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 June 30, 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 August 1, 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 June 30, 1994. . . . . . . . . . 1-2
Condensed Consolidated Statements of
Operations for the three and six months ended
June 30, 1993 and 1994 . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1993 and 1994 . . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . 5-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 14-21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 22-23
ITEM 3(b).DEFAULTS UPON SENIOR SECURITIES - DIVIDEND
ARREARAGE ON PREFERRED STOCK . . . . . . . . . . . . . 24
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 24-25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . 27
<PAGE>
PART I - FINANCIAL INFORMATION
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
December 31, June 30,
1993 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $17,173 and $6,968 . . . . . . . . . . . . $ 42,358 $ 41,398
Accounts receivable, less allowances of $25,440
in 1993. . . . . . . . . . . . . . . . . . . . . . 2,432 --
Officer and employee receivables. . . . . . . . . . 407 280
Inventories . . . . . . . . . . . . . . . . . . . . 10,124 9,979
Video rights. . . . . . . . . . . . . . . . . . . . 29,839 24,302
Deferred income taxes . . . . . . . . . . . . . . . 4,176 3,876
Other . . . . . . . . . . . . . . . . . . . . . . . 1,136 1,313
Assets held for sale. . . . . . . . . . . . . . . . 86,000 76,445
TOTAL CURRENT ASSETS 176,472 157,593
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . 1,686 1,628
RECEIVABLE FROM AFFILIATE. . . . . . . . . . . . . . 8,047 6,562
VIDEO RIGHTS, net of accumulated amortization
of $429,881 and $448,562. . . . . . . . . . . . . . 32,228 36,291
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 1,320 299
GOODWILL, net of accumulated amortization of
$32,193 and $34,155 . . . . . . . . . . . . . . . . 33,796 31,834
$ 253,549 $ 234,207
(Continued)
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
(Amounts in Thousands)
December 31, June 30,
1993 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
12% Subordinated Secured Notes due 1994 . . . . . . $ 36,707 $ 36,914
Current maturities of long-term obligations . . . . 8,043 7,690
Current maturities of Increasing Rate Senior
Subordinated Notes . . . . . . . . . . . . . . . . 3,791 3,791
Video rights obligations. . . . . . . . . . . . . . 15,850 9,541
Accounts payable, deferred revenue and accrued
expenses . . . . . . . . . . . . . . . . . . . . . 18,343 19,220
Accrual for returns and advertising net of
accounts receivable of $12,706 in 1994. . . . . . -- 7,492
Liabilities related to assets held for sale . . . . 46,601 37,073
Series B Cumulative Convertible Preferred Stock
(5,000,000 shares 1993 and 4,375,000 shares 1994). 40,000 35,000
Dividends payable . . . . . . . . . . . . . . . . . 1,340 967
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 170,675 157,688
LONG-TERM OBLIGATIONS, less current maturities . . . 3,333 --
INCREASING RATE SENIOR SUBORDINATED NOTES DUE
1999, including capitalized interest of
$20,662 and $18,819, less current maturities. . . . 56,871 55,027
DEFERRED REVENUE AND ACCRUED EXPENSES, less
current portion . . . . . . . . . . . . . . . . . . 1,740 1,646
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 ($15,400,000
redemption value 1994); 1,000,000 (1993) and
1,625,000 (1994) shares outstanding. . . . . . . . 1,000 1,625
Series C Convertible Preferred Stock-- 15,000 shares
authorized and outstanding; $1.00 par value;
liquidation preference of $15,589,000 (1993) and
$15,978,000 (1994) . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . 106,507 110,882
Retained deficit. . . . . . . . . . . . . . . . . . (96,901) (102,985)
10,742 9,658
$ 253,549 $ 234,207
See notes to consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Six Months
Ended June 30, Ended June 30,
1993 1994 1993 1994
Net Sales. . . . . . . . . . . . . . . . . . . .$35,167 $29,151 $64,699 $47,416
Cost of goods sold . . . . . . . . . . . . . . . 27,745 23,569 51,667 38,766
GROSS PROFIT. . . . . . . . . . . . . . . . . 7,422 5,582 13,032 8,650
Operating Expenses:
Selling, general and administrative expenses. . 3,885 4,450 7,814 8,166
Amortization of goodwill. . . . . . . . . . . . 981 981 1,962 1,962
4,866 5,431 9,776 10,128
2,556 151 3,256 (1,478)
Disposal of VCL/Carolco Communications GmbH:
Net Sales . . . . . . . . . . . . . . . . . . . 9,083 -- 14,853 --
Costs and Expenses. . . . . . . . . . . . . . . 11,146 -- 16,779 --
(2,063) -- (1,926) --
OPERATING PROFIT (LOSS) . . . . . . . . . . . 493 151 1,330 (1,478)
Interest expense, net . . . . . . . . . . . . . (1,589) (1,220) (2,086) (2,429)
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . (1,096) (1,069) (756) (3,907)
Income tax expense. . . . . . . . . . . . . . . -- 300 -- 300
LOSS FROM CONTINUING OPERATIONS . . . . . . . (1,096) (1,369) (756) (4,207)
Discontinued Operations:
Loss from discontinued operations
net of income taxes . . . . . . . . . . . . . (445) -- (1,513) --
LOSS FROM DISCONTINUED OPERATIONS . . . . . (445) -- (1,513) --
NET LOSS. . . . . . . . . . . . . . . . . .$(1,541)$(1,369)$(2,269)$(4,207)
Loss per common share:
Continuing operations . . . . . . . . . . . . .$ (.17)$ (.34)$ (.20)$ (.70)
Discontinued operations . . . . . . . . . . . . (.04) -- (.13) --
Net loss. . . . . . . . . . . . . . . . . . . .$ (.21)$ (.34)$ (.33)$ (.70)
Weighted average number of shares outstanding. . 12,087 12,094 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)
Six Months Ended
June 30,
1993 1994
OPERATING ACTIVITIES:
Loss from continuing operations . . . . . . . . . . $ (756) $ (4,207)
Adjustments to reconcile net loss to
net cash provided by (used for) continuing
operating activities:
Depreciation and amortization of property
and equipment. . . . . . . . . . . . . . . . . . 652 268
Amortization of goodwill. . . . . . . . . . . . . 2,456 1,962
Amortization of and adjustments to video rights . 34,332 18,681
Income taxes payable and deferred income taxes. . (689) 300
Utilization of pre-acquisition net operating
loss carryforwards . . . . . . . . . . . . . . . (18) --
(Increase) decrease in operating assets, net of
acquisitions:
Accounts receivable . . . . . . . . . . . . . . . 2,131 2,432
Officer and employee receivables. . . . . . . . . 174 127
Inventories . . . . . . . . . . . . . . . . . . . 1,316 145
Assets held for sale. . . . . . . . . . . . . . . 2,891 9,555
Receivable from stockholder . . . . . . . . . . . 1,752 1,485
Other assets. . . . . . . . . . . . . . . . . . . (2,808) 844
Increase (decrease) in operating liabilities,
net of acquisitions:
Accounts payable and accrued expenses . . . . . . (10,295) (1,094)
Accrual for returns and advertising . . . . . . . -- 7,492
Liabilities related to assets held for sale . . . 552 (9,528)
Acquisition of and adjustment to video rights . . (47,204) (17,207)
Video rights obligations incurred . . . . . . . . 47,204 17,207
Payments on video rights obligations. . . . . . . (50,339) (23,516)
Cash provided by (used for) continuing
operating activities . . . . . . . . . . . . . (18,649) 4,946
Cash provided by (used for) discontinued
operations . . . . . . . . . . . . . . . . . . (1,798) --
Cash provided by (used for) operating
activities . . . . . . . . . . . . . . . . . . (20,447) 4,946
INVESTING ACTIVITIES:
Acquisition of property and equipment . . . . . . . (1,913) (210)
Cash used for investing activities. . . . . . . (1,913) (210)
FINANCING ACTIVITIES:
Issuance of bank debt and long-term obligations . . 140,383 207
Payments on bank debt and long-term obligations . . (121,621) (5,530)
Payment of debt restructuring expenses. . . . . . . (987) --
Dividends accrued but not paid. . . . . . . . . . . -- (373)
Issuance of Series C Preferred Stock. . . . . . . . 14,550 --
Cash provided by (used for) financing
activities . . . . . . . . . . . . . . . . . . 32,325 (5,696)
Effect of exchange rate changes . . . . . . . . (443) --
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . 9,522 (960)
Cash and cash equivalents at beginning
of period. . . . . . . . . . . . . . . . . . . 18,847 42,358
Cash and cash equivalents at end of period. . . $ 28,369 $ 41,398
See notes to consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1994
Note 1 - Going Concern
On January 28, 1994, the bank credit facility (the "Existing
LIVE Credit Facility") between LIVE Entertainment Inc. ("LIVE")
and LIVE Home Video Inc. ("LHV") and a group of banks headed by
Chemical Bank and Credit Lyonnais Bank Nederland N.V. (the
"Existing LIVE Bank Group") was amended. The maximum credit
available under the Existing LIVE Credit Facility was reduced to
$20,000,000 effective on the date of the amendment. The
commitments under the Existing LIVE Credit Facility were further
reduced on a monthly basis. In July, 1994, the Existing LIVE Bank
Group agreed to amend the Existing LIVE Credit Facility to (i)
eliminate all lenders thereunder other than Chemical Bank, (ii)
reduce the maximum amount of credit available thereunder to $1,000,
and (iii) extend the maturity date thereof to August 31, 1994. The
amendment was intended to preserve the priority of existing
security interests pending completion of negotiations for the New
LIVE Credit Facility described in the following paragraph and did
not include any waiver of past defaults. As of the date hereof,
there are no amounts owed under the Existing LIVE Credit Facility
which matures on August 31, 1994.
LIVE is in negotiations with Chemical Bank, as well as others,
to obtain a replacement source of financing for the Existing LIVE
Credit Facility, having a credit limit of at least $30,000,000 with
a term of eighteen months (the "New LIVE Credit Facility"). A
condition to obtaining the New LIVE Credit Facility is the
agreement of the holders of at least $31,000,000 in principal
amount of LIVE's $37,000,000 in 12% Subordinated Secured Notes Due
September 1994 (the "LIVE 12% Notes") to extend the present
September 15, 1994 maturity date for payment of the LIVE 12% Notes
held by them to a date which would be not earlier than three months
after the maturity date of the New LIVE Credit Facility (the "LIVE
12% Note Extension"). Although management of LIVE is negotiating
to obtain both the New LIVE Credit Facility and the LIVE 12% Note
Extension prior to the present maturity date of the LIVE 12% Notes,
there can be no assurance that LIVE will be successful in these
efforts. If LIVE is unable to obtain replacement financing of at
least $31,000,000 or an extension of the maturity of the LIVE 12%
Notes, it may not be in a position to pay the amounts due under the
LIVE 12% Notes upon the maturity thereof and might not be able to
continue as a going concern.
As a result of LIVE'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., and (b) its German video distribution
subsidiary, VCL/Carolco Communications GmbH ("VCL"), LIVE was not
in compliance with a number of ratios under the Existing LIVE
Credit Facility and the Indenture governing the LIVE 12% Notes (the
"LIVE 12% Note Indenture") as of December 31, 1993, March 31, 1994
and June 30, 1994. Neither Chemical Bank nor the holders of the
LIVE 12% Notes have waived these defaults. Chemical Bank has
informed LIVE that it does not intend to grant such waivers.
