Artisan Entertainment Inc. Business Information, Profile, and History

Company Perspectives:

Artisan Entertainment is not afraid to step up and assume the mantle of the industry's number one full-service independent film studio. With its aggressive decision-making style, filmmaker-friendly approach, diverse holdings, and combined industry experience, Artisan's ascension is firmly on course.

History of Artisan Entertainment Inc.

Artisan Entertainment Inc. produces, distributes, and markets motion pictures. Specializing in independent films, Artisan has had box office triumphs with movies such as The Blair Witch Project. However, the bulk of Artisan's revenues are derived from its home video distribution arm, which controls the licenses to a library of over 2,000 movies including Terminator 2: Judgment Day, Dirty Dancing, and Reservoir Dogs. Artisan's library enables the company to remain independent in an era when most other formerly unaffiliated production companies (often referred to as 'indies') have been purchased by major studios. Artisan also operates a division that produces, acquires, and distributes programming for cable and pay-per-view television. Owned by an investor group headed by Bain Capital, Artisan has undergone several changes in ownership and management. Founded in 1981 as Family Home Video, the company's name was changed first to International Video Entertainment (I'VE), later to LIVE Entertainment Cos., and finally in 1998 to Artisan.

Formation of Original Company: 1981

Noel C. Bloom founded Family Home Entertainment in 1981. Bloom, who had initially entered the video business as a distributor of pornographic videos, recognized the growth potential of the fledgling home video industry. Although videocassette recorders were still a novelty at the time, Bloom forged relationships with several film production companies which provided Family Home Entertainment with the license to manufacture and distribute video copies of films. Family Home Entertainment concentrated mostly on children's titles.

In 1984, Bloom incorporated his enterprise as International Video Entertainment (I'VE), which included the Family Home Entertainment label, as well as USA Home Video, Monterey Video, and Thrillervideo. By 1986, video distribution had become such a lucrative operation that companies such as I'VE were able to help underwrite the costs of movies in exchange for their video rights. Securing the rights to even a single popular title could be a boon for a company. As Bloom commented to the San Diego Union-Tribune in 1984, for example, distributing Bo Derek's film Bolero was like 'shipping gold.'

Under the Leadership of Carolco: 1987-93

Despite its early successes, however, I'VE fell deeply into debt during its expansion. At the close of 1986, I'VE posted a net loss of $20 million, despite an infusion of cash resulting from the purchase of 25 percent of the company by Carolco Pictures Inc.--an independent film company responsible for the phenomenally popular 'Rambo' movies. 'I'VE was a mess, probably on the verge of bankruptcy,' a securities analyst told the Los Angeles Times in 1986. 'Carolco bought ... in the hope and belief they could turn it around.' By January 1987, Carolco had completed its acquisition of I'VE, and the video distributor became a subsidiary of Carolco.

Faced with I'VE's outstanding potential-and at the same time its substantial problems--Carolco appointed Jose Menendez, a well-respected former executive at RCA, to head up its new subsidiary. Menendez immediately returned I'VE to profitability by aggressively seeking video distribution contracts with independent producers. Relying on his strong Hollywood connections, Menendez sealed up deals with Ed Pressman (the producer of Oliver Stone's hit film Wall Street), as well as with action-picture star Sylvester Stallone. 'Menendez ... took a second-rate home video supplier and made a business out of it,' an analyst told the Los Angeles Daily News on August 26, 1990.

In June 1987, Menendez oversaw I'VE's acquisition of Lieberman Enterprises, the second largest U.S. distributor of music and home videos. With this purchase, I'VE could tap into Lieberman's substantial mass market distribution network to stores such as Wal-Mart in the Midwest. Menendez instituted additional changes when he cut I'VE's employees from 550 down to 167. The following year, I'VE was rechristened LIVE Entertainment. Profits for 1988 soared to $16 million, as LIVE released a number of hit rental titles such as Teenage Mutant Ninja Turtles and Rambo III.

