<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ................ To
.................
Commission File Number 0-11071
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
California 84-0685613
--------------------------------------------- -------------------------------------
<S> <C>
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
</TABLE>
9333 Oso Avenue, Chatsworth, California 91311
---------------------------------------------
(Address of principal executive offices, including zip code)
(818) 407-9100
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
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 ( )
Number of shares outstanding of the registrant's common stock on November 3,
1995: 13,477,196
<PAGE>
===============================================================================
PART I - FINANCIAL INFORMATION
===============================================================================
ITEM 1. FINANCIAL STATEMENTS.
--------------------
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and March 31, 1995
===============================================================================
<TABLE>
<CAPTION>
ASSETS
September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,138,213 $ 2,187,063
Accounts receivable, net of allowances of
$2,961,305 - September 30, 1995;
$2,700,000 - March 31, 1995 19,272,711 11,986,576
Inventories 15,526,152 16,283,281
Prepaid expenses and other assets 1,085,686 668,590
Notes receivable, net of deferred gain
of $2,626,450 327,421 352,017
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$4,029,628 - September 30, 1995;
$3,578,700 - March 31, 1995 2,082,279 2,013,403
----------- -----------
$39,432,462 $33,490,930
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and March 31, 1995
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $ 14,984,747 $ 11,150,261
Accrued royalties 6,591,831 5,564,812
Revolving credit facility 416,788 ---
Capital lease obligations 29,500 103,358
------------ ------------
Total liabilities 22,022,866 16,818,431
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,365,385 shares
authorized; none issued and outstanding --- ---
Common stock, no par value, 25,000,000 shares
authorized; 13,476,196 and 13,797,429 issued
and outstanding at September 30, 1995 and
March 31, 1995, respectively 22,518,442 25,216,305
Stock warrants (407,704) (582,006)
Additional paid-in capital 3,064,129 3,064,129
Accumulated deficit (7,765,271) (11,025,929)
------------ ------------
Net shareholders' equity 17,409,596 16,672,499
------------ ------------
$ 39,432,462 $ 33,490,930
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
NET SALES $26,006,905 $19,824,008
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 20,755,190 15,519,224
Selling expenses 998,497 1,008,404
General and administrative expenses 1,310,476 876,380
Amortization of production costs 731,423 735,742
----------- -----------
23,795,586 18,139,750
----------- -----------
OPERATING INCOME 2,211,319 1,684,258
OTHER EXPENSES (INCOME):
Interest expense 48,351 404,724
Interest income (77,194) (208,136)
Amortization of deferred financing costs --- 42,961
----------- -----------
(28,843) 239,549
----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 2,240,162 1,444,709
INCOME TAXES 238,200 39,600
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 2,001,962 1,405,109
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES --- 94,836
----------- -----------
NET INCOME $ 2,001,962 $ 1,310,273
=========== ===========
NET INCOME PER SHARE (Note 5)
Income before extraordinary item $ .13 $ .10
Extraordinary item - costs associated with
early retirement of debt --- ---
----------- -----------
NET INCOME PER SHARE $ .13 $ .10
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 5) 18,148,045 18,568,704
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Six Months Ended September 30, 1995 and 1994
===============================================================================
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
NET SALES $ 44,136,162 $ 35,926,588
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 34,878,849 28,019,555
Selling expenses 1,911,044 1,753,930
General and administrative expenses 2,360,486 1,775,037
Amortization of production costs 1,428,105 1,541,503
------------ ------------
40,578,484 33,090,025
------------ ------------
OPERATING INCOME 3,557,678 2,836,563
OTHER EXPENSES (INCOME):
Interest expense 79,215 867,243
Interest income (157,395) (325,853)
Amortization of deferred financing costs --- 90,945
------------ ------------
(78,180) 632,335
------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 3,635,858 2,204,228
INCOME TAXES 375,200 59,600
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 3,260,658 2,144,628
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES --- 94,836
------------ ------------
NET INCOME $ 3,260,658 $ 2,049,792
============ ============
NET INCOME PER SHARE (Note 5):
Income before extraordinary item $ .21 $ .17
Extraordinary item - costs associated with
early retirement of debt --- (.01)
------------ ------------
NET INCOME PER SHARE $ .21 $ .16
============ ============
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 5) 18,113,087 12,819,006