Therefore, under the terms of the Existing LIVE Credit Facility,
LIVE is not able to borrow any amounts thereunder. Furthermore, as
a result of the existence of the unwaived defaults, under the terms
of the Existing LIVE Credit Facility Chemical Bank could terminate
the Existing LIVE Credit Facility at any time. Under the terms of
the LIVE 12% Note Indenture, as long as the default does not relate
to non-payment thereunder or bankruptcy of LIVE, the holders of the
LIVE 12% Notes are not entitled to declare any default under the
LIVE 12% Notes or the LIVE 12% Note Indenture, or accelerate
payment of the LIVE 12% Notes, unless the Existing LIVE Credit
Facility is accelerated or is terminated. If Chemical Bank
exercises its right to terminate the Existing LIVE Credit Facility,
the holders of the LIVE 12% Notes would be entitled to accelerate
payment of the amounts due to them. If such acceleration occurred,
an event of default would exist under LIVE's $40,000,000 of
Increasing Rate Senior Subordinated Notes due 1999 (the "LIVE
Increasing Rate Notes") entitling the holders of the LIVE
Increasing Rate Notes to accelerate payment thereof as well. If
such accelerations occurred, LIVE most likely would not be in a
position to pay the amounts due. Management of LIVE believes,
although no assurances can be given, that Chemical Bank will
continue to extend the Existing LIVE Credit Facility and forbear
from terminating the Existing LIVE Credit Facility pending
consummation of the New LIVE Credit Facility.
Without either replacement facilities or an agreement for
extension, the Existing LIVE Credit Facility will be due on August
31, 1994 and the LIVE 12% Notes will be due on September 15, 1994.
LIVE believes that at the end of 1994 it may be in violation of
the minimum consolidated net worth covenant contained in the LIVE
Increasing Rate Note Indenture. Such default would permit the
trustee thereunder or holders of 25% in aggregate principal amount
of LIVE Increasing Rate Notes to give notice and accelerate the
indebtedness represented by the LIVE Increasing Rate Notes. If
such indebtedness were accelerated, it is unlikely that LIVE would
be in a position to pay the amount due. Repayment of the amounts
due under the LIVE Increasing Rate Note Indenture is subordinate to
repayment in full of all amounts due under the Existing LIVE Credit
Facility, if any, as well as repayment in full of all amounts due
under the LIVE 12% Note Indenture.
These conditions raise substantial doubt about LIVE's ability to
continue as a going concern.
LIVE's management is taking the following actions to address the
liquidity and capital resources issues facing it:
(a) LIVE is in negotiations with Chemical Bank and other
potential financing sources to obtain the New LIVE Credit
Facility prior to the expiration of the Existing LIVE
Credit Facility.
(b) LIVE has held preliminary discussions with holders of LIVE
12% Notes regarding obtaining the LIVE 12% Note Extension.
There is no assurance, however, that LIVE will be successful in
any of these activities.
LIVE's receipt of the New LIVE Credit Facility, the LIVE 12%
Note Extension and certain other amendments to the LIVE 12% Notes,
and various amendments to the LIVE Increasing Rate Note Indenture
to, among other matters, eliminate the minimum consolidated net
worth covenant contained therein, are conditions to the business
combination of LIVE and Carolco Pictures Inc. ("Carolco").
Note 2 - Agreement on Business Combination with Carolco
In March 1994, LIVE and Carolco reached agreement in principle
on a business combination (the "Merger"), and executed a Merger
Agreement with respect thereto on August 11, 1994. The Merger has
been 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 Merger, 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 Merger. If the Merger had closed on
August 1, 1994, the exchange ratio would have been one share of
newly issued LIVE Common Stock for each 6.5 shares of Carolco
Common Stock.
As a result of the Merger, the current LIVE stockholders will
own between 21% and 28% of the combined company, the name of which
will be changed to Carolco Entertainment Inc.
The Merger is subject to a number of conditions, including (a)
redemption of LIVE's Series B Cumulative Convertible Preferred
Stock (the "LIVE Series B Preferred"), (b) amendments to the LIVE
12% Note Indenture, the Indenture governing the LIVE Increasing
Rate Notes (the "LIVE Increasing Rate Note Indenture"), and the
terms of LIVE's Series C Convertible Preferred Stock (the "LIVE
Series C Preferred"), (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 Merger. The Merger is also subject to approval by
the majority of the non-affiliated common stockholders of each of
Carolco and LIVE.
Note 3 - Agreement for Sale of Specialty Retail Division;
Redemption of LIVE Series B Preferred
In July 1994, LIVE entered into agreements (collectively, the
"Strawberries Purchase Agreement") with Strawberries Acquisition
Corp. ("SAC"), providing for the sale of the Specialty Retail
Division to SAC for the total purchase price of $35,000,000. SAC
is an affiliate of Daniels & Associates, Jefferson Capital Group,
Ltd. (an affiliate of LIVE director R. Timothy O'Donnell) and Ivan
Lipton (President of the Specialty Retail Division). Although
there is no certainty that such sale will close, if the sale does
not close by September 7, 1994 through no fault of LIVE, SAC will
forfeit $250,000 in earnest money deposited on the signing of the
Strawberries Purchase Agreement.
