SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1994
Commission File No. 0-17342
LIVE ENTERTAINMENT INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-4178252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15400 Sherman Way, Van Nuys, California 91406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 988-5060
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 has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes X No
As of May 6, 1994, there were 12,093,610 shares of the Registrant's
Common Stock, 6,000,000 shares of the Registrant's Series B Cumulative
Convertible Preferred Stock and 15,000 shares of the Registrant's Series
C Convertible Preferred Stock outstanding.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets at
December 31, 1993 and March 31, 1994. . . . . . . . 1-2
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1993 and 1994 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1993 and 1994 . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . 5-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . .11-15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . .15-17
ITEM 3(b).DEFAULTS UPON SENIOR SECURITIES - DIVIDEND
ARREARAGE ON PREFERRED STOCK. . . . . . . . . . . . 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 18
<PAGE>
PART I - FINANCIAL INFORMATION
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
December 31, March 31,
1993 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $17,173 and $6,101 . . . . . . . . . . . . $ 42,358 $ 51,247
Accounts receivable, less allowances of $25,440
in 1993. . . . . . . . . . . . . . . . . . . . . . 2,432 --
Officer and employee receivables. . . . . . . . . . 407 186
Inventories . . . . . . . . . . . . . . . . . . . . 10,124 9,615
Video rights. . . . . . . . . . . . . . . . . . . . 29,839 32,121
Deferred income taxes . . . . . . . . . . . . . . . 4,176 4,176
Other . . . . . . . . . . . . . . . . . . . . . . . 1,136 1,562
Assets held for sale. . . . . . . . . . . . . . . . 86,000 84,214
TOTAL CURRENT ASSETS 176,472 183,121
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . 1,686 1,715
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . . . 8,047 7,983
VIDEO RIGHTS, net of accumulated amortization
of $429,881 and $436,173. . . . . . . . . . . . . . 32,228 32,082
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 1,320 789
GOODWILL, net of accumulated amortization of
$32,193 and $33,174 . . . . . . . . . . . . . . . . 33,796 32,815
$ 253,549 $ 258,505
(Continued)
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
(Amounts in Thousands)
December 31, March 31,
1993 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
12% Subordinated Secured Notes due 1994 . . . . . . $ 36,707 $ 36,810
Current maturities of long-term obligations . . . . 8,043 7,701
Current maturities of Increasing Rate Senior
Subordinated Notes . . . . . . . . . . . . . . . . 3,791 3,713
Video rights obligations. . . . . . . . . . . . . . 15,850 13,163
Accounts payable, deferred revenue and accrued
expenses . . . . . . . . . . . . . . . . . . . . . 18,343 17,282
Accrual for returns and advertising net of
accounts receivable of $5,022 in 1994 . . . . . . -- 18,570
Liabilities related to assets held for sale . . . . 46,601 44,933
Series B Cumulative Convertible Preferred Stock
(5,000,000 shares) . . . . . . . . . . . . . . . . 40,000 40,000
Dividends payable . . . . . . . . . . . . . . . . . 1,340 777
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 170,675 182,949
LONG-TERM OBLIGATIONS, less current maturities . . . 3,333 1,666
INCREASING RATE SENIOR SUBORDINATED NOTES DUE
1999, including capitalized interest of
$20,662 and $18,740, less current maturities. . . . 56,871 55,027
DEFERRED REVENUE AND ACCRUED EXPENSES, less
current portion . . . . . . . . . . . . . . . . . . 1,740 1,708
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . 10,188 10,188
STOCKHOLDERS' EQUITY:
Series B Cumulative Convertible Preferred Stock--
authorized 9,000,000 shares; $1.00 par value;
$60,000,000 liquidation preference; 1,000,000
shares outstanding . . . . . . . . . . . . . . . . 1,000 1,000
Series C Convertible Preferred Stock-- 15,000 shares
authorized and outstanding; $1.00 par value;
$15,000,000 liquidation preference . . . . . . . . 15 15
Common Stock--authorized 120,000,000 shares; $0.01
par value; 12,090,016 (1993) and 12,093,610 (1994)
shares outstanding . . . . . . . . . . . . . . . . 121 121
Additional paid-in capital. . . . . . . . . . . . . 106,507 106,507
Retained deficit. . . . . . . . . . . . . . . . . . (96,901) (100,676)
10,742 6,967
$ 253,549 $ 258,505
See notes to consolidated financial statements.