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended September 30, 1995 and 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,260,658 $ 2,049,792
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,879,032 1,894,353
Amortization of loan costs --- 214,560
Amortization of stock warrants 174,302 174,303
Changes in assets and liabilities associated
with operating activities, net of acquired business:
(Increase) decrease in:
Accounts receivable (4,427,176) (5,531,414)
Insurance settlement receivable --- 6,543,059
Laserdisc inventory 2,110,296 (1,897,765)
Royalty and distribution fee advances, net 352,926 331,622
Production cost expenditures (1,420,262) (1,494,931)
Prepaid expenses and other assets (363,271) 48,244
Notes receivable 24,596 154,644
Increase (decrease) in:
Accounts payable, accrued royalties
and liabilities 3,100,765 657,003
----------- -----------
Net cash provided by operating activities 4,691,866 3,143,470
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments --- (1,015,479)
Proceeds from maturities of short-term investments --- 2,806,232
Capital expenditures (314,203) (329,913)
Acquisition of business, less cash acquired (3,071,580) ---
----------- -----------
Net cash (used) provided by investing activities (3,385,783) 1,460,840
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
For the Six Months Ended September 30, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 13,289,854 $ ---
Repayment of advances under revolving credit facility (12,873,066) ---
Repayment of senior secured note payable --- (2,000,000)
Principal payments under capital lease obligations (73,858) (138,414)
Repurchase of common stock (2,821,179) ---
Net proceeds from exercise of stock options 123,316 525,180
------------- ------------
Net cash used by financing activities (2,354,933) (1,613,234)
------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,048,850) 2,991,076
Cash and cash equivalents at beginning of period 2,187,063 2,355,649
------------- ------------
Cash and cash equivalents at end of period $ 1,138,213 $ 5,346,725
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 68,986 $ 884,174
Income taxes $ 69,000 $ 67,500
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements as of and for the periods
ended September 30, 1995 include the accounts of Image Entertainment, Inc. and
its wholly-owned subsidiary U.S. Laser Video Distributors, Inc. (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying consolidated balance sheet at September 30, 1995 and the
related consolidated statements of operations and cash flows for the periods
ended September 30, 1995 and 1994 of the Company included herein are unaudited;
however, such information reflects all adjustments of a normal recurring nature
which management believes are necessary for a fair presentation of results for
the interim periods. The accompanying consolidated financial information for
the periods ended September 30, 1995 and 1994 should be read in conjunction
with the Financial Statements, the Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
March 31, 1995 Form 10-K.
Certain fiscal 1995 amounts have been reclassified to conform with the fiscal
1996 presentation.
Sales are seasonal in nature, but also vary with the popularity of titles in
release. The results of operations for the periods ended September 30, 1995
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 31, 1996.
NOTE 2. ACQUISITION.
Effective June 8, 1995, Image NewCo., Inc. ("NewCo"), a newly created wholly-
owned subsidiary, acquired and assumed substantially all of the assets and
liabilities, respectively, of V.T. Laser, Inc., a privately-held New Jersey
based corporation doing business as "U.S. Laser Video Distributors," for a
purchase price of approximately $3.1 million in cash. NewCo's name was
subsequently changed to U.S. Laser Video Distributors, Inc. ("U.S. Laser").
U.S. Laser is a nonexclusive distributor of optical disc programming and the
publisher of LASERVIEWS: America's Laser Disc Magazine, a bimonthly consumer
periodical focusing on product announcements, software reviews and articles of
general interest to the laserdisc consumer. U.S. Laser has been in the
laserdisc distribution business since 1985.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the acquired assets and assumed liabilities were recorded at their
fair market value on the acquisition date. The operating results of U.S.
Laser, from the acquisition date to September 30, 1995, are included in the
accompanying consolidated statement of operations for the periods ended
September 30, 1995. The Company has classified the amount of purchase price in
excess of the fair market value of the net assets acquired as goodwill,
aggregating approximately $165,000 and included as a component of prepaid
expenses and other assets in the accompanying consolidated balance sheet at
September 30, 1995. Goodwill is being amortized on a straight line method over
20 years. Amortization charged to operations for the periods ended September
30, 1995 was immaterial. The acquisition of U.S. Laser does not qualify as a
significant subsidiary under SEC Rules and Regulations and, accordingly,
proforma information is not presented.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------
NOTE 3. INVENTORIES.
