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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 84-0685613
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
At June 3, 1996, 13,865,028 shares of Common Stock were outstanding, and the
aggregate market value of the shares of Common Stock held by the registrant's
nonaffiliates was approximately $50,963,142 (based upon the closing price of the
Common Stock on the NASDAQ National Market System on such date). Shares of
Common Stock held by the registrant's directors, executive officers and 5% or
more shareholders have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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IMAGE ENTERTAINMENT, INC.
FORM 10-K ANNUAL REPORT
FOR FISCAL YEAR ENDED MARCH 31, 1996
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C>
PART I ....................................................................................... 1
ITEM 1. Business ................................................................... 1
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ITEM 2. Properties ................................................................. 11
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ITEM 3. Legal Proceedings .......................................................... 12
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ITEM 4. Submission of Matters to a Vote of Security Holders ........................ 12
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THE COMPANY'S EXECUTIVE OFFICERS .............................................................. 13
PART II ....................................................................................... 14
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters ...... 14
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ITEM 6. Selected Financial Data .................................................... 15
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
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Operations ................................................................. 16
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ITEM 8. Financial Statements and Supplementary Data ................................ 26
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
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Disclosure ................................................................. 49
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PART III....................................................................................... 49
ITEM 10. Directors and Executive Officers of the Registrant ......................... 49
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ITEM 11. Executive Compensation ..................................................... 49
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ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............. 49
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ITEM 13. Certain Relationships and Related Transactions ............................. 49
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PART IV ....................................................................................... 49
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 49
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SIGNATURES .................................................................................... 51
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PART I
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ITEM 1. BUSINESS.
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GENERAL
Image Entertainment, Inc. (the "Company") was incorporated in Colorado in
April 1975 as Key International Film Distributors, Inc. The Company's present
name was adopted in June 1983. The Company reincorporated in California in
November 1989. Its principal executive offices are located at 9333 Oso Avenue,
Chatsworth, California 91311, and its telephone number is (818) 407-9100.
The Company has distributed programming on laserdisc since 1983, and is the
largest laserdisc licensee and distributor in North America. The Company's
subsidiary, U.S. Laser Video Distributors, Inc., is a New Jersey based
nonexclusive distributor of optical disc programming and is considered to be the
largest laserdisc software "one-stop" in the country. U.S. Laser also publishes
LASERVIEWS: America's Laser Disc Magazine, a bimonthly consumer periodical
focusing on product announcements, software reviews and articles of general
interest to the laserdisc/digital entertainment software consumer.
The Company distributes thousands of titles ranging from feature films and
music videos to family, documentary and special interest programming, directly
or through subdistributors. Titles are obtained from major motion picture
studios and other suppliers under exclusive and nonexclusive license and
wholesale distribution agreements.
To obtain exclusive titles, the Company generally enters into license
agreements whereby it acquires the exclusive right to manufacture and distribute
laserdisc programming in exchange for royalties. The Company releases exclusive
titles from licensors such as Disney's Buena Vista Home Video, Geffen Records,
Hallmark Home Entertainment, MGM/UA Home Entertainment, New Line Home Video,
Orion Home Video, Playboy Home Video and Turner Home Entertainment. Some of the
exclusive titles currently available from the Company include: The Lion King,
Pulp Fiction, Seven, Crimson Tide, Dumb And Dumber, Goldeneye, Get Shorty and
Leaving Las Vegas. Some of the exclusive titles the Company expects to release
during fiscal 1997 include: Toy Story, Pocahontas, The Rock, Moll Flanders, The
Birdcage, Gulliver's Travels, James And The Giant Peach, Mighty Aphrodite,
Flirting With Disaster, Rumble In The Bronx, Special Collector's Editions of
Desperately Seeking Susan, Unbearable Lightness Of Being, Lawnmower Man, The
Mask, Fiddler On The Roof and West Side Story. See Cautionary Statements --
---
"Delays of Releases" below.
The Company also acts as a wholesale distributor. In such capacity, the
Company generally acquires laserdisc programming in finished, prepackaged form
for resale to retail accounts. The Company is the exclusive wholesale
distributor of laserdisc programming from Twentieth Century Fox Home
Entertainment and The Voyager Company (including Voyager's prestigious
"Criterion Collection" line). Some of the Fox and Voyager titles currently
available from the Company include: Die Hard With A Vengeance, Speed, True
Lies, The X-Files and Criterion Collection collector's editions of Seven, Belle
De Jour, Dead Presidents and John Woo's Hard Boiled. Some of the Fox and
Voyager titles the Company
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1 Image Entertainment, Inc.
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expects to release during fiscal 1997 include: Independence Day, The Truth About
Cats And Dogs, Broken Arrow, collector's editions of The King And I and They
Shoot Horses, Don't They?, and Criterion Collection collector's editions of Pulp
Fiction, El Cid, Brazil and Dead Ringers. In addition, the Company is a
nonexclusive wholesale distributor of laserdisc programming from motion picture
studios such as Columbia/TriStar, MCA/Universal, Paramount (through U.S. Laser),
Polygram and Warner Bros. Some of the nonexclusive studio titles currently
distributed by the Company include: Batman Forever, The Bridges Of Madison
County, Apollo 13, The American President, The Usual Suspects, Forrest Gump and
Casino. Some of the nonexclusive studio titles the Company expects to distribute
during fiscal 1997 include: Twister, Mission Impossible, Heat, Dead Man Walking,
The Cable Guy, Eraser, The Nutty Professor and Sense And Sensibility. See
---
Cautionary Statements -- "Delays of Releases" below.
In preparing titles for laserdisc replication, the Company uses its in-
house, state-of-the-art digital postproduction facility to create laserdisc
masters. It then delivers the masters to manufacturers such as Kuraray,
Mitsubishi, Pioneer Video Manufacturing and Technidisc for the replication of
laserdiscs. The Company's in-house, full-service creative services/computer
graphics department designs laserdisc jackets and creative materials for
advertising and marketing. The Company's in-house marketing department
implements marketing programs, issues publicity and publishes Image Laserdisc
Preview, a free, consumer-oriented, monthly magazine available through most
laserdisc retailers, featuring new releases and containing articles and
information of current interest to the laserdisc/multimedia consumer.
RECENT DEVELOPMENTS
On April 26, 1996, the Company entered into an agreement in principle
pursuant to which Thomson Consumer Electronics, a leading hardware manufacturer
whose brands include RCA and ProScan, granted exclusive rights to the Company
for the distribution to Thomson dealers of digital video disc ("DVD") software,
a new format which will deliver compressed digital-quality video and audio on a
5-inch disc. The parties contemplate entering into a definitive written
agreement in fiscal 1997, which agreement will include, among other provisions,
the term of the agreement and a list of the participating studios whose titles
will be distributed by the Company to Thomson dealers.
On May 21, 1996, the Company entered into an exclusive output license and
distribution agreement pursuant to which the Company acquired the right to
replicate, market and distribute MGM/UA Home Entertainment programming on
laserdisc in the United States and Canada through the year 2001. Some of the
MGM/UA titles currently available under this agreement include: Goldeneye, Get
Shorty and Leaving Las Vegas. Some of the MGM/UA titles the Company expects to
release in fiscal 1997 include: The Birdcage, Mulholland Falls, Moll Flanders,
Larger Than Life, and A Family Thing. See Cautionary Statements -- "Delays of
---
Releases" below. Prior to entering into this exclusive output license agreement,
the Company had entered into other license agreements for MGM/UA programming
which were limited to specific titles.
On June 5, 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 real property is located adjacent to McCarran
International Airport. The Company intends to build an approximately 85,000
square foot automated warehouse and distribution facility on approximately 8
acres of the
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Image Entertainment, Inc. 2
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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 consists of street-frontage acreage and is subject to
customary zoning and other commercial property restrictions. The new facility
will replace the Company's existing 48,300 square foot leased distribution
center in Chatsworth, California. See Item 2. Properties. The Company believes
---
the new facility will be completed by June 1, 1997. The close of escrow and
ultimate purchase of the new property is contingent upon the achievement of
certain rezoning objectives and the obtaining of acceptable financing. The total
estimated project cost, assuming the divestiture of approximately 8.5 acres of
the new property and inclusive of building construction and equipment costs, is
$7.5 million, for which the Company is currently seeking financing. There can be
no assurances that the Company will obtain such financing on terms and
conditions reasonable or acceptable to the Company. The Company plans to create
a new division, Image Distribution Services, that will offer third-party
distribution services such as inventory management, order processing and
distribution.
The Company recently reached an agreement in principle with Twentieth
Century Fox Home Entertainment to extend the term of its existing exclusive
laserdisc distribution agreement from June 30, 1996 to June 30, 1999. No other
terms of the agreement were materially changed. The parties contemplate
entering into a definitive written agreement in fiscal 1997.
In August 1996, the Company expects to release the first of several fully-
interactive CD-ROM titles jointly developed, published and distributed by the
Company and The Voyager Company. The first release is A Night To Remember, the
1958 British classic documenting the tragic sinking of the ocean liner Titanic.
In addition to the full-length feature film, the CD-ROM will contain a wealth of
ancillary material including the ship's blueprint, passenger log and disaster
time line. The Company also expects to release under the arrangement two
additional titles in calendar 1996, King Kong and Citizen Kane. 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 acclaimed Criterion Collection line of laserdisc
programming which the Company distributes exclusively. See Cautionary
---
Statements -- "Nature of the Entertainment Industry" below.
LASERDISC BASICS
The laserdisc, a larger optical version of the compact disc, is encoded
with both audio and visual information. Just as compact discs offer distinct
advantages over records and audiotapes, laserdiscs offer distinct advantages
over videocassettes: higher resolution video, full-fidelity discrete channel
digital audio, instant access to any scene, frame-by-frame viewing, greater
durability and superior interactive capability. The laserdisc is not to be
confused with the short-lived capacitance electronic disc (CED), which was
introduced by RCA in the early 1980s and abandoned by it in 1986. The CED (or
"videodisc") was read by a stylus and did not utilize optical laser technology.
Laserdisc (software) demand is primarily driven by the installed base of
laserdisc players (hardware). When introduced over a decade ago, laserdisc
players met with only moderate success because of their cost compared to VCRs,
their inability to record, limited software availability and consumers'
unfamiliarity with the laserdisc format. However, the format has since
benefitted from consumer acceptance of CD technology and increasing consumer
interest in the "home theater" concept,
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3 Image Entertainment, Inc.
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including THX sound equipment, the recent introduction of "Dolby Digital" (AC-
3), big-screen televisions and wide-screen televisions.
A number of hardware manufacturers offer a variety of laserdisc player
models. Major retailers of audio and video components such as Circuit City,
Frys, Lechmere, Montgomery Ward, Radio Shack, Sears and The Good Guys carry
laserdisc players.
Virtually all laserdisc players are combination players, which play both
compact discs and laserdiscs. Pioneer Electronics, a leading manufacturer of
laserdisc hardware, introduced an entry-level player listing at $299 in early
1995. Denon, Pioneer, Panasonic, Runco and Theta have introduced several high-
end laserdisc player models which retail between $1,000 and $4,500. Depending
upon the make and model, laserdisc players may also offer karaoke and game add-
ons and an assortment of other special features. All new models of Pioneer
players retailing for $399 and above include "Dolby Digital," also known as
"AC-3." This new audio feature, currently available only with laserdisc
technology, allows for six discrete channels of audio to be played back in home
theater applications, giving the viewer a closer approximation of the original
theatrical experience and a more true-to-life placement of sound.
The Company anticipates the laserdisc market will remain primarily a sell-
through rather than a rental market. Most titles currently have a suggested
retail price of $24.99 to $39.99, low enough for consumers to build a personal
library.
PROGRAM ACQUISITION
GENERAL. Because the Company does not produce its own programming, its
-------
success depends upon entering into new and renewing existing licenses and
wholesale distribution agreements for feature films and other programming. There
can be no assurances that suppliers of programming will continue to enter into
or renew licenses or distribution agreements on terms acceptable to the Company.
The Company, however, believes that its production, creative services, marketing
and distribution expertise will continue to make it an attractive partner for
such suppliers.
Twentieth Century Fox Home Entertainment and Disney's Buena Vista Home
Video retain the right to terminate their respective agreements with the Company
if specified events of default occur, such as a "change in control" (as defined
in the agreements) of the Company. Future licenses and distribution agreements
may contain these or other similar termination provisions relating to a change
in control. A number of the Company's license and distribution agreements
provide for the sale of laserdiscs to Columbia House, a large mail order
distributor.
LICENSES. The Company enters into licenses whereby it acquires from
--------
suppliers of programming the right to manufacture and distribute their titles on
laserdisc. Licenses are for specific titles or for a licensor's existing
library and future releases over a designated term ("output licenses"), and
generally give the Company exclusive rights. The Company releases exclusive
titles from licensors such as Buena Vista Home Video, Geffen Records, Hallmark
Home Entertainment, MGM/UA Home Entertainment, New Line Home Video, Orion Home
Video, Playboy Home Video and Turner Home Entertainment. Under a November 26,
1991 agreement with Buena Vista Home Video, a subsidiary of The Walt Disney
Company, the Company has the exclusive right to replicate, market and distribute
Disney, Touchstone, Buena
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Image Entertainment, Inc. 4
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Vista and Hollywood Pictures, and certain Miramax, programming on laserdisc in
the United States and Canada and their respective territories (although Disney
may distribute to certain accounts if it so elects). The agreement was amended
on January 1, 1995 to extend Image's exclusive rights until December 31, 1999.
In connection with the agreement, Buena Vista's parent company was issued a
warrant to purchase Common Stock of the Company. See Item 8. Financial
---
Statements and Supplementary Data -- Note 10 to Consolidated Financial
Statements. Under a December 22, 1992 agreement with New Line Home Video, Inc.,
a division of New Line Cinema, the Company has the exclusive right to replicate,
market and distribute all New Line, Fine Line and other programming acquired by
New Line on laserdisc in the United States (and Canada for certain titles) until
December 1997 or December 1998 if New Line elects. In connection with the
agreement, New Line was issued a warrant to purchase Common Stock of the
Company. See Item 8. Financial Statements and Supplementary Data -- Note 10 to
---
Consolidated Financial Statements.
In return for the grant of rights, the Company pays royalties to its
licensors. Royalties are expressed as a percentage of the Company's net
revenues from laserdisc sales. In many cases, the Company pays licensors
advances or minimum guarantees on a title, which are recouped against any
royalties earned from that title and (if cross-collateralized) other titles
under the license. Advances under most output licenses are paid according to
predetermined schedules, regardless of the number and marketability of the
titles subsequently available. In entering into licenses, the Company depends,
to a large extent, on its ability to anticipate the public's changing taste in
laserdisc programming, foresee (as to output licenses) licensors' future
releases, and pay for any advances, minimum guarantees and other licensee
obligations.
In general, licenses have terms of two to seven years and are limited to
the United States, Canada and their respective territories and possessions.
Under most output licenses, the Company has one to five years to select titles
and two to five years to distribute a title after its release on laserdisc.
Distribution of licensed titles accounted for approximately 50% of fiscal
1996 net sales, 55% of fiscal 1995 net sales and 50% of fiscal 1994 net sales.
Exclusive titles from the following licensors accounted for the largest
percentages of fiscal 1996 net sales (the only percentage in excess of 10% is
indicated): Buena Vista Home Video (27.7%), New Line Home Video, Orion Home
Video, Hallmark Home Entertainment and MGM/UA Home Entertainment. Exclusive
titles from the following licensors accounted for the largest percentages of
fiscal 1995 net sales (the only percentage in excess of 10% is indicated): Buena
Vista Home Video (29.2%), New Line Home Video, Orion Home Video, Sultan
Entertainment and Turner Home Entertainment. Exclusive titles from the
following licensors accounted for the largest percentages of fiscal 1994 net
sales (the only percentage in excess of 10% is indicated): Buena Vista Home
Video (18.4%), New Line Home Video, Orion Home Video, Academy Entertainment,
Inc. and Prism Entertainment.
The selection periods under the five licenses which accounted for the
largest percentages of fiscal 1996 net sales will expire on various dates
between December 1997 (New Line Home Video) and December 2002 and the
distribution periods with respect to individual titles under such licenses have
expired or will expire on various dates through approximately December 2004.
While efforts are made
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5 Image Entertainment, Inc.