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Ended
March 31,
1993 1994
Net Sales. . . . . . . . . . . . . . . . . . . . . . $ 29,532 $ 18,265
Cost of goods sold . . . . . . . . . . . . . . . . . 23,922 15,198
GROSS PROFIT. . . . . . . . . . . . . . . . . . . 5,610 3,067
Operating Expenses:
Selling, general and administrative expenses. . . . 4,046 3,716
Amortization of goodwill. . . . . . . . . . . . . . 981 981
5,027 4,697
583 (1,630)
Disposal of VCL/Carolco Communications GmbH (VCL):
Net Sales . . . . . . . . . . . . . . . . . . . . . 5,770 --
Costs and Expenses. . . . . . . . . . . . . . . . . 5,516 --
254 --
OPERATING PROFIT (LOSS) . . . . . . . . . . . . . 837 (1,630)
Interest expense, net . . . . . . . . . . . . . . . (497) (1,208)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (BENEFIT). . . . . . . . . . 340 (2,838)
Income tax expense (benefit). . . . . . . . . . . . -- --
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . 340 (2,838)
Discontinued Operations:
Loss from discontinued operations
net of income taxes. . . . . . . . . . . . . . . . (1,068) --
LOSS FROM DISCONTINUED OPERATIONS . . . . . . . . (1,068) --
NET LOSS. . . . . . . . . . . . . . . . . . . . . (728) (2,838)
Preferred dividends. . . . . . . . . . . . . . . . . 767 937
NET LOSS ATTRIBUTABLE TO COMMON STOCK . . . . . . $ (1,495) $ (3,775)
Loss per common share:
Continuing operations . . . . . . . . . . . . . . . $ (0.03) $ (0.31)
Discontinued operations . . . . . . . . . . . . . . (0.09) --
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.31)
Weighted average number of shares outstanding. . . . 12,087 12,094
See notes to condensed consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Three Months Ended
March 31,
1993 1994
OPERATING ACTIVITIES:
Loss from continuing operations . . . . . . . . . . $ 340 $ (2,838)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) continuing
operating activities:
Depreciation and amortization of property
and equipment. . . . . . . . . . . . . . . . . . 309 191
Amortization of goodwill. . . . . . . . . . . . . 1,052 981
Amortization of and adjustments to video rights . 13,539 6,292
Income taxes payable and deferred income taxes. . (190) --
Utilization of pre-acquisition net operating
loss carryforwards . . . . . . . . . . . . . . . 142 --
(Increase) decrease in operating assets, net of
acquisitions:
Accounts receivable . . . . . . . . . . . . . . . 5,400 2,432
Officer and employee receivables. . . . . . . . . 48 125
Inventories . . . . . . . . . . . . . . . . . . . 2,145 509
Assets held for sale. . . . . . . . . . . . . . . 1,541 1,786
Receivable from stockholder . . . . . . . . . . . 1,018 64
Other assets. . . . . . . . . . . . . . . . . . . (3,218) 201
Increase (decrease) in operating liabilities,
net of acquisitions:
Accounts payable and accrued expenses . . . . . . (9,785) (2,030)
Accrual for returns and advertising . . . . . . . -- 18,570
Liabilities related to assets held for sale . . . (420) (1,668)
Acquisition of and adjustment to video rights . . (49,151) (8,428)
Video rights obligations incurred . . . . . . . . 49,046 8,428
Payments on video rights obligations. . . . . . . (48,306) (11,115)
Cash provided by (used for) continuing
operating activities . . . . . . . . . . . . . (36,490) 13,500
Cash provided by (used for) discontinued
operations . . . . . . . . . . . . . . . . . . (277) --
Cash provided by (used for) operating
activities . . . . . . . . . . . . . . . . . . (36,767) 13,500
INVESTING ACTIVITIES:
Acquisition of property and equipment . . . . . . . (833) (220)
Cash used for investing activities. . . . . . . (833) (220)
FINANCING ACTIVITIES:
Issuance of bank debt and long-term obligations . . 110,841 186
Payments on bank debt and long-term obligations . . (85,637) (4,014)
Payment of debt restructuring expenses. . . . . . . (987) --
Dividends accrued but not paid. . . . . . . . . . . -- (563)
Issuance of Series C Preferred Stock. . . . . . . . 14,550 --
Cash provided by (used for) financing
activities . . . . . . . . . . . . . . . . . . 38,767 (4,391)
Effect of exchange rate changes . . . . . . . . 106 --
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . 1,273 8,889
Cash and cash equivalents at beginning
of period. . . . . . . . . . . . . . . . . . . 18,847 42,358
Cash and cash equivalents at end of period. . . $ 20,120 $ 51,247
See notes to consolidated financial statements.
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1994
Note 1 - Going Concern
On January 28, 1994, the bank credit facility (the "Bank Credit
Facility") between LIVE Entertainment Inc. ("LIVE" or the
"Company") and LIVE Home Video Inc. ("LHV") and a group of banks
headed by Chemical Bank and Credit Lyonnais Bank Nederland N.V.
(the "Bank Group") was amended. The maximum credit available under
the Bank Credit Facility was reduced to $20,000,000 effective on
the date of the amendment. The commitments under the Bank Credit
Facility will be further reduced on a monthly basis to $10,000,000
by June 29, 1994. Furthermore, the maximum credit amount available
under the Bank Credit Facility will continue to be reduced by an
amount equal to cash dividends paid on the Company's 6,000,000
shares of Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") and 15,000 shares of Series C
Convertible Preferred Stock (the "Series C Preferred Stock"). As
of May 1, 1994 the maximum credit available under the Bank Credit
Facility was $14,249,000.
