenting stockholder must serve a copy of
the petition on Ascent. If no petition is filed within the 120-day period, the
rights of all dissenting stockholders to appraisal will cease.
Stockholders seeking to exercise appraisal rights should not assume that
the surviving corporation will file a petition with respect to the appraisal of
the fair value of their shares or that the surviving corporation will initiate
any negotiations with respect to the fair value of those shares. The surviving
corporation is under no obligation to, and has no present intention to, take any
action in this regard. Accordingly, stockholders who wish to seek appraisal of
their shares should initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods and in the manner prescribed
in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
Hearing in Chancery Court. If a petition for an appraisal is filed in a
timely manner, at the hearing on the petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and will
appraise the shares of Ascent common stock owned by those stockholders. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
stock certificates to the Register in Chancery for notation on such certificates
of the pendency of the appraisal proceedings; and if any stockholder fails to
comply with such direction, the Delaware Court may dismiss the proceedings as to
such stockholder. The court will determine the fair value of those shares,
taking into account all relevant circumstances, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, to be paid, if any, upon the fair value. The Court
of Chancery may determine the cost of the appraisal proceeding and assess it
against the parties as the court deems equitable.
Neither Liberty Media nor Ascent makes any representation as to the outcome
of the appraisal of fair value as determined by the court and stockholders
should recognize that such an appraisal could result in a determination of a
value that is higher or lower than, or the same as, the merger consideration.
Liberty Media does not anticipate offering more than the merger consideration to
any stockholder exercising appraisal rights and reserves the right to assert, in
any appraisal proceeding, that, for purposes of Section 262, the "fair value" of
a share of Ascent Class A common stock is less than the merger consideration.
Expenses. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although upon application of a
dissenting stockholder, the court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding (including, without limitation, reasonable attorney's fees and the
fees and expenses of experts) be charged
37
pro rata against the value of all shares of Ascent common stock entitled to
appraisal. In the absence of a court determination or assessment, each party
bears its own expenses.
No Right to Vote or Receive Dividends. Any stockholder who has demanded
appraisal in compliance with Section 262 will not, after the merger, be entitled
to vote such stock for any purpose or receive payment of dividends or other
distributions, if any, on Ascent common stock, except for dividends or
distributions, if any, payable to stockholders of record at a date prior to the
merger.
Withdrawal. A stockholder may withdraw a demand for appraisal and accept
Liberty Media Series A common stock at any time within 60 days after the
effective date of the merger, or thereafter may withdraw a demand for appraisal
with the written approval of Ascent. Notwithstanding the foregoing, if an
appraisal proceeding is properly instituted, it may not be dismissed as to any
stockholder without the approval of the Delaware Court of Chancery, and any such
approval may be conditioned on the Court of Chancery's deeming the terms to be
just. If, after the merger, a holder of Ascent Class A common stock who had
demanded appraisal for his shares fails to perfect or loses his right to
appraisal, those shares will be treated as if they were converted into Liberty
Media Series A common stock at the time of the merger.
BECAUSE A STOCKHOLDER THAT FAILS TO COMPLY ENTIRELY WITH THE STRICT
REQUIREMENTS OF THE DELAWARE GENERAL CORPORATION LAW MAY LOSE SUCH STOCKHOLDER'S
RIGHT TO AN APPRAISAL, ANY ASCENT STOCKHOLDER WHO IS CONSIDERING EXERCISING
APPRAISAL RIGHTS SHOULD PROMPTLY CONSULT A LEGAL ADVISOR.
DELISTING AND DEREGISTRATION OF ASCENT COMMON STOCK AFTER THE MERGER
If the merger is completed, Ascent Class A common stock will be delisted
from the Nasdaq National Market and deregistered under the Securities Exchange
Act.
COMPARISON OF STOCKHOLDER RIGHTS
As a stockholder of Ascent, your rights are governed by Ascent's
certificate of incorporation and bylaws. After completion of the merger, you
will become a stockholder of Liberty Media. As a Liberty Media stockholder, your
rights will be governed by Liberty Media's certificate of incorporation and
bylaws. Ascent and Liberty Media are each incorporated under the laws of the
State of Delaware and accordingly, your rights as a stockholder will continue to
be governed by the Delaware General Corporation Law after completion of the
merger.
This section of the notice/prospectus describes certain differences between
the rights of holders of Ascent common stock and Liberty Media common stock.
This description is only a summary and may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents we refer to for a more complete understanding of the differences
between being a stockholder of Ascent and being a stockholder of Liberty Media.
COMMON STOCK
Ascent has Class A common stock and Class B common stock issued and
outstanding and Liberty Media has Series A common stock and Series B common
stock issued and outstanding. Ascent has authorized 400,000,000 shares of common
stock, and Liberty Media has authorized 4,400,000,000 shares of common stock. As
of March 31, 2003, there were approximately 57.2 million shares of Ascent common
stock outstanding and an aggregate of approximately 7.9 million shares reserved
for issuance upon exercise of stock options and the warrant. As of March 31,
2003, there were approximately 2,685.1 million shares of Liberty Media common
stock outstanding and an aggregate of approximately 77.4 million shares reserved
for issuance upon exercise of options and warrants.
CLASS B/SERIES B CONVERSION
Each share of Class B common stock of Ascent and each share of Series B
common stock of Liberty Media, respectively, is convertible, at the option of
the holder, into one share of Class A common stock of Ascent or one share of
Series A common stock of Liberty Media, respectively. Neither the Class A common
stock of Ascent nor the Series A common stock of Liberty Media is convertible.
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PREFERRED STOCK
Ascent has authorized 5,000,000 shares of preferred stock, none of which
were outstanding as of March 31, 2003. Liberty Media has authorized 50,000,000
shares of preferred stock, none of which were outstanding as of March 31, 2003.
VOTING RIGHTS
With respect to each of Ascent and Liberty Media, the holders of Class A
common stock and Series A common stock, respectively, are entitled to one vote
for each share held, and the holders of Class B common stock and Series B common
stock, respectively, are entitled to ten votes for each share held, on all
matters voted on by stockholders, including elections of directors. Neither
Ascent nor Liberty Media provides for cumulative voting in the election of
directors in its respective charter.
LIQUIDATION AND DISSOLUTION
In the event of liquidation, dissolution or winding up of Ascent, the
holders of Class A common stock and Class B common stock of Ascent, and in the
event of liquidation, dissolution or winding up of Liberty Media, the holders of
Series A common stock and Series B common stock of Liberty Media, respectively,
will share equally, on a share for share basis, in the assets remaining for
distribution to the common stockholders of the applicable corporation, after
payment or provisions for payment of such corporation's debts and liabilities
and subject to prior payment in full of any preferential amounts to which the
holders of such corporation's preferred stock may be entitled.
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. The boards of
directors of each of Ascent and Liberty Media are divided into three classes, as
nearly equal in size as possible, with one class elected annually. The holders
of a series of preferred stock of each of Ascent and Liberty Media may be
entitled to elect additional directors, if the certificate of designations, with
respect to such series so provides. Directors of each of Ascent and Liberty
Media are elected for a term of three years, subject to the election and
qualification of the director's successor and to the director's earlier death,
resignation or removal.
NUMBER OF DIRECTORS
Ascent's board of directors currently consists of seven directors. The
number of directors on Ascent's board is determined by resolution of the board,
but cannot be less than three. Liberty Media's board of directors currently
consists of eight directors. The number of directors on Liberty Media's board is
determined by resolution of the board, but cannot be less than three.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The certificate of incorporation of Ascent provides that, unless otherwise
prescribed by law, any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken without a meeting, without notice
and without a vote if a consent or consents in writing setting forth the action
so taken shall be signed by the holder or holders of outstanding stock of Ascent
having at least the minimum number of votes necessary to authorize or take such
action at a meeting at which all shares of stock of Ascent entitled to vote
thereon were present and voted. The certificate of incorporation of Liberty
Media, however, does not permit its stockholders to take action by written
consent in lieu of a meeting of stockholders, except as otherwise provided in
the terms of any series of preferred stock.
Special meetings of stockholders of each of Liberty Media and Ascent for
any purpose or purposes may be called only by the Secretary of the applicable
company (1) upon written request of holders of not less than 66 2/3% of the
total voting power of outstanding capital stock or (2) at the request of at
least 75% of the members of the board then in office, except as otherwise
required by law and subject to the rights of the holders of any series of
preferred stock. No business other than that stated in the notice of special
meeting shall be transacted at any special meeting.
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REMOVAL OF DIRECTORS
The certificate of incorporation of Liberty Media provides that, subject to
the rights of any series of preferred stock, directors may be removed from
office only for cause upon the affirmative vote of the holders of a least a
majority of the total voting power of the then outstanding shares of Series A
common stock, Series B common stock and any series of preferred stock entitled
to vote at an election of directors, voting together as a single class.
The certificate of incorporation of Ascent provides that, subject to the
rights of the holders of any series of preferred stock, directors may be removed
from office only for cause upon the affirmative vote of the holders of at least
66 2/3% of the total voting power of the then outstanding shares of Class A
common stock, Class B common stock and any series of preferred stock entitled to
vote at an election of directors, voting together as a single class. Except as
may otherwise be provided by law, "cause" for removal, as defined in Ascent's
certificate of incorporation, shall exist only if: (i) the director whose
removal is proposed has been convicted of a felony, or has been granted immunity
to testify in an action where another has been convicted of a felony, by a court
of competent jurisdiction and such conviction is no longer subject to direct
appeal; (ii) such director has become mentally incompetent, whether or not so
adjudicated, which mental incompetence directly affects his ability as a
director of Ascent, as determined by at least 66 2/3% of the members of the
board of directors then in office (other than such director); or (iii) such
director's actions or failure to act have been determined by at least 66 2/3% of
the members of the board of directors then in office (other than such director)
to be in derogation of the director's duties.
ACTIONS REQUIRING SUPERMAJORITY VOTE
The certificate of incorporation of Liberty Media provides that, subject to
the rights of the holders of any series of preferred stock, the affirmative vote
of the holders of at least 66 2/3% of the voting power of outstanding capital
stock, voting together as a single class, is required for the following
corporate actions:
- to adopt, amend or repeal any provision of the certificate of
incorporation or the addition or insertion of other provisions in the
certificate;
- to adopt, amend or repeal any provision of the bylaws;
- the merger or consolidation with any other corporation;
- the sale, lease or exchange of all, or substantially all, of the assets
of the corporation; or
- the dissolution of the corporation.
However, the foregoing voting requirement shall not apply to any of the
foregoing corporate actions (1) as to which the Delaware General Corporation
Law, as then in effect, does not require the consent of its stockholders or (2)
which has been approved by at least 75% of the members of its board then in
office has approved.
Liberty Media's chairman, John C. Malone, holds the power to direct the
vote of approximately 44% of Liberty Media's outstanding voting power, including
the power to direct the vote of approximately 94% of the outstanding shares of
Liberty Media's Series B common stock.
The certificate of incorporation of Ascent does not require a supermajority vote
to take any actions except as discussed above under "Removal of Directors."
EXPERTS
The consolidated balance sheets of Liberty Media Corporation and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2002
have been incorporated by reference herein in reliance upon the report, dated
March 17, 2003, of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
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As discussed in notes 3 and 7 to the consolidated financial statements,
Liberty Media Corporation changed its method of accounting for intangible assets
in 2002 and for derivative financial instruments in 2001.
The consolidated balance sheets of Telewest Communications plc and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2002, have been incorporated by reference herein in reliance upon the report,
dated March 26, 2003, of KPMG Audit Plc, independent chartered accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The report of KPMG Audit plc dated March 26, 2003 contains an explanatory
paragraph that states that Telewest Communications plc is undergoing financial
restructuring which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in note 3 to the consolidated financial statements, Telewest
Communications plc changed its method of accounting for intangible assets in
2002 and derivative instruments in 2001.
The consolidated balance sheets of Ascent Media Group, Inc. (formerly known
as Liberty Livewire Corporation) and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for the years ended
December 31, 2002 and 2001, the seven months ended December 31, 2000 and the
five months ended May 31, 2000, have been incorporated by reference herein in
reliance upon the report, dated February 18, 2003, of KPMG LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
The KPMG LLP report states that effective June 9, 2000, Liberty Media
Corporation obtained a controlling interest in Ascent Media Group, Inc.
(formerly known as Liberty Livewire Corporation) in a business combination
accounted for as a purchase. As a result of the business combination, the
consolidated financial information for the period after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition, and therefore is not comparable.
In addition, the KPMG LLP report states that Ascent adopted Statement of
Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective
January 1, 2002, and accordingly, has changed its method of accounting for
goodwill and other intangible assets for the year ended December 31, 2002.
LEGAL MATTERS
An opinion regarding the legality of the Liberty Media Series A common
stock to be issued in the merger is being provided by Baker Botts L.L.P.,
counsel to Liberty Media.
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ANNEX A
SECTION 262
OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
("APPRAISAL RIGHTS")
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
A-1
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or section 253 of this title, then, either a constituent corporation
before the effective date of the merger or consolidation, or the surviving
or resulting corporation within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given,
A-2
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the resulting corporation would have had to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving or
resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit discovery or
other pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may
A-3
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
A-4
ANNEX B
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] 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
---------------------
ASCENT MEDIA GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-1679856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 [X] 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates on the
last business day of the registrant's most recently completed second fiscal
quarter (June 28, 2002) was approximately $14,226,557. The number of shares of
common stock issued and outstanding at March 7, 2003 was: 4,884,565 Class A
common stock and 52,341,164 Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 19
ITEM 3. LEGAL PROCEEDINGS........................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS......................................... 22
ITEM 6. SELECTED FINANCIAL DATA..................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 43
ITEM 11. EXECUTIVE COMPENSATION...................................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 59
ITEM 14. CONTROLS AND PROCEDURES..................................... 62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 63
SIGNATURES............................................................ 64
CERTIFICATIONS........................................................ 65
1
This report contains statements that constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. To
the extent that such statements are not recitations of historical fact, such
statements constitute forward-looking statements that, by definition, involve
risks and uncertainties. Where, in any forward-looking statement, Ascent Media
Group, also referred to in this report as "we" or the "Company", expresses an
expectation or belief as to future results or events, such expectation or belief
is expressed in good faith and believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The following include some but not all of the
factors that could cause actual results or events to differ materially from
those anticipated:
- industry-wide market factors such as the timing of, and spending on,
feature film and television production;
- spending on foreign and domestic television advertising;
- foreign and domestic spending by broadcasters, cable companies and
syndicators on first run and existing content libraries;
- the possibility of an industry-wide strike or other job action by or
affecting a major entertainment industry union;
- failure to maintain relationships with key customers and certain key
personnel;
- more rapid than expected technological obsolescence;
- failure to integrate acquired operations in expected time frames;
- continuing negative economic conditions potentially impacting our ability
to maintain compliance with our debt covenants; and
- threatened terrorist attacks and ongoing military action in the Middle
East and other parts of the world.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this annual report, and the Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based. For a
discussion of additional factors which may affect future results of operations,
see Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS -- Factors That May Affect Future Results
of Operations" below.
PART I
ITEM 1. BUSINESS
OVERVIEW
Ascent Media Group, Inc., incorporated in Delaware in 1952, provides
creative and technical media services to the media and entertainment industries.
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, corporate,
educational, industrial and advertising content. Our assets and operations are
primarily composed of the assets and operations of ten companies acquired during
2001 and 2000. The combination and integration of these acquired entities allow
us to offer integrated outsourcing solutions for the technical and creative
requirements of our clients, from content creation to distribution of the final
product.
We have organized our facilities and operations into three business
segments or groups. Each business segment has a president, director of finance,
director of technology and director of sales and marketing
2
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 business segment to
focus on its particular set of services and client base, while our centralized
corporate functions facilitate implementation of financial and operational
controls across the organization. Our business segments are described below. For
financial information about each business segment, see Part IV, Item 15,
"EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K." For
information about the services that each business segment provides, see
"Services" in this Item 1 below.
ASCENT MEDIA CREATIVE SERVICES
Our Creative Services Group provides services necessary to complete the
creation of original content including feature films, television shows, movies
of the week/mini series for television, television commercials, music videos,
promotional and identity campaigns and corporate communications programming. Our
services begin after principal photography and cover a wide range of services
necessary to complete a project. This may include film to video tape transfers,
color correction, creative editorial services, graphics and title sequences,
electronic assembly, two-dimension compositing, creation of computer generated
images, sound editorial, sound mixing, music composition, sound design and
integration of interactive program elements. The Creative Services Group has
three divisions: Entertainment Television, Commercial Television and Audio.
ASCENT MEDIA MANAGEMENT SERVICES
Our Media Management Services Group optimizes, archives, manages and
repurposes media assets for global distribution. We provide access to all forms
of content, duplication and formatting services, language conversions and
laybacks, restoration and preservation of old or damaged content, mastering from
motion picture film to high resolution or data formats, digital audio and video
encoding services and digital media management services for global home video,
broadcast, pay-per-view, video-on-demand, streaming media and other emerging new
media distribution channels.
ASCENT MEDIA NETWORK SERVICES
Our Network Services 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 Network
Services Group primarily provides dedicated facilities and resources designed
for specific client requirements on the basis of contractual agreements.
FORMATION
NAME CHANGE
On November 20, 2002, we changed our name from Liberty Livewire Corporation
to Ascent Media Group, Inc.
CHANGE IN CONTROL AND SUBSEQUENT ACQUISITIONS AND DIVESTITURES
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, referred to in this report as
Liberty Media, entered into a merger agreement, 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.
3
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 which was at that time a tracking stock of AT&T. As a result,
Liberty Media acquired 60% of our 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. Prior to the Todd Merger,
the Company, provided sound, video and ancillary post production and
distribution services to the motion picture and television industries in the
United States and Europe.
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, the assumption of 4MC stock options which were converted into stock
appreciation rights to purchase 1,936,778 Liberty Media Group Class A common
stock valued at $52.9 million, and the assumption of a warrant to an investor
which was converted into a warrant 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.
Virgin Media Group Limited. 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 Liberty Media and us.
Certain Assets of SounDelux Entertainment Group of Delaware. On July 19,
2000, a wholly-owned subsidiary of Liberty Media, referred to in this report as
Liberty Sub, acquired Soundelux, which consisted of certain assets and
operations of SounDelux Entertainment Group of Delaware, Inc., referred to in
this report as 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 (i) Triumph
Communications Inc., (ii) Triumph Communications & Fiber Services, LLC, (iii)
Triumph Communications & Leasing Services Inc., (iv) American Simulcast Corp.,
and (v) The Triumph Switch Company LLC, collectively referred to in this report
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.
On December 23, 2002, the Company sold to Leafco Communications, Inc. all
of its equity interest in Triumph for nominal consideration plus the assumption
of net liabilities in the amount of $4.0 million. In connection with this sale,
the Company entered into an agreement to loan the buyer an amount not to exceed
$4.0 million. As of the date of this report, such loan agreement has been
terminated by the parties and the buyer has repaid to the Company all monies
advanced to the buyer pursuant to this loan. In connection with this loan
termination, the Company entered into an agreement to loan Rapco Enterprises,
Inc., an affiliate of Leafco Communications, Inc., $2.0 million.
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
4
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, Liberty Media acquired
Video Services Corporation, also referred to as VSC. The total consideration
paid by Liberty Media was valued at $119.7 million. The $119.7 million was
comprised of $38.0 million in cash, paid to the shareholders of VSC, and an
additional $46.5 million of debt of VSC paid or assumed by Liberty Media for a
total of $84.5 million in cash. In addition, Liberty Media issued 1,441,212
shares of Liberty Media Group Class A common stock and options to purchase
119,666 shares of Liberty Media Group Class A common stock, with an aggregate
estimated fair market value of $35.2 million at the time of signing of the
transaction.
Also on December 22, 2000, pursuant to a contribution agreement, Liberty
Media contributed to us 100% of the outstanding capital stock of 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 Liberty Media and us (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
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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.
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 digital versatile disc (DVD) design, authoring
and encoding services to the home video market. Cinram-POP is located in Santa
Monica, California.
BVI-Miami, LLC. On May 6, 2002, we entered into both an Amended and
Restated Operating Agreement and a Contribution and Assignment and Assumption
Agreement with Broadcast Video, Inc. (referred to in this report as "Broadcast
Video") and BVI-Miami, LLC (referred to in this report as "BVI-Miami"). Pursuant
to such agreements, we contributed assets and obligations of our former
subsidiary, The Post Edge, Inc., doing business as Manhattan Transfer-Miami,
into BVI-Miami, a newly formed Miami, Florida-based limited liability company
with Broadcast Video. BVI-Miami consists of the operations of The Post Edge,
Inc. and the operations of Broadcast Video and certain of its affiliated
businesses. We own a 40% membership interest in BVI-Miami. Broadcast Video owns
the remaining 60% membership interest and manages BVI-Miami's operations. The
net book value of the assets and liabilities of $2.5 million were reclassified
as an investment. We do not have any current or contingent material obligations
to BVI-Miami.
LIBERTY MEDIA CORPORATION
As a result of these acquisitions and certain other transactions, at
December 31, 2002, Liberty Media owned over 91% of our outstanding common stock,
which represents over 99% of our voting power. For information on Liberty
Media's interest in the Company, see Part II, Item 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS -- Liquidity and
Capital Resources -- Liberty Subordinated Credit Agreement and -- Stock Sales to
Liberty Media" and Part III, Item 12, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
INDUSTRY
CREATIVE MEDIA SERVICES
The creative media services industry supports the media and entertainment
industries 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 creative media 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
creative media services company providing fully-integrated service solutions.
Our business segments 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 media and
entertainment industries are expected to have an impact on our business
segments:
- 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. This may
lead to an increased demand for capital expenditures in order to meet the
industry
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demand for technological innovation. If we meet these technological
challenges, we may benefit from the ability to provide an increasingly
complex mix of content formats and broadcast standards to various
geographic locations 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.
- 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 Internet protocol
distribution, or 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, which
could require investment in additional equipment required to service
digital media. At the same time, 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
distribution outlets and revenue streams from the same programming.
- Increased outsourcing of technical and creative services. Film and
television studios as well as broadcast and cable networks 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 integrated 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 the technology, infrastructure and creative talent that we
provide may enhance the creative process of producing original
programming and modernizing aging library material.
- Reality-Based Programming. Broadcast and cable programmers continue to
rely on reality-based programming for significant portions of their
primetime and pre-primetime schedules. Such shows tend to have lower
post-production budgets than traditional scripted programming.
Accordingly, the prevalence of such programming may reduce industry
demand for some of the services that we provide.
- Content Repurposing. Broadcast and cable programmers have continued to
show more regular-season reruns, both in regular time slots and at
alternative viewing times. To the extent that this practice may reduce
demand for original programming, or erode the traditional concept of the
24-week television season, such trends could reduce industry demand for
some of our services.
- Extended Use of Advertising Spots. Although television commercials have
traditionally had a relatively short "shelf-life," with spots updated
frequently within a given advertising campaign, some advertisers have
begun to re-use the same television commercials for longer periods.
Accordingly, production of new short-form television commercials remains
slow, despite the recent increase in television ad spending. If such
trend continues, it could reduce industry demand for some of our
services.
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MOTION PICTURE PRODUCTION AND DISTRIBUTION
Various facilities throughout the Company provide services to the motion
picture industry. The Creative Services business segment creates visual effects,
sound effects and animation sequences and integrates them into newly-released
feature films, while the Media Management and Network Services business segments
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.
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, as the demand
for digital video product grows, most media content libraries 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 Creative Services
Group provides a full array of services to facilitate the creation of television
programs and commercials, the Media Management Services Group provides a full
array of services for managing existing content libraries, and the Network
Services Group provides a full array of services necessary to deliver television
programming to program distributors.
The increase in international demand for entertainment content has further
driven the need for new and repurposed 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.
NEW MEDIA PRODUCTION AND DISTRIBUTION
The television production and distribution industry is in a state of
transformation. Both multiple system cable operators, also called MSOs, and
direct broadcast satellite, or DBS, operators have introduced new products and
services into the marketplace. These content 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 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. Interactive television, or ITV,
middleware developers such as Wink, OpenTV, and Liberate Technologies are
currently deploying their technology platforms into digitally enabled TV
households.
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As a result of the introduction of services such as PVRs, VOD, subscription
video-on-demand, or SVOD, and 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.
FACTORS AFFECTING THE GROWTH AND DEVELOPMENT OF OUR BUSINESSES
The growth and development of the businesses described above is dependent
upon a number of factors that could cause actual results to differ materially
from those anticipated. For a discussion of those factors see Part II, Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS -- Factors That May Affect Future Results of Operations."
Additionally, the liquidity and capital resources of the Company may also affect
the growth and development of such businesses. For a discussion of the Company's
liquidity and capital resources, see Part II, Item 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
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, 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 Ascent Media Group enterprise; and integration
of financial and administrative functions.
Our objective is to be a leading provider of services to the media and
entertainment industry and provide customers quality solutions for the creation,
management and distribution of content, individually and as part of a package
solution on a global basis. We intend to achieve this objective by pursuing the
following strategies:
Establish centralized, scalable, financial and operating
infrastructure. We have established an experienced management team. 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 leverage our scale
opportunities, our technical capacities, our breadth of services and our global
reach in order to broaden our relationships within the organizational structure
of our client base. We intend to further integrate our facilities and operations
establishing "best practices" and increase scale and capacity to drive growth.
Our goal is to deploy proven, leading technologies in a consistent manner across
all of our operations.
Leverage our core businesses in the developing digital media service
platform. We intend to leverage our existing client relationships,
technological expertise and digital infrastructure to build new revenue streams
in emerging new media markets. We intend to develop new business opportunities
in areas such as digital imaging, digital media management and interactive
media.
Drive the convergence of traditional and new media. We intend 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 scaleable enterprise solutions to our existing
client base. Second, we intend to effectively consolidate and integrate newly
acquired assets and operations with our existing businesses. Finally, we plan to
invest in emerging growth opportunities and
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deploy next-generation digital media services in the areas of digital imaging,
digital media 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.
Our ability to execute our strategy is dependent upon a number of factors
that could cause actual results to differ materially from those anticipated. For
a discussion of those factors see Part II, Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS -- Factors That May
Affect Future Results of Operations." Additionally, our ability to execute our
strategy is also dependent on our liquidity and capital resources. For a
discussion of the Company's liquidity and capital resources, see Part II, Item
7., "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
SERVICES
CREATIVE SERVICES GROUP
The Creative Services Group has three divisions: Entertainment Television,
Commercial Television and Audio. Generally, the Creative Services Group provides
the technical and creative services necessary to conform principal photography
into a final product suitable for viewing audiences. We digitally create or
manipulate sounds and images in high-resolution formats for integration into
feature films, television programs, television commercials, music videos,
promotional and identity campaigns and corporate communications programming. In
fiscal year 2002, the Creative Services Group contributed $275.1 million, or 51%
of our total revenues, as compared to $332.9 million, or 56.2%, in fiscal year
2001 and $221.0 million, or 72.1%, in fiscal year 2000.
ENTERTAINMENT TELEVISION DIVISION
We 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. We believe our
competitive advantages lie in the breadth and scalability of our services, the
reputation and accessibility of our creative talent and our 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, Level
3, Digital Symphony, Soho Images and St. Anne's. 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); an Emmy Award for
The X-Files (Best Visual Effects for a Series); and Monitor Awards for Alias,
"Pilot" (Film Originated TV Series, Best Color), The X-Files, "John Doe" (Film
Originated TV Series, Best Color Finalist), CSI: Crime Scene Investigators,
"Alter Boys" (Film Originated TV Series-Best Color Finalist), Almost A
Woman(Film Originated TV Specials-Best Color Correction), The Lost Battalion
(Film Originated TV Specials-Best Color Correction Finalist), Fidel (Film
Originated TV Specials-Best Color Correction Finalist), Kite & Fly, "Trip"
(Music Videos, Best Color Correction Finalist). 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.
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Transfer and digital formatting. We receive 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 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.
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
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. We believe our
competitive advantages lie in the reputation and accessibility of our creative
talent, the ability to provide scale and global reach for national and
international advertising campaigns and the ability to provide the 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 Company 3, R!OT, Method, Filmcore, POP, Rushes, SVC, One Post Ltd. 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" and "Topseed"; Chevy, "Brawl", Snap.com, "New
Friend", 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 We Stand Alone (Documentaries, Best Audio Mixer), United Airlines,
"Pager" (National Commercials, Best Audio Mixing), Skittles, "Maze" (National
Commercials, Best Color Correction Finalist), FX, "Born to be Wild" (On Air
Promotions, Best Audio Mixing), FX "Born to be Wild" (On Air Promotions, Best
Sound Design Finalist); 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), TNT,
"Saturday Night New Classic: Fargo" (Silver, Creative
11
Editorial); Broadcast Design Awards for Turner Production Effects, "Turner
Investor Sales Tapes"(Gold), Turner Classic Movies, "Trailers" (Gold), VH-1
Fashion Awards, "Open Animation" (Bronze), 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,
equipment and 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.
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
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.
Each has contributed to many television and motion picture projects and each has
won awards for their efforts in these areas. Soundelux also provides high-end
microphones for the music industry. The Hollywood Edge and Soundelux Microphones
distribute sound tools to the consumer market through worldwide distribution
channels and the Internet.
Recent awards garnered by the Audio Division include Academy Awards for
Chicago (Best Sound), Black Hawk Down (Best Sound), Braveheart (Best Sound
Effects Editing), Last of the Mohicans (Best Sound), British Academy Awards for
Chicago (Best Sound), 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 We Stand Alone (Best Audio Mixer, Documentaries);
Alias, "Pilot" (Best Color Correction, Film Originated Television Series) and
Almost a Woman (Best
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Color Correction, Film Originated Television Specials), United Airlines, "Pager"
(Best Audio Mixing, National Commercial), FX, "Born to be Wild" (Best Audio
Mixing, On Air Promotions), 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 (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 editing, music recording, music composition and clearance,
music supervision, overseas music recording, score production and song
placement. Feature film and television producers utilize our studio facilities
and 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 specialized sound treatments and formats.
MEDIA MANAGEMENT SERVICES GROUP
The Media Management Services Group provides owners of content libraries
with an entire complement of facilities and services necessary to optimize,
archive, manage and repurpose media assets for global distribution via freight,
satellite, fiber and the Internet. We provide access to all forms of content,
duplication and formatting services, language conversions and laybacks,
restoration and preservation of old or damaged content, mastering from motion
picture film to high resolution or data formats, digital audio and video
encoding services and digital media management services for global home video,
broadcast, pay-per-view, video-on-demand, streaming media and other emerging new
media distribution channels. We believe our competitive advantages include
client loyalty, reputation, capacity to handle large-scale projects and our
ability to offer integrated content management solutions on a global basis. Our
media facilities are located in Burbank, Hollywood, and Santa Monica,
California; Northvale, New Jersey; Barcelona, Spain and London, England.
We anticipate 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 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 2002, the Media Management Services group
contributed $104.9 million, or 19.5% of our total revenues, as compared to
$104.1 million, or 17.6%, in fiscal year 2001 and $56.8 million, or 18.5%, in
fiscal year 2000. A more detailed description of the key services provided by
our Media Management Services 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 a
highly controlled 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 factor
that benefits our clients. We are an independent archive provider and believe we
are advanced with respect to security, environmental control and access
features.
Asset management center. Physical elements stored in the archive are
uniquely barcoded and maintained in a library management database offering rapid
access to elements, concise reporting of element status and element tracking
throughout its travel through the Company's operations.
Restoration and preservation of existing and damaged
content. Substantially all film elements originating prior to 1983 have faded,
degraded or been damaged. Damaged film negative must be restored
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because sub-masters produced from damaged film will generally not meet the
minimum quality standards required in domestic and international 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 restoration and
preservation services for existing film content.
Transferring film to digital media. A considerable amount of 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 or in other media formats, even
though the destination market is a theatrical release on film. We use advanced
electronic systems to transform content from all current broadcast standards and
formats to 16mm or 35mm film. This process is used for all forms of theatrical
film distribution, including short form and long form advertising, commercials,
studio promotions and trailers, as well as theatrical length presentations
including feature films, concerts and special events.
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
international markets require the original dialog to be replaced with dialog in
the local language. 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
with unique characteristics that significantly increase equipment capacity while
reducing error rates and labor cost.
Digital Media Management Center. We are developing a digital media
management infrastructure, also referred to in this report as the Digital Media
Management Center. For more information on the Digital Media Management Center,
see "DEVELOPING BUSINESSES -- Digital Media Management Center" in this Item I
below.
NETWORK SERVICES GROUP
The acquisitions of the assets and operations that comprise our Network
Services 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 and satellite 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
14
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. On December 23, 2002, we divested our equity ownership in the Triumph
entities. As a result of this divestiture, our Network Services Group
significantly reduced its point-of-presence facilities and its internal fiber
capabilities within the U.S. Our Network Services Group, however, continues to
maintain, in a more cost effective manner, its fiber capabilities through third
party providers.
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. We
believe our competitive advantages lie in our ability to distribute content
worldwide, our ability to package our services in a cost-effective manner, our
backup distribution paths and our reputation for distribution on multiple
technological platforms. Our broadcast facilities are located in California,
Minnesota, Maryland, New York, New Jersey, Connecticut, Florida, the United
Kingdom and Singapore. In fiscal year 2002, the Network Services group
contributed $159.1 million, or 29.5% of our total revenues, as compared to
$155.6 million, or 26.2%, in fiscal year 2001 and $28.6 million, or 9.3%, in
fiscal year 2000. A more detailed description of the key services provided by
our Network Services 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 television production studios in Stamford, Connecticut and
Singapore with live-to-satellite interview services, 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 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.
Syndication and Commercial Integration. We provide programming to most
United States broadcast television stations through daily satellite
transmissions. 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 and computer server
based 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
15
and DBS subscribers. We use automated systems for broadcast playback. 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;
Burbank, California; Minneapolis, Minnesota; New York, New York; Northvale, New
Jersey; Stamford, Connecticut; and Palm Bay, Florida.
Satellite transport. We operate satellite earth station facilities in
Singapore; Burbank, California; New York, New York; Northvale, New Jersey;
Minneapolis, Minnesota; Stamford, Connecticut; and Palm Bay, Florida. Our
facilities are generally staffed 24 hours a day and may be used for downlink,
turnaround and uplink 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 and full-time 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 feeds in both C-Band and Ku-Band frequencies. We also
provide transportable services, including point-to-point microwave transmission,
transportable up-link and downlink transmission, and broadcast quality
teleconference services.
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 Network Services
Group, enabling us to quickly respond to customer needs and new services. AFA's
clients include major broadcast networks, numerous cable channels, corporate
television networks, 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 rental needs.
DEVELOPING BUSINESSES
DIGITAL MEDIA MANAGEMENT CENTER
We are implementing a new digital media management infrastructure called
the Digital Media Management Center, which will provide asset management
services to create, edit, assemble, manage, process, catalog, transport and
deliver all forms of digital media content. The creation of this digital media
management platform provides for an integrated, extensible and scaleable asset
management environment across all of our business segments and operating
divisions. It also supports the workflows and media assets of our clients. We
have developed a set of services for the motion picture, television, commercial
and advertising markets and currently use services to edit, assemble, manage and
deliver digital assets within the Company and for clients. Our digital media
management initiative also provides an operating framework for implementation of
new services, such as metadata creation, ingestion and processing, compression
and encryption, digital content cataloging as well as media versioning and file
based transport and delivery of media content that bring value to our clients.
This business applies to multiple traditional distribution platforms as well as
new media distribution businesses such as VOD.
Our digital media management initiative requires custom design and
development of a comprehensive suite of next generation services designed to
complement our 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 position us ahead of our
competitors by providing migration paths from the management of existing
(physical) media to automated real time management of new (file
16
based) media types. 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 film based project dailies.
Clients will need only a password and a broadband modem to receive Tier One
service, which will stream up to three days' worth of dailies in Windows or
MPEG-4 Media formats. 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 "videotape-free" private network delivery of transferred
film dailies directly to offline editors.
Virtual Sessions. The Virtual Session allows producers to work
collaboratively with editors, effects specialists and telecine artists in an
online interactive environment, minimizing costs and other logistics associated
with long-distance travel. Real-time sessions can be conducted live, enabling
shoulder-to-shoulder collaboration around the globe, with full-resolution images
delivered via private or public networks. 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 online, near line and offline storage solutions, video and
audio duplication, and distribution. Clients may order copies, compilation reels
and customized playlists in a variety of formats, including recordable digital
versatile disc, 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.
NEW PRODUCTS GROUP
We are implementing initiatives through our newly-created New Products
Group that develops new products that will often involve one or more divisions
and newer technology. These products are targeted at generating incremental
revenue or enhancing current offerings utilizing existing operational
infrastructure as a foundation.
The initiatives that the New Products Group is currently developing or has
begun implementing include the following:
VOD/SVOD. Many cable operators see video-on-demand, or VOD, as the key to
providing them a competitive advantage over 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 subscription video-on-demand, or
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 by expanding our existing
services for file encoding, metadata creation, promotional material creation,
file delivery and service reporting into a VOD/SVOD infrastructure and by
leveraging existing relationships with cable operators and content owners. In
addition, we expect to provide support for the other interactive services
expected to complement the VOD/SVOD environment.
Interactive Television. 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 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,
17
post-produced, archived and distributed at the same time and under the same
creative control as the traditional elements.
Store and Forward. Store and Forward is a technology architecture that
allows content to be transported in a cost efficient and timely manner. Many of
our current clients require content to be shipped around the globe within tight
time frames. Store and Forward allows video and data content to become broken
into data packets wrapped in an IP distribution format thus enabling it to be
sent as data files over a variety of transport mechanisms. We are exploring
opportunities to expand our existing content distribution services into the
Store and Forward space.
CUSTOMERS
For the year ended December 31, 2002, no single customer accounted for more
than 10% of our consolidated revenues. No customer accounted for more than 10%
of the Creative Services Group revenue, one customer accounted for 11.1% of the
Media Management Services Group revenue, and two customers accounted for 14.3%
and 11.8%, respectively, of the Network Services Group revenue. The Creative
Services 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 Media Management
Services client base includes the major motion picture studios and their
international divisions as well as independent owners of television and film
libraries. The Network Services client base consists of broadcast and cable
television networks, local television channels, broadcast syndicators, satellite
broadcasters and corporate television networks.
A loss of any of our large customers would reduce our revenues. Although we
serviced over 3,500 customers during the year ended December 31, 2002, our ten
largest customers accounted for approximately 37.5% of our consolidated revenues
and our single largest customer accounted for approximately 6.5% 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.
COMPETITION
The creative media services industry is highly competitive with much of the
competition 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 also outsource their requirements to
other independent providers like us or to other studios. We also actively
compete with certain industry participants that may be smaller but have a unique
operating niche or specialty business. There is no assurance that we will be
able to compete effectively against these competitors, but we believe that our
breadth of services is unique among most competitors in the entertainment
services industry in terms of the range of service offerings within each
business segment. We believe that our reputation and brand names are
acknowledged and recognized for their contribution to creating quality content
and that our ability to offer integrated solutions within and across our
business segments sets us apart from our competitors.
EMPLOYEES
We have approximately 3,825 employees who work in five countries providing
services from approximately 70 operating facilities.
18
REGULATION
Some of our subsidiary companies hold licenses and authorizations from the
Federal Communications Commission, or FCC, required for the conduct of their
businesses, including earth station and various classes of wireless licenses and
an authorization to provide certain services pursuant to Section 214 of 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 fifteen
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 also is typically
subject to regulation under local zoning ordinances.
GEOGRAPHIC AREAS
Please see Part IV, Item 15, "EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K" for Consolidated Financial Statements included in this
report for financial information in each geographic area in which we conduct
business.
ITEM 2. PROPERTIES
The Company's operations are conducted in approximately 70 owned, leased or
licensed operating facilities, located throughout the world.
Domestically, our Creative Services Group, Media Management Services Group,
and Network Services Group, operate primarily in California and the Eastern
seaboard (New York and New Jersey). Our Creative Services Group also operates
facilities in Georgia and Florida; our Media Management Services Group also
operates facilities in Florida; and our Network Services Group also operates
facilities in Connecticut, Minnesota and Florida.
Internationally, our Creative Services Group, Media Management Services
Group, and Network Services Group, operate primarily in London, England. Our
Creative Services Group also operates facilities in Mexico City, Mexico; our
Media Management Services Group also operates facilities in Barcelona, Spain;
and our Network Services Group also operates facilities in the Republic of
Singapore.
Worldwide, we lease approximately 1.3 million square feet and own another
400,000 square feet. In the United States, our leased facilities total
approximately 1.1 million square feet and have terms expiring between June 2003
and December 2012. Several of these agreements have extension options. The
leased properties are used for our technical operations, office space and media
storage. Our international leases have terms that expire between December 2003
and August 2019, and are also used for our technical operations, office space
and media storage. Over half of the international leases have extension clauses.
Approximately 320,000 square feet of our owned facilities are located in
Southern California, with another 80,000 square feet located in Northvale, New
Jersey; Atlanta, Georgia; and Stamford, Connecticut. In addition, we own
approximately 50,000 square feet in London, England. Nearly all of our owned
facilities are purpose-built for our technical and creative service operations.
Our facilities are adequate to support our current near term growth needs.
ITEM 3. LEGAL PROCEEDINGS
Paul Dujardin v. Liberty Media Corporation and Ascent Media Group,
Inc. Mr. Paul Dujardin filed a complaint (the "Complaint") in U.S. District
Court, Southern District of New York, on November 30,
19
2001, against Liberty Media and the Company, alleging violations of Section
10(b), Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934,
common law fraud, negligent misrepresentation, breach of the earnout provisions
of an acquisition agreement involving the sale of Mr. Dujardin's company,
Triumph Communications ("Triumph"), to the Company in July 2000 (the "Triumph
Acquisition"), and breach of contract for failure to make Mr. Dujardin head of
the Company's Network Services Group. The securities claims in the Complaint
allege that, in a series of transactions during 2000, Liberty Media agreed to
secretly contribute assets to the Company in exchange for the Company's stock,
at prices that ultimately were below the NASDAQ trading price on the date the
transactions were consummated. The Complaint alleges that the Company and
Liberty Media fraudulently concealed these "below-market" transactions and that,
as a result, the Company's stock price was inflated. In reality, all of these
allegedly "concealed" transactions were fully disclosed in numerous public
filings made with the Securities and Exchange Commission. According to this
theory, Mr. Dujardin claims approximately $15 million in damages, plus punitive
damages. Mr. Dujardin also claims that, pursuant to the acquisition agreement
between Triumph and the Company, he is entitled to an "earnout" entitling him to
approximately 88,000 shares of the Company's stock. The earnout provision allows
Mr. Dujardin to collect the entire amount upon his termination on August 29,
2001, unless the Company had grounds to terminate Mr. Dujardin for failure to
perform his job duties and commission of misconduct injurious to the Company.
Based on the arbitrator's decision in a related arbitration proceeding with Mr.
Dujardin, we returned the earnout shares to Mr. Dujardin on August 6, 2002. Mr.
Dujardin rejected delivery of the shares and claims that he instead is owed the
lost value of the earnout shares as of August 29, 2001, which he claims is
approximately $682,000. On February 13, 2003, the Company and Liberty Media
filed a motion to dismiss the Complaint in its entirety. We are still awaiting a
decision on the motion from the federal court. We will vigorously defend our
interests in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
RESTATED CERTIFICATE OF INCORPORATION
On November 15, 2002, the holders of 99% of the voting power of the issued
and outstanding shares of capital stock of the Company adopted a restated
certificate of incorporation for the Company ("Restated Certificate of
Incorporation"), through a written consent of stockholders to action without a
meeting, which was delivered to the Company the same day. The Restated
Certificate of Incorporation, which became effective on November 20, 2002,
changed the name of the Company to "Ascent Media Group, Inc." and amended
information with respect to the Company's registered agent in Delaware. On
November 18, 2002, the Company mailed a notice regarding such taking of action
by written consent to the persons (other than the persons who executed and
delivered the written consent) who were the holders of record of issued and
outstanding capital stock of the Company on November 15, 2002, such date being
the date that the signed written consent of stockholders was delivered to the
Company.