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to renegotiate and renew licenses prior to expiration, there can be no assurance
that licenses or distribution agreements will be renegotiated or renewed.
Historically, the Company has not attempted to obtain foreign (with the
exception of Canadian) laserdisc distribution rights, since foreign sales,
outside of Canada and certain Pacific Rim countries where such rights are
generally unavailable to non-domestic entities, have been minimal. Under a
special arrangement, Image sells laserdiscs of Disney titles to Disney for
distribution to designated Disney licensees and distributors in Hong Kong,
Indonesia, Malaysia, Philippines, Singapore, Taiwan and Thailand. From time to
time, the Company similarly acts as a fulfillment center servicing foreign
territories for other licensors.
Although the Company does not produce its own motion picture programming,
the Company often creates and releases Special Edition laserdiscs, an
increasingly important source of revenue, publicity and prestige for the
Company. Special Editions usually consist of a feature film (obtained under
license) and a variety of ancillary materials such as out-takes, restored
footage or a director's cut, interviews with the director, cast or other
participants in the film-making process, separate audio track narratives,
scripts and/or treatments, press clippings, compact discs of the soundtrack,
production photos, and other materials of interest. Recently, the Company began
releasing limited, numbered Special Editions personally autographed by the
film's director or other talent. The Voyager Company also creates and releases
Special Editions which the Company distributes on an exclusive basis. In
response to growing consumer demand, the Company will be releasing increasingly
more titles in THX, wide-screen (letterboxed) and/or Dolby Digital versions.
WHOLESALE DISTRIBUTION. In addition to its licensing activities, the
----------------------
Company is a wholesale distributor of laserdisc programming that it acquires
from certain major motion picture studios and other suppliers.
On July 1, 1992, the Company and Twentieth Century Fox Home Entertainment
entered into an exclusive four-year laserdisc distribution agreement which
superseded the exclusive laserdisc distribution agreement between the parties
that had been in effect since September 1, 1990. Under the agreement, the
Company has the right to acquire existing and future Fox titles until June 30,
1996 for distribution in the United States, Canada and Puerto Rico (although Fox
may distribute to certain accounts if it so elects). The parties have reached an
agreement in principle to extend the term of the agreement until June 30, 1999.
In connection with the original agreement, Twentieth Century Fox Film
Corporation, Twentieth Century Fox Home Entertainment's parent company, was
issued and on May 10, 1996 exercised in full a warrant to purchase Common Stock
of the Company. See Item 8. Financial Statements and Supplementary Data --
---
Note 10 to Consolidated Financial Statements. Under a November 10, 1992
agreement, as amended on October 12, 1994, the Company has the exclusive right
to purchase and distribute Voyager programming in the United States, and
additional territories, under certain circumstances through March 31, 1999. The
Company's rights with respect to Voyager titles are non-exclusive after March
31, 1999.
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Image Entertainment, Inc. 6
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The Company is also a nonexclusive wholesale distributor of laserdisc
programming from Warner Home Video, MCA/Universal Home Video, Paramount (through
U.S. Laser), Columbia TriStar Home Video, Lumivision, Republic Entertainment,
BMG Music and Polygram Records.
In general, the Company acquires laserdisc programming for wholesale
distribution in finished, prepackaged form, and thus does not provide any
creative services with respect to such programming; however, in connection with
the Fox and Voyager exclusive distribution agreements, the Company finishes and
packages the product for a fee. The Company is generally not required to pay
advances, although the Voyager agreement required an advance and a minimum
distribution fee guarantee and the Fox agreement requires the Company to
guarantee the purchase of a minimum number of laserdiscs. In a typical
nonexclusive wholesale distribution arrangement, the program supplier notifies
the Company of its upcoming releases and the Company then solicits its customers
and places orders for the releases. In acquiring laserdiscs for nonexclusive
wholesale distribution, the Company is generally required to pay within 60 days
of delivery.
Wholesale (exclusive and nonexclusive) distribution of laserdiscs accounted
for approximately 50% of fiscal 1996 net sales, 45% of fiscal 1995 net sales and
50% of fiscal 1994 net sales. Exclusive wholesale distribution of Fox product
accounted for approximately 24% of fiscal 1996 net sales, 27% of fiscal 1995 net
sales and 31% of fiscal 1994 net sales. Generally, the Company's profit margin
on exclusive licensed product and exclusive wholesale distributed product has
been greater than its profit margin on nonexclusive product it distributes
wholesale.
SALES AND CREDIT POLICIES
The Company sells both licensed and wholesale product directly to retailers
or through subdistributors subject to the terms of the Company's dealer sales
policies. Laserdisc sales to the following customers accounted for the largest
percentage of the Company's fiscal 1996 net sales (the only percentage equal to
or greater than 10% is indicated): Musicland (10.9%), MTS/Tower Records and
Video, Transworld Music Corp., Ken Crane's Home Entertainment, Bassin
Distributors and Norwalk Record Distributors. Laserdisc sales to the following
customers accounted for the largest percentages of the Company's fiscal 1995 net
sales (none equaled or exceeded 10%): Musicland, U.S. Laser Video Distributors,
MTS/Tower Records and Video, Camelot Music and Ken Crane's Home Entertainment.
Laserdisc sales to the following customers accounted for the largest percentages
of the Company's fiscal 1994 net sales (none equaled or exceeded 10%): U.S.
Laser Video Distributors, Norwalk Record Distributors, Ken Crane's Home
Entertainment, Musicland and MTS/Tower Records and Video.
The Company's prospective customers generally submit a credit application
followed by a minimum opening order for laserdiscs. If the application is
accepted, credit terms are assigned. Open account terms generally require
payment within 45 to 60 days of delivery. The Company may also require a
purchaser to provide a purchase money security interest, a personal guarantee, a
letter of credit and/or other collateral. Due largely to extensive controls
instituted by the Company and the efforts of its experienced credit department,
bad debt expense was less than 0.2% of net sales during fiscal 1996, and less
than 0.1% of net sales during fiscal 1995 and 1994. The amount of bad debt
actually written off in fiscal 1996, 1995 and 1994 was approximately $149,000,
$47,000 and $39,000, respectively.
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7 Image Entertainment, Inc.
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Although sales of laserdiscs are generally considered final, the Company
allows customers to return a portion of their stock on a quarterly basis. This
allowance is noncumulative and is based on the customer's prior quarter
purchases. Stock returns, other than for defective laserdiscs, amounted to
approximately 7.2% of all laserdiscs sold in fiscal 1996, 8.6% of all laserdiscs
sold in fiscal 1995 and 9.5% of all laserdiscs sold in fiscal 1994. Returns of
defective laserdiscs have been minimal and are generally covered by
manufacturers' warranties.
As part of its ongoing campaign to expand the laserdisc market, the Company
aggressively solicits new retail accounts, enticing them with a broad range of
titles and marketing options such as hardware/software cross-promotions.
Although the Company generally sells directly to retailers it also sells to
certain major music and laserdisc subdistributors, who have an extensive retail
network. Historically, to stay competitive with subdistributors, the Company has
offered improved pricing, faster delivery, expanded sales, customer service and
marketing departments and increased inventory of high-demand titles.
As of June 1, 1996, the Company had approximately $6.9 million of backlog
orders for laserdiscs. The Company expects to fill all of the backlog orders
within the current fiscal year.
MARKETING
The Company's strategy is to promote its product and the laserdisc format
in general. The Company's marketing efforts are directed toward consumers and
video software and hardware dealers, and involve point-of-sale advertising,
advertising in trade and consumer publications, dealer incentive programs, trade
show exhibits, bulletins featuring new releases and in-stock catalogue titles
and the publication of the Image Laserdisc Preview, a free, consumer-oriented,
monthly magazine with an estimated 100,000 unit circulation.
Promotion of each new title generally begins eight to sixteen weeks before
the scheduled in-store release with the mailing of the Image Laserdisc Preview
magazine and bulletins to retailers. An active telemarketing campaign follows.
The Company attempts to release a title on laserdisc as close in time as
possible to its videocassette release date to capitalize on videocassette
advertising and publicity campaigns.
Since the installed base of laserdisc players and the demand for laserdiscs
are interrelated, the Company has worked closely with major laserdisc player
manufacturers to promote the laserdisc format. For example, manufacturers of
selected laserdisc players sometimes make available to purchasers free or
substantially discounted laserdiscs.
The Company also maintains a website on the Internet at www.image-
entertainment.com. The site includes an online edition of the Image Laserdisc
Preview, weekly new product announcements, Company information and information
of general interest to the laserdisc consumer.
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Image Entertainment, Inc. 8
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LASERDISC PRODUCTION
Under a typical license, the licensor of a title delivers a program master
and art work to the Company for quality evaluation. If the Company deems the
master acceptable, its postproduction facility creates a submaster with
specifications for laserdisc format. This submaster is delivered to the
manufacturer for the replication of laserdiscs. The laserdisc jacket is
designed and produced by the Company's creative services staff and sent to a
printer for replication. The laserdisc manufacturer will either package and
shrink-wrap the laserdiscs and ship the completed product to the Company or ship
the laserdiscs in bulk to the Company and the Company will package and shrink-
wrap the laserdiscs at its own facility. The Company estimates that 35% of the
manufactured units are received in finished form and 65% of the manufactured
units are received in bulk shipments requiring packaging and shrink-wrapping in-
house.
To reduce production costs and expedite the production process, in November
1990 the Company installed an in-house, state-of-the-art digital postproduction
facility. To further increase efficiencies and reduce costs, in January 1995
the Company purchased digital pre-press equipment for the output of high
resolution, four-color separations used for art work production. These unique
facilities allow the Company to format over 90% of the laserdisc masters (from
all licensors) it would otherwise contract out to post-production facilities and
deliver to printers final, color separated film it would otherwise contract out
to graphics houses.
MANUFACTURING OF LASERDISCS
The Company currently uses six laserdisc manufacturers, four of which press
discs in the United States. In fiscal 1996, the following manufacturers
supplied the largest percentages of the laserdiscs pressed for the Company
(percentages in excess of 10% are indicated): Mitsubishi (35.6%), Pioneer Video
Manufacturing (23.9%), Kuraray (23.4%), Technidisc (16.2%), Sony's Digital Audio
Disc Corporation and 3M. In fiscal 1995, the following manufacturers supplied
the largest percentages of the laserdiscs pressed for the Company (percentages
in excess of 10% are indicated): Mitsubishi (39.5%), Kuraray (24.6%),
Technidisc (18.4%), Pioneer Video Manufacturing (15.9%), Sony's Digital Audio
Disc Corporation and 3M.
The Company attempts to solicit orders from its customers for laserdiscs
prior to submitting orders for the manufacture of such discs. Under its
manufacturing purchase orders, the Company generally must pay for finished
laserdiscs within 45 to 90 days of invoicing. The Company's goal is to order
for manufacture that number of units of each title which will enable the Company
to ship the bulk of the order within 60 days of delivery. Attainment of this
goal depends largely upon the Company's ability to predict the popularity of a
title.
While the Company believes that manufacturing facilities currently have the
aggregate capacity to fulfill its orders, if any manufacturer used by the
Company were unable to supply the Company with laserdiscs, the Company believes
it could place its orders for such laserdiscs with other manufacturers (subject
to such manufacturers' willingness to re-prioritize their laserdisc pressing
schedules).
- --------------------------------------------------------------------------------
9 Image Entertainment, Inc.
<PAGE>
TRADEMARKS
The Company has received Federal registration of the trademark "IMAGE" in
the United States Patent and Trademark Office. The Company also uses the
trademarks "Vocal Images," "The Music Disc" and "The Finest in Laserdiscs" and
the service marks "Image Post" and "Image Creative Group."
EMPLOYEES
At June 3, 1996 and June 1, 1995, the Company had 96 and 94 full-time
employees, respectively. The Company considers its employee relations to be
satisfactory. At June 3, 1996, U.S. Laser had 26 full-time employees, who were
not included in the number of Company employees set forth immediately above.
CAUTIONARY STATEMENTS
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed or implied in any forward looking statements
made herein. The Company intends to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Competition. The Company believes that it is the largest laserdisc
-----------
licensee and distributor in the United States; however, the Company also faces
competition from Pioneer LDCA, which also licenses and distributes laserdiscs;
laserdisc subdistributors; and Columbia TriStar Home Video, MCA/Universal Home
Video and Warner Home Video, who sell their own programming directly to
retailers, as well as to the Company and other distributors. Laserdiscs also
face competition from other forms of home video entertainment, e.g.,
---
videocassettes and network, syndicated, pay/cable television and DSS (direct
satellite system). New technologies in the entertainment industry (such as the
DVD format, entertainment programming on the Internet and video on demand, all
of which are currently in various stages of development) may also offer
alternate forms of leisure-time entertainment or alter the way in which existing
forms are delivered, thereby increasing competition. See Item 7. Management's
---
Discussion and Analysis of Financial Condition and Results of Operations --
Summary and Outlook.
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; 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 variability 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 Company's marketing
and promotional activities; (iii) the Company's rights and distribution
activities; (iv) the extension, termination or non-renewal of existing license
and distribution rights; and (v) general economic changes affecting consumer
demand for laserdisc hardware and software and affecting the buying habits of
the Company's customers.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 10
<PAGE>
Nature of the Entertainment Industry. Audience acceptance of the Company's
------------------------------------
products represents a response not only to the artistic components of the
products, but also to the level of advertising and promotion by the studios and
distributors, the availability of alternative forms of entertainment and leisure
time activities, changes in public taste, and other intangible factors, all of
which change rapidly and cannot be predicted. This situation presents a number
of risks, including the risk that some of the Company's laserdisc titles may not
be commercially successful, that costs will not be recouped or that anticipated
profits justifying the Company's commitments will not being realized.
Acquisition Opportunities. The Company has explored, and continues to
-------------------------
explore, acquisition opportunities in various businesses complementary to those
of the Company. To date, however, other than the 1995 acquisition of U.S. Laser
(see Item 7. Management's Discussion and Analysis of Financial Condition and
---
Results of Operations -- Acquisition) no acquisition agreement has been reached.
Furthermore, there can be no assurances that the Company will enter into any
acquisition agreement. Nor can the Company currently predict how such an
agreement would impact its results. Any material acquisition would require the
Company to obtain financing. There can be no assurances that the Company will
obtain such financing on terms and conditions reasonable or acceptable to the
Company.
Delays of Releases. The Company currently expects that all new laserdisc
------------------
titles with expected release dates in fiscal 1997 will be released during that
year. In the past, however, the Company's licensors, for various reasons, have
from time to time delayed releasing certain titles to the laserdisc and
videocassette markets. There can be no assurances that delays of this type will
not occur in the future.
Dependence on Key Personnel. The success of the Company depends to a
---------------------------
significant degree on the efforts of the Company's executive management,
especially its President and Chief Executive Officer, its Chief Financial
Officer, its Chief Administrative Officer and its Senior Vice President of
Sales, Marketing and Operations. The Company's operations may be adversely
affected if one or more members of executive management cease to be active in
the Company. The Company, however, has designed its compensation structure and
employee benefit programs to encourage long-term employment of all executive
officers.
ITEM 2. PROPERTIES.
----------
The lease for the Company's office space (30,080 square feet) in
Chatsworth, California provides for monthly rent of $13,849 (subject to annual
adjustment based upon increases in the consumer price index) and will expire on
March 31, 2000.
The lease for the Company's warehouse space (48,300 square feet) in
Chatsworth, California provides for monthly rent of $22,238 (subject to annual
adjustment based upon increases in the consumer price index) and will expire on
March 31, 2000.