Inventories at September 30, 1995 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
September 30, March 31,
1995 1995
------------- -----------
<S> <C> <C>
Laserdisc inventory $ 11,334,395 $ 11,730,755
Royalty and distribution fee advances 3,050,367 3,403,293
Production costs 1,141,390 1,149,233
------------ ------------
$ 15,526,152 $ 16,283,281
============ ============
</TABLE>
Production costs are net of accumulated amortization of $4,822,929 and
$4,838,547 at September 30, 1995 and March 31, 1995, respectively.
NOTE 4. INCOME TAXES.
Income taxes were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by management. The majority of Federal and a portion of state
income taxes are offset by the utilization of net operating loss carryforwards.
NOTE 5. NET INCOME PER SHARE.
Net income per share was based on the weighted average number of common shares
and common share equivalents (e.g., options and warrants), if dilutive,
outstanding for each of the periods presented. The amount of dilution to be
reflected in net income per share was computed by application of the treasury
stock method. In periods where the amount of common stock issuable if all
options and warrants were deemed exercised exceeds 20% of the total shares
outstanding at the end of the period, the treasury stock method was modified,
as required by Accounting Principles Board Opinion No. 15, to adequately
reflect the dilutive effect of options and warrants on net income per share.
Under the modified treasury stock method, net income per share data were
computed as if all outstanding options and warrants were exercised at the
beginning of the period (or on the issuance date, if issued during the period)
and as if the funds obtained thereby were applied as follows: first to
repurchase up to 20% of the outstanding shares at the average market price
during the period, then any remaining proceeds were applied to reduce any
short- or long-term debt and, if any proceeds remained thereafter, such
proceeds were applied to invest in short-term U.S. government securities. If
the result of the foregoing application of proceeds had an aggregate dilutive
effect on net income per share, the net income per share calculation must
reflect the shares issuable upon the assumed exercise of options and warrants,
net of the assumed repurchase of shares, and adjustments to net income
resulting from the assumed application of proceeds. If, on the other hand, the
aggregate effect was anti-dilutive, common share equivalents and adjustments to
net income resulting from the assumed application of proceeds were excluded
from the calculation of net income per share.
The effects of the application of the modified treasury stock method were
included in determining net income per share for the periods ended September
30, 1995 and the three months ended September 30, 1994 and excluded from the
per-share amounts for the six months ended September 30, 1994.
Fully diluted net income per share was not presented for the periods ended
September 30, 1995 and 1994 since the amounts did not differ significantly from
the primary net income per share.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------
The following table sets forth the calculation of net income per share for
the periods ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
As Presented
------------
Income before extraordinary
item $ 2,001,962 $ 1,405,109 $ 3,260,658 $ 2,144,628
Extraordinary item, net of taxes --- 94,836 --- 94,836
----------- ----------- ----------- -----------
Net income 2,001,962 1,310,273 3,260,658 2,049,792
----------- ----------- ----------- -----------
Adjustments
-----------
Add: reduction of interest expense
on assumed reduction of debt,
net of taxes 24,810 380,954 34,400 ---
Add: interest income on assumed
investment in U.S. government
securities, net of taxes 280,065 113,047 552,667 ---
----------- ----------- ----------- -----------
Adjustment to income before
extraordinary item and
net income 304,875 494,001 587,067 ---
----------- ----------- ----------- -----------
As Adjusted
-----------
Income before extraordinary
item 2,306,837 1,899,110 3,847,725 2,144,628
Extraordinary item, net of taxes --- 94,836 --- 94,836
----------- ----------- ----------- -----------
Net income $ 2,306,837 $ 1,804,274 $ 3,847,725 $ 2,049,792
=========== =========== =========== ===========
Weighted average common
shares and common share
equivalents outstanding:
Common shares 13,615,768 13,003,849 13,689,151 12,819,006
Common stock options
and warrants 4,532,277 5,564,855 4,423,936 ---
----------- ----------- ----------- -----------
18,148,045 18,568,704 18,113,087 12,819,006
=========== =========== =========== ===========
Net income per share:
Income before extraordinary
item $ .13 $ .10 $ .21 $ .17
Extraordinary item --- --- --- (.01)
----------- ----------- ----------- -----------
Net income per share $ .13 $ .10 $ .21 $ .16
=========== =========== =========== ===========
</TABLE>
NOTE 6. REVOLVING CREDIT AND TERM LOAN FACILITY.
