<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, 1996
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)
California 84-068561
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 4,
1996: 13,556,994
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and March 31, 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,059,786 $ 4,665,942
Accounts receivable, net of allowances of
$2,988,000 - September 30, 1996;
$3,183,000 - March 31, 1996 11,207,480 13,333,372
Inventories 17,942,061 15,275,693
Royalty, distribution fee
and license fee advances 9,320,345 3,169,444
Prepaid expenses and other assets 2,016,170 906,098
Notes receivable, net 26,462 75,908
Property, equipment and improvements,
net of accumulated depreciation and
amortization of
$3,519,634 - September 30, 1996;
$3,145,347 - March 31, 1996 2,098,809 1,979,211
----------- -----------
$43,671,113 $39,405,668
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and March 31, 1996
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $15,198,837 $13,606,541
Accrued royalties, distribution
fees and license fees 5,244,123 5,273,698
Revolving credit facility 3,236,885 -
----------- -----------
Total liabilities 23,679,845 18,880,239
----------- -----------
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; 13,556,800 and
and 13,556,160 issued and
outstanding at September 30, 1996 and
March 31, 1996, respectively 19,373,614 21,121,582
Stock warrants (121,875) (233,401)
Additional paid-in capital 3,064,129 3,064,129
Accumulated deficit (2,324,600) (3,426,881)
----------- -----------
Net shareholders' equity 19,991,268 20,525,429
----------- -----------
$43,671,113 $39,405,668
=========== ===========
</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, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $17,761,678 $26,006,905
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 13,850,472 20,755,190
Selling expenses 1,234,153 998,497
General and administrative expenses 1,353,155 1,310,476
Amortization of production costs 741,223 731,423
----------- -----------
17,179,003 23,795,586
----------- -----------
OPERATING INCOME 582,675 2,211,319
OTHER EXPENSES (INCOME):
Interest expense 82,000 48,351
Interest income (49,383) (77,194)
----------- ------------
32,617 (28,843)
----------- ------------
INCOME BEFORE INCOME TAXES 550,058 2,240,162
INCOME TAXES 54,000 238,200
----------- ------------
NET INCOME $ 496,058 $ 2,001,962
=========== ===========
NET INCOME PER SHARE (Note 4) $ .04 $ .13
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 4) 15,264,825 18,148,045
============ ===========
</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, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET SALES $37,908,278 $44,136,162
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 29,831,859 34,878,849
Selling expenses 2,314,843 1,911,044
General and administrative expenses 2,815,327 2,360,486
Amortization of production costs 1,513,203 1,428,105
----------- -----------
36,475,232 40,578,484
----------- -----------
OPERATING INCOME 1,433,046 3,557,678
OTHER EXPENSES (INCOME):
Interest expense 108,068 79,215
Interest income (144,303) (157,395)
----------- -----------
(36,235) (78,180)
----------- -----------
INCOME BEFORE INCOME TAXES 1,469,281 3,635,858
INCOME TAXES 367,000 375,200
----------- -----------
NET INCOME $ 1,102,281 $ 3,260,658
=========== ===========
NET INCOME PER SHARE (Note 4) $ .08 $ .21
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 4) 15,655,915 18,113,087
=========== ===========
</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, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,102,281 $ 3,260,658
Adjustments to reconcile net income
to net cash (used) provided by operating activities:
Amortization of production costs 1,513,203 1,428,105
Depreciation and other amortization 401,416 450,927
Amortization of stock warrants 111,526 174,302
Provision for doubtful accounts 321,017 32,267
Changes in assets and liabilities associated
with operating activities, net of acquired business:
Accounts receivable 1,804,874 (4,459,443)
Laserdisc inventory (2,657,650) 2,110,296
Royalty, distribution and license fee
advances, net (6,150,901) 352,926
Production cost expenditures (1,521,920) (1,420,262)
Prepaid expenses and other assets (1,116,244) (363,271)
Notes receivable 49,446 24,596
Accounts payable, accrued royalties, distribution
fees, license fees and liabilities 1,562,721 3,100,765
----------- ----------
Net cash (used) provided by operating activities (4,580,231) 4,691,866
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (514,842) (314,203)
Acquisition of business, less cash acquired - (3,071,580)
----------- -----------
Net cash used by investing activities (514,842) (3,385,783)
----------- -----------
</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, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 16,701,581 $ 13,289,854
Repayment of advances under revolving credit facility (13,464,696) (12,873,066)
Principal payments under capital lease obligations - (73,858)
Repurchase of common stock (1,795,948) (2,821,179)
Net proceeds from exercise of stock options 47,980 123,316
------------ ------------
Net cash provided (used) by financing activities 1,488,917 (2,354,933)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,606,156) (1,048,850)
Cash and cash equivalents at beginning of period 4,665,942 2,187,063
------------ ------------
Cash and cash equivalents at end of period $ 1,059,786 $ 1,138,213
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 54,579 $ 68,986
Income taxes $ 668,000 $ 69,000
============ ============
</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, 1996 and 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, 1996 and
the related consolidated statements of operations and cash flows for the
periods ended September 30, 1996 and 1995 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,
1996 and 1995 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, 1996 Form 10-K.
Certain fiscal 1996 amounts have been reclassified to conform with the
fiscal 1997 presentation.
Acquisition. The consolidated statements of operations for the periods
------------
ended September 30, 1996 and 1995 included the operating results of the
Company's wholly-owned subsidiary U.S. Laser Video Distributors, Inc.