The term of the Bank Credit Facility ends July 29, 1994 and
earlier in the event of a default. Additionally, the Company's
$37,000,000 in 12% Subordinated Secured Notes Due September 1994
("12% Notes") are due and payable on September 15, 1994.
The Company is in negotiations with members of the Bank Group,
as well as others, to provide a replacement source of financing of
up to $40,000,000, having a term of at least one year, prior to the
expiration of the Bank Credit Facility (the "New Bank Credit
Facility"). A condition to obtaining the New Bank Credit Facility
is the agreement of the holders of at least $31,000,000 in
principal amount of the 12% Notes to extend the maturity date for
payment of the 12% Notes held by them to a date which would be not
earlier than several months after the maturity date of the New Bank
Credit Facility (the "12% Note Extension"). Although management
believes there is a realistic possibility of obtaining both the New
Bank Credit Facility and the 12% Note Extension prior to the
expiration of the Bank Credit Facility, there is no assurance that
management will be successful in these efforts. If the Company is
unable to obtain replacement financing, it may not be in a position
to pay the amounts due under the Bank Credit Facility and the 12%
Notes upon the maturity thereof.
As a result of the Company's operating results in 1993, as well
as its decision to dispose of both (a) its "Specialty Retail
Division," consisting of its wholly owned subsidiary, Strawberries
Inc. ("Strawberries") and Strawberries' wholly owned subsidiary,
Waxie Maxie Quality Music Co. ("Waxie Maxie"), and (b) its German
video distribution subsidiary, VCL/Carolco Communications GmbH
("VCL"), the Company was not in compliance with a number of ratios
under the Bank Credit Facility and the Indenture (the "12% Note
Indenture") governing the 12% Notes as of December 31, 1993 and
March 31, 1994. The Company is in discussions with the Bank Group
to obtain waivers of the non-compliance and management believes
that those waivers will be obtained. However, there is no
assurance those waivers will be obtained. If the Bank Group waives
the non-compliance, such waiver automatically acts as a waiver of
the corresponding non-compliance under the 12% Note Indenture. If
the Company does not secure the waivers, LHV will be unable to
borrow under the Bank Credit Facility. LHV's current projections
show that it may not need to borrow under the Bank Credit Facility
prior to the July 1994 expiration of the Bank Credit Facility. If
the Company does not secure the waivers and if, and only if, the
Bank Group exercises its right to terminate the Bank Credit
Facility, the holders of the 12% Notes could accelerate payment of
the amounts due to them. If such acceleration occurred, an event
of default would exist under the Company's $40,000,000 of
Increasing Rate Senior Subordinated Notes due 1999 (the "Public
Notes") allowing the holders of the Public Notes to accelerate
payment thereof. In the event of any such accelerations, the
Company might not be in a position to pay the amounts due.
Without either replacement facilities or an agreement for
extension, the Bank Credit Facility will be due on July 29, 1994
and the 12% Notes will be due on September 15, 1994.
These conditions raise substantial doubt about LIVE's ability to
continue as a going concern.
The Company's management is taking the following actions to
address concerns about its ability to continue as a going concern:
(a) The Company is in negotiations with members of the Bank
Group and other potential financing sources to obtain the
New Bank Credit Facility prior to the expiration of the
Bank Credit Facility.
(b) The Company has held preliminary discussions with holders
of 12% Notes regarding obtaining the 12% Note Extension.
Although there is no assurance that the Company will be
successful in any of these activities, management believes that
there is a realistic possibility of completing all of them during
1994.
The Company's receipt of the New Bank Credit Facility is a
condition to the business combination of the Company and Carolco
Pictures Inc. ("Carolco").
Note 2 - Agreement in Principle on Business Combination with
Carolco
In March 1994, the Company and Carolco reached agreement in
principle on a business combination (the "Combination"). The
Combination will be structured as a tax free exchange whereby each
Carolco stockholder will receive one share of newly issued LIVE
Common Stock for each 5.5 shares of Carolco Common Stock held by
them. The exchange ratio will be subject to adjustment based on
the market price of Carolco Common Stock prior to the consummation
of the Combination, subject to two limitations. The first
limitation is that the number of Carolco shares to be exchanged for
each share of LIVE will be adjusted upward, if necessary, so that
the market value of Carolco shares to be exchanged is at least
$3.00, but in no event will more than 6.5 shares of Carolco be
exchanged for each share of LIVE. The second limitation is similar
to the first in that the number of Carolco shares to be exchanged
for each share of LIVE will be adjusted downward, if necessary, so
that the market value of Carolco shares to be exchanged is no more
than $4.00, but in no event will fewer than 4.5 shares of Carolco
be exchanged for each share of LIVE. The market value of Carolco
shares will be deemed to be the average trading price of Carolco
Common Stock for the twenty (20) trading days ending no earlier
than three days prior to the closing of the Combination.
As a result of the Combination, the current LIVE stockholders
will own between 22% and 29% of the combined company, the name of
which will be changed to Carolco Entertainment Inc.