At September 30, 1995, the Company had $416,788 in borrowings outstanding
under its November 15, 1994, three year, $15,000,000 revolving credit and
term loan facility with Foothill Capital Corporation. The borrowings are
secured by substantially all of the Company's assets and bear interest at
prime plus 1.5% (10.25% at September 30, 1995).
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
GENERAL
Since 1983, the Company has distributed a broad range of programming on
laserdisc for home viewing. The Company generally enters into license agreements
whereby it acquires the exclusive right to manufacture and distribute laserdisc
programming. In addition, the Company acts as an exclusive and nonexclusive
wholesale distributor of laserdisc programming.
RESULTS OF OPERATIONS
The Company's net sales for the three and six months ended September 30,
1995 were up 31.2% and 22.9%, respectively, over the comparable prior-year
periods. Operating income increased 31.3% to $2,211,319 and 25.4% to $3,557,678
for the three and six months ended September 30, 1995, respectively, from
$1,684,258 and $2,836,563 for the comparable prior-year periods. Net income
increased 52.8% to $2,001,962, or $.13 per share, and 59.1% to $3,260,658, or
$.21 per share, for the three and six months ended September 30, 1995,
respectively, from $1,310,273, or $.10 per share, and $2,049,792, or $.16 per
share, for the three and six months ended September 30, 1994, respectively.
THE THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1994
Net sales for the September 1995 quarter increased 31.2% to $26,006,905
from $19,824,008 for the September 1994 quarter. The September 1995 quarter
benefitted from a strong release schedule which included net sales of
approximately $8,400,000 from the exclusive release of LION KING, PULP FICTION,
and CINDERELLA and the continued sale of STAR WARS TRILOGY: THE DEFINITIVE
COLLECTION. The September 1995 quarter included a full quarter of U.S. Laser's
net sales, the first full quarter after its June 8, 1995 acquisition (see Note 2
---
to the consolidated financial statements). Net sales for the September 1995
quarter, exclusive of U.S. Laser's net sales, increased 17.1% to $23,220,334
from $19,824,008 for the September 1994 quarter. Strong exclusive releases
during the September 1994 quarter included net sales of approximately $5,200,000
from the release of ALADDIN, THE CROW and DANCES WITH WOLVES: LIMITED
COLLECTOR'S EDITION. Net sales are affected by the popularity of new releases
and the then current economic environment.
Cost of laserdisc sales for the September 1995 quarter increased to
$20,755,190 from $15,519,224 for the September 1994 quarter. As a percentage of
net sales, cost of laserdisc sales for the September 1995 quarter increased to
79.8% from 78.3% for the September 1994 quarter. The increase in cost of sales
as a percentage of net sales was due primarily to the acquisition of U.S. Laser
(U.S. Laser has substantially lower margins as a nonexclusive distributor) and
in part to the fluctuation in sales mix. The sales mix of higher-margin
exclusive product and lower-margin nonexclusive product and the margins within
each category vary with the availability and popularity of titles and the
Company's marketing emphasis. Lower-margin nonexclusive product sales and lower-
margin U.S. Laser sales accounted for 19.5% of net sales for the September 1995
quarter. Lower-margin nonexclusive product sales accounted for 7.9% of net sales
for the September 1994 quarter. Cost of laserdisc sales as a percentage of net
sales for the September 1995 quarter, exclusive of U.S. Laser's net sales and
cost of laserdisc sales, increased to 78.9% from 78.3% for the September 1994
quarter.