("U.S. Laser"). Operating results of U.S. Laser were included for the
entire three-month periods ended September 30, 1996 and 1995,
respectively, as well as the six-month period ended September 30, 1996.
For the six-month period ended September 30, 1995, operating results
include 17 business days of the quarter ended June 30, 1995, commencing
on the June 8, 1995 acquisition of U.S. Laser, and the entire remaining
three months of the six-month period ended September 30, 1995.
Seasonality and Variability. The Company has generally experienced
---------------------------
higher sales of laserdiscs in the quarters ended December 31 and March
31 due to increased consumer spending associated with the year-end
holidays and the home video release of many high profile, high budget
summer theatrical releases; however, since most sales of a title occur
in the first few months after its release, seasonal sales also vary with
the popularity of titles in release. In addition to seasonality issues,
other factors have contributed to the fluctuation in the Company's net
sales on a quarterly basis. These factors include: (i) the popularity
of titles in release during the quarter; (ii) the pending introduction
of the new digital video disc format and its affect on consumers and
hardware and software retailers; (iii) general economic conditions
affecting consumer demand and buying habits for laserdisc hardware and
software;(iv) the Company's marketing and promotional activities;
(v) the Company's rights and distribution activities; and, (vi) the
extension, termination or non-renewal of existing license and
distribution rights. The results of operations for the periods ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the entire fiscal year ending March 31, 1997.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 2. INVENTORIES.
Inventories at September 30, 1996 and March 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------- -----------
<S> <C> <C>
Laserdisc inventory $16,613,927 $13,956,276
Production costs 1,328,134 1,319,417
----------- -----------
$17,942,061 $15,275,693
=========== ===========
</TABLE>
Production costs are net of accumulated amortization of $4,872,146 and
$4,941,715 at September 30, 1996 and March 31, 1996, respectively.
NOTE 3. INCOME TAXES.
Income taxes for the periods ended September 30, 1996 were computed
using the effective tax rate estimated to be applicable for the full
fiscal year ending March 31, 1997, which is subject to ongoing review
and evaluation by management. A portion of Federal income taxes for the
periods ended September 30, 1996 were offset by the utilization of net
operating loss carryforwards.
NOTE 4. 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 are deemed
exercised, exceeds 20% of the total shares outstanding at the end of the
period, the treasury stock method is 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 outstanding long-term debt and, if any
proceeds remained thereafter, such proceeds were applied to invest in
U.S. government securities. If the result of the foregoing application
of proceeds has 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
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
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 are excluded from the calculation of net income
per share.
The modified treasury stock method was used to determine net income per
share for the periods ended September 30, 1996 and 1995.
Fully diluted net income per share was not presented for the periods
ended September 30, 1996 and 1995 since the amounts did not differ
significantly from the primary net income per share.
The following table sets forth the calculation of net income per share
for the periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <S> <C> <C> <C>
As Presented
- ------------
Net income $ 496,058 $ 2,001,962 $ 1,102,281 $ 3,260,658
----------- ----------- ----------- -----------
Adjustments
- -----------
Add: reduction of interest expense
on assumed reduction of debt,
net of taxes 48,334 24,810 53,589 34,400
Add: interest income on assumed
investment in U.S. government
securities, net of taxes 70,465 280,065 171,443 552,667
----------- ----------- ----------- -----------
Adjustment to net income 118,799 304,875 225,032 587,067
----------- ----------- ----------- -----------
As Adjusted
- -----------
Net income $ 614,857 $ 2,306,837 $ 1,327,313 $ 3,847,725
=========== =========== =========== ===========
Weighted average common
shares and common share
equivalents outstanding:
Common shares 13,635,377 13,615,768 13,678,979 13,689,151
Common stock options
and warrants 1,629,448 4,532,277 1,976,936 4,423,936
----------- ----------- ----------- -----------
15,264,825 18,148,045 15,655,915 18,113,087
========== =========== =========== ===========
Net income per share $ .04 $ .13 $ .08 $ .21
=========== =========== =========== ===========
</TABLE>
9
<PAGE>
NOTE 5. REVOLVING CREDIT AND TERM LOAN FACILITY.
At September 30, 1996, the Company had $3,236,885 in borrowings
outstanding under its November 15, 1994, three-year, $15,000,000
revolving credit and term loan facility with Foothill Capital
Corporation. Borrowings are secured by substantially all of the
Company's assets and bear interest at prime plus 1.5% (9.75% at
September 30, 1996).
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,
1996 decreased 31.7% and 14.1%, respectively, over the comparable prior-year
periods. Operating income decreased 73.7% to $582,675 and 59.7% to $1,433,046
for the three and six months ended September 30, 1996, respectively, from
$2,211,319 and $3,557,678 for the comparable prior-year periods. Net income
decreased 75.2% to $496,058, or $.04 per share, and 66.2% to $1,102,281, or
$.08 per share, for the three and six months ended September 30, 1996,
respectively, from $2,001,962, or $.13 per share, and $3,260,658, or $.21 per
share, for the three and six months ended September 30, 1995, respectively.
The Company's effective tax rate for fiscal 1997 is estimated to be 25.0%
versus 10.6% and 10.3% for the three and six months ended September 30, 1995,
respectively.
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales for the September 1996 quarter decreased 31.7% to $17,761,678
from $26,006,905 for the September 1995 quarter. The release schedule for the
September 1996 quarter was substantially weaker than that of the September 1995
quarter. The September 1996 quarter's release schedule generated sales of
approximately $10.1 million which included exclusive titles such as BROKEN
ARROW, THE BIRDCAGE, MR. HOLLAND'S OPUS, RUMBLE IN THE BRONX and NIXON.