The Company has recently entered into an agreement to purchase
approximately 16.5 acres of unimproved real property in Las Vegas, Nevada for
approximately $4 million. The Company intends to build a new warehouse and
distribution facility on the property. See Item 1. Business -- Recent
---
- --------------------------------------------------------------------------------
11 Image Entertainment, Inc.
<PAGE>
Developments. The close of escrow and ultimate purchase of the new property is
contingent upon the achievement of certain rezoning objectives and the obtaining
of acceptable financing. If escrow does not close on this property, the Company
intends to seek alternative property. The Company, however, will remain
obligated under its Chatsworth, California warehouse lease and intends to
sublease the space. The Company believes it can sublease the space at a rate
that will not result in a material expense to the Company; however, there can be
no assurances that the Company could sublease the space or even if successful
would not incur a material expense. If escrow does not close on the Las Vegas
property and the Company is unsuccessful in acquiring an alternative warehouse
facility, the Company believes that its Chatsworth, California warehouse will
provide adequate capacity to meet its needs in the foreseeable future but will
not efficiently accommodate growth in the Company's business.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
The Company is not currently a party to any material legal action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 12
<PAGE>
THE COMPANY'S EXECUTIVE OFFICERS
Executive officers serve at the pleasure of the Company's board of
directors (the "Board"). There are no family relationships between any
executive officer or director. The following information sets forth the
position and age of the Company's executive officers at June 1, 1996 and their
business experience for at least the prior five years:
<TABLE>
<CAPTION>
Executive Officer Age Position & Background
- ----------------- --- ---------------------
<S> <C> <C>
Martin W. Greenwald 54 Chairman of the Board, Chief Executive Officer and President
since April 1981, and Treasurer since January 1988. Mr. Greenwald's
prior experience includes film production services and investment management.
Mr. Greenwald is a 1964 graduate of Fairleigh Dickinson University. Since July
1990, Mr. Greenwald has been a director of the Permanent Charities Committee of
the Entertainment Industries, an umbrella organization which coordinates
charitable contributions from the entertainment industries. Since 1995, Mr.
Greenwald has been the Chairperson of the Laserdisc Association of America.
Cheryl L. Lee 37 Chief Administrative Officer since April 1993 and
General Counsel since April 1992; Vice President of Business Affairs from
February 1989 to March 1992; prior thereto, Counsel, Theatrical Distribution &
Acquisition, Twentieth Century Fox Film Corporation. Ms. Lee received her A.B.
degree from Stanford University in 1980 and her J.D. degree from New York
University Law School in 1984. Ms. Lee is a member of the California Bar.
Jeff M. Framer 35 Chief Financial Officer since April 1993; Controller
from September 1990 to March 1993; Senior Manager, KPMG Peat Marwick LLP, from
July 1989 to September 1990; and, Manager, KPMG Peat Marwick LLP, from July 1988
to June 1989. Mr. Framer received his B.S. degree in Business Administration
and Accounting Theory and Practice from California State University at
Northridge in 1984. Mr. Framer is a certified public accountant.
David A. Borshell 31 Senior Vice President, Sales, Marketing and Operations
from December 1994; Senior Vice President, Operations, from April 1993 to
December 1994; Vice President, Operations, from January 1991 to March 1993;
Director of Operations from July 1990 to December 1990; Director of Sales from
November 1988 to June 1990; and, Account Executive from February 1986 to
November 1988.
</TABLE>
- -------------------------------------------------------------------------------
13 Image Entertainment, Inc.
<PAGE>
- -------------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Common Stock trades on The Nasdaq Stock Market under the symbol "DISK"
since February 1988. The Common Stock has been included on the Nasdaq National
Market since February 19, 1991. The table below presents the high and low
closing prices on the NASDAQ/NMS. All prices reflect a 1-for-14 6/7 reverse
stock split effected February 8, 1991.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1996 High Low
-------------------------------- -------- --------
<S> <C> <C>
Quarter ended June 30, 1995 $ 7.375 $ 6.50
Quarter ended September 30, 1995 $ 6.9375 $ 6.375
Quarter ended December 31, 1995 $ 8.875 $ 6.625
Quarter ended March 31, 1996 $ 7.125 $ 6.3125
Fiscal Year Ended March 31, 1995 High Low
-------------------------------- -------- --------
Quarter ended June 30, 1994 $ 8.31 $ 5.88
Quarter ended September 30, 1994 $ 9.00 $ 6.75
Quarter ended December 31, 1994 $ 8.06 $ 6.88
Quarter ended March 31, 1995 $ 8.13 $ 6.75
</TABLE>
As of June 3, 1996 there were 1,903 holders of record of Common Stock. The
closing price on that date was $6.75.
The Company has never paid a cash dividend on the Common Stock and
presently intends to retain any future earnings for business development. In
addition, the Company is party to a loan agreement which imposes restrictions on
its payment of dividends. See Note 9 to Consolidated Financial Statements.
---
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The selected financial data presented below was derived from the
consolidated financial statements of the Company and should be read in
conjunction with such financial statements, the notes thereto and the other
financial information included herein.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
- ---------------------
Net sales $ 95,086,164 $ 85,590,730 $ 65,577,813 $ 59,813,867 $ 58,661,593
Operating costs and expenses 86,926,339 77,850,931 60,575,598 74,380,855** 56,366,978
Operating income (loss) 8,159,825 7,739,799 5,002,215 (14,566,988) 2,294,615
Interest expense (155,530) (1,184,190) (2,335,894) (2,531,729) (2,010,152)
Interest income 337,370 518,258 486,889 439,481 349,165
Amortization of deferred financing costs -- (111,459) (270,251) (315,631) (116,620)
Net gain on insurance settlement -- 742,390 959,511 -- --
Income (loss) before income
taxes and extraordinary item 8,341,665 7,704,798 3,842,470 (16,974,867) 517,008
Income taxes (742,617) (175,303) (103,871) (800) (800)
Income (loss) before extraordinary item 7,599,048 7,529,495 3,738,599 (16,975,667) 516,208
Extraordinary item, net of taxes -- (1,218,831)* (377,535)* -- --
Net income (loss) $ 7,599,048 $ 6,310,664 $ 3,361,064 $(16,975,667) $ 516,208
Income (loss) per share
before extraordinary item (Note 5) $ .49 $ .51 $ .30 $ (1.44)** $ .04
Extraordinary item per share -- (.07)* (.03)* -- --
Net income (loss) per share (Note 5) $ .49 $ .44 $ .27 $ (1.44)** $ .04
Weighted average shares
outstanding (Note 5) 17,651,367 18,138,957 12,346,967 11,760,401 13,356,675
BALANCE SHEET DATA:
- ------------------
Total assets $ 39,405,668 $ 33,490,930 $ 42,526,264 $ 46,745,395 $ 49,358,746
Total liabilities 18,880,239 16,818,431 31,411,828 39,713,777 30,551,277
Net shareholders' equity 20,525,429 16,672,499 11,114,436 7,031,618 18,807,469
</TABLE>
* Extraordinary item - costs associated with early retirement of debt, net of
related taxes of $33,800 and $10,476 for fiscal 1995 and 1994, respectively.
** Includes a nonrecurring pre-tax charge of $10,366,000 equal to $.88 per
share (pre-tax), related to the Company's restructuring of its operations.
- --------------------------------------------------------------------------------
15 Image Entertainment, Inc.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
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/digital entertainment software consumer. U.S.
Laser has been in the laserdisc distribution business since 1985. See Item 1.
---
Business -- General.
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 March 31, 1996, are included in the accompanying
consolidated statement of operations for the year ended March 31, 1996. The
Company has classified the amount of purchase price in excess of the fair market
value of the net assets acquired as goodwill. At March 31, 1996, goodwill was
approximately $183,000 and was included as a component of prepaid expenses and
other assets in the accompanying consolidated balance sheet at March 31, 1996.
INSURANCE SETTLEMENTS - BUSINESS INTERRUPTION AND PROPERTY DAMAGE
On March 30, 1995, the Company received an $880,000 insurance settlement
from its claim of business interruption losses sustained in the January 17, 1994
Northridge earthquake. The settlement resulted in a net gain of $742,390 after
the accrual of related expenses and reimbursement of incurred costs. The net
gain was reported as other income in the accompanying consolidated statement of
operations for the year ended March 31, 1995.
In June 1994, the Company, under its commercial property insurance policy,
received a $7,543,000 insurance settlement from its claim to recover damage and
losses to personal property including fixtures, property, inventory and
equipment sustained in the Northridge earthquake. The settlement resulted in a
net gain of $959,511 after the write-off of the net book value of damaged
inventory, fixtures, property and equipment, accrual of related royalties and
expenses and reimbursement of incurred costs. The net gain was reported as
other income in the accompanying consolidated statement of operations for the
year ended March 31, 1994.
At March 31, 1996, the Company had no further claim with respect to damage
and losses sustained in the January 17, 1994 Northridge earthquake.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 16
<PAGE>
RESULTS OF OPERATIONS
Net sales have increased each year in the three-year period ended March
31, 1996 from $65,577,813 in fiscal 1994 to $85,590,730 in fiscal 1995 to
$95,086,164 in fiscal 1996. Operating income has increased each year in the
three-year period ended March 31, 1996 from $5,002,215 in fiscal 1994 to
$7,739,799 in fiscal 1995 to $8,159,825 in fiscal 1996. Income before income
taxes and extraordinary item (excluding the net gains on insurance settlements
relating to the January 17, 1994 Northridge earthquake) has increased each year
in the three-year period ended March 31, 1996 from $2,882,959 in fiscal 1994 to
$6,962,408 in fiscal 1995 to $8,341,665 in fiscal 1996.
Income before extraordinary item was $7,599,048, or $.49 per share, in
fiscal 1996, compared to $7,529,495, or $.51 per share, in fiscal 1995, and
$3,738,599, or $.30 per share, in fiscal 1994. The minimal increase in income
before extraordinary item in fiscal 1996 as compared to fiscal 1995 is primarily
due to a higher effective income tax rate for 1996, as further described below,
and a net gain on insurance settlement included in fiscal 1995. Net income
increased to $7,599,048, or $.49 per share, for fiscal 1996 from $6,310,664, or
$.44 per share, for fiscal 1995 and $3,361,064, or $.27 per share, for fiscal
1994.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Net sales for fiscal 1996 increased 11.1% to $95,086,164 from $85,590,730
for fiscal 1995. This increase results from the acquisition of U.S. Laser (see
---
Note 3 to the Consolidated Financial Statements at Item 8 herein). Net sales
for fiscal 1996, exclusive of U.S. Laser's net sales, decreased 1.2% to
$84,538,855 from $85,590,729 for fiscal 1995. Both fiscal 1996 and 1995 had
strong release schedules. The Company's net sales of previously released
laserdisc titles in the fourth quarter of fiscal 1996 were not as strong as
fiscal 1995 due primarily to the soft retail environment experienced by the
chain music/video stores, and may have also been affected by other factors such
as the confusion and uncertainty in the marketplace about the pending
introduction of DVD software and how its video and audio quality will compare to
laserdisc software. See "Summary and Outlook" below. In the future, the
---
Company expects that net sales will be affected by the popularity of new
releases, the prevailing economic environment and the extent of the Company's
distribution of the DVD format and DVD's market penetration. See Item 1.
---
Business -- Cautionary Statements -- "Competition" and "Nature of the
Entertainment Industry"; and, "Summary and Outlook" below.
Cost of laserdisc sales for fiscal 1996 increased to $74,386,545 from
$66,773,017 for fiscal 1995. As a percentage of net sales, cost of laserdisc
sales for fiscal 1996 increased to 78.2% from 78.0% for fiscal 1995. The
increase in cost of laserdisc sales as a percentage of net sales is due
primarily to the acquisition of U.S. Laser (U.S. Laser has substantially lower
margins as a nonexclusive distributor), offset in part by the impact of salvage
inventory sales explained below. 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, accounted for 18.8% of net sales for fiscal 1996.
Lower-margin nonexclusive product sales accounted for 9.5% of net sales for
fiscal 1995. Cost of laserdisc sales as a percentage of net sales for fiscal
1996, exclusive of U.S. Laser's net sales and
- -------------------------------------------------------------------------------
17 Image Entertainment, Inc.
<PAGE>
cost of laserdisc sales, decreased to 77.5% from 78.0% for fiscal 1995. During
fiscal 1996 and 1995, sales of salvaged inventory, retained as part of the June
1994 insurance settlement relating to the January 17, 1994 Northridge
earthquake, decreased cost of laserdisc sales as a percentage of net sales
(exclusive of U.S. Laser's net sales) to 77.5% from 78.0% for fiscal 1996 and to
78.0% from 79.0% for fiscal 1995.
Selling expenses increased 13.2% to $4,531,382 for fiscal 1996 from
$4,002,482 for fiscal 1995. As a percentage of net sales, selling expenses for
fiscal 1996 increased to 4.8% from 4.7% for fiscal 1995. The increase, as a
percentage of net sales, resulted from the acquisition of U.S. Laser, which has
higher selling expenses as a percentage of net sales. Selling expenses for
fiscal 1996, exclusive of U.S. Laser's selling expenses, decreased 2.0% to
$3,922,887 from $4,002,482 for fiscal 1995 and, as a percentage of net sales,
decreased to 4.6% for fiscal 1996 from 4.7% for fiscal 1995. The decrease as a
percentage of net sales was due primarily to a reduction in trade advertising
and the lower expense for market development funds provided to customers for
advertising, offset almost entirely by increased sales promotions which
principally included bundling laserdisc software with laserdisc players. The
Company expects to increase its expenditures for market development, trade
advertising and sales promotions in the coming fiscal year.
General and administrative expenses for fiscal 1996 increased 27.3% to
$5,124,090 from $4,025,822 for fiscal 1995. As a percentage of net sales,
general and administrative expenses increased to 5.4% for fiscal 1996 from 4.7%
for fiscal 1995. This increase resulted primarily from the inclusion of U.S.
Laser's general and administrative expenses, higher professional fees including
investment banking, legal and accounting, higher personnel and fringe benefit
costs and higher insurance premium costs. General and administrative expenses
for fiscal 1996, exclusive of U.S. Laser's general and administrative expenses,
increased 5.0% to $4,229,092 from $4,025,822 for fiscal 1995 and, as a
percentage of net sales, increased to 5.0% for fiscal 1996 from 4.7% for fiscal
1995.
Amortization of production costs for fiscal 1996 decreased 5.4% to
$2,884,322 from $3,049,610 for fiscal 1995. As a percentage of net sales,
amortization of production costs for fiscal 1996 decreased to 3.0% from 3.6% for
fiscal 1995. The decrease as a percentage of net sales is principally
attributable to the inclusion of U.S. Laser's net sales in fiscal 1996 and
partially attributable to cost savings realized from the Company's digital pre-
press equipment installed in January 1995. As a nonexclusive distributor, U.S.
Laser does not incur production costs. Amortization of production costs as a
percentage of net sales for fiscal 1996, exclusive of U.S. Laser's net sales,
decreased to 3.4% from 3.6% for fiscal 1995. In the future, the Company expects
amortization of production costs to be a function of the timing and number of
Image exclusive titles placed into production.
Interest expense for fiscal 1996 decreased 88.0% to $155,530 from
$1,295,649 for fiscal 1995 (for comparative purposes, fiscal 1995 includes both
interest expense and amortization of deferred financing costs). Improved cash
flow from operations and the November 1994 refinancing of senior notes with a
revolving credit facility resulted in substantially lower borrowings outstanding
during fiscal 1996.
Interest income for fiscal 1996 decreased 34.9% to $337,370 from $518,258
for fiscal 1995. 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.
- -------------------------------------------------------------------------------
Image Entertainment, Inc. 18
<PAGE>
Income taxes for fiscal 1996 were approximately 8.9% of income before
income taxes and extraordinary item, substantially higher than the 2.3% and 2.7%
effective tax rates for fiscal 1995 and 1994, respectively. Net operating loss
carryforwards for Federal and state taxes purposes were utilized to offset
taxable income for the three years ended March 31, 1996. However, for fiscal
1996, the net operating loss carryforward for state tax purposes was fully
utilized during the second quarter of fiscal 1996, leading to a higher effective
income tax rate for state purposes for the full fiscal year.
Extraordinary item - costs of $1,218,831 associated with early retirement
of debt, net of related taxes of $33,800 for fiscal 1995, resulted from a July
1994 prepayment and the November 1994 refinancing described in "Liquidity and
Capital Resources" and is composed of prepayment penalties and amortization of
deferred financing costs and discount of debt issuance, accelerated as a result
of the early retirement ($759,138 of the extraordinary charge represents noncash
charges).
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
Net sales for fiscal 1995 increased 30.5% to $85,590,730 from $65,577,813
for fiscal 1994. Fiscal 1995 net sales benefitted from a stronger release
schedule than that in fiscal 1994. Net sales are affected by the popularity of
new releases and the current economic environment.
