<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ To _________
Commission File Number 0-11071
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
California 84-0685613
- -------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 (_)
Number of shares outstanding of the registrant's common stock on February 5,
1996: 13,775,298
<PAGE>
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PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS.
--------------------
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and March 31, 1995
================================================================================
ASSETS
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1995
------------------ --------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,388,693 $ 2,187,063
Accounts receivable, net of allowances of
$2,940,033 - December 31, 1995;
$2,700,000 - March 31, 1995 16,455,849 11,986,576
Inventories 17,097,714 16,283,281
Prepaid expenses and other assets 859,217 668,590
Notes receivable, net of deferred gain and
allowances of $2,671,450 282,421 352,017
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$4,234,238 - December 31, 1995;
$3,578,700 - March 31, 1995 1,958,656 2,013,403
----------- -----------
$39,042,550 $33,490,930
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and March 31, 1995
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1995
------------------ ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $14,199,960 $ 11,150,261
Accrued royalties 6,137,669 5,564,812
Revolving credit facility 114,740 ---
Capital lease obligations --- 103,358
----------- ------------
Total liabilities 20,452,369 16,818,431
----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,365,385 shares
authorized; none issued and outstanding --- ---
Common stock, no par value, 25,000,000 shares
authorized; 13,551,198 and 13,797,429 issued
and outstanding at December 31, 1995 and
March 31, 1995, respectively 21,184,477 25,216,305
Stock warrants (320,552) (582,006)
Additional paid-in capital 3,064,129 3,064,129
Accumulated deficit (5,337,873) (11,025,929)
----------- ------------
Net shareholders' equity 18,590,181 16,672,499
----------- ------------
$39,042,550 $ 33,490,930
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended December 31, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
NET SALES $28,071,730 $27,329,155
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 21,899,417 21,478,241
Selling expenses 1,340,016 1,236,967
General and administrative expenses 1,474,383 1,010,924
Amortization of production costs 687,680 776,940
----------- -----------
25,401,496 24,503,072
----------- -----------
OPERATING INCOME 2,670,234 2,826,083
OTHER EXPENSES (INCOME):
Interest expense 43,798 267,998
Interest income (70,762) (116,454)
Amortization of deferred financing costs --- 20,514
----------- -----------
(26,964) 172,058
----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 2,697,198 2,654,025
INCOME TAXES 269,800 72,200
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 2,427,398 2,581,825
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES --- 1,123,995
----------- -----------
NET INCOME $ 2,427,398 $ 1,457,830
=========== ===========
NET INCOME PER SHARE (Note 5)
Income before extraordinary item $ .15 $ .16
Extraordinary item - costs associated with
early retirement of debt --- (.06)
----------- -----------
NET INCOME PER SHARE $ .15 $ .10
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 5) 17,648,555 18,229,068
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended December 31, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
NET SALES $72,207,892 $63,255,743
OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 56,778,266 49,497,796
Selling expenses 3,251,060 2,990,897
General and administrative expenses 3,834,869 2,785,961
Amortization of production costs 2,115,785 2,318,443
----------- -----------
65,979,980 57,593,097
----------- -----------
OPERATING INCOME 6,227,912 5,662,646
OTHER EXPENSES (INCOME):
Interest expense 123,013 1,135,241
Interest income (228,157) (442,307)
Amortization of deferred financing costs --- 111,459
----------- -----------
(105,144) 804,393
----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 6,333,056 4,858,253
INCOME TAXES 645,000 131,800
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 5,688,056 4,726,453
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES --- 1,218,831
----------- -----------
NET INCOME $ 5,688,056 $ 3,507,622
=========== ===========
NET INCOME PER SHARE (Note 5):
Income before extraordinary item $ .36 $ .34
Extraordinary item - costs associated with
early retirement of debt --- (.07)
----------- -----------
NET INCOME PER SHARE $ .36 $ .27
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 5) 17,915,265 18,105,713
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended December 31, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,688,056 $ 3,507,622
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,771,321 2,874,013
Amortization of loan costs --- 953,396
Amortization of stock warrants 261,454 261,454
Changes in assets and liabilities associated
with operating activities, net of acquired business:
(Increase) decrease in:
Accounts receivable (1,610,314) (5,246,054)
Insurance settlement receivable --- 6,543,059
Laserdisc inventory 818,619 (2,206,666)
Royalty and distribution fee advances, net 232,301 (145,619)
Production cost expenditures (2,267,202) (2,160,335)
Prepaid expenses and other assets (136,802) (260,564)
Notes receivable 69,596 219,682
Increase in:
Accounts payable, accrued royalties
and liabilities 1,861,816 4,355,019
----------- -----------
Net cash provided by operating activities 7,688,845 8,695,007
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments --- (1,015,479)
Proceeds from maturities of short-term investments --- 5,671,886
Capital expenditures (395,190) (577,087)
Acquisition of business, less cash acquired (3,071,580) ---
----------- -----------
Net cash (used) provided by investing activities (3,466,770) 4,079,320
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
For the Nine Months Ended December 31, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 27,767,677 $ 23,401,368
Repayment of advances under revolving credit facility (27,652,937) (23,401,368)
Repayment of senior secured note payable --- (13,500,000)
Principal payments under capital lease obligations (103,358) (176,405)
Repurchase of common stock (4,297,243) ---
Net proceeds from exercise of stock options 265,416 610,350
------------ ------------
Net cash used by financing activities (4,020,445) (13,066,055)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 201,630 (291,728)
Cash and cash equivalents at beginning of period 2,187,063 2,355,649
------------ ------------
Cash and cash equivalents at end of period $ 2,388,693 $ 2,063,921
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 139,790 $ 1,686,284
Income taxes $ 138,000 $ 70,950
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements as of and for the periods
ended December 31, 1995 include the accounts of Image Entertainment, Inc. and
its wholly-owned subsidiary U.S. Laser Video Distributors, Inc. (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying consolidated balance sheet at December 31, 1995 and the related
consolidated statements of operations and cash flows for the periods ended
December 31, 1995 and 1994 of the Company included herein are unaudited;
however, such information reflects all adjustments of a normal recurring nature
which management believes are necessary for a fair presentation of results for
the interim periods. The accompanying consolidated financial information for
the periods ended December 31, 1995 and 1994 should be read in conjunction with
the Financial Statements, the Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's March
31, 1995 Form 10-K.
Certain fiscal 1995 amounts have been reclassified to conform with the fiscal
1996 presentation.
Sales are seasonal in nature, but also vary with the popularity of titles in
release. The results of operations for the periods ended December 31, 1995 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending March 31, 1996.
NOTE 2. ACQUISITION.
Effective June 8, 1995, Image NewCo., Inc. ("NewCo"), a newly created wholly-
owned subsidiary, acquired and assumed substantially all of the assets and
liabilities, respectively, of V.T. Laser, Inc., a privately-held New Jersey
based corporation doing business as "U.S. Laser Video Distributors," for a
purchase price of approximately $3.1 million in cash. NewCo's name was
subsequently changed to U.S. Laser Video Distributors, Inc. ("U.S. Laser").
U.S. Laser is a nonexclusive distributor of optical disc programming and the
publisher of LASERVIEWS: America's Laser Disc Magazine, a bimonthly consumer
periodical focusing on product announcements, software reviews and articles of
general interest to the laserdisc consumer. U.S. Laser has been in the
laserdisc distribution business since 1985.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the acquired assets and assumed liabilities were recorded at their
fair market value on the acquisition date. The operating results of U.S. Laser,
from the acquisition date to December 31, 1995, are included in the accompanying
consolidated statements of operations for the periods ended December 31, 1995.
The Company has classified the amount of purchase price in excess of the fair
market value of the net assets acquired as goodwill. Goodwill totals
approximately $172,000 and is included as a component of prepaid expenses and
other assets in the accompanying consolidated balance sheet at December 31,
1995. Goodwill is being amortized on a straight-line method over 20 years.
Amortization charged to operations for the periods ended December 31, 1995 was
immaterial. The acquisition of U.S. Laser does not qualify as a significant
subsidiary under SEC Rules and Regulations and, accordingly, proforma
information is not presented.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3. INVENTORIES.
Inventories at December 31, 1995 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ -----------
<S> <C> <C>
Laserdisc inventory $12,626,072 $11,730,755
Royalty and distribution fee advances 3,170,992 3,403,293
Production costs 1,300,650 1,149,233
----------- -----------
$17,097,714 $16,283,281
=========== ===========
</TABLE>
Production costs are net of accumulated amortization of $4,826,150 and
$4,838,547 at December 31, 1995 and March 31, 1995, respectively.
NOTE 4. INCOME TAXES.
Income taxes were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by management. The majority of Federal and a portion of state income
taxes are offset by the utilization of net operating loss carryforwards.
NOTE 5. NET INCOME PER SHARE.
Net income per share was based on the weighted average number of common shares
and common share equivalents (e.g., options and warrants), if dilutive,
outstanding for each of the periods presented. The amount of dilution to be
reflected in net income per share was computed by application of the treasury
stock method. In periods where the amount of common stock issuable if all
options and warrants were deemed exercised exceeds 20% of the total shares
outstanding at the end of the period, the treasury stock method is modified, as
required by Accounting Principles Board Opinion No. 15, to adequately reflect
the dilutive effect of options and warrants on net income per share.
Under the modified treasury stock method, net income per share data is 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 would be applied to reduce any short- or long-term debt
and, if any proceeds remained thereafter, such proceeds would be applied to
invest in short-term U.S. government securities. If the result of the foregoing
application of proceeds had an aggregate dilutive effect on net income per
share, the net income per share calculation must reflect the shares issuable
upon the assumed exercise of options and warrants, net of the assumed repurchase
of shares, and adjustments to net income resulting from the assumed application
of proceeds. If, on the other hand, the aggregate effect was anti-dilutive,
common share equivalents and adjustments to net income resulting from the
assumed application of proceeds would be excluded from the calculation of net
income per share.
The modified treasury stock method was used to determine net income per share
for the periods ended December 31, 1995 and 1994.
Fully diluted net income per share was not presented for the periods ended
December 31, 1995 and 1994 since the amounts did not differ significantly from
the primary net income per share.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
The following table sets forth the calculation of net income per share for the
periods ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
As Presented
- ------------
Income before extraordinary
item $ 2,427,398 $ 2,581,825 $ 5,688,056 $ 4,726,453
Extraordinary item, net of taxes --- 1,123,995 --- 1,218,831
----------- ----------- ----------- -----------
Net income 2,427,398 1,457,830 5,688,056 3,507,622
----------- ----------- ----------- -----------
Adjustments
- -----------
Add: reduction of interest expense
on assumed reduction of debt,
net of taxes 24,557 191,098 58,957 1,008,714
Add: interest income on assumed
investment in U.S. government
securities, net of taxes 244,322 173,321 768,578 345,256
----------- ----------- ----------- -----------
Adjustment to income before
extraordinary item and
net income 268,879 364,419 827,535 1,353,970
----------- ----------- ----------- -----------
As Adjusted
- -----------
Income before extraordinary
item 2,696,277 2,946,244 6,515,591 6,080,423
Extraordinary item, net of taxes --- 1,123,995 --- 1,218,831
----------- ----------- ----------- -----------
Net income $ 2,696,277 $ 1,822,249 $ 6,515,591 $ 4,861,592
=========== =========== =========== ===========
Weighted average common
shares and common share
equivalents outstanding:
Common shares 13,346,766 13,492,086 13,574,462 13,043,494
Common stock options
and warrants 4,301,789 4,736,982 4,340,803 5,062,219
----------- ----------- ----------- -----------
17,648,555 18,229,068 17,915,265 18,105,713
=========== =========== =========== ===========
Net income per share:
Income before extraordinary
item $ .15 $ .16 $ .36 $ .34
Extraordinary item --- (.06) --- (.07)
----------- ----------- ----------- -----------
Net income per share $ .15 $ .10 $ .36 $ .27
=========== =========== =========== ===========
</TABLE>
NOTE 6. DEFAULT OF NOTES RECEIVABLE
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 its adult
laserdisc licensing and distribution business (the "Assets") for
9
<PAGE>
$3,828,600. The purchase price for the Assets 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.