The LIVE Series B Preferred is mandatorily redeemable from the
net proceeds of any sale of the Specialty Retail Division. As a
result of LIVE's decision to dispose of its interest in the
Specialty Retail Division, a total of $40,000,000 of LIVE Series B
Preferred had been re-classified from equity to current liabilities
as of December 31, 1993 reflecting LIVE's then expectation to sell
the Specialty Retail Division for $40,000,000. As a result of the
Strawberries Purchase Agreement, such re-classification was
decreased to $35,000,000 as of June 30, 1994. As of July 31, 1994,
the aggregate redemption price for the LIVE Series B Preferred was
$51,000,000 and that redemption price increases by an additional
$600,000 per month through October 1995, when the redemption price
reaches $60,000,000 and remains at that price thereafter. One of
the conditions of the Merger is the redemption of all of the LIVE
Series B Preferred prior to the closing of the Merger.
Upon the sale of the Specialty Retail Division to SAC in
accordance with the Strawberries Purchase Agreement, LIVE will use
the proceeds to redeem a portion of the LIVE Series B Preferred on
the following conditions:
(i) Chemical Bank, or if the Existing LIVE Credit Facility
is replaced, the participant banks under such
replacement facility, permits such redemption to occur;
and
(ii) the appropriate consents are obtained under the LIVE 12%
Note Indenture; and
(iii) such redemption does not impair the capital of LIVE and
is not prohibited under the Delaware General Corporation
Law ("DGCL").
The proceeds of the sale of the stock of the Specialty Retail
Division to SAC pursuant to the Strawberries Purchase Agreement
will not be sufficient to redeem the outstanding LIVE Series B
Preferred in its entirety. LIVE has had discussions with certain
holders of LIVE 12% Notes who have indicated a willingness to
provide LIVE with up to $17,000,000 to use to redeem that portion
of the LIVE Series B Preferred that is not redeemed from the
proceeds of the sale of the Specialty Retail Division, on the
following conditions:
(i) the indebtedness is evidenced by the issuance of
additional LIVE 12% Notes in principal amount equal to
the funds provided;
(ii) the holders of not less than $31,000,000 in principal
amount of the LIVE 12% Notes consent to the increase in
the total principal amount of the LIVE 12% Notes;
(iii) Chemical Bank, or if the Existing LIVE Credit Facility
is replaced, the participant banks under such
replacement facility, permits the issuance of such
additional LIVE 12% Notes and the use of the proceeds
thereof to redeem the LIVE Series B Preferred; and
(iv) such redemption does not impair the capital of LIVE and
is not prohibited under the DGCL.
There is no assurance that the sale of the Specialty Retail
Division will occur, that the proceeds of such sale will equal
$35,000,000, that LIVE's banks will agree to the use of the
proceeds of the sale of the Specialty Retail Division to redeem the
LIVE Series B Preferred, that holders of LIVE 12% Notes will agree
to provide LIVE with up to an additional $17,000,000 to use to
redeem that portion of the LIVE Series B Preferred that is not
redeemed from the proceeds of the sale of the Specialty Retail
Division, that the holders of at least $31,000,000 in principal
amount of the LIVE 12% Notes will consent to the increase in the
total principal amount of the LIVE 12% Notes and the use of the
proceeds thereof to redeem the LIVE Series B Preferred, or that any
such redemption will not impair the capital of LIVE and will not be
prohibited under the DGCL. In any of such events, LIVE may not be
able to redeem the LIVE Series B Preferred and, unless it is
waived, one of the conditions to the Merger will not have been
satisfied.
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 (including CD-ROM)
which they market and distribute in all media worldwide. LIVE's
primary activities are in the distribution of product on
videocassettes to wholesalers, retailers and consumers in the
United States and Canada (LHV) and internationally (LIVE NV). As
described above, in July 1994 LIVE entered into the Strawberries
Purchase Agreement providing for the sale of the Specialty Retail
Division. LIVE owns an 81% interest in VCL, a home video
distribution and marketing company headquartered in Munich,
Germany. As discussed below, LIVE also intends to dispose of its
interest in VCL. VCL's year-end is November 30. The Specialty
Retail Division engages in the retail sale of audio records and
tapes, compact discs and video products and consists of 148 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, LIVE decided to dispose of its interests
in the Specialty Retail Division and VCL. The sale pursuant to the
Strawberries Purchase Agreement will be effected in such a manner
whereby the buyer assumes all liabilities; likewise, LIVE expects
the sale of VCL to be effected in such a manner whereby the buyer
also assumes all liabilities. LIVE's continuing operations are
primarily in a single business segment, the distribution and retail
sale of a broad variety of entertainment software products.
Basis of Presentation: The accompanying consolidated
financial statements and footnotes are unaudited and are condensed,
as contemplated by the Securities and Exchange Commission under
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all
disclosures required by generally accepted accounting principles,
but in the opinion of management of LIVE include all adjustments
(consisting only of normal recurring accruals) necessary to fairly
state the financial position and results of operations of LIVE.
The financial statements include the accounts of LIVE and its
subsidiaries - LHV, the Specialty Retail Division, LIVE NV and VCL.
The financial statements reflect LIVE'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 and
VCL as a disposal of a portion of a line of business. All
significant intercompany balances and transactions have been
eliminated.
Net Loss Per Common Share: Per share information has been
determined on the basis of 12,093,610 weighted average shares
outstanding for the three and six months ended June 30, 1994 and
12,087,922 weighted average shares outstanding for the three and
six months ended June 30, 1993. The net loss per common share for
the three and six months ended June 30, 1994 gives effect to the
accretion of the redemption value of the LIVE Series B Preferred of
$1,800,000 and $2,400,000 respectively. The net loss per common
share for the three months ended June 30, 1993 and June 30, 1994
gives effect to dividends on both the LIVE Series B Preferred and
the LIVE Series C Preferred of $937,000 and $940,000, respectively.
The net loss per common share for the six months ended June 30,
1993 and June 30, 1994 gives effect to dividends on both the LIVE
Series B Preferred and the LIVE Series C Preferred of $1,704,000
and $1,877,000, respectively.