Selling expenses for the September 1995 quarter decreased 1.0% to $998,497
from $1,008,404 for the September 1994 quarter. As a percentage of net sales,
selling expenses for the September 1995 quarter decreased to 3.8% from 5.1% for
the September 1994 quarter. The decrease resulted from a reduction in the
Company's net expense for market development funds provided to customers for
advertising, marketing and related purposes and reduced advertising and
convention expenses offset by inclusion of a full quarter of U.S. Laser's
selling expenses and higher freight expense associated with the quarter's net
sales increase. Selling expenses for the September 1995 quarter, exclusive of
U.S. Laser's
10
<PAGE>
selling expenses, decreased 20.6% to $800,883 from $1,008,404 for the September
1994 quarter and as a percentage of net sales, selling expenses for the
September 1995 quarter decreased to 3.4% from 5.1% for the September 1994
quarter.
General and administrative expenses for the September 1995 quarter
increased 49.5% to $1,310,476 from $876,380 for the September 1994 quarter. As a
percentage of net sales, general and administrative expenses for the September
1995 quarter increased to 5.0% from 4.4% for the September 1994 quarter. The
increase resulted from the inclusion of a full quarter of U.S. Laser's general
and administrative expenses, higher accrued executive and employee performance-
based bonuses and higher depreciation expenses related to the creative service
department's digital pre-press system. General and administrative expenses for
the September 1995 quarter, exclusive of U.S. Laser's general and administrative
expenses, increased 20.2% to $1,053,327 from $876,380 for the September 1994
quarter and as a percentage of net sales, general and administrative expenses
for the September 1995 quarter increased to 4.5% from 4.4% for the September
1994 quarter.
Amortization of production costs for the September 1995 quarter decreased
0.6% to $731,423 from $735,742 for the September 1994 quarter. As a percentage
of net sales, amortization of production costs for the September 1995 quarter
decreased to 2.8% from 3.7% for the September 1994 quarter. The decrease, as a
percentage of net sales, is attributable to the inclusion of U.S. Laser's net
sales for the 1995 quarter and cost savings afforded by the creative service
department's digital pre-press system installed in December 1994 which has
substantially reduced the outsourcing of laserdisc jacket film color
separations. Amortization of production costs as a percentage of net sales for
the September 1995 quarter, exclusive of U.S. Laser's net sales, decreased to
3.1% from 3.7% for the September 1994 quarter. Amortization of production costs
is also a function of the timing and number of Image exclusive titles placed
into production.
Interest expense for the September 1995 quarter decreased 89.2% to $48,351
from $447,685 in combined interest expense and amortization of deferred
financing costs for the September 1994 quarter. Improved cash flow from
operations and the November 1994 refinancing of senior notes with a revolving
credit facility resulted in substantially less borrowings outstanding in the
September 30, 1995 quarter.
Interest income for the September 1995 quarter decreased 62.9% to $77,194
from $208,136 for the September 1994 quarter. The utilization of cash for the
acquisition of U.S. Laser and the repurchase of common stock under the Company's
stock repurchase program accounted for the decrease in interest bearing funds.
THE SIX MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1994
Net sales for the six months ended September 30, 1995 increased 22.9% to
$44,136,162 from $35,926,588 for the six months ended September 30, 1994. The
six months ended September 30, 1995 benefitted from a strong release schedule in
the September 1995 quarter, strong catalogue title sales and the acquisition of
U.S. Laser. Net sales for the six months ended September 30, 1995, exclusive of
U.S. Laser's net sales, increased 13.0% to $40,592,899 from $35,926,588 for the
comparable 1994 period. Net sales are also affected by the popularity of new
releases.
Cost of laserdisc sales for the six months ended September 30, 1995
increased to $34,878,849 from $28,019,555 for the six months ended September 30,
1994. As a percentage of net sales, cost of laserdisc sales for the six months
ended September 30, 1995 increased to 79.0% from 78.0% for the six months ended
September 30, 1994. The increase in cost of sales as a percentage of net sales
was due primarily to the acquisition of U.S. Laser (U.S. Laser has substantially
lower margins as a nonexclusive distributor) and in part to the fluctuation in
sales mix. The sales mix of higher-margin exclusive product and lower-margin
nonexclusive product and the margins within each category vary with the
availability and popularity of titles and the Company's marketing emphasis.
Lower-margin nonexclusive product sales and
<PAGE>
lower-margin U.S. Laser sales accounted for 18.4% of net sales for the six
months ended September 30, 1995. Lower-margin nonexclusive product sales
accounted for 9.1% of net sales for the six months ended September 30, 1994.