Comparatively, the September 1995 quarter release schedule generated sales of
approximately $16.7 million and included exclusive titles such as LION KING,
PULP FICTION, CINDERELLA, and the release of THX versions of STAR WARS, THE
EMPIRE STRIKES BACK and RETURN OF THE JEDI. Additionally, the Company
experienced weaker net sales of catalogue titles (previously released laserdisc
titles) in the September 1996 quarter versus the September 1995 quarter. The
weakness was primarily a result of the decline in laserdisc
10
<PAGE>
hardware sales, reported by the Electronics Industry Association ("EIA") to be
down approximately 35.0% for calendar 1996 to date versus the same prior-year
period. The decline in laserdisc hardware sales was attributable to the
continued confusion and uncertainty in the laserdisc marketplace about the
pending introduction of the new 5-inch DVD format and its quality (versus
laserdisc). The weakness in catalogue sales was also a result of continued
retail softness experienced by the chain music/video stores and the fact that
the September 1995 quarter included substantial sales from the STAR WARS
TRILOGY: THE DEFINITIVE COLLECTION which, as of January 1, 1996, was no longer
available in this three-movie collector's set. In the future, the Company
expects that net sales will continue to be affected by the popularity of new
releases, laserdisc hardware sales, the extent of the Company's distribution of
the DVD format and DVD's market penetration and the prevailing economic
environment.
Cost of laserdisc sales for the September 1996 quarter decreased to
$13,850,472 from $20,755,190 for the September 1995 quarter. As a percentage of
net sales, cost of laserdisc sales for the September 1996 quarter decreased to
78.0% from 79.8% for the September 1995 quarter. The September 1996 quarter's
decrease in cost of laserdisc sales as a percentage of net sales primarily
resulted from laserdisc manufacturing cost savings due to the comparative
strength of the U.S. Dollar against the Japanese Yen, earned laserdisc
manufacturing volume incentive rebates and comparatively increased sales of
higher-margin salvaged inventory retained as part of a June 1994 insurance
settlement all offset, in part, by comparatively increased sales of lower-margin
nonexclusive product sales as a percentage of net sales. At September 30, 1996,
the Company had minimal salvaged inventory remaining on hand.
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, including lower-margin U.S. Laser sales
(U.S. Laser has substantially lower margins because it is solely a nonexclusive
distributor), accounted for 29.6% of net sales in the September 1996 quarter
compared to 17.4% of in the September 1995 quarter. Beginning with the June
1996 quarter, one of the Company's largest exclusive product customers began
buying substantially all of their nonexclusive laserdisc product from the
Company, contributing to the percentage increase in nonexclusive product sales.
Selling expenses for September 1996 quarter increased 23.6% to
$1,234,153 from $998,497 for the September 1995 quarter. As a percentage of net
sales, selling expenses for the September 1996 quarter increased to 6.9% from
3.8% for the September 1995 quarter. This increase resulted primarily from
higher market development funds provided to customers, increased trade
advertising of exclusive titles and additional freight out expense as a percent
of net sales in connection with the Company's initial consolidation of U.S.
Laser's laserdisc distribution activities. See - Summary and Outlook. The
Company expects, although there can be no assurance, to ultimately reduce its
freight out expenses as a percent of net sales following the completion of the
U.S. Laser distribution consolidation. To promote the laserdisc format and take
advantage of the continued delays in the introduction of the anticipated DVD
format, the Company expects to maintain its current higher level of expenditures
for market development and trade advertising as well as increase its sales
promotions for the balance of fiscal 1997 as compared to fiscal 1996. During
the September 1996 quarter, the Company commenced its four-
11
<PAGE>
month "Laserdisc Roadshow" promotion which is modeled after the Company's
February 1996 "Laserdisc Spectacular" held in Los Angeles, California. Company
sales and marketing personnel, with support from Pioneer Entertainment and the
Company's exclusive and nonexclusive laserdisc suppliers, are traveling to nine
major U.S. cities promoting the laserdisc format with laserdisc hardware and
software promotions.
General and administrative expenses for the September 1996 quarter
increased 3.3% to $1,353,155 from $1,310,476 for the September 1995 quarter. As
a percentage of net sales, general and administrative expenses for the September
1996 quarter increased to 7.6% from 5.0% for the September 1995 quarter. This
increase resulted primarily from an increase in the provision for doubtful
accounts due to continued softness in the retail entertainment software market.
Amortization of production costs for the September 1996 quarter
increased 1.3% to $741,223 from $731,423 for the September 1995 quarter. As a
percentage of net sales, amortization of production costs for the September 1996
quarter increased to 4.2% from 2.8% for the September 1995 quarter. The Company
expects amortization of production costs to continue to be a function of the
timing and number of exclusive titles placed into production.
Interest expense for the September 1996 quarter increased 69.6% to
$82,000 from $48,351 for the September 1995 quarter. Interest income for the
September 1996 quarter decreased 36.0% to $49,383 from $77,194 for the September
1995 quarter. The September 1996 quarter saw the utilization of cash and
borrowings under the Company's revolving credit facility to finance advance
royalty and certain inventory purchase and license fee obligations under the May
1996 exclusive laserdisc output license and distribution agreement with MGM/UA
Home Entertainment as well as the continued repurchase of common stock under the
Company's stock repurchase program.