The Combination is subject to a number of conditions, including
(a) redemption of the Series B Preferred Stock, (b) amendments to
the 12% Note Indenture governing the 12% Notes, the Indenture
governing the $40,000,000 in principal amount of LIVE's Increasing
Rate Senior Subordinated Notes due 1999, and the terms of the
Series C Preferred Stock, (c) delivery of fairness opinions by the
independent financial advisors to each company, and (d) the
availability of financing commitments at each company prior to the
closing of the Combination. The Combination is also subject to the
execution of a definitive business combination agreement by no
later than May 23, 1994 (unless that date is extended by agreement
between LIVE and Carolco) and the subsequent approval of the
Combination by a majority of the non-affiliated common stockholders
of each of Carolco and LIVE.
Note 3 - Management Changes
On April 15, 1994, Satoshi Matsumoto resigned from the Board of
Directors of the Company and Gregory R. Pierson was appointed as a
Director of the Company. Mr. Matsumoto's departure from the Board
of Directors was not the result of any dispute with the Company.
Rodney W. Trovinger, the Company's Acting Chief Financial
Officer, unexpectedly passed away on April 17, 1994. In April
1994, Michael J. White, LIVE's Executive Vice President, Chief
Administrative Officer and General Counsel, was appointed Acting
Chief Financial Officer of the Company.
Note 4 - Summary of Significant Accounting Policies
Background and Operations: LIVE was formed in 1988 and its
largest ongoing businesses are LHV and LEI-IVE Entertainment N.V.
("LIVE NV"), which acquire rights to theatrical motion pictures,
children's films and special interest programs which they market
and distribute primarily on videocassettes to wholesalers,
retailers and consumers in the United States and Canada (LHV) and
internationally (LIVE NV). As part of its international
activities, the Company also owns an 81% interest in VCL, a home
video distribution and marketing company headquartered in Munich,
Germany. VCL's year-end is November 30. The Company also operates
the Specialty Retail Division. The Specialty Retail Division
engages in the retail sale of audio records and tapes, compact
discs and video products and consists of 142 stores in the
Northeastern United States and the Baltimore/Washington D.C.
metropolitan area. The Specialty Retail Division has a January 31
year-end. In March 1994, the Company decided to dispose of its
interests in the Specialty Retail Division and VCL. The Company
expects the sales to be effected in such a manner whereby the
buyers assume all liabilities. Accordingly, the Company's
interests in the Specialty Retail Division and VCL have been
recorded as "Assets Held For Sale" and "Liabilities Related To
Assets Held For Sale." The Company's continuing operations are
principally in a single business segment, the distribution and
retail sale of a broad variety of entertainment software products.
Principles of Consolidation: The financial statements include
the accounts of the Company and its subsidiaries - LHV, the
Specialty Retail Division, LIVE NV and VCL. The financial
statements reflect the Company's interests in the Specialty Retail
Division and VCL as "Assets Held For Sale" and "Liabilities Related
To Assets Held For Sale" and have been restated to account for the
Specialty Retail Division as a discontinued operation. All
significant intercompany balances and transactions have been
eliminated.
Note 5 - Litigation
On January 9, 1992, a purported class action lawsuit was filed
in the U.S. District Court, Central District of California, by
alleged stockholders of the Company against the Company, Carolco
and certain of the Company's past and present directors and
executive officers. The complaint alleges, among other things,
that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder (a) by concealing the true value of certain
of LIVE's assets, and overstating goodwill, stockholders' equity,
operating profits and net income in LIVE's Form 10-K for the year
ended December 31, 1990, in its 1990 Annual Report and in its Forms
10-Q for the quarters ended March 31, 1991 and June 30, 1991, and
(b) by materially understating the true extent of the write off of
goodwill in connection with the sale of substantially all of the
assets of the Company's wholly owned subsidiary, Lieberman
Enterprises Incorporated ("Lieberman"), to Handleman Company
("Handleman") in July 1991. In addition, the complaint alleges
that certain of the defendants are liable as controlling persons
under Section 20 of the Exchange Act and alleges that certain other
defendants are liable for aiding and abetting the primary
violations. Subsequently, two additional lawsuits were filed in
the U.S. District Court, Central District of California, by alleged
stockholders of the Company against the same persons and entities
who were defendants in the original actions, making substantially
the same allegations as were made in the first lawsuit. On March
30, 1992, these lawsuits were consolidated. Further, in April
1992, an amended complaint was filed in the consolidated action,
lengthening the alleged class period and adding as defendants
certain additional officers, directors and affiliates of the
Company and Carolco, including Pioneer LDCA, Inc. ("Pioneer"), as
well as a lender to LHV and Carolco. On June 17, 1992, the U.S.
District Court, Central District of California, entered an order
conditionally certifying the class, subject to possible
decertification after discovery is completed. On January 27, 1993,
a second amended complaint was filed in the consolidated class
action making additional and modified allegations against certain
of the defendants claiming they are liable as controlling persons
under Section 20 of the Exchange Act and claiming that certain
other defendants are liable for aiding and abetting the primary
violations. On April 19, 1993, the court issued a ruling
dismissing Pioneer from this lawsuit.