At December 31, 1995, $1,163,200 and $1,790,671 remained due under Notes A and
B, respectively. The accompanying balance sheet at December 31, 1995 reflects
notes receivable of $282,421 which represents the total remaining principal
balance due under Notes A and B, net of the deferred gain on sale and other
allowances of $2,671,450.
The Company is currently in discussions with LEI regarding the renegotiation of
payment terms. Should an amicable resolution not be reached, the Company will
take necessary and appropriate action to enforce its rights under the Agreement.
Although it is not possible to determine the ultimate resolution of this matter,
management believes the Company will ultimately receive, through renegotiation
or other action, not less than the net carrying value of the notes receivable
and accrued interest at December 31, 1995, as well as any necessary legal costs.
NOTE 7. REVOLVING CREDIT AND TERM LOAN FACILITY.
At December 31, 1995, the Company had $114,740 in borrowings outstanding under
its November 15, 1994, three-year, $15,000,000 revolving credit and term loan
facility with Foothill Capital Corporation. The borrowings are secured by
substantially all of the Company's assets and bear interest at prime plus 1.5%
(10.0% at December 31, 1995).
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
GENERAL
Since 1983, the Company has distributed a broad range of programming
on laserdisc for home viewing. The Company generally enters into license
agreements whereby it acquires the exclusive right to manufacture and distribute
laserdisc programming. In addition, the Company acts as an exclusive and
nonexclusive wholesale distributor of laserdisc programming.
RESULTS OF OPERATIONS
The Company's net sales for the three and nine months ended December
31, 1995 increased 2.7% and 14.2%, respectively, over the comparable prior-year
periods. For the three months ended December 31, 1995, operating income
decreased 5.5% to $2,670,234 from $2,826,083 for the comparable prior-year
period. For the nine months ended December 31, 1995, operating income increased
10.0% to $6,227,912 from $5,662,646 for the comparable prior-year period. For
the three months ended December 31, 1995, income before extraordinary item
(costs related to early retirement of debt) decreased 6.0% to $2,427,398, or
$.15 per share, from $2,581,825, or $.16 per share, for the comparable prior-
year period. For the nine months ended December 31, 1995, income before
extraordinary item increased 20.3% to $5,688,056, or $.36 per share, from
$4,726,453, or $.34 per share, for the comparable prior year period. Net income
increased 66.5% to $2,427,398, or $.15 per share, and 62.2% to $5,688,056, or
$.36 per share, for the three and nine months ended December 31, 1995,
respectively, from $1,457,830, or $.10 per share, and $3,507,622, or $.27 per
share, for the three and nine months ended December 31, 1994, respectively.
THE THREE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1994
Net sales for the December 1995 quarter increased 2.7% to $28,071,730
from $27,329,155 for the December 1994 quarter. This increase results from the
acquisition of U.S. Laser (see Note 2 to the consolidated financial statements),
---
offset in part by a reduction in sales of exclusive product. Net sales for the
December 1995 quarter, exclusive of U.S. Laser's net sales, decreased 11.7% to
$24,136,140 from $27,329,155 for the December 1994 quarter. The December 1995
quarter release schedule included net sales of approximately $2,600,000 from the
exclusive release of CRIMSON TIDE and JUDGE DREDD. The December 1994 quarter
represented the strongest quarter of exclusive releases in the Company's history
and included net sales of approximately $8,600,000 from the release of SNOW
WHITE AND THE SEVEN DWARFS, SPEED, and THE NIGHTMARE BEFORE CHRISTMAS. Net
sales are affected by the popularity of new releases and the economic
environment.
Cost of laserdisc sales for the December 1995 quarter increased to
$21,899,417 from $21,478,241 for the December 1994 quarter. As a percentage of
net sales, cost of laserdisc sales for the December 1995 quarter decreased to
78.0% from 78.6% for the December 1994 quarter. The decrease as a percentage of
net sales was due to a favorable shift in sales mix, offset in part by the
acquisition of U.S. Laser (U.S. Laser has substantially lower margins as a
nonexclusive distributor). 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 20.3% of net sales for the December 1995 quarter. Lower-
margin nonexclusive product sales accounted for 8.9% of net sales for the
December 1994 quarter. Cost of laserdisc sales as a percentage of net sales for
the December 1995 quarter, exclusive of U.S. Laser's net sales and cost of
laserdisc sales, decreased to 77.3% from 78.6% for the December 1994 quarter.
Selling expenses for the December 1995 quarter increased 8.3% to
$1,340,016 from $1,236,967 for the December 1994 quarter. As a percentage of
net sales, selling expenses for the December 1995 quarter increased to 4.8% from
4.5% for the December 1994 quarter. The increase resulted primarily from
11
<PAGE>
increased sales promotions, higher personnel costs and the inclusion of U.S.
Laser's selling expenses. Selling expenses for the December 1995 quarter,
exclusive of U.S. Laser's selling expenses, decreased 6.3% to $1,159,537 from
$1,236,967 for the December 1994 quarter and, as a percentage of net sales,
increased to 4.8% for the December 1995 quarter from 4.5% for the December 1994
quarter.
General and administrative expenses for the December 1995 quarter
increased 45.8% to $1,474,383 from $1,010,924 for the December 1994 quarter. As
a percentage of net sales, general and administrative expenses for the December
1995 quarter increased to 5.3% from 3.7% for the December 1994 quarter. This
increase resulted primarily from the inclusion of U.S. Laser's general and
administrative expenses, higher accrued executive and employee performance-based
bonuses, higher personnel costs, higher professional fees and a larger provision
for doubtful receivables. General and administrative expenses for the December
1995 quarter, exclusive of U.S. Laser's general and administrative expenses,
increased 14.0% to $1,152,041 from $1,010,924 for the December 1994 quarter and,
as a percentage of net sales, increased to 4.8% for the December 1995 quarter
from 3.7% for the December 1994 quarter.
Amortization of production costs for the December 1995 quarter
decreased 11.5% to $687,680 from $776,940 for the December 1994 quarter. As a
percentage of net sales, amortization of production costs for the December 1995
quarter decreased to 2.4% from 2.8% for the December 1994 quarter. The decrease
as a percentage of net sales, is attributable to the inclusion of U.S. Laser's
net sales for the 1995 quarter. As a nonexclusive distributor, U.S. Laser does
not incur production costs. Amortization of production costs as a percentage of
net sales, exclusive of U.S. Laser's net sales, was 2.8% for the December 1995
and 1994 quarters. Amortization of production costs is also a function of the
timing and number of Image exclusive titles placed into production.
Interest expense for the December 1995 quarter decreased 84.8% to
$43,798 from $288,512 in combined interest expense and amortization of deferred
financing costs for the December 1994 quarter. Improved cash flow from
operations and the November 1994 refinancing of senior notes with a revolving
credit facility resulted in substantially lower borrowings outstanding in the
December 31, 1995 quarter.
Interest income for the December 1995 quarter decreased 39.2% to
$70,762 from $116,454 for the December 1994 quarter. The utilization of cash
for the acquisition of U.S. Laser and the repurchase of common stock under the
Company's stock repurchase program accounted for the decrease in interest
bearing funds.
Extraordinary item - costs associated with early retirement of debt of
$1,123,995, net of related taxes of $31,200 for the December 1994 quarter
resulted from the November 1994 refinancing of 11% senior secured and 13% senior
secured subordinated notes and is composed of prepayment penalties and
amortization of deferred financing costs and discount on debt issuance,
accelerated as a result of the early retirement ($701,702 of the extraordinary
charge represents noncash charges).
THE NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 1994
Net sales for the nine months ended December 31, 1995 increased 14.2%
to $72,207,892 from $63,255,743 for the nine months ended December 31, 1994.
Both the 1995 and 1994 periods had strong release schedules which included the
following exclusive releases and re-releases generating over $1,000,000 in net
sales each: LION KING, PULP FICTION, CRIMSON TIDE, STAR WARS, EMPIRE STRIKES
BACK, and RETURN OF THE JEDI during the nine months ended December 31, 1995, and
SNOW WHITE AND THE SEVEN DWARFS, ALADDIN, SPEED, THE NIGHTMARE BEFORE CHRISTMAS,
THE CROW, TOMBSTONE, MRS. DOUBTFIRE, and DANCES WITH WOLVES: LIMITED COLLECTOR'S
EDITION during the nine months ended December 31, 1994. The 1995 period further
benefitted from the acquisition of U.S. Laser (see Note 2 to the consolidated
financial statements). Net sales for the nine months ended December 31, 1995,
exclusive of U.S. Laser's net sales, increased 2.3% to
12
<PAGE>
$64,729,039 from $63,255,743 for the nine months ended December 31, 1994. Net
sales are affected by the popularity of new releases and the economic
environment.
Cost of laserdisc sales for the nine months ended December 31, 1995
increased to $56,778,266 from $49,497,796 for the nine months ended December 31,
1994. As a percentage of net sales, cost of laserdisc sales for the nine months
ended December 31, 1995 increased to 78.6% from 78.3% for the nine months ended
December 31, 1994. The increase in cost of 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 a favorable
fluctuation in sales mix. The sales mix of higher-margin exclusive product and
lower-margin nonexclusive product and the margins within each category vary with
the availability and popularity of titles and the Company's marketing emphasis.
Lower-margin nonexclusive product sales, including lower-margin U.S. Laser
sales, accounted for 18.3% of net sales for the nine months ended December 31,
1995. Lower-margin nonexclusive product sales accounted for 9.0% of net sales
for the nine months ended December 31, 1994. Cost of laserdisc sales as a
percentage of net sales for the nine months ended December 31, 1995, exclusive
of U.S. Laser's net sales and cost of laserdisc sales, decreased to 77.9% from
78.3% for the nine months ended December 31, 1994.
Selling expenses for the nine months ended December 31, 1995 increased
8.7% to $3,251,060 from $2,990,897 for the nine months ended December 31, 1994.
As a percentage of net sales, selling expenses for the nine months ended
December 31, 1995 decreased to 4.5% from 4.7% for the nine months ended December
31, 1994. The increase in absolute selling expenses resulted primarily from the
acquisition of U.S. Laser, increased advertising in trade magazines and sales
promotions. The increase was offset, in part, by a reduction in the Company's
expense for market development funds provided to customers for advertising, cost
savings realized on the Company's monthly Image Laserdisc Preview magazine by
utilizing the in-house creative service department's digital pre-press system,
and lower convention expenses. Selling expenses for the nine months ended
December 31, 1995, exclusive of U.S. Laser's selling expenses, decreased 6.1% to
$2,809,540 from $2,990,897 for the nine months ended December 31, 1994 and, as a
percentage of net sales, decreased to 4.3% for the nine months ended December
31, 1995 from 4.7% for the nine months ended December 31, 1994.
General and administrative expenses for the nine months ended December
31, 1995 increased 37.6% to $3,834,869 from $2,785,961 for the nine months ended
December 31, 1994. As a percentage of net sales, general and administrative
expenses for the nine months ended December 31, 1995 increased to 5.3% from 4.4%
for the nine months ended December 31, 1994. This increase resulted primarily
from the inclusion of U.S. Laser's general and administrative expenses, higher
accrued executive and employee performance-based bonuses, higher personnel and
legal costs, and a larger provision for doubtful receivables. General and
administrative expenses for the nine months ended December 31, 1995, exclusive
of U.S. Laser's general and administrative expenses, increased 14.9% to
$3,202,209 from $2,785,961 for the nine months ended December 31, 1994 and, as a
percentage of net sales, increased to 4.9% for the nine months ended December
31, 1995 from 4.4% for the nine months ended December 31, 1994.
Amortization of production costs for the nine months ended December
31, 1995 decreased 8.7% to $2,115,785 from $2,318,443 for the nine months ended
December 31, 1994. As a percentage of net sales, amortization of production
costs for the nine months ended December 31, 1995 decreased to 2.9% from 3.7%
for the nine months ended December 31, 1994. The decrease as a percentage of
net sales is principally attributable to the inclusion of U.S. Laser's net sales
for the 1995 period. As a nonexclusive distributor, U.S. Laser does not incur
production costs. Amortization of production costs as a percentage of net sales
for the nine months ended December 31, 1995, exclusive of U.S. Laser's net
sales, decreased to 3.3% from 3.7% for the comparable 1994 period. Amortization
of production costs is also a function of the timing and number of Image
exclusive titles placed into production.
