Low DVD Sales And Cash Flow Plague Image

Faced with growing debt, reduced orders from its customers, and more returns of unsold DVDs, Image Entertainment Inc. is in a position unlike the company has ever been up against before. True, the Chatsworth-based distributor of home entertainment programming has been through bad economic times. The Northridge earthquake in 1994 had a severe impact on Image’s ability to do business. But those instances were not compounded by two botched mergers, such as Image has been through the past 18 months. Then in early July, the company’s accounting firm raised doubts that Image can continue in business due to debt and lack of money for its operations. With a $4 million payment due on a convertible note at the end of July and a follow up payment in the same amount six months later, internal cash flow projections concluded the money wouldn’t be there. Still, with cuts in employees and other expenses and the hiring of an investment banking firm to parse out new sources of capital or even a buyer, company executives are confident Image has taken the right steps to meet its latest challenge. “We will persevere through this set of circumstances,” said CFO and President Jeff Framer. Those circumstances originated primarily from the recession. For its 28-year history, Image has always been able to make the necessary changes with each new form of distribution. The company started out producing laser discs and then moved to DVDs and has a small footprint in digital distribution online and broadcast. For most of 2008, the company was doing quite well in terms of revenues and cash flow. For the third quarter ending Dec. 31, the company reported net income of $304,000 and revenues of $39.2 million. But after the new year bumps appeared in the road. For one, there was a $4 million payment on a convertible note the company paid with its cash reserves. A more cautious approach by its customers who were more careful of managing their money didn’t help matters either. That was followed by the bankruptcy filing of Source Interlink, whose AEC division supplies national retailers and mass merchants with Image products. “The third biggest customer not buying as much exacerbates everything,” Framer said of Source Interlink, which has since emerged from bankruptcy. As all this took place, Image was going through what turned out to be the second of two failed mergers. In both cases with BTP Acquisition in 2008 and Nyx Acquisition in 2009 the proposed merger partner could not come up with the necessary financing to close the deal. The Nyx situation dragged on for months, with Image walking away claiming a breach by the new media investment group and then resuming talks once with the payment of a business disruption fee. While in both cases Image received some payment as the merger talks were extended the company in the long run could not benefit from the fees. The mergers after all took their toll on the board of directors, the executives and the employees. In hindsight, Framer said, it would have been better had Image not gone ahead with the proposed mergers with Nyx and BTP. For both, the company board of directors and its legal counsel handled the process. By bringing in the investment banking firm Houlihan Lokey Howard & Zukin Capital Inc. to oversee new infusions of capital or even a sale of the company, a different result is expected. “I would say they would have more thorough understanding of a potential buyer than the board did,” Framer said. Even as movies and television shows increasingly shift to digital distribution, Image still considers the DVD as its core business. For fiscal 2009, sales of standard definition DVDs surpassed $100 million, compared to the $4.2 million in revenues generated by digital distribution (and which was double the revenues from fiscal 2008). On a global basis, sales of DVD are expected to lose ground through 2011 before picking up, according to the PricewaterhouseCoopers’ Entertainment & Media Outlook Report. In that same period, digital downloads are expected to grow in double digits with a 38 percent growth from 2009 to 2013, the outlook report said. The fiscal 2009 increase in DVD sales was attributed to Image attaining rights to feature film titles, a move away from the traditional niche product, such as comedy and musical performances, which the company is known for. Still, high hopes are attached to the September release of a concert DVD by Terry Fator, a ventriloquist who won “America’s Got Talent” and now headlines at the Mirage on the Las Vegas Strip. Much of the company’s value rests in the 3,200 title library although the relationships with content suppliers and retailers and technical expertise could also interest a potential buyer. Some content producers see as a benefit that Image remains independent of the major Hollywood studios. “We are a target for producers with content who prefer not to go through the big studios and maintain more control over the distribution,” Framer said.