In February 1992, a purported class action lawsuit was filed in
the U.S. District Court, District of Delaware, by an alleged holder
of Carolco's public debt, against the Company, Carolco and certain
directors and executive officers of Carolco. The Delaware
complaint alleges, among other things, that the defendants violated
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by concealing the true value of certain of the Company's
assets, and overstating goodwill, stockholders' equity, operating
profits and net income in the Company's Form 10-K for the year
ended December 31, 1990 and in its Forms 10-Q for the quarters
ended March 31, 1991 and June 30, 1991. In April of 1992 this
lawsuit was transferred to the U.S. District Court, Central
District of California. The proceedings are being coordinated with
the consolidated action described in the preceding paragraph. On
July 17, 1992, the U.S. District Court, Central District of
California, entered an order conditionally certifying the class,
subject to possible decertification after discovery is completed.
On March 24, 1994, the same day as the Company and Carolco
announced that they had reached agreement in principle on the
Combination, a purported class action lawsuit was filed in the
Delaware Chancery Court by an alleged stockholder of the Company
against the Company, Carolco, Pioneer, Cinepole Productions B.V.
and certain past and present directors of the Company and Carolco.
The complaint alleges, among other things, that the defendants
breached their fiduciary duties in agreeing in principle to the
Combination. The complaint seeks an injunction prohibiting the
Company and Carolco from proceeding with the Combination, as well
as unspecified monetary damages. In April 1994 two former
directors of the Company were dismissed from this action without
prejudice.
Management and counsel to the Company are unable to predict the
ultimate outcome of the above-described actions at this time.
However, the Company and the other defendants believe that all
these lawsuits are without merit and intend to defend them
vigorously. Accordingly, no provision for any liability which may
result has been made in the Company's consolidated financial
statements. In the opinion of management, these actions, when
finally concluded and determined, will not have a material adverse
effect upon the Company's financial position or results of
operations.
Other than as described above, there are no material legal
proceedings to which LIVE or any of its subsidiaries are a party
other than ordinary routine litigation in the ordinary course of
business. In the opinion of management (which is based in part on
the advice of outside counsel), resolution of these matters will
not have a material adverse impact on the Company's financial
position or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1994 Compared to Three Months
Ended March 31, 1993
Continuing Operations
Net sales of LHV decreased to $18,265,000 during 1994 compared
to $29,532,000 during 1993. The decrease of $11,267,000, or 38.2%,
is primarily attributable to a weaker release schedule in the first
quarter of 1994 compared to the first quarter of 1993. LHV
released only four rental titles during the three months ended
March 31, 1994 compared to eight rental titles during the
comparable period in 1993. This is primarily due to the change in
management in LHV that occurred in January and February 1994. The
new management determined that they would be better able to
maximize sales and profits of LHV's titles after they had become
familiar with LHV and its operations. The release of four LHV
rental titles originally scheduled for initial release in the first
quarter of 1994 will occur until later in 1994.
Gross profits of LHV decreased $2,453,000, or 45.3%, to
$3,067,000 during 1994 compared to $5,610,000 during 1993. The
decrease in gross profit dollars was primarily related to the
decrease in sales. As a percentage of sales, gross profit
decreased from 19.0% during 1993 to 16.8% during 1994, primarily
due to the decrease in rental sales, which usually generate higher
margins.
Selling, general and administrative expenses of LHV decreased
$330,000, or 8.2%, to $3,716,000 during 1994 compared to $4,046,000
during 1993. As a percentage of sales, the amount increased from
13.7% during 1993 to 20.4% during 1994. The dollar decrease is
primarily a result of the Company's efforts to reduce overhead.
The percentage increase is primarily due to the decrease in sales.
Net interest expenses of LHV increased $711,000, or 143%, to
$1,208,000 during 1994 compared to $497,000 during 1993. Interest
expense increased as a result of the issuance of $37,000,000 of 12%
Notes during March and April of 1993. The entire balance was
outstanding during the entire first quarter of 1994.
Preferred dividends of $937,000 in 1994 and $767,000 in 1993
represents the 5% cash dividend accrued on both the Series B
Preferred Stock and the Series C Preferred Stock.
<PAGE>
Discontinued Operations
As a result of the Board of Directors' decision to dispose of
the Company's interests in the Specialty Retail Division and VCL,
the Division's results of operations for the three months ended
March 31, 1993 have been restated and accounted for as a
discontinued operation. VCL's operating results for the same
period have been restated and accounted for as a disposal of a
portion of a line of business. Accordingly, the provision for
losses during the phase-out period totaling $2,024,000 for the
Specialty Retail Division and $3,885,000 for VCL have been accrued
and accounted for at December 31, 1993 and are not included in the
results of operations for the three months ended March 31, 1994.
Losses of $856,000 and $930,000 have been charged against the
respective provisions during the three months ended March 31, 1994.
Liquidity and Capital Resources
The Series B Preferred Stock is mandatorily redeemable from the
net proceeds of any sale of the Specialty Retail Division. As a
result of the Company's decision to dispose of its interest in the
Specialty Retail Division, a total of $40,000,000 of the Series B
Preferred Stock has been re-classified from equity to current
liabilities at December 31, 1993 and March 31, 1994 reflecting the
Company's expectation to sell the Division for no less than
$40,000,000.