ANNUAL MEETING OF STOCKHOLDERS
On December 20, 2002, the Company filed with the SEC and mailed to its
stockholders a definitive proxy statement for its 2002 annual meeting of
stockholders, which was held on January 23, 2003. Stockholders of record as of
December 16, 2002 voted as follows on the following matters:
(1) Election of the three nominees listed below (in alphabetical order) to
Class III of the Company's board of directors. The names of the nominees and
votes for each nominee were as follows:
i. Robert R. Bennett
FOR WITHHELD
----------- --------
480,795,444 52,282
ii. William R. Fitzgerald
FOR WITHHELD
----------- --------
480,733,640 114,086
20
iii. Larry E. Romrell
FOR WITHHELD
----------- --------
480,835,885 11,841
(2) Approval of the issuance of shares of Class B common stock and
convertible notes convertible into shares of Class B common stock after the date
of the annual meeting of stockholders pursuant to Supplement No. 3 (referred to
in this report as "Supplement No. 3"), dated as of August 13, 2002, to the First
Amended and Restated Credit Agreement, dated as of December 22, 2000, between
the Company and Liberty Media (referred to in this report as the "Liberty
Subordinated Credit Agreement"); the potential issuance of shares of Class B
common stock and convertible notes convertible into shares of Class B common
stock pursuant to future supplements to the Liberty Subordinated Credit
Agreement for a purchase price per share or with an initial conversion price per
share, as applicable, determined in a manner no less favorable to the Company
than as provided in Supplement No. 3; and the potential issuance of shares of
Class B common stock upon conversion of convertible notes convertible into
shares of Class B common stock issued pursuant to Supplement No. 3 and
outstanding on the date of the annual meeting of stockholders. For details on
the Liberty Subordinated Credit Agreement and Supplement No. 3, see Part II,
Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Liquidity and Capital Resources -- Liberty Subordinated Credit
Agreement" below.
FOR AGAINST ABSTAIN NON-VOTES
----------- ------- ------- ---------
477,830,683 13,582 749 3,002,712
(3) Ratification of the appointment of KPMG LLP as independent auditors for
the Company for the year ending December 31, 2002.
FOR AGAINST ABSTAIN
----------- ------- -------
480,837,121 9,671 934
The term of office for the following directors continued after the 2002
annual meeting of stockholders (in alphabetical order):
Gary S. Howard (Class II Director)
David P. Malm (Class I Director)
Brian C. Mulligan (Class I Director)
Barney W. Schotters (Class II Director)
The Class I Directors' term expires at the 2003 annual meeting of
stockholders and the Class II Directors' term expires at the 2004 annual meeting
of stockholders.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
CLASS A COMMON STOCK
Our Class A common stock, par value $.01 per share, is traded on the
National Market tier of the Nasdaq Stock Market under the symbol "AMGIA", which
was changed from "LWIRA" on November 20, 2002 in connection with our corporate
name change. The Transfer Agent and Registrar for our Class A common stock is
Continental Stock Transfer and Trust Company, 17 Battery Place, 8th Floor, New
York, New York 10004-1123. We have not paid cash dividends during the last two
fiscal years and do not expect to pay cash dividends in the foreseeable future.
As of December 31, 2002, there were 310 record holders of our Class A common
stock. The number of holders of Class A common stock does not include an
indeterminate number of stockholders whose shares are held by brokers in "street
name." The following table sets forth, for the periods indicated, the high and
low sales prices for our Class A common stock for each full quarterly period
within the two most recent fiscal years, as reported on the Nasdaq Stock Market.
FISCAL YEAR ENDED DECEMBER 31, 2002 HIGH($) LOW($)
----------------------------------- ------- ------
Fourth Quarter.............................................. 3.74 0.87
Third Quarter............................................... 3.15 1.33
Second Quarter.............................................. 6.00 2.63
First Quarter............................................... 7.60 5.56
FISCAL YEAR ENDED DECEMBER 31, 2001 HIGH($) LOW($)
----------------------------------- ------- ------
Fourth Quarter.............................................. 8.28 5.20
Third Quarter............................................... 12.60 4.75
Second Quarter.............................................. 8.98 3.13
First Quarter............................................... 14.38 3.25
CLASS B COMMON STOCK
A holder of shares of our Class B common stock, par value $.01 per share,
has ten votes per share, as compared to one vote per share for holders of the
Class A common stock. We have not paid cash dividends during the last two fiscal
years and do not expect to pay cash dividends in the foreseeable future.
Pursuant to our Restated Certificate of Incorporation, our Class B common stock
is convertible into shares of Class A common stock at any time at the option of
the holder, at a conversion ratio of one-to-one, as the same may be adjusted
from time to time as the result of any stock split, reverse stock split or
similar event effecting the Class A common stock. In all other respects, the
Class A common stock and Class B common stock are substantially identical and
have equal rights and privileges, except that shares of Class B common stock are
convertible into shares of Class A common stock, on a one-to-one basis, at the
option of the holder at any time. All of our Class B common stock is held by
Liberty Media and its subsidiaries and is not publicly traded. We act as
transfer agent for our Class B common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The following paragraph sets forth certain required information with
respect to securities of the Company that were sold by the Company and were not
registered under the Securities Act of 1933, as amended (referred to in this
report as the "Securities Act"). All of the securities so issued were issued in
reliance upon the exemption from registration under the Securities Act afforded
by Section 4(2) thereof.
On December 31, 2002, we issued 2,056,506 shares of our Class B common
stock to Liberty Media, 1,756,770 of our Class B common stock to Liberty LWR,
Inc., and 857,471 shares of our Class B common stock to Liberty Livewire
Holdings, Inc., as quarterly interest payments under the Liberty Subordinated
22
Credit Agreement. For details on the Liberty Subordinated Credit Agreement, see
Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources -- Liberty
Subordinated Credit Agreement" below, and for details on stock sales to Liberty
Media, see Part II, Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources -- Supplement No. 3 and -- Other Stock Issuances to Liberty Media"
below.
EQUITY COMPENSATION PLAN INFORMATION
For Equity Compensation Plan Information, see Part III, Item 12, "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- Non-Security
Holder-Approved Equity Compensation Plans.
ITEM 6. SELECTED FINANCIAL DATA
ASCENT MEDIA TODD-AO
------------------------------------------ -----------------------------------------------------
SEVEN MONTHS FIVE MONTHS FOUR MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31, DECEMBER 31, AUGUST 31, AUGUST 31,
2002 2001 2000 2000 1999 1999 1998
------------ ------------ ------------ ----------- ------------ ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net revenues.............. $ 539,333 $ 592,732 $ 253,099 $ 53,243 $ 43,261 $ 118,517 $ 102,614
========== ========== ========== ========== ========== ========= ==========
Net (loss) income......... $ (135,186) $ (436,289) $ (9,793) $ (1,675) $ 449 $ 1,313 $ 3,419
========== ========== ========== ========== ========== ========= ==========
Income (loss) per share of
common stock:
Basic................... $ (3.07) $ (11.52) $ (0.28) $ (0.16) $ 0.05 $ 0.14 $ 0.34
========== ========== ========== ========== ========== ========= ==========
Diluted................. $ (3.07) $ (11.52) $ (0.28) $ (0.16) $ 0.04 $ 0.13 $ 0.33
========== ========== ========== ========== ========== ========= ==========
Total assets.............. $ 793,326 $ 919,691 $1,175,845 $ 159,448 $ 162,004 $ 153,180 $ 135,366
========== ========== ========== ========== ========== ========= ==========
Long-term debt and capital
lease obligations....... $ 588,355 $ 608,241 $ 492,573 $ 61,210 $ 65,866 $ 65,520 $ 44,654
========== ========== ========== ========== ========== ========= ==========
Cash dividends per share:
Class A................. $ -- $ -- $ -- $ -- $ -- $ 0.05 $ 0.06
========== ========== ========== ========== ========== ========= ==========
Class B................. $ -- $ -- $ -- $ -- $ -- $ 0.04 $ 0.05
========== ========== ========== ========== ========== ========= ==========
Weighted average shares
outstanding:
Basic................... 43,971,836 37,858,123 34,463,373 10,768,773 9,927,077 9,570,187 9,987,429
========== ========== ========== ========== ========== ========= ==========
Diluted................. 43,971,836 37,858,123 34,463,373 10,768,773 10,656,340 9,832,614 11,218,051
========== ========== ========== ========== ========== ========= ==========
The periods presented above reflect the results of the change in control on
June 9, 2000. See Note 1 to the Consolidated Financial Statements.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contain certain 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 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, "Factors That May Affect Future Results of Operations". We disclaim any
obligation to update any of the forward-looking statements contained in this
discussion to reflect any future events or developments. The discussion that
follows should be read in conjunction with the accompanying Consolidated
Financial Statements and the Notes to Consolidated Financial Statements.
OVERVIEW
Ascent Media Group 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 content.
Our assets and operations are primarily comprised of ten companies acquired
during 2001 and 2000. The combination and integration of these acquired entities
allow us to offer our clients a complete range of services, from image capture
to "last mile" distribution. We are able to offer outsourcing solutions for the
technical and creative requirements of our clients. We have organized our
facilities and operations into the three business segments, that we call Groups,
as described below.
Creative Services Group. Our Creative Services Group provides services
necessary to complete the creation of original content including feature films,
television shows, movies of the week/mini series for television, television
commercials, music videos, promotional and identity campaigns and corporate
communications programming. Our services begin after principal photography and
cover a wide range of services necessary to complete a project. This may include
film to video tape transfers, color correction, creative editorial services,
graphics and title sequences, electronic assembly, two-dimension compositing,
creation of computer generated images, sound editorial, sound mixing, music
composition, sound design and integration of interactive program elements. The
Creative Services Group has three divisions: Entertainment Television,
Commercial Television and Audio.
Media Management Services Group. Our Media Management Services Group
optimizes, archives, manages and repurposes media assets for global
distribution. We provide access to all forms of content, duplication and
formatting services, language conversions and laybacks, restoration and
preservation of old or damaged content, mastering from motion picture film to
high resolution or data formats, digital audio and video encoding services and
digital media management services for global home video, broadcast, pay-
per-view, video-on-demand, streaming media and other emerging new media
distribution channels.
Network Services Group. Our Network Services Group provides the services
necessary to assemble and distribute programming for cable and broadcast
networks via fiber and satellite to audiences in North America, Europe and Asia.
Our Network Services Group primarily provides dedicated facilities and resources
designed for specific client requirements on the basis of contractual
agreements.
ACQUISITIONS IN 2001
On February 1, 2001, we acquired GWNS from Viacom, Inc. On August 23, 2001,
we acquired from Cinram U.S. Holdings, Inc. the 51% interest in Cinram-POP that
we did not already own. On
24
September 6, 2001, we acquired the remaining 99% interest in LNS that we did not
already own, thereby acquiring the operations of Ascent Network Services.
JOINT VENTURE IN 2002
On May 6, 2002, we contributed assets and obligations of our former
subsidiary, The Post Edge, Inc., doing business as Manhattan Transfer-Miami,
into a newly formed Miami, Florida-based limited liability company with
Broadcast Video, Inc. The new entity, BVI-Miami, consists of the operations of
The Post Edge, Inc. and the operations of Broadcast Video, Inc. and certain of
its affiliated businesses. We own a 40% membership interest in BVI-Miami.
Broadcast Video, Inc. owns the remaining 60% membership interest and manages
BVI-Miami's operations. The net book value of the assets and liabilities of $2.5
million were reclassified as an investment. We do not have any current or
contingent material obligations to BVI-Miami.
DIVESTITURE IN 2002
On December 23, 2002, we sold to Leafco Communications, Inc. all of our
equity interest in Triumph for nominal consideration plus the assumption of net
liabilities in the amount of $4.0 million. In connection with this sale, we
entered into an agreement to loan the buyer an amount not to exceed $4.0
million. As of date of this report, such loan agreement has been terminated by
the parties and the buyer has repaid us all monies advanced pursuant to such
loan. In connection with this loan termination, we entered into an agreement to
loan Rapco Enterprises, Inc., an affiliate of Leafco Communications, Inc., $2.0
million. The above transactions, in the aggregate, resulted in a gain from this
divestiture of $1.6 million.
EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION
We believe that Earnings Before Interest Taxes Depreciation and
Amortization, or EBITDA, is an important measure of our financial performance.
We define EBITDA as earnings before interest, taxes, depreciation and
amortization, excluding gains and losses on asset sales and unusual charges such
as restructuring, integration and impairment. Our investments in new
infrastructure, machine capacity, technology and goodwill arising from our
significant acquisition activity have produced a relatively high depreciation
and, prior to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, amortization expense,
which have historically been significant annual non-cash charges to earnings.
EBITDA is calculated before depreciation and amortization charges and, in
businesses with significant non-cash expenses, is widely used as a measure of
cash flow available to pay interest and repay debt, and, to the extent available
after debt service and other required uses, to make acquisitions or invest in
capital equipment and new technologies. As a result, we view EBITDA as an
important measure of our financial performance and valuation and have included
EBITDA as a measure of financial performance herein. EBITDA does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles ("GAAP") and should not be considered in isolation or as a
substitute for other measures of performance prepared in accordance with GAAP.
EBITDA does not reflect that portion of our capital expenditures that may be
required to maintain our market share, revenues and leadership position in our
industry. Moreover, not all EBITDA will be available to pay interest or repay
debt. Additionally, our presentation of EBITDA may not be comparable to
similarly titled measures reported by other companies.
CRITICAL ACCOUNTING POLICIES
Valuation of Long-lived Assets and Amortizable Other Intangible Assets. We
perform impairment tests for our long-lived assets if an event or circumstance
indicates that the carrying amount of our long-lived assets may not be
recoverable. In response to changes in industry and market conditions, we may
also strategically realign our resources and consider restructuring, disposing
of, or otherwise exiting businesses. Such activities could result in impairment
of our long-lived assets or other intangible assets. We are subject to the
possibility of impairment of long-lived assets arising in the ordinary course of
25
business. We regularly consider the likelihood of impairment and recognize
impairment if the carrying amount of a long-lived asset or intangible asset is
not recoverable from its undiscounted cash flows in accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. Impairment is
measured as the difference between the carrying amount and the fair value of the
asset.
Valuation of Goodwill and Non-amortizable Other Intangible Assets. We
assess the impairment of goodwill annually and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include
significant underperformance to historical or projected future operating
results, substantial changes in our strategy or the manner of use of our assets,
and significant negative industry or economic trends. Effective January 1, 2002,
we adopted SFAS No. 142 and in accordance with its provisions, during the first
quarter of fiscal year 2002, we recorded a transitional impairment charge of
$20.2 million against goodwill related to our Entertainment Television reporting
unit, which is part of our Creative Services Group. Such charge has been
reflected as a cumulative effect of a change in accounting principle.
Additionally, as a result of our annual impairment testing, we recorded a
goodwill impairment charge of $83.7 million during the fourth quarter of fiscal
2002. Of this impairment charge, $56.8 million impairment related to our
Entertainment Television reporting unit and $26.9 million related to our
Commercial Television reporting unit. Fair value of each reporting unit was
determined through the use of an outside independent valuation consultant. The
consultant used both the income approach and market approach in determining fair
value.
In accordance with SFAS No. 142, we ceased amortizing goodwill totaling
$421.7 million at the beginning of fiscal year 2002 and $17.5 million of
acquired assembled workforce previously classified as identifiable intangible
assets. Additionally, in accordance with SFAS No. 142, we ceased amortizing $1.7
million of tradename classified as an other intangible asset. As a result, for
the year ended December 31, 2002, we did not recognize $27.8 million of
amortization expense that would have been recognized had the previous standards
been in effect. For additional information regarding SFAS No. 142, see Notes 2
and 3 in the Notes to Consolidated Financial Statements.
Valuation of Trade Receivables. We must make estimates of the
collectibility of our trade receivables. Our management analyzes the
collectibility based on historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms. We record an allowance for doubtful accounts based upon specifically
identified receivables that we believe are uncollectible. In addition, we also
record an amount based upon a percentage of each aged category of our trade
receivables. These percentages are estimated based upon our historical
experience of bad debts. Our trade receivables balance was $96.1 million, net of
allowance for doubtful accounts of $9.0 million, as of December 31, 2002.
Valuation of Deferred Tax Assets. In accordance with SFAS No. 109,
Accounting for Income Taxes, we review the nature of each component of our
deferred income taxes for reasonableness. We have determined that it is more
likely than not that we will not realize a portion of our tax benefits
associated with certain cumulative net operating loss carry forwards and
impairment reserves, and as such, we have reserved for a portion of our deferred
income tax assets and incurred charges of $24.7 million and $93.8 million during
the years ended December 31, 2002 and 2001. For additional information regarding
SFAS No. 109, see Notes 2 and 10 in the Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The Creative Services Group's revenues are primarily generated from fees
for video and audio post production, special effects and editorial services for
the television, film and advertising industries. The Media Management Services
Group provides owners of film libraries a broad range of restoration,
preservation, archiving, professional mastering and duplication services. The
Media Management Services Group's results also include our Digital Media
Management initiative. The Network Services Group's revenues consist of fees
relating to facilities and services necessary to assemble and distribute
programming for cable and broadcast networks across the world via fiber,
satellite and the Internet. The Network Services Group's results also include
our Bandwidth Management initiative, predominantly Triumph, which
26
was disposed on December 23, 2002. Corporate related items and unallocated
revenues and expenses are reflected in Corporate and Other, below. Additionally,
Corporate and Other includes the results of our New Products Group which is
leading our efforts in developing new products and businesses such as VOD and
SVOD, Interactive Television and Store and Forward. Cost of services and
operating expenses consists primarily of production wages, facility costs and
other direct costs, selling, general and administrative expenses, depreciation
and amortization and impairment charges.
Our consolidated results of operations for the year ended December 31,
2002, include a full twelve months of results for GWNS, Cinram-POP and LNS. For
these subsidiaries, our consolidated results of operations for the year ended
December 31, 2001 include the results of GWNS from February 1, 2001, include the
results of Cinram-POP from September 1, 2001 and include the results of LNS from
September 1, 2001. Additionally, certain reclassifications have been made to the
prior year's EBITDA in the Comparison of Reported Results for the Year Ended
December 31, 2002 to the year ended December 31, 2001 section below to conform
to the current year's presentation.
COMPARISON OF REPORTED RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR
ENDED DECEMBER 31, 2001
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
SEGMENT REVENUES 2002 2001
---------------- ------------ ------------
(IN THOUSANDS)
Creative Services Group..................................... $275,119 $332,921
Media Management Services Group............................. 104,938 104,063
Network Services Group...................................... 159,123 155,550
Corporate and Other......................................... 153 198
-------- --------
$539,333 $592,732
======== ========
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
SEGMENT EBITDA 2002 2001
-------------- ------------ ------------
(IN THOUSANDS)
Creative Services Group..................................... $ 50,150 $ 67,052
Media Management Services Group............................. 30,889 31,672
Network Services Group...................................... 51,320 49,265
Corporate and Other......................................... (45,070) (42,246)
--------- ---------
$ 87,289 $ 105,743
========= =========
Net loss.................................................... $(135,186) $(436,289)
========= =========
Revenues decreased $53.4 million, or 9.0%, to $539.3 million for the year
ended December 31, 2002 from $592.7 million for the year ended December 31,
2001. Creative Services Group revenues decreased by $57.8 million resulting from
unfavorable comparisons to 2001, which benefited from increased television and
feature film production as a result of the threatened actors and writers
strikes. Consequently, 2002 experienced lower film production due to a soft
feature market while studios released stock-piled product. Additionally,
Creative Services Group revenues suffered as a result of challenging economic
conditions impacting film and television post production, and sluggishness in
the advertising market reducing television advertising spending. Furthermore,
Creative Services Group revenues were impacted by the consolidation of certain
facilities as we continued to streamline our operations. Media Management
Services Group revenues increased by $.9 million as a result of higher demand
for DVD mastering partially offset by lower spending from larger clients for
traditional media services. Network Services Group revenues increased by $3.6
million resulting from the full year impact of the GWNS and LNS acquisitions of
$7.4 million and an increase in our Bandwidth Management revenue of $1.2 million
27
partially offset by a net decrease of $5.0 million due to cancellation and
timing of various contracts, large network construction and installation
projects.
Costs of services decreased $48.2 million, or 13.0%, to $322.0 million for
the year ended December 31, 2002 from $370.2 million for the year ended December
31, 2001. The decrease is attributed to a $53.1 million decline across all of
our Groups primarily in production material, production personnel and equipment
expenses as a result of the decreased production activity noted above, offset by
$4.9 million increase resulting from full year impact of 2001 acquisitions
discussed above.
Selling, general and administrative expenses increased $3.2 million, or
2.5%, to $130.0 million for the year ended December 31, 2002 from $126.8 million
for the year ended December 31, 2001. The increase is primarily attributed to
$3.9 million in severance costs and $.7 million resulting from the full year
impact of 2001 acquisitions, partially offset by lower personnel and support
costs.
As a result of the above, EBITDA, as defined, decreased $18.5 million, or
17.5%, to $87.2 million for the year ended December 31, 2002, from $105.7
million for the year ended December 31, 2001. Creative Services Group EBITDA
decreased $16.9 million partially due to the lower revenues described above
offset by lower costs, including savings from fiscal 2001 facility
consolidations and restructuring activities. Media Management Services Group
EBITDA decreased $.8 million resulting from increased spending on our Digital
Media Management initiative of $1.5 million partially offset by realization of
higher revenues. Network Services Group EBITDA increased $2.0 million due to
higher margin projects secured early in the year as well as cost savings and
streamlining initiatives partially offset by additional investments of $1.4
million in our Bandwidth Management initiative. Corporate and Other EBITDA
decreased $2.8 million primarily due to severance costs of $3.9 million, higher
professional fees including legal and marketing of $.7 million offset by reduced
costs resulting from the consolidation of our corporate activities.
Depreciation and amortization decreased $61.3 million, or 47.7%, to $67.3
million for the year ended December 31, 2002, from $128.6 million for the year
ended December 31, 2001. Approximately $39.8 million of the decrease is
attributed to the Company's adoption of SFAS No. 142 pursuant to which goodwill
and other identifiable intangible assets with indefinite lives are no longer
amortized. An additional $19.8 million of decrease is attributed to reduced
depreciation expense primarily resulting from the property and equipment
impairment charge recorded in the fourth quarter of 2001 (more fully explained
in "2001 Impairment Charge" below), the sale of certain owned facilities, and
divestitures (more fully discussed in the "Divestiture in 2002" earlier). The
remaining $1.7 million decrease is the result of reduced amortization resulting
from the 2001 impairment of certain identifiable intangible assets.
Non-cash compensation expense decreased $4.3 million, or 101.1%, to $48,000
in income for the year ended December 31, 2002, from $4.3 million in expense
reported for the year ended December 31, 2001. Results for the twelve months
ended December 31, 2002 primarily included income of $3.2 million relating to a
decline in the value of the underlying stock price used to value employee stock
appreciation rights, or SARs, and unearned stock compensation income of
$135,000, offset by compensation expense of $3.2 million relating to the
issuance of "in-the-money" stock options pursuant to our 2001 incentive
compensation plan. The expense recorded in the twelve months ended December 31,
2001 related primarily to the increase in value of the underlying stock price
used to value employee SARs of $2.5 million and issuance of "in-the-money" stock
options as discussed above of $1.6 million.
Impairment of goodwill, intangible and long-lived assets decreased $224.2
million, or 72.8%, to $83.7 million for the year ended December 31, 2002, from
$307.9 million for the year ended December 31, 2001. Results for the twelve
months ended December 31, 2002 include a charge of $83.7 million during the
fourth quarter of fiscal 2002, resulting from the annual impairment test of
goodwill in accordance with SFAS No. 142. We recorded a $56.8 million impairment
charge in our Entertainment Television reporting unit and a $26.9 million
impairment charge in our Commercial Television reporting unit, both part of our
Creative Services Group. During the year ended December 31, 2001, we recorded
$307.9 million in impairment charges relating to long-lived assets, goodwill and
intangibles, which are more fully explained in "2001 Impairment Charge" below.
28
Restructuring and other charges decreased $6.0 million to $.4 million in
income for the year ended December 31, 2002. During the year ended December 31,
2001 we recorded a restructuring charge of $5.6 million intended to improve
operating efficiencies and effectiveness. Income in fiscal year 2002 represents
a revision of estimates for certain restructuring reserves recorded in fiscal
year 2001.
Interest expense increased $1.7 million, or 2.7%, to $64.8 million for the
year ended December 31, 2002, from $63.1 million for the year ended December 31,
2001. The increase is primarily attributed to additional interest on our
interest rate swaps, and increased borrowings under the Liberty Subordinated
Credit Agreement offset by a decrease in interest on our Senior Credit Facility.
Interest expense for fiscal year 2002 included $21.3 million of non-cash expense
related to payments under the Liberty Subordinated Credit Agreement, $18.5
million related to interest under our Senior Credit Facility, $16.2 million
related to interest rate swaps (of which $6.5 million is non-cash), $5.4 million
of amortization of debt discount and debt issuance cost, and $3.7 million of
interest related to capital leases, notes, and mortgages, partially offset by
$.3 million of interest income.
Other income and expense increased $25.4 million, or 231.8%, to $14.5
million in income for the year ended December 31, 2002, from $10.9 million in
expense for the year ended December 31, 2001. Other income for the year ended
December 31, 2002 primarily includes $8.3 million related to the increase in the
market value of certain freestanding interest rate swap instruments, $4.1
million related to the termination of certain interest rate swaps, $1.8 million
from a gain on sale of certain real estate and a $1.6 million gain on the sale
of Triumph, offset by $2.3 million related to the payment of an arbitration
award more fully discussed in the "Arbitration Settlement" below. In contrast,
the year ended 2001 primarily included $9.9 million loss from the sale of
domestic real estate property and $3.8 million as a result of a decrease in the
market value of the freestanding interest rate swap agreements.
As a result of the above, the loss before income taxes and change in
accounting principle decreased $311.2 million to $113.5 million for the year
ended December 31, 2002 from $424.7 million for the year ended December 31,
2001.
The provision for income taxes decreased $10.2 million, or 87.9%, to $1.4
million for the year ended December 31, 2002, from $11.6 million for the year
ended December 31, 2001. The decrease is primarily due to a valuation allowance
recorded on deferred tax assets during the year ended December 31, 2001. Our
fiscal year 2002 effective income tax rate was approximately 1.1 % compared to
2.7% for 2001.
Effective January 1, 2002, we adopted SFAS No. 142 and, in accordance with
its provisions, we recorded a transitional impairment charge of goodwill of
$20.2 million during the first quarter of fiscal 2002. This charge has been
reflected as a cumulative effect of a change in accounting principle.
As a result, our net loss decreased $301.1 million to $135.2 million for
the year ended December 31, 2002 from $436.3 million for the year ended December
31, 2001.
COMPARISON OF REPORTED RESULTS FOR THE COMBINED YEAR ENDED DECEMBER 31, 2001 TO
REPORTED RESULTS FOR THE COMBINED YEAR ENDED DECEMBER 31, 2000.
For the purpose of the table and discussion below, our operating results
for the seven months ended December 31, 2000 have been combined with the
operating results of Todd-AO for the five months ended May 31, 2000 (the
"combined year ended December 31, 2000"), The operating results are not
comparable between the annual periods as the five months ended May 31, 2000 do
not include the effects of purchase accounting adjustments related to the Todd
Merger, and the subsequent period representing the seven months ended December
31, 2000 does include the effects of the purchase accounting adjustments related
to the Todd Merger.
29
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
COMBINED SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
SEGMENT REVENUES 2001 2000 2000 2000
---------------- ------------ ------------ ------------ -----------
(IN THOUSANDS)
Creative Services Group..................... $332,921 $220,971 $177,808 $43,163
Media Management Services Group............. 104,063 56,756 46,676 10,080
Network Services Group...................... 155,550 28,615 28,615 --
Corporate and Other......................... 198 -- -- --
-------- -------- -------- -------
$592,732 $306,342 $253,099 $53,243
======== ======== ======== =======
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
COMBINED SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
SEGMENT EBITDA 2001 2000 2000 2000
-------------- ------------ ------------ ------------ -----------
(IN THOUSANDS)
Creative Services Group..................... $ 64,369 $ 43,627 $ 38,178 $ 5,449
Media Management Services Group............. 30,967 15,775 13,704 2,071
Network Services Group...................... 48,969 3,194 3,194 --
Corporate and Other......................... (38,562) (20,314) (20,314) --
--------- -------- -------- -------
$ 105,743 $ 42,282 $ 34,762 $ 7,520
========= ======== ======== =======
Net loss.................................... $(436,289) $(11,468) $ (9,793) $(1,675)
========= ======== ======== =======
Revenues increased $286.4 million, or 93.5%, to $592.7 million for the year
ended December 31, 2001 from $306.3 million for the combined year ended December
31, 2000. The contribution of 4MC combined with the acquisitions of LNS, GWNS,
Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho contributed $290.6
million, or 101.5%, of the overall revenue increase among all of our segments.
The overall increase was partially offset by a decrease in revenues for the
Creative Services Group as a result of the impact of a recessionary market
environment and a reduction in television advertising spending.
Costs of services increased $172.0 million, or 86.8%, to $370.2 million for
the year ended December 31, 2001 from $198.2 million for the combined year ended
December 31, 2000. The contribution of 4MC combined with the acquisitions of
LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph and Soho contributed
$171.5 million, or 99.7%, of the overall increase.
Selling, general and administrative expenses increased $60.3 million, or
90.7%, to $126.8 million for the year ended December 31, 2001 from $66.5 million
for the combined year ended December 31, 2000. The contribution of 4MC combined
with the acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux,
Triumph and Soho contributed $42.9 million, or 71.1%, of the overall increase.
The remainder of the increase was primarily due to corporate centralization
activities and increases in professional and legal fees.
As a result of the above, EBITDA, as defined, increased $63.4 million, or
149.9%, to $105.7 million for the year ended December 31,2001, from $42.3
million for the combined year ended December 31, 2000.
Depreciation and amortization increased $70.1 million, or 119.8%, to $128.6
million for the year ended December 31, 2001, from $58.5 million for the
combined year ended December 31, 2000. The increase was primarily due to the
equipment, goodwill and other intangibles acquired with respect to the
acquisitions previously mentioned and new capital additions incurred during the
year ended December 31, 2001.
30
Non-cash compensation expense was $4.3 million for the year ended December
31, 2001, as compared to $29.6 million in income reported for the combined year
ended December 31, 2000, an increase of $33.9 million. The income recorded
during the combined year ended December 31, 2000 was related to a decline in
value of the underlying financial instruments used to value employee stock
appreciation rights or SARs. The expense in the year ended December 31, 2001
related primarily to the increase in value of the underlying financial
instruments used to value employee SARs in addition to the issuance of "in the
money" stock options pursuant to our 2001 incentive compensation plan.
Interest expense increased $42.3 million, or 203.4%, to $63.1 million for
the year ended December 31, 2001, from $20.8 million for the combined year ended
December 31, 2000. The increase is attributable to additional borrowings under
the Senior Credit Agreement, the Liberty Subordinated Credit Agreement and other
borrowings incurred primarily related to the funding of acquisitions. Interest
expense for fiscal year 2001 included non-cash expense related to payments under
the Liberty Subordinated Credit Agreement totaling $17.9 million, $6.2 million
related to interest rate swaps, and $4.1 million of amortization of debt
discount and debt issuance cost. Interest expense for the combined year ended
December 31, 2000 included $254,000 of non-cash expense related to payments
under the Liberty Subordinated Credit Agreement.
Included in operating expenses for the year ended December 31, 2001 is
$307.9 million in impairment charges relating to long-lived assets, goodwill and
intangibles, which is more fully explained in the "2001 Impairment Charge"
section below.
Additionally, during the fourth quarter of fiscal 2001 we completed certain
restructuring activities intended to improve operating efficiencies and
effectiveness to strengthen our competitive position in the marketplace through
cost and expense reductions. In connection with this initiative, we recorded a
pre-tax restructuring charge of $5.6 million. This charge includes payments $5.2
million related to lease charges due to planned facility closures and $425,000
for employee severance payments.
Other expense increased $10.8 million to $11.0 million for the year ended
December 31, 2001 from $198,000 for the combined year ended December 31, 2000.
The increase was primarily due to losses on the disposal of assets totaling $9.9
million and charges related to the decline in market value of certain
freestanding interest rate swap instruments totaling $2.1 million. These
expenses were partially offset by other income.
As a result of the above, the loss before income taxes and change in
accounting principle increased $416.5 million to $424.7 million for the year
ended December 31, 2001 from $8.2 million for the combined year ended December
31, 2000.
The provision for income taxes increased $8.4 million, or 262.5%, to $11.6
million for the year ended December 31, 2001, from $3.2 million for the combined
year ended December 31, 2000. The increase is due to valuation allowances
recorded on deferred tax assets during the year ended December 31, 2001. Our
fiscal year 2001 effective income tax rate was approximately 2.7% primarily due
to disallowed deductions for goodwill of $204.0 million and valuation allowances
of $246.0 million.
As a result, our net loss increased $424.8 million to $436.3 million for
the year ended December 31, 2001 from $11.5 million for the combined year ended
December 31, 2000.
COMPARISON OF PRO FORMA RESULTS (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 2001
TO THE PRO FORMA RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 (UNAUDITED).
As a result of the significance and timing of the contribution of 4MC and
the acquisitions of LNS, GWNS, Cinram-POP, Visiontext, VSC, Soundelux, Triumph
and Soho in 2001 and 2000, certain information for the years ending December 31,
2001 and 2000 is being presented on a pro forma basis. Our management believes
that these pro forma revenue and EBITDA results provide additional information
useful in analyzing the underlying business results. However, pro forma
operating results should be considered in addition to, and not as a substitute
for, actual results of operations. The following
31
unaudited pro forma financial information is presented as if each acquisition
was consummated on January 1, 2000.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
SEGMENT REVENUES 2001 2000
---------------- ------------ ------------
(IN THOUSANDS)
Creative Services Group..................................... $332,921 $367,847
Media Management Services Group............................. 105,204 99,530
Network Services Group...................................... 169,180 173,488
Corporate and Other......................................... 198 --
-------- --------
$607,503 $640,865
======== ========
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
SEGMENT EBITDA 2001 2000
-------------- ------------ ------------
(IN THOUSANDS)
Creative Services Group..................................... $ 64,369 $ 74,552
Media Management Services Group............................. 31,313 26,126
Network Services Group...................................... 52,367 41,939
Corporate and Other......................................... (38,562) (26,166)
--------- --------
$ 109,487 $116,451
========= ========
Net loss.................................................... $(439,351) $(45,266)
========= ========
Pro forma revenues decreased by $33.4 million, or 5.2%, to $607.5 million
for the year ended December 31, 2001 from $640.9 million for the year ended
December 31, 2000. This decrease was primarily due to a $34.9 million decrease
in Creative Services Group revenue as a result of reduced television advertising
spending. Additionally, the Network Services Group experienced a $4.3 million,
or 2.5%, decrease in revenue attributed to the timing of certain large projects.
These decreases were partially offset by an increase of $5.7 million, or 5.7%,
in Media Management Services Group revenue resulting from the expansion of
business.
Pro forma EBITDA decreased by $7.0 million, or 6.0%, to $109.5 million for
the year ended December 31, 2001 from $116.5 million for the year ended December
31, 2000. This decrease was primarily the result of a $10.2 million decrease in
the Creative Services Group's EBITDA due to the revenue shortfall as described
above offset by cost savings. Such reductions were partially offset by a $5.2
million, or 19.9% increase in Media Management Services Group EBITDA and a $10.4
million, or 24.9%, increase in Network Services Group EBITDA, both as a result
of significant reductions in their cost structures resulting from integration
and reorganization activities. Additionally, EBITDA decreased by $6.6 million
due to additional costs associated with our new Interactive Media business
initiative and by $5.8 million due to increases in other expenses, primarily
associated with corporate centralization activities and increased professional
and legal fees. This combined increase in costs of $12.4 million, as presented
above, is reflected in Corporate and Other.
Pro forma net loss increased $394.1 million to $439.4 million for the year
ended December 31, 2001, from $45.3 million for the combined year ended December
31, 2000. The increase in net loss was primarily driven by the impairment charge
described below and higher depreciation and amortization, interest, non-cash
compensation and other expenses.
ARBITRATION SETTLEMENT
During the year ended December 31, 2002, the previously reported
arbitration proceeding arising from (i) the termination of Paul Dujardin's
employment with us, and (ii) the disposition of 440,981 shares of our Class A
common stock (the "Hold-Back Shares") owned by Mr. Dujardin and held by us
concluded.
32
Pursuant to an arbitrator's decision, we were ordered to pay $3.4 million plus
interest at 9% from August 29, 2001 to July 25, 2002, the date we paid the
award, for a total amount of $3.7 million ("Arbitration Award"). In determining
the award, the arbitrator concluded that at August 29, 2001, the value of the
Hold-Back Shares was $3.4 million, or $7.67 per share. In accordance with
generally accepted accounting principles, we were deemed to have paid $3.20 per
share for the Hold-Back Shares with the difference of $4.47 per share, or $2.3
million, recorded to other expense. The Hold-Back Shares were originally issued
to Mr. Dujardin in partial consideration for the Company's acquisition of
Triumph on July 25, 2000.
2001 IMPAIRMENT CHARGE
During fiscal year 2001, challenging economic conditions impacted overall
business trends. In particular, both the entertainment and technology sectors
suffered a substantial decline in economic activity. These challenges were
further exacerbated by the events of September 11, 2001, resulting in a
continued negative economic impact. These factors contributed largely to our
inability to meet our 2001 financial and operating objectives and have resulted
in reduced expectations and opportunities for the near term.
Accordingly, we evaluated the recoverability of our goodwill, intangible
assets and long-lived assets carrying values pursuant to Accounting Principles
Board ("APB") No. 17, Intangible Assets, and SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This involved writing-down goodwill, intangibles and certain long-lived assets
to their fair value, which was based upon both fair market comparables and by
discounting the future cash flows of these assets through their remaining useful
lives. As these definite-lived intangible assets and long-lived assets will
remain in service, the remaining net book value of the assets will be
depreciated over their remaining estimated useful lives.
Therefore, during the quarter ended December 31, 2001, we recorded asset
impairment charges totaling $286.9 million. These charges primarily represent a
write-off of goodwill, intangible assets and long-lived assets of our existing
feature film and entertainment television sound services, and certain assets
associated with the development of our fiber optic transport and IP hosting
transport services. Part of our original valuation of these assets was affected
by our expectation that the development and delivery of interactive television
and other interactive services, including the rollout of a broadband
infrastructure, would have materialized sooner and therefore would have provided
more immediate growth opportunities.
Additionally, during the fourth quarter of 2001 we completed certain
integration and consolidation activities intended to improve operating
efficiencies and effectiveness and to strengthen our competitive position in the
marketplace through cost and expense reductions. In connection with these
initiatives, we recorded a charge of $21.0 million for impairment of certain
equipment and other fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We continue to monitor the credit markets and other sources of capital in
case we are unable to generate sufficient cash flow from operations to service
our indebtedness or to make capital expenditures and other discretionary
investments. If we are required to raise capital in the future, there can be no
assurance that we will be able do so on favorable terms. If we are unable to
generate sufficient cash flow from operations in the future to service our debt
and working capital needs, we may be required to reduce capital expenditures,
sell assets or refinance all or a portion of our existing debt or obtain
additional financing. Our ability to make scheduled principal debt payments, to
pay interest or to refinance our indebtedness depends on our future financial
position and results of operations, which, to a certain extent, are subject to
general conditions in or affecting our industry and our customers and to general
economic, political, financial, competitive, legislative and regulatory factors
beyond our control.
33
We expect to fund our capital expenditure requirements with cash flows from
operating activities and, to the extent permitted by the Senior Credit
Agreement, proceeds derived from leasing transactions and sales of non-strategic
assets. To the extent that such cash flows, leasing transactions and proceeds
may be insufficient (after servicing our existing indebtedness and funding our
working capital requirements) to provide adequate funds for planned capital
expenditures, we are exploring alternatives to funding capital expenditures
consistent with the restrictions contained in the Senior Credit Agreement, such
as loans and equity investments. Although we monitor the credit markets and
other sources of capital, there can be no assurance that we will be able to
secure funds for capital expenditures or that, if such funds are available, such
funds will be available on favorable terms. If we cannot obtain additional funds
for our capital expenditures, and the cash flows, leasing transactions and
proceeds described above are insufficient (after servicing our existing
indebtedness and funding our working capital requirements) to provide adequate
funds for planned capital expenditures, we may be required to reduce our planned
capital expenditures. Any such reduction in capital expenditures may have a
negative effect on our business.
CASH FLOWS
Cash flows provided by operations for the year ended December 31, 2002 were
$42.6 million, as compared to $73.6 million for the year ended December 31,
2001. The decrease in net cash flows provided from operations is primarily
attributable to lower revenues and EBITDA and changes in working capital. Cash
and cash equivalents were $12.0 million at December 31, 2002, a decrease of
$11.4 million from December 31, 2001. This decrease relates primarily to cash
used for capital expenditures and payments on long-term debt and capital lease
obligations offset by cash provided by operating activities.
Net cash flows used in investing activities was $50.6 million for the year
ended December 31, 2002 compared to net cash flows provided by financing
activities of $191.7 million for the year ended December 31, 2001. The decrease
is primarily attributed to the 2001 acquisitions of GWNS for $108.2 million, LNS
for $31.3 million, and Cinram-POP for $0.5 million. Additionally, we invested
$55.4 million in property, plant and equipment during the year ended December
31, 2002 compared to $73.7 million for the year ended December 31, 2001. These
expenditures reflected continued investments in the Creative, Media and Network
Services Groups as well as our shared corporate infrastructure. The decrease
from the year ended December 31, 2001 was primarily due to lower spending
throughout all Groups. During the year ended December 31, 2002, we sold certain
domestic real estate properties that generated net proceeds of $4.8 million.
During the year ended December 31, 2002, net cash flows used in financing
activities was $7.0 million compared to $119.9 million for the year ended
December 31, 2001. Net cash flows provided by financing activities for the year
ended December 31, 2001 was primarily borrowings under our Liberty Subordinated
Agreement and were used for acquisitions. For descriptions and details of
financing activities during fiscal year 2002 see discussion below and at Note 8
in the Notes to Consolidated Financial Statements.
SENIOR CREDIT AGREEMENT
At December 31, 2002, we had borrowed $363.9 million under the Senior
Credit Agreement (including Letters of Credit of $.6 million) and $3.7 million
was available for future borrowings, subject to the terms of the Senior Credit
Agreement. During the year ended December 31, 2002, we borrowed $5.0 million
under the Senior Credit Agreement which was primarily used to fund capital
expenditures and working capital. During the year ended December 31, 2002, we
repaid $33.4 million under our Senior Credit Agreement.
During the year ended December 31, 2002, we had two additional amendments
to the Senior Credit Agreement; one amendment, dated March 26, 2002 (the "March
26, 2002 Amendment"), and another amendment, dated November 13, 2002 ("the
November 13, 2002 Amendment").
The March 26, 2002 Amendment and the November 13, 2002 Amendment each
amended the Senior Credit Agreement to provide greater financial flexibility to
us by allowing for more favorable leverage ratio tests and a more favorable
fixed charge coverage ratio test. Each also removes some restrictions on
34
transactions we may enter into. In consideration for the above changes, we
agreed to (1) higher interest rates on the loans until our leverage ratio is
reduced below 4.00 to 1.00, (2) new restrictions on the use of the proceeds from
the sale of assets and (3) a permanent reduction of $40.0 million in the amount
available for the future borrowings under the Senior Credit Agreement. After
giving effect to this amendment, $3.7 million is available for future borrowings
under the Senior Credit Agreement as of December 31, 2002.