The effective income tax rate for the September 1996 quarter was 9.8%,
the tax rate necessary to adjust the cumulative effective tax rate for the six
months ended September 30, 1996 to approximately 25.0%, which is the effective
tax rate anticipated by the Company for the full fiscal year ending March 31,
1997. The effective income tax rate for the September 1995 quarter was 10.6%.
Net operating loss carryforwards for Federal and state tax purposes were
utilized to offset taxable income for the September 1995 quarter. However, the
net operating loss carryforward for state tax purposes was fully utilized during
fiscal 1996, and the Federal net operating loss carryforward is expected to be
fully utilized in fiscal 1997, which together lead to a higher effective income
tax rate for Federal and state tax purposes for fiscal 1997.
THE SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1995
Net sales for the six months ended September 30, 1996 decreased 14.1% to
$37,908,278 from $44,136,162 for the six months ended September 30, 1995. The
release schedule for the six months ended September 30, 1996 was substantially
weaker than that of the six months ended September 30,
12
<PAGE>
1995 which included LION KING, PULP FICTION, CINDERELLA, and the release of THX
versions of STAR WARS, THE EMPIRE STRIKES BACK, and RETURN OF THE JEDI. The
Company's net sales of catalogue titles (previously released laserdisc titles)
in the six months ended September 30, 1996 were weaker than those in the six
months ended September 30, 1995. The weakness was primarily a result of the
decline in laserdisc hardware sales, reported by the EIA to be down
approximately 35.0% for calendar 1996 to date versus the same prior-year period.
The decline in laserdisc hardware sales was attributable to the continued
confusion and uncertainty in the laserdisc marketplace about the pending
introduction of the new 5-inch DVD format and its quality (versus laserdisc).
The weakness in catalogue sales was also a result of the continued retail
softness experienced by the chain music/video stores and the fact that the
September 1995 period included substantial sales from the STAR WARS TRILOGY: THE
DEFINITIVE COLLECTION which, as of January 1, 1996, was no longer available in
this three-movie collector's set. The reduction in net sales for the six months
ended September 30, 1996 versus 1995 resulting from a weaker release schedule
and reduced catalogue sales were slightly offset by the inclusion of a full six
months of U.S. Laser sales for the September 1996 period versus three months and
17 business days for the September 1995 period. In the future, the Company
expects that net sales will continue to be affected by the popularity of new
releases, laserdisc hardware sales, the extent of the Company's distribution of
the DVD format and DVD's market penetration and the prevailing economic
environment.
Cost of laserdisc sales for the six months ended September 30, 1996
decreased to $29,831,859 from $34,878,849 for the six months ended September 30,
1995. Cost of sales as a percentage of sales decreased to 78.7% for the six
months ended September 30, 1996 from 79.0% for the six months ended September
30, 1995. The September 1996 period's decrease in cost of laserdisc sales as a
percentage of net sales primarily resulted from laserdisc manufacturing cost
savings due to the comparative strength of the U.S. Dollar against the Japanese
Yen and earned laserdisc manufacturing volume incentive rebates in the September
1996 quarter, offset, in part, by the inclusion of U.S. Laser's lower-margin net
sales and cost of laserdisc sales for the full six month period ended September
30, 1996 versus three months and 17 business days for the September 1995 period,
increased sales of lower-margin nonexclusive product sales as a percentage of
net sales and comparatively decreased sales of high-margin salvaged inventory
retained as part of the June 1994 insurance settlement.
The sales mix of higher-margin exclusive product and lower-margin
nonexclusiveproduct 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, including lower-margin U.S. Laser sales
(U.S. Laser has substantially lower margins because it is solely a nonexclusive
distributor), accounted for 27.6% of net sales in the six months ended September
30, 1996 compared to 16.9% of in the six months ended September 30, 1995.
Beginning with the June 1996 quarter, one of the Company's largest exclusive
product customers began buying substantially all of their nonexclusive laserdisc
product from the Company, contributing to the percentage increase in
nonexclusive product sales.
Selling expenses for six months ended September 30, 1996 increased 21.1%
to $2,314,843 from $1,911,044 for the six months ended September 30, 1995. As a
percentage of net sales, selling expenses for the six months ended September 30,
1996 increased to 6.1% from 4.3% for the six months ended
13
<PAGE>
September 30, 1995. This increase resulted primarily from increased market
development funds provided to customers, increased trade advertising of
exclusive titles, increased sales promotions and a full six months of U.S.
Laser's selling expenses for the 1996 period versus three months and 17 business
days for the 1995 period. To promote the laserdisc format and take advantage of
the continued delays in the introduction of the anticipated DVD format, the
Company expects to maintain its current higher level of expenditures for market
development, trade advertising and sales promotions for the balance of fiscal
1997 as compared to fiscal 1996. During the September 1996 quarter, the Company
commenced its four-month "Laserdisc Roadshow" promotion which is modeled after
the Company's February 1996 "Laserdisc Spectacular" held in Los Angeles,
California. Company sales and marketing personnel, with support from Pioneer
Entertainment and the Company's exclusive and nonexclusive laserdisc suppliers,
are traveling to nine major U.S. cities promoting the laserdisc format with
laserdisc hardware and software promotions.