At March 31, 1994, the Company had total current assets of
$183,121,000 and total current liabilities of $182,949,000,
resulting in working capital of $172,000, a decrease of $5,625,000
over the working capital at December 31, 1993.
Historically, the Company has funded its operations through a
combination of cash generated from operations, bank borrowings,
advances from distributors under distribution agreements and the
proceeds from the issuance of the 12% Notes. For the three months
ending March 31, 1994, the Company generated positive cash flow
from continuing operations of $13,500,000.
On May 11, 1992, LHV entered into a three-year distribution
agreement with WEA that became effective on June 1, 1992. Under
the terms of the agreement, WEA advanced $20,000,000 to LHV,
recoupable from distribution revenues during the three-year term of
the agreement at the rate of $555,555 per month plus interest at
LIBOR (3.68% at March 31, 1994) plus 0.2%, not to exceed the prime
rate. The advance is secured by a first priority security interest
in certain of LHV's FHE catalog titles. The amount of the advance
outstanding as of March 31, 1994 was $8,333,000.
In 1993, the Company received a total of $37,000,000 upon
issuance of the 12% Notes and as of May 1, 1994 was able to borrow
up to $14,249,000 under the Bank Credit Facility for new video
rights acquisitions. The total borrowings and borrowing
availability under the Bank Credit Facility and the 12% Notes
($51,249,000 as of May 1, 1994) will provide sufficient funds to
permit LHV to acquire additional films for distribution.
Investing activities generated a negative cash flow during the
first quarter of 1994 of $220,000, primarily as a result of the
acquisition of property and equipment at LHV.
On January 28, 1994, the Bank Credit Facility was amended. The
maximum credit available under the Bank Credit Facility was reduced
to $20,000,000 effective on the date of the amendment. The
commitments under the Bank Credit Facility will be further reduced
on a monthly basis to $10,000,000 by June 29, 1994. The term of
the Bank Credit Facility ends July 29, 1994 and earlier in the
event of a default. Furthermore, the maximum credit amount under
the Bank Credit Facility will continue to be further reduced by an
amount equal to cash dividends paid on the Series B Preferred Stock
and Series C Preferred Stock. On April 1, 1994, cash dividends
totaling $750,000 were paid on the Series B Preferred Stock,
thereby reducing the maximum credit currently available under the
Bank Credit Facility to $15,916,000 as of that date.
As a result of the Company's operating results in 1993, as well
as its decision to dispose of the Specialty Retail Division and
VCL, the Company was not in compliance with a number of ratios
under the Bank Credit Facility and the 12% Note Indenture as of
December 31, 1993 and March 31, 1994. The Company is in
discussions with the Bank Group to obtain waivers of the non-
compliance and management believes that those waivers will be
obtained. However, there is no assurance those waivers will be
obtained. If the Bank Group waives the non-compliance, such waiver
automatically acts as a waiver of the corresponding non-compliance
under the 12% Note Indenture. If the Company does not secure the
waivers, LHV will be unable to borrow under the Bank Credit
Facility. LHV's current projections show that it may not need to
borrow under the Bank Credit Facility prior to the July 1994
expiration of the Bank Credit Facility. If the Company does not
secure the waivers and if, and only if, the Bank Group exercises
its right to terminate the Bank Credit Facility, the holders of the
12% Notes could accelerate payment of the amounts due to them. If
such acceleration occurred, an event of default would exist under
the Public Notes, allowing the holders of the Public Notes to
accelerate payment thereof. In the event of any such
accelerations, the Company might not be in a position to pay the
amounts due.
Without either replacement facilities or an agreement for
extension, the Bank Credit Facility will be due on July 29, 1994
and the 12% Notes will be due on September 15, 1994.
The Company is in negotiations with members of the Bank Group,
as well as others, to provide the New Bank Credit Facility prior to
the expiration of the Bank Credit Facility. The Company also is in
negotiations with holders of $31,000,000 in principal amount of the
12% Notes to obtain the 12% Note Extension. A condition to
obtaining the New Bank Credit Facility is obtaining the 12% Note
Extension. Although management believes there is a realistic
possibility of obtaining both the New Bank Credit Facility and the
12% Note Extension prior to the expiration of the Bank Credit
Facility, there is no assurance that management will be successful
in these efforts. If the Company is unable to obtain replacement
financing, it may not be in a position to pay the amounts due under
the Bank Credit Facility and the 12% Notes upon the maturity
thereof and might not be able to continue as a going concern.
The 12% Notes were issued on March 26, 1993. Repayment of the
12% Notes has been guaranteed by the same subsidiaries of LIVE that
are borrowers under the Bank Credit Facility. The 12% Notes bear
interest at the rate of 12% per annum, with interest payable
monthly, and are currently due and payable on September 15, 1994.