Under the Senior Credit Agreement, the Company's Total Leverage Ratio may
not exceed 4.55 to 1.00 for any measurement period from December 31, 2002 to
June 30, 2003. Thereafter, the Total Leverage Ratio is reduced over subsequent
measurement periods until it reaches a Total Leverage Ratio of 3.50 to 1.00 for
any measurement period after January 1, 2005. At December 31, 2002, the
Company's Total Leverage Ratio was 4.12 to 1.00. The Company was not subject to
a Fixed Charge Coverage Ratio covenant at or prior to December 31, 2002. For any
measurement period beginning January 1, 2003, the Company's Fixed Charge
Coverage Ratio may not be less than 0.85 to 1.00, which increases over the
succeeding two quarters until October 1, 2003, when the Company's Fixed Charge
Coverage Ratio may not be less than 1.00 to 1.00 for the remainder of the term
of the Senior Credit Agreement. At December 31, 2002, the Company's Fixed Charge
Coverage Ratio was 1.07 to 1.00. The Company's failure to generate anticipated
levels of revenue or its failure to procure capital equipment necessary to
generate such revenues could result in its failure to satisfy the financial
covenants described above.
LIBERTY SUBORDINATED CREDIT AGREEMENT
At December 31, 2002, we had borrowed $224.3 million under the Liberty
Subordinated Credit Agreement and $81.9 million was available for future
borrowings under the terms of the Liberty Subordinated Credit Agreement with the
consent of, and on terms determined by, Liberty Media. During the year ended
December 31, 2002, we borrowed $18.1 million under the Liberty Subordinated
Credit Agreement which was used for working capital, to fund the Arbitration
Award, capital expenditures and repayment of principal under the Senior Credit
Agreement. Such amounts were borrowed pursuant to Supplements No. 1, 2 and 3 to
the Liberty Subordinated Credit Agreement discussed below. The remaining $206.2
million, borrowed as of December 31, 2001, was used to fund several acquisitions
("Acquisitions Funds") and was represented by convertible notes in the amount
borrowed, which are convertible into our Class B common stock at $10.00 per
share. The effective annual interest rate for 2002 on the Liberty Subordinated
Credit Agreement is 10.0%.
SUPPLEMENT NO. 1 AND SUPPLEMENT NO. 2
The Liberty Subordinated Credit Agreement allows us to borrow the
Acquisition Funds and up to an additional $100.0 million from Liberty Media with
the consent of, and on terms determined by, Liberty Media (the "Additional
Available Funds"). The parties to the Senior Credit Agreement agreed in a letter
dated June 28, 2002 (the "Senior Credit Agreement Consent Letter") and the
parties to an agreement between us and Heller Financial Leasing, Inc. ("the
Heller Credit Agreement"), agreed in a separate letter dated June 28, 2002 (the
"Heller Consent Letter" and, together with the Senior Credit Agreement Consent
Letter, the "June 2002 Consent Letters"), that, with respect to $25.0 million of
the Additional Available Funds, (1) convertible notes could be issued that could
be convertible into our Class B common stock at a price per share determined by
us, rather than at $10.00 per share as permitted under the Senior Credit
Agreement, and (2) to the extent these funds were borrowed to purchase capital
assets and to fund the Arbitration Award, such borrowed funds could be repaid to
Liberty Media before we pay amounts owed under the Senior Credit Agreement,
provided that, among other conditions, such repayment is funded solely with
proceeds of additional equity contributions from Liberty Media or any of its
affiliates other than ourselves or any of our subsidiaries. Our ability to
determine the conversion rights under the Liberty Subordinated Credit Agreement
with respect to Additional Available Funds does not affect the conversion rights
for amounts previously borrowed under the Liberty Subordinated Credit Agreement
and may be determined on a case by case basis only on amounts borrowed with
respect to the $25.0 million of Additional Available Funds to which the June
2002 Consent Letters apply.
35
On June 28, 2002, we entered into Supplement No. 1 to the Liberty
Subordinated Credit Agreement with Liberty Media, under which we borrowed $6.5
million for the purchase of capital assets, and issued a promissory note, that
is convertible into our Class B common stock at $3.50 per share.
On July 24, 2002, we entered into Supplement No. 2 to the Liberty
Subordinated Credit Agreement with Liberty Media, under which we borrowed an
additional $2.3 million to fund part of the Arbitration Award, and issued a
promissory note in the same amount that is convertible into our Class B common
stock at $3.50 per share.
SUPPLEMENT NO. 3
On August 13, 2002, we entered into Supplement No. 3 to the Liberty
Subordinated Credit Agreement with Liberty Media under which we may draw $25.0
million of Additional Available Funds, as needed, at Liberty Media's option: (a)
through loans under the Liberty Subordinated Credit Agreement of subordinated
convertible loans with a conversion price per share equal to 115% of the average
market price of our Class A common stock for the five most recent trading days
ending on and including the date which is two business days prior to the date of
the borrowing, (b) through sales of our Class B common stock to Liberty Media at
a purchase price per share equal to the average market price of our Class A
common stock for the five most recent trading days ending on and including the
date which is two business days prior to the date of the stock sale, or (c)
through any combination of (a) or (b) ("Supplement No. 3"). Any draws under
Supplement No. 3 are subject to us obtaining any necessary consents and
approvals and issuing any required notices, including, to the extent applicable,
stockholder approval of the issuance of shares of Class B common stock to
Liberty Media, whether as a sale of stock or upon conversion of a loan
("Stockholder Consent"). Liberty Media, which then held over 87% of the
outstanding common stock and over 99% of the voting power of the outstanding
common stock and now holds over 91% of the outstanding common stock and over 99%
of the voting power of the outstanding common stock, agreed in Supplement No. 3
to vote in favor of any Stockholder Consent. As a result, at a meeting of our
stockholders on January 23, 2003, our stockholders (including Liberty Media)
approved (1) the potential issuance of shares of our Class B common stock upon
conversion of convertible notes convertible into shares of our Class B common
stock pursuant to Supplement No. 3 and outstanding on January 23, 2003, (2) the
issuance of our Class B common stock and convertible notes convertible into
shares of our Class B common stock after January 23, 2003, pursuant to
Supplement No. 3 and (3) the potential issuance of shares of our Class B common
stock upon conversion of convertible notes convertible into shares of our Class
B common stock issued pursuant to future supplements to the Liberty Subordinated
Credit Agreement for a purchase price per share or with an initial conversion
price per share, as applicable, determined in a manner no less favorable to us
than as provided in Supplement No. 3. Proceeds of the loans or stock sales under
Supplement No. 3 must be used for capital expenditures, payment of the principal
amount of loans made under the Senior Credit Agreement or working capital.
On September 26, 2002, the parties to the Senior Credit Agreement and the
parties to the Heller Credit Agreement agreed in separate letters,
(collectively, the "September 2002 Consent Letters"), with respect to an
additional $25.0 million of the Additional Available Funds (over and above the
$25.0 million contemplated in the June 2002 Consent Letters), convertible notes
could be issued that could be convertible into our Class B common stock at a
price per share determined by us that was no less than 115% of the average daily
market price of our Class A common stock for the five most recent trading days
ending on and including the date which is two business days prior to the date of
the borrowing.
On September 30, 2002, we received $17.2 million under Supplement No. 3 in
consideration for our issuance of a convertible note in the amount of $5.3
million that is convertible into our Class B common stock at $1.94 per share and
sale of 7,070,000 unregistered shares of our Class B common stock at a price of
$1.69 per share for total proceeds of $11.9 million. The conversion price of the
convertible note and purchase price of the shares sold were calculated in
accordance with Supplement No. 3. The proceeds were used to repay borrowings
under the Senior Credit Agreement, for capital expenditures and for working
capital.
36
On October 17, 2002, we borrowed an additional $4.0 million under
Supplement No. 3 and issued a convertible note in the same amount that is
convertible into our Class B common stock at $1.56 per share. The conversion
price was calculated in accordance with Supplement No. 3. The proceeds were used
for purchase of capital assets.
MORTGAGE DEBT, CAPITAL LEASES AND OTHER BORROWINGS
During the year ended December 31, 2002, we borrowed $4.0 million under
certain property mortgages and repaid $12.5 million of debt related to capital
leases, mortgage notes and other borrowings.
STOCK SALES TO LIBERTY MEDIA
In addition to the sale of 7,070,000 unregistered shares of our Class B
common stock to Liberty Media discussed above, on July 24, 2002, under
Supplement No. 2, we sold 440,981 unregistered shares of our Class B common
stock to Liberty Media for $3.05 per share for proceeds of approximately $1.4
million. The closing price of our Class A common stock on July 24, 2002 was
$1.95 per share. The proceeds of the stock sale were used to fund part of the
Arbitration Award.
OTHER STOCK ISSUANCES TO LIBERTY MEDIA
During the year ended December 31, 2002, we issued 10,436,853 shares of our
Class B common stock to Liberty Media and its affiliates in payment of $21.3
million in interest under the Liberty Subordinated Credit Agreement. Shares of
our Class B common stock are convertible into shares of our Class A common
stock, on a one-for-one basis, at any time at the option of the holder.
OTHER
On July 1, 2002, we terminated our $165.0 million notional interest rate
swap for $1.4 million in cash proceeds. Additionally, we terminated a $200.0
million notional interest rate swap for cash proceeds of $1.4 million on
September 20, 2002 and $1.3 million on September 30, 2002.
CONTRACTUAL OBLIGATIONS
Information concerning the amount and timing of required payments under our
contractual obligations is summarized below:
PAYMENTS DUE BY PERIOD
-------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS TOTAL
----------------------- --------- --------- --------- ------------- --------
(IN THOUSANDS)
Long term debt.................. $13,945 $ 64,277 $297,222 $217,440 $592,884
Capital leases.................. 4,984 7,490 1,925 -- 14,399
Operating leases................ 25,003 45,893 42,390 79,691 192,977
------- -------- -------- -------- --------
Total contractual
obligations................ $43,932 $117,660 $341,537 $297,131 $800,260
======= ======== ======== ======== ========
We have contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible we may incur losses upon conclusion of such matters, an estimate of any
loss or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board, or FASB, issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections, in April 2002; SFAS No. 146, Accounting for Costs
Associated with Exit and Disposal Activities, in June
37
2002; and SFAS No. 148, Accounting for Stock-Based Compensation -- Transition
and Disclosure, in December 2002. In November 2002, the FASB issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45")
and in February 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). In November 2002, the FASB's Emerging
Issues Task Force issued EITF 00-21, Revenue Arrangements with Multiple
Deliverables.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds SFAS 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of SFAS 145,
we will be required to apply the criteria in APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion No. 30), in determining the classification of gains and
losses resulting from the extinguishment of debt. Additionally, SFAS 145 amends
SFAS 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS 145 will be effective for fiscal years
beginning after May 15, 2002 with early adoption of the provisions related to
the rescission of SFAS 4 encouraged. Upon adoption, companies must reclassify
prior period items that do not meet the extraordinary item classification
criteria in Opinion No. 30. We believe the adoption of SFAS 145 will not have a
material impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit and Disposal Activities. SFAS 146 nullifies EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).Under EITF 94-3,
a liability for an exit cost is recognized at the date of an entity's commitment
to an exit plan. Under SFAS 146, the liabilities associated with an exit or
disposal activity will be measured at fair value and recognized when the
liability is incurred and meets the definition of a liability in the FASB's
conceptual framework. This statement is effective for exit or disposal
activities initiated after December 31, 2002. We believe the adoption of SFAS
146 will not have a material impact on our financial statements.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, which amends SFAS No.
123, Accounting for Stock-Based Compensation. SFAS 148 amends the disclosure
requirements in SFAS 123 for stock-based compensation for annual periods ending
after December 15, 2002 and for interim periods beginning after December 15,
2002. The disclosure requirements apply to all companies, including those that
continue to recognize stock-based compensation under APB Opinion No. 25,
Accounting for Stock Issued to Employees. Effective for financial statements for
fiscal years ending after December 15, 2002, SFAS 148 also provides three
alternative transition methods for companies that choose to adopt the fair value
measurement provisions of SFAS 123. We do not choose to adopt the fair value
measurement provisions of SFAS 123.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which addresses the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002. We do
not have any guarantees that require disclosure under FIN 45.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of a guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with
38
multiple elements. The initial recognition and measurement provisions are
effective for all guarantees within the scope of FIN 45 issued or modified after
December 31, 2002.
As noted above we have adopted the disclosure requirements of FIN 45 and
will apply the recognition and measurement provisions for all guarantees entered
into or modified after December 31, 2002. To date we have not entered into any
guarantees within the purview of FIN 45.
In February 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addresses the consolidation by business
enterprises of variable interest entities, which have one or both of the
following characteristics: (1) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional financial
support from other parties, or (2) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: (a) the
direct or indirect ability to make decisions about the entity's activities
through voting or similar rights, (b) the obligation to absorb the expected
losses of the entity if they occur, or (c) the right to receive the expected
residual returns of the entity if they occur. FIN 46 will have a significant
effect on existing industry practice because it requires existing variable
interest entities to be consolidated if those entities do not effectively
disburse risks among parties involved. In addition, FIN 46 contains detailed
disclosure requirements. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. This Interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. We believe the adoption of FIN 46 will not have a material impact
on our financial statements.
In November 2002, the FASB's Emerging Issues Task Force issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, EITF 00-21
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying EITF 00-21,
separate contracts with the same entity or related parties that are entered into
at or near the same time are presumed to have been negotiated as a package and
should, therefore, be evaluated as a single arrangement in considering whether
there are one or more units of accounting. That presumption may be overcome if
there is sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate units
of accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Alternatively, companies may elect to report the change in accounting as a
cumulative-effect adjustment. Early application of this consensus is permitted.
We believe the adoption of EITF 00-21 will not have a material impact on our
financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Factors that may affect future results of operations include, but are not
limited to, industry-wide market factors such as the timing of, spending on, and
technological, regulatory or other developments in feature film and television
programming production, foreign and domestic television advertising, and foreign
and domestic spending by broadcasters, cable companies and syndicators on first
run and existing content libraries. In addition, our failure to maintain
relationships with key customers and certain key personnel, the possibility of
an industry-wide strike or other job action by a major entertainment industry
union, more rapid than expected technological obsolescence, significant capital
expenditure investments prior to generating revenue, and any failure to compete
in the highly-competitive post-production business could also cause actual
results to differ materially from those described in forward-looking statements.
We have incurred significant indebtedness to fund the past acquisitions.
This indebtedness may result in a significant percentage of our cash flow being
applied to the payment of interest, and there can be no
39
assurance that our operations will generate sufficient cash flow to service the
indebtedness. This indebtedness, as well as any indebtedness we may incur in the
future, may adversely affect our ability to finance operations, as financial
covenant limitations reach their maximum which could limit our ability to pursue
business opportunities that may be in our best interests and that of our
stockholders.
As part of our business strategy, we have acquired substantial operations
in several different geographic locations in the prior two years. These
businesses have experienced varying profitability or losses in recent periods.
Since the aforementioned dates of acquisition, we have continued to work
extensively on the integration of these businesses. However, there can be no
assurances regarding the ultimate success of our integration efforts or
regarding our ability to maintain or improve the results of operations of these
businesses.
We derive our revenue primarily from the motion picture and television
production industries and the content distribution 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 content distribution
industry is highly competitive with several companies providing services similar
to ours. Our existing credit agreements currently limit our ability to make
capital investments. There are no assurances that we will be able to obtain or
fund the implementation of 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 have technology
that enables them to provide services that are more reliable, faster, less
expensive, reach more customers or have other advantages over the services we
provide, then the demand for our services may decrease. See Part I, Item 1,
"BUSINESS -- Customers."
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 and 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 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.
The rescheduling or cancellation of several significant projects may have a
material effect on our quarterly and/or annual operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
We seek to reduce cash flow volatility associated with changes in interest
rates by entering into financial arrangements intended to provide a hedge
against the risk associated with such volatility. We continue to have exposure
to such risks to the extent they are not hedged. We assess interest rate cash
flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities. Interest rate swap agreements are the primary instruments
used to manage interest rate fluctuation affecting our $385.5 million of
variable rate debt primarily associated with our Senior Credit Agreement. At
December 31, 2002, we had
40
three interest rate swap agreements with a combined fair market value of $7.1
million in favor of our counterparties. In one swap agreement, we receive
variable interest rate payments and make fixed interest rate payments on a
notional amount of $365.0 million. This swap agreement matures on June 30, 2003.
In addition, we had two interest rate swap agreements in the UK with a fair
value of $0.6 million in favor of our counterparties. These swap agreements
mature on March 10, 2016.
On July 1, 2002, we terminated our $165.0 million notional interest rate
swap for $1.4 million in cash proceeds. Additionally, we terminated a $200.0
million notional interest rate swap for cash proceeds of $1.4 million on
September 20, 2002 and $1.3 million on September 30, 2002.
TABULAR PRESENTATION OF INTEREST RATE RISK
The table below represents in the prescribed tabular form, the contractual
principal (or notional) balances of our interest risk sensitive instruments at
the expected maturity dates as well as the fair value of those instruments for
the period ended December 31, 2002. All instruments are reported in U.S.
dollars, our reporting currency.
FISCAL YEAR
-------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
------- ------- ------- -------- ------- ---------- -------- ----------
(IN THOUSANDS)
Mortgage loans
Fixed rate............. $ 10 $ 406 $ 237 $ 255 $ 257 $7,687 $ 8,852 $ 8,852
Interest rate.......... 7.81% 7.81% 7.81% 7.81% 7.82% 7.81% 7.81% --
Capital leases (fixed
rate)/Other
Fixed rate............. $ 2,850 $ 1,484 $ 1,340 $ 1,925 $ -- -- $ 7,599 $ 7,599
Interest rate.......... 13.52% 15.00% 15.00% 15.00% -- -- 14.44% --
Senior credit facility
Variable rate.......... $14,436 $22,460 $31,835 $240,325 $54,875 $ -- $363,932 $363,932
Interest rate.......... 5.06% -- -- -- -- -- 5.06% --
Mortgage loans
Variable rate.......... $ 114 $ 1,089 $ 8,251 $ 763 $ 747 $4,453 $ 15,417 $ 15,417
Interest rate.......... 4.46% -- -- -- -- -- 4.46% --
Capital leases (variable
rate)/other
Variable rate.......... $ 2,133 $ 2,133 $ 2,533 $ -- $ -- $ -- $ 6,800 $ 6,800
Interest rate.......... 4.65% -- -- -- -- -- 4.65% --
Variable to fixed swaps
Pay fixed rate......... $ 374 $ 9 $ 7 $ 7 $ 6 $ 3 $ -- $ --
Interest rate.......... 4.88% 5.73% 5.73% 5.73% 5.73% 5.73% -- --
FOREIGN CURRENCY RISK
We continually monitor our economic exposure to changes in foreign exchange
rates and may enter into foreign exchange agreements where and when appropriate.
Whenever possible, we utilize local currency borrowings to fund foreign
acquisitions. At December 31, 2002, we did not have any foreign exchange
agreements. Substantially all of our foreign transactions are denominated in
foreign currencies, including the liabilities of our foreign subsidiaries.
Although our foreign transactions are not generally subject to significant
foreign exchange transaction gains or losses, the financial statements of our
foreign subsidiaries are translated into United States dollars as part of our
consolidated financial reporting. As a result, fluctuations in exchange rates
affect our financial position and results of operations.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For all Financial Statements and Supplementary Data, see Part IV, Item 15
of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists our directors and executive officers as of the date of
this report.
NAME DATE OF BIRTH POSITION WITH COMPANY
---- ------------- ---------------------
William R. Fitzgerald(1)(2)...... May, 20, 1957 Chairman of the Board, President, Chief
Executive Officer and Class III Director
Robert R. Bennett(1)............. April 19, 1958 Class III Director
Gary S. Howard(2)(3)............. February 22, 1951 Class II Director
David P. Malm(2)(3).............. July 4, 1964 Class I Director
Brian C. Mulligan(2)............. June 11, 1959 Class I Director
Larry E. Romrell................. December 30, 1939 Class III Director
Barney W. Schotters(3)........... November 25, 1944 Class II Director
Scott Davis...................... July 10, 1951 President, Networks Division
Richard C. Fickle................ June 9, 1957 Executive Vice President, Business
Development
Aidan P. Foley................... October 12, 1957 Executive Vice President and Chief
Marketing Officer and President,
Enterprise Solutions Group
William A. Humphrey.............. April 16, 1955 President, Media Division
William E. Niles................. August 19, 1963 Executive Vice President, General Counsel
and Secretary
George C. Platisa................ March 2, 1957 Executive Vice President and Chief
Financial Officer
Gavin W. Schutz.................. December 29, 1953 Executive Vice President and Chief
Technology Officer
Robert S. Solomon................ May 21, 1958 Executive Vice President and Chief
Operating Officer, Creative Services
Kenneth S. Williams.............. December 31, 1955 Chief Operating Officer
---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
WILLIAM R. FITZGERALD was appointed as the Company's President and acting
Chief Executive officer on May 17, 2002, and continues to serve as the Company's
Chairman of the Board and a director since his appointment on July 26, 2000. He
has served as a Senior Vice President of the Company's parent company, Liberty
Media, since August 2000. Mr. Fitzgerald served as Chief Operating Officer,
Operations Administration, of AT&T Broadband, formerly known as
Tele-Communications, Inc., or TCI, from August 1999 to May 2000, and Executive
Vice President and Chief Operating Officer of TCI from March 1999 to August
1999. Mr. Fitzgerald served as Executive Vice President and Chief Operating
Officer of TCI Communications, Inc., or TCIC, the domestic cable subsidiary of
TCI, from November 1998 to March 1999, served as Executive Vice President of
TCIC from December 1997 to March 1999, and served as Senior Vice President of
TCIC from March 1996 to December 1997. Mr. Fitzgerald is a director of the
Company's affiliates, On Command Corporation and Liberty Satellite & Technology,
Inc. (which is referred to in this report as LSAT).
ROBERT R. BENNETT was elected as a director in June 2000. Mr. Bennett has
served as President and Chief Executive Officer of Liberty Media since April
1997, and as a member of the Board of Directors of Liberty Media since September
1994. Mr. Bennett served as Executive Vice President of TCI from April
43
1997 to March 1999. Mr. Bennett also served as Executive Vice President,
Secretary and Treasurer of Liberty Media from June 1995 through March 1997, and
as its Chief Financial Officer from May 1996 through March 1997. Mr. Bennett
also served as acting Chief Financial Officer of Liberty Digital, Inc. from June
1997 to July 1997. Mr. Bennett is also a director of LSAT, USA Interactive,
UnitedGlobalCom, Inc. and OpenTV, Inc.
GARY S. HOWARD was elected as a director in June 2000. Mr. Howard has
served as Executive Vice President and Chief Operating Officer of Liberty Media
since July 1998. Mr. Howard served as Chief Executive Officer of LSAT from
December 1996 to April 2000. Mr. Howard also served as Executive Vice President
of TCI from December 1997 to March 1999; as Chief Executive Officer, Chairman of
the Board and a director of TV Guide, Inc. from June 1997 to March 1999; and as
President and Chief Executive Officer of TCI Ventures Group, LLC from December
1997 to March 1999. Mr. Howard is also a director of Liberty Media, LSAT,
UnitedGlobalCom, Inc., SpectraSite, Inc. and On Command Corporation and is
Chairman of the Board of LSAT and On Command Corporation.
DAVID P. MALM has served as a director since 1997, except for a period
between June 9, 2000 and July 18, 2000. He is currently a partner of Halpern,
Denny & Company, a Boston-based private equity investment firm, which he formed
in 1991.
BRIAN C. MULLIGAN was appointed by the board as a director, effective
December 6, 2002. Mr. Mulligan was an Executive Advisor to The Boston Consulting
Group, a management consulting firm, from April 2002 to October 2002. From
January 2001 to March 2002, Mr. Mulligan served as Chairman of, and Consultant
to, Fox Television, a division of The News Corporation Limited, or NewsCorp,
where he oversaw the Fox Television Stations group, Fox Sports, the Fox Cable
Networks Services Group and the business operations of the FOX Broadcasting
Network. Mr. Mulligan also served as Executive Vice President and Chief
Financial Officer of The Seagram Company Ltd., then a company with four business
segments in music, filmed entertainment, recreation, and spirits and wine, where
he was responsible for all corporate financial and strategic business matters,
from December 1999 to December 2000. Mr. Mulligan served as Co-Chairman of
Universal Pictures, Inc. from June 1999 to December 1999, where he was jointly
responsible for worldwide operations including development, production,
marketing and distribution, and in several positions at Universal Studios, Inc.,
including, Executive Vice President, Operations and Finance from December 1998
to June 1999 and Senior Vice President, Business Development and Strategic
Planning from June 1995 to December 1998.
LARRY E. ROMRELL was elected as a director in June 2000. Mr. Romrell served
as Executive Vice President of TCI from January 1994 to March 1999, and has
served as a consultant to AT&T Broadband since March 1999. Mr. Romrell also
served, from December 1997 to March 1999, as Executive Vice President and Chief
Executive Officer of TCI Business Alliance and Technology Co., a former
subsidiary of TCI that oversaw and developed TCI's technology activities; from
December 1997 to March 1999, as Senior Vice President of TCI Ventures Group,
LLC, and, from September 1994 to October 1997, as President of TCI Technology
Ventures, Inc., a former subsidiary of TCI that invested in and developed
companies engaged in advancing telecommunications technology. Mr. Romrell is
also a director of Liberty Media and Arris Group, Inc.
BERNARD W. SCHOTTERS was elected as a director in December 2001. Mr.
Schotters is currently a consultant and private equity investor. Since April
2000, he has been a member of Telecom Partners, a venture capital firm based in
Denver, Colorado. From March 1999 through March 2000, Mr. Schotters served as an
Executive Vice President of TCI, and its successor, AT&T Broadband. Mr.
Schotters also served as TCI's Executive Vice President, Finance and Treasury,
and Principal Financial Officer from March 1998 to March 1999, and, prior to
March 1998, as its Senior Vice President, Finance and Treasury and Principal
Financial Officer. Mr. Schotters is a member of the National Association of
Treasurers and the National Cable Television Association and a past member of
The Nasdaq Stock Market's Issuer Affairs Committee.
SCOTT DAVIS has served as President of the Company's Network Services Group
since September 2000. Prior to joining us, Mr. Davis served as the Senior Vice
President, Consumer Product Management
44
for Cablevision Systems Corporation, a cable television system operator, from
1998 to 2000. From 1995 to 1998, Mr. Davis served as Executive Vice President at
MTV Networks.
RICHARD C. FICKLE was appointed as Executive Vice President, Strategic
Development in November 2001. Mr. Fickle was previously employed with AT&T
Broadband and its predecessor, TCI, from 1987 to 1992 and from 1994 to November
2001, where he held several positions, including Senior Vice President,
overseeing Headend In The Sky (HITS) and interactive television product
development.
AIDAN P. FOLEY joined the Company in March 2002. Mr. Foley served as
Executive Vice President, Business Development from May 2002 to June 2002, and
then as Executive Vice President and Chief Marketing Officer since June 2002.
Since March 2002, he has also served as President, Enterprise Solutions Group.
Prior to joining the Company, Mr. Foley was Chief Executive Officer of ClearView
Networks, a video networks company, from January 2001 to November 2001. From
October 1994 to November 2000, he was President and Chief Executive Officer of
Eastman Kodak's Digital Motion Imaging, a global group of companies and
divisions encompassing the entertainment services of Eastman Kodak.
WILLIAM A. HUMPHREY has served as President of the Company's Media
Management Services Group since August 2002. Prior to joining the Company, he
was President and Chief Operating Officer of NextLeft, Inc., an e-business
consulting firm, from April 1999 to August 2002 and Executive Vice President,
Business Development, Technology and Entertainment Operations at Turner
Broadcasting Systems, Inc., a content and programming provider, from August 1999
to April 2000. From April 1984 to August 1999, Mr. Humphrey also held various
management positions at Sony Pictures Entertainment, most recently as Executive
Vice President of Sony's Digital Studios from March 1997 to August 1999. Mr.
Humphrey received a Technical Emmy Award in 1998 and Sony's 50th Anniversary
Project Award in 1997. He also served as co-chair of the Montreux International
Digital Post Production Symposium for 1998-1999.
WILLIAM E. NILES was appointed the Company's Executive Vice President,
General Counsel and Secretary in January 2002. Prior to this appointment, Mr.
Niles served as the Company's Executive Vice President of Business and Legal
Affairs from October 2001 to January 2002, and as the Company's Senior Vice
President and Assistant Secretary from June 2000 to October 2001. Mr. Niles was
General Counsel and Vice President of Business Affairs of Four Media Company
from February 1998 to June 2000. From 1997 to February 1998, Mr. Niles served as
General Counsel and Vice President of Business Affairs of Visualize, a
post-production company doing business as POP that was acquired by Four Media
Company, now a Company subsidiary, in February 1998. Prior to his appointment at
POP, Mr. Niles practiced law as a partner of Stein & Kahan, a law corporation.
GEORGE C. PLATISA was appointed as the Company's Chief Financial Officer
and Executive Vice President in May 2001. Mr. Platisa served as Chief Financial
Officer of Broadband Sports, a creator and distributor of athlete and sports
news content, fantasy sports news and services and authentic sports memorabilia,
from 2000 to 2001, and as Chief Financial Officer of Pacificare of California, a
health and consumer services company, from 1998 to 2000. From 1993 to 1998, Mr.
Platisa served in several positions in financial management with The Walt Disney
Company, including Vice President, Operations Planning, and Vice President,
Controllership.
GAVIN W. SCHUTZ was appointed Executive Vice President and Chief Technology
Officer of the Company in November 2000. Mr. Schutz has been with Four Media
Company since 1993, prior to which he spent 13 years as Vice President and
Director of Engineering of Image Transform, Inc., a company that Four Media
Company acquired in 1993. Mr. Schutz has been the principal architect of the
Company's deployment of digital infrastructure.
ROBERT S. SOLOMON was appointed both Executive Vice President and Chief
Operating Officer of the Creative Services Group in March 2003. Prior to this
appointment, Mr. Solomon was Senior Vice President and Chief Financial Officer
of the Creative Services Group from June 2000 to March 2003. From September 1998
to June 2000, Mr. Solomon was Senior Vice President of the Pictures Group at
45
Four Media Company, which acquired Encore in September 1998, where Mr. Solomon
had served as Chief Financial Officer from February 1997 to September 1998.
KENNETH S. WILLIAMS joined the Company in August 2002 and serves as the
Company's Chief Operating Officer. Mr. Williams previously served as President
of Technicolor Digital Cinema, LLC, a joint venture between Technicolor and
Qualcomm to develop distribution technology and support services for digital
content, from January 2002 to August 2002, and as President and Chief Executive
Officer of Stan Lee Media, Inc., a digital entertainment studio, from August
2000 to December 2001. Mr. Williams spent 18 years with Columbia Pictures and
Sony Pictures Entertainment, most recently as President of the Digital Studios
Division from January 1997 to July 2000. Mr. Williams is a board member and past
president of the Los Angeles Conservancy, a board member of the Music Center/Los
Angeles, and a member and past chair of the Entertainment Technology Council,
University of Southern California.
BOARD COMPOSITION
The authorized number of directors of the Company is currently nine. The
Company has a classified board of directors that is to consist of three Class I
directors, three Class II directors and three Class III directors. At each
annual meeting of stockholders, one class of directors is elected for a full
term of three years. The Class III directors were elected at the 2002 annual
meeting of stockholders, held on January 23, 2003, to serve until the 2005
annual meeting of stockholders. At the 2003 annual meeting of stockholders, the
Class I directors' term will expire, and elections will be held for a new
three-year term to expire at the 2006 annual meeting of stockholders. At the
2004 annual meeting, the Class II directors' term will expire, and elections
will be held for a new three-year term to expire at the 2007 annual meeting of
stockholders. With the resignations of Class I Directors Salah Hassanein
(effective February 27, 2002) and Robert Walston (effective May 17, 2002), and
Class II Director Sydney Pollack (effective November 8, 2002), and the
appointment of Class I Director Brian C. Mulligan (effective December 6, 2002),
the Company currently has seven members on the board of directors. The board is
actively seeking to fill the remaining two vacancies on the board of directors.
Vacancies resulting from such resignations may be filled by the affirmative vote
of a majority of the remaining directors then in office (even though less than a
quorum) or by the sole remaining director. Any director elected in this manner
will hold office for the remainder of the full term of the class of directors in
which the vacancy occurred and until such director's successor is elected and
qualified.
BOARD OF DIRECTORS MEETINGS IN 2002
For the year ended December 31, 2002, the Company's board of directors met
three times. During 2002, each director other than Robert R. Bennett and Larry
E. Romrell attended, either in person or telephonically, at least 75% of the
aggregate of the total number of board of directors meetings and the total
number of meetings held by the committees of the board of directors on which
they served.
BOARD COMMITTEES
The Company's board of directors has a standing Executive Committee, Audit
Committee and Compensation Committee.
Executive Committee. The principal responsibilities of the Executive
Committee are to, if necessary, exercise all the powers and authority of the
board of directors in the management of the business and affairs of the Company
to the fullest extent permitted by applicable law, and the Company's Restated
Certificate of Incorporation and bylaws, as each may be amended from time to
time. Robert R. Bennett and William R. Fitzgerald are the current members on the
Executive Committee and both have served on the committee since July 26, 2000.
Robert T. Walston served on the Executive Committee from August 3, 2001 to May
17, 2002, when he resigned from the board. The Executive Committee did not meet
in 2002, but did act by unanimous written consent in lieu of meeting.
Audit Committee. The Audit Committee operates under a written charter
adopted by the board of directors, a copy of which was attached as Annex A to
the Company's proxy statement for the annual
46
meeting of stockholders held on December 19, 2001. The Audit Committee reviews
the scope and approach of the annual audit, the annual financial statements and
the auditors' report thereon and the auditors' comments relative to the adequacy
of the Company's system of internal controls and accounting systems. The Audit
Committee is also responsible for recommending to the board of directors the
appointment of independent public accountants for the following year. The Audit
Committee met four times in 2002.
From January 1, 2002 to March 5, 2002, the Company's Audit Committee was
comprised of David P. Malm, Sydney Pollack and Bernard W. Schotters. Each member
was "independent" within the meaning of Nasdaq Marketplace Rule 4200(a)(14).
Effective March 5, 2002, Mr. Pollack resigned from the Audit Committee, citing
an inability to serve thereon due to the extent of his other professional
obligations. (Mr. Pollack subsequently resigned from the Board of Directors,
effective November 8, 2002, again citing an inability to serve thereon due to
the extent of his other professional obligations.)
Following Mr. Pollack's resignation from the Audit Committee, the board of
directors appointed Gary S. Howard as the third member of the Audit Committee,
effective March 5, 2002. As Executive Vice President and Chief Operating Officer
of Liberty Media, Mr. Howard is not an "independent" director under Nasdaq
Marketplace Rule 4200(a)(14). Mr. Howard is a current member of the board of
directors and has extensive professional training and experience in finance and
accounting matters, having served as both a CPA and a treasurer/senior vice
president of finance. The board determined that Mr. Howard's membership on the
Audit Committee was in the Company's and the stockholders' best interests and
the lack of any other independent directors created exceptional and limited
circumstances under which, pursuant to Nasdaq Marketplace Rule 4350(d)(2), the
Company could allow one member of the board of directors who was not
independent, and who was not a current employee or an immediate family member of
an employee, to be appointed to the Audit Committee. On December 6, 2002, the
board filled one of the vacancies on the board of directors with Brian C.
Mulligan, a director who is an "independent" director under the Nasdaq
Marketplace Rules. On that same day, Mr. Mulligan was appointed to, and Mr.
Howard resigned from, the Audit Committee.
Compensation Committee. The purpose of the Compensation Committee is to
review management compensation levels and provide recommendations to the board
of directors regarding salaries and other compensation for the Company's
executive officers, including bonuses and incentive programs. From January 1,
2002 to March 5, 2002, the members of the Compensation Committee were Messrs.
Fitzgerald, Howard, Malm and Pollack, and Mr. Schotters was an alternate member
of the Compensation Committee. On March 5, 2002, Mr. Pollack resigned from the
Compensation Committee, citing an inability to serve thereon due to the extent
of his other professional obligations, and Mr. Schotters was appointed as a full
member of the Compensation Committee. The Compensation Committee met one time in
2002.
COMPENSATION OF DIRECTORS
Members of the Company's board of directors who are also full-time
employees or consultants of the Company or Liberty Media, or any of their
respective subsidiaries, or any other affiliate of Liberty Media, do not receive
any additional compensation for their services as a member of the Company's
board of directors.
Members of the Company's board of directors who are not full-time employees
or consultants of the Company or Liberty Media or any of their respective
subsidiaries, which we refer to collectively as Independent Directors for
purposes of this discussion, receive a director's fee of $16,000 per year.
Members of the Company's Audit Committee who are Independent Directors also
receive $750 for (i) each telephonic or in-person meeting of the Audit Committee
that is not convened simultaneously with, or immediately preceding or following
the conduct of, any regularly scheduled or special meeting of the board of
directors, and (ii) each monthly financial update teleconference of the board of
directors which is not held simultaneously with, or immediately preceding or
following the conduct of, any meeting of the Audit Committee or the board of
directors. Directors are not otherwise separately compensated for
47
service on board committees. Independent Directors are also reimbursed for
expenses incurred to attend any meeting of the board or board committee on which
they serve.
On November 28, 2000, the board of directors adopted the Company's 2000
Nonemployee Director Stock Option Plan, which was approved at the Company's
annual meeting of stockholders on December 19, 2001. Pursuant to the 2000
Nonemployee Director Stock Option Plan, each Independent Director, as of
November 28, 2000, was granted options to purchase 15,000 shares of the
Company's Class A common stock. In addition, each person who became, or becomes,
an Independent Director after November 28, 2000 was, or will be, automatically
granted options to purchase up to 15,000 shares of the Company's Class A common
stock upon such person becoming a director. The 2000 Nonemployee Director Stock
Option Plan provides that the per share exercise price of each option granted
under the plan will be equal to the fair market value of the Company's Class A
common stock on the date such option is granted. In general, fair market value
is determined by reference to the last sale price for shares of the Company's
Class A common stock on the date of grant. Options granted pursuant to the 2000
Nonemployee Director Stock Option Plan will be exercisable, on a cumulative
basis, as to 20% of the number of shares of the Company's Class A common stock
subject to the option on each of the first, second, third, fourth and fifth
anniversary of the date the option was granted.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers, and persons who beneficially own
more than 10% of a registered class of the Company's equity securities, file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of the Company's Class A common stock and other
equity securities within a specified period following a change. Officers,
directors and greater than 10% stockholders are required by Securities and
Exchange Commission regulations to furnish us with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to us with respect to our most recent fiscal year
and our actual knowledge, or written representations that no Forms 5 were
required, the Company believes that, during the year ended December 31, 2002,
the Company's officers, directors and greater-than-ten-percent beneficial owners
complied with all Section 16(a) filing requirements.
48
ITEM 11. EXECUTIVE COMPENSATION
The following table shows certain compensation earned during the fiscal
years ending December 31, 2002, 2001 and 2000, by the Company's Named Executive
Officers.
The columns for other annual compensation, restricted stock awards and
long-term incentive plans have been omitted because there was no compensation
required to be reported in such columns.
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION SECURITIES
FISCAL ----------------------- UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#) COMPENSATION($)
--------------------------- ----------- ---------- --------- ------------------ ----------------
William R. Fitzgerald(1)..... 2002 232,500(2) -- -- --(3)
Chairman of the Board, 2001 225,000(2) -- -- --(3)
President, Chief Executive 2000 -- -- -- --
Officer
Robert T. Walston(4)......... 2002 753,846(5) -- -- 2,305,500(8)
Former Chief Executive 2001 601,154 -- 775,000(7) 5,250(9)
Officer and President 2000 288,462(6a) -- -- 3,400(10)
Lawrence Chernoff(11)........ 2002 451,620 -- -- 2,135(13)
Former President, 2001 357,524 -- 275,000(12) 1,538(14)
Creative Services Group 2000 145,041(6b) -- -- 1,538(10)
Scott Davis.................. 2002 350,000 -- -- 2,135(13)
President, Network Services 2001 350,000 -- 175,000 --
Group 2000 84,808(15) -- -- --
George C. Platisa............ 2002 400,000 -- -- --
Executive Vice President 2001 246,154(16) 50,000 250,000 --
and Chief Financial 2000 -- -- -- --
Officer
Gavin W. Schutz.............. 2002 350,000 -- -- 4,510(13)
Executive Vice President 2001 292,885 -- 185,000 3,663(17)
and Chief Technology 2000 274,670(6c) -- -- 984,497(10)
Officer
Marcus O. Evans(18).......... 2002 363,462(19) -- -- --
Former Executive Vice 2001 348,701 -- 250,000(20) --
President, Secretary and 2000 215,385(6d) -- -- --
General Counsel
---------------
(1) Mr. Fitzgerald was appointed as Chairman of the Board, effective July 26,
2000, and was appointed Chief Executive Officer and President, effective
May 17, 2002.
(2) This represents the portion of Mr. Fitzgerald's salary, benefits and 401(k)
contribution to the Liberty Media 401(k) Savings Plan paid by the Company
as part of the fees paid to Liberty Media, as described under Part III,
Item 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Services
Received From Liberty Media" below. The remainder of Mr. Fitzgerald's
salary, benefits and 401(k) contribution is paid by Liberty Media.
(3) Mr. Fitzgerald receives 401(k) contributions to the Liberty Media 401(k)
Savings Plan made by both the Company and Liberty Media. The portion of
such 401(k) contributions made by the Company are part of his annual
salary, described in this table and Note 2 above.
(4) Mr. Walston resigned as President, Chief Executive Officer and a director,
effective May 17, 2002.
49
(5) This amount represents payments to Mr. Walston during and after his
employment with the Company, pursuant to the terms of his employment
agreement, dated January 1, 1999, with the Company's subsidiary, Four Media
Company (referred to in this report as the "4MC Agreement"). For more
information about the 4MC Agreement, see "Employment Agreements with Named
Executive Officers -- Robert T. Walston" in this Item 11 below.
(6) These amounts represent salary for seven months ended December 31, 2000.
These amounts do not include:
(a) $192,307 of salary for the five months ended May 31, 2000 earned by Mr.
Walston at Four Media Company prior to its acquisition by the Company;
(b) $116,194 of salary for the five months ended May 31, 2000 earned by Mr.
Chernoff at Four Media Company prior to its acquisition by the Company;
(c) $105,769 of salary for the five months ended May 31, 2000 earned by Mr.
Schutz at Four Media Company prior to its acquisition by the Company;
and
(d) $40,835 of salary for the period commencing March 15, 2000 through June
1, 2000 earned by Mr. Evans and paid by Four Media Company.
(7) Mr. Walston's options terminated unexercised at December 31, 2002.
(8) This amount represents (i) the forgiveness of a $2.0 million loan and
accrued interest on the loan of $300,000 pursuant to the 4MC Agreement and
(ii) contributions of $5,500 made by the Company to the Liberty Media
401(k) Savings Plan. For more information regarding (i) the 4MC Agreement,
see "Employment Agreements with Named Executive Officers -- Robert T.
Walston" in this Item 11 below, and (ii) the Company's contributions to the
Liberty Media 401(k) Savings Plan, see "Liberty Media 401(k) Savings Plan
Contributions" in this Item 11 below.
(9) This amount represents contributions of $3,077 made by the Company to the
Four Media Company 401(k) Plan for the four months ended April 30, 2001,
and $2,173 made by the Company to the Liberty Media 401(k) Savings Plan for
the eight months ended December 31, 2001 after the Four Media Company
401(k) Plan merged into the Liberty Media 401(k) Savings Plan. For more
information regarding the Company's contributions to the Liberty Media
401(k) Savings Plan, see "Liberty Media 401(k) Savings Plan Contributions"
in this Item 11 below.