Cost of laserdisc sales for fiscal 1995 increased to $66,773,017 from
$50,985,390 for fiscal 1994. As a percentage of net sales, cost of laserdisc
sales for fiscal 1995 increased to 78.0% from 77.7% in fiscal 1994. The sales
mix of higher-margin exclusive product and lower-margin nonexclusive product and
the margins within each category have a direct effect on these percentages and
vary with the availability and popularity of titles and the Company's marketing
emphasis. Lower margin nonexclusive product sales accounted for 9.5% and 10.5%
of net sales for fiscal 1995 and 1994, respectively. During fiscal 1995, sales
of salvaged inventory, retained as part of the June 1994 insurance settlement
relating to the January 17, 1994 Northridge earthquake, decreased cost of
laserdisc sales as a percentage of net sales to 78.0% from 79.0%. Cost of
laserdisc sales as a percentage of net sales for fiscal 1995 was also impacted
by selling certain slower moving inventory at reduced prices, in the ordinary
course of business, not specifically targeted in the Company's March 1993
restructuring. Fiscal 1995 restructuring-targeted inventory sales had an
immaterial effect on cost of laserdisc sales as a percentage of net sales.
Selling expenses increased to $4,002,482 for fiscal 1995 from $3,113,131
for fiscal 1994; however, as a percentage of net sales, selling expenses were
4.7% in fiscal 1995 and 1994. Fiscal 1995 saw improvements in and expanded
circulation of the Company's monthly Image Laserdisc Preview magazine, increased
advertising in trade magazines, and the Company's introduction of a 2-day air
shipping program.
General and administrative expenses increased 10.1% to $4,025,822 for
fiscal 1995 from $3,657,082 for fiscal 1994; however, as a percentage of net
sales, general and administrative expenses decreased to 4.7% for fiscal 1995
from 5.6% for fiscal 1994. Fiscal 1995 saw an increase in the allowance for
doubtful accounts, higher depreciation expense related to the addition of the
creative
- --------------------------------------------------------------------------------
19 Image Entertainment, Inc.
<PAGE>
services/computer graphics department's pre-press equipment and higher employee
and executive performance-based bonuses.
Amortization of production costs increased 8.1% to $3,049,610 for fiscal
1995 from $2,819,995 for fiscal 1994; however, as a percentage of net sales,
amortization of production costs decreased to 3.6% for fiscal 1995 from 4.3% for
fiscal 1994. Amortization of production costs is a function of the timing and
number of Image exclusive titles placed into production.
Interest expense and amortization of deferred financing costs together
decreased 50.3% to $1,295,649 for fiscal 1995 from $2,606,145 for fiscal 1994.
The reduction in interest expense and amortization of deferred financing costs
resulted from fiscal 1995 and 1994 prepayments of debt and the November 1994
refinancing described in "Liquidity and Capital Resources."
Extraordinary item - costs of $1,218,831 associated with early retirement
of debt, net of related taxes of $33,800 for fiscal 1995, resulted from a July
1994 prepayment and the November 1994 refinancing described in "Liquidity and
Capital Resources" and is composed of prepayment penalties and amortization of
deferred financing costs and discount of debt issuance, accelerated as a result
of the early retirement ($759,138 of the extraordinary charge represents noncash
charges). The extraordinary charge of $377,535, net of related taxes of
$10,476, for fiscal 1994 resulted from voluntary prepayments of debt and is
composed of prepayment penalties and noncash charges of $263,011 in accelerated
amortization of deferred financing costs.
ACCOUNTING POLICIES
The Company's earnings are significantly affected by accounting policies
required for the entertainment industry. The costs to produce licensed laserdisc
programming (the "Production Costs") are capitalized as incurred. Pursuant to
the income forecast method, as discussed in Financial Accounting Standards Board
Statement No. 53, a percentage of the Production Costs is charged to expense
each month based upon (i) a projected revenue stream resulting from distribution
of new and previously released laserdisc programming related to the Production
Costs and (ii) management's estimate of the ultimate net realizable value of the
Production Costs. Production Costs include the cost of converting film prints
or tapes into the laserdisc format, jacket artwork costs and the overhead of the
Company's creative services/computer graphics and production departments.
Estimates of future revenues are reviewed periodically and amortization of
Production Costs is adjusted accordingly. If estimated future revenues are not
sufficient to recover the unamortized balance of Production Costs, such costs
are reduced to estimated net realizable value.
Royalty and distribution fee advances represent fixed minimum payments
made to licensors for laserdisc programming distribution rights. A licensor's
share of program distribution revenues is retained by the Company until the
share equals the advance(s) paid to the licensor. Thereafter, any excess is
paid to the licensor. In the event of an excess, the Company records, as a cost
of laserdisc sales, an amount equal to the licensor's share of the net
distribution revenues. Royalty and distribution fee advances are charged to
operations as revenues are earned, and are stated at the lower of unamortized
cost or estimated net realizable value on an individual-title or license-
agreement basis.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 20
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To
Be Disposed Of" ("SFAS No. 121"), was issued. SFAS No. 121 provides guidelines
for the recognition of impairment losses related to long-term assets and is
effective for fiscal years beginning after December 15, 1995 with earlier
adoption encouraged. The Company intends to adopt SFAS No. 121 for its fiscal
year ending March 31, 1997. While the Company is still evaluating SFAS No. 121,
it does not believe that adoption will have a material effect on the Company's
consolidated financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting For Stock-Based Compensation" ("SFAS No. 123"), was issued. SFAS
No. 123 provides guidelines for the recognition of expense and related
disclosures for stock-based compensation and is effective for fiscal years
beginning after December 31, 1995 with earlier adoption encouraged. The Company
intends to adopt SFAS No. 123 for its fiscal year ending March 31, 1997. While
the Company is still evaluating SFAS No. 123, it currently expects to elect to
continue to measure compensation costs under Accounting Principles Board Opinion
No. 25, "Accounting For Stock Issued To Employees," and to comply with the
proforma disclosure requirements of SFAS No. 123. If the Company makes this
election, the adoption of SFAS No. 123 will not have a material effect on the
Company's consolidated financial statements.
INFLATION
Management believes that inflation is not a material factor in the
operation of the Company's business at this time.
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 flow from operations. For
fiscal 1996, operating activities provided cash of $10,359,922, investing
activities used cash of $3,682,962 and financing activities used cash of
$4,198,081, resulting in a net increase in cash and cash equivalents of
$2,478,879.
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. See
---
"Acquisition" above. The transaction was funded through operating cash flow and
borrowings under the Company's revolving credit facility.
- --------------------------------------------------------------------------------
21 Image Entertainment, Inc.
<PAGE>
To refinance its existing long-term debt and gain borrowing flexibility to
maintain growth, on November 15, 1994, the Company entered into a Loan and
Security Agreement with Foothill Capital Corporation, an asset-based lender.
The agreement provides for revolving advances and the issuance of and guaranty
of standby letters of credit under a $14,250,000 revolving credit facility and a
series of term loans under a $750,000 capital expenditure term loan facility.
The term of the agreement is three years, renewable automatically thereafter for
successive one-year periods unless earlier terminated by either party on 120
days' prior written notice. Concurrent with funding of the revolving credit
facility, the Company immediately retired $11,500,000 of long-term debt
representing the outstanding balance of a November 18, 1991 private placement.
Borrowings under the agreement are secured by substantially all of the
Company's assets and bear interest at the highest prime rate of three reference
banks plus 1.5% (9.75% at March 31, 1996), payable monthly. Funds available for
borrowing under the credit facility may not exceed the borrowing base specified
in the agreement. At March 31, 1996, the Company had no borrowings outstanding
under the revolving credit and term loan facilities and had borrowing
availability of approximately $11,470,000. The agreement requires the Company to
comply with certain financial and operating covenants. To accommodate the U.S.
Laser acquisition, the Company's lender waived compliance with certain covenants
which restrict corporate acquisitions and related expenditures. At March 31,
1996, the Company was in compliance with all financial and other operating
covenants.
At March 31, 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, 1996. These letters of credit secure balances due to program suppliers.
On January 16, 1995, the Company's Board of Directors announced approval
of a stock repurchase program authorizing the Company to buy up to one million
shares of its outstanding common stock. Purchases will be made from time to
time in open market and/or privately negotiated transactions based on current
market conditions and other factors. During the years ended March 31, 1996 and
1995, the Company has repurchased 653,300 and 254,800 shares of its common
stock, respectively for $4,388,150 and $1,868,481, respectively. Since the
announcement and through March 31, 1996, the Company has repurchased 908,100
shares of its common stock for $6,256,631.
At March 31, 1996, as adjusted for additional commitments made through May
24, 1996, the Company had license obligations for royalty advances and minimum
guarantees and exclusive distribution fee obligations for minimum guarantees of
approximately $11,749,000 during fiscal 1997, $5,475,000 during fiscal 1998,
$9,397,000 during fiscal 1999 and $7,589,000 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 needs.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 22
<PAGE>
SUMMARY AND OUTLOOK
During the fourth quarter of fiscal 1996, the Company experienced weaker
net sales of previously released laserdisc titles versus the same prior-year
period. Management believes this to be a result of the soft retail environment
affecting the chain music/video stores and possible confusion and uncertainty in
the marketplace about the pending introduction of the digital video disc ("DVD")
format. Management believes the retail environment affecting the chain
music/video stores will strengthen over the long term and is looking forward to
releasing future high visibility titles, such as Toy Story, Pocahontas, The
Birdcage, The Rock, Independence Day and Broken Arrow. See Item 1. Business --
---
Cautionary Statements -- "Nature of Entertainment Industry" and "Delays of
Releases."
The promotion surrounding the pending introduction of the new DVD format
has created confusion and uncertainty in the marketplace. In the event that the
DVD format is released in the foreseeable future, it could have an impact on the
laserdisc market. However, no verifiable information currently exists relative
to the format's introduction date (or 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 assurances, 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. See Item 1. Business -- Cautionary Statements -- "Competition" and
---
"Nature of Entertainment Industry."
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 Disney,
Touchstone, Hollywood Pictures and Buena Vista Home Video, and certain Miramax,
programming through December 31, 1999.
In April 1996, the Company entered into an agreement in principle pursuant
to which Thomson Consumer Electronics, a leading hardware manufacturer whose
brands include RCA and Proscan, granted exclusive rights to the Company for the
distribution to Thomson dealers (approximately 5,000 locations) of DVD software.
The parties contemplate entering into a definitive agreement in fiscal 1997,
which agreement will include, among other provisions, the term of the agreement
and a list of the participating studios whose titles will be distributed by the
Company to Thomson dealers.
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 Home Entertainment programming
on laserdisc in the United States and Canada through the year 2001.
- --------------------------------------------------------------------------------
23 Image Entertainment, Inc.
<PAGE>
The Company recently reached an agreement in principle to extend its July
1, 1992 exclusive laserdisc purchase and distribution agreement with Twentieth
Century Fox Home Entertainment through June 30, 1999. No other terms of the
agreement are materially changed. The parties contemplate entering into a
definitive written agreement in fiscal 1997.
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 an approximately 85,000
square foot, automated warehouse and distribution facility on approximately 8
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 street-frontage acreage.
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 June 1,
1997. The close of escrow and ultimate purchase of the property is contingent
upon the achievement of certain rezoning objectives and the obtaining of
acceptable financing. The total estimated project cost, assuming the
divestiture of approximately 8.5 acres of the new property and inclusive of
building construction and equipment costs, is $7.5 million, for which the
Company is currently seeking financing. There can be no assurances that the
Company will obtain such financing on terms and conditions reasonable or
acceptable to the Company. The Company plans to create a new division, Image
Distribution Services, that will offer third-party distribution services such as
inventory management, order processing and distribution. See Item 1. Business
---
- -- Recent Developments and Item 2. Properties.
In August 1996, the Company expects to release the first of several fully-
interactive CD-ROM titles jointly developed, published and distributed by the
Company and The Voyager Company. The first release is A Night To Remember, the
1958 British classic documenting the tragic sinking of the ocean liner Titanic.
In addition to the full-length feature film, the CD-ROM will contain a wealth of
ancillary material including the ship's blueprint, passenger log and disaster
time line. The Company also expects to release under the arrangement two
additional titles in calendar 1996, King Kong and Citizen Kane. 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 acclaimed Criterion Collection line of laserdisc programming
which the Company distributes exclusively. See Item 1. Business -- Cautionary
Statements -- "Nature of the Entertainment Industry."
The Company continues to license new programming for laserdisc
distribution as well as seek to renew and extend relationships with existing
studios. The Company will seek 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. See Item 1. Business --
---
Cautionary Statements -- "Acquisition Opportunities." 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.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
<S> <C>
Independent Auditors' Report.............................................................. 27
Consolidated Balance Sheets at March 31, 1996 and 1995.................................... 28
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994... 30
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1996,
1995 and 1994............................................................................. 31
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994... 32
Notes to Consolidated Financial Statements................................................ 35
Schedule II - Valuation and Qualifying Accounts........................................... 50
</TABLE>
- --------------------------------------------------------------------------------
25 Image Entertainment, Inc.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We have audited the accompanying consolidated financial statements of Image
Entertainment, Inc. and subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Image Entertainment,
Inc. and subsidiary as of March 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
May 24, 1996 except for Note 14 which is as of June 5, 1996
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 26
<PAGE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 4,665,942 $ 2,187,063
Accounts receivable, net of allowances of
$3,183,000 - 1996; $2,700,000 - 1995 13,333,372 11,986,576
Inventories (Note 6) 18,445,137 16,283,281
Prepaid expenses and other assets 906,098 668,590
Notes receivable, net of deferred gain
and allowances (Note 7) 75,908 352,017
Property, equipment and improvements, net (Note 8) 1,979,211 2,013,403
----------- -----------
$39,405,668 $33,490,930
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------
27 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $15,538,275 $ 11,150,261
Accrued royalties (Note 6) 3,341,964 5,564,812
Capital lease obligations -- 103,358
----------- ------------
Total liabilities 18,880,239 16,818,431
----------- ------------
Commitments and Contingencies (Notes 7, 13 and 14)
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;
13,556,160 and 13,797,429 issued and outstanding
in 1996 and 1995, respectively (Note 11) 21,121,582 25,216,305
Stock warrants (Note 10) (233,401) (582,006)
Additional paid-in capital 3,064,129 3,064,129
Accumulated deficit (3,426,881) (11,025,929)
----------- ------------
Net shareholders' equity 20,525,429 16,672,499
----------- ------------
$39,405,668 $ 33,490,930
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 28
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $95,086,164 $85,590,730 $65,577,813
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 74,386,545 66,773,017 50,985,390
Selling expenses 4,531,382 4,002,482 3,113,131
General and administrative expenses 5,124,090 4,025,822 3,657,082
Amortization of production costs 2,884,322 3,049,610 2,819,995
----------- ----------- -----------
86,926,339 77,850,931 60,575,598
----------- ----------- -----------
OPERATING INCOME 8,159,825 7,739,799 5,002,215
OTHER EXPENSES (INCOME):
Interest expense 155,530 1,184,190 2,335,894
Interest income (337,370) (518,258) (486,889)
Amortization of deferred financing costs -- 111,459 270,251
Net gain on insurance settlement (Note 4) -- (742,390) (959,511)
----------- ----------- -----------
(181,840) 35,001 1,159,745
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 8,341,665 7,704,798 3,842,470
INCOME TAXES (Note 12) 742,617 175,303 103,871
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 7,599,048 7,529,495 3,738,599
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES (Note 9) -- 1,218,831 377,535
----------- ----------- -----------
NET INCOME $ 7,599,048 $ 6,310,664 $ 3,361,064
=========== =========== ===========
NET INCOME PER SHARE (Note 5):
Income before extraordinary item $.49 $.51 $ .30
Extraordinary item - costs associated with
early retirement of debt -- (.07) (.03)
----------- ----------- -----------
NET INCOME PER SHARE $.49 $.44 $ .27
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 5) 17,651,367 18,138,957 12,346,967
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------
29 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 10 AND 11)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
-------------------------- Stock Additional Accumulated
Shares Amount Warrants Paid-in Capital Deficit
----------- ------------ ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, March 31, 1993 12,121,775 $25,875,237 ($1,279,216) $3,133,254 ($20,697,657)
Exercise of options 438,139 373,149 -- -- --
Amortization of stock warrants -- -- 348,605 -- --
Net income -- -- -- -- 3,361,064
---------- ----------- ----------- --------------- ------------
BALANCES, March 31, 1994 12,559,914 26,248,386 (930,611) 3,133,254 (17,336,593)
Exercise of options 1,492,315 836,400 -- -- --
Stock repurchased (254,800) (1,868,481) -- -- --
Warrant repurchased -- -- -- (69,125) --
Amortization of stock warrants -- -- 348,605 -- --
Net income -- -- -- -- 6,310,664
---------- ----------- ----------- --------------- ------------
BALANCES, March 31, 1995 13,797,429 25,216,305 (582,006) 3,064,129 (11,025,929)
Exercise of options 412,031 293,427 -- -- --
Stock repurchased (653,300) (4,388,150) -- -- --
Amortization of stock warrants -- -- 348,605 -- --
Net income -- -- -- -- 7,599,048
---------- ----------- ----------- --------------- ------------
BALANCES, March 31, 1996 13,556,160 $21,121,582 ($233,401) $3,064,129 ($3,426,881)
========== =========== =========== =============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,599,048 $ 6,310,664 $ 3,361,064
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 797,639 795,581 678,786
Amortization of production costs 2,884,322 3,049,610 2,819,995
Amortization of loan costs -- 953,396 677,545
Amortization of stock warrants 348,605 348,605 348,605
Loss on disposition of equipment -- -- 4,264
Changes in assets and liabilities
associated with operating activities, net of
acquired business:
(Increase) decrease in:
Accounts receivable 1,526,474 (2,598,298) 5,476,697
Insurance settlement receivable -- 6,543,059 (6,543,059)
Laserdisc inventory (609,569) (1,821,629) 5,983,221
Royalty and distribution fee advances, net 233,849 1,419,132 477,855
Production cost expenditures (3,054,506) (2,932,050) (2,636,821)
Prepaid expenses and other assets (23,886) 2,266 (107,829)
Notes receivable 276,109 219,682 142,284
Accounts payable, accrued royalties
and liabilities 381,837 (1,274,672) (1,671,812)
----------- ----------- -----------
Net cash provided by operating activities 10,359,922 11,015,346 9,010,795
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, less cash acquired (3,130,804) -- --
Capital expenditures (552,158) (1,023,550) (26,601)
Purchases of short-term investments -- (1,015,479) (4,796,544)
Proceeds from maturities of
short-term investments -- 5,671,886 3,180,153
----------- ----------- -----------
Net cash (used) provided by
investing activities (3,682,962) 3,632,857 (1,642,992)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------
31 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 27,800,549 $ 29,102,618 --
Repayment of advances under revolving credit facility (27,800,549) (29,102,618) --
Principal payments under capital lease obligations (103,358) (215,583) ($274,420)
Repurchase of warrant and common stock (4,388,150) (1,937,606) --
Net proceeds from exercise of stock options 293,427 836,400 373,149
Repayment of senior secured notes payable -- (13,500,000) (6,500,000)
------------ ------------ -----------
Net cash used by
financing activities (4,198,081) (14,816,789) (6,401,271)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,478,879 (168,586) 966,532
Cash and cash equivalents at beginning of year 2,187,063 2,355,649 1,389,117
------------ ------------ -----------
Cash and cash equivalents at end of year $ 4,665,942 $ 2,187,063 $ 2,355,649
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 114,754 $ 1,723,234 $ 2,432,269
Income taxes $ 585,000 $ 70,950 $ 66,000
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
As discussed at Note 3 to the consolidated financial statements, in June 1995,
the Company acquired certain assets and assumed certain liabilities of V.T.