General and administrative expenses for the six months ended September
30, 1996 increased 19.3% to $2,815,327 from $2,360,486 for the six months ended
September 30, 1995. As a percentage of net sales, general and administrative
expenses for the six months ended September 30, 1996 increased to 7.4% from 5.3%
for the six months ended September 30, 1995. This increase resulted primarily
from an increase in the provision for doubtful accounts due to the Chapter 11
bankruptcy filing of a large customer and continued softness in the retail
entertainment software market, inclusion of a full six months of U.S. Laser's
general and administrative expenses in the 1996 period versus three months and
17 business days for the 1995 period and higher insurance premium costs for
increased coverage.
Amortization of production costs for the six months ended September 30,
1996 increased 6.0% to $1,513,203 from $1,428,105 for the six months ended
September 30, 1995. As a percentage of net sales, amortization of production
costs for the six months ended September 30, 1996 increased to 4.0% from 3.2%
for the six months ended September 30, 1995. The Company expects amortization
of production costs to continue to be a function of the timing and number of
exclusive titles placed into production.
Interest expense for the six months ended September 30, 1996 increased
36.4% to $108,068 from $79,215 for the six months ended September 30, 1995.
Interest income for the six months ended September 30, 1996 decreased 8.3% to
$144,303 from $157,395 for the six months ended September 30, 1995. The six
months ended September 30, 1996 saw the utilization of cash and borrowings under
the Company's revolving credit facility to finance royalty advance and certain
inventory purchase and license fee obligations under the May 1996 exclusive
laserdisc output license and distribution agreement with MGM/UA Home
Entertainment as well as the continued repurchase of common stock under the
Company's stock repurchase program.
The effective income tax rate for the six months ended September 30,
1996 was approximately 25.0% versus 10.3% for the six months ended September 30,
1995. Net operating loss carryforwards for Federal and state tax purposes were
utilized to offset taxable income for the six months ended September 30, 1995.
However, the net operating loss carryforward for state tax purposes was fully
utilized during fiscal 1996 and the Federal net operating loss carryforward is
expected to be fully utilized
14
<PAGE>
in fiscal 1997, which together lead to a higher effective income tax rate for
Federal and state tax purposes for fiscal 1997.
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 the repurchase of its
common stock, the acquisition of the assets of U.S. Laser and the procurement of
new licensing agreements. 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, 1996, operating activities used cash and cash equivalents of
$4,580,231, investing activities used cash and cash equivalents of $514,842 and
financing activities provided cash and cash equivalents of $1,488,917, resulting
in a net decrease in cash and cash equivalents of $3,606,156. See discussion
below regarding the working capital expended in connection with the MGM/UA Home
Entertainment ("MGM/UA") exclusive laserdisc output license and distribution
agreement.
At September 30, 1996, the Company had $3,236,885 borrowings outstanding
under its November 15, 1994, three-year, $15,000,000 revolving credit and term
loan facility with Foothill Capital Corporation. Funds available for borrowing
under the revolving credit facility may not exceed the borrowing base, as
defined in the facility agreement. At September 30, 1996, the Company had total
borrowing availability of approximately $4,650,000 under the revolving credit
and term loan facility, which is net of availability securing outstanding
letters of credit. Borrowings are secured by substantially all of the Company's
assets and bear interest at prime plus 1.5% (9.75% at September 30, 1996). The
facility agreement requires the Company to comply with certain financial and
operating covenants. At September 30, 1996, the Company was in compliance with
all financial and operating covenants.
At September 30, 1996, the Company had $2,500,000 of outstanding letters
of credit issued and guaranteed by the Company's lender and expiring on November
15, 1997. These letters of credit secure balances due to program suppliers.
In May 1996, the Company entered into an exclusive laserdisc output
license and distribution agreement pursuant to which the Company acquired the
right to replicate, market and distribute MGM/UA programming on laserdisc in the
United States and Canada through the year 2001. During the quarter ended
September 30, 1996, certain commitments under the agreement were met by MGM/UA
which required the Company to pay a $5 million royalty advance as well as a $1
million down payment on an inventory purchase and elements license commitment,
composed of the purchase of MGM/UA's on-hand laserdisc inventory for
approximately $3.0 million (for which delivery to the Company was
15
<PAGE>
substantially completed in August, 1996) and the license for the use of MGM/UA's
laserdisc masters and art elements relating to catalogue titles for the term of
the agreement for approximately $2.5 million.
In July 1996, the Company extended its July 1, 1992 exclusive laserdisc
purchase and distribution agreement with Twentieth Century Fox Home
Entertainment giving the Company exclusive laserdisc distribution rights to
Twentieth Century Fox Home Entertainment programming through June 30, 1999.
On June 27, 1996, the Company's Board of Directors approved a 500,000
share increase to the Company's January 1995 authorization to repurchase up to
one million shares of outstanding common stock. Purchases are made from time to
time in the open market and/or through privately negotiated transactions based
on current market conditions and other factors. During the six months ended
September 30, 1996, the Company purchased 315,000 shares of its common stock for
$1,795,948 under its stock repurchase program. Since January 1995 and through
September 30, 1996, the Company has repurchased 1,223,100 shares of its common
stock for $8,052,579.
At September 30, 1996, the Company had license obligations for royalty
advances, minimum guarantees and other fees of approximately $1,641,000 for the
remainder of fiscal 1997, $5,072,000 during fiscal 1998, $6,582,000 during
fiscal 1999 and $11,185,064 during fiscal 2000. These advances and guarantees
are recoupable against royalties 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 that cash available from operations and its
revolving credit and term loan facility will be adequate to meet anticipated
working capital requirements for the next twelve months. The Company is seeking
additional sources of financing in connection with its consideration of
acquisition opportunities and its proposed new distribution facility in Las
Vegas, Nevada. See - Summary and Outlook below.