LIVE suggests that these condensed consolidated financial
statements be read in conjunction with its consolidated financial
statements for the year ended December 31, 1993 and related notes
thereto included on Form 10-K filed with the Securities and
Exchange Commission.
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 LIVE against LIVE, Carolco and certain of
LIVE'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 LIVE'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 LIVE 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 LIVE 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 defendant 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 LIVE, 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 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 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.
Discovery is currently taking place in both lawsuits.
On March 24, 1994, the same day that the signing of a letter
of intent with respect to the Merger was announced, a purported
class action lawsuit was filed in the Court of Chancery of the
State of Delaware in and for New Castle County by an alleged
stockholder of LIVE against LIVE, Carolco, certain of Carolco's and
LIVE's past and present executive officers and directors, Pioneer
and Cinepole Productions B.V., a stockholder of both LIVE and
Carolco ("Cinepole"). The complaint alleges, among other things,
that the defendants have violated their fiduciary duties owed to
LIVE's stockholders in connection with the Merger. The plaintiff
seeks a preliminary and permanent injunction enjoining the Merger
under its current financial terms; an open market auction of LIVE;
to the extent the Merger is consummated prior to the entry of a
final judgment in the action, rescission of the Merger; repayment
of profits and benefits obtained as a result of the defendants'
alleged conduct; and attorneys fees and expenses.
Management and counsel to LIVE are unable to predict the
ultimate outcome of the above-described actions at this time.
However, LIVE 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 LIVE's consolidated financial statements. In the
opinion of management, these actions, when finally concluded and
determined, will not have a material adverse effect upon LIVE'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 LIVE'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 June 30, 1994 Compared to Three Months
Ended June 30, 1993
Continuing Operations
Net sales of LHV decreased to $29,151,000 in the second
quarter of 1994 compared to $35,167,000 during the comparable 1993
quarter. The decrease of $6,016,000 or 17.1% is primarily
attributable to a weaker release schedule in the second quarter of
1994 compared to the second quarter of 1993. LHV released only
three rental titles during the three months ended June 30, 1994
compared to ten rental titles during the comparable period in 1993.
The decrease in sales resulting from fewer rental releases in the
second quarter of 1994 was partially offset by an increase in sell-
through sales.
Gross profits of LHV decreased $1,840,000, or 24.8%, to
$5,582,000 during the second quarter of 1994 compared to $7,422,000
during the second quarter of 1993. The decrease in gross profit
dollars was primarily related to the decrease in sales and an
increase in amortization of video rights costs related to
adjustments in projected values of certain film properties. As a
percentage of sales, gross profit decreased from 21.0% during 1993
to 19.2% during 1994, primarily due to a combination of the
decrease in rental sales, which usually generate higher margins,
and an increase in sell-through sales which usually generate lower
margins.
Selling, general and administrative expenses of LHV increased
$565,000, or 14.6%, to $4,450,000 during 1994 compared to
$3,885,000 during 1993. As a percentage of sales, the amount
increased from 11.1% during 1993 to 15.3% during 1994. The dollar
increase is primarily a result of approximately $500,000 in
expenses related to the Merger. The percentage increase is
primarily due to the decrease in sales and the increase in
expenses.
Net interest expense of LHV decreased $369,000, or 23.3%, to
$1,220,000 during 1994 compared to $1,589,000 during 1993 resulting
from a reduction in amortization of loan fees which are included in
interest expense.
Preferred dividends of $940,000 in 1994 and $937,000 in 1993
represent the 5% cash dividend accrued on both the LIVE Series B
Preferred and the LIVE Series C Preferred.
<PAGE>
Discontinued Operations
As a result of LIVE's decision to dispose of its interests in
the Specialty Retail Division and VCL, the Specialty Retail
Division's results of operations for the three months ended June
30, 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 June 30, 1994. Losses of $468,000 and
$1,033,000 have been charged against the respective provisions
during the three months ended June 30, 1994.
Six Months Ended June 30, 1994 Compared to Six Months Ended
June 30, 1994
Continuing Operations
Net sales of LHV decreased to $47,416,000 during the first six
months of 1994 compared to $64,699,000 during the first six months
of 1993. The decrease of $17,283,000, or 26.7%, is primarily
attributable to a weaker release schedule in the first six months
of 1994 compared to the first six months of 1993. LHV released
seven rental titles during the six months ended June 30, 1994
compared to eighteen rental titles during the comparable period in
1993. The decrease in sales resulting from fewer rental releases
in the first six months of 1994 was partially offset by an increase
in sell-thru and catalog sales.
Gross profits of LHV decreased $4,382,000, or 33.6%, to
$8,650,000 during the first six months of 1994 compared to
$13,032,000 during the first six months of 1993. The decrease in
gross profit dollars was primarily related to the decrease in sales
and an increase in amortization of video rights costs related to
adjustments in projected values of certain film properties. As a
percentage of sales, gross profit decreased from 20.2% during 1993
to 18.3% during 1994, primarily due to a combination of the
decrease in rental sales, which usually generate higher margins,
and an increase in sell-through and catalog sales, which usually
generate lower margins.
Selling, general and administrative expenses of LHV increased
$352,000, or 4.5%, to $8,166,000 during 1994 compared to $7,814,000
during 1993. As a percentage of sales, the amount increased from
12.1% during 1993 to 17.3% during 1994. The dollar increase is
primarily a result of approximately $500,000 in expenses related to
the Merger. The percentage increase is primarily due to the
decrease in sales.
Net interest expense of LHV increased $343,000, or 16.5%, to
$2,429,000 during 1994 compared to $2,086,000 during 1993,
resulting from the issuance of the LIVE 12% Notes in March 1993,
partially offset by increased interest income in 1994.