(10) This amount represents (i) $981,097 paid by Liberty Media to Mr. Schutz
upon exercise of his Four Media Company stock options prior to the
acquisition of Four Media Company by Liberty Media in April 2000 and (ii)
contributions of $3,4000 made by the Company to the Four Media Company
401(k) Plan on the respective executive's behalf, for the seven months
ended December 31, 2000. For more information on the acquisition of Four
Media Company, see Part I, item 1, "BUSINESS -- Formation -- Change in
Control and Subsequent Acquisitions and Divestitures."
(11) Mr. Chernoff resigned as the President of the Creative Services group,
effective December 31, 2002, and was appointed, pursuant to a consulting
agreement, as Chairman of the Creative Services group. For more information
about the consulting agreement, see Part III, Item 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Consulting Agreement with Named
Executive Officer" below.
(12) On November 15, 2001, the Company granted Mr. Chernoff an option to
purchase 275,000 shares of the Company's Class A common stock, the first
25% of which vested on December 31, 2002. Pursuant to a consulting
agreement between the Company and Mr. Chernoff, the remaining 75%
terminated on January 1, 2003, upon the commencement of the consulting
agreement. For more information about the consulting agreement, see Part
III, Item 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Consulting
Agreement with Named Executive Officer" below.
(13) This amount represents contributions made by the Company to the Liberty
Media 401(k) Savings Plan.
50
(14) This amount represents contributions made by the Company to the Four Media
Company 401(k) Plan for the four months ended April 30, 2001.
(15) Mr. Davis joined the Company as President, Network Services on September
27, 2000. This amount represents salary for the four months ended December
31, 2000.
(16) Mr. Platisa joined the Company as Executive Vice President and Chief
Financial Officer on May 14, 2001. This amount represents salary for the
seven months ended December 31, 2001.
(17) This amount represents contributions of $1,692 made by the Company to the
Four Media Company 401(k) Plan for the four months ended April 30, 2001,
and $1,971 made by the Company to the Liberty Media 401(k) Savings Plan for
the eight months ended December 31, 2001 after the Four Media Company
401(k) Plan merged into the Liberty Media 401(k) Savings Plan. For more
information regarding the Company's contributions to the Liberty Media
401(k) Savings Plan, see "Liberty Media 401(k) Savings Plan Contributions"
in this Item 11 below.
(18) Mr. Evans resigned as Executive Vice President, Secretary and General
Counsel, effective January 21, 2002.
(19) This amount also represents payments to Mr. Evans after his employment with
the Company, pursuant to the terms of his severance agreement and general
release, dated January 21, 2002, with the Company and Liberty Media. For
more information about this severance agreement and general release, see
"Severance Agreements with Named Executive Officers -- Marcus O. Evans" in
this Item 11 below.
(20) On November 15, 2001, the Company granted Mr. Evans an option to purchase
250,000 shares of the Company's Class A common stock. Pursuant to a
severance agreement and general release among the Company, Liberty Media
and Mr. Evans, effective January 21, 2002, the Company accelerated the
vesting of 62,500 shares, representing 25%, of such option, and the
original option grant was terminated as to the remaining 187,500 shares,
representing 75% of such option. For more information about this severance
agreement and general release, see "Severance Agreements with Named
Executive Officers -- Marcus O. Evans" in this Item 11 below.
LIBERTY MEDIA 401(k) SAVINGS PLAN CONTRIBUTIONS
Since June 2001, the Company's employees, including its executive officers,
have been eligible to enroll in the Liberty Media 401(k) Savings Plan. The
Liberty Media 401(k) Savings Plan provides the Company's employees with an
opportunity to save for retirement. Subject to the maximum limits allowed by
law, eligible participants may contribute up to 99% of their compensation. The
Company will match 50% of the participants' contribution up to 6% of
compensation, which matching contribution is invested in a Liberty Media stock
fund. The participants' contributions to the savings plan are fully vested upon
contribution. The Company's matching contributions are vested as follows:
YEARS OF SERVICE VESTING PERCENTAGE
---------------- ------------------
Less than one............................................... 0%
1-2......................................................... 33%
2-3......................................................... 66%
3 or more................................................... 100%
OPTIONS GRANTS IN FISCAL YEAR 2002
No Named Executive Officers were granted options in fiscal year 2002.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
No Named Executive Officers exercised options in fiscal year 2002. The
Company has not issued any SARs.
51
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS AT
NUMBER OF SECURITIES FISCAL
SHARES UNDERLYING UNEXERCISED OPTIONS YEAR-END($)
ACQUIRED ON VALUE AT FISCAL YEAR-END(#) EXERCISABLE/
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------------------------ -------------
William R. Fitzgerald......... -- -- -- --
Robert T. Walston............. -- -- --(1) --
Lawrence Chernoff............. -- -- Exercisable: 68,750 --
Unexercisable: 206,250(2)
Scott Davis................... -- -- Exercisable: 43,750 --
Unexercisable: 131,250
George C. Platisa............. -- -- Exercisable: 0 --
Unexercisable: 250,000
Gavin W. Schutz............... -- -- Exercisable: 0 --
Unexercisable: 185,000
Marcus O. Evans............... -- -- Exercisable: 62,500 --
Unexercisable: 0
---------------
(1) Mr. Walston right to exercise 193,750 shares of the Company's Class A common
stock terminated unexercised on December 31, 2002.
(2) Pursuant to Mr. Chernoff's consulting agreement, the 206,250 shares that
were unexercisable at December 31, 2002 terminated on January 1, 2003. For
more information about Mr. Chernoff's consulting agreement, see Part III,
Item 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Consulting
Agreement with Named Executive Officer" below.
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 2002
No long-term incentive plan awards were granted in fiscal year 2002.
REPORT ON REPRICING OF OPTIONS
The Company did not, at any time during 2002, change the exercise price of
stock options or SARs previously awarded to any of its executive officers.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Robert T. Walston. Prior to Mr. Walston's resignation as the Company's
President, Chief Executive Officer and director on May 17, 2002, Mr. Walston had
an employment agreement with Four Media Company, the Company's subsidiary, which
was executed on January 1, 1999 and expired on December 31, 2003 (the "4MC
Agreement"). Under the terms of the 4MC Agreement, among other things, Mr.
Walston was to be paid an annual salary of $500,000 as Four Media Company's
Chairman and Chief Executive Officer. Although Mr. Walston's agreement had not
been modified, effective August 6, 2001, upon assumption of duties as the
Company's then-current President and Chief Executive Officer, Mr. Walston began
receiving an annual salary of $700,000. On November 15, 2001, Mr. Walston was
granted stock options permitting him to purchase 775,000 shares of the Company's
Class A common stock at an exercise price of $7.00 per share under the terms of
the Company's 2001 Incentive Plan.
On May 17, 2002, Mr. Walston's employment with the Company ended. Under the
terms of his employment agreement, the Company is paying Mr. Walston his annual
base salary of $700,000 until the end of the term of his employment agreement on
December 31, 2003 and automatically forgave a loan of $2.0 million and accrued
interest on the loan of $300,000. In addition, Mr. Walston's option to purchase
1,654,191 shares of Liberty Media Series A common stock became exercisable upon
the termination of his employment and remained exercisable until January 31,
2003 at which time it expired unexercised. For
52
more information on the loan to Mr. Walston, see Part III, Item 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Executive Officer Loan" below.
The Company is currently negotiating severance arrangements with Mr.
Walston, the terms of which have not been agreed upon.
Scott Davis. Mr. Davis currently has an employment agreement, dated May
30, 2002, with the Company. During the five-year term of this employment
agreement, Mr. Davis is paid an annual base salary of $350,000 and is eligible
for a bonus payment, if any, based on an incentive bonus plan to be established
and administered by the Compensation Committee of the board of directors. Mr.
Davis also acknowledged receipt of an option to purchase 175,000 shares of the
Company's Class A common stock at an exercise price of $7.00 granted to him on
November 15, 2001 under the terms of Company's 2001 Incentive Plan.
George C. Platisa. Mr. Platisa currently has an employment agreement,
dated May 21, 2001, with the Company. During the five-year term of this
employment agreement, Mr. Platisa is paid an annual base salary of $400,000,
received a one-time signing bonus of $50,000 and is eligible for an annual bonus
payment based on the sole discretion of the Chief Executive Officer. Mr. Platisa
also received an option to purchase 250,000 shares of the Company's Class A
common stock at an exercise price of $7.00 under the terms of Company's 2001
Incentive Plan.
Gavin W. Schutz. Mr. Schutz currently has an employment agreement, dated
May 21, 2002, with the Company. During the five-year term of this employment
agreement, Mr. Schutz is paid an annual base salary of $350,000 and is eligible
for a bonus payment, if any, based on an incentive bonus plan to be established
and administered by the Compensation Committee of the board of directors. Mr.
Schutz also acknowledged receipt of an option to purchase 185,000 shares of the
Company's Class A common stock at an exercise price of $7.00 granted to him on
November 15, 2001 under the terms of Company's 2001 Incentive Plan.
SEVERANCE AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Marcus O. Evans. On January 21, 2002, Marcus O. Evans entered into a
severance agreement and general release with the Company and Liberty Media
specifying the terms of the termination of his position as Executive Vice
President, General Counsel and Secretary. Pursuant to the provisions of this
severance agreement, effective January 21, 2002, Mr. Evans will continue to
receive an amount equal to his then annual base salary of $350,000 per year as
severance payments until January 31, 2004 and reimbursement for medical benefits
through January 31, 2004. In addition, effective January 21, 2002, the Company
accelerated the vesting of Mr. Evans' existing stock options with respect to
62,500 shares of its Class A common stock, which represented 25% of the original
option grant to Mr. Evans on November 15, 2001 to purchase 250,000 shares of the
Company's Class A common stock, and the original option grant was terminated as
to the remaining 187,500 shares. The vested option shares are exercisable
through January 31, 2004, at an exercise price of $7.00 per share subject to the
terms of the 2001 Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following members of the Company's board of directors serve as members
of the Compensation Committee of the board of directors: William R. Fitzgerald,
Gary S. Howard, David P. Malm and Bernard W. Schotters. None of the members of
the Compensation Committee (i) is an officer or employee of the Company or any
of its subsidiaries, (ii) was formerly an officer or employee of the Company or
any of its subsidiaries, or (iii) had any related party transactions, except
that Mr. Fitzgerald is the President and Chief Executive Officer of the Company
and an officer of each of the Company's U.S. subsidiaries. Messrs. Howard and
Fitzgerald are each officers, and Mr. Howard is a director of, Liberty Media,
and Mr. Fitzgerald and another director of the Company own interests in a
subsidiary of Liberty Media that owns equity securities of the Company,
including convertible notes issued under the Liberty Subordinated Credit
Agreement.
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table lists stockholders believed by the Company to be the
beneficial owners of more than five percent of either class of its outstanding
common stock as of December 31, 2002. The number of shares beneficially owned by
each stockholder is determined under rules promulgated by the Securities and
Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership generally includes any shares as to which the individual has sole or
shared voting power or investment power. Inclusion in the table below of such
shares, however, does not constitute an admission that the named stockholder is
a direct or indirect beneficial owner of such shares. Shares issuable upon
exercise or conversion of options and convertible securities that were
exercisable or convertible within 60 days after December 31, 2002 and upon
vesting of restricted shares are deemed to be outstanding for the purpose of
computing the percentage ownership and overall voting power of persons believed
to beneficially own such securities, but have not been deemed to be outstanding
for the purpose of computing the percentage ownership or overall voting power of
any other person. For purposes of the following presentation, beneficial
ownership of shares of the Company's Class B common stock, though convertible on
a one-for-one basis into shares of Class A common stock, is reported as
beneficial ownership of shares of Class B common stock only. Voting power in the
table is computed with respect to a general election of directors. So far as is
known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as believed to be owned by
them, except as otherwise stated in the notes to the table. Shares of the
Company's Class A common stock are represented in the table as AMGIA and shares
of the Company's Class B common stock are represented in the table as AMGIB.
COMBINED VOTING
NUMBER OF SHARES POWER OF ALL
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIALLY OWNED PERCENT OF CLASS(1) HOLDINGS(1)
------------------------------------ -------------- ------------------ ------------------- ---------------
Liberty Media Corporation......... AMGIA 45,600 *
12300 Liberty Boulevard AMGIB 75,475,040(2) 100.00 99.31%
Englewood, Colorado
Robert A. Naify................... AMGIA 876,985(3) 17.96
172 Golden Gate Avenue AMGIB -- -- *
San Francisco, California
David P. Beddow................... AMGIA 387,500(4) 7.93
c/o Ascent Media Group, Inc. AMGIB -- -- *
520 Broadway, 5th Floor
Santa Monica, CA 90401
Royce & Associates................ AMGIA 380,900(5) 7.80
1414 Avenue of the Americas AMGIB -- -- *
New York, New York 10019
---------------
* Less than one percent.
(1) Based on 4,884,559 shares of the Company's Class A common stock and
52,341,164 shares of the Company's Class B common stock issued and
outstanding as of December 31, 2002.
(2) Includes 23,133,876 shares of the Company's Class B common stock that are
issuable upon conversion of convertible notes that are convertible within 60
days of December 31, 2002 (and includes those shares that became convertible
on January 23, 2003). Of the shares shown as beneficially owned by Liberty
Media, 29,614,075 are owned by direct and indirect subsidiaries of Liberty
Media.
(3) Includes 876,985 shares of the Company's Class A common stock held by trusts
for which Mr. Naify is both trustee and beneficiary or income beneficiary.
54
(4) Represents stock options to acquire 387,500 shares of the Company's Class A
common stock granted pursuant to Mr. Beddow's severance agreement with the
Company and Liberty Media, all of which are currently exercisable.
(5) Based on a Schedule 13D/A filed on January 31, 2003 with the Securities and
Exchange Commission for beneficial ownership as of December 31, 2002.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of shares of the Company's Class A common stock by each of the
Company's directors; by each individual serving as chief executive officer in
2002, by the Company's four most highly-compensated executive officers other
than the chief executive officer (based on their salary and all other
compensation) at December 31, 2002 and by two executives who would have been
among the four most highly compensated executive officers but were not serving
as executive officers at December 31, 2002 (referred to in this report as the
Named Executive Officers), and by all of the Company's directors and executive
officers as a group. In addition, the table sets forth information with respect
to the beneficial ownership of such individuals of shares of Series A common
stock and Series B common stock of Liberty Media, which owns a controlling
interest in the Company. The Liberty Media charter provides that holders of
Liberty Media Series A common stock are entitled to one vote per share held and
holders of Liberty Media Series B common stock are entitled to ten votes per
share held and, except as otherwise required by Delaware law, vote together as a
single class.
The following information is given as of December 31, 2002 and in case of
percentage ownership information, is based on 4,884,559 shares of the Company's
Class A common stock and 52,341,164 shares of the Company's Class B common
stock, 2,476,953,566 shares of Liberty Media Series A common stock and
212,044,128 shares of Liberty Media Series B common stock issued and outstanding
on that date. Shares issuable upon exercise or conversion of options and
convertible securities that were exercisable or convertible within 60 days of
December 31, 2002 and upon vesting of restricted shares are deemed to be
outstanding for the purpose of computing the percentage ownership and overall
voting power of persons believed to beneficially own such securities, but have
not been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power of any other persons. For purposes of the
following presentation, beneficial ownership of shares of Liberty Media Series B
common stock, though convertible on a one-for-one basis into shares of Liberty
Media Series A common stock, is reported as beneficial ownership of shares of
Liberty Media Series B common stock only.
The number of shares beneficially owned by each of the Company's directors
and each of its Named Executive Officers is determined under rules promulgated
by the Securities and Exchange Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership generally includes any shares as to which the
individual has sole or shared voting power or investment power. Inclusion in the
table below of such shares, however, does not constitute an admission that the
named director or Named Executive Officer is a direct or indirect beneficial
owner of such shares. Voting power in the table is computed with respect to a
general election of directors. So far as is known to the Company, the persons
indicated below have sole voting and investment power with respect to the shares
indicated as believed to be owned by them, except as
55
indicated in the notes to the table. Shares of the Company's Class A common
stock will be represented in the table as AMGIA.
COMBINED
VOTING
POWER OF ALL
NUMBER OF SHARES PERCENT OF CLASS CLASSES OR
NAME TITLE OF CLASS OR SERIES BENEFICIALLY OWNED OR SERIES SERIES
---- ------------------------ ------------------ ---------------- ------------
Directors:
William R. Fitzgerald.... AMGIA -- -- --
Liberty Media Series A 653,642(1)(2)(3)(29) * *
Liberty Media Series B -- -- --
Robert R. Bennett........ AMGIA -- -- --
Liberty Media Series A 3,799,842(4)(5)(6)(7) * 1.8%
Liberty Media Series B 7,923,330(6) 3.6%
Gary S. Howard........... AMGIA -- -- --
Liberty Media Series A 5,650,822(8)(9)(10)(11)(12) * *
Liberty Media Series B -- --
David P. Malm............ AMGIA 6,000(13) * *
Liberty Media Series A -- -- --
Liberty Media Series B -- --
Brian C. Mulligan........ AMGIA -- -- --
Liberty Media Series A -- -- --
Liberty Media Series B -- --
Larry E. Romrell......... AMGIA -- -- --
Liberty Media Series A 210,365(14)(29) * *
Liberty Media Series B 3,240(14) *
Bernard W. Schotters..... AMGIA 3,000(15) * *
Liberty Media Series A 2,834,000(16)(17) * *
Liberty Media Series B 3,656(18) *
Named Executive Officers:
Robert T. Walston(19).... AMGIA -- -- --
Liberty Media Series A 1,654,778(20)(21) * *
Liberty Media Series B -- --
Lawrence Chernoff........ AMGIA 68,750(22) * *
Liberty Media Series A 49,446(23)(24) * *
Liberty Media Series B -- --
Scott Davis.............. AMGIA 1,000 * *
Liberty Media Series A -- -- --
Liberty Media Series B -- --
George C. Platisa........ AMGIA -- -- --
Liberty Media Series A -- -- --
Liberty Media Series B -- --
Gavin W. Schutz.......... AMGIA -- -- --
Liberty Media Series A -- -- --
Liberty Media Series B -- --
Marcus O. Evans.......... AMGIA 62,500(25) * *
Liberty Media Series A -- -- --
Liberty Media Series B -- --
All Directors and executive
officers (as of
December 31, 2002)....... AMGIA 78,750(26) 1.6% *
as a group (16 persons) Liberty Media Series A 13,302,529(27) * 2.0%
Liberty Media Series B 7,930,226(28) 3.6%
---------------
* Less than one percent.
56
(1) Includes stock options to acquire 611,274 shares of Liberty Media Series A
common stock, all of which are exercisable within 60 days of December 31,
2002.
(2) Includes 6,168 shares held by Liberty Media's 401(k) Savings Plan.
(3) Does not include Mr. Fitzgerald's ownership of a 7.9488% equity interest in
common stock of Liberty Livewire Holdings, Inc. See footnote 29 below.
(4) Includes 22,287 shares of Liberty Media Series A common stock held by the
Liberty Media 401(k) Savings Plan.
(5) Includes beneficial ownership of 349,307 restricted shares of Liberty Media
Series A common stock, none of which were vested at December 31, 2002.
(6) Includes beneficial ownership of 25,640 shares of Liberty Media Series A
common stock and 7,922,930 shares of Liberty Media Series B common stock
which may be acquired within 60 days of December 31, 2002 upon exercise of
stock options. Mr. Bennett has the right to convert the options for shares
of Liberty Media Series B common stock into options for shares of Liberty
Media Series A common stock. The number of shares subject to these options
and the applicable exercise prices were adjusted as of October 31, 2002,
the record date of a rights offering by Liberty Media, as a result of its
incentive stock plan's antidilution provisions. Also includes 400 shares of
Liberty Media Series B common stock beneficially owned by Mr. Bennett.
(7) Includes 1,246,580 shares of Liberty Media Series A common stock owned by
Hilltop Investments, Inc., which is jointly owned by Mr. Bennett and his
wife, Mrs. Deborah Bennett.
(8) Includes 291,089 restricted shares of Liberty Media Series A common stock
held by a Grantor Retained Annuity Trust, none of which were vested at
December 31, 2002.
(9) Includes beneficial ownership of 4,173,183 shares of Liberty Media Series A
common stock which may be acquired within 60 days of December 31, 2002,
pursuant to stock options. The number of shares subject to these options
and the applicable exercise prices were adjusted as of October 31, 2002,
the record date of a rights offering by Liberty Media, as a result of its
incentive stock plan's antidilution provisions.
(10) Includes 40,623 shares of Liberty Media Series A common stock held by the
Liberty 401(k) Savings Plan for the benefit of Mr. Howard.
(11) Includes 12,284 shares of Liberty Media Series A common stock owned by Mr.
Howard's wife, Leslie D. Howard, and 185,120 shares of Liberty Media Series
B common stock owned by Mrs. Leslie D. Howard, and held by a Grantor
Retained Annuity Trust, as to which shares Mr. Howard has disclaimed
beneficial ownership.
(12) Includes 314,376 shares of Liberty Media Series A common stock owned by a
Grantor Retained Annuity Trust.
(13) Assumes the exercise in full of stock options to acquire 6,000 shares of
the Company's Class A common stock, all of which are exercisable within 60
days of December 31, 2002.
(14) Does not include Mr. Romrell's ownership of a 7.9488% equity interest in
common stock of Liberty Livewire Holdings, Inc. See footnote 29 below.
(15) Assumes the exercise in full of stock options to acquire 3,000 shares of
the Company's Class A common stock, all of which are exercisable within 60
days of December 31, 2002.
(16) Includes 4,788 shares of Liberty Media Series A common stock held in a
custodial account for the benefit of family members. Mr. Schotters is the
custodian of this account and disclaims beneficial ownership of the shares
therein.
(17) Includes stock options to acquire 1,096,456 shares of Liberty Media Series
A common stock, all of which are exercisable within 60 days of December 31,
2002.
(18) Includes 328 shares of Liberty Media Series B common stock held by
Communications Capital Partners, LLC, an entity controlled by Bernard and
Nancy Schotters.
(19) Mr. Walston resigned as President, Chief Executive Officer and a director,
effective May 17, 2002.
57
(20) Represents 587 shares held by Liberty Media's 401(k) Savings Plan.
(21) Assumes the exercise in full of stock options to acquire 1,654,191 shares
of Liberty Media Series A common stock that may be exercised within 60 days
of December 31, 2002. These stock options terminated unexercised on January
31, 2003.
(22) Assumes the exercise in full of stock options to acquire 68,750 shares of
the Company's Class A common stock that may be exercised within 60 days of
December 31, 2002.
(23) Assumes the exercise in full of stock options to acquire 47,311 shares of
Liberty Media Series A common stock that may be exercised within 60 days of
December 31, 2002. The number of shares subject to the stock options and
the applicable exercise prices were adjusted as of October 31, 2002, the
record date of a rights offering by Liberty Media, as a result of its
incentive plan's antidilution provisions.
(24) Includes 2,135 shares held by Liberty Media's 401(k) Savings Plan.
(25) Assumes the exercise in full of stock options to acquire 62,500 shares of
Liberty Media Series A common stock that may be exercised within 60 days of
December 31, 2002, pursuant to Mr. Evans' severance agreement with Liberty
Media and the Company. For a description of Mr. Evans' severance agreement,
see Part III, Item 11, "COMPENSATION INFORMATION -- Severance Agreements
with Named Executive Officers -- Marcus O. Evans" above.
(26) Includes shares described in footnotes 13, 15, 22 and 24 above.
(27) Includes the following:
a. Shares described in footnotes 1 through 12, 14, 16, 17, 20, 21, 23 and
24 above.
b. 297 shares beneficially held by Scott Davis under Liberty Media's
401(k) Savings Plan.
c. Shares beneficially held by Richard C. Fickle, as follows: (i) 7,041
shares beneficially owned by Mr. Fickle and his wife, Robin Fickle,
(ii) 25,584 shares that may be acquired within 60 days of December 31,
2002 upon exercise of stock options, and (iii) 1,917 shares held under
Liberty Media's 401(k) Savings Plan. The number of shares subject to
the stock options and the applicable exercise prices were adjusted as
of October 31, 2002, the record date of a rights offering by Liberty
Media, as a result of its incentive plan's antidilution provisions.
d. Shares beneficially held by William E. Niles, as follows: (i) 10,790
shares that may be acquired within 60 days of December 31, 2002 upon
exercise of stock options, and (ii) 704 shares held under Liberty
Media's 401(k) Savings Plan. The number of shares subject to the stock
options and the applicable exercise prices were adjusted as of October
31, 2002, the record date of a rights offering by Liberty Media, as a
result of its incentive plan's antidilution provisions.
e. Shares beneficially held by Gavin W. Schutz, as follows: (i) 59,551
shares that may be acquired within 60 days of December 31, 2002 upon
exercise of stock options, and (ii) 497 shares held under Liberty
Media's 401(k) Savings Plan. The number of shares subject to the stock
options and the applicable exercise prices were adjusted as of October
31, 2002, the record date of a rights offering by Liberty Media, as a
result of its incentive plan's antidilution provisions.
f. Shares beneficially held by Lawrence Chernoff, as follows: (i) 47,311
shares that may
be acquired within 60 days of December 31, 2002 upon exercise of stock
options, and (ii) 166 shares held under Liberty Media's 401(k) Savings
Plan. The number of shares subject to the stock options and the applicable
exercise prices were adjusted as of October 31, 2002, the record date of a
rights offering by Liberty Media, as a result of its incentive plan's
antidilution provisions.
(28) Represents shares described in footnotes 6 and 18.
(29) Mr. Fitzgerald and Mr. Romrell each hold 7.9488% of the common stock of
Liberty Livewire Holdings, Inc., an indirect subsidiary of Liberty Media.
Liberty Livewire Holdings owns 34,977,209 shares of the Company's Class B
common stock and a $41.0 million participation interest in the Liberty
Subordinated Credit Agreement. The participation interest does not apply to
loans made under the supplements to the Liberty Subordinated Credit
Agreement.
58
EQUITY COMPENSATION PLAN INFORMATION
WEIGHTED-
AVERAGE
EXERCISE PRICE NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE OF OUTSTANDING AVAILABLE FOR FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF OPTIONS, EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS AND (EXCLUDING SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS COLUMN (A))
------------- -------------------------- ----------------- -----------------------------------
(A) (B) (C)
-------------------------- ----------------- -----------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY
HOLDERS
2001 Incentive Plan(1)... 5,153,750 shares of the $7.06 1,846,250 shares of the Company's
Company's Class A common Class A common stock
stock
2000 Nonemployee Director
Stock Option Plan(1)..... 51,000 shares of the $6.47 99,000 shares of the Company's
Company's Class A common Class A common stock
stock(2)
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS
None..................... N/A N/A N/A
TOTAL...................... 5,204,750 shares of the $7.06 1,945,250 shares of the Company's
Company's Class A common Class A common stock
stock
---------------
(1) Approved by our stockholders at the 2001 Annual Meeting of Stockholders,
held December 19, 2001.
(2) Of the 15,000 shares of our Class A common stock granted in an option to
Sydney Pollack, a former nonemployee director who resigned from our board of
directors on November 8, 2002, 6,000 shares had vested as of the date of his
resignation, which were exercisable until February 6, 2003. Mr. Pollack did
not exercise his option as to these vested shares before February 6, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LIBERTY SUBORDINATED CREDIT AGREEMENT WITH LIBERTY MEDIA AND SUPPLEMENTS TO
LIBERTY SUBORDINATED CREDIT AGREEMENT WITH LIBERTY MEDIA
The Company and Liberty Media, which owns over 91% of the Company's
outstanding common stock and over 99% of the voting power of the Company's
outstanding common stock, are parties to the Liberty Subordinated Credit
Agreement as well as Supplements Nos. 1, 2 and 3 thereto. For a discussion of
such agreements and borrowings and stock sales made pursuant to such agreements,
see the discussion contained in Part II, Item 7, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources -- Liberty Subordinated Credit Agreement, -- Supplement No. 1
and Supplement No. 2 and -- Supplement No. 3.
SALES OF STOCK TO LIBERTY MEDIA
For a discussion of the Company's sales of stock to Liberty Media, in
addition to those sales referred to in "-- Liberty Subordinated Credit Agreement
with Liberty Media and Supplements to Liberty Subordinated Credit Agreement with
Liberty Media" above, see the discussion contained in Part II, Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources -- Stock Sales to Liberty Media."
59
TAX SHARING AGREEMENT BETWEEN LIBERTY MEDIA AND THE COMPANY
In November 2000, the Company and Liberty Media became parties to a tax
sharing agreement, whereby the Company is obligated to make a cash payment to
Liberty Media in each year that it (taken together with all of the Company's
domestic subsidiaries) has positive taxable income measured on a separate return
basis. The amount of the payment would be equal to the amount of that positive
taxable income multiplied by the highest corporate tax rate. In the event that
(1) the Company and its subsidiaries, when treated as a separate group, have a
net operating loss or are entitled to a net tax credit for a particular year,
and (2) Liberty Media is able to use such loss or credit to reduce its tax
liability for any year, the Company would become entitled to a credit against
future payments to Liberty Media under the agreement. If the Company becomes
disaffiliated from Liberty Media and the group of companies that file tax
returns jointly with Liberty Media (i.e., if the value or voting power of
Liberty Media's stock ownership of the Company were to drop below 80%) prior to
the time that the Company is able to use such credit, the Company would be
entitled to a payment from Liberty Media at the earlier of the time that (1) the
Company shows it could have used the net operating loss carry forward or net tax
credit to reduce the Company's own separately computed tax liability or (2) the
value or voting power of Liberty Media's stock ownership of us drops below 20%.
In addition, under the tax sharing agreement, the Company has the right to
participate in the defense of claims of the Internal Revenue Service that might
affect its liability under the agreement, and to participate in tax refunds paid
to Liberty Media where such refunds are due in part to its operations.
SERVICES RECEIVED FROM LIBERTY MEDIA
Liberty Media allocates salaries, benefits, business insurance and certain
other general and administrative expenses (including a portion of the salary of
William R. Fitzgerald, the Company's President and Chief Executive Officer) to
the Company. In addition, the Company reimburses Liberty Media for certain
expenses, such as employee medical costs, and business property and casualty
insurance paid by Liberty Media on behalf of the Company. The Company has
determined the allocated and reimbursed amounts to be reasonable and equal to
the fair value of the expenses charged. Amounts allocated from Liberty Media to
the Company totaled $14.1 million and $5.4 million for the years ended December
31, 2002 and 2001, respectively. The increase in such amounts is primarily
attributed to medical insurance being purchased through Liberty Media starting
fiscal 2002.
EXECUTIVE OFFICER LOAN
On April 8, 1999, Mr. Walston was granted a loan from Four Media Company in
the principal amount of $2.0 million in conjunction with the execution of his
agreement with Four Media Company, dated January 1, 1999, for employment as its
President and Chief Executive Officer. Four Media Company became a subsidiary of
the Company in June 2000 and Mr. Walston became the Company's acting President
and Chief Executive Officer in April 2001 and was the Company's President and
Chief Executive Officer from August 2001 to May 2002.
The loan was unsecured and bore interest at an annual rate of 4.59%,
compounded semiannually. Mr. Walston was required to repay the outstanding
balance of the loan, if any, and any accrued interest thereon, no later than May
8, 2004. Notwithstanding the foregoing terms of the loan, Mr. Walston's
employment agreement provided that the outstanding balance of the loan, if any,
and any accrued interest thereon would be automatically forgiven, upon the
occurrence of any of the following events: (1) a change of control of Four Media
Company during the five-year term of the loan; or (2) termination of Mr.
Walston's employment without cause or for good reason; or (3) the Company (as
successor to Four Media Company) achieving $327.0 million or more in
consolidated gross operating revenues (as defined in the note governing the
loan) during the 365 day period beginning April 8, 2003 (referred to in this
report as the Measurement Period); or (4) the Company (as successor to Four
Media Company) achieving $87.0 million or more in consolidated "earnings before
interest, taxes, depreciation and amortization" during the Measurement Period;
or (5) the board of directors, in its sole and absolute discretion, determining
that the payments under the loan should be forgiven following the expiration of
the
60
Measurement Period. In April 2000, Mr. Walston agreed to waive the forgiveness
of the loan that would otherwise have resulted from the acquisition of Four
Media Company by Liberty Media.
On January 25, 2002, our Compensation Committee approved, subject to
stockholder approval, an amendment and restatement of the loan agreement (i) to
modify the performance benchmarks, which, if satisfied, would result in a
cancellation of the loan, (ii) to provide for our payment of all tax liability
incurred by Mr. Walston associated with any forgiveness of the loan, and (iii)
to extend the term of the loan from May 8, 2004 to February 15, 2005. Since the
annual meeting of stockholders was held on January 23, 2003, after Mr. Walston's
employment with the Company terminated, the proposed loan amendment was not
submitted for stockholder approval.
On May 17, 2002, Mr. Walston's employment with the Company terminated and,
pursuant to his employment agreement, the outstanding balance under the loan of
$2.0 million plus accrued interest of $300,000 was automatically forgiven. The
Company is currently negotiating severance arrangements with Mr. Walston, the
terms of which have not been agreed upon.
SERVICES RECEIVED FROM SMH ENTERTAINMENT, INC.
In connection with Liberty Media's acquisition of a controlling interest in
our Company, we, Mr. Hassanein (then a member of our board of directors who
later resigned as of February 27, 2002), SMH Entertainment, Inc., a corporation
under Mr. Hassanein's control, and Liberty Media entered into a three-year
consulting agreement, dated December 10, 1999, and commencing as of June 9,
2000, as amended by certain stock option agreements, the terms of which are as
follows: (1) SMH Entertainment receives $150,000 annually as compensation for
Mr. Hassanein's consulting services to us during the terms of the agreement; and
(2) Mr. Hassanein received a stock option to purchase 50,000 shares of our Class
A common stock at an exercise price of $7.00 per share, all of which are fully
vested and exercisable, and an additional stock option to purchase 100,000
shares of our Class A common stock at an exercise price of $10.27 per share, all
of which are fully vested and exercisable. The above-mentioned options were
granted to Mr. Hassanein on August 6, 2001, pursuant to stock option agreements
dated as of June 1, 2001, and they all expire on the earlier of June 9, 2010, a
change of control of the Company, or two years after the death or permanent
disability of Mr. Hassanein, if not previously exercised.
CONSULTING AGREEMENT WITH NAMED EXECUTIVE OFFICER
The Company has entered into a three-year consulting agreement with
Lawrence Chernoff, dated November 20, 2002 and amended and restated January 1,
2003 to include Mr. Chernoff's company, Larry Chernoff & Associates, as a
signatory to the consulting agreement, pursuant to which Mr. Chernoff's
employment with the Company terminated effective December 31, 2002 and he became
a consultant to the Company effective January 1, 2003. Under the consulting
agreement, Mr. Chernoff will provide advice, guidance and consultation to the
Company with respect to (a) the operation, management, and strategic vision of
the Company's Creative Services Group, (b) marketing, client retention and
development, and new business development for the Creative Services Group, and
(c) new technologies and their deployment. For these services, Mr. Chernoff will
be paid a minimum of $350,000 per year and will have the opportunity to earn
additional compensation up to a maximum of $130,000 per year. Mr. Chernoff
received no severance payment in connection with the termination of his
employment, but 68,750 of the shares covered by Mr. Chernoff's option to
purchase 275,000 of the Company's Class A common stock vested on December 31,
2002, and will remain exercisable in accordance with the terms of the Company's
2001 Incentive Plan for so long as Mr. Chernoff remains a consultant to the
Company. The option terminated as to the remaining 206,250 shares on January 1,
2003. Mr. Chernoff's option to purchase a total of 59,139 shares of Liberty
Media Series A common stock (47,311 shares of which have already vested) will
continue to vest in accordance with its current vesting schedule and will remain
exercisable in accordance with the terms of the Four Media Company 1997 Stock
Plan for so long as Mr. Chernoff remains a consultant to the Company. The term
of the consulting agreement will automatically extend for two additional
one-year periods unless Mr. Chernoff gives prior notice of his intention to
terminate the consulting agreement.
61
SERVICES AGREEMENTS WITH ONCOMMAND CORPORATION
Effective October 1, 2002, the Company entered into a short-term agreement
with OnCommand Corporation ("OnCommand"), a controlled subsidiary of Liberty
Media, pursuant to which the Company is supplying OnCommand with uplink and
satellite transport services at a cost of $150,000 through March 31, 2003.
OnCommand has been utilizing the Company's services to test the satellite
delivery of content updates to OnCommand's downlink sites at various hotels. The
Company executed a Content Preparation and Distribution Services Agreement,
dated March 24, 2003, with a wholly-owned subsidiary of OnCommand, under which
the Company will provide uplink and satellite transport services for a
negotiated rate of approximately $250,000 per year for a period of five years
and content preparation services valued at a negotiated rate for each use of
covered services for a period of five years at OnCommand's request. The parties
are also negotiating an agreement for the installation by the Company of
satellite equipment at OnCommand's downlink sites at hotels for a set fee per
installation completed.
ITEM 14. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer performed
an evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934, as
amended) as of a date within 90 days prior to the filing of this report. Based
on this evaluation, the Company's chief executive officer and chief financial
officer conclude that such controls and procedures effectively insure that
information required to be disclosed in this report is appropriately recorded,
processed and reported. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules and Exhibits
(1) Financial Statements and Schedules are as listed in the Index to
Financial Statements and Financial Statement Schedule on page F-1
of this Annual Report on Form 10-K.
(2) See Exhibit Index on page 61 of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed with the Commission on October 8,
2002 (regarding transactions under Supplement No. 3 to the Liberty
Subordinated Credit Agreement on September 30, 2002).
Current Report on Form 8-K, filed with the Commission on November 14,
2002 (attaching certifications by the Company's chief executive officer
and chief financial officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 in connection with the Company's filing of
its Quarterly Report on Form 10-Q, which was also filed with the
Commission on November 14, 2002).
Current Report on Form 8-K, filed with the Commission on November 18,
2002 (regarding a written consent of stockholders in lieu of a meeting
to amend the Company's articles of incorporation to change the name of
the Company to "Ascent Media Group" and amends certain information with
respect to the Company's registered agent in Delaware).
(c) Exhibits
Exhibits are as listed in the Exhibit Index on page 61 of this Annual
Report on Form 10-K.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASCENT MEDIA GROUP, INC.
/s/ WILLIAM R. FITZGERALD
--------------------------------------
William R. Fitzgerald
President, Chief Executive Officer and
Director
March 27, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William R. Fitzgerald and George C.
Platisa, and each or any one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE SIGNATURE
---- ---------
March 27, 2003 /s/ WILLIAM R. FITZGERALD
----------------------------------
William R. Fitzgerald
Chairman of the Board
President, Chief Executive
Officer and Director
March 27, 2003 /s/ GARY S. HOWARD
----------------------------------
Gary S. Howard
Director
March 27, 2003 /s/ BRIAN C. MULLIGAN
----------------------------------
Brian C. Mulligan
Director
March 27, 2003 /s/ BERNARD W. SCHOTTERS
----------------------------------
Bernard W. Schotters
Director
March 27, 2003 /s/ JAY SINGH
----------------------------------
Jay Singh
Senior Vice President and
Chief Accounting Officer
DATE SIGNATURE
---- ---------
March 27, 2003 /s/ ROBERT R. BENNETT
----------------------------------
Robert R. Bennett
Director
March 27, 2003 /s/ DAVID P. MALM
----------------------------------
David P. Malm
Director
March 27, 2003 /s/ LARRY E. ROMRELL
----------------------------------
Larry E. Romrell
Director
March 27, 2003 /s/ GEORGE C. PLATISA
----------------------------------
George C. Platisa
Chief Financial Officer and
Executive Vice President
64
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William R. Fitzgerald, certify that:
1. I have reviewed this annual report on Form 10-K of Ascent Media Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ WILLIAM R. FITZGERALD
--------------------------------------
William R. Fitzgerald
Chief Executive Officer
Date: March 27, 2003
65
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, George C. Platisa, certify that:
1. I have reviewed this annual report on Form 10-K of Ascent Media Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ GEORGE C. PLATISA
--------------------------------------
George C. Platisa
Chief Financial Officer
Date: March 27, 2003
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
3.1 Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated November 18, 2002, filed
with the Securities and Exchange Commission (the
"Commission") on November 18, 2002).
3.2 Amended and Restated Bylaws of the Company (filed herewith).
4.1 Specimen certificate for shares of Class A common stock; par
value $0.01 per share, of the Company (filed herewith).
4.2 Specimen certificate for shares of Class B common stock, par
value $0.01 per share, of the Company (filed herewith).
10.1 Liberty Livewire Corporation 2001 Incentive Plan
(Incorporated by reference to Annex B to the Company's Proxy
Statement filed with the Commission on November 20, 2001).
10.2 2000 Nonemployee Director Stock Option Plan of Liberty
Livewire Corporation (Incorporated by reference to Annex C
to the Company's Proxy Statement filed with the Commission
on November 20, 2001).
10.3 Subordination Agreement dated as of June 2001, between the
Company and Liberty Media Corporation (Incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K, filed with the Commission on April 1, 2002).
10.4 Amendment No. 1 to the Senior Credit Agreement, dated as of
November 1, 2001 among Liberty Livewire Corporation, the
several banks and other financial institutions from time to
time parties to the Agreement, Bank of America, N.A., as
issuer of certain letters of credit and as swingline lender,
Banc of America Securities LLC, as lead arranger and book
manager, Bank of America, N.A., as administrative agent for
the lenders, Salomon Smith Barney Inc., as syndication agent
for the lenders and the Bank of New York Company, Inc. as
documentation agent for the lenders (Incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K, filed with the Commission on April 1, 2002).
10.5 Amendment No. 2, dated as of March 26, 2002, to the Credit
Agreement, dated as of December 22, 2000, among Liberty
Livewire Corporation, as Borrower, the Several Lenders from
Time to Time Parties Thereto; Banc of America Securities
LLC, as Lead Arranger and Book Manager; Bank of America,
N.A., as Issuer and Swingline Lender; Bank of America, N.A.,
as Administrative Agent; Salomon Smith Barney Inc., as
Syndication Agent; and The Bank of New York Company, Inc.,
as Documentation Agent (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on May 15, 2002).
10.6 Amendment No. 3, dated as of November 13, 2002, to the
Credit Agreement, dated as of December 22, 2000, among
Liberty Livewire Corporation, as Borrower, the Several
Lenders from Time to Time Parties Thereto; Banc of America
Securities LLC, as Lead Arranger and Book Manager; Bank of
America, N.A., as Issuer and Swingline Lender; Bank of
America, N.A., as Administrative Agent; Salomon Smith Barney
Inc., as Syndication Agent; and The Bank of New York
Company, Inc., as Documentation Agent (Incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on November 14,
2002).
10.7 Senior Credit Agreement Consent Letter, dated June 28, 2002
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
August 14, 2002).
10.8 Heller Consent Letter, dated June 28, 2002 (Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q, filed on August 14, 2002).
67
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
10.9 Supplement No. 1 to the First Amended and Restated Credit
Agreement, dated June 28, 2002, by and between Liberty
Livewire Corporation and Liberty Media Corporation, and
Promissory Note, dated June 28, 2002, from Liberty Livewire
Corporation in favor of Liberty Media Corporation
(Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
August 14, 2002).
10.10 Supplement No. 2 to the First Amended and Restated Credit
Agreement, dated July 24, 2002, by and between Liberty
Livewire Corporation and Liberty Media Corporation, and
Promissory Note, dated July 24, 2002, from Liberty Livewire
Corporation in favor of Liberty Media Corporation
(Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
August 14, 2002).
10.11 Supplement No. 3 to the First Amended and Restated Credit
Agreement, dated August 13, 2002, by and between Liberty
Livewire Corporation and Liberty Media Corporation
(Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
August 14, 2002).
10.12 Consent Letter of Parties to the Senior Credit Agreement,
dated September 26, 2002 (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on November 14, 2002).
10.13 Consent Letter of Heller Financial Leasing, Inc., dated
September 26, 2002 (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on November 14, 2002).
