Video Distribution Firm’s Losses Fade to Black

In August, 1986, Jose Menendez, former chief operating officer of RCA/Ariola, was brought in to run International Video Entertainment, then in Woodland Hills, which was in the business of buying the video rights to feature films. Unfortunately IVE wasn’t making a profit.

Less than a year later Menendez’s task was complicated when IVE bought an interest in Lieberman Enterprises, a Minneapolis outfit that delivers video and music software to big retailers.

The combined companies are called LIVE Entertainment, which is based in Newbury Park. And in just 18 months Menendez’s work has won high marks. “You went from a family dominated company to something that was more professionally managed,” said Lee Isgur, an analyst with the New York brokerage firm of Paine Webber.

The turnaround is starting to show up where it counts--in the numbers. For the 9 months that ended Sept. 30, LIVE turned an approximate $5-million profit compared to a loss of $4.6 million a year earlier, while sales spurted to $224 million, compared to an estimated $185 million in the same period a year earlier based on the assumption that the companies had been merged then. The company’s stock has also started perking up, climbing from $15.50 in mid-July to $21.25 on Monday.

Stallone Films

LIVE owes its existence to Carolco Pictures, the Los Angeles-based motion picture company that is best known for producing some of Sylvester Stallone’s films, including all three Rambo movies. Carolco is controlled by two Hollywood newcomers, Hungarian-born Andrew Vajna and Lebanese-born Mario Kassar.

But Carolco decided it needed a distribution arm for video sales of its films so it bought most of the stock of International Video Entertainment, which also bought the rights to children’s programming as well as movies.

Because Carolco also thought there was a dollar to be made in the actual distribution of videos and music software, IVE bought a controlling interest in Lieberman Enterprises.

Carolco then essentially merged Lieberman and IVE forming the new company in February. The idea was that IVE could broaden Lieberman’s video offerings and Lieberman could improve IVE’s sales by distributing its products, with Carolco, of course, having an outlet for its films. Today Carolco owns 49% of LIVE’s stock.

Family Business

Lieberman is the nation’s second-largest distributor of videos and music software to mass merchandisers such as WalMart and Sears and has been run by the Lieberman family since 1937. Rack jobbers such as Lieberman design the layout of each store’s entertainment department, install displays and signs, arrange the advertising and maintain the inventory. Essentially, they are the middlemen between programmers like IVE and retailers.

With the combined companies, however, Menendez faced several pressing problems. For one thing Lieberman had a huge, unwieldy inventory of videos, records, CDs and computer software scattered over 10 warehouses across the country.

He sold off much of Lieberman’s inventories, cutting it from $58 million to $32 million and also cut labor costs 16% by closing two warehouses. Menendez has also pushed Lieberman to open new accounts in the Western United States, where it hasn’t done much business. Some 60 Federated stores in California and Texas recently signed agreements with Lieberman. Lieberman has also benefited from recent surges in CD and video sales. “CDs took the audio market, which was in the doldrums in the early 80s, and made it a growth market,” Menendez said.

As for the IVE side of the business, Menendez, 44, moved the company’s headquarters to a cheaper location and reduced the number of employees by 63%. He sold IVE’s video duplication service for $25 million in cash to Rank America and invested the proceeds in signing agreements with movie producers other than Carolco.

But one of Menendez’s priorities has been to reduce his firm’s reliance on Stallone’s action adventures and Carolco. Depending so heavily on one studio such as Carolco could be risky. Motion picture independents such as Cannon Group and De Laurentis Entertainment Group are having financial trouble.

Yet most of LIVE’s biggest releases, including “Rambo III” and the soon-to-be-released “Red Heat” starring Arnold Schwarzenegger, have been Carolco films.

To attract big stars, Carolco has had to pay extraordinary sums. Stallone got $16 million for Rambo III and Schwarzenegger got $10 million for “Red Heat,” which could put a lot of financial pressure on the studio if the films don’t do well.

Carolco relies so heavily on Stallone that the company has a $37-million life insurance policy on him and spends nearly $1 million a year on bodyguards.

Dependent on Carolco

If Carolco starts having problems, it could hurt IVE and possibly even Lieberman, according to analysts. “Both companies are puppets of Carolco,” Mayfield said.

To lessen LIVE’s dependence on Carolco for blockbuster videos, Menendez signed deals with some other producers for some as yet to be released films. The list includes producer Cary Brokaw (who produced “Kiss of the Spider Woman”), Taylor Hackford (“Everybody’s All-American,” “La Bamba,” “An Officer and a Gentleman”) and Edward R. Pressman (“Conan the Barbarian,” “Wall Street”). “They’ve signed some agreements with some attractive producers,” said Tom Adams, an analyst with the media research firm of Paul Kagan & Associates in Carmel.

LIVE has a catalogue of 1,300 titles, a tiny library compared to competitors such as Paramount Home Video and Warner Home Video, but Menendez wants to watch his costs and is trying to be more selective by cutting back the number of films it plans to release. From now on Menendez said LIVE plans to release about 24 movies a year.

“Do we want more A titles?,” asked Menendez. “Absolutely unequivocally. We want A titles like everybody else. More important we want A titles that are profitable. Big blockbuster successful movies.”

Picking Winners

The success of a video company like LIVE depends on how astute it is in judging the video potential of a movie. Independent video companies have to pay advances to studios to acquire the video rights to a film.

In the past, a lot of independents have run into financial problems because they paid too much. “You can read article after article after article which tells you independent video companies are having a difficult time,” Menendez said.

Nevertheless, Menendez has made a big side bet on Stallone’s popularity. LIVE has cut a separate deal from Carolco and agreed to pay $40 million in advances for the video rights to Sylvester Stallone’s next five action adventure films. Analysts think they got a bargain. “They only have to sell less than 200,000 cassettes to meet expenses. It’s probably a good deal,” said analyst Adams. “Rambo III” has sold more than 370,000 copies since its release in October.