Preferred dividends of $1,877,000 in 1994 and $1,704,000 in
1993 represents the 5% cash dividend accrued on both the LIVE
Series B Preferred and the LIVE Series C Preferred.
Discontinued Operations
As a result of the Board of Directors' decision to dispose of
LIVE's interests in the Specialty Retail Division and VCL, the
Specialty Retail Division's results of operations for the six
months ended June 30, 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 six months ended June 30, 1994.
Losses of $1,324,000 and $1,963,000 have been charged against the
respective provisions during the six months ended June 30, 1994.
Liquidity and Capital Resources
In the second quarter of 1994, management of LIVE decided to
begin releasing fewer rental titles per month than in prior years
for a number of reasons, among them being: (a) fewer titles being
purchased by LIVE since late 1991 due to the liquidity problems
encountered by LIVE since that time, (b) a shift in rental market
tastes, with a much greater portion of video store purchases being
devoted to theatrically released "A" titles than lower budgeted,
straight to video or television "B" titles that have been the
predominant titles released by LIVE since 1992, and (c) an increase
in the absolute number of "B" titles in the marketplace, resulting
in increased competition for decreasing retailer purchase funds.
Management currently intends to address these issues by (i)
reducing its number of rental titles released per month,
particularly the direct-to-video "B" titles, allowing LIVE's
marketing and sales forces to place increased emphasis on a smaller
number of titles, (ii) acquiring more rights to films than only
domestic video rights (including theatrical, television,
international and CD-ROM) and diversifying its business to license
such additional rights directly rather than through intermediaries,
(iii) continuing LIVE's focus on the sell-through business,
exploiting LIVE's library of over 2,000 titles including children's
and special interest programs, and (iv) attempting to release a
higher percentage of "A" titles by increasing its efforts to
acquire films with greater theatrical release potential. Obtaining
the New LIVE Credit Facility and the LIVE 12% Note Extension are
critical factors in this latter effort.
Management believes that the decrease in revenues due to fewer
rental releases per month will eventually be compensated for
through a combination of increased ancillary revenues (such as
theatrical, television, international and CD-ROM) and higher
revenues per rental release due to a combination of increased focus
on fewer titles and a higher percentage of "A" title acquisitions.
There is no assurance that this will be the case, however.
The LIVE Series B Preferred is mandatorily redeemable from the
net proceeds of any sale of the Specialty Retail Division. As a
result of LIVE's decision to dispose of its interest in the
Specialty Retail Division, a total of $40,000,000 of the LIVE
Series B Preferred was re-classified from equity to current
liabilities at December 31, 1993 reflecting LIVE's then expectation
to sell the Specialty Retail Division for no less than $40,000,000.
As a result of the Strawberries Purchase Agreement, such re-
classification was decreased to $35,000,000 as of June 30, 1994.
Because of the establishment of contingency reserves in connection
with the original decision to dispose of the Specialty Retail
Division, no additional expense has been recorded in connection
with the reduced sale price for the Specialty Retail Division.
At June 30, 1994, LIVE had total current assets of
$157,593,000 and total current liabilities of $157,688,000,
resulting in negative working capital of $95,000, a decrease of
$5,892,000 compared to LIVE's working capital at December 31, 1993.
Historically, LIVE 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 LIVE 12% Notes. For the six
months ending June 30, 1994, LIVE generated positive cash flow from
continuing operations of $4,946,000.
On May 11, 1992, LHV entered into a three-year distribution
agreement with WEA Corp. ("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 (4.56% at June 30, 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 June 30, 1994 was
$6,666,667.
In 1993, LIVE received a total of $37,000,000 upon issuance of
the LIVE 12% Notes. The total borrowings under the LIVE 12% Notes
will provide sufficient funds to permit LHV to acquire additional
films for distribution.
Investing activities generated a negative cash flow during the
first six months of 1994 of $210,000, primarily as a result of the
acquisition of property and equipment at LHV.
On January 28, 1994, the Existing LIVE Credit Facility with
the Existing LIVE Bank Group was amended. The maximum credit
available under the Existing LIVE Credit Facility was reduced to
$20,000,000 effective on the date of the amendment. The
commitments under the Existing LIVE Credit Facility were further
reduced on a monthly basis. On July 29, 1994, the Existing LIVE
Bank Group agreed to amend the Existing LIVE Credit Facility to (i)
eliminate all lenders thereunder other than Chemical Bank, (ii)
reduce the maximum amount of credit available thereunder to $1,000,
and (iii) extend the maturity date thereof to August 31, 1994. The
amendment did not include any waiver of past defaults. The purpose
of the amendment was to preserve liens on collateral pending
completion of negotiations for the New LIVE Credit Facility. As of
the date hereof, there are no amounts owed under the Existing LIVE
Credit Facility which matures on August 31, 1994.
LIVE is in negotiations with Chemical Bank, as well as others,
to obtain the New LIVE Credit Facility prior to the expiration of
the Existing LIVE Credit Facility. LIVE also is in negotiations
with holders of $31,000,000 in principal amount of the LIVE 12%
Notes to obtain the LIVE 12% Note Extension. A condition to
obtaining the New LIVE Credit Facility is that LIVE obtain the LIVE
12% Note Extension. Although management of LIVE is negotiating to
obtain both the New LIVE Credit Facility and the LIVE 12% Note
Extension prior to the present maturity date of the LIVE 12% Notes,
there can be no assurance that LIVE will be successful in these
efforts. If LIVE is unable to obtain replacement financing of at
least $31,000,000 or an extension of the maturity of the LIVE 12%
Notes, it may not be in a position to pay the amounts due under the
LIVE 12% Notes upon the maturity thereof.