10.14 Stock Purchase Agreement, dated as of September 30, 2002, by
and between the Company and Liberty Media Corporation
(Incorporated by reference to Exhibit 99.5 to the Company's
Current Report on Form 8-K as filed with the Commission on
October 8, 2002).
10.15 Promissory Note, dated September 30, 2002 of the Company in
the original principal amount of $5,349,700 for the benefit
of Liberty Media Corporation (Incorporated by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K as
filed with the Commission on October 8, 2002).
10.16 Promissory Note, dated October 17, 2002 of the Company in
the original principal amount of $4,000,000 for the benefit
of Liberty Media Corporation (filed herewith).
10.17 Employment Agreement, dated January 1, 1999, by and between
Robert T. Walston and Four Media Company (Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K, filed on April 1, 2002).
10.18 Employment Agreement, dated May 30, 2002, by and between
Scott Davis and the Company (filed herewith).
10.19 Employment Agreement, dated May 21, 2001, by and between
George C. Platisa and the Company (filed herewith).
10.20 Employment Agreement, dated May 21, 2002, by and between
Gavin Schutz and the Company (filed herewith).
10.21 Consulting Agreement, dated January 1, 2003, by and among
Lawrence Chernoff, Larry Chernoff & Associates and the
Company (filed herewith).
10.22 Registration Rights Agreement, dated as of June 1, 2001,
between the Company and Salah M. Hassanein (Incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K, filed on April 1, 2002).
10.23 Stock Option Agreement, dated as of June 1, 2001, between
the Company and Salah M. Hassanein (option for 50,000
shares) (Incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K, filed on April 1,
2002).
68
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
10.24 Stock Option Agreement, dated as of June 1, 2001, between
the Company and Salah M. Hassanein (option for 100,000
shares) (Incorporated by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-K, filed on April 1,
2002).
11.1 Computation of Per Share Earnings. See Note 2 of Notes to
Financial Statements.
18.1 Changes in Accounting Principles. See Note 2 of Notes to
Financial Statements.
21.1 Subsidiaries of the Company (filed herewith).
24 Power of Attorney (included with the signature page hereof).
99.1 Certification pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. Pursuant to Commission Release 34-47551 this
certification shall not be deemed to be filed with the
Commission but shall be deemed to accompany this report.
69
ASCENT MEDIA GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 2002 and 2001... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001, the Seven Months Ended
December 31, 2000, and the Five Months Ended May 31,
2000...................................................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended December
31, 2002 and 2001, the Seven Months Ended December 31,
2000, and the Five Months Ended May 31, 2000.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001, the Seven Months Ended
December 31, 2000, and the Five Months Ended May 31,
2000...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II: Valuation and Qualifying Accounts for the Years
Ended December 31, 2002 and 2001, the Seven Months Ended
December 31, 2000, and the Five Months Ended May 31,
2000...................................................... F-40
Schedules other than those listed above have been omitted because of the
absence of the conditions under which they are required or because the required
information, where material, is shown in the financial statements or the notes
thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Ascent Media Group, Inc.:
We have audited the accompanying consolidated financial statements of
Ascent Media Group, Inc. (formerly known as Liberty Livewire Corporation) and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ascent Media
Group, Inc. (formerly known as Liberty Livewire Corporation) and subsidiaries as
of December 31, 2002 and 2001, and the results of their operations and their
cash flows for the years ended December 31, 2002 and 2001, the seven months
ended December 31, 2000, and the five months ended May 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the related financial statement schedule when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
June 9, 2000, Liberty Media Corporation obtained a controlling interest in
Ascent Media Group, Inc. (formerly known as Liberty Livewire Corporation) in a
business combination accounted for as a purchase. As a result of the business
combination, the consolidated financial information for the period after the
acquisition is presented on a different cost basis than that for the periods
before the acquisition and thereof, is not comparable.
As discussed in Note 3 to the consolidated financial statements, the
Company adopted Statement of Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002, and accordingly, has changed its
method of accounting for goodwill and other intangible assets for the year ended
December 31, 2002.
/s/ KPMG LLP
February 18, 2003
Los Angeles, California
F-2
ASCENT MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
2002 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 11,998 $ 23,433
Trade receivables, net.................................... 96,091 96,696
Inventories............................................... 4,314 4,016
Deferred income taxes, net................................ 6,176 5,006
Prepaid expenses and other current assets................. 15,862 14,237
--------- ---------
Total current assets............................... 134,441 143,388
--------- ---------
Property, plant and equipment, net........................ 300,497 316,077
Goodwill and other intangible assets, net................. 343,057 448,909
Other assets, net......................................... 15,331 11,317
--------- ---------
Total assets....................................... $ 793,326 $ 919,691
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations............................................. $ 18,928 $ 19,129
Accounts payable.......................................... 31,280 38,906
Accrued expenses and other current liabilities............ 61,266 76,345
--------- ---------
Total current liabilities.......................... 111,474 134,380
--------- ---------
Long-term debt and capital lease obligations.............. 383,056 424,556
Convertible subordinated notes, net....................... 205,299 183,685
Due to parent company, net................................ 14,107 5,439
Deferred income taxes, net................................ 1,506 5,006
Other liabilities......................................... 9,661 13,177
--------- ---------
Total liabilities.................................. 725,103 766,243
--------- ---------
Commitments and contingencies (See Note 15)
Stockholders' Equity:
Common Stock:
Class A; authorized 300,000,000 shares of $0.01 par
value; 4,884,559 and 5,334,022 issued and outstanding
at December 31, 2002 and 2001, respectively............ 49 53
Class B; authorized 100,000,000 shares of $0.01 par
value; 52,341,164 and 34,393,330 issued and outstanding
at December 31, 2002 and 2001, respectively............ 523 344
Additional paid-in capital................................ 653,842 617,933
Treasury stock; 16,251 and 1,508 shares at cost at
December 31, 2002 and 2001, respectively................ (124) (28)
Accumulated deficit....................................... (581,268) (446,082)
Other..................................................... 161 (1,356)
Accumulated other comprehensive loss...................... (4,960) (17,416)
--------- ---------
Total stockholders' equity......................... 68,223 153,448
--------- ---------
Total liabilities and stockholders' equity.................. $ 793,326 $ 919,691
========= =========
See accompanying notes to consolidated financial statements
F-3
ASCENT MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
------------------
ASCENT MEDIA TODD-AO
------------------------------------------------- ------------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------------- ------------------
Net revenues..................................... $ 539,333 $ 592,732 $ 253,099 $ 53,243
Cost of services................................. 322,007 370,191 161,633 36,563
----------- ----------- ----------- -----------
Gross profit................................. 217,326 222,541 91,466 16,680
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative............ 130,037 126,783 57,352 9,160
Depreciation and amortization.................. 67,272 128,603 51,545 6,925
Non-cash compensation (income) expense......... (48) 4,293 (29,577) --
Impairment of goodwill, intangible and
long-lived assets............................ 83,718 307,932 -- --
Restructuring and other charges................ (435) 5,558 -- --
----------- ----------- ----------- -----------
Total operating expenses..................... 280,544 573,169 79,320 16,085
----------- ----------- ----------- -----------
Income (loss) from operations.................... (63,218) (350,628) 12,146 595
----------- ----------- ----------- -----------
Interest expense, net.......................... 64,820 63,119 19,132 1,641
Other (income) expense, net.................... (14,515) 10,974 (872) 1,070
----------- ----------- ----------- -----------
Loss before income taxes and change in accounting
principle...................................... (113,523) (424,721) (6,114) (2,116)
Provision (benefit) for income taxes............. 1,436 11,568 3,679 (441)
----------- ----------- ----------- -----------
Loss before change in accounting principle....... (114,959) (436,289) (9,793) (1,675)
Change in accounting principle................... (20,227) -- -- --
----------- ----------- ----------- -----------
Net loss......................................... $ (135,186) $ (436,289) $ (9,793) $ (1,675)
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding:
----------- ----------- ----------- -----------
Basic and diluted.............................. 43,971,836 37,858,123 34,463,373 10,768,773
=========== =========== =========== ===========
Net loss per common share -- basic and diluted:
Loss before change in accounting principle..... $ (2.61) $ (11.52) $ (0.28) $ (0.16)
Change in accounting principle................. (.46) -- -- --
----------- ----------- ----------- -----------
Net loss per common share...................... $ (3.07) $ (11.52) $ (0.28) $ (0.16)
=========== =========== =========== ===========
-----------------
See accompanying notes to consolidated financial statements
F-4
ASCENT MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS
------------------- ------------------- PAID-IN (ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) STOCK OTHER
---------- ------ ---------- ------ ---------- ------------ -------- -------
Balance at December 31,
1999.................... 8,951,404 $ 91 1,747,178 $ 17 $ 47,089 $ 21,881 $ (47) $ --
Exercise of stock
options............... 151,318 -- -- -- 776 -- -- --
Other comprehensive
income................ -- -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- (1,675) -- --
---------- ---- ---------- ---- -------- --------- ----- -------
Balance at May 31, 2000... 9,102,722 91 1,747,178 17 47,865 20,206 (47) --
Conversion of equity in
Todd Merger........... (4,828,403) (48) 4,772,729 48 91,474 (20,206) 28 (2,858)
Unearned stock
compensation.......... -- -- -- -- (2,458) -- -- 2,585
Exercise of stock
options............... 348,959 4 296,039 3 1,413 -- -- --
Stock issued for
acquisitions.......... 683,465 6 24,796,770 248 413,974 -- -- --
SAR adjustments......... -- -- -- -- -- -- -- (409)
Contribution to
capital............... -- -- -- -- 17,918 -- -- --
Other comprehensive
loss.................. -- -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- (9,793) -- --
---------- ---- ---------- ---- -------- --------- ----- -------
Balance at December 31,
2000.................... 5,306,743 53 31,612,716 316 570,186 (9,793) (19) (682)
Stock compensation...... -- -- -- -- 1,661 -- -- 179
Issuance of stock....... 28,787 -- -- -- 252 -- -- --
Beneficial conversion on
subordinated debt..... -- -- -- -- 25,475 -- -- --
SAR adjustments......... -- -- -- -- -- -- -- (853)
Contribution to
capital............... -- -- -- -- 2,496 -- -- --
Purchase of treasury
shares................ (1,508) -- -- -- -- -- (9) --
Payment of interest on
convertible
subordinated notes.... -- -- 2,780,614 28 17,863 -- -- --
Other comprehensive
loss.................. -- -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- (436,289) -- --
---------- ---- ---------- ---- -------- --------- ----- -------
Balance at December 31,
2001.................... 5,334,022 $ 53 34,393,330 $344 $617,933 $(446,082) $ (28) $(1,356)
Stock compensation...... -- -- -- -- 2,799 -- -- 255
Issuance of stock....... 6,261 -- 7,510,981 75 13,218 -- -- --
SAR adjustments......... -- -- -- -- 135 -- 1,262
Redemption of stock..... (440,981) (4) (1,407) -- -- --
Purchase of treasury
shares................ (14,743) -- -- -- -- -- (96) --
Payment of interest on
convertible
subordinated notes.... -- -- 10,436,853 104 21,164 -- -- --
Other comprehensive
loss.................. -- -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- (135,186) -- --
---------- ---- ---------- ---- -------- --------- ----- -------
Balance at December 31,
2002.................... 4,884,559 $ 49 52,341,164 $523 $653,842 $(581,268) $(124) $ 161
========== ==== ========== ==== ======== ========= ===== =======
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
------------- ---------
Balance at December 31,
1999.................... $ (171) $ 68,860
Exercise of stock
options............... -- 776
Other comprehensive
income................ 5,643 5,643
Net loss................ -- (1,675)
-------- ---------
Balance at May 31, 2000... 5,472 73,604
Conversion of equity in
Todd Merger........... -- 68,438
Unearned stock
compensation.......... -- 127
Exercise of stock
options............... -- 1,420
Stock issued for
acquisitions.......... -- 414,228
SAR adjustments......... -- (409)
Contribution to
capital............... -- 17,918
Other comprehensive
loss.................. (12,406) (12,406)
Net loss................ -- (9,793)
-------- ---------
Balance at December 31,
2000.................... (6,934) 553,127
Stock compensation...... -- 1,840
Issuance of stock....... -- 252
Beneficial conversion on
subordinated debt..... -- 25,475
SAR adjustments......... -- (853)
Contribution to
capital............... -- 2,496
Purchase of treasury
shares................ -- (9)
Payment of interest on
convertible
subordinated notes.... -- 17,891
Other comprehensive
loss.................. (10,482) (10,482)
Net loss................ -- (436,289)
-------- ---------
Balance at December 31,
2001.................... $(17,416) $ 153,448
Stock compensation...... -- 3,054
Issuance of stock....... -- 13,293
SAR adjustments......... 1,397
Redemption of stock..... -- (1,411)
Purchase of treasury
shares................ -- (96)
Payment of interest on
convertible
subordinated notes.... -- 21,268
Other comprehensive
loss.................. 12,456 12,456
Net loss................ -- (135,186)
-------- ---------
Balance at December 31,
2002.................... $ (4,960) $ 68,223
======== =========
See accompanying notes to consolidated financial statements
F-5
ASCENT MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Cash flows from operating activities:
Net loss.................................................. $(135,186) $(436,289) $ (9,793) $(1,675)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 67,272 128,603 51,545 6,925
Non-cash interest expense............................... 27,666 25,507 -- --
Amortization of discount................................ 3,462 2,968 -- --
Change in market value of derivative.................... (8,314) 2,119 -- --
Non-cash compensation expense........................... (48) 4,293 (29,577) --
Impairment of long-lived assets......................... 83,718 307,932 -- --
Change in accounting principle.......................... 20,227
Restructuring and other charges......................... (435) 5,388 -- --
Deferred income taxes (benefit), net.................... (4,670) 5,541 12,995 565
Realized loss on sale of marketable securities.......... -- 1,402 -- --
(Gain) loss on disposal of fixed assets................. (1,766) 9,867 -- --
Gain on sale of Triumph................................. (1,599) -- -- --
Other................................................... 424 (1,323) -- --
Changes in assets and liabilities (net of acquisitions):
Trade receivables, net.................................. 1,676 17,867 (7,442) 2,469
Inventories, prepaid expenses and other assets.......... (7,858) 9,398 (2,000) (115)
Accounts payable, accrued expenses and other
liabilities........................................... (5,407) (22,918) 2,401 (2,021)
Due to/from parent company.............................. 8,668 3,917 (7,246) --
Other non-current liabilities........................... (5,193) 9,309 866 (1,695)
--------- --------- --------- -------
Net cash flows provided by operating activities............. 42,637 73,581 11,749 4,453
--------- --------- --------- -------
Cash flows from investing activities:
Proceeds from sales of marketable securities and
investments........................................... -- 7,834 -- 1,951
Purchases of marketable securities and investments...... -- (300) (5,093) --
Proceeds from disposal of fixed assets.................. 4,791 14,475 -- --
Capital expenditures.................................... (55,352) (73,705) (76,700) (4,038)
Acquisitions, net of cash acquired...................... -- (140,014) (23,607) --
Other assets............................................ -- -- -- (1,669)
--------- --------- --------- -------
Net cash flows used in investing activities................. (50,561) (191,710) (105,400) (3,756)
--------- --------- --------- -------
Cash flows from financing activities:
Borrowings of long-term debt............................ 8,955 53,384 384,472 400
Payments of long-term debt and capital lease
obligations........................................... (45,883) (46,508) (385,485) (2,669)
Borrowings under convertible subordinated notes......... 18,151 113,738 92,454 --
Proceeds from exercise of stock options................. -- -- 5,366 776
Proceeds from issuance of common stock.................. 13,293 -- 7,053 --
Purchase of treasury stock.............................. (96) (757) 23 --
Redemption of stock..................................... (1,411) -- -- --
--------- --------- --------- -------
Net cash flows (used in) provided by financing activities... (6,991) 119,857 103,883 (1,493)
--------- --------- --------- -------
Effect of exchange rate changes on cash..................... 3,480 2,239 (203) (67)
--------- --------- --------- -------
Net (decrease) increase in cash and cash equivalents........ (11,435) 3,967 10,029 (863)
Cash and cash equivalents at beginning of period............ 23,433 19,466 9,437 10,300
--------- --------- --------- -------
Cash and cash equivalents at end of period.................. $ 11,998 $ 23,433 $ 19,466 $ 9,437
========= ========= ========= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 35,748 $ 35,834 $ 18,583 $ 2,689
========= ========= ========= =======
Income taxes............................................ $ 1,874 $ 1,611 $ 2,406 $ --
========= ========= ========= =======
Non-cash investing and financing activities:
Capital lease obligations incurred on equipment......... $ -- $ 14,354 $ -- $ --
========= ========= ========= =======
Stock issued for payment of interest on convertible
subordinated notes.................................... $ 21,268 $ 17,891 $ -- $ --
========= ========= ========= =======
Divestiture of Triumph.................................. $ (1,599) $ -- $ -- $ --
========= ========= ========= =======
----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-6
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, CHANGE IN CONTROL AND BASIS OF PRESENTATION
Organization -- Ascent Media Group, Inc. ("Ascent Media" or the "Company")
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;
services necessary to facilitate the global maintenance, management and
distribution of existing content libraries; and services necessary to assemble
and distribute programming for cable and broadcast networks via fiber, satellite
and the Internet.
The Company's assets and operations are primarily comprised of the assets
and operations of the following ten companies acquired during 2001 and 2000:
Four Media Company ("4MC"); Virgin Media Group Limited ("Virgin"); the sound
post-production and certain related businesses of SounDelux Entertainment Group
of Delaware, Inc. ("Soundelux"); Triumph Communications, Inc. ("Triumph"); Video
Services Corporation ("VSC"); Group W Network Services and 100% of the capital
stock of Asia Broadcast Centre Pte. Ltd. and Group W Broadcast Pte. Ltd.
(collectively "GWNS"); Livewire Network Services, LLC ("LNS"); Soho Group
Limited ("Soho"); Visiontext Limited ("Visiontext"); and Cinram-POP DVD Center
LLC ("Cinram-POP"). The combination and integration of the acquired entities
allows the Company to offer its clients a range of services, from image capture
to "last mile" distribution, a complete outsourcing solutions for the technical
and creative requirements.
Change in Control -- On June 9, 2000, the stockholders of the Company, then
called The Todd-AO Corporation, approved a series of transactions including: (1)
a reclassification of the existing common stock of Todd-AO; (2) the merger of
B-Group Merger Corp., as a wholly-owned subsidiary of Liberty Media Corporation,
with and into Todd-AO, and related merger proposals, referred to as the Todd
Merger; (3) certain post-merger business combinations set forth in an agreement
between Todd-AO and Liberty Media Corporation, dated as of February 11, 2000;
and (4) the change of Todd-AO's name to Liberty Livewire Corporation. On
November 20, 2002, the Company changed its name from Liberty Livewire
Corporation to Ascent Media Group, Inc.
In the Todd Merger, each issued and outstanding share of Todd-AO common
stock was converted into the right to receive 0.4 shares of Ascent Media Class A
common stock and 0.5 shares of Liberty Media Group Class A common stock, a
tracking stock held by AT&T Corporation ("AT&T"). Liberty Media's aggregate
ownership interest in the Company as of December 31, 2002 consists of both the
Company's Class A common stock and Class B common stock, representing over 91%
of the Company's outstanding equity. Liberty Media beneficially holds and
controls all of Ascent Media's outstanding Class B common stock both directly
and indirectly through its wholly owned subsidiary, Liberty LWR, Inc., and
through Liberty LWR, Inc.'s majority owned subsidiary, Liberty Livewire
Holdings, Inc. This ownership gives Liberty Media approximately 99% voting
control of the Company.
Until August 10, 2001, Liberty Media was an indirect wholly owned
subsidiary of AT&T Corporation. Its former parent, Tele-Communications, Inc.
("TCI"), was acquired by AT&T in March 1999. Liberty Media and its subsidiaries
constituted all of the businesses and assets of the Liberty Media Group. Liberty
Media Group Class A common stock and Liberty Media Group class B common stock,
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
Corporation split-off from AT&T and began trading as an independent publicly
held company. In the split-off, each share of Liberty Media Group Class A and
Class B common stock were redeemed, on a one-for-one basis, for one share of
Liberty Media Corporation's Series A and Series B common stock, respectively.
Basis of Presentation -- Due to the level of ownership of the Company
obtained by Liberty Media as a result of the Todd Merger, as discussed above,
and Liberty Media's contribution of 4MC to the Company as further described in
Note 5, Liberty Media applied "push down" accounting and transferred to the
Company the estimated fair value adjustments relating to the assets and
liabilities of Todd-AO at June 9, 2000. The assets and liabilities of 4MC have
been recorded at Liberty Media's historical value including fair value
adjustments resulting from the acquisition of 4MC by Liberty Media.
On August 10, 2000, the Board of Directors of the Company approved the
change of the Company's fiscal year end from August 31 to December 31.
F-7
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying statements of operations, cash flows and stockholders'
equity for the five months ended May 31, 2000 represent the results of
operations of Todd-AO before its acquisition by Liberty Media. The consolidated
financial statements for the years ended December 31, 2002 and 2001, and the
seven months ended December 31, 2000 represent the consolidated financial
condition and results of operations of the Company after giving effect to the
Todd Merger. For financial statement purposes, the acquisition by Liberty Media
is deemed to have occurred on June 1, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in
preparation of the accompanying consolidated financial statements. Such policies
are in accordance with accounting principles generally accepted in the United
States of America and have been consistently applied. The preparation of
financial statements in conformity with generally accepted accounting principles
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of revenues and expenses for each reporting period. The
significant estimates made in preparation of the Company's consolidated
financial statements primarily relate to valuation of goodwill, other intangible
assets, long-lived assets, deferred tax assets, and the amount of the allowance
for doubtful accounts. While management believes that the carrying value of such
assets and liabilities is adequate as of December 31, 2002 and 2001, actual
results could differ from the estimates upon which the carrying values were
based.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries after
elimination of all significant intercompany transactions and accounts.
Cash Equivalents -- The Company considers investments with original
purchased maturities of three months or less to be cash equivalents.
Trade Receivables -- Trade receivables are shown net of an allowance based
on historical collection trends and management's judgment on the collectibility
of these accounts. These collection trends, as well as prevailing and
anticipated economic conditions, are routinely monitored by management, and any
adjustments required are reflected in current operations. The allowance for
doubtful accounts as of December 31, 2002 and 2001 was $9.0 million and $12.0
million, respectively.
Concentration of Credit Risk and Significant Customers -- For the years
ended December 31, 2002 and 2001, the seven months ended December 31, 2000, and
the five months ended May 31, 2000, no single customer accounted for more than
10% of consolidated revenues.
Inventories -- Inventories are valued at the lower of cost or market using
the first in, first out method. Inventories are primarily comprised of unused
audio and video tapes.
Income Taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. SFAS No.
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS No. 109 generally considers all
expected future events other than proposed changes in the tax law or rates.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the assets' estimated
useful lives. Principal lives are as follows: buildings, 10-20 years; equipment,
3-5 years. Leaseholds, leasehold improvements, and lease acquisition costs are
amortized over the estimated useful life or the lease term, whichever is
shorter. Maintenance and repairs are charged to expense as incurred.
Depreciation expense for property, plant and equipment was $64.2 million, $83.9
million, $30.4 million and $6.4 million for the year ended December 31, 2002 and
2001, seven months ended December 31, 2000, and five months ended May 31, 2000,
respectively.
Goodwill and Non-amortizable Other Intangible Assets -- Effective January
1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
and ceased amortizing goodwill and non-amortizable other
F-8
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intangible assets. In accordance with SFAS No. 142, the Company reviews the
impairment of goodwill annually and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The effect of the
adoption was to record a transitional impairment of $20.2 million during the
first quarter of fiscal 2002 reflected as a change in accounting principle on
the statements of operations.
Other Intangible Assets -- Amortizable other intangible assets are
amortized on a straight-line basis over their estimated useful lives of 3 to 5
years.
Long-Lived Assets -- Management reviews the realizability of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In evaluating the value and future
benefits of long-term assets, their carrying value is compared to management's
best estimate of undiscounted future cash flows over the remaining amortization
period. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value of the assets
exceeds the estimated fair value of the assets.
Foreign Currency Translation -- The Company's foreign subsidiaries
functional currencies are their respective local currencies. Assets and
liabilities of foreign operations are translated into U.S. dollars using current
exchange rates, and revenues and expenses are translated into U.S. dollars using
average exchange rates. The effects of the foreign currency translation
adjustments are deferred and are included in stockholders' equity as a component
of accumulated other comprehensive loss.
Net Income Per Common Share -- The Company presents earnings per share
("EPS") in accordance with SFAS No. 128, Earnings Per Share. Under SFAS No. 128,
basic EPS is computed by dividing earnings available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method.
As a result of losses, convertible subordinated notes, warrants and stock
options that could potentially dilute basic EPS in the future that were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive are as follows: 36,303,057 for the year ended December 31, 2002,
29,251,674 for the year ended December 31, 2001, 11,745,357 for the seven months
ended December 31, 2000 and 849,391 for the five months ended May 31, 2000.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value because of the short-term maturity of these instruments. Notes payable are
carried at amounts approximating fair value based on current rates offered to
the Company for debt with similar terms.
Interest Rate Swap Agreements -- The Company utilizes interest rate swap
agreements to manage interest rate exposures and accounts for these swaps in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an Amendment of SFAS No. 133. The Company records
all derivatives on the balance sheet at fair value. The Company has one swap
which is a freestanding derivative instrument and changes in fair value are
reflected in earnings. The Company also has two swaps which are hedging
instruments and changes in fair value are reflected in accumulated other
comprehensive income.
Revenue Recognition -- Revenues from post production related services are
recognized primarily based upon the number of hours of work performed each month
and the agreed upon billing rate. Revenues for certain Network related services
are recognized when services are provided. Revenues on other long-term contracts
are recorded on the basis of the estimated percentage of completion of
individual contracts. Estimated losses on long-term contracts are recognized in
the period in which a loss becomes evident.
F-9
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation -- The Company has one stock-based employee
compensation plan, which is more fully described in Note 12. The Company applies
the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations including FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25, issued in March 2000, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net loss if the fair-value-based method had been applied to all
outstanding and unvested awards in each period (in thousands, except per share
data).
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Net loss as reported......................... $(135,186) $(436,289) $(9,793) $(1,675)
Stock-based employee compensation expense
included in reported net loss.............. 3,189 1,625 -- --
Stock-based employee compensation expense
determined under fair value based method
for all awards............................. (4,256) (4,633) -- (52)
--------- --------- ------- -------
Adjusted net loss............................ $(136,253) $(439,297) $(9,793) $(1,727)
========= ========= ======= =======
Net loss per share As reported basic and
diluted.................................... $ (3.07) $ (11.52) $ (0.28) $ (0.16)
========= ========= ======= =======
Adjusted basic and diluted................. $ (3.10) $ (11.60) $ (0.28) $ (0.16)
========= ========= ======= =======
Reclassifications -- Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to the current year's
presentation.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, the Company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives, but is required to test such assets annually for impairment. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and be reviewed for impairment.
Effective January 1, 2002, the Company adopted SFAS No. 142 and in
accordance with its provisions, the Company recorded, during the first quarter
of fiscal 2002, a transitional impairment charge of $20.2 million against
goodwill related to its Entertainment Television reporting unit, which is part
of the Creative Services Group. Such charge has been reflected as a cumulative
effect of a change in accounting principle. Also, the Company recorded a
goodwill impairment charge of $83.7 million during the fourth quarter of fiscal
2002, as a result of its annual impairment test of goodwill in accordance with
SFAS No. 142. Of this impairment charge, $56.8 million related to the
Entertainment Television reporting unit and $26.9 million related to the
Commercial Television reporting unit, both part of the Creative Services Group.
Fair value of each reporting unit was determined through the use of an outside
independent valuation consultant. The consultant used both the income approach
and market approach in determining fair value.
F-10
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with SFAS No. 142, the Company has ceased amortizing goodwill
totaling $421.7 million as of the beginning of fiscal year 2002 and $17.5
million of acquired assembled workforce previously classified as identifiable
intangible assets. Additionally, in accordance with SFAS No. 142, the Company
has ceased amortizing $1.7 million of tradenames classified as intangible
assets. As a result, for the year ended December 31, 2002, the Company did not
recognize $27.8 million of amortization expense that would have been recognized
had the previous standards been in effect.
The following table presents other intangible assets subject to
amortization and estimated future amortization under the provisions of SFAS No.
142 as of December 31, 2002 (in thousands):
Other intangible assets Employment agreements............... $ 8,188
Non-compete agreements.................................... 2,840
-------
11,028
Accumulated amortization.................................. (5,625)
-------
$ 5,403
=======
Estimated amortization expense 2003......................... 2,186
2004...................................................... 2,186
2005...................................................... 1,031
-------
$ 5,403
=======
For the year ended December 31, 2002, the Company recorded $2.3 million of
amortization expense for other intangible assets.
The following table presents the impact of SFAS No. 142 on net loss and net
loss per share had the standard been in effect for fiscal 2001 and 2000 (amounts
in thousands, except per share data):
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Reported net loss............................ $(135,186) $(436,289) $(9,793) $(1,675)
Amortization of goodwill................... -- 31,606 15,265 1,031
Amortization of acquired assembled
workforce intangible assets............. -- 8,215 3,489 --
Income tax effect.......................... -- -- (1,057) (208)
--------- --------- ------- -------
Net adjustments......................... -- 39,821 17,697 823
Adjusted net (loss) income................... $(135,186) $(396,468) $ 7,904 $ (852)
========= ========= ======= =======
Reported net (loss) income per share -- basic
and diluted................................ $ (3.07) $ (11.52) $ (.28) $ (.16)
========= ========= ======= =======
Adjusted net (loss) income per
share -- basic............................. $ (3.07) $ (10.47) $ .23 $ (.08)
========= ========= ======= =======
Adjusted net (loss) income per share --
diluted.................................... $ (3.07) $ (10.47) $ .18 $ (.08)
========= ========= ======= =======
4. IMPAIRMENT AND RESTRUCTURING CHARGES
During fiscal year 2001, challenging economic conditions impacted overall
business trends. In particular, the entertainment and technology sectors
suffered substantial economic declines. These challenges were further
F-11
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exacerbated by the events of September 11, 2001, resulting in a continued
negative economic impact during the latter part of the year. These factors
contributed largely to the Company's inability to meet its 2001 operating
objectives and have created reduced expectations and opportunities for the near
term.
Accordingly, the Company evaluated the recoverability of its goodwill and
long-lived asset carrying values pursuant to APB Opinion No. 17, Intangible
Assets, and SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. This involved writing-down goodwill,
intangible assets and certain long-lived assets to their fair values, which was
based upon both fair market comparables and by discounting the future cash flows
of these assets through their useful life. As these assets will remain in
service, the remaining net book value of the assets will be depreciated over
their remaining estimated useful lives.
During the quarter ended December 31, 2001, the Company recorded goodwill,
intangible asset, long-lived assets and other asset impairments of $213.9
million, $11.0 million, $59.9 million and $2.1 million, respectively, totaling
$286.9 million. These charges were recorded in each of the Company's three
business segments, but were primarily related to a write-off of goodwill,
intangible assets and long-lived assets for the Company's existing feature film
and entertainment television sound services, and certain assets associated with
the development of the Company's fiber optic transport and IP hosting transport
services. Part of the Company's original valuation of these assets was affected
by its expectation that the development and delivery of interactive television
and other interactive services, including the rollout of a broadband
infrastructure, would have materialized sooner and therefore would have provided
more immediate growth opportunities.
Additionally, during the fourth quarter of 2001 the Company completed
certain restructuring activities designed to improve operating efficiencies and
effectiveness and to strengthen its competitive position in the marketplace
primarily through cost and expense reductions. In connection with these
integration and consolidation initiatives, we recorded a charge of $21.0 million
for impairment of certain equipment and other fixed assets and $5.6 million for
restructuring, which includes $5.2 million related to excess lease commitments
due to planned facility closures and $425,000 for employee severance payments.
Our continuing efforts to integrate acquired businesses may require further
charges for exit and separations plans.
The following table provides the activity and balances of the restructuring
reserve account for the years ended December 31, (in thousands):
OPENING ENDING
BALANCE ADDITIONS DEDUCTIONS BALANCE
------- --------- ---------- -------
Excess facility costs.................................... $5,133 $ -- $ -- $5,133
Employee separations..................................... 425 -- 170 255
------ ----- ------ ------
December 31, 2001...................................... $5,558 $ -- $ 170 $5,388
====== ===== ====== ======
Excess facility costs.................................... $5,133 $ -- $2,906 $2,227
Employee separations..................................... 255 -- 255 --
------ ----- ------ ------
December 31, 2002...................................... $5,388 $ -- $3,161 $2,227
====== ===== ====== ======
5. ACQUISITIONS
On April 10, 2000, Liberty Media acquired Four Media Company ("4MC") for
$123.3 million in cash plus 3,182,300 shares of Class A Liberty Media tracking
stock valued at $137.7 million, converted 4MC vested options into stock
appreciation rights valued at $52.9 million, and issued a warrant valued at $7.8
million. The total consideration was allocated based on the estimated fair
values of the assets and liabilities acquired with the excess consideration of
$270.7 million recorded as goodwill and $19.8 million as identifiable intangible
assets. On May 31, 2000, 4MC acquired six entities from the Virgin Media Group
Limited ("Virgin") for $39.5 million in cash. The consideration was allocated
based on the estimated fair values of the assets and liabilities acquired with
the excess
F-12
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration of $21.1 million recorded as goodwill. On June 9, 2000, Liberty
Media contributed all of the issued and outstanding shares of 4MC to the Company
in exchange for 16,614,952 shares of the Company's Class B common stock, valued
at $279.7 million pursuant to a Contribution Agreement between Liberty Media and
the Company. The assets and liabilities of 4MC, including Virgin, were recorded
based on Liberty Media's historical values, which includes the effect of Liberty
Media's acquisitions of 4MC and Virgin. Assets acquired were $291.6 million
(including cash of $14.1) and liabilities assumed were $302.5 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. It has international facilities in Mexico
City, Mexico; London, England; and the Republic of Singapore.
On July 19, 2000, a wholly-owned subsidiary of Liberty Media ("Liberty
Sub"), acquired Soundelux, which consists of certain of the assets and
operations of SounDelux Entertainment Group of Delaware, Inc. Immediately
following the closing of this asset purchase, Liberty Media contributed 100% of
its ownership interest in Liberty Sub to the Company in exchange for 8,181,818
shares of the Company's Class B common stock pursuant to a previously negotiated
contribution agreement between Liberty Media and the Company. The acquisition
has been accounted for as a purchase and the acquisition cost of $90.0 million
has been allocated to the assets acquired and liabilities assumed based on
estimates of their fair values. Assets acquired were $12.3 million and
liabilities assumed were $4.0 million with the excess consideration of $71.0
million recorded as goodwill and $10.7 million as identifiable intangible
assets. The Company's consolidated financial statements have incorporated
Soundelux's activity from the effective date of the acquisition. Soundelux
provides sound design and re-recording services for feature films, television,
advertising and new media. Soundelux operations are located in Los Angeles,
California.
On July 25, 2000, the Company acquired (i) Triumph Communications Inc.,
(ii) Triumph Communications & Fiber Services, LLC, (iii) Triumph Communications
& Leasing Services Inc., (iv) American Simulcast Corp., and (v) The Triumph
Switch Company LLC (collectively, "Triumph") in exchange for a cash payment to
the seller totaling $5.7 million, forgiveness of existing notes payable to the
Company from Triumph totaling $4.5 million, and 705,554 shares of the Company's
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. The
acquisition has been accounted for as a purchase and the acquisition cost of
$53.1 million has been allocated to the assets acquired and liabilities assumed
based on estimates of their fair values. Assets acquired were $3.5 million and
liabilities assumed were $7.2 million with the excess consideration of $53.6
million recorded as goodwill and $3.2 million as identifiable intangible assets.
The Company's consolidated financial statements have incorporated Triumph's
activity from the effective date of the acquisition. 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 system, encoding and
encryption, and IRD sales and authorization. Triumph was sold on December 23,
2002, which is discussed further in Note 6 below.
On August 11, 2000, a wholly owned subsidiary of the Company in the United
Kingdom acquired all of the outstanding shares of Soho Group Limited ("Soho")
for $27.0 million in cash (net of approximately $200,000 of cash acquired). The
acquisition has been accounted for as a purchase and the acquisition costs were
allocated to the assets acquired and liabilities assumed based on estimates of
their fair values. Assets acquired were $21.0 million and liabilities assumed
were $2.8 million with the excess consideration of $8.7 million recorded as
goodwill. The Company's consolidated financial statements have incorporated
Soho's activity from the effective date of the acquisition. Soho provides
services primarily to the commercial advertising industry including negative
developing, negative cutting services (using a proprietary computerized
technology), film to digital media transfer, 2D and 3D compositing and animation
and television commercial finishing.
On October 9, 2000, a wholly owned subsidiary of the Company in the United
Kingdom acquired all of the outstanding shares of Visiontext Limited
("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. The acquisition
has been accounted for as a
F-13
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase and the acquisition costs of $4.8 million were allocated to the assets
acquired and liabilities assumed based on estimates of their fair values. Assets
acquired were $1.3 million and liabilities assumed were $757,000 with the excess
consideration of $4.3 million recorded as goodwill. The Company's consolidated
financial statements have incorporated Visiontext's activity from the effective
date of the acquisition. Visiontext is located in London, England and Los
Angeles, California and provides subtitling services to commercial advertising
and home video markets.
On December 22, 2000, Liberty Media acquired Video Services Corporation
("VSC"). The total consideration paid by Liberty Media was valued at $119.7
million. The $119.7 million was comprised of $38.0 million in cash, paid to the
shareholders of VSC, and an additional $46.5 million of debt of VSC paid or
assumed by Liberty Media for a total of $84.5 million in cash. In addition,
Liberty Media issued 1,441,212 shares of Liberty Media Group Class A common
stock and options to purchase 119,666 shares of Liberty Media Group Class A
common stock, with an aggregate estimated fair market value of $35.2 million at
the time of signing of the transaction.
Pursuant to the terms of a contribution agreement between Liberty Media and
the Company, Liberty Media contributed the equity of VSC to the Company on
December 22, 2000. In consideration for the contribution of VSC, the Company
issued to Liberty Media a convertible promissory note in the principal amount of
$92.5 million. The convertible note was issued to Liberty Media under the terms
of the Liberty Subordinated Credit Agreement. An additional $9.6 million was
paid by the Company to pay down debt of VSC. The total value of the
consideration paid by the Company in connection with the contribution of VSC was
$102.1 million.
As part of the contribution of VSC from Liberty Media to the Company, the
Company assumed Liberty Media's acquisition basis of $119.7 million. The $17.6
million difference between the $119.7 million paid by Liberty Media and the
$102.1 million paid by the Company has been accounted by the Company as a
contribution to the capital of the Company . The acquisition has been accounted
for as a purchase and the acquisition cost of $119.7 million was allocated to
the assets acquired and liabilities assumed based on estimates of their fair
values. Assets acquired were $69.4 million and liabilities assumed were $33.5
million, with $77.7 million of the excess consideration recorded as goodwill and
the remaining $6.1 million of the excess consideration recorded as identifiable
intangible assets. The Company's consolidated financial statements have
incorporated VSC's activity from the effective date of the acquisition. 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.
On January 5, 2001, the Company entered into an agreement pursuant to which
it purchased a 1% ownership interest in Livewire Network Services, LLC ("LNS")
from an affiliate of Liberty Media in exchange for $300,000 in cash.
Simultaneously, the Company and Liberty Media entered into a formal operating
agreement (the "Operating Agreement") under which the Company was appointed as
manager of LNS. The Operating Agreement contained a put-call provision, pursuant
to which on September 6, 2001 the Company acquired the remaining 99% ownership
interests of LNS for $31.3 million (net of $425,000 of cash acquired) financed
from debt from the Liberty Subordinated Credit Agreement. The tangible assets,
goodwill and liabilities of LNS were recorded based on Liberty Media's
historical values of $8.5 million, $25.6 million and $2.8 million, respectively.
LNS provides operational, installation, maintenance and support services for
satellite communication systems and their users. LNS is located in Melbourne,
Florida and is included in the Network Services Group for segment reporting.
On February 1, 2001, the Company acquired substantially all of the U.S.
assets of Group W Network Services, from Viacom, Inc., including 100% of the
capital stock of Asia Broadcast Centre Pte., Ltd. and Group W Broadcast Pte.,
Ltd. (collectively, "GWNS"). The acquisition was financed in part with debt from
the Liberty Subordinated Credit Agreement, in the amount of $82.0 million, other
borrowings from Liberty Media evidenced by additional non-convertible
subordinated notes in the aggregate amount of $13.8 million, $13.4 million from
the Company's revolving credit facility and $1.5 million of cash from
operations. The acquisition has been accounted for as a purchase and the
acquisition cost of $108.2 million (net of $2.5 million of cash acquired) has
been allocated to the assets acquired and liabilities assumed based on estimates
of their fair values. Assets acquired and liabilities assumed were $60.1 million
and $18.9 million, respectively, with the excess consideration of $67.0 million
recorded as goodwill. The Company's consolidated financial statements have
incorporated GWNS's activity from the effective date of the acquisition.
F-14
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GWNS provides production and distribution services for the broadcast and cable
industries from locations in the Republic of Singapore, Minneapolis, Minnesota
and Stamford, Connecticut.
On August 23, 2001, the Company acquired the remaining 51% of Cinram-POP
DVD Center LLC ("Cinram-POP"), which it did not already own from Cinram U.S.
Holdings, Inc. The acquisition has been accounted for as a purchase and the
acquisition cost of $536,000 (net of $295,000 of cash acquired) has been
allocated to the assets acquired and liabilities assumed based on estimates of
their fair values. Assets acquired and liabilities assumed were approximately
$796,000 and $209,000 respectively. Subsequent to the elimination of the
Company's $432,000 equity investment in the Cinram-POP joint venture, excess
consideration of $381,000 was recorded as goodwill. The Company's consolidated
financial statements have incorporated Cinram-POP's activity under the equity
method through September 6, 2001, and consolidated thereafter. Goodwill will not
be amortized for this transaction pursuant to SFAS No. 142, as described in Note
3. Cinram-POP provides DVD design, authoring and encoding services to the home
video market. Cinram-POP is located in Santa Monica, California and is included
in the Media Management Services Group for segment reporting.
In accordance with the requirements of APB Opinion No. 16, Business
Combinations, and SFAS No. 141, Business Combinations, the following unaudited
pro forma consolidated financial information is presented as if each acquisition
was consummated on January 1, 2000. The unaudited pro forma information includes
the results of operations for the period prior to the acquisitions, adjusted for
amortization of goodwill, depreciation, interest expense on borrowings incurred
to fund the acquisitions, and income taxes. The unaudited pro forma information
is not necessarily indicative of the results of operations had these events
actually occurred on January 1, 2000, nor is it necessarily indicative of future
results. No pro forma adjustments have been included for the pre-acquisition
time periods for potential fluctuations in the liability recorded for the stock
appreciation rights granted in the 4MC acquisition, including effects of market
fluctuations or estimates of exercises (in thousands, except per share data):
2001 2000
--------- --------
Net revenues................................................ $ 607,503 $640,865
========= ========
Net loss.................................................... $(439,351) $(45,266)
========= ========
Net loss per share -- basic and diluted..................... $ (11.61) $ (1.16)
========= ========
Included in the unaudited proforma net loss is goodwill amortization
expense of $31.6 million and $16.3 for the years ended December 31, 2001 and
2000, respectively. As discussed in Note 3, the Company has ceased amortizing
goodwill effective January 1, 2002.