The 12% Note Indenture includes warranties, financial ratios,
covenants and restrictions which generally mirror the terms of the
Bank Credit Facility. Repayment of the 12% Notes is subordinated
to repayment of the Bank Credit Facility, and until payment in full
and termination of the Bank Credit Facility, the rights of holders
of the 12% Notes to accelerate payment thereunder are limited to
payment defaults and/or acceleration of the Bank Credit Facility.
Repayment of the 12% Notes is secured by a lien on all of the
assets of LIVE and LHV, subordinate to the lien under the Bank
Credit Facility and other pre-existing liens.
On June 11, 1992, the Specialty Retail Division entered into a
two-year $10,000,000 line of credit with Foothill Capital
Corporation (the "Strawberries Credit Facility") to provide working
capital as well as funds for expansion for the Specialty Retail
Division. Borrowings under the Strawberries Credit Facility are
secured by substantially all of the assets of the Specialty Retail
Division. Outstanding borrowings under the Strawberries Credit
Facility bear interest at the rate of 3.5% per annum above the
higher of the Bank of America reference rate or the greater of the
Citibank or Mellon Bank prime rate. In no event will interest
under the loan be less than 9% per annum or $25,000 per month. As
of the end of the Specialty Retail Division's first fiscal quarter
of 1994, $6,010,000 was outstanding under the Strawberries Credit
Facility. In May 1994, the Specialty Retail Division and Foothill
Capital Corporation agreed to extend the term of the Strawberries
Credit Facility until September 30, 1994 and to increase the
maximum credit available thereunder from $10,000,000 to
$15,000,000. The Specialty Retail Division is currently in the
process of attempting to secure a new line of credit. Management
of the Specialty Retail Division believes that if a new line of
credit cannot be obtained, the Strawberries Credit Facility can be
further extended through the end of 1994. Management expects that
the Strawberries Credit Facility or a new line of credit, together
with funds generated from the operations of the Specialty Retail
Division, will be sufficient to provide the Division with all
needed capital resources through 1994.
The Specialty Retail Division owns the building housing its
corporate headquarters and distribution center in Milford,
Massachusetts. In 1988, the Division entered into a $4,000,000
mortgage loan on this building, bearing interest at the prime rate
plus 0.5%, with interest payable monthly, annual principal
reduction payments of $40,000 and a balloon payment of all unpaid
principal and interest on August 20, 1993. In July 1993, the
Division agreed with the holder of the mortgage loan to change the
interest rate to a fixed rate of 9% per annum, to continue annual
principal reduction payments of $40,000 and to extend the balloon
payment date to August 20, 1995. The amount outstanding under the
mortgage loan as of April 30, 1994 was $3,800,000.
The Company experienced negative cash flows from financing
activities of $4,391,000 during the first quarter of 1994 primarily
due to payments of bank debt and long term obligations.
The Company's management is taking the following actions to
address the liquidity and capital resources issues facing it:
(a) The Company is in negotiations with members of the Bank
Group and other potential financing sources to obtain the
New Bank Credit Facility prior to the expiration of the
Bank Credit Facility.
(b) The Company has held preliminary discussions with holders
of the 12% Notes regarding obtaining the 12% Note
Extension.
Although there is no assurance that the Company will be
successful in any of these activities, management believes that
there is a realistic possibility of completing all of them during
1994.
If management is successful in its financing efforts, it
believes that the Company will have sufficient capital resources to
continue to finance its activities, including the continued
acquisition of additional film titles.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 9, 1992, a purported class action lawsuit was filed
in the U.S. District Court, Central District of California, by
alleged stockholders of the Company against the Company, Carolco
and certain of the Company's past and present directors and
executive officers. The complaint alleges, among other things,
that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder (a) by concealing the true value of certain
of LIVE's assets, and overstating goodwill, stockholders' equity,
operating profits and net income in LIVE's Form 10-K for the year
ended December 31, 1990, in its 1990 Annual Report and in its Forms
10-Q for the quarters ended March 31, 1991 and June 30, 1991, and
(b) by materially understating the true extent of the write off of
goodwill in connection with the sale of substantially all of the
assets of the Company's wholly owned subsidiary, Lieberman
Enterprises Incorporated ("Lieberman"), to Handleman Company
("Handleman") in July 1991. In addition, the complaint alleges
that certain of the defendants are liable as controlling persons
under Section 20 of the Exchange Act and alleges that certain other
defendants are liable for aiding and abetting the primary
violations. Subsequently, two additional lawsuits were filed in
the U.S. District Court, Central District of California, by alleged
stockholders of the Company against the same persons and entities
who were defendants in the original actions, making substantially
the same allegations as were made in the first lawsuit. On March
30, 1992, these lawsuits were consolidated. Further, in April
1992, an amended complaint was filed in the consolidated action,
lengthening the alleged class period and adding as defendants
certain additional officers, directors and affiliates of the
Company and Carolco, including Pioneer LDCA, Inc. ("Pioneer"), as
well as a lender to LHV and Carolco. On June 17, 1992, the U.S.