The year 1989 brought further changes to LIVE. The company moved its headquarters from Thousand Oaks to Van Nuys, California. It also made its initial foray into the retail sector of the market in June of that year with its acquisition of BeckZack Corp., which controlled an 81-store chain of audio and home video retail stores called Strawberries. However, the year would prove more memorable because of Menendez's tragic death. Both he and his wife were shot repeatedly at close range in their Beverly Hills home, fueling rumors in the media of LIVE's supposed mob connections. Newspapers pondered whether Menendez's death was connected to I'VE's seedy roots (the California Attorney General had issued a report on organized crime in 1986 which fingered Bloom as a 'major distributor of X-rated movies,' according to the August 25, 1989, Wall Street Journal). However, all such suppositions of a link between LIVE, organized crime, and Menendez's death were eventually refuted when Menendez's own sons--Lyle and Eric--were convicted of their father's heinous murder.

Shaken by the fallout, the company conducted an extensive search to find Menendez's successor. Finally, in 1990, Wayne Patterson, a former chairman of Pace Membership Warehouse, was named LIVE's chairman and chief executive officer. The company's troubles did not end, however. LIVE's parent company, Carolco, fell prey to a host of financial problems. As the Los Angeles Times explained on January 21, 1991, 'Carolco ha[d] long been known for its big budget movies and lavish spending, even by Hollywood standards.' The studio's freewheeling ways racked up debt, which forced it to cut back on production. Since nearly one-third of LIVE's revenues were derived from sales of videotapes of Carolco films, Carolco's troubles directly impacted LIVE. Moreover, LIVE's chain of retail stores began to report heavy losses.

LIVE's resources were further taxed by the company's decision to enter into strategic partnerships with several movie companies. In 1990 alone, LIVE signed long-term preproduction deals to distribute videos from a slew of movie companies, including Miramax Films, New Visions Pictures, Avenue Pictures, Gladden Entertainment, Scotti Brothers Films, and Working Title Films. The same year, LIVE bought Munich-based VCL, the leading home video distributor in Germany. This was an important transaction because it marked LIVE's first effort to establish for itself an international presence. LIVE also acquired Navarre Corp., a music and PC software distributor that LIVE integrated into its Lieberman operations. Adding to this spate of acquisitions, LIVE's Strawberries division purchased Waxie Maxie, a 33-store chain of audio and video products. But LIVE was not finished. In 1991, it completed a deal that had been nearly a year in the making, when it spent over $60 million to bring Vestron, Inc. into its fold. This new property was a video distributor and movie maker that had been faltering ever since the tremendous success of its 1987 release Dirty Dancing. However, this purchase made sense for LIVE because Vestron's video library included such profitable titles as Platoon and the 'National Geographic' series, as well as the ever popular Dirty Dancing.

LIVE and Carolco proposed merging in 1991. Late in the year, however, both companies' stock prices dropped precipitously, forestalling any future discussion of unification--the spotlight focused on both companies only illuminated the financial difficulties each faced. In an effort to pare its operations, LIVE sold Lieberman Enterprises to Handleman Co. Further shaking up the company, CEO Patterson resigned in December 1991, and was replaced by David Mount, formerly the head of LIVE's Home Video Division.

Financial Collapse in 1993

Although LIVE took in a significant amount of money on the strength of its 1991 video release of Terminator 2: Judgment Day, the company reported losses of $107 million on earnings of $361 million. LIVE scored some commercial success in 1992 with its release on video of the Academy Award-winning film The Crying Game, as well as Basic Instinct. Even more noteworthy was LIVE's entrance into movie production in 1992 with Reservoir Dogs and Light Sleeper. Nevertheless, saddled particularly by the albatross of its retail division, LIVE lost $14.8 million in 1992, and total revenue for the year had dropped 19 percent. By the close of 1992, LIVE was '[c]onstrained by debt and a lack of capital, and in danger of defaulting on its bonds,' according to the January 11, 1994, Los Angeles Times. As a result of its dire financial situation, the company filed a 'prepackaged' bankruptcy petition in February 1993.