Laser, Inc. for $3,065,602:
<TABLE>
<S> <C>
Fair value of assets acquired $ 4,724,377
Excess of purchase price over fair value
of net assets acquired recorded as
goodwill 189,756
Cash paid for net assets acquired (3,065,602)
Expenses incurred in connection with
the acquisition (65,202)
-----------
Liabilities assumed $ 1,783,329
===========
</TABLE>
Fully depreciated property, equipment and improvements removed from property,
equipment and improvement costs totaled $1,187,598 at March 31, 1996.
Fully amortized production costs removed from production costs totaled
$2,766,896 and $3,208,593 at March 31, 1996 and 1995, respectively.
Capital expenditures for the year ended March 31, 1994 excludes $204,053 of
property and equipment destroyed in the January 17, 1994 Northridge earthquake
and reimbursed under the insurance settlement. See Note 4 to the Consolidated
---
Financial Statements for additional information.
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
33 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Image Entertainment, Inc. (the "Company") was incorporated in Colorado on April
1, 1975. In November 1989, the Company reincorporated in California. The
Company's primary business is the distribution of programming on laserdisc under
exclusive and nonexclusive license and wholesale distribution agreements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Consolidation
- -------------
The consolidated financial statements include those of the Company 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.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with maturities
of three months or less to be cash equivalents.
Accounts Receivable
- -------------------
At March 31, 1996 and 1995, the allowance for doubtful accounts was $333,000 and
$200,000, respectively, and the allowance for sales returns was $2,850,000 and
$2,500,000, respectively.
Amortization of Production Costs
- --------------------------------
The Company amortizes its capitalized production costs in accordance with the
provisions of Statement of Financial Accounting Standards No. 53 ("SFAS No.
53"). Pursuant to the income forecast method, a percentage of the production
costs is charged to expense each month based upon (i) a projected revenue stream
resulting from distribution of new and previously released laserdisc programming
related to the production costs and (ii) management's estimate of the ultimate
net realizable value of the production costs. Estimates of future revenues are
reviewed periodically and amortization of production costs is adjusted
accordingly. If estimated future revenues are not sufficient to recover the
unamortized balance of production costs, such costs are reduced to the estimated
net realizable value.
Revenue Recognition
- -------------------
Revenue is recognized upon shipment. The Company's return policy allows
customers to return a percentage of laserdiscs purchased on a quarterly basis.
This allowance is noncumulative, is based on the customer's prior quarter
purchases and is limited on an individual-title basis. The Company provides for
estimated returns when product is shipped to customers.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Major Customers
- ---------------
One customer accounted for 10.9% of fiscal 1996 net sales. No customers
individually accounted for 10% or more of fiscal 1995 and 1994 net sales.
Depreciation and Amortization of Property, Equipment and Improvements
- ---------------------------------------------------------------------
Depreciation of property and equipment is provided for using the straight-line
method over the estimated useful lives of the related assets, generally five
years. Leasehold improvements are amortized over the shorter of the estimated
useful life of the improvements or the remaining lease term. Assets acquired
under capitalized leases are amortized over the life of the lease. The cost of
repairs and maintenance is charged to operations when incurred.
Goodwill
- --------
The excess of purchase price over the value of the net assets acquired is
included in prepaid expenses and other assets and is amortized on a straight-
line basis over a 20-year period. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining useful life can be recovered through undiscounted
future operating cashflow from the acquired operation.
Income Taxes
- ------------
The Company accounts for income taxes pursuant to the provisions of Financial
Accounting Standards Board Statement No. 109. Under the asset and liability
method of Statement No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and the future tax benefits derived from operating
loss and tax credit carryforwards.
Fourth Quarter Adjustments
- --------------------------
During the fourth quarter of fiscal 1995 and 1994, the Company recorded a net
gain on insurance settlement of claims of business interruption and property
damage, respectively, related to the January 17, 1994 Northridge earthquake of
$742,390 and $959,511, respectively. See Note 4 to the Consolidated Financial
---
Statements.
Fair Value of Financial Instruments
- -----------------------------------
Carrying amounts approximate fair value due to the relatively short maturity of
such instruments.
- --------------------------------------------------------------------------------
35 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Use of Estimates
- ----------------
Company management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Reclassifications
- -----------------
Certain fiscal 1995 and 1994 balances have been reclassified to conform with the
fiscal 1996 presentation.
NOTE 3. 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/digital entertainment software 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 March 31, 1996, are included in the accompanying
consolidated statement of operations for the year ended March 31, 1996. The
Company has classified the amount of purchase price in excess of the fair market
value of the net assets acquired as goodwill. At March 31, 1996, goodwill was
approximately $183,000 and is included as a component of prepaid expenses and
other assets in the accompanying consolidated balance sheet at March 31, 1996.
Goodwill is being amortized on a straight-line method over 20 years.
Amortization charged to operations for the year ended March 31, 1996 was
immaterial. The acquisition of U.S. Laser does not qualify as a significant
subsidiary as defined in Security and Exchange Commission Rules and Regulations
and, accordingly, proforma information is not presented.
NOTE 4. INSURANCE SETTLEMENTS - BUSINESS INTERRUPTION AND PROPERTY DAMAGE.
On March 30, 1995, the Company received an $880,000 insurance settlement from
its claim of business interruption losses sustained in the January 17, 1994
Northridge earthquake. The settlement resulted in a net gain of $742,390 after
the accrual of related expenses and reimbursement of incurred costs. The net
gain was reported as other income in the accompanying consolidated statement of
operations for the year ended March 31, 1995.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In June 1994, the Company received a $7,543,000 insurance settlement from its
claim to recover damage and losses to personal property including fixtures,
property, inventory and equipment sustained in the Northridge earthquake. Of
the settlement, $1,000,000 was received in February 1994 and the remaining
$6,543,000 was received in June 1994. The settlement resulted in a net gain of
$959,511 after the write-off of the net book value of damaged inventory,
fixtures, property and equipment, accrual of related royalties and expenses and
reimbursement of incurred costs. The net gain was reported as other income in
the accompanying consolidated statement of operations for the year ended March
31, 1994.
At March 31, 1996, the Company had no further claim with respect to damage and
losses sustained in the January 17, 1994 Northridge earthquake.
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 are 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 are applied to reduce long-term
debt and, if any proceeds remain thereafter, such proceeds are 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 income resulting from the assumed application of proceeds.
If, on the other hand, the aggregate effect is 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 effects of the application of the modified treasury stock method were
included in determining net income per share for the years ended March 31, 1996
and 1995 and were excluded from the per share amounts for the year ended March
31, 1994.
Fully diluted net income per share was not presented since the amounts do not
differ significantly from the primary net income per share.
- --------------------------------------------------------------------------------
37 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
years ended March 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
As Presented
- ------------
Income before extraordinary item $ 7,599,048 $ 7,529,495 $ 3,738,599
Extraordinary item, net of taxes -- 1,218,831 377,535
----------- ----------- -----------
Net income 7,599,048 6,310,664 3,361,064
----------- ----------- -----------
Adjustments
- -----------
Add: reduction of interest expense on
assumed reduction of debt, net of taxes 73,987 1,074,638 --
Add: interest income on assumed investment
in U.S. government securities,
net of taxes 925,446 635,999 --
----------- ----------- -----------
Adjustments to income before extraordinary
item and net income 999,433 1,710,637 --
----------- ----------- -----------
As Adjusted
- -----------
Income before extraordinary item 8,598,481 9,240,132 3,738,599
Extraordinary item, net of taxes -- 1,218,831 377,535
----------- ----------- -----------
Net income $ 8,598,481 $ 8,021,301 $ 3,361,064
=========== =========== ===========
Weighted average common shares and
common share equivalents outstanding:
Common shares 13,569,554 13,255,228 12,346,967
Common stock options and warrants 4,081,813 4,883,729 --
----------- ----------- -----------
17,651,367 18,138,957 12,346,967
=========== =========== ===========
Net income per share:
Income before extraordinary item $ .49 $ .51 $ .30
Extraordinary item -- (.07) (.03)
----------- ----------- -----------
Net income per share $ .49 $ .44 $ .27
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INVENTORIES.
Inventories at March 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Laserdisc inventory $13,956,276 $11,730,755
Royalty and distribution fee advances 3,169,444 3,403,293
Production costs 1,319,417 1,149,233
----------- -----------
$18,445,137 $16,283,281
=========== ===========
</TABLE>
Laserdisc inventory consists of finished laserdiscs for sale and is stated at
the lower of average cost or market.
Royalty and distribution fee advances represent fixed minimum payments made to
licensors for laserdisc programming distribution rights. A licensor's share of
program distribution revenues is retained by the Company until the share equals
the advance(s) paid to the licensor. Thereafter, any excess is paid to the
licensor. In the event of an excess, the Company records, as a cost of
laserdisc sales, an amount equal to the licensor's share of the distribution
revenues. Royalty and distribution fee advances are charged to operations as
revenues are earned and are stated at the lower of unamortized cost or estimated
net realizable value on an individual-title or license-agreement basis.
The costs to produce licensed laserdisc programming include the cost of
converting film prints or tapes into the laserdisc format, jacket artwork costs
and the overhead of the Company's creative services/computer graphics and
production departments. As discussed in Note 2 to the Consolidated Financial
Statements, the Company amortizes its production costs in accordance with SFAS
No. 53. Production costs are net of accumulated amortization of $4,941,715 and
$4,838,547 at March 31, 1996 and 1995, respectively. The Company expects to
amortize substantially all of the March 31, 1996 production costs through fiscal
1998.
NOTE 7. NOTES RECEIVABLE - SALE OF CERTAIN ASSETS.
On December 31, 1990, the Company entered into a Purchase and Sale Agreement
(the "Agreement") with LEI Partners, L.P., a California Limited Partnership
("LEI"), pursuant to which the Company sold all of the assets of the adult
laserdisc licensing and distribution business for $3,828,600. The purchase
price consisted of $300,000 cash, a $1,328,600 note ("Note A") and a $2,200,000
note ("Note B").
On December 31, 1995, LEI defaulted on a $581,600 principal payment due under
Note A and breached the Agreement. As a result of the default, the unpaid
balances of Notes A and B became immediately due and payable.
- --------------------------------------------------------------------------------
39 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On February 1, 1996, the Company and LEI entered into a Settlement and
Forbearance Agreement ("Settlement Agreement") to resolve certain disputes
between the Company and LEI including but not limited to its default under Note
A and related breach of the Agreement. Under the Settlement Agreement, LEI will
be able to satisfy its obligations otherwise owing under Note A by timely making
the following payments of principal and interest aggregating the total amount of
$1,379,299: (a) initial payment of $219,387 on February 9, 1996, $200,000 of
which represents principal and $19,387 of interest accrued through January 31,
1996; (b) 48 equal monthly installments of $15,000 on the last business day of
each month commencing on February 29, 1996 and ending on January 31, 2000, which
payments each represent principal and interest at 8% per annum; (c) an
additional quarterly payment of $15,000 on the last business day of each third
month in which monthly installments are required to be paid (16 quarterly
payments in total); and (d) concurrent with the final monthly payment and
quarterly installment payment, an additional amount of $199,912, which payment
represents the remaining principal balance due under Note A.
Contingent upon and subsequent to LEI's full performance of all of its
obligations under the Settlement Agreement, the remaining principal balance due
under Note B will be discharged in full. If any event of default (as defined in
the Settlement Agreement) occurs and is continuing, including but not limited to
the failure to make all or any one of the payments described above when due, all
of the terms and conditions of the Settlement Agreement will be automatically
revoked, and all of the terms and conditions of the Agreement and Notes A and B
will be automatically and immediately reinstated, and the unpaid balances of
Notes A and B will be immediately due and payable.
As of March 31, 1996, principal balances of $945,985 and $1,790,671 remained due
under Notes A and B, respectively. At March 31, 1996, the Company offset the
remaining principal balance under Note B against the equivalent amount of
deferred revenue originally recorded in December 1990 in anticipation of LEI's
full performance of all of its obligations under the Settlement Agreement, in
which event the Company would discharge the remaining principal balance due
under Note B.
The accompanying consolidated balance sheet at March 31, 1996 reflects notes
receivable of $75,908 which represents the total remaining principal balance due
under Note A, net of the deferred gain on sale and other allowances of $870,077.
Recognition of the gain on sale has been deferred until the net book value of
the assets originally sold to LEI is fully recovered. Once the net receivable
at March 31, 1996 of $75,908 is collected, the Company will recognize a gain on
sale as principal payments under the Settlement Agreement are received. At
March 31, 1996, LEI was in compliance with all the terms and conditions of the
Settlement Agreement.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. PROPERTY, EQUIPMENT AND IMPROVEMENTS.
Property, equipment and improvements, stated at cost, at March 31, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Furniture, fixtures and equipment $ 4,150,541 $ 3,747,694
Leasehold improvements 717,079 1,059,377
Assets under capitalized leases 23,325 455,098
Other 233,613 329,934
----------- -----------
5,124,558 5,592,103
Less accumulated depreciation and
amortization, including $21,381 and
$232,844 relating to capitalized leases
for 1996 and 1995, respectively (3,145,347) (3,578,700)
----------- -----------
$ 1,979,211 $ 2,013,403
=========== ===========
</TABLE>
Depreciation and amortization of property, equipment and improvements was
$791,951, $795,580, and $623,777 for fiscal 1996, 1995, and 1994, respectively.