Interest expense for the nine months ended December 31, 1995 decreased
90.1% to $123,013 from $1,246,700 in combined interest expense and amortization
of deferred financing costs for the nine
13
<PAGE>
months ended December 31, 1994. 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 the nine months
ended December 31, 1995.
Interest income for the nine months ended December 31, 1995 decreased
48.4% to $228,157 from $442,307 for the nine months ended December 31, 1994.
The utilization of cash for the acquisition of U.S. Laser and the repurchase of
common stock under the Company's stock repurchase program accounted for the
decrease in interest bearing funds.
Extraordinary item - costs associated with early retirement of debt of
$1,218,831, net of related taxes of $33,800 for the nine months ended December
31, 1994 resulted from a July 1994 principal prepayment and the November 1994
refinancing of the 11% senior secured and 13% senior secured subordinated notes
and is composed of prepayment penalties and amortization of deferred financing
costs and discount on debt issuance, accelerated as a result of the early
retirement ($759,138 of the extraordinary charge represents noncash charges).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements vary primarily with the
level of its licensing, production and distribution activities. The principal
uses of working capital are for program licensing costs (i.e., royalty payments,
----
including advances, to program suppliers), distribution fee advances,
manufacturing and production costs, costs of acquiring finished product for
wholesale distribution and selling, general and administrative expenses. Since
January 1995, the Company has used working capital for both the repurchase of
its common stock and the acquisition of assets of U.S. Laser. Working capital
requirements increase as licensing and distribution activities increase.
Working capital has historically been provided by private sales of common stock,
notes representing long-term debt, bank borrowings and cash flows from
operations. For the nine months ended December 31, 1995, operating activities
provided cash and cash equivalents of $7,688,845, investing activities used cash
and cash equivalents of $3,466,770 and financing activities used cash and cash
equivalents of $4,020,445, resulting in a net increase in cash and cash
equivalents of $201,630.
Effective June 8, 1995, the Company acquired and assumed substantially
all of the assets and liabilities, respectively, of V.T. Laser, Inc., a
privately-held New Jersey based corporation doing business as "U.S. Laser Video
Distributors," for a purchase price of approximately $3.1 million in cash. The
transaction was funded through operating cash flow and borrowings under the
Company's revolving credit facility.
At December 31, 1995, the Company had $114,740 in borrowings
outstanding under its November 15, 1994, three-year, $15,000,000 revolving
credit and term loan facility with Foothill Capital Corporation ("Foothill") and
had borrowing availability of $12,385,260. The borrowings are secured by
substantially all of the Company's assets and bear interest at prime plus 1.5%
(10.0% at December 31, 1995). The facility agreement requires the Company to
comply with certain financial and operating covenants. To accommodate the U.S.
Laser acquisition, Foothill waived compliance with certain covenants which
restrict corporate acquisitions and related expenditures. At December 31, 1995,
the Company was in compliance with all financial and other operating covenants.
At December 31, 1995, the Company had $2,500,000 of outstanding
letters of credit issued and guaranteed by Foothill and expire on November 15,
1996. These letters of credit secure balances due to program suppliers.
During the three and nine months ended December 31, 1995, the Company
repurchased 224,100 and 639,800 shares of its common stock, respectively, for
$1,476,064 and $4,297,243, respectively, under a stock repurchase program
approved by the Company's Board of Directors on January 16, 1995.
14
<PAGE>
At December 31, 1995, the Company had license obligations for royalty
advances and minimum guarantees and exclusive distribution fee obligations for
minimum guarantees of approximately $1,955,000 for the remainder of fiscal 1996,
$4,509,000 during fiscal 1997, $4,317,000 during fiscal 1998, $4,573,000 during
fiscal 1999 and $2,589,000 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 operating needs for the next twelve months.
SUMMARY AND OUTLOOK
In September 1995, the Company signed a four-year extension to its
November 26, 1991 license agreement with Buena Vista Home Video giving the
Company exclusive laserdisc license and distribution rights to Walt Disney,
Touchstone, Hollywood Pictures, Buena Vista Home Video and Miramax programming
through December 31, 1999.
The Company continues to license new programming for laserdisc
distribution as well as seek to renew and extend relationships with existing
studios as distribution and/or license agreements mature. The Company believes
the laserdisc industry will continue its growth through the turn of the century.
In addition to its laserdisc licensing and distribution, the Company
continues to seek investment opportunities in growth oriented companies
complementary to the Company's existing operations, such as proprietary content
production or software distribution businesses. Should suitable investment
opportunities arise that would require funds in excess of those provided by
operations and availability under the Company's revolving credit facility,
additional financing sources may be sought.
15
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The consolidated financial statements as of December 31, 1995 and for
the three- and nine-month periods ended December 31, 1995 and 1994 in this Form
10-Q have been reviewed by KPMG Peat Marwick LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review
follows.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Image Entertainment, Inc.
We have reviewed the condensed consolidated balance sheet of Image
Entertainment, Inc. as of December 31, 1995, and the related condensed
consolidated statements of operations and cash flows for the three and nine
month periods ended December 31, 1995 and 1994 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. All information included in these financial
statements is the representation of the management of Image Entertainment, Inc.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with general accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Image Entertainment, Inc. as of March 31, 1995,
and the related statements of operations and cash flows for the year then ended
(not presented herein); and in our report dated June 6, 1995, except for Note
14, which was as of June 8, 1995, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of March 31, 1995, is fairly presented,
in all material respects, in relation to the balance sheet from which it has
been derived.
/s/KPMG PEAT MARWICK LLP
Los Angeles, California
February 1, 1996
17
<PAGE>
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
-----------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES.
---------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not Applicable
ITEM 5. OTHER INFORMATION.
-----------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
See Exhibit Index on page 20
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.
Date: February 12, 1996 By: /s/ MARTIN W. GREENWALD
-----------------------
Martin W. Greenwald
Chairman of the Board,
Chief Executive Officer,
President and Treasurer
Date: February 12, 1996 By: /s/ JEFF M. FRAMER
------------------
Jeff M. Framer
Chief Financial Officer
19
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
10.1* 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 and form of
Intercreditor Agreement dated as of _______, 199__ by and
between _______________ and _____________.
15* Letter re unaudited interim financial information.
27* Financial Data Schedule.
</TABLE>
* EXHIBIT(S) NOT PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
20
<PAGE>
EXHIBIT 10.1
AMENDMENT NUMBER ONE TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment")
is entered into as of October 31, 1995, by and between Foothill Capital
Corporation, a California corporation ("Foothill"), on the one hand, and Image
Entertainment, Inc., a California corporation ("Borrower"), with reference to
the following facts:
A. Foothill and Borrower heretofore have entered into that certain Loan
and Security Agreement, dated as of November 15, 1994 (the
"Agreement");
B. Borrower has requested Foothill to amend the Agreement to, among other
things, add specified portions of eligible accounts and eligible
inventory of Borrower's wholly-owned subsidiary, U.S. Laser Video
Distributors, Inc., a New Jersey corporation ("USLVD"), to the
Borrowing Base, as set forth in this Amendment;
C. Foothill is willing to so amend the Agreement in accordance with the
terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill and Borrower hereby agree as follows:
1. Amendments to the Agreement.
---------------------------
a. The definition of "Accounts" in Section 1.1 of the Agreement hereby
is deleted in its entirety and the following hereby is substituted in lieu
thereof:
"Accounts" means all currently existing and hereafter arising
--------
accounts and all other forms of obligations owing to Borrower or USLVD
arising out of the sale or lease of goods or the rendition of services by
Borrower or USLVD, irrespective of whether earned by performance, and any
and all credit insurance, guaranties, or security therefor.
b. The definition of "Change of Control" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Change of Control" shall be deemed to have occurred at such time as
-----------------
(a) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, but exclusive of Image
Investors Co., so long as it continues to be owned and controlled by
Messrs. John W. Kluge and Stuart Subotnick, or their respective heirs)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of more than 25%
of the total voting power of all classes of stock then outstanding of
Borrower normally entitled to vote in the election of directors; or (b)
Borrower ceases to own 100% of the issued and outstanding capital stock of
USLVD or ceases to own 100% of the total voting power of all classes of
stock then outstanding of USLVD normally entitled to vote in the election
of directors.
1
<PAGE>
c. The definition of "Collateral" in Section 1.1 of the Agreement
hereby is deleted in its entirety and the following hereby is substituted
in lieu thereof:
"Collateral" means each of the following: the Accounts of Borrower;
----------
Borrower's Books; the Equipment; the General Intangibles; the Inventory of
Borrower; the Negotiable Collateral; any money, or other assets of Borrower
which now or hereafter come into the possession, custody, or control of
Foothill; and the proceeds and products, whether tangible or intangible, of
any of the foregoing including proceeds of insurance covering any or all of
the Collateral, and any and all Accounts of Borrower, Equipment, General
Intangibles, Inventory of Borrower, Negotiable Collateral, money, deposit
accounts, or other tangible or intangible, real or personal, property
resulting from the sale, exchange, collection, or other disposition of the
Collateral, or any portion thereof or interest therein, and the proceeds
thereof.
d. The definition of "Dilution Reserve" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby are
substituted in lieu thereof:
"Dilution Reserve (Borrower)" means, as of the date of any
---------------------------
determination, an amount equal to (a) the amount of Eligible Borrower
Accounts, times (b) the amount (expressed as a percentage and calculated
based upon the prior twelve month period) of Borrower's Accounts which were
the subject of credit memoranda and other dilution in excess of fifteen
percent (15%).
"Dilution Reserve (USLVD)" means, as of the date of any
------------------------
determination, an amount equal to (a) the amount of Eligible USLVD
Accounts, times (b) the amount (expressed as a percentage and calculated
based upon the prior twelve month period) of USLVD's Accounts which were
the subject of credit memoranda and other dilution in excess of fifteen
percent (15%).
e. The definition of "Eligible Accounts" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Eligible Accounts" means Eligible Borrower Accounts and Eligible
-----------------
USLVD Accounts.
f. The definition of "Eligible Inventory" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Eligible Inventory" means Inventory consisting of first quality
------------------
laserdisc finished goods held for sale in the ordinary course of Borrower's
and USLVD's respective businesses, that are located at Borrower's and
USLVD's respective premises identified on Schedule E-1, are acceptable to
------------
Foothill in the exercise of its reasonable credit judgment, and strictly
comply with all of Borrower's representations and warranties to Foothill.
Eligible Inventory shall not include Exclusive Inventory, slow moving or
obsolete items, restrictive or custom items, work-in-process, packaging
(including laserdisc "jackets") and shipping materials, supplies used or
consumed in Borrower's or USLVD's respective businesses, Inventory at any
location other than those set forth on Schedule E-1, Inventory subject to a
------------
security interest or lien in favor of any third Person (including security
interests or liens in favor of any lessor or bailee, unless and only so
long as a landlord waiver or
2
<PAGE>
bailee agreement between Foothill and such lessor or bailee (as the case
may be), in form and substance satisfactory to Foothill, is in full force
and effect), bill and hold goods, Inventory that is not subject to
Foothill's perfected security interests, defective goods, "seconds," and
Inventory acquired on consignment. Eligible Inventory shall be valued at
the lower of Borrower's or USLVD's, as the case may be, cost or market
value.
g. The definition of "Exclusive Inventory" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Exclusive Inventory" means Inventory that Borrower or USLVD has
-------------------
the exclusive right to manufacture or distribute wholesale.
h. The definition of "Foothill Expenses" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Foothill Expenses" means all reasonable: costs or expenses
-----------------
(including taxes, photocopying, notarization, telecommunication and
insurance premiums) required to be paid by Borrower or USLVD under any of
the Loan Documents that are paid or advanced by Foothill; documentation,
filing, recording, publication, appraisal (including periodic Collateral
appraisals), and search fees assessed, paid, or incurred by Foothill in
connection with Foothill's transactions with Borrower or USLVD; costs and
expenses incurred by Foothill in the disbursement of funds to Borrower (by
wire transfer or otherwise); charges paid or incurred by Foothill resulting
from the dishonor of checks; costs and expenses paid or incurred by
Foothill to correct any default or enforce any provision of the Loan
Documents, or in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale, or advertising to sell the
Collateral or the USLVD Collateral, or any portion thereof, irrespective of
whether a sale is consummated; costs and expenses paid or incurred by
Foothill in examining Borrower's Books or "Guarantor's Books" (as defined
in the Security Agreement); costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents; and attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection
with a "workout," a "restructuring," or an Insolvency Proceeding concerning
Borrower or USLVD), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
i. The definition of "FoxVideo" in Section 1.1 of the Agreement
hereby is deleted in its entirety and the following hereby is substituted in
lieu thereof:
"FoxVideo" means Twentieth Century Fox Home Entertainment, Inc.