---
SUMMARY AND OUTLOOK
During the first six months of fiscal 1997 and fourth quarter of fiscal
1996, the Company experienced weaker net sales of catalogue titles (previously
released laserdisc titles) versus the same prior-year periods. Management
believes this to be primarily a result of the decline in laserdisc hardware
sales, reported by the EIA to be down approximately 35.0% for calendar 1996 to
date versus the same prior-year period. The decline in laserdisc hardware was
a result of the confusion and uncertainty in the laserdisc marketplace about the
pending introduction of the DVD format. Another factor contributing to the
weakness in catalogue sales was a soft retail environment affecting the chain
music/video stores. Management believes, although there can be no assurance,
that the retail environment affecting the chain music/video stores will
strengthen in the future and is looking forward to releasing high visibility
titles, such as TOY STORY, INDEPENDENCE DAY, POCAHONTAS, BAMBI (rerelease), THE
ROCK, PHENOMENON and COURAGE UNDER FIRE.
16
<PAGE>
The promotion surrounding the pending introduction of the new DVD format
has created confusion and uncertainty in the laserdisc marketplace. In the
event that the DVD format is released in the foreseeable future, it could have a
further impact on the laserdisc market. However, no verifiable information
currently exists relative to the format's introduction date, the number of
studios participating in the initial roll-out, expected consumer acceptance,
expected market penetration, video quality (as compared to laserdisc quality),
software price (i.e., sell-through only pricing versus two-tiered sell-through
and rental pricing), hardware price, production cost, and the number and breadth
of titles that will be available when the format is introduced and, subsequent
thereto, the frequency and number of additional new and catalogue titles
expected to be released in the format. The Company nevertheless believes,
although there can be no assurance, that the laserdisc format will remain
viable despite the introduction of DVD because over 10,000 titles in a broad
range of categories are available on laserdisc, an established consumer base
exists for laserdisc, many laserdiscs are released in the special edition format
that appeals to collectors and many laserdisc consumers own large collections of
laserdisc titles. In addition, Pioneer Electronics, the largest manufacturer
and distributor of laserdisc hardware has announced that it will be introducing
a combination laserdisc, DVD and CD player in January 1997; the success of the
player will also help promote the sale of catalogue and new laserdisc releases.
In October 1996, the Company entered into a two-year agreement pursuant
to which Thomson Consumer Electronics, a leading hardware manufacturer whose
brands include RCA, GE and Proscan, granted exclusive rights to the Company for
the distribution of DVD software to authorized Thomson hardware dealers. The
two-year term begins with the initial roll-out of DVD software by any major home
video company. Currently, there are over 5,000 authorized Thomson locations
which are potential customers. Under the agreement, Thomson and the Company
have formulated a strategic alliance to bring DVD software and hardware together
at the retail level. Because of delays, generally experienced with the
introduction of any new video format, studio participation and the scheduled
release of DVD software has yet to be determined.
In June 1996, the Company entered into an agreement to purchase
approximately 16.5 acres of unimproved real property in Las Vegas, Nevada for
approximately $4 million. The property is located adjacent to McCarran
International Airport. The Company intends to build a 76,000 square foot
automated distribution facility on approximately eight acres of the acquired
property to accommodate anticipated business growth through the year 1999 and
allow for a 24-hour product turn. The architectural plans allow for expansion
of the building's footprint up to a maximum of 150,000 square feet to
accommodate additional business growth. The Company plans to sell the balance
of the property which is subject to customary zoning and other commercial
property restrictions and which consists of high visibility street-frontage.
The new facility will replace the Company's existing 48,300 square foot leased
facility in Chatsworth, California. The Company intends to sublease the
Chatsworth, California space through the termination of its leasehold
obligations. The Company believes the new facility will be completed by July
1, 1997. The close of escrow and ultimate purchase of the property is
contingent upon obtaining acceptable financing. The total estimated project
cost, assuming the divestiture of approximately eight and one-half acres of the
new property and inclusive of building construction and equipment costs, is
$7.5 million, for which the Company is currently in the final credit
17
<PAGE>
approval process with a lending institution. There can be no assurances that the
Company will obtain ultimate credit approval. The Company is considering the
creation of a new division, Image Distribution Services, that will offer third-
party distribution services such as inventory management, order processing and
distribution.
During the September 1996 quarter, in an effort to achieve distribution
cost savings by ultimately streamlining distribution efforts of the Company and
its subsidiary U.S. Laser and eliminating distribution operation redundancy,
the Company began its consolidation of the majority of U.S. Laser's laserdisc
distribution activities. In August, the Company began shipping U.S. Laser's
laserdisc product out of its Chatsworth warehouse. There can be no assurance
that the Company will realize cost savings from the consolidation of U.S.
Laser's distribution operation. U.S. Laser will continue to service its sales
customer accounts, maintaining its sales staff and its customer service and
order processing operations, and publish its monthly magazine LASERVIEWS:
America's Laser Disc Magazine out of newly leased corporate office space
(U.S. Laser's existing lease for corporate, warehouse and distribution space
terminated in September 1996). Effective September 1996, U.S. Laser leased
7,625 square feet of corporate office and retail space in Whippany, New Jersey.
In October 1996, U.S. Laser opened its new retail concept store "Digitainment."