LIVE's time in bankruptcy proceedings was mercifully short. The company emerged in March 1993, with court approval to issue new notes and preferred stock in order to retire its old debt. Carolco survived its own restructuring, and surrendered its share of LIVE to a group of major investors, led by Pioneer Electronic Corporation.

Charting a New Course: 1994

In 1994, Roger Burlage took the helm at LIVE. His influence as CEO was profound. As the Hollywood Reporter explained on April 21, 1997, Burlage was 'instrumental in transforming LIVE from being essentially an acquirer and supplier of home video product into a diversified entertainment company that compete[d] with major Hollywood studios.' One of his first actions was to shed LIVE's foundering and unprofitable retail division. After selling Strawberries and Waxie Maxie, he turned his attention to diversifying the company. To this end, Burlage launched a domestic television production unit and steered the company toward devoting more energy to producing and distributing its own original films. Nevertheless, LIVE did not abandon its primary focus on video distribution. In 1994 the company released the Academy Award-winning The Piano, followed the next year by the hit movie Stargate. After LIVE returned to profitability in 1995, the company debuted five films for theatrical release, including The Substitute, The Arrival, and Trees Lounge.

New Ownership, New Direction: 1997

Despite Burlage's efforts to transform LIVE into a new sort of company--one rooted in movie production as well as home video distribution--his freedom to operate was constrained by pressure from LIVE's shareholders, particularly after the publicly traded company lost $3.4 million in 1996. 'His hands have been tied by the market,' an analyst noted to the Hollywood Reporter. In April 1997, this situation changed dramatically, when LIVE agreed to be acquired for $150 million in cash by an investor group led by Bain Capital of Boston and Richland Gordon & Co. Not only did this transaction provide LIVE with the $49 million it needed to pay off long-term debt, but it also made LIVE a private company, no longer dependent on the whims of the market. After settling a shareholder suit in July related to the buyout, LIVE's new owners quickly took action to streamline the company. In August, 40 of LIVE's 166 jobs were cut, and it was widely speculated that LIVE's investors wanted to strip down the company and sell it in a few months, or else abandon film production altogether.

LIVE's new management was perfectly frank about their goals for the company. As the Los Angeles Times explained on July 27, 1998, the three leading voices at LIVE 'loudly vowed to turn it into the preeminent independent motion picture studio.' Although Burlage was initially retained as LIVE's chairman, new executives Bill Block, Mark Curcio, and Amir Malin strove to craft a new image for LIVE, as well as a new purpose. Block, a former ICM agent, and Malin, once a partner at October Films, were installed as LIVE's co-presidents, and began to plot LIVE's creative course. Curcio, who had been a financial consultant at Bain Capital, oversaw financial matters.

Block, Malin, and Curcio sought to explore LIVE's potential as an independent film producer. Other prominent indies, such as Miramax, New Line, Orion, and October Films, had recently been subsumed into larger movie studios. But LIVE afforded unique opportunities. Unlike almost all other independent studios, LIVE controlled one of the largest home video libraries in the country. 'From both a management and shareholder perspective, we saw tremendous value in LIVE's video library,' Malin told Video Business. 'It's very difficult for companies to survive without a library that offsets the vagaries of the box office.' The steady stream of revenue that LIVE's home video distribution provided could carry the company steadily through the financial turbulence of independent film production.

Soon after the management trio took control of LIVE, the company rereleased the 1987 hit film Dirty Dancing (whose rights it had acquired in the Vestron deal) to theaters nationwide. In September 1997, LIVE debuted a home-grown product, director Wes Craven's horror film Wishmaster, which opened in 2,500 U.S. theaters. In October 1997, LIVE broke new ground again when it signed a long-term contract with Showtime Networks Inc., in which Showtime (a premium cable television channel) received exclusive television rights for all LIVE films released at theaters between September 1, 1997, and December 31, 2000.