Cost of laserdisc sales as a percentage of net sales for the six months ended
September 30, 1995, exclusive of U.S. Laser's net sales and cost of laserdisc
sales, increased to 78.3% from 78.0% for the comparable 1994 period.
Selling expenses for the six months ended September 30, 1995 increased 9.0%
to $1,911,044 from $1,753,930 for the six months ended September 30, 1994. As a
percentage of net sales, selling expenses for the six months ended September 30,
1995 decreased to 4.3% from 4.9% for the six months ended September 30, 1994.
The increase in absolute selling expenses resulted primarily from the
acquisition of U.S. Laser as well as higher freight expense associated with
increased net sales for the period. The increase was offset, in part, by a
reduction in the Company's net expense for market development funds provided to
customers for advertising, marketing and related purposes and reduced
advertising and convention expenses. Selling expenses for the six months ended
September 30, 1995, exclusive of U.S. Laser's selling expenses, decreased 5.9%
to $1,650,003 from $1,753,930 for the comparable 1994 period and as a percentage
of net sales, selling expenses for the six months ended September 30, 1995
decreased to 4.1% from 4.9% for the comparable 1994 period.
General and administrative expenses for the six months ended September 30,
1995 increased 33.0% to $2,360,486 from $1,775,037 for the six months ended
September 30, 1994. As a percentage of net sales, general and administrative
expenses for the six months ended September 30, 1995 increased to 5.4% from 4.9%
for the six months ended September 30, 1994. The increase resulted from the
acquisition of U.S. Laser, higher accrued executive and employee performance-
based bonuses and higher depreciation expenses related to the creative service
department's digital pre-press system. General and administrative expenses for
the six months ended September 30, 1995, exclusive of U.S. Laser's general and
administrative expenses, increased 15.5% to $2,050,168 from $1,775,037 for the
comparable 1994 period and as a percentage of net sales, general and
administrative expenses for the six months ended September 30, 1995 increased to
5.1% from 4.9% for the comparable 1994 period.
Amortization of production costs for the six months ended September 30,
1995 decreased 7.4% to $1,428,105 from $1,541,503 for the six months ended
September 30, 1994. As a percentage of net sales, amortization of production
costs for the six months ended September 30, 1995 decreased to 3.2% from 4.3%
for the comparable 1994 period. The decrease as a percentage of net sales is
attributable to the inclusion of U.S. Laser's net sales for the 1995 period and
cost savings afforded by the creative service department's digital pre-press
system installed in December 1994 which has substantially reduced the
outsourcing of laserdisc jacket film color separations. Amortization of
production costs for the September 1995 quarter as a percentage of net sales,
exclusive of U.S. Laser's net sales, decreased to 3.5% from 4.3% for the
comparable 1994 period. Amortization of production costs is also a function of
the timing and number of Image exclusive titles placed into production.
Interest expense for the six months ended September 30, 1995 decreased
91.7% to $79,215 from $958,188 in combined interest expense and amortization of
deferred financing costs for the six months ended September 30, 1994. Improved
cash flow from operations and the November 1994 refinancing of senior notes with
a revolving credit facility resulted in substantially less borrowings
outstanding during the six months ended September 30, 1995.
Interest income for the six months ended September 30, 1995 decreased 51.7%
to $157,395 from $325,853 for the six months ended September 30, 1994. The
utilization of cash for the acquisition of U.S. Laser and the repurchase of
common stock under the Company's stock repurchase program accounted for the
decrease in interest bearing funds.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements vary primarily with the level of
its licensing, production and distribution activities. The principal uses of
working capital are for program licensing costs (i.e., royalty payments,
----
including advances, to program suppliers), distribution fee advances,
manufacturing and production costs, costs of acquiring finished product for
wholesale distribution and selling, general and administrative expenses. Since
January 1995, the Company has used working capital for both the repurchase of
its common stock and the acquisition of assets of U.S. Laser. Working capital
requirements increase as licensing and distribution activities increase.