Digitainment offers a large selection of optical disc software for sale and
rental as well as "Home Theater" hardware systems for sale. The store also
includes an Internet Cafe which contains a coffeehouse and computer terminals
which allow customers to access the Internet. The hardware sales, Internet
Cafe and Internet access computers are managed by outside firms on a profit
sharing basis. The Company may open other Digitainment stores should the retail
concept store prove successful.
In October 1996, the Company released the first of several fully-
interactive CD-ROM titles jointly developed, published and distributed by the
Company and The Voyager Company. The first release was A Night To Remember,
the 1958 British classic documenting the tragic sinking of the ocean liner
Titanic. The Company also expects to release two additional titles under the
arrangement. The Voyager Company is a New York-based privately-held company
that develops, publishes and distributes innovative, entertainment programming
on CD-ROM. The Voyager Company also produces the Criterion Collection line of
laserdisc programming which the Company distributes exclusively.
The Company continues to license new programming for laserdisc
distribution as well as seek to renew and extend relationships with existing
studios. In addition, the Company is seeking exclusive and nonexclusive DVD
distribution rights where available.
In addition to its laserdisc licensing and distribution, the Company
continues to seek investment opportunities in growth oriented companies which
would be complementary to the Company's existing operations such as proprietary
content production or software distribution businesses. Should additional
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.
18
<PAGE>
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q, including without limitation
statements containing the words "believes," "anticipates," "expects" and words
of similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. The Company has made forward-looking statements in this Form 10-Q
concerning, among other things, (i) viability of the laserdisc format despite
the introduction of DVD; (ii) the January 1997 release date of the Pioneer
Electronics combination laserdisc, DVD and CD player, its ultimate success and
its impact on catalogue and new release laserdisc sales; (iii) the strengthening
of the music/video retail environment over the long term; (iv) anticipated
growth through 1999 and desire for a 24-hour product turn necessitate the
purchase of eight acres of land and the building of an expandable distribution
facility; (v) the July 1, 1997 completion date of the new facility and its total
cost, net of the planned divestiture of eight and one-half acres would be
approximately $7.5 million; (vi) cost savings achieved by the consolidation of
U.S. Laser's distribution activities; and, (vii) the opening of other
Digitainment stores should the retail concept store prove successful. These
statements are only predictions, however, actual events or results may differ
materially as a result of risks facing the Company. These risks include, but
are not limited to: (i) number of studios participating in DVD; (ii) DVD's
video and audio quality versus laser; (iii) DVD hardware/software pricing
versus laser; (iv) number of and breadth of titles that will ultimately be
available; (v) ultimate consumer acceptance of DVD; (vi) shifts in industry
distribution channels; (vii) shifts in consumer retail buying habits; (viii) the
availability and financing of future acquisition candidates whose product Image
could distribute out of the Las Vegas facility; (ix) possible construction
delays and unforeseen additional construction costs; (x) the financial strength
of the music/video retail chains; and (xi) other factors referenced in this Form
10-Q. Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company disclaims
any obligation to update any such factors or to announce publicly the result of
any revisions to any of the forward-looking statements contained in this and
other Securities and Exchange Commission filings of the Company to reflect
future events or developments.
19
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The consolidated financial statements as of September 30, 1996 and for
the three- and six-month periods ended September 30, 1996 and 1995 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.
20
<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, 1996, and the related condensed
consolidated statements of operations and cash flows for the three and six month
periods ended September 30, 1996 and 1995 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 consolidated balance sheet of Image Entertainment, Inc. as of
March 31, 1996, and the related consolidated statements of operations and cash
flows for the year then ended (not presented herein); and in our report dated
May 24, 1996, except for Note 14, which was as of June 5, 1996, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of March 31, 1996, 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 5, 1996
21
<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 6, 1996, the Company held its annual meeting of
shareholders. Represented at the meeting in person or by proxy were
11,806,941 shares of common stock (approximately 85.16% 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 11,709,412 votes for and
97,529 votes withheld. With respect to Mr. Segall's election, there
were 11,710,391 votes for and 96,550 votes withheld. With respect to
Mr. Epstein's election, there were 11,710,343 votes for and 96,598 votes
withheld. With respect to Mr. Harris's election, there were 11,709,465
votes for and 96,598 votes withheld.
At the meeting, the Company's shareholders voted upon and ratified the
appointment of KPMG Peat Marwick LLP as the Company's independent
auditors for the fiscal year ending March 31, 1997. With respect to
this matter, there were 11,752,134 votes for, 45,306 votes against and
7,001 abstentions.
ITEM 5. OTHER INFORMATION.
-----------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
See Exhibit Index on page 24
(b) Reports on Form 8-K
None
22
<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 14, 1996 By: /s/ MARTIN W. GREENWALD
---------------------------------
Martin W. Greenwald
Chairman of the Board, Chief
Executive Officer, President
and Treasurer
Date: November 14, 1996 By: /s/ JEFF M. FRAMER
---------------------------------
Jeff M. Framer
Chief Financial Officer
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Stock Purchase Agreement between the Company and Stuart Segall
dated as of July 12, 1995.
10.2 Stock Purchase Agreement between the Company and Martin W.
Greenwald dated as of June 27, 1996.
10.3 Amendment No. 2 dated and effective as of July 1, 1996 to
Employment Agreement of Martin W. Greenwald dated July 1, 1994.
10.4* Option granted October 10, 1996 by the Company to Martin W.
Greenwald.
15* Letter re unaudited interim financial information.
27* Financial Data Schedule.