As a result of LIVE's operating results in 1993, as well as
its decision to dispose of the Specialty Retail Division and VCL,
LIVE was not in compliance with a number of ratios under the
Existing LIVE Credit Facility and the LIVE 12% Note Indenture as of
December 31, 1993, March 31, 1994 and June 30, 1994. Neither
Chemical Bank nor the holders of the LIVE 12% Notes have waived
these defaults. Chemical Bank has informed LIVE that it does not
intend to grant such waivers. Therefore, under the terms of the
Existing LIVE Credit Facility, LIVE is not able to borrow any
amounts thereunder. Furthermore, as a result of the existence of
the unwaived defaults, under the terms of the Existing LIVE Credit
Facility Chemical Bank could terminate the Existing LIVE Credit
Facility at any time. Under the terms of the LIVE 12% Note
Indenture, as long as the default does not relate to non-payment
thereunder or bankruptcy of LIVE, the holders of the LIVE 12% Notes
are not entitled to declare any default under the LIVE 12% Notes or
the LIVE 12% Note Indenture, or accelerate payment of the LIVE 12%
Notes, unless the Existing LIVE Credit Facility is accelerated or
is terminated. If Chemical Bank exercises its right to terminate
the Existing LIVE Credit Facility, the holders of the LIVE 12%
Notes would be entitled to accelerate payment of the amounts due to
them. If such acceleration occurred, an event of default would
exist under the LIVE Increasing Rate Notes allowing the holders of
the LIVE Increasing Rate Notes to accelerate payment thereof as
well. If such accelerations occurred, LIVE most likely would not
be in a position to pay the amounts due. Management of LIVE
believes, although no assurances can be given, that Chemical Bank
will continue to extend the Existing LIVE Credit Facility and
forbear from terminating the Existing LIVE Credit Facility pending
consummation of the New LIVE Credit Facility.
Without either replacement facilities or an agreement for
extension, the Existing LIVE Credit Facility will be due on August
31, 1994 and the LIVE 12% Notes will be due on September 15, 1994.
LIVE believes that at the end of 1994 it may be in violation
of the minimum consolidated net worth covenant contained in the
LIVE Increasing Rate Note Indenture. Such default would permit the
trustee thereunder or holders of 25% in aggregate principal amount
of LIVE Increasing Rate Notes to give notice and accelerate the
indebtedness represented by the LIVE Increasing Rate Notes. If
such indebtedness were accelerated, it is unlikely that LIVE would
be in a position to pay the amount due. Repayment of the amounts
due under the LIVE Increasing Rate Note Indenture is subordinate to
repayment in full of all amounts due under the Existing LIVE Credit
Facility, if any, as well as repayment in full of all amounts due
under the LIVE 12% Note Indenture.
The LIVE 12% Notes were issued on March 26, 1993. Repayment
of the LIVE 12% Notes has been guaranteed by the same subsidiaries
of LIVE that are borrowers under the Existing LIVE Credit Facility.
The LIVE 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 LIVE 12% Note Indenture includes
warranties, financial ratios, covenants and restrictions which
generally mirror the terms of the Existing LIVE Credit Facility.
Repayment of the LIVE 12% Notes is subordinated to repayment of the
Existing LIVE Credit Facility. Until payment in full and
termination of the Existing LIVE Credit Facility, the rights of
holders of the LIVE 12% Notes to accelerate payment thereunder are
limited to payment defaults and/or acceleration of the Existing
LIVE Credit Facility. Repayment of the LIVE 12% Notes is secured
by a lien on all of the assets of LIVE and LHV, subordinate to the
lien under the Existing LIVE 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 second fiscal quarter
of 1994, $11,622,000 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. In July 1994, LIVE
entered into an agreement to sell the Specialty Retail Division,
which sale LIVE expects to close in August 1994.
The Specialty Retail Division owns the building housing its
corporate headquarters and distribution center in Milford,
Massachusetts. In 1988, the Specialty Retail 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 Specialty Retail 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 July 31, 1994 was
$3,800,000.
Dividends on the LIVE Series C Preferred, at the rate of 5%
per annum on the unreturned $15,000,000 liquidation value of the
LIVE Series C Preferred, are due on June 30 and December 31 of each
year. Although the dividends scheduled to be paid on June 30,
1993, December 31, 1993 and June 30, 1994 were accrued by LIVE,
those dividends were not paid due to restrictions imposed on LIVE
by the terms of the LIVE Series B Preferred, which prohibit the
payment of dividends on the LIVE Series C Preferred unless the
aggregate amount of such dividends, together with all cash
dividends paid on the LIVE Series B Preferred, does not exceed the
net income of LIVE (adding back specified net worth exclusions)
since the March 23, 1993 date of issuance of the LIVE Series B
Preferred and LIVE Series C Preferred. LIVE has had a consolidated
net loss for the period subsequent to March 23, 1993. Thus,
pursuant to the terms of the LIVE Series B Preferred, LIVE was
prohibited from paying the June 30, 1993, December 31, 1993 and
June 30, 1994 cash dividends on the LIVE Series C Preferred which,
together with accrued and unpaid dividends thereon, totalled
$978,255 as of June 30, 1994.
The unpaid LIVE Series C Preferred dividend itself bears a
dividend of 5% per annum, and is due on the next regularly
scheduled dividend payment date for the LIVE Series C Preferred.
LIVE intends to pay the June 30, 1993, December 31, 1993 and June
30, 1994 dividends, plus the additional dividends thereon, as soon
as it has sufficient net income to permit such payment to occur or
as soon as the LIVE Series B Preferred has been redeemed, provided
that such payment does not impair the capital of LIVE and is
permitted under the DGCL.
LIVE experienced negative cash flows from financing activities
of $5,696,000 during the first six months of 1994 primarily due to
interest payments on bank debt and payments on long term
obligations.