Working capital has historically been provided by private sales of common stock,
notes representing long-term debt, bank borrowings and cash flows from
operations. For the six months ended September 30, 1995, operating activities
provided cash and cash equivalents of $4,691,866, investing activities used cash
and cash equivalents of $3,385,783 and financing activities used cash and cash
equivalents of $2,354,933, resulting in a net decrease in cash and cash
equivalents of $1,048,850.
Effective June 8, 1995, the Company acquired and assumed substantially all
of the assets and liabilities, respectively, of V.T. Laser, Inc., a privately-
held New Jersey based corporation doing business as "U.S. Laser Video
Distributors," for a purchase price of approximately $3.1 million in cash. The
transaction was funded through operating cash flow and borrowings under the
Company's revolving credit facility.
At September 30, 1995, the Company had $416,788 in borrowings outstanding
under its November 15, 1994, three-year, $15,000,000 revolving credit and term
loan facility with Foothill Capital Corporation ("Foothill") and had borrowing
availability of $11,569,595. The borrowings are secured by substantially all of
the Company's assets and bear interest at prime plus 1.5% (10.25% at September
30, 1995). The facility agreement requires the Company to comply with certain
financial and operating covenants. With respect to the June 8, 1995 acquisition
of U.S. Laser, Foothill waived compliance with certain covenants which restrict
corporate acquisitions and related expenditures. At September 30, 1995, the
Company was in compliance with all financial and other operating covenants.
At September 30, 1995, the Company had $2,990,000 of outstanding letters of
credit issued and guaranteed by Foothill. Of the outstanding letters of credit,
$490,000 expire November 15, 1995 and $2,500,000 expire November 15, 1996. These
letters of credit secure balances due to program suppliers.
During the three and six months ended September 30, 1995, the Company
repurchased 329,500 and 415,700 shares of its common stock for $2,218,614 and
$2,821,179, respectively, under its stock repurchase program approved by the
Company's Board of Directors on January 16, 1995.
At September 30, 1995, the Company had license obligations for royalty
advances and minimum guarantees and exclusive distribution fee obligations for
minimum guarantees of approximately $4,602,000 for the remainder of fiscal 1996,
$3,969,000 during fiscal 1997, $4,358,000 during fiscal 1998, $4,619,000 during
fiscal 1999 and $2,627,000 during fiscal 2000. These advances and guarantees are
recoupable against royalties and distribution fees earned by the licensors and
program suppliers, respectively. Depending upon the competition for license and
exclusive distribution rights, the Company may have to pay increased advances,
guarantees and/or royalty rates in order to acquire or retain such rights in the
future.
Management believes its internal and external sources of funding are
adequate to meet anticipated operating needs for the next twelve months.
13
<PAGE>
SUMMARY AND OUTLOOK
In September 1995, the Company signed a four year extension to its November
26, 1991 license agreement with Buena Vista Home Video giving the Company
exclusive laserdisc license and distribution rights to Walt Disney, Touchstone,
Hollywood Pictures, Buena Vista Home Video and Miramax programming through
December 31, 1999.
The Company continues to license new programming for laserdisc distribution
as well as seek to renew and extend relationships with existing studios as
distribution and/or license agreements mature. The Company believes the
laserdisc industry will continue its growth through the turn of the century.
In addition to its laserdisc licensing and distribution, the Company
continues to seek investment opportunities in growth oriented companies
complementary to the Company's existing operations, such as proprietary content
production or software distribution businesses. Should suitable investment
opportunities arise that would require funds in excess of those provided by
operations and availability under the Company's revolving credit facility,
additional financing sources may be sought.
14
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The consolidated financial statements as of September 30, 1995 and for the
three- and six-month periods ended September 30, 1995 and 1994 in this Form 10-Q
have been reviewed by KPMG Peat Marwick LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review follows.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Image Entertainment, Inc.
We have reviewed the condensed consolidated balance sheet of Image
Entertainment, Inc. as of September 30, 1995, and the related condensed
consolidated statements of operations and cash flows for the three and six month
periods ended September 30, 1995 and 1994 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. All information included in these financial
statements is the representation of the management of Image Entertainment, Inc.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with general accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Image Entertainment, Inc. as of March 31, 1995,
and the related statements of operations and cash flows for the year then ended
(not presented herein); and in our report dated June 6, 1995, except for Note
14, which was as of June 8, 1995, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of March 31, 1995, is fairly presented,
in all material respects, in relation to the balance sheet from which it has
been derived.