NOTE 9. REVOLVING CREDIT AND TERM LOAN FACILITY.
On November 15, 1994, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation, an asset-based lender. The agreement
provides for revolving advances and the issuance of and guaranty of standby
letters of credit under a $14,250,000 revolving credit facility and a series of
term loans under a $750,000 capital expenditure term loan facility. The term of
the agreement is three years, renewable automatically thereafter for successive
one-year periods.
Borrowings under the agreement are secured by substantially all of the Company's
assets and bear interest at the highest prime rate of three reference banks plus
1.5% (9.75% at March 31, 1996), payable monthly. Funds available for borrowing
under the credit facility may not exceed the borrowing base specified in the
agreement. At March 31, 1996, the Company had no borrowings outstanding under
the revolving credit and term loan facilities and had borrowing availability of
$10,720,000 and $750,000, respectively. The agreement requires the Company to
comply with certain financial and operational covenants. To accommodate the
U.S. Laser acquisition, the Company's lender waived compliance with certain
covenants which restrict corporate acquisitions and related expenditures. At
March 31, 1996, the Company was in compliance with all financial and other
operational covenants.
Concurrent with funding of the revolving credit facility, the Company
immediately retired $11,500,000 of long-term debt representing the outstanding
balance of the November 18, 1991 private placement. The accelerated
amortization of deferred financing costs and discount on debt issuance and
penalties
- --------------------------------------------------------------------------------
41 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
resulting from the early retirement of debt totaled $1,218,831 and $377,535 for
the year ended March 31, 1995 and 1994, respectively, of which $759,138 and
$263,011, respectively, represent noncash charges. The extraordinary charges are
recorded net of taxes of $33,800 and $10,476 for fiscal 1995 and 1994,
respectively.
For the years ended March 31, 1995 and 1994, amortization of the lender's and
investment banker's warrants issued in connection with the 1991 private
placement, excluding amortization accelerated as a result of the early
retirement of this debt, totaled $82,799 and $144,283, respectively.
Amortization of the lender's and investment banker's warrants were recorded as
interest expense and amortization of deferred financing costs, respectively, in
the accompanying consolidated statements of operations.
NOTE 10. AMORTIZATION OF WARRANTS ASSOCIATED WITH PROGRAM ACQUISITION
AGREEMENTS.
The value of warrants issued in connection with program acquisition agreements
entered into during fiscal years 1992 and 1993 and their respective issuance
costs are amortized ratably over the term of the related agreements.
Amortization for the years ended March 31, 1996, 1995 and 1994 totaled $348,605
each, and were recorded as cost of laserdisc sales in the accompanying
consolidated statements of operations. The unamortized balance of stock
warrants at March 31, 1996 totals $233,401.
NOTE 11. STOCK OPTIONS AND WARRANTS.
The Company has three employee stock option plans. Incentive stock options may
be granted under one plan, and incentive stock options and nonstatutory options
under the other two. Under the plans, the exercise price of an incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The exercise price of a nonstatutory option generally may not be
less than 85% of the fair market value on the date of grant. The term of an
option may be no more than 10 years from the date of grant. The Company also
has a directors stock option plan providing for an initial and annual award of
an option to purchase 15,000 shares of common stock to each director eligible to
participate under the plan. Only nonstatutory options may be granted under the
directors plan. The directors plan also provides for an exercise price of $0.25
over the fair market value of the common stock on the date of grant, fixed
vesting and a ten year term. In addition to options under the three employee
plans and the directors plan, the Company has granted options (including the
antidilution rights described below and warrants in connection with a 1991
private placement and program acquisition agreements described in Notes 9 and
10) to officers, shareholders, creditors and others for various business
purposes.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock option transactions for the three years ended March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Per-Share
Shares Price Range
----------- -----------
<S> <C> <C>
Outstanding, March 31, 1993 8,712,914 $ .59-10.25
Granted 293,577 5.38-5.63
Exercised (438,139) .59-5.63
Surrendered (82,751) 2.50
Canceled (166,907) 5.10-9.75
----------
Outstanding, March 31, 1994 8,318,694 .59-10.25
Granted 537,771 7.00-8.75
Exercised (1,492,315) .59-5.63
Surrendered (269,174) 1.07-2.50
Canceled (65,208) 5.38-9.75
----------
Outstanding, March 31, 1995 7,029,768 .59-10.25
Granted 295,000 6.875-7.75
Exercised (412,031) .59-7.00
Surrendered (854,434) 5.85
Canceled (50,864) 5.625-7.25
----------
Outstanding, March 31, 1996 6,007,439 $ .59-10.25
==========
</TABLE>
Of the options reflected as outstanding on March 31, 1996 and 1995, options to
purchase 5,833,689 and 6,602,611 shares of common stock were exercisable,
respectively.
A December 29, 1987 stock purchase agreement (the "Agreement") provides for the
grant of antidilution rights (the "Rights") to various persons (the
"Investors"). Each Investor is entitled to Rights in connection with certain
issuances of common stock.
Upon the exercise of certain options outstanding as of December 29, 1987 (the
"Management Options"), each Investor will be granted Rights to purchase shares
of common stock pursuant to a formula based in part on the percentage of the
outstanding shares of common stock owned by the Investor on December 29, 1987.
Rights to purchase an aggregate of 522,135 shares of common stock may be granted
to the Investors if all the Management Options are exercised. As of March 31,
1996, Rights to purchase 450,700 shares had been granted, Rights to purchase
307,283 shares had been exercised (as to 84,168 shares in fiscal 1996, 12,299
shares in fiscal 1995, and 36,933 shares in fiscal 1994, at per-share exercise
prices ranging from $.74 to $1.07) and Rights to purchase 143,417 shares were
outstanding. The above table includes as outstanding on March 31, 1996
additional Rights to purchase 71,435 shares, which Rights would be granted only
upon subsequent exercises of Management Options.
Rights granted in connection with the exercise of a Management Option are
exercisable for two years from the date of grant and have a per-share exercise
price equal to the greater of (a) $.74 or (b) the exercise price of the
Management Option.
- --------------------------------------------------------------------------------
43 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Upon certain issuances of shares of common stock other than pursuant to the
exercise of Management Options, each Investor will be granted a Right (the
"Other Right") so that the equity interest represented by the Agreement shares
held by the Investor (excluding the shares purchased upon the exercise of Rights
issued in connection with the exercise of Management Options) will not be
diluted. As of March 31, 1996, Other Rights to purchase 851,183 shares of
common stock had been exercised (as to 2,720 shares in fiscal 1996, 87,771
shares in fiscal 1995, and none in fiscal 1994, at per-share exercise prices
ranging from $.59 to $9.29).
NOTE 12. INCOME TAXES.
Income taxes for the three years ended March 31, 1996, all current, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal $164,473 $128,806 $ 75,415
State 578,144 46,497 28,456
-------- -------- --------
$742,617 $175,303 $103,871
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets at March 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 703,000 $ 3,150,000
Royalty reserves 773,000 1,548,000
Sales returns reserve 450,000 416,000
Inventory reserves 488,000 300,000
Installment sales 372,000 312,000
Other 779,000 200,000
----------- -----------
Deferred tax assets 3,565,000 5,926,000
Less valuation allowance (3,565,000) (5,926,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
At March 31, 1996, the Company had net operating loss carryforwards for Federal
income tax purposes of approximately $2,067,000 which will expire on March 31,
2008. The Company also has Alternative Minimum Tax credit carryforwards of
$165,000 which do not expire.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Expected income tax expense based on Federal statutory rates for the three years
ended March 31, 1996 differed from actual tax expense as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Expected income tax expense $ 2,784,000 $ 2,205,000 $1,178,000
State income taxes, net of
Federal benefit 503,000 398,000 213,000
Change in valuation allowance
due to utilization of net
operating loss carryforwards (2,361,000) (1,336,000) (972,000)
Exercise of stock options (24,000) (1,168,000) (315,000)
Other (159,000) 76,000 0
----------- ----------- ----------
$ 743,000 $ 175,000 $ 104,000
=========== =========== ==========
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES.
The lease for the Company's corporate office space provides for monthly rent of
$13,849 (subject to annual adjustment based upon increases in the consumer price
index). The lease for the Company's warehouse space provides for monthly rent
of $22,238 (subject to annual adjustment based upon increases in the consumer
price index). Both leases expire on March 31, 2000. The lease for the
Company's New Jersey facility provides for monthly rent of $5,809 and expires on
August 31, 1996. The Company also has leased additional warehouse space through
March 31, 1997 with monthly rent of $2,750.
Future minimum annual rental payments at March 31, 1996 are approximately as
follows:
<TABLE>
<CAPTION>
Fiscal Amount
- --------- ----------
<S> <C>
1997 $ 510,619
1998 450,466
1999 433,040
2000 433,040
----------
$1,827,165
==========
</TABLE>
Rent expense was $476,043, $458,819, and $296,190 for fiscal 1996, 1995, and
1994, respectively.
The Company is a defendant in an employment related legal action. Management
believes that resolution of the aforementioned legal action will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
- --------------------------------------------------------------------------------
45 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At March 31, 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, 1996.
These letters of credit secure balances due to program suppliers.
At March 31, 1996, as adjusted for additional commitments made through May 24,
1996, the Company's future obligations for royalty advances and minimum
guarantees and exclusive distribution fee guarantees under the terms of existing
licenses and an exclusive distribution agreement, respectively, are as follows:
<TABLE>
<CAPTION>
Fiscal Amount
- --------- -----------
<S> <C>
1997 $11,749,000
1998 5,475,000
1999 9,397,000
2000 7,589,000
-----------
$34,210,000
===========
</TABLE>
NOTE 14. SUBSEQUENT EVENT.
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 Company intends to build an approximately 85,000 square foot
automated warehouse and distribution facility on approximately 8 acres of the
acquired property. The Company plans to sell the balance of the property
consisting of street-frontage acreage. The new facility will replace the
Company's existing 48,300 square foot leased facility in Chatsworth, California.
The Company believes the new facility will be completed by June 1, 1997. The
close of escrow and ultimate purchase of the property is contingent upon the
achievement of certain rezoning objectives and the obtaining of financing
acceptable to the Company.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 46
<PAGE>
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------------------------
First Second Third Fourth
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 1996:
- --------------------------------
Net sales $ 18,129,257 $ 26,006,905 $ 28,071,730 $ 22,878,272
Operating income $ 1,346,359 $ 2,211,319 $ 2,670,234 $ 1,931,913
Net income $ 1,258,696 $ 2,001,962 $ 2,427,398 $ 1,910,992
Net income per share/(4)/ $ 0.09 $ 0.13 $ 0.15 $ 0.12
Fiscal year ended March 31, 1995:
- --------------------------------
Net sales $ 16,102,580 $ 19,824,008 $ 27,329,155 $ 22,334,987
Operating income $ 1,152,305 $ 1,684,258 $ 2,826,083 $ 2,077,153
Income before extraordinary item $ 739,519 $ 1,405,109 $ 2,581,825 $ 2,803,042(3)
Net income $ 739,519 $ 1,310,273(1) $ 1,457,830(2) $ 2,803,042
Net income per share:
Income before extraordinary item/(4)/ $ 0.06 $ 0.10 $ 0.16 $ 0.17
Net income /(4)/ $ 0.06 $ 0.10 $ 0.10 $ 0.17
</TABLE>
__________________________
/(1)/ Net of extraordinary charge, net of taxes, related to early retirement of
debt of $94,836.
/(2)/ Net of extraordinary charge, net of taxes, related to early retirement of
debt of $1,123,995.
/(3)/ Includes net gain on insurance settlement, net of taxes, of $725,499.
/(4)/ Net income per share are computed independently for each of the quarters
presented using the modified treasury stock method as described in detail
in Note 5 to the Consolidated Financial Statements. Therefore, the sum of
the quarterly earnings per share may not equal the total computed for the
fiscal year or any cumulative interim period.
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required to be set forth in this Part III (except for the
list of Executive Officers set forth in Part I hereof) is included in a
definitive Proxy Statement pursuant to Regulation 14A, incorporated herein
by reference, to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
March 31, 1996.
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT. Page
----
<S> <C>
1. Financial Statements:
Independent Auditors' Report 27
Consolidated Balance Sheets at March 31, 1996 and 1995 28
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and
1994 30
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1996,
1995 and 1994 31
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995
and 1994 32
Notes to Consolidated Financial Statements 35
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 50
3. Exhibits: See the Exhibit Index on pages i through iv.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 48
<PAGE>
SCHEDULE II
-- VALUATION AND QUALIFYING ACCOUNTS --
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
-------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
of Year Expenses Written-Off of Year
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1996: $ 200,000 $ 281,601* $ (148,584) $ 333,017
============= ============ ============ ===========
For the Year Ended March 31, 1995: $ 168,570 $ 78,343 $ (46,913) $ 200,000
============= ============ ============ ===========
For the Year Ended March 31, 1994: $ 206,657 $ 875 $ (38,962) $ 168,570
============= ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Allowance for Sales Returns
---------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
of Year Expenses Written-Off of Year
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1996: $ 2,500,000 $ 350,000 $ -- $ 2,850,000
============= ============ ============ ===========
For the Year Ended March 31, 1995: $ 4,075,000 $ -- $ (1,575,000) $ 2,500,000
============= ============ ============ ===========
For the Year Ended March 31, 1994: $ 2,500,000 $ 1,575,000 $ -- $ 4,075,000
============= ============ ============ ===========
</TABLE>
- ---------------
* Includes $177,432 representing the allowance for doubtful accounts of U.S.
Laser as of its June 1995 acquisition date. See Item 7. Management's
---
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisition.
- --------------------------------------------------------------------------------
49 Image Entertainment, Inc.
<PAGE>
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.,
a California corporation
Dated: June 28, 1996 By: /s/ Martin W. Greenwald
--------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: June 28, 1996 By: /s/ Martin W. Greenwald
--------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer
Dated: June 28, 1996 By: /s/ Jeff M. Framer
--------------------------------------------
JEFF M. FRAMER,
Chief Financial Officer (Principal Financial and
Accounting Officer)
Dated: June 28, 1996 By:/s/ Stuart Segall
--------------------------------------------
STUART SEGALL,
Vice President & Director
Dated: June 28, 1996 By:/s/ Ira Epstein
--------------------------------------------
IRA EPSTEIN,
Director
Dated: June 28, 1996 By:/s/ Russell Harris
--------------------------------------------
RUSSELL HARRIS,
Director
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 50
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Articles of Incorporation. Filed as Exhibit 3.1 of the
Company's Form 10-K for the year ended March 31, 1995, and
incorporated by reference herein.
3.2 Bylaws. Filed as Exhibit 3.2 of the Company's Form 10-K for the
year ended March 31, 1995, and incorporated by reference herein.
10.1+ The Company's Restated 1989 Incentive Stock Option Plan, as
amended. Filed as Exhibit 10.1 of the Company's Form 10-K for the
year ended March 31, 1992, and incorporated by reference herein.
10.2+ The Company's 1990 Stock Option Plan. Filed as Exhibit A of the
Company's Proxy Statement dated December 27, 1990, and
incorporated by reference herein.
10.3+ The Company's Restated 1992 Stock Option Plan. Filed as Exhibit A
of the Company's Proxy Statement dated September 9, 1994, and
incorporated by reference herein.
10.4 The Company's 1994 Eligible Directors Stock Option Plan and Form
of Eligible Director Non-Qualified Stock Option Agreement. Filed
as Exhibit 10.4 of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.5+ Form of Option Agreement dated October 15, 1991 between the
Company and Martin W. Greenwald. Filed as Exhibit 10.3 of the
Company's 10-Q for the quarter ended September 30, 1991, and
incorporated by reference herein.
10.6+ Option granted August 13, 1992 by the Company to Cheryl Lee. Filed
as Exhibit 10.12 of the Company's Form 10-K for the year ended
March 31, 1994, and incorporated by reference herein.
10.7+ Form of Option granted May 19, 1994 to Jeff Framer, Cheryl Lee and
David Borshell. Filed as Exhibit 10.24 to the Company's Form 10-K
for the year ended March 31, 1994, and incorporated by reference
herein.