LIVE's management is taking the following actions to address
the liquidity and capital resources issues facing it:
(a) LIVE is in negotiations with Chemical Bank and other
potential financing sources to obtain the New LIVE
Credit Facility prior to the expiration of the Existing
LIVE Credit Facility.
(b) LIVE has held preliminary discussions with holders of
the LIVE 12% Notes regarding obtaining the LIVE 12% Note
Extension.
There is no assurance, however, that LIVE will be successful
in any of these activities.
If management is successful in its financing efforts, it
believes that LIVE will have sufficient capital resources to
continue to finance its activities, including the continued
acquisition of additional film titles.
<PAGE>
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 LIVE against LIVE, Carolco and certain of
LIVE'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 LIVE's wholly owned subsidiary,
Lieberman, to 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 LIVE 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 LIVE and Carolco, including 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 defendant 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 LIVE, 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 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 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.
Discovery is currently taking place in both lawsuits.
On March 24, 1994, the same day that the signing of a letter
of intent with respect to the Merger was announced, a purported
class action lawsuit was filed in the Court of Chancery of the
State of Delaware in and for New Castle County by an alleged
stockholder of LIVE against LIVE, Carolco, certain of Carolco's and
LIVE's past and present executive officers and directors, Pioneer
and Cinepole. The complaint alleges, among other things, that the
defendants have violated their fiduciary duties owed to LIVE's
stockholders in connection with the Merger. The plaintiff seeks a
preliminary and permanent injunction enjoining the Merger under its
current financial terms; an open market auction of LIVE; to the
extent the Merger is consummated prior to the entry of a final
judgment in the action, rescission of the Merger; repayment of
profits and benefits obtained as a result of the defendants'
alleged conduct; and attorneys fees and expenses.
Management and counsel to LIVE are unable to predict the
ultimate outcome of the above-described actions at this time.
However, LIVE 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 LIVE's consolidated financial statements. In the
opinion of management, these actions, when finally concluded and
determined, will not have a material adverse effect upon LIVE'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 LIVE's financial position or
results of operations.
<PAGE>
ITEM 3(b). DEFAULTS UPON SENIOR SECURITIES - DIVIDEND ARREARAGE ON
PREFERRED STOCK
Dividends under the LIVE Series C Preferred, at the rate of 5%
per annum on the unreturned $15,000,000 liquidation value of the
LIVE Series C Preferred, are due on June 30 and December 31 of each
year. Although the $188,000 dividend scheduled to be paid on June
30, 1993, the $375,000 dividend scheduled to be paid on December
31, 1993 and the $375,000 dividend scheduled to be paid on June 30,
1994 all were accrued by LIVE, those dividends were not paid due to
restrictions imposed on LIVE by the terms of the LIVE Series B
Preferred, which prohibit the payment of dividends on the LIVE
Series C Preferred unless the aggregate amount of such dividends,
together with all cash dividends paid on the LIVE Series B
Preferred, does not exceed the net income of LIVE (adding back
specified net worth exclusions) since the March 23, 1993 date of
issuance of the LIVE Series C Preferred and the LIVE Series B
Preferred. LIVE has had a consolidated net loss since March 23,
1993. Thus, pursuant to the terms of the LIVE Series B Preferred,
LIVE was prohibited from paying the June 30, 1993, December 31,
1993 and June 30, 1994 cash dividends on the LIVE Series C
Preferred.
The unpaid dividends themselves bear a dividend of 5% per
annum, and are due on the next regularly scheduled dividend payment
date for the LIVE Series C Preferred. LIVE 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 LIVE Series B Preferred has been redeemed,
provided that such payment does not impair the capital of LIVE and
is permitted under the DGCL.
ITEM 5. OTHER INFORMATION
In March 1994, LIVE and Carolco reached agreement in principle
on the Merger, and executed a Merger Agreement with respect thereto
on August 11, 1994. The Merger has been 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 Merger, 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
Merger. If the Merger had closed on August 1, 1994, the exchange
ratio would have been one share of newly issued LIVE Common Stock
for each 6.5 shares of Carolco Common Stock.
As a result of the Merger, the current LIVE stockholders will
own between 21% and 28% of the combined company, the name of which
will be changed to Carolco Entertainment Inc.
The Merger is subject to a number of conditions, including (a)
redemption of the LIVE Series B Preferred, (b) amendments to the
LIVE 12% Note Indenture, LIVE Increasing Rate Note Indenture, and
the terms of the LIVE Series C Preferred, (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 Merger. The Merger is also subject to
approval by the majority of the non-affiliated common stockholders
of each of Carolco and LIVE.
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.
<PAGE>
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: August 15, 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 Six Months
Ended June 30, Ended June 30,
1993 1994 1993 1994
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding . . . . . . 12,087 12,094 12,087 12,094
Net loss from continuing operations . . . . . .$(1,096)$(1,369)$ (756)$(4,207)
Net loss from discontinued operations . . . . . (445) -- (1,513) --
Less preferred dividends. . . . . . . . . . . . 937 940 1,704 1,877
Less accretion in redemption value of
LIVE Series B Cumulative Convertible
Preferred Stock. . . . . . . . . . . . . . . . -- 1,800 -- 2,400
Net loss attributable to common stock . . . . .$(2,478)$(4,109)$(3,973)$(8,484)
Net loss per common share
Continuing operations. . . . . . . . . . . . .$ (0.17)$ (0.34)$ (0.20)$ (0.70)
Discontinued operations. . . . . . . . . . . . (0.04) -- (0.13) --
Net loss. . . . . . . . . . . . . . . . . . . .$ (0.21)$ (0.34)$ (0.33)$ (0.70)