/s/KPMG PEAT MARWICK LLP
Los Angeles, California
November 1, 1995
16
<PAGE>
================================================================================
PART II - OTHER INFORMATION
================================================================================
ITEM 1. LEGAL PROCEEDINGS.
-----------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES.
---------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
On September 15, 1995, the Company held its annual meeting of
shareholders. Represented at the meeting in person or by proxy were
12,616,314 shares of common stock (approximately 91.55% of the shares
entitled to vote), constituting a quorum.
At the meeting, Martin W. Greenwald, Stuart Segall, Ira S. Epstein and
Russell Harris were elected as directors of the Company to serve until
their respective successors have been elected and qualified. With
respect to Mr. Greenwald's election, there were 12,402,695 votes for
and 213,619 votes withheld. With respect to Mr. Segall's election,
there were 12,453,667 votes for and 162,647 votes withheld. With
respect to Mr. Epstein's election, there were 12,473,485 votes for and
142,829 votes withheld. With respect to Mr. Harris's election, there
were 12,518,076 votes for and 98,238 votes withheld.
At the meeting, the Company's shareholders voted upon and ratified the
following matters:
(a) To approve an amendment to the Company's Bylaws to provide for a
board of directors consisting of a minimum of four (4) and a
maximum of seven (7) members. With respect to this matter, there
were 12,374,703 votes for, 149,235 votes against and 63,745
abstentions.
(b) To approve the Company's 1994 Eligible Directors Stock Option
Plan providing for an initial and annual award to each Eligible
Director of an option to purchase 15,000 shares of the common
stock of the Company. With respect to this matter, there were
12,011,877 votes for, 408,203 votes against and 64,908
abstentions.
(c) To ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending March
31, 1996. With respect to this matter, there were 12,478,314
votes for, 60,854 votes against and 71,403 abstentions.
ITEM 5. OTHER INFORMATION.
-----------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
See Exhibit Index on page 20
17
<PAGE>
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
IMAGE ENTERTAINMENT, INC.
Date: November 9, 1995 By: /s/MARTIN W. GREENWALD
--------------------------------
Martin W. Greenwald
Chairman of the Board, Chief Executive Officer,
President and Treasurer
Date: November 9, 1995 By: /s/JEFF M. FRAMER
--------------------------------
Jeff M. Framer
Chief Financial Officer
19
<PAGE>
=============================================================================
EXHIBIT INDEX
=============================================================================
Exhibit No. Description
- ----------- -----------
15* Letter re unaudited interim financial information.
27* Financial Data Schedule.
* EXHIBIT(S) NOT PREVIOUSLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
20
<PAGE>
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
Image Entertainment, Inc.
Chatsworth, California
Gentlemen:
Re: Registration Statement Nos. 33-43241, 33-55393 and 33-57336
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated November 1, 1995 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/KPMG PEAT MARWICK LLP
Los Angeles, California
November 7, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM. FORM
10-Q SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,138,213
<SECURITIES> 0
<RECEIVABLES> 22,234,016
<ALLOWANCES> 2,961,305
<INVENTORY> 15,526,152
<CURRENT-ASSETS> 0<F1>
<PP&E> 6,111,907
<DEPRECIATION> 4,029,628
<TOTAL-ASSETS> 39,432,462
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
<COMMON> 22,518,442
0
0
<OTHER-SE> (5,108,846)
<TOTAL-LIABILITY-AND-EQUITY> 39,432,462
<SALES> 44,136,162
<TOTAL-REVENUES> 44,136,162
<CGS> 34,878,849
<TOTAL-COSTS> 34,878,849
<OTHER-EXPENSES> 1,428,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,215
<INCOME-PRETAX> 3,635,858
<INCOME-TAX> 375,200
<INCOME-CONTINUING> 3,260,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,260,658
<EPS-PRIMARY> .21
<EPS-DILUTED> 0<F2>
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
<F2>NOT PRESENTED SINCE THE AMOUNTS DO NOT DIFFER SIGNIFICANTLY FROM THE
PRIMARY NET INCOME PER SHARE.
</FN>
</TABLE>
