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Image's Dim Picture Gets Sharper Look : Entertainment: The laser-disc distributor emerges from its restructuring after failing to fulfill potential.


If image were everything, Chatsworth-based Image Entertainment Inc. would have it all.

Investment analysts have long spoken glowingly about the laser-disc distributor, America's second-richest person, John Kluge, recently upped his ante in the firm to 38.2%, and the company has secured a host of exclusive licensing agreements with the likes of FoxVideo Inc., New Line Home Video, Orion Home Video and Disney's Buena Vista Home Video.

Also, Japanese trading firm Mitsui & Co. Ltd. and industrial giant Mitsubishi Corp. weighed in with votes of confidence, buying 2% and 3.5% stakes in the company, respectively.

But it hasn't been enough.

Image Entertainment, one of the nation's largest distributors and licensors of laser discs with an estimated 35% market share, posted a $17-million loss last year on revenues of $60.4 million and has shown an annual profit only once in its decade of existence. The net worth of the company plummeted in the last year from $18.8 million to $7 million.

Well, that's show business. If Image were a movie, it would have gotten rave reviews from the critics and bombed at the box office.

Like others, including its main rival, LDCA Inc., a subsidiary of Japan's Pioneer Electronic Corp., Image had bet on big growth in laser discs. The compact disc-like movies offer higher-resolution video, better sound, instant access to any scene, frame-by-frame viewing and greater durability than videocassettes.

"The real root of the problem is that they were gearing up for phenomenal growth because everyone had predicted that laser discs would take off," said Christopher Marlett, a research analyst with Drake Capital Securities in Santa Monica. "They didn't call it accurately and built overhead for growth that never came."

The weak economy hurt Image and the laser-disc industry more than others, said Jon Hickman, a senior portfolio manager for several funds at Wells Fargo Bank that own about 150,000 Image shares. "During the recession, people could certainly justify putting off the purchase of a laser-disc player," Hickman said.

As a result, Image was forced into a $10.4-million restructuring in March.

"It was management coming to the realization that the business had to be done differently," Marlett said about the restructuring, which included laying off 17% of the company's employees, including three high-paid executives, trimming its work force to 76.

The restructuring also included a large amount of laser-disc inventory being written down and advance royalty payments made to studios.

Some observers, including Marlett, think Image has turned the corner. And Image Chairman and Chief Executive Martin W. Greenwald said the benefits of the restructuring will soon begin to show.

"The report card in terms of what we did will begin to be reflected in the first quarter," Greenwald said. "The economics of our operation the way it was had too much cost built in to what we were doing."

Greenwald had estimated revenues for the fiscal first quarter that ended June 30 to be about $16 million, up from $9.8 million a year earlier, a number that Marlett echoed. The analyst projected that the company would show a $600,000 profit for the quarter.

Although growth in the laser disc market has been slow, Image stands to benefit as the number of households with laser-disc players reaches 1 million this year, as estimated by the Washington, D.C.-based Electronic Industry Assn. About 1% of households have laser-disc players, the trade group said, compared to more than 70% that have videocassette recorders. In 1992, 212,000 of the players were sold, up from 120,000 in 1989, and sales for 1993 are estimated to reach 235,000.

As players' prices fall, down to about $450 from about $700 five years ago, and they become easier to use and able to play audio CDs as well as video laser discs, they will become more popular, Wells Fargo's Hickman said.

"It's similar in some ways to the transition from records to CDs," Hickman said. "Movies are a little more expensive, so it's taken longer."

But in the wings, short-sellers see dark shadows in the company's future, and more of them are betting that Image will continue to stumble. Short-interest investors sell borrowed stocks and hope the stock price will fall, after which they buy back the stock and return it to the lender, pocketing the difference.

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