--------
j. The definition of "FoxVideo Reserve" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"FoxVideo Reserve" means, as of the date of any determination, an
----------------
amount equal to (a) so long as Foothill's liens on and security interests
in the Collateral are fully perfected and an intercreditor agreement in
respect of the obligations and assets of Borrower, in form and substance
satisfactory to Foothill in its sole discretion, between Foothill and
FoxVideo is in full force and effect, zero, and (b) otherwise, (i) the
amount of accounts payable or Indebtedness owed by Borrower to FoxVideo,
minus (ii) the undrawn amount available to be drawn under one or more
-----
letters of credit obtained by Borrower for the benefit of FoxVideo
3
<PAGE>
with respect to repayment of the sums included in clause (b)(i) above,
minus (iii) forty-five percent (45%) of the value of Inventory composed of
-----
FoxVideo products that would be Eligible Inventory if it were not Exclusive
Inventory.
k. The definition of "Indebtedness" in Section 1.1 of the Agreement
hereby is deleted in its entirety and the following hereby is substituted in
lieu thereof:
"Indebtedness" means: (a) all obligations of Borrower or USLVD for
------------
borrowed money; (b) all obligations of Borrower or USLVD evidenced by
bonds, debentures, notes, or other similar instruments and all
reimbursement or other obligations of Borrower or USLVD in respect of
letters of credit, letter of credit guaranties, bankers acceptances,
interest rate swaps, controlled disbursement accounts, or other financial
products; (c) all obligations under capital leases; (d) all obligations or
liabilities of others of like kind and nature to those described in clauses
(a) through (c) above that are secured by a lien or security interest on
any property or asset of Borrower or USLVD, irrespective of whether such
obligation or liability is assumed; (e) any obligation of Borrower
guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-
made, discounted, or sold with recourse to Borrower) any indebtedness,
lease, dividend, letter of credit, or other obligation of any other Person;
and (f) any obligation of USLVD guaranteeing or intended to guarantee
(whether guaranteed, endorsed, co-made, discounted, or sold with recourse
to USLVD) any indebtedness, lease, dividend, letter of credit, or other
obligation of any other Person.
l. The definition of "Inventory" in Section 1.1 of the Agreement
hereby is deleted in its entirety and the following hereby is substituted in
lieu thereof:
"Inventory" means all present and future inventory in which Borrower
---------
or USLVD has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's and USLVD's
present and future raw materials, work in process, finished goods, and
packing and shipping materials, wherever located, and any documents of
title representing any of the above.
m. The definition of "License Agreements" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"License Agreements" means, collectively, the distribution and license
------------------
agreements, each as amended from time to time, pursuant to which licensors
have granted Borrower or USLVD the right, whether exclusive or non-
exclusive, to manufacture or distribute wholesale laserdisc programming.
n. The definition of "Loan Documents" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Loan Documents" means, collectively, this Agreement, the Blocked
--------------
Account Agreement, the Lockbox Agreement, the Capital Expenditure Loan
Note, the Trademark Security Agreement, the Guaranty, the Security
Agreement, the USLVD Copyright Security Agreement, the USLVD Trademark
Security Agreement, any note or notes executed by Borrower or USLVD and
payable to Foothill, and any other agreement entered into in connection
with this Agreement.
o. The definition of "Material Adverse Effect" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
4
<PAGE>
"Material Adverse Effect" means a material adverse effect upon (a) the
-----------------------
business, operations, properties, assets, prospects, or financial condition
of Borrower and USLVD, taken as a whole, or upon the value of the Eligible
Accounts or Eligible Inventory or the validity or priority of Foothill's
security interest therein, (b) the ability of Borrower to perform, or of
Foothill to enforce, the Obligations, or (c) the ability of USLVD to
perform, or of Foothill to enforce, the obligations of USLVD under the Loan
Documents to which USLVD is a party.
p. The definition of "Permitted Liens" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Permitted Liens" means: (a) liens for taxes, assessments or
---------------
governmental charges or claims the payment of which is not, at the time,
required to be paid by this Agreement or the Security Agreement or does not
constitute an Event of Default hereunder or thereunder; (b) statutory liens
of landlords and liens of carriers, warehousemen, mechanics, and
materialmen and other liens imposed by law incurred in the ordinary course
of business for sums not yet delinquent or the subject of a Permitted
Protest; (c) liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance,
and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money); (d) any attachment or judgment lien not
constituting an Event of Default hereunder or under the Security Agreement;
(e) leases or subleases granted to others not interfering in any material
respect with the ordinary conduct of the business of Borrower or USLVD; (f)
easements, rights-of-way, restrictions, minor defects, encroachments, or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the
business of Borrower or USLVD; (g) any interest or title of a lessor or
sublessor under any lease permitted by this Agreement; (h) liens arising
from UCC financing statements relating solely to leases permitted by this
Agreement; (i) liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties that are not delinquent
in connection with the importation of goods; (j) any interest (exclusive of
security interests or other consensual lien) or title of a licensor under
any License Agreement; (k) liens and security interests held by Foothill;
(l) liens and security interests set forth on Schedule P-1 attached
------------
hereto; (m) purchase money security interests and liens of lessors under
capital leases to the extent that the acquisition or lease of the
underlying asset was permitted under Section 7.9, and so long as the
-----------
security interest or lien only secures the purchase price of the asset; and
(n) so long as and to the extent that an intercreditor agreement (if any)
in the form of Exhibit I-1 attached hereto is in full force and effect
-----------
between Foothill and the beneficiary under a Permitted Vendor Guarantee,
subordinate liens in favor of such beneficiary granted by Borrower or by
USLVD to secure its obligations under that Permitted Vendor Guarantee.
q. The definition of "Permitted Protest" in Section 1.1 of the
Agreement hereby is deleted in its entirety and the following hereby is
substituted in lieu thereof:
"Permitted Protest" means the right of Borrower or USLVD to protest
-----------------
any lien, tax, rental payment, or other charge, other than any such lien or
charge that secures the Obligations or the obligations owing to Foothill
under any Loan Document, provided (i) a reserve with respect to the
obligation underlying such lien, tax, rental payment, or other charge, is
established on the books of Borrower or USLVD, as the case may be, in an
amount that is required by GAAP, (ii) any such protest is instituted and
diligently prosecuted by Borrower or USLVD, as the case may be, in good
faith, and (iii) Foothill is satisfied that, while
5
<PAGE>
any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the liens or security
interests of Foothill in and to the property or assets of Borrower or
USLVD.
r. Section 1.1 of the Agreement hereby is amended by adding the
following new defined terms in alphabetical order:
"Eligible Borrower Accounts" means those Accounts, net of finance
--------------------------
charges, created by Borrower in the ordinary course of business that arise
out of Borrower's sale of goods or rendition of services, that strictly
comply with all of Borrower's representations and warranties to Foothill.
Eligible Borrower Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within
ninety (90) days of the due date set forth in the invoice or Accounts with
selling terms of more than seventy-five (75) days and all Accounts owed by
an Account Debtor that has failed to pay fifty percent (50%) or more of its
Accounts owed to Borrower or USLVD within ninety (90) days of the due date
set forth in the invoice;
(b) Accounts with respect to which the Account Debtor is an
officer, employee, Affiliate, or agent of Borrower or USLVD;
(c) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the Account Debtor
may be conditional;
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States or Canada, and which are not either (i)
covered by credit insurance in form and amount, and by an insurer,
satisfactory to Foothill, or (ii) supported by one or more letters of
credit that are assignable by their terms and have been delivered to
Foothill in an amount, of a tenor, and issued by a financial institution,
acceptable to Foothill;
(e) Accounts with respect to which the Account Debtor is the
United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Foothill, with the Assignment of Claims
Act, 31 U.S.C. (S) 3727);
(f) Accounts with respect to which Borrower or USLVD is or may
become liable to the Account Debtor for goods sold or services rendered by
the Account Debtor to Borrower or USLVD (exclusive, however, of Accounts
with respect to which Borrower or USLVD shall have obtained an agreement,
in form and substance satisfactory to Foothill, from the Account Debtor
agreeing to waive its rights of offset as against Foothill);
(g) Accounts with respect to an Account Debtor whose total
obligations owing to Borrower or USLVD, as the case may be, exceed fifteen
percent (15%) of all Eligible Borrower Accounts or all Eligible USLVD
Accounts, as the case may
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<PAGE>
be, to the extent of the obligations owing by such Account Debtor in excess
of such percentage; provided, however, in the case of Accounts with respect
-------- -------
to which Musicland Group, Inc. is the Account Debtor, Eligible Accounts
shall not include Accounts thereof owing to Borrower to the extent that the
total obligations of Musicland Group, Inc. owing to Borrower exceed twenty-
five percent (25%) of all Eligible Borrower Accounts;
(h) Accounts arising from rebilling or chargebacks with respect
to short billing on prior invoices;
(i) Accounts with respect to which the Account Debtor disputes
liability or makes any claim with respect thereto (to the extent of the
amount of the dispute or claim), or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts that are payable in other than United States
Dollars; and
(l) Accounts that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower or
USLVD of the subject contract for goods or services.
"Eligible USLVD Accounts" means those Accounts that do not qualify as
-----------------------
Eligible Borrower Accounts solely because they are created by USLVD instead
of by Borrower and relate to the Account Debtors of USLVD instead of
Borrower; provided, however, in the case of Accounts with respect to which
-------- -------
Trans World Music Corporation ("TWMC") is the Account Debtor, Eligible
Accounts shall not include Accounts thereof owing to USLVD to the extent
that the total obligations of TWMC owing to USLVD exceed thirty percent
(30%) of all Eligible USLVD Accounts.
"First Amendment" means that certain Amendment Number One to Loan
---------------
and Security Agreement, dated as of October __, 1995, between Foothill and
Borrower.
"First Amendment Closing Date" means October __, 1995.
----------------------------
"Guaranty" means, that certain General Continuing Guaranty by USLVD in
--------
favor of Foothill, in form and substance satisfactory to Foothill in its
sole and absolute discretion.
"Lockbox Account" shall mean the depositary account established
---------------
pursuant to the Lockbox Agreement.
"Lockbox Agreement" means that certain Lockbox Operating Procedural
-----------------
Agreement, in form and substance satisfactory to Foothill, among USLVD,
Foothill, and the Lockbox Bank.
"Lockbox Bank" means Midlantic National Bank.
------------
7
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"Permitted Vendor Guarantees" means, collectively, (a) guarantees
---------------------------
by Borrower in favor of WEA, UNI Distribution Corp., and Pioneer LDCA,
Inc., (b) guarantees by Borrower in favor of such other sellers of
laserdisc finished goods Inventory to USLVD that Foothill may approve in
its sole discretion, and (c) the guarantee by USLVD in favor of WEA.
"Security Agreement" means, that certain Security Agreement between
------------------
USLVD and Foothill, in form and substance satisfactory to Foothill in its
sole and absolute discretion.
"USLVD" means U.S. Laser Video Distributors, Inc., a New Jersey
-----
corporation and wholly-owned Subsidiary of Borrower.
"USLVD Collateral" means the "Collateral" as defined in the USLVD
----------------
Security Agreement.
"USLVD Copyright Security Agreement" means, that certain Copyright
----------------------------------
Security Agreement between USLVD and Foothill, in form and substance
satisfactory to Foothill in its sole and absolute discretion.
"USLVD Trademark Security Agreement" means, that certain Trademark
----------------------------------
Security Agreement between USLVD and Foothill, in form and substance
satisfactory to Foothill in its sole and absolute discretion.
"WEA" means Warner/Elektra/Atlantic Corporation.