District Court, Central District of California, entered an order
conditionally certifying the class, subject to possible
decertification after discovery is completed. On January 27, 1993,
a second amended complaint was filed in the consolidated class
action making additional and modified allegations against certain
of the defendants claiming they are liable as controlling persons
under Section 20 of the Exchange Act and claiming that certain
other defendants are liable for aiding and abetting the primary
violations. On April 19, 1993, the court issued a ruling
dismissing Pioneer from this lawsuit.
In February 1992, a purported class action lawsuit was filed in
the U.S. District Court, District of Delaware, by an alleged holder
of Carolco's public debt, against the Company, Carolco and certain
directors and executive officers of Carolco. The Delaware
complaint alleges, among other things, that the defendants violated
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by concealing the true value of certain of the Company's
assets, and overstating goodwill, stockholders' equity, operating
profits and net income in the Company's Form 10-K for the year
ended December 31, 1990 and in its Forms 10-Q for the quarters
ended March 31, 1991 and June 30, 1991. In April of 1992 this
lawsuit was transferred to the U.S. District Court, Central
District of California. The proceedings are being coordinated with
the consolidated action described in the preceding paragraph. On
July 17, 1992, the U.S. District Court, Central District of
California, entered an order conditionally certifying the class,
subject to possible decertification after discovery is completed.
On March 24, 1994, the same day as the Company and Carolco
announced that they had reached agreement in principle on the
Combination, a purported class action lawsuit was filed in the
Delaware Chancery Court by an alleged stockholder of the Company
against the Company, Carolco, Pioneer, Cinepole Productions B.V.
and certain past and present directors of the Company and Carolco.
The complaint alleges, among other things, that the defendants
breached their fiduciary duties in agreeing in principle to the
Combination. The complaint seeks an injunction prohibiting the
Company and Carolco from proceeding with the Combination, as well
as unspecified monetary damages. In April 1994 two former
directors of the Company were dismissed from this action without
prejudice.
Management and counsel to the Company are unable to predict the
ultimate outcome of the above-described actions at this time.
However, the Company and the other defendants believe that all
these lawsuits are without merit and intend to defend them
vigorously. Accordingly, no provision for any liability which may
result has been made in the Company's consolidated financial
statements. In the opinion of management, these actions, when
finally concluded and determined, will not have a material adverse
effect upon the Company's financial position or results of
operations.
Other than as described above, there are no material legal
proceedings to which LIVE or any of its subsidiaries are a party
other than ordinary routine litigation in the ordinary course of
business. In the opinion of management (which is based in part on
the advice of outside counsel), resolution of these matters will
not have a material adverse impact on the Company's financial
position or results of operations.
<PAGE>
ITEM 3(b). DEFAULTS UPON SENIOR SECURITIES - DIVIDEND ARREARAGE
ON PREFERRED STOCK
Dividends under the Series C Preferred Stock, at the rate of 5%
per annum on the unreturned $15,000,000 liquidation value of the
Series C Preferred Stock, are due on June 30 and December 31 of
each year. Although the $188,000 dividend scheduled to be paid on
June 30, 1993 and the $375,000 dividend scheduled to be paid on
December 31, 1993 both were accrued by the Company, those dividends
were not paid due to restrictions imposed on the Company by the
terms of the Series B Preferred Stock, which prohibit the payment
of dividends on the Series C Preferred Stock unless the aggregate
amount of such dividends, together with all cash dividends paid on
the Series B Preferred Stock, does not exceed the net income of the
Company (adding back specified net worth exclusions) since the
March 23, 1993 date of issuance of the Series C Preferred Stock and
the Series B Preferred Stock. The Company has had a consolidated
net loss since March 23, 1993. Thus, pursuant to the terms of the
Series B Preferred Stock, the Company was prohibited from paying
the June 30, 1993 and December 31, 1993 cash dividends on the
Series C Preferred Stock.
The unpaid dividends themselves bear a dividend of 5%, and are
due on the next regularly scheduled dividend payment date for the
Series C Preferred Stock. The Company intends to pay the unpaid
dividends, plus the additional dividends thereon, as soon as it has
generated sufficient net income to permit such payment to occur or
as soon as the Series B Preferred Stock has been redeemed, provided
that such payment does not impair the capital of LIVE and is
permitted under the Delaware General Corporation Law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 11 - Computation of Income (Loss) Per
Common Share (Unaudited).
Reports on Form 8-K: None.
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.
LIVE ENTERTAINMENT INC.
Dated: May ____, 1994 By: /s/ MICHAEL J. WHITE
Michael J. White
Acting Chief Financial Officer
<PAGE>
EXHIBIT 11
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three months ended
March 31,
1993 1994
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding . . . . . . . . . 12,087 12,094
Net income (loss) from continuing operations. . . . .$ 340 $ (2,838)
Net loss from discontinued operations . . . . . . . . (1,068) --
Less preferred dividends. . . . . . . . . . . . . . . 767 937
Net loss attributable to common stock . . . . . . . .$ (1,495) $ (3,775)
Net income (loss) per common share
Continuing operations. . . . . . . . . . . . . . . . $ (0.03) $ (0.31)
Discontinued operations. . . . . . . . . . . . . . . (0.09) --
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.31)