The following table provides supplemental disclosure related to the
Company's fiscal year 2001 acquisitions (in thousands):
GWNS CINRAM-POP LNS
-------- ---------- -------
Assets acquired
Trade and other receivables, net.......................... $ 7,203 $ 425 $ 681
Inventories, prepaid and other assets..................... 6,243 9 1,075
Property, plant and equipment............................. 46,622 362 6,727
Goodwill.................................................. 67,041 381 25,597
Liabilities assumed
Accounts payable, accrued expenses and other.............. (5,129) (209) (2,768)
Long-term debt and capital lease obligations.............. (13,814) -- --
Elimination of the Company's investment in Cinram-POP....... -- (432) --
-------- ----- -------
Net assets acquired......................................... $108,166 $ 536 $31,312
======== ===== =======
F-15
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides supplemental disclosure related to the
Company's fiscal year 2000 acquisitions (in thousands):
4MC SOUNDELUX TRIUMPH SOHO VISIONTEXT VSC
--------- --------- ------- ------- ---------- --------
Assets acquired
Cash................................... $ 14,066 $ -- $ -- $ -- $ -- $ 696
Trade and other receivables,........... 46,723 4,154 218 4,470 620 20,683
Inventories, prepaid and other......... 13,627 1,777 669 223 15 5,860
Deferred income taxes, net............. 21,504 -- 40 -- -- 6,911
Property, plant and equipment.......... 195,680 6,324 2,539 16,316 656 35,208
Goodwill............................... 270,744 71,042 53,566 8,732 4,314 77,681
Identifiable intangible assets......... 19,820 10,730 3,190 -- -- 6,090
Liabilities assumed
Accounts payable, accrued expenses and
other............................... (70,580) (4,027) (6,832) (1,924) (757) (24,764)
Long-term debt and capital lease
obligations......................... (231,922) -- (332) (848) -- (8,702)
--------- ------- ------- ------- ------ --------
Net assets acquired...................... $ 279,662 $90,000 $53,058 $26,969 $4,848 $119,663
========= ======= ======= ======= ====== ========
On June 9, 2000, approximately 60% of the Company's outstanding common
stock was acquired by Liberty Media through the Todd Merger, as described in
Note 1. In connection with this acquisition, the Company made the following
purchase accounting adjustments (in thousands):
Property, plant and equipment, net.......................... $(11,002)
Marketable securities....................................... (54)
Trade receivables and other, net............................ 98
Goodwill.................................................... 75,417
Identifiable intangible assets.............................. 14,140
Other assets, net........................................... (23)
Accounts payable and accrued expenses....................... (1,568)
Deferred income taxes payable............................... (12,119)
Additional paid-in capital.................................. (91,474)
Unearned compensation....................................... 2,858
Treasury stock.............................................. (28)
Unearned gain/loss on marketable equity..................... 4,448
Foreign exchange adjustment................................. (899)
Retained earnings........................................... 20,206
--------
$ --
========
F-16
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DIVESTITURE
On December 23, 2002, the Company sold to Leafco Communications, Inc. all
of its equity interest in Triumph for nominal consideration plus the assumption
of net liabilities in the amount of $4.0 million. In connection with this sale,
the Company entered into an agreement to loan the buyer an amount not to exceed
$4.0 million. As of date of this report, such loan agreement has been terminated
by the parties and the buyer has repaid to the Company all monies advanced to
buyer pursuant to this loan. In connection with this loan termination, the
Company entered into an agreement to loan Rapco Enterprises, Inc., an affiliate
of Leafco Communications, Inc., $2.0 million. The above transactions, in the
aggregate resulted in a gain from the divestiture of $1.6 million.
7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The following table provides additional detail related to the Company's
consolidated balance sheets (in thousands):
2002 2001
-------- ---------
Prepaid expenses and other current assets
Prepaid expenses.......................................... $ 11,882 $ 9,387
Security deposits......................................... 623 1,307
Income tax receivable..................................... 2,635 1,732
Other receivables......................................... 722 1,811
-------- ---------
$ 15,862 $ 14,237
======== =========
Property, plant and equipment, net
Land...................................................... $ 71,343 $ 63,079
Buildings................................................. 126,266 125,354
Equipment................................................. 184,133 275,389
Accumulated depreciation.................................. (81,245) (147,745)
-------- ---------
$300,497 $ 316,077
======== =========
Goodwill, net
Goodwill.................................................. $335,219 $ 421,670
-------- ---------
$335,219 $ 421,670
======== =========
Other intangible assets, net
Assembled workforce....................................... $ -- $ 17,510
Employment agreements..................................... 8,188 8,188
Non-compete agreements.................................... 2,840 3,414
Tradenames................................................ 2,435 1,694
Accumulated amortization.................................. (5,625) (3,567)
-------- ---------
$ 7,838 $ 27,239
======== =========
Other assets, net
Long term receivable...................................... $ 107 $ 66
Investments............................................... 4,493 2,408
Other assets.............................................. 10,731 8,843
-------- ---------
$ 15,331 $ 11,317
======== =========
Accrued expenses and other current liabilities
Payroll and related expenses.............................. $ 19,082 $ 16,267
Interest and interest rate swap........................... 7,252 14,638
Deferred revenues......................................... 6,278 9,062
Restructuring and severance............................... 2,227 5,388
Taxes and other........................................... 26,427 30,990
-------- ---------
$ 61,266 $ 76,345
======== =========
Other liabilities
Deferred rent and deposits................................ $ 5,161 $ 5,226
Other liabilities......................................... 2,495 5,045
Income taxes payable -- non current....................... 2,005 2,906
-------- ---------
$ 9,661 $ 13,177
======== =========
F-17
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
The Company's long-term debt at December 31, consisted of the following (in
thousands):
2002 2001
-------- --------
Revolver.................................................... $187,236 $208,800
Term loan A................................................. 118,750 125,000
Term loan B................................................. 57,330 57,915
Convertible subordinated notes.............................. 224,343 206,192
Discount on convertible subordinated notes.................. (19,044) (22,507)
Real property mortgage notes................................ 24,269 21,328
Capital lease obligations and other......................... 14,399 30,642
-------- --------
607,283 627,370
Less: current maturities.................................... (18,928) (19,129)
-------- --------
$588,355 $608,241
======== ========
Borrowings have the following scheduled maturities (in thousands):
2003........................................................ $ 18,928
2004........................................................ 27,572
2005........................................................ 44,197
2006........................................................ 243,268
2007........................................................ 55,879
Thereafter.................................................. 217,439
--------
$607,283
========
SENIOR CREDIT AGREEMENT
OVERVIEW
At December 31, 2002, $363.9 million was outstanding under the Senior
Credit Agreement (including Letters of Credit of $.6 million) and $3.7 million
was available for future borrowings, subject to the terms of the Senior Credit
Agreement. During the year ended December 31, 2002, the Company repaid $33.4
million under the Senior Credit Agreement. During the year ended December 31,
2002, the Company borrowed $5.0 million under the Senior Credit Agreement which
was primarily used to fund capital expenditures and working capital.
BACKGROUND
The Company entered into the Senior Credit Agreement, dated as of December
22, 2000, as amended by Amendment No. 1, No. 2, and No. 3, dated as of November
1, 2001, March 26, 2002, and November 13, 2002, respectively, with several
lenders from time to time parties to the credit agreement, BANC OF AMERICA
SECURITIES LLC, as Lead Arranger and Book Manager, BANK OF AMERICA, N.A., as
administrative agent for the Lenders, SALOMON SMITH BARNEY INC., as Syndication
Agent, and THE BANK OF NEW YORK COMPANY, INC., as Documentation Agent (the
"Senior Credit Agreement"). Under the agreement, as amended, the Company may
borrow up to $367.6 million in term and revolving loans, subject to new lenders
being added to the facility and compliance with certain financial covenants and
other borrowing conditions. As of December 31, 2002, the Senior Credit Agreement
commitment comprised of Term loan A and Term loan B, and a revolving credit
facility (the "Revolver"). Term loan A, which matures on December 22, 2006, has
a commitment of $118.8 million. Term
F-18
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan B, which matures on June 30, 2007, has a commitment of $57.3 million. In
general, semi-annual principal payments on Term loan A began in September 2002
and continue through fiscal 2006 and semi-annual principal payments on Term loan
B began in fiscal 2001 and continue through fiscal 2007. The Revolver has a
commitment of $191.5 million under which loans are available through maturity on
December 22, 2006, at which time all outstanding balances are due. The Revolver
also includes a $25.0 million sub-limit for the issuance of standby and
commercial letters of credit. As of December 31, 2002, the outstanding letters
of credit totaled $.6 million. The Senior Credit Agreement loans are
collateralized by substantially all of the operating assets of the Company.
The March 26, 2002 Amendment and the November 13, 2002 Amendment each
amended the Senior Credit Agreement to provide greater financial flexibility to
the Company by allowing for more favorable leverage ratio tests and a more
favorable fixed charge coverage ratio test. Each also removes some restrictions
on transactions the Company may enter into. In consideration for the above
changes, the Company agreed to (1) higher interest rates on the loans until the
Company's leverage ratio is reduced below 4.00 to 1.00, (2) new restrictions on
the use of the proceeds from the sale of assets and (3) a permanent reduction of
$40.0 million in the amount available for the future borrowings under the Senior
Credit Agreement. After giving effect to this amendment, $3.6 million is
available for future borrowings under the Senior Credit Agreement as of December
31, 2002.
Under the Senior Credit Agreement, the Company's Total Leverage Ratio may
not exceed 4.55 to 1.00 for any measurement period from December 31, 2002 to
June 30, 2003. Thereafter, the Total Leverage Ratio is reduced over subsequent
measurement periods until it reaches a Total Leverage Ratio of 3.50 to 1.00 for
any measurement period after January 1, 2005. At December 31, 2002, the
Company's Total Leverage Ratio was 4.12 to 1.00. The Company was not subject to
a Fixed Charge Coverage Ratio at or prior to December 31, 2002. For any
measurement period beginning January 1, 2003, the Company's Fixed Charge
Coverage Ratio may not be less than 0.85 to 1.00, which increases over the
succeeding two quarters until October 1, 2003, when the Company's Fixed Charge
Coverage Ratio may not be less than 1.00 to 1.00 for the remainder of the term
of the Senior Credit Agreement.
Interest related to the Senior Credit Agreement is paid monthly, bi-monthly
or quarterly in arrears and is based on the "Alternate Base Rate" or the
"Eurodollar Rate," whichever is applicable to the loan, plus margins based on
the leverage ratio as defined in the agreement for Term loan A and the Revolver
and defined margins for Term loan B. The Alternate Base Rate is a daily
fluctuating rate per annum equal to the higher of the Federal Funds Rate plus
0.5% or the Prime Rate. The Eurodollar Rate is the rate per annum equal to the
average British Bankers Association Interest Settlement Rate for deposits in the
relevant currency or an alternate base, as defined in the agreement, if that
rate is unavailable. As of December 31, 2002, the effective interest rates on
Term loan A, Term loan B and the Revolver borrowings were 4.65%, 5.4% and 4.68%,
respectively.
The Senior Credit Agreement requires certain financial ratios to be
maintained and contains other restrictive covenants, including restrictions on
incurring additional indebtedness. As of December 31, 2002, the Company was in
compliance with all covenants in the Senior Credit Agreement.
LIBERTY SUBORDINATED CREDIT AGREEMENT
OVERVIEW
At December 31, 2002, $224.3 million was outstanding under the Liberty
Subordinated Credit Agreement and $81.9 million was available for future
borrowings under the terms of the Liberty Subordinated Credit Agreement with the
consent of, and on terms determined by, Liberty Media.
On December 22, 2000, the Company and Liberty Media finalized the First
Amended and Restated Credit Agreement (the "Liberty Subordinated Credit
Agreement"), pursuant to which Liberty Media agreed to make subordinated
convertible loans ("Convertible Subordinated Notes") to the Company of $206.2
million ("Acquisition Funds"), for the funding of several acquisitions as
described in Note 5. The Convertible Subordinated Notes are convertible at the
option of Liberty Media at any time prior to maturity, into shares of the
Company's Class B common stock at a conversion price of $10.00 per share. If not
earlier converted, the notes will become due and
F-19
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable on June 30, 2008. Interest accrues on the notes at a rate of 10% per
annum, payable quarterly either in cash, shares of the Company's Class B common
stock or a combination thereof, at the Company's discretion, subject to certain
limits. Under the agreement, shares of the Company's Class B common stock issued
as payment for interest are valued at 95% of the ten-day trailing average
closing price of shares of the Company's Class A common stock on the interest
payment date.
Under the Liberty Subordinated Credit Agreement, the Company has borrowed
$206.2 million, which is comprised of $92.5 million, $82.0 million and $31.7
million related to the acquisitions of VSC, GWNS and LNS respectively, as
described in Note 5. On the date of the GWNS draw, the fair value of common
stock exceeded the conversion price by $2.81 per share and as such, a beneficial
conversion of $23.0 million was recorded as a discount to the Convertible
Subordinated Notes and an increase to additional paid-in capital. On the date of
the LNS draw, the fair value of common stock exceeded the conversion price by
$0.76 per share, and as such, a beneficial conversion of $2.4 million was
recorded. The discounts are being amortized as non-cash charges to interest
expense over the earlier of the remaining term of the Liberty Subordinated
Credit Agreement or date of conversion. During fiscal year 2002 and 2001,
approximately $3.5 million and $3.0 million, respectively, was included as a
non-cash charge to interest expense in the statement of operations, related to
the amortization of the total discount.
In accordance with the terms of the Senior Credit Agreement, the Company
also borrowed $13.8 million from an affiliate of Liberty Media to fund the
acquisition of GWNS, as evidenced by two non-convertible notes with principal
balances of $9.4 million and $4.4 million. These non-convertible notes were
fully repaid during the quarter ended June 30, 2001.
During the year ended December 31, 2002, the Company entered into three
supplemental agreements under the Liberty Subordinated Credit Agreement: 1)
Supplement No. 1, dated June 28, 2002; 2) Supplement No. 2, dated July 24, 2002;
and; 3) Supplement No. 3, dated August 13, 2002. The Company borrowed an
aggregate amount of $18.1 million pursuant to the three supplements. Proceeds
from the three supplemental borrowings were used for working capital, to fund
the award in an arbitration matter with Paul Dujardin (the "Arbitration Award"),
capital expenditures and repayment of principal under the Senior Credit
Agreement.
SUPPLEMENT NO. 1 AND SUPPLEMENT NO. 2
The Liberty Subordinated Credit Agreement allows the Company to borrow the
Acquisition Funds and up to an additional $100.0 million from Liberty Media with
the consent of, and on terms determined by, Liberty Media (the "Additional
Available Funds"). The parties to the Senior Credit Agreement agreed in a letter
dated June 28, 2002 (the "Senior Credit Agreement Consent Letter") and the
parties to an agreement between the Company and Heller Financial Leasing, Inc.
(the "Heller Credit Agreement"), agreed in a separate letter dated June 28, 2002
(the "Heller Consent Letter" and, together with the Senior Credit Agreement
Consent Letter, the "June 2002 Consent Letters"), that, with respect to $25.0
million of the Additional Available Funds, (1) convertible notes could be issued
that could be convertible into the Company's Class B common stock at a price per
share determined by the Company, rather than at $10.00 per share as permitted
under the Senior Credit Agreement, and (2) to the extent these funds were
borrowed to purchase capital assets and to fund the Arbitration Award, such
borrowed funds could be repaid to Liberty Media before the Company pays amounts
owed under the Senior Credit Agreement, provided that, among other conditions,
such repayment is funded solely with proceeds of additional equity contributions
from Liberty Media or any of its affiliates other than the Company or any of its
subsidiaries. The Company's ability to determine the conversion rights under the
Liberty Subordinated Credit Agreement with respect to Additional Available Funds
does not affect the conversion rights for amounts previously borrowed under the
Liberty Subordinated Credit Agreement and may be determined on a case by case
basis only on amounts borrowed with respect to the $25.0 million of Additional
Available Funds to which the June 2002 Consent Letters apply.
On June 28, 2002, the Company and Liberty Media entered into Supplement No.
1 to the Liberty Subordinated Credit Agreement, under which the Company borrowed
$6.5 million for the purchase of capital assets, and issued a promissory note,
dated June 28, 2002, in the same amount that is convertible into the Company's
Class B common
F-20
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock at $3.50 per share, which represents a $0.56 per share premium over the
$2.94 per share closing price of the Company's Class A common stock on that day.
On July 24, 2002, the Company and Liberty Media entered into Supplement No.
2 to the Liberty Subordinated Credit Agreement, under which the Company borrowed
an additional $2.3 million to fund part of the Arbitration Award, and issued a
promissory note in the same amount that is convertible into the Company's Class
B common stock at $3.50 per share which represents a $1.55 per share premium
over the $1.95 per share closing price of the Company's Class A common stock on
that day.
SUPPLEMENT NO. 3
On August 13, 2002, the Company entered into Supplement No. 3 to the
Liberty Subordinated Credit Agreement with Liberty Media under which the Company
may draw $25.0 million of Additional Available Funds, as needed, at Liberty
Media's option: (a) through loans under the Liberty Subordinated Credit
Agreement of subordinated convertible loans with a conversion price per share
equal to 115% of the average market price of the Company's Class A common stock
for the five most recent trading days ending on and including the date which is
two business days prior to the date of the borrowing, (b) through sales of the
Company's Class B common stock to Liberty Media at a purchase price per share
equal to the average market price of the Company's Class A common stock for the
five most recent trading days ending on and including the date which is two
business days prior to the date of the stock sale, or (c) through any
combination of (a) or (b) ("Supplement No. 3"). Any draws under Supplement No. 3
are subject to the Company obtaining any necessary consents and approvals and
issuing any required notices, including, to the extent applicable, stockholder
approval of the issuance of shares of Class B common stock to Liberty Media,
whether as a sale of stock or upon conversion of a loan ("Stockholder Consent").
Liberty Media, which then held over 87% of the outstanding common stock and over
99% of the voting power of the outstanding common stock and now holds over 91%
of the outstanding common stock and over 99% of the voting power of the
outstanding common stock, agreed in Supplement No. 3 to vote in favor of any
Stockholder Consent. As a result, at a meeting of the Company's stockholders on
January 23, 2003, the Company's stockholders (including Liberty Media) approved
(1) the potential issuance of shares of the Company's Class B common stock upon
conversion of convertible notes convertible into shares of the Company's Class B
common stock pursuant to Supplement No. 3 and outstanding on January 23, 2003,
(2) the issuance of the Company's Class B common stock and convertible notes
convertible into shares of the Company's Class B common stock after January 23,
2003, pursuant to Supplement No. 3 and (3) the potential issuance of shares of
the Company's Class B common stock upon conversion of convertible notes
convertible into shares of the Company's Class B common stock issued pursuant to
future supplements to the Liberty Subordinated Credit Agreement for a purchase
price per share or with an initial conversion price per share, as applicable,
determined in a manner no less favorable to the Company than as provided in
Supplement No. 3. Proceeds of the loans or stock sales under Supplement No. 3
must be used for capital expenditures, payment of the principal amount of loans
made under the Senior Credit Agreement or working capital.
On September 26, 2002, the parties to the Senior Credit Agreement agreed in
a letter, dated September 26, 2002, and the parties to the Heller Credit
Agreement agreed in a separate letter, dated September 26, 2002 (collectively,
the "September 2002 Consent Letters"), with respect to an additional $25.0
million of the Additional Available Funds (over and above the $25.0 million
contemplated in the June 2002 Consent Letters), convertible notes could be
issued that could be convertible into the Company's Class B common stock at a
price per share determined by the Company that was no less than 115% of the
average daily market price of the Company's Class A common stock for the five
most recent trading days ending on and including the date which is two business
days prior to the date of the borrowing.
On September 30, 2002, the Company received $17.2 million under Supplement
No. 3 in consideration for the Company's issuance of a convertible note in the
amount of $5.3 million that is convertible into the Company's Class B common
stock at $1.94 per share and sale of 7,070,000 unregistered shares of its Class
B common stock at a price of $1.69 per share for total proceeds of $11.9
million. The conversion price of the convertible note and purchase
F-21
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price of the shares sold were calculated in accordance with Supplement No. 3.
The proceeds were used to repay borrowings under the Senior Credit Agreement,
for capital expenditures and for working capital.
On October 17, 2002, the Company borrowed $4.0 million under Supplement No.
3 and issued a convertible note in the same amount that is convertible into the
Company's Class B common stock at $1.56 per share. The conversion price was
calculated in accordance with Supplement No. 3. The proceeds were used for
purchase of capital assets.
PROPERTY MORTGAGES AND OTHER DEBT
In April 1999, a wholly-owned subsidiary of the Company in the United
Kingdom financed the purchase of a property in London, England with a ten-year
term mortgage note in the amount of $5.2 million bearing interest at 6.725% per
annum, based upon a twenty-five year amortization period. Principal and interest
payments of approximately $100,000 per year are payable from fiscal year 1999
through 2008 with the remaining principal balance of $3.6 million due in fiscal
year 2009. In June 2000, the same subsidiary financed the purchase of an
adjoining property with a ten-year mortgage note in the amount of $3.9 million
bearing interest at 8.02% per annum, based upon a twenty-five year amortization
period. Principal and interest payments of less than $100,000 per year are
payable from fiscal year 2000 through 2009 with the remaining principal balance
of $3.1 million due in fiscal year 2010. Both loans are collateralized by their
respective properties.
In April 2001, the Company entered into a $2.0 million mortgage loan with
United California Bank ("UCB"), collateralized by a deed of trust covering one
of the Company's properties in Burbank, California. The mortgage loan requires
monthly interest payments based on the relevant one, two, three or six-month
London interbank market rate ("LIBOR") for the period determined by the Company,
plus 2.25%. The loan matured on April 23, 2002 and was fully paid. In addition,
the Company holds a $7.7 million mortgage loan through UCB, collateralized by a
deed of trust covering the same property. Principal payments of $113,976 began
in fiscal 1997 and continue through fiscal year 2004, with a final principal
payment of approximately $7.5 million due at maturity on January 31, 2005.
In June 2001, the Company borrowed $10.0 million from Heller Financial
Leasing Inc. in order to pay down $9.7 million of outstanding debt under the
Revolver. Quarterly principal payments of $533,333 are due from September 30,
2001 through March 31, 2005 with a final $2.0 million principal payment due at
maturity on June 30, 2005. Interest is payable quarterly with principal, and is
based on the relevant three-month LIBOR for the quarter, plus 3.25%. The
interest rate in effect as of December 31, 2002 was 4.65%. The loan is
collateralized by certain equipment used in the Company's Creative Services
Group and Media Management Services Groups.
In September 2001, two of the Company's wholly owned subsidiaries in the
United Kingdom entered into separate loan agreements with National Westminster
Bank Plc., for the purpose of funding capital expenditure initiatives for the
Company's United Kingdom operations. In accordance with the terms of the
agreements, the Company may borrow up to $18.7 million. As of December 31, 2002,
$16.3 million was outstanding and $2.4 million was available for future
borrowings. The Company anticipates repaying the debt in 60 equal quarterly
principal repayments which began in 2002. Interest is calculated based on the
relevant one, two, three or six-month LIBOR for the period determined by the
Company, plus 1.25%. As of December 31, 2002, the effective interest rate was
5.262%.
The Company has entered into various capital leases related to the purchase
of equipment with interest rates varying from 3.9% to 19.4%. Future minimum
lease payments under noncancellable capital lease agreements are as follows:
2003, $5.3 million; 2004, $3.3 million; 2005, $3.9 million; 2006, $1.9 million;
and; 2007, $-0-. Included in such minimum lease payments for capital leases is
interest in the aggregate amount of $2.3 million.
F-22
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMPREHENSIVE INCOME (LOSS)
The following summarizes comprehensive income (loss) and comprehensive
income (loss) reclassification adjustments included in the statements of
stockholders' equity (in thousands):
--------------------------------------------------------
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Net loss............................................. $(135,186) $(436,289) $ (9,793) $(1,675)
Unrealized gain (loss) on available for sale
securities(1)...................................... -- 1,463 (4,200) 6,078
Unrealized loss on cash flow hedge................... (548) (12,624) -- --
Gain (loss) on foreign currency translation.......... 6,606 (6,361) (2,043) (435)
Conversion of equity in Todd Merger.................. -- -- (3,549) --
Acquisition of 4MC................................... -- -- (2,614) --
Reclassification adjustment for realized losses on
available for sale securities(2)................... -- 815 -- --
Reclassification adjustment for amortization of loss
on cash flow hedge................................. 6,398 6,225 -- --
--------- --------- -------- -------
Net gain (loss) recognized in other comprehensive
income............................................. 12,456 (10,482) (12,406) 5,643
--------- --------- -------- -------
Total comprehensive (loss) income.................... $(122,730) $(446,771) $(22,199) $ 3,968
========= ========= ======== =======
---------------------------------------------------------------------------------------------------------------
---------------
(1) Net of tax expense of $957, tax benefit of $2.7 million and tax expenses of
$4.5 million, for the years ended December 31, 2001, seven months ended
December 31, 2000 and five months ended May 31, 2000, respectively.
(2) Net of tax benefit of $533 for the year ended December 31, 2001.
F-23
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The Company's effective income tax rate differs from the federal statutory
income tax rate due to the following:
----------------------------------------------------------------------------------
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Federal statutory income tax rate.................... 35% 35% 35% 35%
Adjust to actual company rate........................ -- -- -- (1.0)
----- ----- ----- -----
Adjusted federal statutory income tax rate........... 35 35 35 34
State and foreign taxes, net of federal benefit...... 1.7 0.3 (8.5) (10.2)
Non-deductible goodwill amortization................. (24.3) (16.8) (86.2) (1.8)
Valuation allowance.................................. (17.6) (20.2) -- --
Interest Expense..................................... (6.5) (1.4) -- --
Deemed Dividend...................................... (2.5) -- -- --
Sale of Subsidiary................................... 11.8 -- -- --
Other, net........................................... 1.3 .4 (0.5) (4.0)
----- ----- ----- -----
(1.1)% (2.7)% (60.2)% 18%
===== ===== ===== =====
------------------------------------------
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities. Components of the
income tax provision are as follows (in thousands):
----------------------------------------------------------------------------------
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN FIVE MONTHS
YEAR ENDED YEAR ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Current -- domestic.................................. $(1,615) $(1,492) $(11,487) $ --
Deferred -- domestic................................. 2,856 12,137 (282) (633)
------- ------- -------- -----
Domestic........................................... 1,241 10,645 (11,769) (633)
======= ======= ======== =====
Current -- foreign................................... (202) 923 2,295 646
Deferred -- foreign.................................. 397 -- 13,153 (454)
------- ------- -------- -----
Foreign............................................ 195 923 15,448 192
------- ------- -------- -----
$ 1,436 $11,568 $ 3,679 $(441)
======= ======= ======== =====
------------------------------------------
F-24
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of pre-tax income (loss) are as follows (in thousands):
--------------------------------------------------------------------------------
ASCENT MEDIA TODD-AO
------------------------------------------ ------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBE 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ ------------
Domestic........................................... $(143,699) $(425,294) $(11,714) $(2,456)
Foreign............................................ 9,949 573 5,600 340
--------- --------- -------- -------
$(133,750) $(424,721) $ (6,114) $(2,116)
========= ========= ======== =======
------------------------------------------
The Company filed its own consolidated federal income tax return up to June
8, 2000. Commencing June 9, 2000, the Company was included in the consolidated
tax return of AT&T through August 10, 2001. Beginning August 11, 2001, the
Company is included in the consolidated tax return of Liberty Media and is party
to a Tax Liability Allocation and Indemnification Agreement (the "Tax Sharing
Agreement") entered into with Liberty Media, as described in Note 17. The income
tax provision is calculated as if the Company were a separate taxpayer.
Components of deferred tax assets and liabilities as of December 31, are as
follows (in thousands):
2002 2001
--------- --------
Current assets
Accounts receivable reserves.............................. $ 3,693 $ 3,147
Accrued liabilities....................................... 2,291 5,497
Other..................................................... 5,142 497
--------- --------
11,126 9,141
Non current assets
Net operating loss carryforwards.......................... 51,467 56,504
Impairment reserves....................................... 46,273 52,599
Capital loss carryforward................................. 15,990 --
Accounts receivable reserves.............................. 5,079 --
Other..................................................... 5,860 3,569
--------- --------
124,669 112,672
Total deferred tax assets, gross.......................... 135,795 121,813
Valuation allowance....................................... (114,037) (96,556)
--------- --------
Total deferred tax assets, net............................ 21,758 25,257
Current liabilities
Prepaid expenses.......................................... (527) (690)
Other..................................................... (4,423) (3,445)
--------- --------
(4,950) (4,135)
Non current liabilities
Depreciation.............................................. (5,259) (9,793)
Amortization.............................................. (6,879) (11,329)
--------- --------
(12,138) (21,122)
--------- --------
Total deferred tax liabilities............................ (17,088) (25,257)
--------- --------
Net deferred tax asset...................................... $ 4,670 $ --
========= ========
F-25
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2002, the Company has $128.5 million and $162.0 million in
net operating loss carryforwards for federal and state tax purposes,
respectively. These net operating losses begin to expire, for federal purposes,
as noted in the following table (in thousands):
EXPIRING
YEARS NOL'S
----- --------
2005 - 2010................................................. $ 17,101
2011 - 2015................................................. 9,990
2016 - 2020................................................. 60,730
2021........................................................ 40,712
--------
$128,533
========
The state NOL's begin expiring in 2002 and continue through 2020. In
addition, the Company has approximately $600,000 of federal income tax credits,
which may be carried forward indefinitely. The Company has $2.2 million of state
income tax credits, of which $2.0 million will expire in the year 2012.
On the date of acquisition, the Company's net operating loss carryforwards
of $59.0 million were subject to the change in control provisions of Internal
Revenue Code Section 382. The limitations on the net operating loss
carryforwards do not have a significant impact on the availability and
utilization of the losses.
During the current year, management has determined that it is more likely
than not that the Company will not realize the tax benefits associated with
certain cumulative net operating loss carryforwards and impairment reserves, and
as such, the Company has increased its valuation allowance for federal and state
purposes. The net change in the total valuation allowance for the year ended
December 31, 2002, was an increase of $17.5 million.
Subsequent recognition of any tax benefits relating to the December 31,
2002 valuation allowance for deferred tax assets will be allocated as follows
(in thousands):
Income tax benefit that would be reported in:
Consolidated statement of operations........................ $110,545
Goodwill.................................................... 3,492
--------
$114,037
========
During 2002, the Company provided $1.6 million of U.S. tax expense for
future repatriation of cash from its Asia operations pursuant to APB 23. This
charge represents all undistributed earnings from Asia not previously taxed in
the United States.
Undistributed earnings of foreign subsidiaries, other than the Asia
operations, aggregated $1.1 million on December 31, 2002, which, under existing
law, will not be subject to U.S. tax until distributed as dividends. Since the
earnings have been, or are intended to be, indefinitely reinvested in foreign
operations, no provision has been made for any U.S. taxes that may be applicable
thereto. Furthermore, any taxes paid to foreign governments on those earnings
may be used in whole or in part as credits against the U.S. tax on any dividends
distributed from such earnings. It is not practicable to estimate the amount of
unrecognized deferred U.S. taxes on these undistributed earnings.
11. STOCKHOLDERS' EQUITY
On June 9, 2000, the Company amended its restated certificate of
incorporation to provide that each outstanding share of Old Class A Stock would
be converted into or reconstituted as 0.4 shares of Class A common stock and
each outstanding share of Old Class B Stock would be converted into or
reconstituted as 0.6 shares of Class B common stock. Immediately thereafter, on
June 9, 2000, in connection with the Todd Merger, the Company again amended its
restated certificate of incorporation such that the total number of shares of
capital stock authorized to be issued is
F-26
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
405,000,000; 400,000,000 of the authorized shares are designated common stock
and 5,000,000 are designated preferred stock. As of December 31, 2002, no shares
of the Company's preferred stock had been issued. Of the total amount of
authorized common stock, 300,000,000 shares have been designated as Class A
common stock and 100,000,000 shares have been designated as Class B common
stock. All the shares of common stock and preferred stock have a par value of
$0.01 per share. Holders of Class A common stock are entitled to one vote per
share and holders of Class B common stock are entitled to ten votes per share.
In all other respects, the Class A and B common stock are substantially
identical and have equal rights and privileges, except that shares of Class B
common stock are convertible into shares of Class A common stock, on a
one-to-one basis, at the option of the holder at any time.
During fiscal 2002, the Company redeemed 440,981 shares of the Company's
Class A common stock related to an arbitration award for an amount of $1.4
million.
12. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
On December 19, 2001, the Company's stockholders approved both the 2001
Incentive Plan (the "2001 Incentive Plan"), which had been previously adopted by
the Board of Directors on November 28, 2000 and amended August 6, 2001 and
November 8, 2001, subject to stockholder approval, and the 2000 Nonemployee
Director Stock Option Plan (the "2000 Nonemployee Director Plan"), which had
been previously adopted by the Board of Directors on August 6, 2001, subject to
stockholder approval.
The 2001 Incentive Plan provides for the granting of non-qualified or
incentive stock options, performance awards, stock appreciation rights,
restricted shares, and stock units. Under the 2001 Incentive Plan, the maximum
number of shares of common stock with respect to which awards may be granted
during the term of the 2001 Incentive Plan is 7,000,000. Stock options under the
2001 Incentive Plan have a maximum term of ten years and vest over a five-year
period commencing at the grant date.
The 2000 Nonemployee Director Plan provides that an automatic grant of
non-qualified stock options to purchase 15,000 shares of the Company's Class A
common stock shall be granted to (i) each nonemployee director who was a
director as of November 28, 2000, with a grant date of November 28, 2000; and
(ii) each individual who becomes a nonemployee director after November 28, 2000
upon his or her appointment to the Company's board of directors. Stock options
under the 2000 Nonemployee Director Plan have an exercise price equal to the
fair market value of the Company's Class A common stock on the date of grant,
have a maximum term of ten years and vest ratably over a five-year period
commencing on the grant date.
Through December 31, 2000, the Company had five stock option plans: The
1986, 1994, 1995, and 1997 Stock Option Plans and the 1998 Stock Incentive Plan.
No stock options or shares were issued from the 1998 plan. These plans provided
for the granting of either non-qualified or incentive stock options at not less
than 85% and 100% of the market value of the stock on the date of the grant.
Options generally became exercisable in installments commencing as of the
beginning of a fiscal year near the date of grant.
Pursuant to the Todd Merger on June 9, 2000, as described in Note 1, each
outstanding Todd-AO stock option under all plans became fully vested and was
converted into a rollover option to purchase 0.5 shares of Liberty Media and 0.4
shares of the Company's Class A common stock. These converted options
automatically expired on December 9, 2000, six months from the acquisition date
of June 9, 2000.
A Stock Option Fulfillment Agreement ("Agreement") was executed between
Liberty Media and the Company as of June 10, 2000 to create a mechanism for the
Company to fulfill its obligations under the rollover options as they pertain to
shares of Liberty Media. Pursuant to the Agreement, the Company purchased
Liberty Media stock on the open market to fulfill the 0.5 Liberty Media share
portion of the options exercised. To fund such purchases, Liberty Media
contributed cash to the Company equal to (i) the number of Liberty Media shares
delivered pursuant to the rollover option elections times (ii) the average of
the high and low price per Liberty Media shares during the day the rollover
option was exercised (iii) less a pro rata share of proceeds received from the
option holder. In consideration
F-27
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for such capital contributions, the Company issued shares of the Company's Class
B common stock in an amount equal to (i) the number of Liberty Media shares
deliverable upon exercise, times (ii) 1.2.
During the seven months ended December 31, 2000, 830,871 Todd-AO converted
options were exercised for 332,348 shares of Ascent Media Class A common stock.
For the funding of the Liberty Media shares to the option holders, 296,039
shares of the Company's Class B common stock were issued to Liberty Media valued
at $5.1 million as consideration for payments made to the Company for the
purchase of Liberty Media stock on the open market. A gain of $836,000 has been
included in the consolidated statement of operations based on the decrease in
Liberty Media stock price between the date of option exercises and the date the
Liberty Media shares were purchased by the Company on the open market.
The following table summarizes information about stock option transactions
under the 2001 Incentive Plan:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
At January 1, 2001.......................................... -- $ --
Awarded................................................... 8,915,000 7.33
Exercised................................................. -- --
Cancelled................................................. (2,782,500) 7.00
---------- -----
At December 31, 2001........................................ 6,132,500 $7.48
Awarded................................................... 765,000 7.00
Exercised................................................. -- --
Cancelled................................................. (1,743,750) 7.06
---------- -----
At December 31, 2002........................................ 5,153,750 $7.53
========== =====
The following tables summarize the information about stock options
outstanding as of December 31, 2002 and December 31, 2001, respectively, under
the 2001 Incentive Plan:
OUTSTANDING AT 12/31/02 EXERCISABLE AT 12/31/02
--------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF YEARS OF EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
------------------------ --------- ---------------- -------- ----------- ----------
$7.00.......................................... 4,666,250 8.5 $7.00 763,750 $ 7.00
$10.27......................................... 100,000 7.4 10.27 100,000 10.27
$13.47......................................... 387,500 8.6 13.47 387,500 13.47
--------- --- ----- --------- ------
5,153,750 8.5 $7.53 1,251,250 $ 9.27
========= === ===== ========= ======
The Company recognized $3.2 million and $1.6 million in stock compensation
expense during the years ended December 31, 2002 and 2001, respectively,
attributable to stock options granted with an exercise price less than the fair
market value on the date of grant. There was no stock option compensation
expense for other periods presented in the consolidated financial statements.
F-28
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the number and weighted average exercise price
of the Todd-AO Stock Options and the Company and Liberty Media options that were
issued in exchange for the Todd-AO options:
WEIGHTED
TODD-AO ASCENT MEDIA AVERAGE
STOCK CLASS A STOCK LIBERTY MEDIA EXERCISE
OPTIONS OPTIONS STOCK OPTIONS PRICE
--------- ------------- ------------- --------
At December 31, 1999.................................... 1,028,645 -- -- $ 6.50
Awarded............................................... 15,000 -- -- 10.94
Exercised............................................. (152,318) -- -- 6.56
Forfeited............................................. (41,936) -- -- 6.52
--------- -------- -------- ------
At June 9, 2000......................................... 849,391 -- -- 6.57
Conversion............................................ (849,391) 339,756 424,696 6.57
Exercised............................................. -- (332,348) (415,436) 6.46
Forfeited............................................. -- (7,408) (9,260) 11.40
--------- -------- -------- ------
At December 31, 2000.................................... -- -- -- $ --
========= ======== ======== ======
SFAS NO. 123 ACCOUNTING FOR STOCK BASED COMPENSATION -- STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Under SFAS No. 123, the estimated fair value of options granted during the years
ended December 31, 2002 and 2001, and the five months ended May 31, 2000 was
approximately $1.6 million, $48.2 million and $52,000, respectively. There were
no options granted during the seven months ended December 31, 2000. The fair
value of each option grant was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions: dividend yield of 0%,
volatility of 41%-113%, a risk free interest rate of 3.98%-5.00% for December
31, 2002; dividend yield of 0%-0.75%, volatility of 25-41%, a risk free interest
rate of 5.00% for December 31, 2001; and risk free interest rate of 5.65% for
May 31, 2000.
Had the Company accounted for its stock based compensation pursuant to the
fair value based accounting method in SFAS No. 123, the Company's net income
(loss) and net income (loss) per share would have changed to the pro forma
amounts indicated below (in thousands, except per share data):
ASCENT MEDIA TODD-AO
------------------------------------------ ------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ ------------
Net loss
As reported...................................... $(135,186) $(436,289) $(9,793) $(1,675)
Pro forma........................................ $(136,253) $(439,297) $(9,793) $(1,727)
Net loss per share
As reported basic and diluted.................... $ (3.07) $ (11.52) $ (0.28) $ (0.16)
Pro forma basic and diluted...................... $ (3.10) $ (11.60) $ (0.28) $ (0.16)
The above pro forma disclosures may not be representative of the effects on
reported pro forma net income for future years. The weighted average fair value
of options granted in 2002 was $2.34 per share.
STOCK APPRECIATION RIGHTS
Pursuant to the acquisition of 4MC by Liberty Media, each outstanding 4MC
stock option was converted into a stock appreciation right ("SARs") at a ratio
0.32258 shares of Liberty Media stock for each 1.0 share of 4MC stock.
F-29
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the election to exercise, holders of vested SARs have the option of
receiving any net cash appreciation of Liberty Media stock over the exercise
price in cash or shares of Liberty Media stock. On October 31, 2002, Liberty
Media made a rights offering, pursuant to which it has determined that stock
appreciation rights outstanding as of the record date will be adjusted to
account for the dilution associated with the rights offering. Effective as of
the record date, the base price of each outstanding stock appreciation right
will be reduced by 2.5%. In addition, each outstanding 4MC stock option was
converted at a ratio of 1.0256. The following table presents the number and
weighted average exercise price of SARs to purchase Liberty Media stock for the
year ended December 31, 2002 and 2001.
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SARS PRICE
--------- --------
Converted at June 9, 2000................................... 3,856,112 $12.50
Exercised................................................. (591,839) 11.59
--------- ------
At December 31, 2000........................................ 3,264,273 $12.66
Exercised................................................. (53,308) 12.66
--------- ------
At December 31, 2001........................................ 3,210,965 12.66
Exercised................................................. (55,464) 10.99
Cancelled................................................. (287,895) 13.42
--------- ------
At October 31, 2002......................................... 2,867,606 12.62
Conversion................................................ 73,410 12.30
--------- ------
At December 31, 2002........................................ 2,941,017 $12.30
========= ======
Summarized information about the outstanding SARs at December 31, 2002 is
as follows:
OUTSTANDING
--------------------------------------- EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF YEARS OF EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SARS CONTRACTUAL LIFE PRICE SARS PRICE
------------------------ --------- ---------------- -------- --------- --------
$9.82 to $12.66................................ 2,598,849 5.79 12.02 2,461,414 12.02
$13.03 to 15.11................................ 342,168 5.54 14.47 291,341 14.49
--------- --- ------ --------- ------
2,941,017 5.75 $12.30 2,752,756 $12.28
========= === ====== ========= ======
There was no accrued expense for the year ended December 31, 2002. The
accrued expense was $3.2 million as of December 31, 2001. The consolidated
statements of operations for the year ended December 31, 2002 include a non-cash
benefit of $3.2 million due to the changes in the stock price underlying the
SARs. During the year ended December 31, 2001, a $2.5 million charge was
recorded.
Upon delivery of an exercise notice to the Company by a participant in the
option plan, the Company forwards such notice to Liberty Media. Liberty Media
processes the exercise notice. If the participant has elected a cash settlement
for the options, Liberty Media will remit funds equivalent to the difference
between the Liberty Media share price established by a ten-day trailing average
as of the day prior to the exercise and the exercise price for the participant's
options multiplied by the number of shares exercised. If the participant elects
to receive Liberty Media shares directly, the participant will remit to the
Company a payment equivalent to the exercise price for the participant's options
multiplied by the number of shares exercised. Liberty Media will issue shares
directly to the participant equivalent to the number of shares exercised.
F-30
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNEARNED STOCK COMPENSATION
Pursuant to the Todd Merger, the Company entered into a consulting
agreement with an executive of Todd-AO. The consulting agreement provides for
the grant of 150,000 options of Liberty Media stock that vest 50,000 per year
over three years beginning June 9, 2000. The fair value of the stock options
recorded as unearned stock compensation on the date of the Todd Merger was $2.9
million. During the year ended December 31, 2002 and 2001, the Company recorded
$135,000 of stock compensation income and $216,000 of stock compensation
expense, respectively, based on the fluctuation in the stock price underlying
the options.
13. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) defined contribution plan covering most of its
full-time domestic employees not covered by employees eligible to participate in
the Motion Picture Industry Pension and Health Plan ("MPIPHP"), a multi-employer
defined benefit pension plan. Contributions to the MPIPHP are determined in
accordance with the provisions of negotiated labor contracts and generally are
based on the number of hours worked. The Company also sponsors a pension plan
for eligible employees of its foreign subsidiaries. Employer contributions are
determined by the Company's Board of Directors. The plans are funded by employee
and employer contributions. Total pension plan expenses for the periods
presented were as follows (in thousands):
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
MPIPH................................................ $2,082 $2,700 $ 297 $212
U.S. 401(k).......................................... 2,077 1,717 260 185
Foreign Plans........................................ 1,635 1,175 532 380
------ ------ ------ ----
$5,794 $5,592 $1,089 $777
====== ====== ====== ====
14. HEDGING ACTIVITIES
The Company uses variable-rate debt to finance its operations. The debt
obligations expose the Company to variability in interest payments due to
changes in interest rates. The Company has interest-rate related derivative
instruments to manage its exposure to fluctuations in interest rates. By using
derivative financial instruments to hedge exposures to changes in interest
rates, the Company exposes itself to credit risk and market risk. Credit risk is
the failure of the counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is positive, the
counterparty owes the Company, which creates credit risk for the Company. When
the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it does not possess credit risk. The counterparties
to the Company's contractual arrangements are major financial institutions with
which the Company also has other financial relationships. The Company monitors
the credit worthiness of its counterparties and does not expect nonperformance
by its counterparties.
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates, currency exchange rates, or
commodity prices. The market risk associated with an interest-rate contract is
managed by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking various hedge transactions. The Company links all
hedges that are designated as cash flow hedges to forecasted transactions or to
floating-rate liabilities on the balance sheet. The Company also assesses, both
at the inception of the hedge and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in cash flows of hedged items.
F-31
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging opportunities. The
Company maintains risk management control systems to monitor interest rate cash
flow risk attributable to both the Company's outstanding or forecasted debt
obligations as well as the Company's offsetting hedge positions. The risk
management control systems involve the use of analytical techniques, including
cash flow sensitivity analysis, to estimate the expected impact of changes in
interest rates on the Company's future cash flows.
At December 22, 2000, the Company entered into an interest rate swap
agreement to manage variations in cash flows resulting from interest rate risk.
This swap changed a portion of the Company's variable-rate cash flow exposure on
the debt obligations to fixed cash flows ("Variable to Fixed Swap"). Under the
terms of the interest rate swap, the Company receives variable interest rate
payments and makes fixed interest rate payments, thereby synthetically creating
the equivalent of fixed-rate debt. The Company amended the contractual terms of
the Variable to Fixed Swap several times throughout fiscal 2001 and each amended
Variable to Fixed Swap has been accounted for as a separate cash flow hedge with
the previous swap de-designated at the same time. In November 2001, the
remaining Variable to Fixed Swap designated as a cash flow hedge was
de-designated. Subsequent to de-designation, the contracts have been accounted
for as freestanding derivative instruments and changes in fair value have been
reflected in earnings. At November 1, 2001, the Company also entered into
interest rate swap agreements in which the Company receives fixed interest rate
payments and pays variable interest rate payments ("Fixed to Variable Swaps").
Changes in the fair value of the interest rate swaps designated as hedging
instruments that effectively offset the variability of cash flows associated
with variable-rate, long-term debt obligations are reported in accumulated other
comprehensive income ("AOCI"). As a result of the de-designation of the hedge on
November 1, 2001, the accumulated balance included in AOCI was and has been
reclassified into interest expense as a yield adjustment of the hedged debt
obligation in the same period in which the related interest affects earnings.
On July 1, 2002, September 20, 2002 and September 30, 2002, the Company
executed a series of transactions whereby it terminated all of its Fixed to
Variable Swaps. The total proceeds of these transactions was approximately $4.1
million.
Changes in the fair value of freestanding interest rate swaps are reported
within the statements of operations as other income or expense. Cash payments or
receipts due upon the contractual settlement of the swaps are recorded as
interest expense. No cash flow hedge ineffectiveness arose from differences
between the critical terms of the interest rate swap and the hedged debt
obligations during the ten months the Variable to Fixed Swaps were designated as
a hedge. As of December 31, 2002, $6.4 million of losses on the Variable to
Fixed Swaps included in AOCI was charged to interest expense with another $6.2
million charged to interest expense during fiscal 2001. The losses were
reclassified to interest expense as interest payments were throughout the
original terms of the Variable to Fixed Swaps.
At December 31, 2002, the Company has three Variable to Fixed Interest Rate
Swaps with a combined notional of approximately $372 million. The largest of
which is a $365 million notional swap due to expire on June 30, 2003. The
Company has chosen to maintain this swap as a stand alone derivative and will
record all changes in market value from period to period through the statement
of operations to derive the benefit of approximately $6.0 million in other
income over the next 6 months. The other two swaps are held by the Company's
subsidiaries, Todd AO UK Limited and Studio Film and Video Holdings Limited, in
the UK. These swaps were entered into on January 17, 2002 and became effective
December 10, 2002, having a combined notional of $7.2 million and a maturity of
March 10, 2016. These swaps have been designated as effective hedges to the
variability of interest rate attributable to the LIBOR interest payments due on
the respective two UK mortgage loans. The changes in fair value for these swaps
are recorded in AOCI.
F-32
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CONTINGENCIES
Future minimum lease payments under scheduled operating leases that have
initial or remaining noncancelable terms in excess of one year are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2003........................................................ $ 25,003
2004........................................................ 23,286
2005........................................................ 22,607
2006........................................................ 21,777
2007........................................................ 20,613
Thereafter.................................................. 79,691
--------
$192,977
========
Rent expense for noncancelable operating leases for real property and
equipment was $29.6 million, $28.4 million, and $13.9 million, for the years
ended December 31, 2002 and 2001, and the combined year ended December 31, 2000,
respectively. Various lease arrangements contain options to extend terms and are
subject to escalation clauses.
At December 31, 2002, the Company is committed to compensation under
long-term employment agreements with its named executive officers as follows:
2003, $2.1 million; 2004, $1.1 million; 2005, $1.1 million; 2006, $1.1 million;
and 2007, $1.1 million.
The Company is involved in litigation and similar claims incidental to the
conduct of its business. In management's opinion, none of the pending actions is
likely to have a material adverse impact on the Company's financial position or
results of operations.
16. BUSINESS SEGMENT INFORMATION
The Company's business units have been aggregated into three reportable
segments: the Creative Services Group, the Media Management Services Group, and
the Network Services Group. Corporate related items and unallocated income and
expenses are reflected in the Corporate and Other column listed below.
Additionally, Corporate and Other includes the results of our New Products Group
which is leading our efforts in Interactive Media and other new business
initiatives.
The Creative Services Group is comprised of the Company's Entertainment
Television, Commercial Television and Audio divisions, which earn revenues by
providing services necessary to complete the creation of original content
including feature films, television shows, movies of the week/mini series,
television commercials, music videos, promotional and identity campaigns and
corporate communications programming. The Media Management Services Group
provides facilities and services necessary to optimize, archive, manage and
repurpose media assets for global distribution via freight, satellite, fiber and
the Internet; access to all forms of content, duplication and formatting
services, language conversions and laybacks, restoration and preservation of old
or damaged content, mastering from motion picture film to high resolution or
data formats, digital audio and video encoding services and digital media
management services for global home video, broadcast, pay-per-view and emerging
new media distribution channels. Additionally, the Media Management Services
Group also includes the results of the Company's Digital Media Management
initiative. The Network Services Group provides services necessary to assemble
and distribute programming for cable and broadcast networks via fiber and
satellite to viewers in North America, Europe and Asia. Additionally, the
Network Services Group includes the result of the Company's Bandwidth management
initiative, predominantly Triumph, which was sold on December 23, 2002.
The Company's management identified its reportable segments based upon the
following factors: (1) the Company's Chief Operating Decision Maker (Chief
Executive Officer) reviews the results of operations for each of
F-33
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the following segments and each Group President accountable for results, (2) a
Group President's overall compensation is based upon the related segment's
results, and (3) the Company's organizational structure contains senior
executives that oversee all of these segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies and are consistent with GAAP. The
Company evaluates performance based upon several factors, including segment
income (loss) before income taxes, interest, depreciation and amortization of
intangibles.
The Company believes that EBITDA is an important measure of its financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
unusual charges such as restructuring, integration and impairment. The Company's
investments in new infrastructure, machine capacity, technology and goodwill
arising from its significant acquisition activity have produced a relatively
high depreciation and amortization expense and have historically been a
significant annual non-cash charge to earnings. EBITDA is calculated before
depreciation and amortization charges and, in businesses with significant
non-cash expenses, is widely used as a measure of cash flow available to pay
interest and repay debt, and, to the extent available after debt service and
other required uses, to make acquisitions or invest in capital equipment and new
technologies. As a result, the Company intends to report EBITDA as a measure of
financial performance. EBITDA does not represent cash generated from operating
activities in accordance with GAAP and should not be considered in isolation or
as a substitute for other measures of performance prepared in accordance with
GAAP. EBITDA does not reflect that portion of its capital expenditures that may
be required to maintain its market share, revenues and leadership position in
its industry. Moreover, not all EBITDA will be available to pay interest or
repay debt. The Company's presentation of EBITDA may not be comparable to
similarly titled measures reported by other companies. Certain reclassifications
have been made to the prior periods reported herein to conform to the current
period's presentation.
Summarized financial information concerning the Company's reportable
segments is presented in the following tables (in thousands):
MEDIA
CREATIVE MANAGEMENT NETWORK
SERVICES SERVICES SERVICES CORPORATE
ASCENT MEDIA GROUP GROUP GROUP AND OTHER TOTAL
------------ -------- ---------- -------- --------- --------
Year Ended December 31, 2002
Revenues from external customers.............. $275,119 $104,938 $159,123 $ 153 $539,333
EBITDA........................................ 50,150 30,889 51,320 (45,070) 87,289
Capital expenditures.......................... 21,819 7,457 9,958 16,118 55,352
Depreciation and amortization................. 38,778 7,483 18,863 2,148 67,272
Total assets.................................. $370,427 $154,062 $245,257 $ 23,580 $793,326
MEDIA
CREATIVE MANAGEMENT NETWORK
SERVICES SERVICES SERVICES CORPORATE
ASCENT MEDIA GROUP GROUP GROUP AND OTHER TOTAL
------------ -------- ---------- -------- --------- --------
Year Ended December 31, 2001
Revenues from external customers.............. $332,921 $104,063 $155,550 $ 198 $592,732
EBITDA........................................ 67,052 31,672 49,265 (42,246) 105,743
Capital expenditures.......................... 39,746 12,084 11,648 10,227 73,705
Depreciation and amortization................. 67,887 16,475 34,563 9,678 128,603
Total assets.................................. $450,905 $169,514 $277,929 $ 21,343 $919,691
F-34
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MEDIA
CREATIVE MANAGEMENT NETWORK
SERVICES SERVICES SERVICES CORPORATE
ASCENT MEDIA GROUP GROUP GROUP AND OTHER TOTAL
------------ -------- ---------- -------- --------- ----------
Seven Months Ended December 31, 2000
Revenues from external customers............. $177,808 $ 46,676 $ 28,615 $ -- $ 253,099
EBITDA....................................... 38,178 13,704 3,194 (20,314) 34,762
Capital expenditures......................... 55,686 3,663 10,358 6,993 76,700
Depreciation and amortization................ 30,778 6,285 5,819 8,663 51,545
Total assets................................. $577,341 $216,355 $348,774 $ 33,375 $1,175,845
MEDIA
CREATIVE MANAGEMENT NETWORK
SERVICES SERVICES SERVICES CORPORATE
TODD-AO GROUP GROUP GROUP AND OTHER TOTAL
------- -------- ---------- -------- --------- --------
Five Months Ended May 31, 2000
Revenues from external customers.............. $ 43,163 $10,080 $ -- $ -- $ 53,243
EBITDA........................................ 5,449 2,071 -- -- 7,520
Capital expenditures.......................... 3,449 589 -- -- 4,038
Depreciation and amortization................. 5,776 1,149 -- -- 6,925
Total assets.................................. $128,263 $31,185 $ -- $ -- $159,448
The following table reconciles the Company's consolidated net loss to
segment EBITDA (in thousands):
ASCENT MEDIA TODD-AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Net loss............................................. $(135,186) $(436,289) $ (9,793) $(1,675)
Add:
Change in accounting principle, net of income tax
benefit......................................... 20,227 -- -- --
Depreciation and amortization...................... 67,272 128,603 51,545 6,925
Non-cash compensation (income) expense............. (48) 4,293 (29,577) --
Impairment of long-lived assets.................... 83,718 307,932 -- --
Restructuring and other charges.................... (435) 5,558 -- --
Interest expense, net.............................. 64,820 63,119 19,132 1,641
Other (income) expense, net........................ (14,515) 10,974 (872) 1,070
Non-recurring costs................................ -- 9,985 648 --
Provision (benefit) for income taxes............... 1,436 11,568 3,679 (441)
--------- --------- -------- -------
EBITDA............................................... $ 87,289 $ 105,743 $ 34,762 $ 7,520
========= ========= ======== =======
F-35
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to the Company's operations in different geographic areas is
as follows (in thousands):
ASCENT MEDIA TODD - AO
------------------------------------------ -----------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
2002 2001 2000 2000
------------ ------------ ------------ -----------
Revenues
United States...................................... $ 420,827 $ 469,045 $ 185,520 $ 38,865
United Kingdom..................................... 93,797 100,651 59,332 14,378
Mexico............................................. 3,670 3,812 2,649 --
Asia............................................... 21,039 19,224 5,598 --
--------- --------- ---------- --------
$ 539,333 $ 592,732 $ 253,099 $ 53,243
========= ========= ========== ========
Net income (loss)
United States...................................... $(145,540) $(435,261) $ (14,383) $ (1,823)
United Kingdom..................................... 1,813 (7,638) 3,720 148
Mexico............................................. 787 523 442 --
Asia............................................... 7,754 6,087 428 --
--------- --------- ---------- --------
$(135,186) $(436,289) $ (9,793) $ (1,675)
========= ========= ========== ========
Assets
United States...................................... $ 584,874 $ 709,790 $1,001,816 $111,430
United Kingdom..................................... 142,144 122,081 152,892 48,018
Mexico............................................. 7,691 9,435 5,232 --
Asia............................................... 58,617 78,385 15,905 --
--------- --------- ---------- --------
$ 793,326 $ 919,691 $1,175,845 $159,448
========= ========= ========== ========
17. RELATED PARTY TRANSACTIONS
LIBERTY SUBORDINATED CLIENT AGREEMENT
For a discussion of the Liberty Subordinated Credit Agreement see Note 8.
STOCK SALES TO LIBERTY MEDIA
On July 24, 2002, the Company sold 440,981 unregistered shares of its Class
B common stock to Liberty Media for $3.05 per share for proceeds of
approximately $1.4 million. The proceeds of the stock sale were used to fund
part of an arbitration award.
On August 13, 2002, as part of Supplement No. 3 to the Liberty Subordinated
Credit Agreement, the Company sold 7,070,000 shares of its unregistered share of
Class B common stock at a price of $1.69 per share for a total purchase price of
$11.9 million. The closing price of the Company's Class A common stock on
September 30, 2002 was $1.57 per share.
OTHER STOCK ISSUANCES TO LIBERTY MEDIA
During the year ended December 31, 2002, the Company issued 10,436,853
shares of its Class B common stock to Liberty Media and its affiliates in
payment of $21.3 million in interest under the Liberty Subordinated Credit
F-36
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement. Shares of the Company's Class B common stock are convertible into
shares of the Company's Class A common stock, on a one-for-one basis, at any
time at the option of the holder.
TAX SHARING AGREEMENT BETWEEN LIBERTY MEDIA AND ASCENT MEDIA GROUP, INC.
In November 2000, the Company and Liberty Media became parties to a tax
sharing agreement, whereby the Company is obligated to make a cash payment to
Liberty Media in each year that it (taken together with all of the Company's
domestic subsidiaries) has positive taxable income measured on a separate return
basis. The amount of the payment would be equal to the amount of that positive
taxable income multiplied by the highest corporate tax rate. In the event that
(1) the Company and its subsidiaries, when treated as a separate group, have a
net operating loss or are entitled to a net tax credit for a particular year,
and (2) Liberty Media is able to use such loss or credit to reduce its tax
liability for any year, the Company would become entitled to a credit against
future payments to Liberty Media under the agreement. If the Company becomes
disaffiliated from Liberty Media and the group of companies that file tax
returns jointly with Liberty Media (i.e., if the value or voting power of
Liberty Media's stock ownership of the Company were to drop below 80%) prior to
the time that the Company is able to use such credit, the Company would be
entitled to a payment from Liberty Media at the earlier of the time that (1) the
Company shows it could have used the net operating loss carry forward or net tax
credit to reduce the Company's own separately computed tax liability or (2) the
value or voting power of Liberty Media's stock ownership of the Company drops
below 20%. In addition, under the tax sharing agreement, the Company has the
right to participate in the defense of claims of the Internal Revenue Service
that might affect its liability under the agreement, and to participate in tax
refunds paid to Liberty Media where such refunds are due in part to its
operations.
SERVICES RECEIVED FROM LIBERTY MEDIA
Liberty Media allocates salaries, benefits, business insurance and certain
other general and administrative expenses (including a portion of the salary of
William R. Fitzgerald, the Company's President and Chief Executive Officer) to
the Company. In addition, the Company reimburses Liberty Media for certain
expenses, such as employee medical costs, and business property and casualty
insurance paid by Liberty Media on behalf of the Company. The Company has
determined the allocated and reimbursed amounts to be reasonable and equal to
the fair value of the expenses charged. Amounts allocated from Liberty Media to
the Company totaled $14.1 million and $5.4 million for the years ended December
31, 2002 and 2001, respectively. The increase in such amounts is primarily
attributed to medical insurance being purchased through Liberty Media starting
fiscal 2002.
EXECUTIVE OFFICER LOAN
On April 8, 1999, Mr. Walston was granted a loan from Four Media Company in
the principal amount of $2.0 million in conjunction with the execution of his
agreement with Four Media Company, dated January 1, 1999, for employment as its
President and Chief Executive Officer. Four Media Company became a subsidiary of
the Company in June 2000 and Mr. Walston became the Company's acting President
and Chief Executive Officer in April 2001 and was the Company's President and
Chief Executive Officer from August 2001 to May 2002.
The loan was unsecured and bore interest at an annual rate of 4.59%,
compounded semiannually. Mr. Walston was required to repay the outstanding
balance of the loan, if any, and any accrued interest thereon, no later than May
8, 2004. Notwithstanding the foregoing terms of the loan, Mr. Walston's
employment agreement provided that the outstanding balance of the loan, if any,
and any accrued interest thereon would be automatically forgiven, upon the
occurrence of any of the following events: (1) a change of control of Four Media
Company during the five-year term of the loan; or (2) termination of Mr.
Walston's employment without cause or for good reason; or (3) the Company (as
successor to Four Media Company) achieving $327.0 million or more in
consolidated gross operating revenues (as defined in the note governing the
loan) during the 365 day period beginning April 8, 2003 (referred to in this
report as the Measurement Period); or (4) the Company (as successor to Four
Media Company) achieving $87.0 million or more in consolidated "earnings before
interest, taxes, depreciation and amortization" during the
F-37
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Measurement Period; or (5) the board of directors, in its sole and absolute
discretion, determining that the payments under the loan should be forgiven
following the expiration of the Measurement Period. In April 2000, Mr. Walston
agreed to waive the forgiveness of the loan that would otherwise have resulted
from the acquisition of Four Media Company by Liberty Media.
On January 25, 2002, the Company's Compensation Committee approved, subject
to stockholder approval, an amendment and restatement of the loan agreement (i)
to modify the performance benchmarks, which, if satisfied, would result in a
cancellation of the loan, (ii) to provide for the Company's payment of all tax
liability incurred by Mr. Walston associated with any forgiveness of the loan,
and (iii) to extend the term of the loan from May 8, 2004 to February 15, 2005.
On May 17, 2002, Mr. Walston's employment with the Company terminated and,
pursuant to his employment agreement, the outstanding balance under the loan of
$2.0 million plus accrued interest of $300,000 was automatically forgiven. The
Company is currently negotiating severance arrangements with Mr. Walston, the
terms of which have not been agreed upon.
CONSULTING AGREEMENT WITH NAMED EXECUTIVE OFFICER
The Company has entered into a three-year consulting agreement with
Lawrence Chernoff, dated November 20, 2002, pursuant to which Mr. Chernoff's
employment with the Company terminated effective December 31, 2002 and he became
a consultant to the Company effective January 1, 2003. Under the consulting
agreement, Mr. Chernoff will provide advice, guidance and consultation to the
Company with respect to (a) the operation, management, and strategic vision of
the Company's Creative Services Group, (b) marketing, client retention and
development, and new business development for the Creative Services Group, and
(c) new technologies and their deployment. For these services, Mr. Chernoff will
be paid a minimum of $350,000 per year and will have the opportunity to earn
additional compensation up to a maximum of $130,000 per year. Mr. Chernoff
received no severance payment in connection with the termination of his
employment, but 68,750 of the shares covered by Mr. Chernoff's option to
purchase 275,000 of the Company's Class A common stock vested on December 31,
2002, and will remain exercisable in accordance with the terms of the Company's
2001 Incentive Plan for so long as Mr. Chernoff remains a consultant to the
Company. The option terminated as to the remaining 206,250 shares on January 1,
2003. Mr. Chernoff's option to purchase a total of 59,139 shares of Liberty
Media Series A common stock or receive cash (47,311 shares of which have already
vested) will continue to vest in accordance with its current vesting schedule
and will remain exercisable, in accordance with the terms of the Four Media
Company 1997 Stock Plan for so long as Mr. Chernoff remains a consultant to the
Company. The term of the consulting agreement will automatically extend for two
additional one-year periods unless Mr. Chernoff gives prior notice of his
intention to terminate the consulting agreement.
18. QUARTERLY FINANCIAL DATA
The following table presents our quarterly financial data for the year
ended December 31, 2002 (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Net revenues............................................. $135,383 $128,649 $130,274 $145,027
Gross profit............................................. 53,696 50,037 51,063 62,530
Impairment charges....................................... -- -- -- 83,718
Restructuring charges.................................... -- -- -- (435)
Change in accounting principle........................... (20,227) -- -- --
Net loss................................................. (26,366) (17,912) (8,746) (82,162)
Net loss per share -- basic and diluted.................. $ (0.66) $ (0.45) $ (0.20) $ (1.56)
F-38
ASCENT MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents our quarterly financial data for the year
ended December 31, 2001 (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Net revenues............................................. $154,303 $147,702 $142,648 $ 148,079
Gross profit............................................. 62,663 55,383 52,723 51,772
Impairment charges....................................... -- -- -- 307,932
Restructuring charges.................................... -- -- -- 5,558
Net loss................................................. (13,494) (31,051) (18,376) (373,368)
Net loss per share -- basic and diluted.................. $ (0.36) $ (0.81) $ (0.48) $ (9.58)
Aggregate per share amounts for each quarter may differ from the annual
totals as each quarter is independently calculated.
F-39
SCHEDULE II
ASCENT MEDIA GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002 AND 2001,
THE SEVEN MONTHS ENDED DECEMBER 31, 2000,
AND THE FIVE MONTHS ENDED MAY 31, 2000
CHARGED ACQUIRED OR
BALANCE AT (CREDITED) TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
OF PERIOD EXPENSES ACCOUNTS AND OTHER PERIOD
---------- ------------- ----------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2002.............. $11,951 $ (963) $(1,858) $ (117)(d) $ 9,013
======= ======= ======= ======= ========
Year ended December 31, 2001.............. $ 5,567 $ 5,763 $ 684(b) $ (63) $ 11,951
======= ======= ======= ======= ========
Seven months ended December 31, 2000...... $ 1,239 $ 493 $ 3,835(a) $ -- $ 5,567
======= ======= ======= ======= ========
Five months ended May 31, 2000............ $ 1,388 $ (149) $ -- $ -- $ 1,239
======= ======= ======= ======= ========
Deferred Tax Asset Valuation Allowance:
Year ended December 31, 2002.............. $96,556 $24,681 $ 712 $(7,912)(d) $114,037
======= ======= ======= ======= ========
Year ended December 31, 2001.............. $ 2,726 $93,830 $ -- $ -- $ 96,556
======= ======= ======= ======= ========
Seven months ended December 31, 2000...... $ -- $ -- $ 2,726(c) $ -- $ 2,726
======= ======= ======= ======= ========
Five months ended May 31, 2000............ $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ========
---------------
(a) Balance acquired in acquisitions of 4MC -- $2,907,000, Soundelux -- $240,000
and Soho -- $688,000.
(b) Balance acquired in acquisitions of GWNS -- $654,000 and LNS -- $30,000.
(c) Balance acquired in acquisitions of VSC -- $1,831,000 and
Virgin -- $895,000.
(d) Sale of Triumph.
F-40
ANNEX C
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] 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 0-1461
ASCENT MEDIA GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-1679856
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
520 BROADWAY, FIFTH FLOOR 90401
SANTA MONICA, CA (Zip Code)
(Address of Principal Executive Offices)
(310) 434-7000
(Registrant's Telephone Number, Including Area Code)
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Common Stock outstanding at May 12, 2003 was
4,884,565 shares of Class A Common Stock and 56,450,469 shares of Class B Common
Stock.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASCENT MEDIA GROUP, INC.
Report on Form 10-Q for the Period Ended March 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31, 2003
(Unaudited) and December 31, 2002 (Audited)................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002 (Unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 (Unaudited)...... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 4. Controls and Procedures..................................... 24
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature................................................... 26
Certifications.............................................. 27
2
PART I -- FINANCIAL INFORMATION
ASCENT MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED) (AUDITED)
Current Assets:
Cash and cash equivalents................................. $ 8,964 $ 11,998
Trade receivables, net of allowance for doubtful accounts
of $8.3 million and $9.0 million, respectively......... 99,534 98,794
Inventories............................................... 4,688 4,314
Deferred income taxes, net................................ 5,382 6,176
Prepaid deposits and other................................ 13,348 13,159
--------- ---------
Total current assets................................... 131,916 134,441
--------- ---------
Property, plant and equipment, at cost, net of accumulated
depreciation and amortization of $90.6 million and $81.2
million, respectively..................................... 285,105 300,497
Goodwill and identifiable intangible assets, net of
accumulated amortization of $6.2 million and $39.0
million, respectively..................................... 341,253 343,057
Other assets, net........................................... 14,707 15,331
--------- ---------
Total assets........................................... $ 772,981 $ 793,326
========= =========
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations............................................ $ 17,999 $ 18,928
Accounts payable.......................................... 26,498 31,280
Accrued expenses and other liabilities.................... 53,790 61,266
Due to parent company, net................................ 15,448 14,107
--------- ---------
Total current liabilities.............................. 113,735 125,581
--------- ---------
Long-term debt and capital lease obligations................ 380,704 383,056
Convertible subordinated notes, net......................... 206,164 205,299
Deferred income taxes, net.................................. 783 1,506
Other liabilities........................................... 9,087 9,661
--------- ---------
Total liabilities...................................... 710,473 725,103
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Common Stock:
Class A; authorized 300,000,000 shares of $0.01 par
value; 4,884,565 and 4,884,559 outstanding as of March
31, 2003 and December 31, 2002, respectively.......... 49 49
Class B; convertible, authorized 100,000,000 shares of
$0.01 par value; 56,450,469 and 52,341,164 issued and
outstanding at March 31, 2003 and December 31, 2002,
respectively.......................................... 565 523
Additional paid-in capital.................................. 660,164 653,842
Treasury stock; 16,251 shares at cost at March 31, 2003 and
December 31, 2002, respectively........................... (124) (124)
Accumulated deficit......................................... (590,607) (581,268)
Other....................................................... 164 161
Accumulated other comprehensive loss........................ (7,703) (4,960)
--------- ---------
Total stockholders' equity............................. 62,508 68,223
--------- ---------
Total liabilities and stockholders' equity.................. $ 772,981 $ 793,326
========= =========
See notes to condensed consolidated financial statements
3
ASCENT MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
----------- -----------
Net revenues................................................ $ 121,439 $ 135,383
Cost of services............................................ 72,422 81,687
----------- -----------
Gross profit........................................... 49,017 53,696
----------- -----------
Operating expenses:
Selling, general and administrative....................... 29,717 31,627
Depreciation and amortization............................. 16,466 17,315
Non-cash compensation expense (income).................... 835 (903)
Gain on the sale of fixed assets.......................... (1,691) --
Restructuring and other charges........................... 2,061 --
----------- -----------
Total operating expenses............................... 47,388 48,039
----------- -----------
Income from operations...................................... 1,629 5,657
----------- -----------
Interest expense, net..................................... 15,038 15,632
Other Income, net......................................... (3,534) (3,621)
----------- -----------
Loss before income taxes and change in accounting
principle................................................. (9,875) (6,354)
Income tax benefit.......................................... (536) (215)
----------- -----------
Loss before change in accounting principle.................. (9,339) (6,139)
Change in accounting principle.............................. -- (20,227)
----------- -----------
Net loss.................................................... $ (9,339) $ (26,366)
=========== ===========
Weighted average number of common and common equivalent
shares outstanding:
Basic and diluted......................................... 56,635,541 39,742,265
=========== ===========
Net loss per common share -- basic and diluted
Loss before change in accounting principle................ $ (0.16) $ (0.15)
Change in accounting principle............................ -- (0.51)
----------- -----------
Net loss per common share................................. $ (0.16) $ (0.66)
=========== ===========
See notes to condensed consolidated financial statements
4
ASCENT MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- --------
Net cash flows provided by operating activities............. $ 141 $ 11,981
------- --------
Cash flows from investing activities:
Proceeds from disposal of fixed assets.................... 4,178 --
Capital expenditures...................................... (4,335) (15,893)
------- --------
Net cash flows used in investing activities................. (157) (15,893)
------- --------
Cash flows from financing activities:
Borrowings of long-term debt.............................. 2,539 --
Payments of long-term debt and capital lease
obligations............................................ (5,461) (2,651)
Other..................................................... -- (96)
------- --------
Net cash flows used in financing activities................. (2,922) (2,747)
------- --------
Effect of exchange rate changes on cash..................... (96) (1,836)
------- --------
Net decrease in cash and cash equivalents................... (3,034) (8,495)
Cash and cash equivalents at beginning of period............ 11,998 23,433
------- --------
Cash and cash equivalents at end of period.................. $ 8,964 $ 14,938
======= ========
See notes to condensed consolidated financial statements
5
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Ascent Media Group, Inc. ("Ascent Media" or the "Company") provides
creative and technical media services to the media and entertainment industries,
including: services necessary to complete the creation of content including
feature films, television shows, television commercials, music videos,
promotional and identity campaigns and corporate communications programming;
services necessary to facilitate the global maintenance, management and
distribution of content libraries; and services necessary to assemble and
distribute programming. The Company's 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, corporate, educational, industrial and advertising content.
The Company's assets and operations are primarily comprised of the
historical business of the Company, formerly known as the Todd-AO Corporation
and nine companies acquired during 2001 and 2000: Four Media Company ("4MC");
Virgin Media Group Limited ("Virgin"); the sound post-production and certain
related businesses of Soundelux Entertainment Group of Delaware, Inc.
("Soundelux"); Video Services Corporation ("VSC"); Group W Network Services and
100% of the capital stock of Asia Broadcast Centre Pte. Ltd. and Group W
Broadcast Pte. Ltd. (collectively "GWNS"); Livewire Network Services, LLC
("LNS"); Soho Group Limited ("Soho"); Visiontext Limited ("Visiontext"); and
Cinram-POP DVD Center LLC now known as Stream Santa Monica ("Stream"). The
combination and integration of these acquired entities allow the Company to
offer integrated outsourcing solutions for the technical and creative
requirements of the Company's clients, from content creation to distribution of
the final product.
2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments (consisting
of those of a normal recurring nature) necessary for a fair presentation of the
results for such periods. The results of operations for any interim period are
not necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. The preparation
of financial statements in conformity with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Certain
reclassifications have been made to prior period balances in order to conform to
the current period presentation.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
transactions and accounts.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which addresses the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002. The
Company does not have any guarantees that require disclosure under FIN 45.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of a guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not
6
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements. The initial recognition and measurement provisions are effective for
all guarantees within the scope of FIN 45 issued or modified after December 31,
2002.
As noted above the Company has adopted the disclosure requirements of FIN
45 and will apply the recognition and measurement provisions for all guarantees
entered into or modified after December 31, 2002. For the quarter ended March
31, 2003, the Company has not entered into any guarantees within the purview of
FIN 45.
In February 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addresses the consolidation by business
enterprises of variable interest entities, which have one or both of the
following characteristics: (1) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional financial
support from other parties, or (2) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: (a) the
direct or indirect ability to make decisions about the entity's activities
through voting or similar rights, (b) the obligation to absorb the expected
losses of the entity if they occur, or (c) the right to receive the expected
residual returns of the entity if they occur. FIN 46 will have a significant
effect on existing industry practice because it requires existing variable
interest entities to be consolidated if those entities do not effectively
disburse risks among parties involved. In addition, FIN 46 contains detailed
disclosure requirements. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. This Interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The Company believes the adoption of FIN 46 will not have a
material impact on our financial statements. As of March 31, 2003, the Company
does not have any Variable Interest Entities.
In November 2002, the FASB's Emerging Issues Task Force issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, EITF 00-21
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying EITF 00-21,
separate contracts with the same entity or related parties that are entered into
at or near the same time are presumed to have been negotiated as a package and
should, therefore, be evaluated as a single arrangement in considering whether
there are one or more units of accounting. That presumption may be overcome if
there is sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate units
of accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Alternatively, companies may elect to report the change in accounting as a
cumulative-effect adjustment. Early application of this consensus is permitted.
The Company believes the adoption of EITF 00-21 will not have a material impact
on our financial statements.
4. POLICY FOR STOCK BASED COMPENSATION
Accounting for Stock Based Compensation. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock Based Compensation -- Transition and
Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.
The Company has one stock-based employee compensation plan. The Company
applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations including FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25, issued in March 2000, to account for its
7
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the then current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net loss and loss per share if the Company had applied
the fair-value-based method as amended by SFAS 148 (in thousands, except per
share data).
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
---------------------
2003 2002
--------- ---------
Net loss reported........................................... $ (9,339) $(26,366)
Less: compensation expense under fair value method.......... (1,468) (1,416)
Add: compensation expense reported.......................... 797 1,038
-------- --------
Pro forma net loss........................................ $(10,010) $(26,744)
======== ========
Net loss per share
As reported basic and diluted............................. $ (0.16) $ (0.66)
======== ========
Pro forma basic and diluted............................... $ (0.18) $ (0.67)
======== ========
5. RESTRUCTURING CHARGES
During the quarter ended March 31, 2003, the Company completed certain
restructuring activities designed to improve operating efficiencies and
effectiveness and to strengthen its competitive position in the marketplace
primarily through cost and expense reductions. In connection with these
integration and consolidation initiatives, the Company recorded a charge of $2.1
million for consolidation of facilities and closure related costs in the
Creative Services Group both domestically and in the United Kingdom. The
restructuring charge includes $1.2 million for employee severance, $715,000
related to excess lease commitments as a result of facility closures and
$176,000 for contract exit costs.
The following table provides the activity and balances of the 2003
restructuring reserve account for the quarter ended March 31, 2003 (in
thousands):
OPENING
BALANCE ADDITIONS DEDUCTIONS 3/31/03
------- --------- ---------- -------
Employee separations..................................... $ -- 1,170 (865) 305
Excess facility costs.................................... -- 715 (32) 683
Contract exit costs...................................... -- 176 (64) 112
----- ------ ----- ------
$ -- $2,061 $(961) $1,100
===== ====== ===== ======
During the fourth quarter of 2001, the Company recorded a charge of $5.6
million for restructuring, which included $5.2 million related to excess lease
commitments as a result of facility closures and $425,000 for employee
severance.
8
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the activity and balances of the 2001
restructuring reserve account for the quarter ended March 31, 2003 (in
thousands):
12/31/02 ADDITIONS DEDUCTIONS 3/31/03
-------- --------- ---------- -------
Excess facility costs................................... $2,227 $ -- $(148) $2,079
Employee separations.................................... -- -- -- --
------ ----- ----- ------
$2,227 $ -- $(148) $2,079
====== ===== ===== ======
The Company's continuing efforts to integrate acquired businesses may
require further charges for facility closures and employee separation plans.
6. COMPREHENSIVE LOSS
Comprehensive loss is defined as all changes in shareholders' equity,
except those resulting from investments by or distributions to shareholders. The
Company's comprehensive loss is as follows (amounts in thousands):
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
---------------------
2003 2002
--------- ---------
Net loss.................................................... $ (9,339) $(26,366)
Unrealized loss on cash flow hedge........................ (125) --
Loss on foreign currency translation...................... (2,618) (2,273)
Reclassification adjustment for amortization of loss on
cash flow hedge........................................ -- 2,016
-------- --------
Net loss recognized in other comprehensive income......... (2,743) (257)
-------- --------
Total comprehensive loss.................................... $(12,082) $(26,623)
======== ========
7. LONG-TERM DEBT
SENIOR CREDIT AGREEMENT
At March 31, 2003, $360.3 million (including letters of credit of $600,000)
was outstanding under the Senior Credit Agreement, dated December 22, 2000, as
amended, among the Company, various lenders who are parties thereto, Banc of
America Securities LLC, as lead arranger and book manager, BANK OF AMERICA,
N.A., as administrative agent for the lenders, Salomon Smith Barney, Inc., as
syndication agent, and The Bank of New York Company, Inc., as documentation
agent (the "Senior Credit Agreement"), and $3.6 million was available for future
borrowings, subject to the terms of the Senior Credit Agreement. During the
quarter ended March 31, 2003, the Company repaid $3.6 million under the Senior
Credit Agreement. No borrowings were made under the Senior Credit Agreement in
the first quarter. The Senior Credit Agreement loans are collateralized by
substantially all of the operating assets of the Company.
The Senior Credit Agreement requires financial ratios to be maintained and
contains other restrictive covenants including restrictions on incurring
additional indebtedness. As of March 31, 2003, the Company was in compliance
with all covenants in the Senior Credit Agreement.
Under the Senior Credit Agreement, the Company's Total Leverage Ratio may
not exceed 4.55 to 1.00 for any measurement period from December 31, 2002 to
June 30, 2003 and is reduced over subsequent measurement periods until it
reaches a Total Leverage Ratio of 3.50 to 1.00 for measurement periods after
January 1, 2005. At March 31, 2003, the Company's Total Leverage Ratio was 4.43
to 1.00. Additionally, the Company's Interest Coverage Ratio may not be less
than 2.50 to 1.00 for any quarter ending prior to December 31, 2003, and may not
be less than 3.00 to 1.00 for any quarter thereafter. The Company's Interest
Coverage Ratio at March 31, 2003 was 3.11 to 1.00. For any measurement period
beginning January 1, 2003, the Company's Fixed Charge Coverage Ratio may not be
less
9
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than 0.85 to 1.00, and increases over the succeeding two quarters until October
1, 2003, when the Company's Fixed Charge Coverage Ratio may not be less than
1.00 to 1.00 for the remainder of the term of the Senior Credit Agreement. At
March 31, 2003, the Company's Fixed Charge Coverage Ratio was 1.14 to 1.00.
As of March 31, 2003, the outstanding borrowings under the Senior Credit
Agreement consisted of Term loan A in the amount of $117.6 million, Term loan B
in the amount of $56.8 million and a revolving credit facility (the "Revolver")
in the amount of $185.9 million (which includes outstanding letters of credit in
the amount of $600,000).
Interest related to the Senior Credit Agreement is paid monthly, bi-monthly
or quarterly in arrears and is based on the "Alternate Base Rate" or the
"Eurodollar Rate," whichever is applicable to the loan, plus applicable margins.
The Alternate Base Rate is a daily fluctuating rate per annum equal to the
higher of the Federal Funds Rate plus 0.5% or the Prime Rate. The Eurodollar
Rate is the rate per annum equal to the average British Bankers Association
Interest Settlement Rate for deposits in the relevant currency or an alternate
base, as defined in the agreement, if that rate is unavailable. As of March 31,
2003, the effective interest rates on Term loan A, Term loan B and the Revolver
borrowings were 4.54%, 5.29% and 4.55%, respectively.
LIBERTY SUBORDINATED CREDIT AGREEMENT
At March 31, 2003, $224.3 million was outstanding under the First Amended
and Restated Credit Agreement, as amended and supplemented, between the Company
and Liberty Media Corporation ("Liberty Media") (the "Liberty Subordinated
Credit Agreement") and $81.9 million was available for future borrowings under
the terms of the Liberty Subordinated Credit Agreement with the consent of, and
on terms determined by, Liberty Media.
Of the $224.3 million outstanding at March 31, 2003 under the Liberty
Subordinated Credit Agreement: (1) $206.2 million is represented by convertible
subordinated notes, which are convertible at the option of Liberty Media at any
time prior to maturity into shares of the Company's Class B common stock
("Convertible Notes") at a conversion price of $10.00 per share, (2) $8.8
million is represented by Convertible Notes having a conversion price of $3.50
per share, (3) $5.3 million is represented by a Convertible Note having a
conversion price of $1.94 per share, and (4) $4.0 million is represented by a
Convertible Note having a conversion price of $1.56 per share. Interest accrues
on each of the Convertible Notes at a rate of 10% per annum, payable quarterly
either in cash, shares of the Company's Class B common stock (valued at 95% of
the ten-day trailing average closing price of shares of the Company's Class A
common stock ending one trading day prior to interest payment date) or a
combination thereof, at the Company's discretion, subject to certain limits.
During the three months ended March 31, 2003, the Company issued 4,109,305
shares of its Class B common stock to Liberty Media and its affiliates in
payment of $5.5 million in interest under the Liberty Subordinated Credit
Agreement. Shares of the Company's Class B common stock are convertible into
shares of the Company's Class A common stock, on a one-for-one basis, at any
time at the option of the holder.
PROPERTY MORTGAGES AND OTHER DEBT
At March 31, 2003, the Company owed $7.7 million under an existing mortgage
loan with Bank of the West. Interest under the loan accrues at a three-month
London interbank market rate ("LIBOR") plus 2.25% per annum and the effective
interest rate at March 31, 2003 was 3.65%.
At March 31, 2003, the Company owed $6.3 million to Heller Financial
Leasing Inc. pursuant to an existing loan secured by certain equipment. Interest
on the loan is based on the relevant three-month LIBOR plus 3.25%, and the
effective interest rate at March 31, 2003 was 4.58% per annum.
At March 31, 2003, three of the Company's subsidiaries in the United
Kingdom owed to National Westminster Bank Plc. an aggregate of $18.0 million
under four existing mortgage loans. The aggregate amount includes $2.5 million
in borrowings under these loans, which was borrowed during the quarter ended
March 31, 2003. Interest
10
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on each of these loans is calculated based on the relevant one, two, three or
six-month LIBOR plus 1.25%, and as of March 31, 2003, the effective interest
rate on the loans was 6.43% per annum.
At March 31, 2003, the Company was a party to capital leases in the
aggregate amount of $6.8 million related to purchases of equipment with a
weighted average interest rate of 13.72%.
8. EARNINGS PER SHARE
As a result of losses, convertible subordinated notes, warrants and stock
options that could potentially dilute basic earnings per share in the future
were excluded in the computation of diluted earnings per share because to
include them would have had an antidilutive effect.
9. FINANCIAL INSTRUMENTS
The Company's statement of operations for the three months ending March 31,
2003 includes $3.0 million of non-cash income related to mark-to-market
adjustments on interest rate swap agreements which had a combined fair market
value of $3.4 million at March 31, 2003 in favor of our counterparties.
Additionally, during the three months ended March 31, 2003, the Company realized
non-cash interest expense of $44,000.
10. BUSINESS SEGMENT INFORMATION
The Company's business units have been aggregated into three reportable
segments: the Creative Services Group, the Media Management Services Group, and
the Network Services Group. Corporate related items and unallocated income and
expenses are reflected in the Corporate and Other column listed below.
Additionally, Corporate and Other includes the results of our New Products Group
which is leading our efforts in Interactive Media and other new business
initiatives.