10.8+ Employment Agreement of Martin W. Greenwald dated July 1, 1994.
Filed as Exhibit 10.8 of the Company's Form 10-K for the year
ended March 31, 1995, and incorporated by reference herein.
- --------------------------------------------------------------------------------
i Image Entertainment, Inc.
<PAGE>
10.8.A+ Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Martin W. Greenwald dated July 1, 1994.
Filed as Exhibit 10.1 of the Company's 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference herein.
10.9+ Employment Agreement of Cheryl Lee dated July 1, 1994. Filed as
Exhibit 10.9 of the Company's Form 10-K for the year ended March
31, 1995, and incorporated by reference herein.
10.9.A+ Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Cheryl Lee dated July 1, 1994. Filed as
Exhibit 10.2 of the Company's 10-Q for the quarter ended June 30,
1995, and incorporated herein by reference herein.
10.10+ Employment Agreement of Jeff Framer dated July 1, 1994. Filed as
Exhibit 10.10 of the Company's Form 10-K for the year ended March
31, 1995, and incorporated by reference herein.
10.10.A+ Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Jeff Framer dated July 1, 1994. Filed as
Exhibit 10.3 of the Company's 10-Q for the quarter ended June 30,
1995, and incorporated herein by reference herein.
10.11+ Employment Agreement of David Borshell dated July 1, 1994. Filed
as Exhibit 10.11 of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.11.A+ Amendment No. 1 dated and effective as of September 1, 1994 to
Employment Agreement of David Borshell dated July 1, 1994. Filed
as Exhibit 10.11.A of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.12+ Form of Indemnity Agreement between the Company and its directors
and officers. Filed as Exhibit F of the Company's Proxy Statement
dated September 5, 1989, and incorporated by reference herein.
10.13 Stock Purchase Agreement among the Company, Directors of the
Company and various Buyers dated December 29, 1987. Filed as
Exhibit 4.3 of the Company's Form 8-K dated December 29, 1987, and
incorporated by reference herein.
10.13.A Form of First Amendment dated July 7, 1992 to the Stock Purchase
Agreement referenced in Exhibit 10.19 above. Filed as Exhibit 10.5
of the Company's Form 10-Q for the quarter ended September 30,
1992, and incorporated by reference herein.
10.14 Stock Purchase Agreement among the Company, Directors of the
Company and Image Investors Co. dated June 27, 1990. Filed as
Exhibit 10.53 of the Company's
- --------------------------------------------------------------------------------
Image Entertainment, Inc. ii
<PAGE>
Form 10-K for the year ended March 31, 1990. The Company and Image
Investors Co. are parties to Stock Purchase Agreements dated July
14, 1988, November 30, 1988, January 11, 1989, February 14, 1989,
May 10, 1989 and June 20, 1990, which are virtually identical to
this Exhibit except for the number of shares of Common Stock
purchased, and incorporated by reference herein.
10.15 Stock Purchase Agreement between the Company and Image Investors
Co. dated December 30, 1992, including Warrant. Filed as Exhibit
10.6 of the Company's Form 10-Q for the quarter ended December 31,
1992, and incorporated by reference herein.
10.16 Purchase and Sale Agreement between the Company and LEI Partners,
L.P. dated December 31, 1990. Filed as Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended December 31, 1990, and
incorporated by reference herein.
10.17 Standard Industrial Lease for 9333 Oso Avenue, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.1 of the Company's Form 10-Q for the quarter ended December 31,
1993.
10.18 Standard Industrial Lease for 20350 Prairie Street, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.2 of the Company's Form 10-Q for the quarter ended December 31,
1993, and incorporated by reference herein.
10.19* Agreement for Purchase and Sale dated June 5, 1996, between
Airport Center Partnership and the Company.
10.20 Loan and Security Agreement between the Company and Foothill
Capital Corporation dated as of November 15, 1994, including
Capital Expenditure Loan Note and Trademark Security Agreement.
Filed as Exhibit 4 of the Company's Form 10-Q for the quarter
ended September 30, 1994, and incorporated by reference herein.
10.20.A Amendment Number One dated as of October 31, 1995 to Loan and
Security Agreement dated as of November 15, 1994 by and between
the Company and Foothill Capital Corporation. Filed as Exhibit
10.1 to the Company's 10-Q for the quarter ended December 31,
1995, and incorporated by reference herein.
10.21 Stock Purchase Agreement between the Company and Kyle Kirkland
dated as of January 26, 1995. Filed as Exhibit 10.20 of the
Company's Form 10-K for the year ended March 31, 1995, and
incorporated by reference herein.
21 Subsidiaries of the Registrant.
- --------------------------------------------------------------------------------
iii Image Entertainment, Inc.
<PAGE>
23* Consent Letter of KPMG Peat Marwick LLP, Independent Certified
Public Accountants.
27* Financial Data Schedule.
_________________________________________________
* Exhibit(s) not previously filed with the Securities and Exchange
Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. iv
<PAGE>
EXHIBIT 10.19
AGREEMENT FOR PURCHASE AND SALE
-------------------------------
This Agreement is made and entered into this 5th day of June, 1996, by and
between AIRPORT CENTER PARTNERSHIP, a Nevada general partnership whose address
is 3635 W. Twain Ave., Suite B, Las Vegas, Nevada 89103, ("Seller") and IMAGE
ENTERTAINMENT, INC., a California corporation whose address is 9333 Oso Avenue,
Chatsworth, California 91311 ("Buyer").
1. RECITALS. Seller is the owner of that certain unimproved real property
--------
located on Sunset Boulevard between Spencer and Bruce, in Clark County, Nevada,
comprising approximately 16.5 acres, and more particularly described in Exhibit
"A" attached hereto (the "Property"). Seller desires to sell the Property and
Buyer desires to buy the Property, upon the terms and conditions set forth in
this Agreement.
2. PURCHASE AND SALE. Through escrow and at closing as hereinafter
-----------------
provided, and conditioned upon full performance by Buyer and Seller of their
obligations under this Agreement, Seller agrees to sell and Buyer agrees to buy
the Property.
3. PURCHASE PRICE. The purchase price for the Property is Four Million
--------------
Dollars ($4,000,000) ("Purchase Price"), which shall consist of $3,700,000 net
to Seller less Seller's closing costs, plus a brokerage fee of $300,000 payable
at Close of Escrow (as hereinafter defined) to Encore Group, New America Network
("Encore"). The Purchase Price shall be paid as follows:
(i) Seller shall receive at the Close of Escrow, $2,150,000 in cash
or immediately available funds (including the Earnest Money Deposit (as
hereinafter defined), along with any interest that has accrued less
Seller's brokerage fees, costs and expenses); and
(ii) Seller may elect to receive up to One Million Eight Hundred
Fifty Thousand Dollars ($1,850,000) payable on January 2, 1997. Said note
shall pay eight percent (8%) simple interest. The Seller may elect to have
a greater portion of this Purchase Price paid in cash at Closing, but must
make such election at least 30 days after the opening of the escrow. In
the event Seller does not provide timely notice to Buyer of its election,
all escrow funds shall be paid in cash at close of escrow. Said note shall
be secured by an irrevocable letter of credit or certificate of deposit
neither of which can be paid to Seller prior to January 2, 1997 or other
security acceptable to both Buyer and Seller. It is specifically
understood and acknowledged by Seller that it shall have no security
interest in the Property by deed of trust or otherwise. The cost of any
such security instrument shall be paid by the Buyer, but credited toward
the Purchase Price at the Close of Escrow.
A. Earnest Money. On or before June 3, 1996, a One Hundred Thousand
-------------
Dollar ($100,000) earnest money deposit ("Earnest Money Deposit") evidenced
by Buyer's cashier's check or other immediately available funds, shall be
prepared by Buyer, provided (1) Buyer has received seventy-one percent
(71%) approval from the Partners of Seller of the Offer and Acceptance
prepared March 26, 1996. Buyer and Seller acknowledge that Buyer has
received this seventy-one percent (71%) approval on April 4, 1996 and (2)
the Airport Center partnership ratifies the agreement, which requires
either unanimous approval of the management committee or a majority of the
partnership ownership interest. In the event the Earnest Money Deposit is
not forthcoming as provided above, Seller may notify Buyer in writing that
this condition precedent has not been fulfilled and that this Agreement is
thereby canceled and void. The Earnest Money Deposit shall be placed in a
trust account or other fiduciary account mutually acceptable to R. Gardner
Jolley, on behalf of the Buyers, and Geoffrey Commons, Esq. on behalf of
the Seller in Los Angeles County, California. Should the Property fail
<PAGE>
to received MD zoning as herein specified, the Earnest Money Deposit shall
promptly be returned to Buyer together with the accrued interest thereon.
B. Release of Earnest Money. The Earnest Money Deposit shall be
------------------------
released to Seller upon Seller presenting proof of rezoning by the
appropriate authorities in Clark County, Nevada of the Property to MD with
said rezoning not to include any unreasonable conditions outside the
parameters of existing MD guidelines. The conditions are deemed reasonable
unless the total costs of all unreasonable conditions exceeds Twenty-five
Thousand Dollars ($25,000). Reasonable conditions would include, but not be
limited to grading and paving adjoining streets to the Property, dedicating
all or a portion of Bruce adjoining the Property, landscaping, restrictions
on height due to location by the airport; unreasonable conditions would
include, but not be limited to restrictions that would significantly reduce
building space, restrictions which would require capital improvements
beyond the normal for MD zoning, restrictions on land use that would impede
the construction of intended uses by Buyer which are consistent with MD
zoning. In the event Buyer believes there are unreasonable restrictions,
Buyer has the obligation to notify Seller within seven days in writing and
Buyer has the following options: (1) to go forward despite the restrictions
(2) if the restrictions have an economic impact of less than One Hundred
Thousand Dollars ($100,000), to request the Seller to share 50/50 in these
costs. Seller has the following rights: (1) to pay a fifty percent (50%)
share of the costs or (2) refuse to pay a fifty percent (50%) share and
cancel the escrow.
4. ESCROW. Escrow shall open with United Title after the Earnest Money
------
Deposit has been placed in an account as agreed to by the parties and the escrow
shall deemed to be opened upon deposit of this Agreement with United Title
located at 4100 W. Flamingo Rd., Suite 1000, Las Vegas, Nevada 89103 (the
"Escrow"). The parties shall execute escrow instructions to be prepared by
United Title in order to consummate the purchase and sale of the Property in
accordance with the terms and provisions of this Agreement. United Title shall
be instructed to prorate current taxes, insurance, Rents (as hereinafter
defined) and any other charges of a like kind or nature relating to the Property
to the Close of Escrow. In the event of any conflict between said escrow
instructions and this Agreement, this Agreement shall prevail.
5. CONDITIONS. This Agreement is subject to the following conditions:
----------
A. Buyer shall have a customary 60-day feasibility study period
("Feasibility Period") within which to conduct studies of the Property,
including, but not limited to: soils testing, environmental study,
biological study (including but not limited to tortoise study), hydrology
tests, design criteria and feasibility. The Feasibility Studies shall also
include review of the sign leases and locating those signs on the Property
along with any easements referred to in the survey to be obtained by Buyer
or any easements referred to in this Agreement. Said studies and tests
shall be at no cost or detriment to Seller and Buyer shall deliver to
Seller copies of all reports as they are completed. Such tests and studies
shall hereinafter be collectively referred to as the "Studies". Buyer shall
be entitled to enter the Property to conduct its Studies as provided for
under paragraph 7 of this Agreement. Furthermore, Seller agrees to
cooperate with Buyer and Buyer's agents in conducting said Studies and, if
required, by signing any documents needed by Buyer to conduct those
Studies. Buyers hereby designate Ron Vitto as the appropriate party to sign
said documents. Buyer has the obligation to notify Seller of problems that
result from these Studies. Buyer may during this sixty (60) day period
decide for any reason not to proceed and this Agreement shall be
terminated. Buyer's only obligation to Seller shall be to pay any title and
escrow costs that may have accrued to that date. Even if problems occur,
said contingency is deemed waived at the end of the sixty (60) day period
unless Seller gives Buyer a written extension of the Feasibility Period.
<PAGE>
B. The Feasibility Period began April 4, 1996 and ends June 3, 1996.
At or before the end of sixty (60) days Buyer shall put up the Earnest
Money Deposit as described above and open escrow. All contingencies shall
be deemed waived at the opening of escrow except: zoning as discussed above
and delivery of the Property free and clear at close of escrow.
C. Payment in full by Seller of any improvement bonds, special
improvement districts, limited improvement districts, at or before close of
escrow.
D. Buyer's re-zoning of the Property to MD (Clark County) within 120
days of the full execution of this Agreement by Seller (the "Re-Zoning
Period"). The Re-Zoning Period may be greater than one hundred and twenty
days (120), which under paragraph 9(B), provides for two (2) thirty (30)
day extensions. Buyer shall apply for said re-zoning on or before June 3,
1996.
E. At the end of the Re-Zoning Period, if re-zoning is not complete,
Buyer may extend Escrow for two (2) thirty (30) day periods as follows:
Buyer shall deposit into Escrow an additional non-refundable $25,000 for
each such thirty (30) day extension on or before the expiration of the then
current escrow period. Such additional deposits shall be non-refundable and
shall be released to Seller, but shall be applied to the Purchase Price if
the sale of the Property is completed.
F. Seller acknowledges that this Agreement must be approved by the
Buyer's Board of Directors, which approval must be obtained within 30 days
of full execution of this Agreement by Seller.
6. PRELIMINARY TITLE REPORT. Buyer shall obtain a Preliminary Title
------------------------
Report on the Property. Buyer shall be deemed to have approved of said report by
June 3, 1996 unless written notification of disapproval has been received by
Seller. In any event, title issues are waived upon opening of escrow unless
Seller and Buyer mutually agree in writing otherwise. In the event of such
disapproval, Seller may cancel the Escrow or alternatively may have thirty (30)
days from the deposit of the Earnest Money Deposit within which to attempt to
eliminate any disapproved exceptions from the policy of title insurance to be
issued in favor of Buyer at the Close of Escrow, and if not eliminated, Escrow
shall be canceled and the Earnest Money Deposit shall be returned to Buyer,
unless Buyer then elects to waive its prior disapproval. Failure of Buyer to
disapprove any exceptions within the above mentioned time limit shall be deemed
approval of the Preliminary Title Report. Any exceptions to which no disapproval
is made shall be deemed "Permitted Exceptions."
7. RIGHT OF ENTRY AND INSPECTION. Buyer shall have the right to enter
-----------------------------
upon the Property at any reasonable time prior to Close of Escrow to make such
inspections, environmental audits, tests, surveys and investigations as Buyer
may deem appropriate. All entry and activities by Buyer upon the Property shall
be at Buyer's sole cost, risk and expense.
8. WARRANTIES OF SELLER. The representations and warranties of Seller
--------------------
made in this Section, unless otherwise noted herein, are material and reasonably
relied upon by Buyer and are true and shall be true in all respects as of the
date this Agreement is executed by Seller and, unless otherwise communicated to
Buyer in writing, as of the Close of Escrow. Such representations and
warranties shall survive the Close of Escrow. Seller hereby warrants that, to
the best of Seller's knowledge, each of the following statements is true:
A. Actions, Suits or Proceedings. There are no actions, suits or
-----------------------------
proceedings which are pending or threatened before any governmental
department, commission, board, bureau, agency or instrumentality that would
materially and adversely affect the Property or the right to occupy or
<PAGE>
utilize it. Buyer acknowledges that Seller has a claim regarding a $25,000
deposit at American Title, however, the parties agree said claim will not
affect the Property.
B. No Notice of Pending Condemnation. There are no pending or
---------------------------------
threatened condemnation or eminent domain proceedings affecting the
Property, or any part thereof.
C. Compliance. There is no aspect or condition of the Property
----------
which violates applicable laws, rules, regulations, codes, or covenants,
conditions or restrictions, nor have there been improvements or alterations
made to the Property without a permit where one was required, nor is there
any unfiled order or directive of any applicable governmental agency, or of
any casualty insurance company that requires any work of investigation,
remediation, repair, maintenance or improvement to be performed on, at or
to the Property.
D. Maintenance During Escrow and Condition at the Close of Escrow.
--------------------------------------------------------------
Seller expressly agrees to manage and maintain the Property until the Close
of Escrow in the customary and ordinary course of business.