---
s. Subsections (a) and (b) of Section 2.1 of the Agreement hereby are
deleted in their entirety and the following hereby is substituted in lieu
thereof:
2.1 REVOLVING ADVANCES. (a) Subject to the terms and conditions of
this Agreement, Foothill agrees to make revolving advances to Borrower in
an amount at any one time outstanding not to exceed the Borrowing Base less
the undrawn or unreimbursed amount of L/Cs and L/C Guarantees outstanding
hereunder. For purposes of this Agreement, "Borrowing Base," as of any
date of determination, shall mean an amount equal to the sum of:
(i) an amount equal to the sum of
(v) the lesser of
(1) seventy five percent (75%) of the amount of Eligible
Borrower Accounts
less (A) the amount, if any, of the Dilution Reserve
----
(Borrower), and
less (B) the amount, if any, of the FoxVideo Reserve,
----
and
8
<PAGE>
(2) an amount equal to Borrower's collections with respect
to Accounts for the immediately preceding seventy-five (75)
day period;
plus, so long as a landlord waiver between Foothill and USLVD's
----
landlord in New Jersey, in form and substance satisfactory to
Foothill, is in full force and effect,
(w) the lowest of
(1) seventy five percent (75%) of the amount of Eligible
USLVD Accounts, less the amount, if any, of the Dilution
----
Reserve (USLVD), and
(2) Five Million Dollars ($5,000,000) and
(3) an amount equal to USLVD's collections with respect to
Accounts for the immediately preceding seventy-five (75) day
period;
plus
----
(ii) an amount equal to the lowest of
(x) forty five percent (45%) of the value of Eligible Inventory,
(y) seventy five percent (75%) of the amount of credit
availability created by Section 2.1(a)(i) (it being understood
-----------------
that in calculating the credit availability under this clause, all
Obligations shall be deemed to have been advanced or issued
against Eligible Accounts to the maximum extent of availability
against Eligible Accounts), and
(z) Five Million Dollars ($5,000,000).
(b) Anything to the contrary in Section 2.1(a) above
--------------
notwithstanding, upon the occurrence and during the continuance of an Event
of Default Foothill may reduce its advance rates based upon Eligible
Accounts or Eligible Inventory without declaring an Event of Default if it
determines, in its reasonable discretion, that there is a material
impairment of the prospect of repayment of all or any portion of the
Obligations or a material impairment of the value or priority of Foothill's
security interests in the Collateral or the USLVD Collateral.
t. Section 2.6 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. From and after
the Closing Date (and, in respect of USLVD, from and after the First
Amendment Closing Date),
9
<PAGE>
Foothill shall be entitled to charge Borrower for one (1) Business Day of
`clearance' at the rate set forth in Section 2.5(a)(i) or Section
----------------- -------
2.5(b)(i), as applicable, on all collections, checks, wire transfers, or
---------
other items of payment that are received by Foothill (regardless of whether
received from the Blocked Account or the Lockbox Account, from Borrower or
USLVD, or otherwise). This across-the-board one (1) Business Day clearance
charge on all receipts is acknowledged by the parties to constitute an
integral aspect of the pricing of Foothill's facility to Borrower, and
shall apply irrespective of the characterization of whether receipts are
owned by Borrower, USLVD, or Foothill, and irrespective of the level of
Borrower's Obligations to Foothill. Should any check or item of payment
applied on account of the Obligations not be honored when presented for
payment, then Borrower shall be deemed not to have made such payment, and
interest shall be recalculated accordingly. Anything to the contrary
contained herein notwithstanding, any wire transfer, check, or other item
of payment shall be deemed received by Foothill only if it is received into
Foothill's Operating Account (as such account is identified in the Blocked
Account Agreement or the Lockbox Agreement) on or before 11:00 a.m. Los
Angeles time. If any wire transfer, check, or other item of payment is
received into Foothill's Operating Account after 11:00 a.m. Los Angeles
time it shall be deemed to have been received by Foothill as of the opening
of business on the immediately following Business Day.
u. Section 4.3 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, NEGOTIABLE
COLLATERAL. (a) On or before the Closing Date, Foothill, Borrower, and the
Blocked Account Bank shall enter into the Blocked Account Agreement, in
form and substance satisfactory to Foothill in its sole discretion,
pursuant to which all of the proceeds of Borrower's cash receipts, checks,
and other items of payment (including, insurance proceeds, proceeds of cash
sales, rental proceeds, and tax refunds) will be forwarded to Foothill on a
daily basis. Borrower agrees that it will continue to consolidate its
receipts into the Blocked Account on each banking day and will not fail to
consolidate its receipts into the Blocked Account on any banking day
without the prior written consent of Foothill. At any time that an Event
of Default has occurred and is continuing, Foothill may: (a) notify
customers or Account Debtors of Borrower that the Accounts, General
Intangibles, or Negotiable Collateral have been assigned to Foothill or
that Foothill has a security interest therein; and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral directly and
charge the collection costs and expenses to Borrower's loan account.
Borrower agrees that it will hold in trust for Foothill, as Foothill's
trustee, any cash receipts, checks, and other items of payment (including,
insurance proceeds, proceeds of cash sales, rental proceeds, and tax
refunds) that it receives and immediately will deliver said cash receipts,
checks, and other items of payment to Foothill in their original form as
received by Borrower.
(b) On or before the First Amendment Closing Date, Foothill,
USLVD, and the Lockbox Bank shall enter into the Lockbox Agreement, in form
and substance satisfactory to Foothill in its sole discretion, pursuant to
which all of USLVD's cash receipts, checks, and other items of payment
(including, insurance proceeds, proceeds of cash sales, rental proceeds,
and tax refunds) that are received by the Lockbox Bank are to be forwarded
by the Lockbox Bank to Foothill on a daily basis. At any time that an
Event
10
<PAGE>
of Default has occurred and is continuing, Foothill or Foothill's designee
may: (a) notify customers or Account Debtors of USLVD that the Accounts,
General Intangibles, or Negotiable Collateral have been assigned to
Foothill or that Foothill has a security interest therein; and (b) collect
the Accounts, General Intangibles, and Negotiable Collateral directly and
charge the collection costs and expenses to Borrower's loan account.
Borrower agrees that it will cause USLVD to hold, in trust for Foothill, as
Foothill's trustee, any cash receipts, checks, and other items of payment
(including, insurance proceeds, proceeds of cash sales, rental proceeds,
and tax refunds) that USLVD receives and cause USLVD immediately to deliver
said cash receipts, checks, and other items of payment to Foothill in their
original form as received by USLVD.
v. Section 4.4 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon
the request of Foothill, Borrower shall, and shall cause USLVD to, execute
and deliver to Foothill all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
pledges, assignments, endorsements of certificates of title, applications
for title, affidavits, reports, notices, pledgeholder agreements, schedules
of accounts, letters of authority, and all other documents that Foothill
may reasonably request, in form satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the Collateral or the
USLVD Collateral, and in order to fully consummate all of the transactions
contemplated hereby and under the other Loan Documents. The foregoing
shall be deemed to include and Borrower hereby agrees that it will, or
cause USLVD to, execute and deliver appropriate mortgages, deeds of trust,
or collateral assignments with respect to any real property interests or
estates acquired after the Closing Date.
w. Section 5.6 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
5.6 LOCATION OF CHIEF EXECUTIVE OFFICES OF BORROWER AND OF USLVD;
FEINS. (a) The chief executive office of Borrower is located at the address
indicated in the preamble to this Agreement and Borrower's FEIN is 84-
0685613; provided, however, that if Borrower changes the location of its
-------- -------
chief executive office or FEIN in accordance with the provisions of Section
-------
7.4, then this Section 5.6(a) automatically shall be deemed changed to
--- --------------
reflect the new location or FEIN.
(b) The chief executive office of USLVD is located at the address
indicated in the preamble to the Security Agreement and USLVD's FEIN is 22-
3380067; provided, however, that if USLVD changes the location of its chief
-------- -------
executive office or FEIN in accordance with the provisions of Section 7.4,
-----------
then this Section 5.6(b) automatically shall be deemed changed to reflect
--------------
the new location or FEIN.
x. Section 5.7 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
11
<PAGE>
5.7 DUE ORGANIZATION AND QUALIFICATION; NO SUBSIDIARIES. Borrower is
duly organized and existing and in good standing under the laws of
California. USLVD is duly organized and existing and in good standing
under the laws of New Jersey. Each of Borrower and USLVD is qualified and
licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified could reasonably be expected to have
a material adverse effect on the business, operations, condition (financial
or otherwise), finances, or prospects of Borrower or USLVD, as the case may
be, or on the value of the Collateral or the USLVD Collateral, as the case
may be, to Foothill. Borrower has no subsidiaries other than USLVD. USLVD
has no subsidiaries.
y. Section 5.14 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
5.14 RELIANCE BY FOOTHILL; CUMULATIVE. Each warranty and
representation contained in this Agreement and the other Loan Documents
automatically shall be deemed repeated with each advance, Capital
Expenditure Loan, or issuance of an L/C or L/C Guaranty and shall be
conclusively presumed to have been relied on by Foothill regardless of any
investigation made or information possessed by Foothill. The warranties
and representations set forth herein shall be cumulative and in addition to
any and all other warranties and representations that Borrower or USLVD now
or hereafter shall give, or cause to be given, to Foothill.
z. A new Section 5.15 hereby is added to the Agreement as follows:
5.15 PERMITTED VENDOR GUARANTEES. (a) Borrower has delivered to
Foothill a true, correct, and complete copy of each Permitted Vendor
Guarantee (as amended or modified) and there exists no default thereunder.
(b) As of the First Amendment Closing Date, neither Borrower nor
USLVD has executed or delivered any security agreement or financing
statement in respect of its assets in favor of any Person (other than
Borrower or USLVD, as the case may be) party to a Permitted Vendor
Guarantee or any Affiliate of such Person.
(c) In respect of the Permitted Vendor Guarantees in favor of
WEA: (i) neither Borrower nor USLVD understands or intends the last
paragraph of its respective Permitted Vendor Guarantee to be a grant of a
security interest; and (ii) neither Borrower nor USLVD has put any assets
or other property of Borrower or USLVD into the possession or control of
WEA or any other Person as agent or bailee for WEA.
aa. The lead-in sentence of Section 6 of the Agreement hereby is
deleted in its entirety and the following hereby is substituted in lieu thereof:
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the Obligations,
and unless Foothill shall otherwise consent in writing, Borrower shall do,
and shall cause USLVD to do, all of the following:
12
<PAGE>
bb. The lead-in sentence of Section 7 of the Agreement hereby is
deleted in its entirety and the following hereby is substituted in lieu thereof:
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the Obligations,
Borrower will not do, and will not cause, suffer, or permit USLVD to do,
any of the following without Foothill's prior written consent:
cc. All references in Sections 4.5 (Power of Attorney), 4.6 (Right to
Inspect), 5.1 (No Prior Encumbrances), 5.2 (Eligible Accounts), 5.3 (Eligible
Inventory), 5.4 (Location of Inventory and Equipment), 5.5 (Inventory Records),
5.8 (Due Authorization; No Conflict), 5.9 (Litigation), 5.11 (Solvency), 6.1
(Accounting System), 6.2 (Collateral Reports), 6.3 (Schedule of Accounts), 6.6
(Designation of Inventory), 6.7 (Returns), 6.10 (Taxes), 6.11 (Insurance), 6.13
(No Setoffs or Counterclaims), 6.14 (Location of Inventory and Equipment), 6.15
(Compliance with Laws), 6.17 (Leases), 6.18 (License Agreements), 7.4 (Change
Name), 7.6 (Restructure), 7.10 (Consignments), the first sentence of Section
7.11 (Distributions), 7.12 (Accounting Methods), 7.14 (Transactions with
Affiliates), 7.17 (Change in Location of Chief Executive Office; Inventory and
Equipment with Bailees), 8.5, 8.6, 8.7, 8.9, 8.10, 8.11, 8.12, 9.1(c), (d), (e),
(f), (g), (h), (i), (j), (k), and (m), and 11.2 of the Agreement to (i)
Borrower, or (ii) the Collateral, shall be deemed references, respectively, to
(i) Borrower or USLVD, as the case may be, or (ii) the Collateral or the USLVD
Collateral, as the case may be.
dd. Section 7.5 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
7.5 GUARANTEE. Other than Permitted Vendor Guarantees, guarantee or
otherwise become in any way liable with respect to the obligations of any
third Person except by endorsement of instruments or items of payment for
deposit to the account of Borrower or USLVD, as the case may be, or which
are transmitted or turned over to Foothill.