The Creative Services Group is comprised of the Company's Entertainment
Television, Commercial Television and Audio divisions, which earn revenues by
providing services necessary to complete the creation of original content
including feature films, television shows, movies of the week/mini series,
television commercials, music videos, promotional and identity campaigns and
corporate communications programming. The Media Management Services Group
provides facilities and services necessary to optimize, archive, manage and
repurpose media assets for global distribution via freight, satellite, fiber and
the Internet; access to all forms of content, duplication and formatting
services, language conversions and laybacks, restoration and preservation of old
or damaged content, mastering from motion picture film to high resolution or
data formats, digital audio and video encoding services and digital media
management services for global home video, broadcast, pay-per-view and emerging
new media distribution channels. Additionally, the Media Management Services
Group also includes the results of the Company's Digital Media Management
initiative. The Network Services Group provides services necessary to assemble
and distribute programming for cable and broadcast networks via fiber and
satellite to viewers in North America, Europe and Asia. Additionally, during
2002 the Network Services Group included the result of the Company's bandwidth
management initiative, Triumph, which was sold on December 23, 2002.
The Company's management identified its reportable segments based upon the
following factors: (1) the Company's Chief Operating Decision Maker (Chief
Executive Officer) reviews the results of operations for each of the following
segments and each Group President is accountable for such results, (2) a Group
President's overall compensation is based upon the related segment's results,
and (3) the Company's organizational structure contains senior executives that
oversee all of these segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies and are consistent with GAAP. The
Company evaluates segment performance based upon several factors, however,
segment Adjusted EBITDA as defined below is the primary measure of segment
performance as it most directly reflects operating results that are managed and
controlled by segment management.
11
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Adjusted EBITDA" is defined by the Company as earnings before interest,
taxes, depreciation and amortization, and excludes non-cash compensation
expense, restructuring charges, gain (loss) on disposal of assets, asset
impairment and other non-cash charges, other income (expense) and changes in
accounting principle. The Company's investments in new infrastructure, machine
capacity, technology and goodwill arising from its significant acquisition
activity have produced a relatively high depreciation and amortization expense
and have historically been a significant annual non-cash charge to earnings.
Because depreciation and amortization reflect primarily the effects of past
capital expenditures and investments, the Company's executive management and
Board of Directors use and historically have used Adjusted EBITDA as a measure
of current operating performance of the Company's business segments and,
accordingly, the primary measure for determining the incentive compensation of
individuals in charge of such segments and assisting management in strategic
planning and allocating corporate resources. Because the Company's executive
management and Board of Directors use Adjusted EBITDA for such purposes, items
which are not within the control of a Group's President or which would affect
the comparability of the segment's performance with past periods are excluded
from the definition of Adjusted EBITDA. Adjusted EBITDA does not reflect
interest expense, changes in working capital and certain other cash requirements
of the Company's business segments, and, as a result, it is not intended to
represent cash flows for the period, or to reflect funds available for
reinvestment or other discretionary uses. Adjusted EBITDA has not been presented
as an alternative to income (loss) from operations, net income (loss) or cash
flows from operating activities and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with GAAP. The
Company's presentation of Adjusted EBITDA for its segments may not be comparable
to similarly titled measures reported by other companies.
The following table reconciles the Company's net loss to total segment
adjusted EBITDA (in thousands):
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
----------------------
2003 2002
--------- ----------
Net loss.................................................... $(9,339) $(26,366)
Add:
Depreciation and amortization............................. 16,466 17,315
Interest expense.......................................... 15,038 15,632
Non cash compensation expense............................. 835 (903)
Restructuring charges..................................... 2,061 --
Gain on disposal of assets................................ (1,691) --
Change in accounting principle............................ -- 20,227
Other income.............................................. (3,534) (3,621)
Benefit for taxes......................................... (536) (215)
------- --------
Total segment Adjusted EBITDA............................... $19,300 $ 22,069
======= ========
12
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
---------------------
2003 2002
--------- ---------
Segment Revenues
Creative Services Group................................... $ 67,223 $ 73,430
Media Management Services Group........................... 24,320 24,704
Networks Services Group................................... 29,896 37,249
-------- --------
$121,439 $135,383
======== ========
Segment Adjusted EBITDA
Creative Services Group................................... $ 10,531 $ 14,553
Media Management Services Group........................... 4,877 6,857
Networks Services Group................................... 11,355 10,828
Corporate and Other....................................... (7,463) (10,169)
-------- --------
$ 19,300 $ 22,069
======== ========
11. RELATED PARTY TRANSACTIONS
LIBERTY SUBORDINATED CREDIT AGREEMENT
At March 31, 2003, $224.3 million was outstanding under the Liberty
Subordinated Credit Agreement and $81.9 million was available for future
borrowings under the terms of the Liberty Subordinated Credit Agreement with the
consent of, and on terms determined by, Liberty Media.
During the three months ended March 31, 2003, the Company issued 4,109,305
shares of its Class B common stock to Liberty Media and its affiliates in
payment of $5.5 million in interest under the Liberty Subordinated Credit
Agreement. Shares of the Company's Class B common stock are convertible into
shares of the Company's Class A common stock, on a one-for-one basis, at any
time at the option of the holder.
SERVICES RECEIVED FROM LIBERTY MEDIA
Liberty Media allocates to the Company a portion of salaries, benefits, and
certain other expenses for Liberty Media employees (including the Company's
President and Chief Executive Officer) who provide services to the Company. In
addition, the Company reimburses Liberty Media for certain expenses, such as
employee medical costs and property, casualty and financial insurance paid by
Liberty Media on behalf of the Company. The Company has determined the allocated
and reimbursed amounts to be reasonable and equal to the fair value of the
expenses charged. Amounts allocated from Liberty Media to the Company totaled
$3.3 million for the quarter ended March 31, 2003.
SERVICES AGREEMENTS WITH ON COMMAND CORPORATION
Beginning in September 2002, the Company began supplying On Command
Corporation ("On Command"), a controlled subsidiary of Liberty Media, with
uplink and satellite transport services at a cost of $150,000 through March 31,
2003 pursuant to a short-term agreement with On Command. On Command was
utilizing the Company's services to test the satellite delivery of content
updates to On Command's downlink sites at various hotels. The Company executed a
Content Preparation and Distribution Services Agreement, dated March 24, 2003,
with a wholly-owned subsidiary of On Command, under which the Company will
provide uplink and satellite transport
13
ASCENT MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services for a monthly fee of $36,000, subject to adjustment, for a period of
five years and content preparation services valued at a negotiated rate for each
use of covered services for a period of five years at On Command's request. The
parties also entered into a Services Agreement, dated April 1, 2003, for the
installation by the Company of satellite equipment at On Command's downlink
sites at hotels for a fee of $500 per installation completed.
12. SALE OF PROPERTY
On February 28, 2003, the Company sold one of its domestic real estate
property for $4.2 million, net of expenses, and recognized a gain on sale of
fixed assets of $1.7 million.
13. DIVESTITURE
On December 23, 2002, the Company sold to Leafco Communications, Inc. all
of its equity interest in Triumph Communications for nominal consideration plus
the assumption of net liabilities in the amount of $4.0 million. In connection
with this sale, the Company entered into an agreement to loan the buyer an
amount not to exceed $4.0 million. As of March 31, 2003, such loan agreement has
been terminated by the parties and the buyer has repaid to the Company all
monies advanced to buyer pursuant to this loan. In connection with this loan
termination, the Company entered into an agreement to loan Rapco Enterprises,
Inc., an affiliate of Leafco Communications, Inc., $2.0 million. The above
transactions, in the aggregate, resulted in a gain from the divestiture of $1.6
million, which was recorded in the quarter ended December 31, 2002.
14. SUBSEQUENT EVENT
ACQUISITION BY LIBERTY MEDIA
On April 25, 2003, Liberty Media announced that it has adopted a plan of
merger to acquire all the issued and outstanding shares of the Company that it
does not already own. Pursuant to the terms of the merger, the Company's
stockholders would receive 0.1147 shares of Liberty Media Series A common stock
for each share of the Company's Class A common stock. Liberty Media currently
owns all the issued and outstanding shares of the Company's Class B common
stock. The transaction is intended to be taxable to the public holders of the
Company's common stock, for U.S. federal income tax purposes.
Because Liberty Media owns in excess of 90% of the outstanding common stock
of the Company, the merger is expected to be accomplished as a "short form"
merger under Delaware law. As a result, neither the approval of the Company's
board of directors nor a vote of its stockholders is required to effect the
merger; however, statutory appraisal rights will be available to stockholders of
the Company who elect to assert such rights, subject to compliance with the
procedures established by Delaware law. The transaction is not subject to any
substantive regulatory conditions, other than the filing and effectiveness of a
registration statement covering the shares of Liberty Media Series A common
stock to be issued in the merger. Liberty Media may terminate the plan of merger
at any time prior to closing if it determines, in its sole discretion, that the
merger is no longer in its best interest. The merger is expected to close during
the third quarter of 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information concerning our
results of operations and financial condition and should be read in conjunction
with the accompanying condensed consolidated financial statements and notes
thereto. Additionally, the following discussion and analysis should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2002. The following discussion focuses
on material trends, risks and uncertainties affecting our results of operations
and financial condition.
Certain statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements that, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, the Company expresses an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
- industry-wide market factors such as the timing of, and spending on,
feature film and television production;
- foreign and domestic television advertising;
- foreign and domestic spending by broadcasters, cable companies and
syndicators on first run and existing content libraries;
- the possibility of an industry-wide strike or other job action by or
affecting the Writers Guild, Screen Actors Guild or other major
entertainment industry union;
- failure to maintain relationships with key customers and certain key
personnel;
- more rapid than expected technological obsolescence;
- failure to integrate acquired operations in expected time frames;
- continuing negative economic conditions potentially impacting our ability
to maintain compliance with our debt covenants.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this quarterly report, and the Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based. For a
discussion of additional factors which may affect future results of operations,
see "-- Factors That May Affect Future Results of Operations" below.
OVERVIEW
Ascent Media Group 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 content.
Our assets and operations are primarily comprised of ten companies acquired
during 2001 and 2000. The combination and integration of these acquired entities
allow us to offer our clients a complete range of services, from image capture
to "last mile" distribution. We are able to offer outsourcing solutions for the
technical and creative requirements of our clients. We have organized our
facilities and operations into the three business segments, that we call Groups,
as described below.
Creative Services Group. Our Creative Services Group provides services
necessary to complete the creation of original content including feature films,
television shows, movies of the week/mini series for television, television
commercials, music videos, promotional and identity campaigns and corporate
communications programming. Our services begin after principal photography and
cover a wide range of services necessary to complete a project. This may include
film to video tape transfers, color correction, creative editorial services,
graphics and title sequences,
15
electronic assembly, two-dimension compositing, creation of computer generated
images, sound editorial, sound mixing, music composition, sound design and
integration of interactive program elements. The Creative Services Group has
three divisions: Entertainment Television, Commercial Television and Audio.
Media Management Services Group. Our Media Management Services Group
optimizes, archives, manages and repurposes media assets for global
distribution. We provide access to all forms of content, duplication and
formatting services, language conversions and laybacks, restoration and
preservation of old or damaged content, mastering from motion picture film to
high resolution or data formats, digital audio and video encoding services and
digital media management services for global home video, broadcast,
pay-per-view, video-on-demand, streaming media and other emerging new media
distribution channels.
Network Services Group. Our Network Services Group provides the services
necessary to assemble and distribute programming for cable and broadcast
networks via fiber and satellite to audiences in North America, Europe and Asia.
Our Network Services Group primarily provides dedicated facilities and resources
designed for specific client requirements on the basis of contractual
agreements.
ADJUSTED EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION FOR
BUSINESS SEGMENTS
"Adjusted EBITDA" is defined by the Company as earnings before interest,
taxes, depreciation and amortization, and excludes non-cash compensation
expense, restructuring charges, gain (loss) on disposal of assets, asset
impairment and other non-cash charges, other income (expense) and changes in
accounting principle. The Company's investments in new infrastructure, machine
capacity, technology and goodwill arising from its significant acquisition
activity have produced a relatively high depreciation and amortization expense
and have historically been a significant annual non-cash charge to earnings.
Because depreciation and amortization reflect primarily the effects of past
capital expenditures and investments, the Company's executive management and
Board of Directors use and historically have used Adjusted EBITDA as a measure
of current operating performance of the Company's business segments and,
accordingly, the primary measure for determining the incentive compensation of
individuals in charge of such segments and assisting management in strategic
planning and allocating corporate resources. Because the Company's executive
management and Board of Directors use Adjusted EBITDA for such purposes, items
which are not within the control of a Group's President or which would affect
the comparability of the segment's performance with past periods are excluded
from the definition of Adjusted EBITDA. Adjusted EBITDA does not reflect
interest expense, changes in working capital and certain other cash requirements
of the Company's business segments, and, as a result, it is not intended to
represent cash flows for the period, or to reflect funds available for
reinvestment or other discretionary uses. Adjusted EBITDA has not been presented
as an alternative to income (loss) from operations, net income (loss) or cash
flows from operating activities and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with GAAP. The
Company's presentation of Adjusted EBITDA for its segments may not be comparable
to similarly titled measures reported by other companies.
A NOTE ON ADJUSTED EBITDA FOR BUSINESS SEGMENTS
The Securities and Exchange Commission promulgated new rules regarding the
use of non-GAAP financial measures in January 2003. Under these new rules, a
non-GAAP financial measure is defined generally as a numerical measure of a
registrant's historical or future financial performance, financial position or
cash flows that: (1) excludes amounts, or is subject to adjustments that have
the effect of excluding amounts, that are included in the most directly
comparable measure calculated and presented in accordance with GAAP; or (2)
includes amounts, or is subject to adjustments that have the effect of including
amounts, that are excluded from the most directly comparable measure calculated
and presented in accordance with GAAP. Among other exceptions, non-GAAP
financial measures do not include financial measures which are required to be
disclosed by GAAP. Because we have reported segment Adjusted EBITDA pursuant to
and in accordance with SFAS No. 131, such financial measures are not considered
to be non-GAAP financial measures. We, in common with other registrants, are
still in the process of interpreting such rules and monitoring developments and
guidance by the SEC with respect to such rules to ensure continued compliance.
While we believe that the presentation in this report complies with the new
rules, we can give no assurance that we will be able to provide the same or
comparable measures of our segments in future reports of the Company.
16
CRITICAL ACCOUNTING POLICIES
Valuation of Long-lived Assets and Amortizable Other Intangible Assets. We
perform impairment tests for our long-lived assets if an event or circumstance
indicates that the carrying amount of our long-lived assets may not be
recoverable. In response to changes in industry and market conditions, we may
also strategically realign our resources and consider restructuring, disposing
of, or otherwise exiting businesses. Such activities could result in impairment
of our long-lived assets or other intangible assets. We are subject to the
possibility of impairment of long-lived assets arising in the ordinary course of
business. We regularly consider the likelihood of impairment and recognize
impairment if the carrying amount of a long-lived asset or intangible asset is
not recoverable from its undiscounted cash flows in accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. Impairment is
measured as the difference between the carrying amount and the fair value of the
asset.
Valuation of Goodwill and Non-amortizable Other Intangible Assets. We
assess the impairment of goodwill annually and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include
significant underperformance to historical or projected future operating
results, substantial changes in our strategy or the manner of use of our assets,
and significant negative industry or economic trends. Effective January 1, 2002,
we adopted SFAS No. 142 and in accordance with its provisions, during the first
quarter of fiscal year 2002, we recorded a transitional impairment charge of
$20.2 million against goodwill related to our Entertainment Television reporting
unit, which is part of our Creative Services Group. Such charge has been
reflected as a cumulative effect of a change in accounting principle.
Accounting for Stock Based Compensation. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock Based Compensation -- Transition and
Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.
We have one stock-based employee compensation plan. We apply the
intrinsic-value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations including FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25, issued in March 2000, to account for our fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, we have elected to continue to apply the intrinsic-value-based
method of accounting described above, and have adopted only the disclosure
requirements of SFAS No. 123.
Valuation of Trade Receivables. We must make estimates of the
collectibility of our trade receivables. Our management analyzes the
collectibility based on historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms. We record an allowance for doubtful accounts based upon specifically
identified receivables that we believe are uncollectible. In addition, we also
record an amount based upon a percentage of each aged category of our trade
receivables. These percentages are estimated based upon our historical
experience of bad debts. Our trade receivables balance was $99.5 million, net of
allowance for doubtful accounts of $8.3 million, as of March 31, 2003.
Valuation of Deferred Tax Assets. In accordance with SFAS No. 109,
Accounting for Income Taxes, we review the nature of each component of our
deferred income taxes for reasonableness. We have determined that it is more
likely than not that we will not realize a portion of our tax benefits
associated with certain cumulative net operating loss carry forwards and
impairment reserves, and as such, we have reserved for a portion of our deferred
income tax assets and incurred charges of $.3 million and $2.9 million during
the three months ended March 31, 2003 and 2002.
RESULTS OF OPERATIONS
The Creative Services Group's revenues are primarily generated from fees
for video and audio post production, special effects and editorial services for
the television, film and advertising industries. The Media Management
17
Services Group provides owners of film libraries a broad range of restoration,
preservation, archiving, professional mastering and duplication services. The
Media Management Services Group's results also include our Digital Media
Management initiative. The Network Services Group's revenues consist of fees
relating to facilities and services necessary to assemble and distribute
programming for cable and broadcast networks across the world via fiber and
satellite. During 2002, the Network Services Group's results also included our
Bandwidth Management initiative, Triumph, which was sold on December 23, 2002.
Corporate related items and unallocated revenues and expenses are reflected in
Corporate and Other, below. Additionally, Corporate and Other includes the
results of our New Products Group which is leading our efforts in developing new
products and businesses such as VOD and SVOD, Interactive Television and Store
and Forward. Cost of services and operating expenses consists primarily of
production wages, facility costs and other direct costs, selling, general and
administrative expenses, depreciation and amortization and impairment charges.
COMPARISON OF REPORTED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002 (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
---------------------
2003 2002
--------- ---------
Segment Revenues
Creative Services Group................................... $ 67,223 $ 73,430
Media Management Services Group........................... 24,320 24,704
Network Services Group.................................... 29,896 37,249
-------- --------
$121,439 $135,383
======== ========
Segment Adjusted EBITDA
Creative Services Group................................... $ 10,531 $ 14,553
Media Management Services Group........................... 4,877 6,857
Network Services Group.................................... 11,355 10,828
Corporate and Other....................................... (7,463) (10,169)
-------- --------
$ 19,300 $ 22,069
======== ========
Net Loss.................................................... $ (9,339) $(26,366)
======== ========
The following table reconciles the Company's net loss to total segment
Adjusted EBITDA (in thousands):
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
----------------------
2003 2002
--------- ----------
Net loss.................................................... $(9,339) $(26,366)
Add:
Depreciation and amortization............................. 16,466 17,315
Interest expense.......................................... 15,038 15,632
Non cash compensation expense............................. 835 (903)
Restructuring charges..................................... 2,061 --
Gain on disposal of assets................................ (1,691) --
Change in accounting principle............................ -- 20,227
Other income.............................................. (3,534) (3,621)
Benefit for taxes......................................... (536) (215)
------- --------
Total segment Adjusted EBITDA............................... $19,300 $ 22,069
======= ========
Revenues decreased $14.0 million, or 10.3%, to $121.4 million for the three
months ended March 31, 2003 from $135.4 million for the three months ended March
31, 2002. Creative Services Group revenues decreased by
18
$6.2 million primarily in our Entertainment Television and Audio operations.
Entertainment Television revenues were lower due to the abnormally early
cancellation of several episodic television shows in the current season and
lower than historical mid-season replacement activity and higher levels of
reality-based programming that typically requires less post production services.
Further, a planned facility closure resulted in reduced capacity in our Audio
business as we continued to streamline our operations. Media Management Services
Group revenues decreased marginally by $.4 million. Network Services Group
revenues decreased by $7.4 million, $5.6 million resulting from the sale of
Triumph and $1.8 million resulting from the negative impact of some renegotiated
contracts offset by new business.
Costs of services decreased $9.3 million, or 11.3%, to $72.4 million for
the three months ended March 31, 2003 from $81.7 million for the three months
ended March 31, 2002. The decrease reflects a decline across all of our Groups
primarily in production material, production personnel and equipment expenses as
a result of the decreased production activity noted above.
Selling, general and administrative expenses decreased $1.9 million, or
6.0%, to $29.7 million for the three months ended March 31, 2003 from $31.6
million for the three months ended March 31, 2002. The decrease is primarily
attributed to lower professional and legal fees, facility charges and other
discretionary expenses.
As a result of the above, Adjusted EBITDA, as defined, for all business
segments decreased $2.8 million, or 12.7%, to $19.3 million for the three months
ended March 31, 2003, from $22.1 million for the three months ended March 31,
2002. Creative Services Group Adjusted EBITDA decreased $4.0 million, or 27.6%,
to $10.5 million as a result of decreased revenues described above and lower
margin reality based programming replacing mid-season cancelled episodic
television shows. The negative impact was offset by higher margin DVD business
and cost savings. Media Management Services Group Adjusted EBITDA decreased $2.0
million, or 28.9%, to $4.9 million resulting from lower margin business, timing
of major customer activity, and higher quarter over quarter labor and facility
costs. Network Services Group Adjusted EBITDA increased $.5 million, or 4.6%, to
$11.4 million due to the sale of Triumph, offset by reduced margins as a result
of renegotiated large contracts and a $500,000 legal settlement during the
quarter. Corporate and Other Adjusted EBITDA increased from ($10.2 million) to
($7.5 million) primarily due to reduced costs resulting from timing of
expenditures associated with legal and professional fees and the consolidation
of our corporate facilities.
Depreciation and amortization decreased $849,000, or 4.9%, to $16.5 million
for the three months ended March 31, 2003, from $17.3 million for the three
months ended March 31, 2002. The decrease is primarily attributed to the Network
Services Group as a result of the sale of Triumph and Corporate and Other as a
result of the sale of certain domestic real estate property.
Non-cash compensation expense increased $1.7 million to $835,000 for the
three months ended March 31, 2003, from $903,000 in income reported for the
three months ended March 31, 2002. Results for the three months ended March 31,
2003 primarily included expense of $800,000 relating to stock options issued to
employees in all segments pursuant to our 2001 incentive compensation plan. The
income recorded in the three months ended March 31, 2002 related primarily to
the decline in value of the underlying stock used to value employee SARs of $1.9
million offset by expense of $1.0 million relating to stock options issued
pursuant to our 2001 incentive compensation plan.
Corporate and Other disposed of certain domestic real estate property for
$4.2 million net of expenses resulting in a gain on sale of fixed assets of $1.7
million.
During the three months ended March 31, 2003, we recognized a restructuring
charge of $2.1 million related to consolidation of facilities and
closure-related costs in the Creative Services Group both domestically and in
the UK. The restructuring charge includes $1.2 million for employee severance,
$715,000 related to excess lease commitments as a result of planned facility
closures and $176,000 for contract exit costs.
Interest expense decreased $594,000, or 3.8%, to $15.0 million for the
three months ended March 31, 2003, from $15.6 million for the three months ended
March 31, 2002. The decrease in interest expense is primarily attributed to no
longer amortizing unrealized losses on terminated interest rate swaps in the
three months ended March 31, 2003, which were amortized in the three months
ended March 31, 2002, resulting in a lower non-cash interest expense. Such
decrease was offset by higher cash interest expense due to increased pricing
margins on our Senior Credit Agreement, effective as of the third amendment of
the Senior Credit Agreement dated November 13, 2002, and higher non-cash
interest expense due to increased borrowings under the Liberty Subordinated
Credit Agreement.
19
Interest expense for the quarter ended March 31, 2003 included $5.5 million of
non-cash expense related to payments under the Liberty Subordinated Credit
Agreement, $4.2 million related to interest under our Senior Credit Agreement,
$3.2 million related to interest rate swaps, $1.3 million of interest related to
capital leases, notes and mortgages, and $866,000 of amortization of debt
discount and debt issuance cost.
Other income decreased $87,000, or 2.4%, to $3.5 million for the three
months ended March 31, 2003 from $3.6 million for the three months ended March
31, 2002. For the three months ended March 31, 2003, other income primarily
includes $3.0 million related to the increase in the market value of certain
freestanding interest rate swap instruments compared to the $3.2 million
increase for the three months ended March 31, 2002.
As a result of the above, the loss before income taxes and change in
accounting principle increased $3.5 million, or 54.7%, to $9.9 million for the
three months ended March 31, 2003 from $6.4 million for the three months ended
March 31, 2002.
The benefit for income taxes increased $321,000, to $536,000 for the three
months ended March 31, 2003, from $215,000 for the three months ended March 31,
2002, primarily due to additional benefits recorded for our foreign operations.
Our effective income tax benefit rate for the three months ended March 31, 2003
was approximately 5.42% primarily due to disallowed deductions for interest
expense of $6.4 million.
On January 1, 2002, we had adopted SFAS No. 142 and in accordance with its
provisions, we had recorded a transitional impairment charge of $20.2 million,
which was reflected as a cumulative effect of a change in accounting principle
in the three months ended March 31, 2002. This change primarily related to
goodwill at the Creative Services Group. No impairment was recognized for the
three months ended March 31, 2003.
As a result of the above, our net loss decreased $17.1 million, or 64.8%,
to $9.3 million for the three months ended March 31, 2003 from $26.4 million for
the three months ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We continue to monitor the credit markets and other sources of capital in
case we are unable to generate sufficient cash flow from operations to service
our indebtedness or to make capital expenditures and other discretionary
investments. If we are required to raise capital in the future, there can be no
assurance that we will be able do so on favorable terms. If we are unable to
generate sufficient cash flow from operations in the future to service our debt
and working capital needs, we may be required to reduce capital expenditures,
sell assets or refinance all or a portion of our existing debt or obtain
additional financing. Our ability to make scheduled principal debt payments, to
pay interest or to refinance our indebtedness depends on our future financial
position and results of operations, which, to a certain extent, are subject to
general conditions in or affecting our industry and our customers and to general
economic, political, financial, competitive, legislative and regulatory factors
beyond our control.
We expect to fund our capital expenditure requirements with cash flows from
operating activities and, to the extent permitted by the Senior Credit
Agreement, proceeds derived from leasing transactions and sales of non-
strategic assets. To the extent that such cash flows, leasing transactions and
proceeds may be insufficient (after servicing our existing indebtedness and
funding our working capital requirements) to provide adequate funds for planned
capital expenditures, we are exploring alternatives to funding capital
expenditures consistent with the restrictions contained in the Senior Credit
Agreement, such as loans and equity investments. Although we monitor the credit
markets and other sources of capital, there can be no assurance that we will be
able to secure funds for capital expenditures or that, if such funds are
available, such funds will be available on favorable terms. If we cannot obtain
additional funds for our capital expenditures, and the cash flows, leasing
transactions and proceeds described above are insufficient (after servicing our
existing indebtedness and funding our working capital requirements) to provide
adequate funds for planned capital expenditures, we may be required to reduce
our planned capital expenditures. Any such reduction in capital expenditures may
have a negative effect on our business.
20
CASH FLOWS
Cash provided by operating activities for the three months ended March 31,
2003, was $141,000 as compared to $11.9 million for the three months ended March
31, 2002. The decrease in net cash flows provided from operations is primarily
attributable to lower revenue and changes in working capital. Cash and cash
equivalents were $9.0 million at March 31, 2003, a decrease of $6.0 million from
March 31, 2002. This decrease relates primarily to cash used for payments on
long-term debt and capital lease obligations.
Net cash used in investing activities was $157,000 for the three months
ended March 31, 2003 compared to $15.9 million for the three months ended March
31, 2002. During the three months ended March 31, 2003, we invested $4.3 million
in property, plant and equipment and sold one of our domestic real estate
property for $4.2 million, net of expenses. For the three months ended March 31,
2002, we invested $15.9 million in property, plant and equipment.
Net cash used in financing activities was $2.9 million for the three months
ended March 31, 2003 compared to $2.7 million for the three months ended March
31, 2002. During the three months ended March 31, 2003, we repaid $5.5 million
of principal borrowings, $3.6 million under the Senior Credit Agreement and $1.9
million in mortgages and capital lease obligations. Additionally, we borrowed
$2.5 million under an existing building mortgage. No borrowings were made under
the Liberty Subordinated Credit Agreement or the Senior Credit Agreement during
the three months ended March 31, 2003.
SENIOR CREDIT AGREEMENT
At March 31, 2003, $360.3 million (including letters of credit of $600,000)
was outstanding under the Senior Credit Agreement, dated December 22, 2000, as
amended, among the Company, various lenders who are parties thereto, Banc of
America Securities LLC, as lead arranger and book manager, BANK OF AMERICA,
N.A., as administrative agent for the lenders, Salomon Smith Barney, Inc., as
syndication agent, and The Bank of New York Company, Inc., as documentation
agent (the "Senior Credit Agreement"), and $3.6 million was available for future
borrowings, subject to the terms of the Senior Credit Agreement. During the
quarter ended March 31, 2003, the Company repaid $3.6 million under the Senior
Credit Agreement. No borrowings were made under the Senior Credit Agreement in
the first quarter. The Senior Credit Agreement loans are collateralized by
substantially all of the operating assets of the Company.
The Senior Credit Agreement requires financial ratios to be maintained and
contains other restrictive covenants including restrictions on incurring
additional indebtedness. As of March 31, 2003, the Company was in compliance
with all covenants in the Senior Credit Agreement.
Under the Senior Credit Agreement, the Company's Total Leverage Ratio may
not exceed 4.55 to 1.00 for any measurement period from December 31, 2002 to
June 30, 2003 and is reduced over subsequent measurement periods until it
reaches a Total Leverage Ratio of 3.50 to 1.00 for measurement periods after
January 1, 2005. At March 31, 2003, the Company's Total Leverage Ratio was 4.43
to 1.00. Additionally, the Company's Interest Coverage Ratio may not be less
than 2.50 to 1.00 for any quarter ending prior to December 31, 2003, and may not
be less than 3.00 to 1.00 for any quarter thereafter. The Company's Interest
Coverage Ratio at March 31, 2003 was 3.11 to 1.00. For any measurement period
beginning January 1, 2003, the Company's Fixed Charge Coverage Ratio may not be
less than 0.85 to 1.00, and increases over the succeeding two quarters until
October 1, 2003, when the Company's Fixed Charge Coverage Ratio may not be less
than 1.00 to 1.00 for the remainder of the term of the Senior Credit Agreement.
At March 31, 2003, the Company's Fixed Charge Coverage Ratio was 1.14 to 1.00.
As of March 31, 2003, the outstanding borrowings under the Senior Credit
Agreement consisted of Term loan A in the amount of $117.6 million, Term loan B
in the amount of $56.8 million and a revolving credit facility (the "Revolver")
in the amount of $185.9 million (which includes outstanding letters of credit in
the amount of $600,000).
Interest related to the Senior Credit Agreement is paid monthly, bi-monthly
or quarterly in arrears and is based on the "Alternate Base Rate" or the
"Eurodollar Rate," whichever is applicable to the loan, plus applicable margins.
The Alternate Base Rate is a daily fluctuating rate per annum equal to the
higher of the Federal Funds Rate plus 0.5% or the Prime Rate. The Eurodollar
Rate is the rate per annum equal to the average British Bankers Association
21
Interest Settlement Rate for deposits in the relevant currency or an alternate
base, as defined in the agreement, if that rate is unavailable. As of March 31,
2003, the effective interest rates on Term loan A, Term loan B and the Revolver
borrowings were 4.54%, 5.29% and 4.55%, respectively.
LIBERTY SUBORDINATED CREDIT AGREEMENT
At March 31, 2003, $224.3 million was outstanding under the First Amended
and Restated Credit Agreement, as amended and supplemented, between the Company
and Liberty Media Corporation ("Liberty Media") (the "Liberty Subordinated
Credit Agreement") and $81.9 million was available for future borrowings under
the terms of the Liberty Subordinated Credit Agreement with the consent of, and
on terms determined by, Liberty Media.
Of the $224.3 million outstanding at March 31, 2003 under the Liberty
Subordinated Credit Agreement: (1) $206.2 million is represented by convertible
subordinated notes, which are convertible at the option of Liberty Media at any
time prior to maturity into shares of the Company's Class B common stock
("Convertible Notes") at a conversion price of $10.00 per share, (2) $8.8
million is represented by Convertible Notes having a conversion price of $3.50
per share, (3) $5.3 million is represented by a Convertible Note having a
conversion price of $1.94 per share, and (4) $4.0 million is represented by a
Convertible Note having a conversion price of $1.56 per share. Interest accrues
on each of the Convertible Notes at a rate of 10% per annum, payable quarterly
either in cash, shares of the Company's Class B common stock (valued at 95% of
the ten-day trailing average closing price of shares of the Company's Class A
common stock ending one trading day prior to interest payment date) or a
combination thereof, at the Company's discretion, subject to certain limits.
During the three months ended March 31, 2003, the Company issued 4,109,305
shares of its Class B common stock to Liberty Media and its affiliates in
payment of $5.5 million in interest under the Liberty Subordinated Credit
Agreement. Shares of the Company's Class B common stock are convertible into
shares of the Company's Class A common stock, on a one-for-one basis, at any
time at the option of the holder.
PROPERTY MORTGAGES AND OTHER DEBT
At March 31, 2003, the Company owed $7.7 million under an existing mortgage
loan with Bank of the West. Interest under the loan accrues at a three-month
London interbank market rate ("LIBOR") plus 2.25% per annum and the effective
interest rate at March 31, 2003 was 3.65%.
At March 31, 2003, the Company owed $6.3 million to Heller Financial
Leasing Inc. pursuant to an existing loan secured by certain equipment. Interest
on the loan is based on the relevant three-month LIBOR plus 3.25%, and the
effective interest rate at March 31, 2003 was 4.58% per annum.
At March 31, 2003, three of the Company's subsidiaries in the United
Kingdom owed to National Westminster Bank Plc. an aggregate of $18.0 million
under four existing mortgage loans. The aggregate amount includes $2.5 million
in borrowings under these loans, which was borrowed during the quarter ended
March 31, 2003. Interest on each of these loans is calculated based on the
relevant one, two, three or six-month LIBOR plus 1.25%, and as of March 31,
2003, the effective interest rate on the loans was 6.43% per annum.
At March 31, 2003, the Company was a party to capital leases in the
aggregate amount of $6.8 million related to purchases of equipment with a
weighted average interest rate of 13.72%.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Factors that may affect future results of operations include, but are not
limited to, industry-wide market factors such as the timing of, spending on, and
technological, regulatory or other developments in feature film and television
programming production, foreign and domestic television advertising production,
and foreign and domestic spending by broadcasters, cable companies and
syndicators on first run and existing content libraries. In addition, our
failure to maintain relationships with key customers and certain key personnel,
the possibility of an industry-wide strike or other job action by a major
entertainment industry union, more rapid than expected technological
obsolescence, significant capital expenditure investments prior to generating
revenue, and any failure to compete in the highly-competitive post-production
business could also cause actual results to differ materially from those
described in forward-looking statements.
22
We have incurred significant indebtedness to fund past acquisitions. This
indebtedness may result in a significant percentage of our cash flow being
applied to the payment of interest, and there can be no assurance that our
operations will generate sufficient cash flow to service the indebtedness. This
indebtedness, as well as any indebtedness we may incur in the future, may
adversely affect our ability to finance operations, as financial covenant
limitations reach their maximum, which could limit our ability to pursue
business opportunities that may be in our best interests and that of our
stockholders.
As part of our business strategy, we have acquired substantial operations
in several different geographic locations in 2001 and 2002. These businesses
have experienced varying profitability or losses in recent periods. Since the
dates of acquisition, we have continued to work extensively on the integration
of these businesses. However, there can be no assurances regarding the ultimate
success of our integration efforts or regarding our ability to maintain or
improve the results of operations of these businesses.
We derive our revenue primarily from services provided to the motion
picture and television production industries and the content distribution
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 content distribution industry is highly competitive with several
companies providing services similar to ours. Our existing credit agreements
currently limit our ability to make capital investments. There are no assurances
that we will be able to obtain or fund the implementation of 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 have technology that enables them to provide
services that are more reliable, faster, less expensive, reach more customers or
have other advantages over the services we provide, then the demand for our
services may decrease.
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 and 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 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.
The rescheduling or cancellation of several significant projects may have a
material effect on our quarterly and/or annual operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
We seek to reduce cash flow volatility associated with changes in interest
rates by entering into financial arrangements intended to provide a hedge
against a portion of the risks associated with such volatility. We continue to
have exposure to such risks to the extent they are not hedged. We assess
interest rate cash flow risk by continually identifying and monitoring changes
in interest rate exposures that may adversely impact expected future cash flows
and by evaluating hedging opportunities. Interest rate swap agreements are the
primary instruments used to manage interest rate fluctuation affecting our
$383.4 million of variable rate debt primarily associated with our Senior Credit
Agreement. At March 31, 2003, we had three interest rate swap agreements with a
combined fair market value of $4.1 million in favor of our counterparties. In
one swap agreement, we receive variable interest rate payments and make fixed
interest rate payments on a notional amount of $365.0 million. This swap
agreement matures on June 30,
23
2003. In addition, we have two interest rate swap agreements in the UK with a
fair value of $700,000 in favor of our counterparties. These swap agreements
mature on March 10, 2016. These swap agreements have the effect of creating a
fixed interest rate with respect to $372.0 million of our $383.4 million
floating (or variable) interest rate debt. Had market interest rates been 100
basis points higher throughout the three months ended March 31, 2003, we would
have recorded an increase of approximately $958,435 of additional interest
expense on our floating (variable) rate debt, offset by a reduction of interest
expense of approximately $930,054 on our interest rate swaps.
FOREIGN CURRENCY RISK
We continually monitor our economic exposure to changes in foreign exchange
rates and may enter into foreign exchange agreements where and when appropriate.
Whenever possible, we utilize local currency borrowings to fund foreign
acquisitions. At March 31, 2003, we did not have any foreign exchange
agreements. Substantially all of our foreign transactions are denominated in
foreign currencies, including the liabilities of our foreign subsidiaries.
Although our foreign transactions are not generally subject to significant
foreign exchange transaction gains or losses, the financial statements of our
foreign subsidiaries are translated into United States dollars as part of our
consolidated financial reporting. As a result, fluctuations in exchange rates
affect our financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer performed
an evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934, as
amended) as of a date within 90 days prior to the filing of this report. Based
on this evaluation, the Company's chief executive officer and chief financial
officer conclude that such controls and procedures effectively insure that
information required to be disclosed in this report is appropriately recorded,
processed and reported. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments that have not been previously
reported in our legal proceedings disclosure in Part I, Item 3 of our Annual
Report on Form 10-K for the year ended December 31, 2002, filed March 27, 2003,
with the Securities and Exchange Commission. In addition, there have been no new
reportable events during the quarter ended March 31, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2003, the Company issued 4,109,305
shares of its Class B common stock to Liberty Media and its affiliates in
payment of $5.5 million in interest under the Liberty Subordinated Credit
Agreement. Such issuance was not registered under the Securities Act of 1933, as
amended, pursuant to the exemption from registration afforded by Section 4(2) of
that Act. Shares of the Company's Class B common stock are convertible into
shares of the Company's Class A common stock, on a one-for-one basis, at any
time at the option of the holder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
For a description of matters submitted to a vote of the Company's
stockholders during the period covered by this report, see "Item 4. Submission
of Matters to a Vote of Security Holders" in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
24
ITEM 5. OTHER INFORMATION
ACQUISITION BY LIBERTY MEDIA
On April 25, 2003, Liberty Media announced that it has adopted a plan of
merger to acquire all the issued and outstanding shares of the Company that it
does not already own. Pursuant to the terms of the merger, the Company's
stockholders would receive 0.1147 shares of Liberty Media Series A common stock
for each share of the Company's Class A common stock. Liberty Media currently
owns all the issued and outstanding shares of the Company's Class B common
stock. The transaction is intended to be taxable to the public holders of the
Company's common stock, for U.S. federal income tax purposes.
Because Liberty Media owns in excess of 90% of the outstanding common stock
of the Company, the merger is expected to be accomplished as a "short form"
merger under Delaware law. As a result, neither the approval of the Company's
board of directors nor a vote of its stockholders is required to effect the
merger; however, statutory appraisal rights will be available to stockholders of
the Company who elect to assert such rights, subject to compliance with the
procedures established by Delaware law. The transaction is not subject to any
substantive regulatory conditions, other than the filing and effectiveness of a
registration statement covering the shares of Liberty Media Series A common
stock to be issued in the merger. Liberty Media may terminate the plan of merger
at any time prior to closing if it determines, in its sole discretion, that the
merger is no longer in its best interest. The merger is expected to close during
the third quarter of 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. Pursuant to Commission Release 34-47551, this
certification shall not be deemed to be filed with the
Commission but shall be deemed to accompany this report.
(b) Reports on Form 8-K.
None.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASCENT MEDIA GROUP, INC.
Date: May 15, 2003
By: /s/ GEORGE C. PLATISA
-------------------------------------
George C. Platisa
Executive Vice President
and Chief Financial Officer
26
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William R. Fitzgerald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ascent Media
Group, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ WILLIAM R. FITZGERALD
---------------------------------------
William R. Fitzgerald
Chief Executive Officer
27
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, George C. Platisa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ascent Media
Group, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ GEORGE C. PLATISA
---------------------------------------
George C. Platisa
Chief Financial Officer
28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Liberty Media's certificate of incorporation and bylaws provide for
indemnification of the officers and directors of Liberty Media to the fullest
extent permitted by law. Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL") provides that a Delaware corporation has the power to eliminate
or limit the personal liability of a director for violations of the director's
fiduciary duty, except (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or redemptions),
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL provides that a corporation may indemnify any
persons, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was a director, officer, employee or agent of such corporation, or
is or was serving at the request of such corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith or incorporated herein by
reference:
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Agreement and Plan of Contribution and Merger, dated as of
May 8, 2003, among Liberty Media Corporation, Liberty LWR,
Inc., Ascent Media Debt, Inc. and Amethyst Merger Sub, Inc.+
3.1 Restated Certificate of Incorporation of Liberty Media
Corporation (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 of Liberty Media
Corporation, File No. 333-55998, as filed on February 21,
2001 (the "Split Off S-1 Registration Statement")).
3.2 Bylaws of Liberty Media Corporation (incorporated by
reference to Exhibit 3.4 to the Split Off S-1 Registration
Statement).
4.1 Specimen certificates for shares of Series A common stock,
par value $.01 per share, of Liberty Media Corporation
(incorporated by reference to Exhibit 4.1 to the Split Off
S-1 Registration Statement).
5.1 Opinion of Baker Botts L.L.P., as to the legality of the
securities being registered.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG Audit Plc.
23.3 Consent of KPMG LLP.
23.4 Consent of Baker Botts L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney.+
---------------
+ Previously filed.
II-1
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on May 27, 2003.
LIBERTY MEDIA CORPORATION
By: /s/ ROBERT R. BENNETT
-------------------------------------
Robert R. Bennett
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons (which
persons constitute a majority of the Board of Directors) in the capacities and
on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
* Chairman of the Board May 27, 2003
------------------------------------------------
John C. Malone
* President, Chief Executive Officer and May 27, 2003
------------------------------------------------ Director
Robert R. Bennett (Principal Executive Officer)
* Executive Vice President, Chief Operating May 27, 2003
------------------------------------------------ Officer and Director
Gary S. Howard
* Senior Vice President and Treasurer May 27, 2003
------------------------------------------------ (Principal Financial Officer)
David J.A. Flowers
* Senior Vice President and Controller May 27, 2003
------------------------------------------------ (Principal Accounting Officer)
Christopher W. Shean
* Director May 27, 2003
------------------------------------------------
Paul A. Gould
* Director May 27, 2003
------------------------------------------------
Donne F. Fisher
* Director May 27, 2003
------------------------------------------------
Jerome H. Kern
* Director May 27, 2003
------------------------------------------------
David E. Rapley
* Director May 27, 2003
------------------------------------------------
Larry E. Romrell
/s/ MARC A. LEAF
------------------------------------------------
Attorney in Fact
II-3