E. Changes in Agreement. Prior to the Close of Escrow, Seller will
--------------------
not violate or modify, orally or in writing, any lease, contract,
understanding or any other agreements, or create any new leases or other
agreements affecting the Property, without Buyer's written approval.
F. Possessory Rights. No person, except as disclosed by this
-----------------
Agreement or otherwise in writing to Buyer, has any right to possession of
the Property.
G. Mechanics' Liens. There are no unsatisfied mechanics' or
----------------
materialman's lien rights concerning the Property.
H. Bankruptcy Proceedings. Neither Seller nor any part of the
----------------------
Property is the subject of any bankruptcy proceedings.
I. True and Correct Documents. All copies of documents furnished to
--------------------------
Buyer by Seller or its representatives in connection with the transaction
are true, correct and complete copies of the originals.
J. Hazardous Materials. Seller has not received any written notice,
-------------------
nor to the best of Seller's actual knowledge, any other information
indicating that the Property is in violation of any Environmental Law. As
used herein, "Environmental Law" shall mean any Federal, State or local
law, ordinance or regulation relating to flammable explosives, radioactive
materials, hazardous wastes, toxic substances, underground storage tanks or
related materials, including, but not limited to asbestos, petroleum or any
petroleum by-products, urea formaldehyde, foam insulation, polychlorinated
biphenlys, and those substances defined as "hazardous substances,"
"hazardous materials," or "toxic substances" in the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") as
amended, 42 U.S.C. (S)(S)9601 et seq.; the Resource Conservation and
-- ----
Recovery Act ("RCRA"), 42 U.S.C. (S)(S)6901 et seq.; Nevada Revised
-- ----
Statutes Chapter 459 (Hazardous Materials); or in any regulations
adopted in publications promulgated pursuant to such laws and amendments
thereto.
To the best knowledge of Seller, there are no Hazardous
Substances on, under, or about the Property, nor has Seller undertaken,
permitted, authorized or suffered, and will not undertake, permit,
authorize or suffer the presence, use, manufacture, handling, generation,
storage, treatment, discharge, release, burial or disposal on, under or
about the Property of any Hazardous Substances,
<PAGE>
or the transportation to, from, or over the Property, of any Hazardous
Substances. As used herein, "Hazardous Substance" shall mean any substance,
material or matter that may give rise to liability under any Environmental
Laws.
K. Endangered Species. The Property complies with or shall comply
------------------
with, as required, the federal Endangered Species Act.
L. Utilities. Telephone services, gas, electric power, storm
---------
sewers, sanitary sewer and water facilities are available to the Property,
adequate to serve the Property and are not subject to any conditions, other
than normal charges to the utility supplier, which would limit the use of
such utilities.
M. Improvement District Proceedings. There are no threatened,
--------------------------------
proposed or pending proceedings through which the Property or any portion
thereof would be included in any improvement district and subjected to any
special, general or local assessment, other than the existing improvement
bond relating to the Property.
N. Landfills. There is no landfill area on any portion of the
---------
Property.
O. Foreign Persons. Seller is not a "foreign person," as that term
---------------
is defined in Section 1445 of the U.S. Internal Revenue Code of 1986, as
amended. (In that regard, Seller shall deposit into Escrow, at or prior to
Close of Escrow, an affidavit in such form as may be required by the U.S.
Internal Revenue Service, setting forth Seller's full name, address and
taxpayer identification number and stating under penalty of perjury that
Seller is not a "foreign person" as so defined).
9. CLOSING.
-------
A. The Escrow is to close ("Close of Escrow") after the Property has
been rezoned as herein provided, but not before September 1, 1996. After
the Property has been rezoned, Buyer, at its option, may close the Escrow
before September 1, 1996, by giving Seller at least ten (10) days notice it
intends to close Escrow. In no event, however, may the Close of Escrow
occur more than one hundred twenty (120) days from the date of execution of
this Agreement, unless the Close of Escrow is extended pursuant to
subparagraph B as set forth below. Possession shall transfer from Seller to
Buyer at Close of Escrow. Buyer is aware that Seller has month to month
sign leases on the Property. These funds shall accrue to Seller until Close
of Escrow. The sign leases and taxes shall be prorated at Close of Escrow.
B. Buyer shall have the right to extend this escrow if zoning has
not been completed for two 30-day periods as follows: Buyer shall pay the
Airport Center partnership Twenty-five Thousand Dollars ($25,000) for each
30-day extension. In the event the escrow closes prior to the expiration of
the extension, the Twenty-five Thousand Dollars ($25,000) shall be credited
by escrow to Buyer. These funds are nonrefundable. The payment of the
Twenty-five Thousand Dollars ($25,000) is a condition precedent to
extending the escrow. If Buyer fails to make this payment, escrow is
automatically terminated unless Seller notifies escrow in writing
otherwise.
C. Seller shall deliver to Buyer, at Close of Escrow:
(1) a grant, bargain, sale deed conveying good and marketable
title to Buyer or its nominee (final vesting shall be determined in
escrow); and
<PAGE>
(2) affidavits or qualifying statements that satisfy the
requirements of (S)1445 of the Internal Revenue Code of 1986, as
amended and described in Paragraph 8(O).
(3) a standard ALTA Owner's Title Insurance Policy or a
standard CLTA Owner's Title Insurance Policy, as the case may be,
to be furnished by United Title insuring Buyer in the amount of
the Purchase Price and showing the Property to be subject to no
exceptions other than the Permitted Exceptions and such other
exceptions as may be expressly approved by Buyer in writing.
D. Buyer and Seller to pay customary closing costs as is normal in
Clark County, Nevada. Seller shall pay for a CLTA Owner's Title Policy,
provided, however, Buyer may elect to pay for ALTA land survey and title
policy but shall be credited the cost of the CLTA policy; and
E. At the Close of Escrow, each of the parties shall deliver to the
escrow agent such sums, instruments and documents as are required by this
Agreement or are customary in similar transactions in Clark County, Nevada,
and each party shall do all of the things reasonably necessary to close
this transaction and carry out the purpose and intent of this Agreement.
F. Taxes, insurance, Rents and any other charges of a like kind or
nature relating to the Property shall be prorated as of the date of the
Close of Escrow.
G. Buyer is aware that acceptance of this offer is conditioned upon
Buyer submitting a signed offer in the amount of Three Hundred Thousand
Thirty-five Dollars ($335,000) to Dorothy Kingsbury and Mavourneen Lamb
regarding the property described as APN 177-02-500-001. Seller acknowledges
that it has already received this offer. Buyer is aware that there is an
existing and signed offer on this approximate 0.6 acre parcel and that
Seller may not have the ability to deliver this parcel. The purchase of
this adjoining parcel is not a contingency of this Agreement.
10. COMMISSIONS. Encore represents the Buyer only in this transaction,
-----------
and is to be compensated at the Close of Escrow as specified above. Buyer and
Seller each warrant that no other broker, salesman or agent has been engaged or
used by it in connection with this transaction, and each party agrees to
indemnify the other party against any and all loss, claims, liability and
expense, excluding reasonable attorneys' fees, arising out of any claim for
commission or fee incurred or allegedly incurred by the indemnifying party.
11. NOTICES. All notices hereunder shall be in writing, and shall be
-------
deemed to have been given or made when actually received if sent by certified
mail, postage prepaid, and return receipt requested, Federal Express (or other
nationally recognized overnight delivery service) or facsimile transmission
(followed by a hard copy sent by certified mail or Federal Express, and will be
directed as follows:
If to Buyer: Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Cheryl Lee, Esq.,
Chief Administrative Officer & General Counsel
Facsimile: 818-577-5143
<PAGE>
If to Seller: Airport Center Partnership
122 Patrician Way
Pasadena, CA 91105
Attn: Geoffrey Commons, Esq.
Facsimile: 818-577-5143
With copy to: Ron Vitto
9830 West Red Coach Avenue
Las Vegas, NV 89129
Facsimile: 702-877-4225
With copy to: Ed Carse
3635 W. Twain Ave., Suite B
Las Vegas, NV 89103
Any party may change its address for purposes of this paragraph by giving the
other party written notice of the new address in the manner set forth above.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
----------------
between the parties relating to the subject matter contained in it and
supersedes all prior or contemporaneous agreements, representations and
understanding of the parties. No waiver of any of the provisions of this
Agreement shall be deemed, nor shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
wavier. No supplement, modification or amendment of this Agreement nor any
waiver of any provision shall be binding unless executed in writing by all the
parties.
13. EXHIBITS. The Exhibits to this Agreement form an integral part of
--------
this Agreement.
14. FORCE MAJEURE. In addition to the specific provisions of this
-------------
Agreement, performance by any party hereunder shall not be deemed to be in
default where delays or defaults are due to war, insurrection, strikes, lock-
outs, riots, floods, earthquakes, fires, casualties, acts of God, acts of the
public enemy, epidemics, quarantine restrictions, freight embargoes, lack of
transportation, governmental restrictions or priority, litigation (including
delays beyond the reasonable control of the party) to include, but not be
limited to: unusually severe weather, inability to secure necessary labor,
materials or tools, delays of any contractor, subcontractor or supplier, acts of
another party, acts or the failure to act of any public or governmental agency
or entity, or any other causes beyond the control or without the fault of the
party claiming an extension of time to perform. An extension of time for any
such cause shall only be for the period of the enforced delay, which period
shall commence to run from the time of the commencement of the cause.
15. NO ATTORNEY FEES. In the event either party institutes an action or
----------------
proceeding to enforce or interpret any rights hereunder, neither party will be
entitled to attorney's fees or expenses incurred in connection therewith.
16. BINDING AGREEMENT. This Agreement shall be binding upon and shall
-----------------
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
17. APPLICABLE LAW AND VENUE. The laws of the State of Nevada shall apply
------------------------
to the interpretation, construction and enforcement of this Agreement. Any
dispute arising under this Agreement shall be settled by binding arbitration in
the Los Angeles, California metropolitan area. The arbitration shall be
conducted under the rules of J.A.M.S./Endisputes or other arbitration
association or service reasonably acceptable to
<PAGE>
the parties. The arbitration shall be conducted by one (1) retired judge,
mutually and reasonable agreeable to both parties.
18. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts. A set of counterparts containing the signatures of all parties
hereto shall have the same effect as a single Agreement containing the
signatures of all parties.
19. JOINT PREPARATION. The provisions of this document have been
-----------------
negotiated by all parties hereto and should therefore not be interpreted or
construed in favor of or with prejudice against any particular party, but in
accordance with the general tenor of the language used.
20. ZONING. Buyer agrees to submit applications to Clark County, Nevada
------
to rezone the Property on or before June 3, 1996. Buyer shall pay all costs
associated with such rezoning, use permits, variances and other applications and
petitions. Seller as the owner agrees to properly execute any rezoning
application and petitions and to timely deliver them to Buyer to allow their
submission to Clark County, Nevada. Seller agrees to have a representative of
Seller make an appearance on the record at each hearing relevant to the rezoning
applications if it is required. Ron Vitto shall be the appropriate party to
sign such documents and appear at any necessary hearing.
21. REMEDIES OF SELLER. Notwithstanding anything in this Agreement to the
------------------
contrary, in the event that Buyer defaults, the sole and exclusive remedy of
Seller against Buyer shall be to retain the Earnest Money Deposit and any
extension payments made to Buyer under Paragraph 5(E), in settlement and payment
of Seller's costs, expenses and damages (including consequential damages)
resulting from such breach, default or failure of Buyer. Seller acknowledges
that such sums shall be considered liquidated damages in payment of any claims
Seller may have against Buyer.
22. CHANGE IN PROPERTY. This Agreement is expressly contingent upon there
------------------
being no change after the expiration of the Feasibility Period and prior to the
Close of Escrow in the nature of, condition of or circumstances affecting the
Property, including, without limitation, any change in (a) the areas determined
to be flood prone areas; (b) availability of utilities; (c) access; (d)
governmental zoning ordinances; or (e) restrictions and requirements affecting
the ownership and development of the Property. If any such change occurs prior
to Close of Escrow, then Buyer may elect to terminate this Agreement by written
notification to Seller at any time prior to Close of Escrow and, notwithstanding
any other provisions of this Contract, the Earnest Money Deposit, any extension
fees and any other amounts which have not been applied to the Purchase Price
shall be promptly refunded to Buyer, and the parties hereto shall have no
further obligation to each other.
23. LEASES. Buyer is aware that certain sign leases ("Leases") affect the
------
Property and generate rents payable to Seller ("Rents"). Upon full execution of
this Agreement, Seller shall immediately provide the Buyer copies of the Leases.
Seller warrants and represents that all the Leases which affect the Property
have been provided to Buyer, are in full force and effect, the copies provided
to Buyer are true and correct copies of the Leases, and that neither Seller nor
the tenants are in default under the terms and provisions of the Leases. The
Seller shall provide to Buyer an Assignment of Leases and Rents which will be
delivered to Buyer upon Close of Escrow. All Rents due and owing by tenant to
Seller shall be prorated to the date of Close of Escrow. Any tenant security
deposit shall be delivered to Buyer at Close of Escrow.
24. MISCELLANEOUS.
-------------
A. No verbal agreements made by Encore relative to this transaction
shall be construed to be a part of this transaction unless incorporated in
writing herein.
<PAGE>
B. Buyer and Seller agree that notice will be given to Encore if any
changes are made to this Agreement and that Encore will be supplied with
copies of all documentation relating to this transaction.
C. Buyer shall cooperate with Seller(s) in applying all or a portion
of the proceeds of this sale in a 1031 tax-deferred exchange, provided that
Buyer shall incur no cost or liability in such cooperation.
D. Except as otherwise expressly provided herein, Buyer, on one
hand, and Seller, on the other hand, shall bear all of its own expenses
(including, without limitation, attorney's fees) incurred in connection
with the preparation, negotiation, execution, delivery or performance of
this Agreement.
E. Buyer is aware that one of the Sellers is a licensed real estate
agent in the state of Nevada.
F. Buyer is aware that easements along proposed Bruce Street have
not been dedicated to Clark County.
G. Subject to the terms and conditions set forth herein, in the
event Buyer causes Escrow and title to fail to as herein provided, Buyer
will be responsible for all reasonable and customary title and Escrow fees.
H. The undersigned partner in Seller hereby represents and warrants
that he has the authority to sign this Agreement on behalf of the Seller,
that the Management Committee of Seller consists of Edward Carse, Geoffrey
Commons and Ronald Vitto, and that the Management Committee has authority
to execute documents on behalf of Seller. Seller further represents that it
has provided Buyer a true and correct copy of the Partnership Agreement
governing Seller and that those terms and provisions remain in full force
and effect.
Dated as of the year and date above first written.
AIRPORT CENTER PARTNERSHIP, IMAGE ENTERTAINMENT, INC.
a __________ partnership, a California corporation,
By: /S/ GEOFFREY D. COMMONS By: /S/ MARTIN W. GREENWALD
------------------------------ ------------------------------
Geoffrey D. Commons Martin W. Greenwald
Its: President
"BUYER"
By: /S/ RON VITTO
------------------------------
Ron Vitto
By: /S/ ED CARSE
------------------------------
Ed Carse
Its: Management Committee
"SELLER"
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-43241, 33-55393 and 33-57336) all on Form S-8 of Image Entertainment, Inc. of
our report dated May 24, 1996, except for Note 14 which is as of June 5, 1996,
relating to the consolidated balance sheets of Image Entertainment, Inc. as of
March 31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1996, and the related schedule, which report appears in
the March 31, 1996 annual report on Form 10-K of Image Entertainment, Inc.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
May 24, 1996,
except for Note 14 which is as of June 5, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 4,665,942
<SECURITIES> 0
<RECEIVABLES> 16,516,372
<ALLOWANCES> 3,183,000
<INVENTORY> 18,445,137
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,124,558
<DEPRECIATION> 3,145,347
<TOTAL-ASSETS> 39,405,668
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 21,121,582
<OTHER-SE> (596,153)
<TOTAL-LIABILITY-AND-EQUITY> 39,405,668
<SALES> 95,086,164
<TOTAL-REVENUES> 95,086,164
<CGS> 74,386,545
<TOTAL-COSTS> 74,386,545
<OTHER-EXPENSES> 2,884,322
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,530
<INCOME-PRETAX> 8,341,665
<INCOME-TAX> 742,617
<INCOME-CONTINUING> 7,599,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,599,048
<EPS-PRIMARY> 0.49
<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>