ee. A new Section 7.19 hereby is added to the Agreement as follows:
7.19 LIENS IN RESPECT OF PERMITTED VENDOR GUARANTIES. (a) Cause,
suffer, or permit a security agreement or financing statement to be
executed, delivered, filed, or recorded in respect of its assets in favor
of any Person (other than Borrower or USLVD, as the case may be) party to a
Permitted Vendor Guarantee or any Affiliate of such Person unless an
Intercreditor Agreement in the form of Exhibit I-1 attached hereto is
-----------
executed and delivered to Foothill and the same is in full force and effect
between Foothill and such Person or Affiliate thereof; and (b) cause,
suffer, or permit any assets or other property of Borrower or USLVD to be
put into the possession or control of WEA or any other Person as agent or
bailee for WEA.
ff. Section 8.8 of the Agreement hereby is deleted in its entirety and
the following hereby is substituted in lieu thereof:
8.8 (a)(i) If a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's properties or assets by the United
States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or
13
<PAGE>
governmental agency, or if any taxes or debts owing at any time hereafter
to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any of Borrower's properties or assets and, in any such
case, the aggregate amount of such taxes or debts is in excess of Twenty
Five Thousand Dollars ($25,000) and less than Two Hundred Fifty Thousand
Dollars ($250,000) and within five (5) days of the filing or attachment of
same, Borrower does not instruct Foothill to reserve the entire amount
thereof (together with interest and penalties projected to be added
thereto) from the Borrowing Base; or (ii) If a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's properties
or assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or
governmental agency, or if any taxes or debts owing at any time hereafter
to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any of Borrower's properties or assets and, in any such
case, the aggregate amount of such taxes or debts is in equal to or in
excess of Two Hundred Fifty Thousand Dollars ($250,000);
(b)(i) If a notice of lien, levy, or assessment is filed of
record with respect to any of USLVD's properties or assets by the United
States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, or if any taxes
or debts owing at any time hereafter to any one or more of such entities
becomes a lien, whether choate or otherwise, upon any of USLVD's properties
or assets and, in any such case, the aggregate amount of such taxes or
debts is in excess of Twenty Five Thousand Dollars ($25,000) and less than
Two Hundred Fifty Thousand Dollars ($250,000) and within five (5) days of
the filing or attachment of same, Borrower does not instruct Foothill to
reserve the entire amount thereof (together with interest and penalties
projected to be added thereto) from the Borrowing Base; or (ii) If a notice
of lien, levy, or assessment is filed of record with respect to any of
USLVD's properties or assets by the United States Government, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, or if any taxes or debts owing at any
time hereafter to any one or more of such entities becomes a lien, whether
choate or otherwise, upon any of USLVD's properties or assets and, in any
such case, the aggregate amount of such taxes or debts is in equal to or in
excess of Two Hundred Fifty Thousand Dollars ($250,000);
gg. The period at the end of Section 8.14 hereby is changed to
";" and a new Section 8.15 hereby is added to the Agreement as follows:
8.15 If USLVD fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in any Loan
Document to which it is a party; or
hh. A new Section 8.16 hereby is added to the Agreement as follows:
8.15 If the obligation of USLVD under any Loan Document to which it
is a party is limited or terminated by operation of law or by USLVD.
2. Representations and Warranties. Borrower hereby represents and
------------------------------
warrants to Foothill that (a) the execution, delivery, and performance of this
Amendment and of the Agreement, as amended by this
14
<PAGE>
Amendment, are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected, and (b) this Amendment and the
Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and
binding obligation, enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of each of
---------------------------------
the following on or before, unless otherwise specified below, the First
Amendment Closing Date shall constitute conditions precedent to the
effectiveness of this Amendment:
a. Foothill shall have received copies of the Permitted Vendor
Guarantees, certified by the Secretary of Borrower to be true, correct, and
complete;
b. Foothill shall have received searches reflecting the filings
of its additional financing statements against Borrower in New Jersey and
against USLVD in New Jersey and California;
c. Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) the Lockbox Agreement;
(2) the Guaranty;
(3) the Security Agreement;
(4) the USLVD Copyright Security Agreement; and
(5) the USLVD Trademark Security Agreement;
d. Foothill shall have received a certificate from the
Secretary of Borrower attesting to the incumbency and signatures of authorized
officers of Borrower and to the resolutions of Borrower's Board of Directors
authorizing its execution and delivery of this Amendment and any other Loan
Documents to which it is a party contemplated in this Amendment and the
performance of this Amendment, the Agreement as amended by this Amendment, and
such other Loan Documents, and authorizing specific officers of Borrower to
execute and deliver the same;
e. Foothill shall have received a certificate from the
Secretary of USLVD attesting to the incumbency and signatures of authorized
officers of USLVD and to the resolutions of USLVD's Board of Directors
authorizing its execution and delivery of the Loan Documents to which it is a
party contemplated in this Amendment and the performance of such Loan Documents,
and authorizing specific officers of USLVD to execute and deliver the same;
f. Foothill shall have received true, correct, and complete
copies of the Bylaws and Articles or Certificate of Incorporation of USLVD, as
amended, and certified by the Secretary of USLVD
15
<PAGE>
g. Foothill shall have received a Certificate of the Secretary of
Borrower stating that the Bylaws and Articles or Certificate of Incorporation of
Borrower have not been amended since the Closing Date;
h. Foothill shall have received certificates of corporate
status with respect to USLVD, such certificates to be issued by the Secretary of
State of the state of incorporation of USLVD and each other state in which
USLVD's failure to be duly qualified or licensed would have a material adverse
effect on the financial condition or properties or assets of USLVD, which
certificates shall indicate that USLVD is in good standing in such state;
i. Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill in its sole discretion;
j. The representations and warranties in this Amendment, the
Agreement as amended by this Amendment, and the other Loan Documents shall be
true and correct in all respects on and as of the date hereof, as though made on
such date (ex-cept to the extent that such representations and warranties relate
solely to an earlier date);
k. No Event of Default or event which with the giving of notice
or passage of time would constitute an Event of Default shall have occurred and
be continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein;
l. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower, USLVD, Foothill, or any of their
respective Affiliates;
m. The Collateral and the USLVD Collateral shall not have
declined materially in value from the values set forth in the most recent
appraisals or field examinations previously done by Foothill; and
n. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance satisfactory to Foothill
and its counsel.
4. Effect on Agreement. The Agreement, as amended hereby, shall be
-------------------
and remain in full force and effect in accordance with its respective terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
5. Further Assurances. Borrower shall, and shall cause USLVD to,
------------------
execute and deliver all agreements, documents, and instruments, in form and
substance satisfactory to Foothill, and take all actions as Foothill may
reasonably request from time to time, to perfect and maintain the perfection and
priority of Foothill's security interests in the Collateral and the USLVD
Collateral, and to fully consummate the transactions contemplated under this
Amendment and the Agreement, as amended by this Amendment.
6. Miscellaneous.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
16
<PAGE>
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof"
or words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. (i) Upon the effectiveness of this Amendment, each reference in the
Agreement and the other Loan Documents to Schedule E-1, Schedule 5.9, and
------------ ------------
Schedule 6.14 of the Agreement shall mean and refer to such schedules as
- -------------
supplemented by the "Schedule E-1 Addendum", the "Schedule 5.9 Addendum", and
the "Schedule 6.15 Addendum", respectively, attached hereto; and (ii) upon the
effectiveness of this Amendment, each reference in the Agreement and the other
Loan Documents to Exhibit I-1 to the Agreement shall mean and refer to Exhibit
----------- -------
I-1 to this Amendment.
- ---
d. This Amendment shall be governed by and construed in accordance
with the laws of the State of California.
[remainder of page intentionally left blank]
17
<PAGE>
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By____________________________
Title:________________________
IMAGE ENTERTAINMENT, INC., a California corporation
By____________________________
Title:________________________
Acknowledged and agreed:
U.S. LASER VIDEO DISTRIBUTORS, INC.,
a New Jersey corporation
By____________________________
Title:________________________
18
<PAGE>
[attach copies of Exhibit I-1 and
addenda to Schedules E-1, 5.9, and 6.14]
19
<PAGE>
SCHEDULE E-1
LOCATION OF ELIGIBLE INVENTORY
U.S. Laser Video Distributors, Inc.
warehouse located at
3-A Oak Road
Fairfield, New Jersey
07004-2903
20
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE 5.9
- --------------------------------------------------------------------------------
LITIGATION
U.S. Laser Video Distributors
Plaintiff: Washburn Graphics, Inc.
Defendant: U.S. Laser (formerly, V.T. Laser, Inc.)
Docket #: SL-00011121-94
Venue: Essex County Superior Court
465 Martin Luther King Jr. Boulevard
Newark, New Jersey 07102
Amount: approx. $7,000.00
Claim: dispute over printing costs
Events: a default judgement was entered against U.S. Laser which U.S. Laser
is seeking to have set aside
- --------------------------------------------------------------------------------
LITIGATION
Image Entertainment, Inc.
Plaintiff: William Linton
Defendant: Image Entertainment, Inc.
Docket #: SC032078
Venue: Superior Court for the State of California for the County of
Los Angeles
Amount: currently indeterminable
Claim: breach of contract
Events: deposition of plaintiff initiated, first mediation conference
pending
21
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE 6.14
- --------------------------------------------------------------------------------
LOCATION OF INVENTORY AND EQUIPMENT
U.S. Laser Video Distributors, Inc.
offices and warehouse located at
3-A Oak Road
Fairfield, New Jersey
07004-2903
22
<PAGE>
INTERCREDITOR AGREEMENT
-----------------------
THIS INTERCREDITOR AGREEMENT (this "Agreement"), dated as of
____________, 199_, is entered into between Junior Creditor and Foothill and is
acknowledged and consented to by Obligor.
W I T N E S S E T H :
WHEREAS, Obligor and Foothill have entered into the Loan Agreement and
various other related documents, instruments, or agreements (collectively, the
"Foothill Agreements");
WHEREAS, to secure the obligations owed to Foothill under the Foothill
Agreements, Obligor has granted to Foothill security interests in and liens on
the Collateral and certain other Assets of Obligor;
WHEREAS, the Foothill Agreements prohibit Obligor, among other things,
from making guaranties in favor of third parties, and from granting, or
permitting or suffering the existence of, security interests in and liens on the
Collateral and the other Assets of Obligor in favor of third parties (except as
permitted by the Foothill Agreements);
WHEREAS, Obligor has entered, or intends to enter, into certain
guaranties and other related documents in favor of Junior Creditor
(collectively, the "Junior Creditor Agreements");
WHEREAS, as a condition precedent to Foothill's agreement to permit
Obligor to enter into, or to permit the existence and continuance of, such
guaranties in favor of Junior Creditor, Junior Creditor is required to execute
and deliver this Agreement to Foothill; and
WHEREAS, Junior Creditor and Foothill desire to agree to (x) the
relative priority of their respective Claims, (y) if and to the extent Junior
Creditor has or may in the future have security interests in or liens on the
Collateral notwithstanding the Foothill Agreements, the relative priority of
their security interests in and liens on the Collateral and (z) certain other
rights, priorities, and interests.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration,
Junior Creditor and Foothill hereby agree as follows, and Obligor hereby
acknowledges and consents to the following:
7. DEFINITIONS; CONSTRUCTION.
-------------------------
(a) DEFINITIONS. As used herein the following initially
-----------
capitalized terms shall have the indicated definitions:
"Accounts" means all present and future (a) "accounts" (as defined in
--------
the UCC) of Obligor, and (b) other rights to payment of Obligor arising from any
sale or lease of goods (including Inventory) or provision of services, or from
any agreement relating to same, including in each instance any related claims on
guaranties or against providers of credit support, irrespective of whether any
of the foregoing are evidenced by an instrument or chattel paper, and
irrespective of whether any of the foregoing are secured, together with all
merchandise returned to or reclaimed by such Obligor relating to any of the
foregoing.
23
<PAGE>
"Agreement" means this Intercreditor Agreement, as it may be amended,
---------
supplemented, or modified from time to time in accordance with the provisions
hereof.
"Asset" means any interest of Obligor in any kind of property or
-----
asset, whether real, personal, or mixed real and personal, or whether tangible
or intangible.
"Bankruptcy Code" means the federal bankruptcy law of the United
---------------
States as from time to time in effect, currently as Title 11 of the United
States Code. Section references to current sections of the Bankruptcy Code
shall refer to comparable sections of any revised version thereof if section
numbering is changed.
