A Rebuilt Image Looks Forward

A year ago, Image Entertainment Inc. was in such poor financial straits that even its own accounting firm had doubts how much longer the home entertainment distributor would stay in business. But 2010 has brought better days after a change in management and business practices and a reduction in debt and expenses. The Chatsworth-based company has made progress in other areas, such as its recent multi-year agreement to have Sony Pictures Home Entertainment handle the manufacture and distribution of DVD and Blu-ray releases. Last month, accounting firm BDO Seidman LLP withdrew its going-concern letter stating that Image was nearing bankruptcy. The letter was released in July 2009 when the company found itself beneath a mountain of debt and lacking money for its operations. “That is one revocation that we want,” said Image Chairman and CEO Ted Green. “People are looking at us different: banks, potential financers, and potential acquisition candidates.” Green and other new executives who came on board in January have looked at the company differently as well. They had goals in mind and a plan on how to achieve those goals even if that meant taking the tough step of eliminating employees for a leaner workforce of 70 people at its headquarters. While avoiding taking potshots at the executives who preceded them, Green and John Hyde, the vice chairman, admit that Image had been an inefficiently run company. One mistake that was corrected was relying on in-house staff for all of the work involved with distributing DVDs. Outsourcing that work not only cuts overhead but puts a focus on three areas that will grow and sustain the business: restructuring; purchasing of new titles and catalogues; and acquisitions. “If there was a major break between the past and present operations it is how we do business,” Hyde said. More than inefficient operations put Image in the position it found itself in a year ago. Hurt by recession As the recession worsened in late 2008 and into the following year, consumers cut back on discretionary entertainment spending. Retailers that had stocked Image discs folded, and the company’s third biggest customer stopped buying product. Botched mergers in 2008 and 2009 took their toll on money and morale. Image then faced more bad news: almost defaulting on a loan, using cash reserves to make a $4 million payment on a convertible note, and delisting from the NASDAQ exchange. In January, private equity firm JH Partners bought a controlling interest in Image and provided much-needed financial stability. Green and Hyde worked behind the scenes to arrange the JH Partners deal and would later invest some of their own money. Joining Hyde and Green – who worked together at IDT Entertainment in Burbank before it was sold to Starz Media – was COO and CFO John Avagliano, whose background was providing strategic and financial management services to the film, video and apparel industries. Two top sales positions at Image were filled by candidates who came from other entertainment companies. In the eight months after JH Partners got involved, Image’s debt was reduced and the three main partners made the moves necessary to meet the realities of 2010 and beyond. Sony agreement That included the manufacturing and distribution agreement with Sony and separate deals that give Image the rights to distribute the Handmade Films catalogue, and Sony titles including “Absence of Malice” and “Adaptation.” With the money now available, Image is in a buying mode to beef up its credentials in the product groupings of comedy, music, independent films, classic TV, the Criterion Collection, and horror films, Green said. Even with digital distribution doing a number on entertainment industry business models, Image continues to make the physical product of the DVD the core of its business even though revenues for standard-def DVDs continue to shrink. On the upswing are the revenues from digital and broadcast distribution but those amounts still fall short of what DVDs bring in. “We are keeping one foot in the present and the other foot in the future where we think the business is going,” Hyde said. Image Entertainment Inc. • Location: Chatsworth • CEO: Ted Green • Employees: 70 • Market Cap: $5.32 million • PE (ttm): N/A • EPS (ttm): -0.1 • Closing PriceE: (as of Sept. 8) $0.23