Birth of Artisan Entertainment

After these accomplishments, LIVE focused on polishing its image. 'We are tarnished by the past,' Curcio confided in the Los Angeles Times on July 27, 1998, referring to the Menendez scandal, as well as to some mediocre films LIVE had created. To emphasize a break with the past, the company changed its name to Artisan Entertainment in April 1998. 'We decided Artisan best described our drive and dedication in bringing quality entertainment to audiences worldwide,' Curcio said in a press release explaining the company's new moniker. At the same time, Artisan moved its corporate headquarters from the San Fernando Valley to Santa Monica, and into a facility that could not only house all of the company's growing divisions, but was also closer to the Hollywood pulse. Artisan also moved into a new loft space in New York's Tribeca district to shore up the company's East Coast and international connections. Even more important to Artisan's reinvention were the relationships it formed with top filmmakers. With acclaimed directors such as Steven Soderburgh, Artisan sought only financial stakes and did not meddle in creative decisions. The strategy paid off. In 1998, Artisan released to theaters Pi, Permanent Midnight, Ringmaster, and The Cruise. Pi--whose rights Artisan had procured at the Sundance Film Festival--won both critical and commercial acclaim.

While Artisan broke into independent film production, the company continued to develop the most revenue-generating portion of its business. In 1997 and 1998, Artisan acquired three home video catalogues. After purchasing the distribution rights to Hallmark Home Entertainment (including Hallmark Hall of Fame television movies) and Cabin Fever, Artisan acquired the Republic Entertainment division of Spelling Entertainment Group Inc. With the Spelling deal, Artisan obtained the rights to distribute such classic films as It's a Wonderful Life and High Noon, as well as modern movies and the home video releases of television shows including Twin Peaks.

Although 1998 proved overall to be a mediocre year for Artisan's theatrical releases, the company hit a gold mine in 1999 when it bought the distribution rights to The Blair Witch Project at the 1999 Sundance Film Festival. This edgy film about three college students who set off into the woods to explore local legends about witchcraft cost only $35,000 to make. Artisan concentrated its marketing on the Internet, both in an effort to keep costs down and to reach young adult consumers. In its first weekend at theaters, Blair Witch earned $29.2 million, which Red Herring termed 'an unheard-of amount for a film with no big stars, no high-powered direc-tors. ...'

Despite the vicissitudes of the film market, Artisan's future prospects looked bright. The company controlled a video library of over 6,600 titles. Curcio told the July 26, 1999, Wall Street Journal that Artisan's 1998 revenues had topped $180 million, and the company had earned a net profit of $5 million. Moreover, he anticipated 1999 revenue to exceed $300 million, and net income to break $7 million. Artisan pledged not to overextend itself in its nascent role as an indie film studio. The company set the goal of making (or acquiring as it did with Blair Witch and Pi) eight to ten films per year.

Principal Competitors: DreamWorks SKG; Trimark Holdings, Inc.; GoodTimes Entertainment; Viacom Inc.; Sony Pictures Entertainment; Metro-Goldwyn-Mayer Inc.; Time Warner Inc.

Chronology

• Key Dates:

• 1981: Family Home Entertainment is formed.
• 1982: Company changes name to International Video Entertainment (I'VE).
• 1984: I'VE is incorporated.
• 1986: I'VE is acquired by Carolco Pictures Inc.
• 1988: I'VE is renamed LIVE Entertainment.
• 1989: LIVE acquires Strawberries, an East Coast chain of retail audio and video stores.
• 1991: LIVE purchases most assets of video distributor and movie maker Vestron, Inc.
• 1992: LIVE begins producing movies.
• 1997: LIVE is acquired by Bain Capital and converted to a private corporation.
• 1998: LIVE is renamed Artisan Entertainment and relocates to Santa Monica, California.