"Books and Records" means all of Obligor's books and records
-----------------
including: ledgers; records indicating, summarizing, or evidencing Obligor's
assets or liabilities, or the Collateral; all information relating to Obligor's
business operations or financial condition; and all computer programs, disc or
tape files, printouts, runs, or other computer prepared information, and those
items of equipment that contain or store such information.
"Business Day" means any day, other than a Saturday or Sunday, that
------------
commercial banks in general are open for the transaction of commercial banking
business in Los Angeles, California.
"Claimants" means Foothill or Junior Creditor.
---------
"Claims" means the Foothill Claim or the Junior Creditor Claim.
------
"Collateral" means any and all Assets, whether tangible or intangible,
----------
in which Obligor now or hereafter has any right, title, or interest, and in
which either or both of Foothill or Junior Creditor from time to time has or may
have any lien or security interest, consisting of the following:
(1) the Accounts, (2) the Books and Records, (3) the Equipment, (4)
the General Intangibles, (5) the Inventory, (6) the Negotiable Collateral,
(7) the Money, and (8) the Proceeds.
"Credit Documents" means the Foothill Agreements and the Junior
----------------
Creditor Agreements.
"Enforcement Action" means, with respect to any Claimant and any Claim
------------------
thereof and with respect to any Asset of Obligor or any Collateral in which such
Claimant has or claims a security interest or lien (including consensual liens,
attachment liens, statutory liens, and judgment liens), any action, whether
judicial or nonjudicial, to assert, collect, or enforce such Claim or any
portion thereof, or to repossess, collect, offset, recoup, give notification to
third parties with respect to, sell, dispose of, foreclose upon, give notice of
sale, disposition, or foreclosure with respect to, retain in satisfaction of
debt, or obtain equitable or injunctive relief with respect to, such Asset or
Collateral.
"Equipment" means all of Obligor's present and hereafter acquired
---------
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
vehicles, tools, parts, dies, jigs, goods (other than consumer goods, farm
products, or Inventory), and any interest in any of the foregoing, wherever
located, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing, wherever
located; provided, however, that Equipment shall not include any Collateral
-------- -------
consisting of Inventory.
"Foothill" means Foothill Capital Corporation, a California
--------
corporation.
24
<PAGE>
"Foothill Agreements" has the meaning ascribed to such term in the
-------------------
recitals to this Agreement, and shall include any future amendments,
modifications, extensions, supplements, restatements, or replacements of any of
the Foothill Agreements.
"Foothill Claim" means any and all present and future "claims" (used
--------------
in its broadest sense, as contemplated by and defined in Section 101(5) of the
Bankruptcy Code, but without regard to whether such claim would be disallowed
under the Bankruptcy Code) of Foothill now or hereafter arising or existing
under or relating to the Foothill Agreements, whether joint, several, or joint
and several, whether fixed or indeterminate, due or not yet due, contingent or
non-contingent, matured or unmatured, liquidated or unliquidated, or disputed or
undisputed, whether under a guaranty or a letter of credit, and whether arising
under contract, in tort, by law, or otherwise, and including all credit advanced
or extended to or for the benefit of Obligor at any time (including any
indebtedness arising pursuant to debtor-in-possession financing arrangements or
pursuant to financing arrangements entered into in connection with the
confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy
Code), any interest or fees thereon (including interest or fees that accrue
after the filing of a petition by or against Obligor under the Bankruptcy Code,
irrespective of whether allowable under the Bankruptcy Code), any costs of
Enforcement Actions, including reasonable attorneys fees and costs, and any
prepayment or termination premiums; it being the parties' understanding and
agreement that Foothill and Obligor may increase the then extant maximum
aggregate principal amount of credit advanced to or extended for the benefit of
Obligor outstanding at any time, so long as, at the time of any proposed
increase, no event of default shall have occurred and be continuing under the
Junior Creditor Agreements.
"General Intangibles" means all present and future (1) general
-------------------
intangibles and other intangible personal property (including choses or things
in action, liens, or other rights arising by operation of law, whether by virtue
of common law, statutory law, or regulatory law) of Obligor, (2) deposit
accounts and rights of Obligor arising under or related to any contract,
including royalty or licensing agreements, (3) intellectual property rights of
Obligor, including copyrights, patents, trademarks, trade names, logos, service
marks, licenses, drawings, purchase orders, customer lists, route lists,
infringement claims, computer programs, computer discs, computer tapes,
literature, and reports, (4) claims of Obligor for tax refunds, insurance
premium refunds, and refunds relating to overfunding of benefit plans, (5)
plans, blueprints, drawings, specifications, designs, and trade secrets of
Obligor, and (6) Books and Records of Obligor, whether maintained on paper, as
computerized records, or otherwise; provided, however, that General Intangibles
-------- -------
shall not include any Collateral consisting of Accounts or Negotiable
Collateral.
"Inventory" means all present and future rights, title, and interest
---------
of Obligor with respect to, wherever located (a) any inventory, including goods
held for sale or lease or to be furnished under a contract of service, (b) raw
materials, work in process, and finished goods, (c) any models, molds, and
masters, (d) packing and shipping materials, and (e) any documents of title
representing any of the above. "Inventory" shall include all rights, title, and
interest of Obligor with respect to any inventory on consignment or
reconsignment to customers of such Obligor where no final sale has occurred from
such Obligor to the customer and the customer is not contractually obligated to
pay for the inventory and may elect to return the inventory to such Obligor.
"Junior Creditor" means ____________________________________________.
---------------
"Junior Creditor Agreements" has the meaning ascribed to such term in
--------------------------
the recitals to this Agreement, and shall include any future amendments,
modifications, extensions, supplements, restatements, or replacements of any of
the Junior Creditor Agreements.
"Junior Creditor Claim" means any and all present and future "claims"
---------------------
(used in its broadest sense, as contemplated by and defined in Section 101(5) of
the Bankruptcy Code, but without regard to whether such claim
25
<PAGE>
would be disallowed under the Bankruptcy Code) of Junior Creditor now or
hereafter arising or existing under or relating to the Junior Creditor
Agreements, whether joint, several, or joint and several, whether fixed or
indeterminate, due or not yet due, contingent or non-contingent, matured or
unmatured, liquidated or unliquidated, or disputed or undisputed, and whether
arising under contract, in tort, by law, or otherwise, and including all credit
advanced or extended to or for the benefit of Obligor at any time (including any
indebtedness arising pursuant to debtor-in-possession financing arrangements or
pursuant to financing arrangements entered into in connection with the
confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy
Code), any interest or fees thereon (including interest or fees that accrue
after the filing of a petition by or against Obligor under the Bankruptcy Code,
irrespective of whether allowable under the Bankruptcy Code), any costs of
Enforcement Actions, including reasonable attorneys fees and costs, and any
prepayment or termination premiums.
"Loan Agreement" means that certain Amended and Restated Loan and
--------------
Security Agreement, dated as of November 15, 1994, between Foothill and Obligor,
and shall include any future amendments, modifications, extensions, supplements,
restatements, or replacements thereof.
"Money" means all present and future cash, coins, currency, or any
-----
other medium of exchange that is treated as the equivalent of cash (but not
including Negotiable Collateral or deposit accounts), including foreign currency
of any of Obligor.
"Negotiable Collateral" means all present and future letters of
---------------------
credit, notes, drafts, instruments, documents, personal property leases, and
chattel paper of any of Obligor.
"Obligor" means Image Entertainment, Inc., a California corporation.
-------
"Proceeds" means, when used with respect to any of the Collateral, all
--------
present and future "proceeds" (as defined in the UCC) of such Collateral,
irrespective of whether received by Obligor, and shall include insurance
proceeds arising from or relating to Collateral, rents received or receivable
from the lease of goods, and dividends or other distributions paid or payable
with respect to shares of capital stock.
"UCC" means the Uniform Commercial Code in effect in the State of
---
California, except with respect to the perfection of any security interest, in
which case the term "UCC" shall refer to the Uniform Commercial Code of the
jurisdiction that, under Section 9103 of the California Uniform Commercial Code,
governs the perfection of the security interest.
(b) CONSTRUCTION. Unless the context of this Agreement clearly
------------
requires otherwise, references to the plural include the singular and to the
singular include the plural, the part includes the whole, the terms "include,"
"includes," and "including" are not limiting (the parties hereto agreeing that
the rule of ejusdem generis shall not be applicable to limit a general
------- -------
statement, which is followed by or referable to an enumeration of specific
matters, to matters similar to the matters specifically mentioned), and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or". The words "hereof," "herein," "hereby," "hereunder" and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Section references are to this
Agreement unless otherwise specified. Any terms used in this Agreement which
are defined in the UCC shall be construed and defined as set forth in the UCC
unless otherwise defined herein. All of the schedules and exhibits attached to
this Agreement shall be deemed incorporated herein by reference.
1. CLAIM PRIORITIES. The Junior Creditor Claim hereby is
----------------
subordinated and made junior in right of payment to the indefeasible payment in
full in cash of the Foothill Claim.
26
<PAGE>
2. LIEN PRIORITIES. Notwithstanding the date, manner, or order of
---------------
perfection of the security interests or liens granted to or in favor of Foothill
or Junior Creditor, and notwithstanding any contrary provisions of the UCC, or
any applicable law or decision, or the provisions of the Foothill Agreements or
the Junior Creditor Agreements, and irrespective of whether Foothill or Junior
Creditor at any time holds possession of any of the Collateral, the following,
as between Foothill and Junior Creditor, shall be the relative priority of the
security interests and liens of Foothill and (if any) of Junior Creditor in and
to the Collateral: As to all of the Collateral, Foothill shall have a first and
prior security interest therein or lien thereon to the extent of the Foothill
Claim, and Junior Creditor shall have a junior and subordinate in lien priority
security interest therein or lien thereon to the extent of the Junior Creditor
Claim.
In the event that Junior Creditor obtains the rights of a holder in
due course of a negotiable instrument that is Collateral, then Section 9309 of
the UCC shall not provide Junior Creditor with priority in such negotiable
instrument. The provisions of Section 9309 of the UCC notwithstanding, the
relative priority of the security interests and liens of Claimants with respect
to any portion of the Collateral in which any Claimant obtains the rights of a
holder in due course shall be determined by the priorities set forth in this
section.
3. DISTRIBUTION OF PROCEEDS OF COLLATERAL. As between Foothill and
--------------------------------------
Junior Creditor, all Proceeds of Collateral, and all amounts resulting from any
sale, exchange, disposition, or collection of any Collateral, shall be
distributed as follows:
i) to Foothill, in an amount up to the amount of the Foothill
Claim; and
ii) the balance, if any, to Junior Creditor, up to the amount of
the Junior Creditor Claim.
This section is applicable with respect to any item of Collateral only
to the extent that both Junior Creditor and Foothill concurrently have a
security interest in or lien on such Collateral. Nothing herein shall require
either Claimant to have or hold a security interest in or lien on Collateral
that it does not wish to have or hold, and the provisions of this Section 3
---------
shall not be relevant to any Collateral in which only Foothill has a security
interest or lien.
4. LIMITATION ON ENFORCEMENT ACTIONS. Any provision in the Junior
---------------------------------
Creditor Agreements to the contrary notwithstanding, without the prior written
consent of Foothill, Junior Creditor shall not take any Enforcement Action
unless and until such time as the Foothill Claims are paid in full.
5. EXERCISE OF REMEDIES. Foothill may exercise its discretion with
--------------------
respect to exercising or refraining from exercising any of its rights and
remedies under the Foothill Agreements or from taking or refraining from taking
any Enforcement Action. Junior Creditor agrees that Foothill shall not incur
any liability to Junior Creditor for taking or refraining from taking any action
with respect to the Collateral so long as Foothill complies with the express
provisions of this Agreement.
6. UCC NOTICES. In the event that any Claimant shall be required by
-----------
the UCC or any other applicable law to give any notice to the other Claimant,
such notice shall be given in accordance with the notice provisions hereof, and
five (5) Business Days notice shall be conclusively deemed to be commercially
reasonable.