* EXHIBIT(S) NOT PREVIOUSLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
24
<PAGE>
EXHIBIT 10.4
IMAGE ENTERTAINMENT, INC.
Notice of Grant of Stock Option & Grant Agreement
1992 STOCK OPTION PLAN GRANT
(Director\Employee Grant)
______________________________________________________________________________
Name: MARTIN W. GREENWALD
Social Security Number: ###-##-####
Address: C/O IMAGE ENTERTAINMENT, INC.
9333 OSO AVENUE
CHATSWORTH, CALIFORNIA 91311
______________________________________________________________________________
You have been granted an option under Image's 1992 Stock Option Plan
(the "Plan") to buy Image, no par value, common stock as follows:
----
Type of Option: SEE BELOW
Date of Grant: OCTOBER 10, 1996
Expiration Date: OCTOBER 9, 2006
Exercise Price Per Share: SEE BELOW
Number of Shares Subject to Option: 150,000
Vesting (and other terms), if any: SEE BELOW
<TABLE>
<CAPTION>
Vesting Date Number of Shares Vested Exercise Price
------------ ----------------------- --------------
<S> <C> <C>
October 10, 1996 Incentive Options 19,999 $6.75
October 10, 1996 Non-Statutory Options 10,001 $6.75
October 10, 1997 Incentive Options 19,999 $6.75
October 10, 1997 Non-Statutory Options 10,001 $6.75
October 10, 1998 Incentive Options 19,999 $6.75
October 10, 1998 Non-Statutory Options 10,001 $6.75
October 10, 1999 Incentive Options 19,999 $6.75
October 10, 1999 Non-Statutory Options 10,001 $6.75
October 10, 2000 Incentive Options 19,999 $6.75
October 10, 2000 Non-Statutory Options 10,001 $6.75
</TABLE>
Special Requirements: NOT SALEABLE UNTIL 6 MONTHS AFTER THE DATE OF
GRANT SO AS TO PRESERVE EXEMPT STATUS UNDER
SECTION 16.
<PAGE>
By your signature and Image's signature below, you and Image
agree that this option is granted under and governed by the terms of the Plan
and this Notice of Grant of Stock Option & Grant Agreement. The Plan, as it may
be amended from time to time, is made part of this document.
Some of the terms of the Plan are as follows:
1. This option may be exercised from time to time as to any number
of vested shares of common stock.
2. This option may be exercised during your lifetime only by you
or, if you become disabled, by your guardian or legal
representative.
3. This option may not be transferred except, if you die, by will
or the laws of descent and distribution.
4. This option will expire on the expiration date set forth above
or earlier if you cease to be an Image employee.
(a) If you cease to be an employee for any reason other than
death or disability, this option will expire two (2)
weeks following the date employment ceases. However,
the committee administering the Plan may, in its sole
discretion, permit this option to be exercised for up to
three (3) months following the date employment ceases.
In any event, this option must be exercised prior to the
expiration date set forth above. This option may be
exercised only to the extent it was exercisable on the
date employment ceases.
(b) If you cease to be an employee because of death or
disability, this option may be exercised by your
successor for one (1) year following the date employment
ceases, but only to the extent this option was
exercisable on the date employment ceases. In any
event, this option must be exercised prior to the
expiration date set forth above.
5. Whenever you wish to exercise this option, you must deliver to
the Legal\Business Affairs Department a completed Exercise
Notice (available from the Legal\Business Affairs Department)
together with full payment of the exercise price. Payment must
be made in cash, in shares of Image common stock or any
combination of cash and Image common stock.
6. Whenever you exercise this option, you must deliver to the
Legal\Business Affairs Department, within ten (10) days of
exercise, any withholding and employment taxes due.
7. The exercise price per share and the number of shares subject to
this option will be appropriately adjusted if there is a stock
split, stock dividend or other change in Image's capital
structure.
By your signature below, you acknowledge that you have received and
reviewed a copy of the Plan, the Prospectus dated October 8, 1991 (as updated
February 21, 1992, and January 8, 1993), Image's Annual Report on
<PAGE>
Form 10-K for the fiscal year ended March 31, 1996 and Image's Proxy Statement
for its September 6, 1996 Annual Shareholders' Meeting.
IMAGE ENTERTAINMENT, INC.: DIRECTOR/GRANTEE:
By: /s/ MARTIN W. GREENWALD By: /s/ MARTIN W. GREENWALD
------------------------------ -----------------------------
MARTIN W. GREENWALD, President MARTIN W. GREENWALD
By: /s/ CHERYL LEE Date: October 10, 1996
------------------------------ ---------------------------
CHERYL LEE, Secretary
Date: October 10, 1996
----------------------------
<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 5, 1996 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.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
November 5, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,059,786
<SECURITIES> 0
<RECEIVABLES> 14,195,480
<ALLOWANCES> 2,988,000
<INVENTORY> 17,942,061
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,618,443
<DEPRECIATION> 3,519,634
<TOTAL-ASSETS> 43,671,113
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 19,373,614
<OTHER-SE> 617,654
<TOTAL-LIABILITY-AND-EQUITY> 43,671,113
<SALES> 37,908,278
<TOTAL-REVENUES> 37,908,278
<CGS> 29,831,859
<TOTAL-COSTS> 29,831,859
<OTHER-EXPENSES> 1,513,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,068
<INCOME-PRETAX> 1,469,281
<INCOME-TAX> 367,000
<INCOME-CONTINUING> 1,102,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102,281
<EPS-PRIMARY> .08
<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>