7. INDEPENDENT CREDIT INVESTIGATIONS. No Claimant, nor any of its
---------------------------------
respective directors, officers, agents, or employees, shall be responsible to
any other Claimant or to any other person or entity for Obligor's solvency,
creditworthiness, financial condition, or ability to repay any of the Claims or
for the accuracy of any recitals, statements, representations, or warranties of
Obligor, oral or written, or for the validity, sufficiency, enforceability, or
perfection of the Claims or the Credit Documents, or any security interests or
liens granted by Obligor to any Claimant
27
<PAGE>
in connection therewith. Each Claimant has entered into its respective
financing agreements with Obligor based upon its own independent investigation,
and makes no warranty or representation to the other Claimant, nor does it rely
upon any representation of the other Claimant with respect to matters identified
or referred to in this paragraph.
8. PERFECTION OF POSSESSORY SECURITY INTERESTS. For the limited
-------------------------------------------
purpose of perfecting the security interests or liens of the Claimants in those
types or items of Collateral in which a security interest or lien may be
perfected by possession, each Claimant hereby appoints the other as its bailee
for the limited purpose of possessing on its behalf any such Collateral that may
come into the possession of such other Claimant from time to time, and each
Claimant agrees to act as the other's bailee for such limited purpose of
perfecting the other's security interest or lien by possession through a bailee,
provided that neither Claimant shall incur any liability to the other Claimant
by virtue of acting as the other's bailee hereunder, and either Claimant may
relinquish possession of Collateral in its possession to the other Claimant
without the consent of the other Claimant, and without incurring liability to
the other Claimant.
9. APPLICABILITY OF PRIORITIES. The priorities provided for herein
---------------------------
with respect to security interests and liens are applicable only to the extent
that such security interests and liens are enforceable and have not been
avoided; if a security interest or lien is judicially determined to be
unenforceable or is judicially avoided with respect to one or more Claims or any
part thereof, the priorities provided for herein shall not be available to such
security interest or lien to the extent that it is avoided or determined to be
unenforceable. The foregoing notwithstanding, each party covenants and agrees
for the benefit of each other party that it shall not challenge, attack, or seek
to avoid any security interest or lien to the extent that it secures any Claim.
10. WAIVER OF RIGHT TO REQUIRE MARSHALING. Each Claimant hereby
-------------------------------------
expressly waives any right that it otherwise might have to require the other
Claimant to marshal Assets or to resort to Collateral in any particular order or
manner, whether provided for by common law or statute. No Claimant shall be
required to enforce any guaranty or any security interest or lien given by
Obligor as a condition precedent or concurrent to the taking of any Enforcement
Action.
11. TERMINATION. This Agreement is a continuing agreement, and,
-----------
unless both Claimants have specifically consented in writing to its earlier
termination, this Agreement shall remain in full force and effect in all
respects until the earlier of (a) such time as the Foothill Claims are paid in
full, Foothill has no further commitment to extend credit facilities to any of
the Obligor, and Foothill has released or terminated its security interests and
liens in the Collateral, or (b) such time as the Junior Creditor Claims are paid
in full, Junior Creditor has no further commitment to extend credit facilities
to any of the Obligor, and Junior Creditor has released or terminated its
security interests and liens in the Collateral.
12. EFFECT OF BANKRUPTCY. This Agreement shall be and remain
--------------------
enforceable notwithstanding any bankruptcy or other insolvency proceeding by or
against Obligor or any other Obligor and shall apply with full force and effect
to any indebtedness arising pursuant to debtor-in-possession financing
arrangements or pursuant to financing arrangements entered into in connection
with the confirmation of a plan of reorganization under Chapter 11 of the
Bankruptcy Code.
13. EFFECT OF DISPOSITIONS OF COLLATERAL ON JUNIOR SECURITY
-------------------------------------------------------
INTERESTS. Claimants agree that any UCC collection, exchange, sale, retention
- ---------
in satisfaction of debt, or other disposition of Collateral by Foothill shall be
free and clear of the junior security interest or lien of Junior Creditor in
such Collateral, if any (provided that any such junior security interest or lien
of Junior Creditor shall attach to any surplus remaining after remittance of the
proceeds
28
<PAGE>
to Foothill in an amount up to the Foothill Claim, which surplus shall be
remitted to Junior Creditor in accordance with the provisions hereof).
14. NOTICES. All notices hereunder shall be effective upon receipt,
-------
shall be in writing, and shall be sent by U.S. mail, Federal Express overnight
courier (or the equivalent), hand delivery by a reputable and reliable
professional courier service, mailgram, telefacsimile, telegram, or telex as
follows:
If to
Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Attn: Business Finance Division Manager
If to
Junior Creditor: ____________-__________________________
_______________________________________
_______________________________________
_______________________________________
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. The failure to send a copy of notice to the individuals who are shown
above as being required to receive copies shall not invalidate or otherwise
affect the validity of a notice that is otherwise effectively given. All
notices or demands sent in accordance with this section shall be deemed received
on the earlier of the date of actual receipt or five (5) Business Days after the
deposit thereof in the mail.
15. NO BENEFIT TO THIRD PARTIES. The terms and provisions of this
---------------------------
Agreement shall be for the sole benefit of Foothill and Junior Creditor and
their respective successors and assigns, and no other person (including
Obligor), firm, entity, or corporation shall have any right, benefit, priority,
or interest under, or because of this Agreement.
16. GOVERNING LAW. This Agreement and all matters related hereto
-------------
shall be governed as to validity, interpretation, enforcement, and effect by the
laws of the State of California.
17. FURTHER ASSURANCES. The parties hereto agree to execute and
------------------
deliver such other documents and to take such action as reasonably may be
required to carry out the purposes and intent of this Agreement, including the
execution of releases and termination statements.
18. ATTORNEYS FEES. If any legal action or proceeding is brought by
--------------
any party hereto to enforce or construe a provision of this Agreement, each
party in such action or proceeding, irrespective of whether such action or
proceeding is settled or prosecuted to final judgment, shall pay its own
attorneys fees and costs.
19. MODIFICATIONS IN WRITING. No amendment, modification,
------------------------
supplement, termination, consent, or waiver of or to any provision of this
Agreement nor any consent to any departure herefrom shall in any event be
effective unless the same shall be in writing and signed by or on behalf of the
Claimants. Any waiver of any provision
29
<PAGE>
of this Agreement, or any consent to any departure from the terms of any
provisions of this Agreement, shall be effective only in the specific instance
and for the specific purpose for which given.
20. WAIVERS; FAILURE OR DELAY. No failure or delay on the part of
-------------------------
either Claimant in the exercise of any power, right, remedy, or privilege under
this Agreement shall impair such power, right, remedy, or privilege or shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such power, right, or privilege preclude any other or further exercise of any
other power, right, or privilege. The waiver of any such right, power, remedy,
or privilege with respect to particular facts and circumstances shall not be
deemed to be a waiver with respect to other facts and circumstances.
21. HEADINGS. Section headings used in this Agreement are for
--------
convenience of reference only and shall not constitute a part of this Agreement
for any purpose or affect the construction of this Agreement.
22. SEVERABILITY OF PROVISIONS. Any provision of this Agreement
--------------------------
which is illegal, invalid, prohibited, or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such illegality,
invalidity, prohibition, or unenforceability without invalidating or impairing
the remaining provisions hereof or affecting the validity or enforceability of
such provision in any other jurisdiction.
23. COMPLETE AND INTEGRATED AGREEMENT. This Agreement is intended by
---------------------------------
the parties as a final expression of their agreement and is intended as a
complete and integrated statement of the terms and conditions of their
agreement. This Agreement shall not be modified except in a writing signed by
the party to be charged, and may not be modified by conduct or oral agreements.
24. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and
----------------------
inures to the benefit of the successors and assigns of each Claimant. Each
Claimant agrees to maintain a copy of this Agreement together with its copies of
the Credit Documents relating to its Claims. Each Claimant expressly reserves
its right to transfer or assign its Claims, in whole or in part, together with
its rights hereunder, provided that, prior to transferring or assigning any
interest in its Claims to any person or entity, each Claimant shall disclose to
such person or entity the existence and contents of this Agreement, shall
provide to such person or entity a complete and legible copy hereof, and shall
advise such person or entity that such Claimant's interests in the Collateral is
subject to the terms hereof. In the event that the Claims of either Claimant
are refinanced with a creditor other than that Claimant, the other Claimant
agrees, upon request of such refinancing creditor, to execute and deliver to
such refinancing creditor an intercreditor agreement containing the same or
substantially the same terms and conditions as are set forth in this Agreement.
25. NO IMPLIED CONSENT TO JUNIOR CREDITOR SECURITY INTERESTS AND
------------------------------------------------------------
LIENS. Junior Creditor hereby acknowledges that the Foothill Agreements
- -----
prohibit Obligor from granting, or permitting or suffering the existence of,
security interests in and liens on the Collateral and the other Assets of
Obligor in favor of third parties (except as permitted by the Foothill
Agreements) and that provisions in respect of the relative priorities of
Foothill's and Junior Creditor's respective security interests in and liens on
the Collateral or other Assets of Obligor are included in this Agreement in the
event that Obligor grants, or suffers or permits to exist, in favor of Junior
Creditor such security interests or liens notwithstanding anything in the
Foothill Agreements to the contrary. Accordingly, the inclusion in this
Agreement of such provisions shall not be deemed or implied to be a consent by
Foothill to any security interests in and liens on the Collateral and the other
Assets of Obligor in favor of Junior Creditor.
26. COUNTERPARTS; TELECOPY EXECUTION. This Agreement may be executed
--------------------------------
in any number of counterparts, each of which shall be deemed to be an original,
admissible into evidence, and all of which together shall be deemed to be a
single instrument. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be
30
<PAGE>
equally as effective as delivery of a manually executed counterpart of this
Agreement. Any party delivering an executed counterpart of this Agreement by
telefacsimile shall also deliver a manually executed counterpart of this
Agreement but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.
31
<PAGE>
IN WITNESS WHEREOF, Junior Creditor and Foothill have executed this
Agreement as of the day and year first above written.
"Foothill" FOOTHILL CAPITAL CORPORATION,
a California corporation
By_________________________________
Title:_____________________________
"Junior Creditor" ______________________________________
32
<PAGE>
ACKNOWLEDGMENT, CONSENT, AND AGREEMENT TO BE BOUND
--------------------------------------------------
By executing this Agreement, the undersigned Obligor acknowledges and
consents to this Agreement and agrees to be bound by the provisions hereof, as
of the day and year first above written. The undersigned Obligor further agrees
that the terms of this Agreement shall not give Obligor any substantive rights
vis-a-vis Junior Creditor or Foothill. Without limiting the generality of the
foregoing, nothing in this Agreement shall be deemed or implied to be a consent
by Foothill to Obligor's granting, or permitting or suffering the existence of,
security interests in and liens on the Collateral and the other Assets of
Obligor in favor of Junior Creditor. If Junior Creditor, on the one hand, or
Foothill, on the other hand, shall enforce its rights or remedies in violation
of the terms of this Agreement, Obligor shall not have the right to assert such
violation as a defense against Junior Creditor or Foothill, as applicable, or
assert such violation as a counterclaim or basis for set-off or recoupment.
IMAGE ENTERTAINMENT, INC.,
a California corporation
By_________________________________
Title:_____________________________
33
<PAGE>
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
Image Entertainment, Inc.
Chatsworth, California
Gentlemen:
Re: Registration Statement Nos. 33-43241, 33-55393 and 33-57336
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated February 1, 1996 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/KPMG PEAT MARWICK LLP
Los Angeles, California
February 9, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,388,693
<SECURITIES> 0
<RECEIVABLES> 19,395,882
<ALLOWANCES> 2,940,033
<INVENTORY> 17,097,714
<CURRENT-ASSETS> 0<F1>
<PP&E> 6,192,894
<DEPRECIATION> 4,234,238
<TOTAL-ASSETS> 39,042,550
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 21,184,477
<OTHER-SE> (2,594,296)
<TOTAL-LIABILITY-AND-EQUITY> 39,042,550
<SALES> 72,207,892
<TOTAL-REVENUES> 72,207,892
<CGS> 56,778,266
<TOTAL-COSTS> 56,778,266
<OTHER-EXPENSES> 2,115,785
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,013
<INCOME-PRETAX> 6,333,056
<INCOME-TAX> 645,000
<INCOME-CONTINUING> 5,688,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,688,056
<EPS-PRIMARY> .36
<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>
