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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period From ....................To
....................
Commission File Number 0-11071
_______________________
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
_______________________
CALIFORNIA 84-0685613
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
9333 OSO AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices, including zip code)
(818) 407-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ( x ) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( x )
At June 1, 1998, 13,507,044 shares of Common Stock were outstanding, and the
aggregate market value of the shares of Common Stock held by the registrant's
nonaffiliates was approximately $45,478,043 (based upon the closing price of the
Common Stock on the NASDAQ National Market System on such date), excluding
shares of Common Stock held by the registrant's directors, executive officers
and 5% or more shareholders. Their holdings have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for Registrant's 1998 Annual Meeting of Shareholders
to be filed within 120 days of fiscal year-end.
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IMAGE ENTERTAINMENT, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
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<TABLE>
<S> <C>
PART I............................................................................................................. 1
ITEM 1. Business..................................................................................... 1
ITEM 2. Properties................................................................................... 15
ITEM 3. Legal Proceedings............................................................................ 16
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................... 17
PART II............................................................................................................ 19
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 19
ITEM 6. Selected Financial Data...................................................................... 20
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................ 21
ITEM 7.A Quantitative and Qualitative Disclosures About Market Risk................................... 41
ITEM 8. Financial Statements and Supplementary Data.................................................. 41
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... 67
PART III........................................................................................................... 67
ITEM 10. Directors and Executive Officers of the Registrant........................................... 67
ITEM 11. Executive Compensation....................................................................... 67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................... 67
ITEM 13. Certain Relationships and Related Transactions............................................... 67
PART IV............................................................................................................ 68
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 68
SIGNATURES......................................................................................................... 70
</TABLE>
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PART I
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ITEM 1. BUSINESS.
--------
GENERAL
Image Entertainment, Inc. (the "Company") was incorporated in Colorado in
April 1975 as Key International Film Distributors, Inc. The Company's present
name was adopted in June 1983. The Company reincorporated in California in
November 1989. Its principal executive offices are located at 9333 Oso Avenue,
Chatsworth, California 91311, and its telephone number is (818) 407-9100.
The Company operates in one industry segment, the domestic home video
market. The Company has distributed a broad range of programming on laserdisc
("LD") since 1983, and is the largest LD licensee and wholesale distributor in
North America. In prior fiscal years, the Company's net sales were derived
almost entirely from its LD business. In March 1997, a new optical disc format,
the digital video disc ("DVD"), was introduced into the domestic home video
market. The Company began distributing DVD programming on a nonexclusive
wholesale distribution basis in March 1997 and began releasing exclusively
licensed DVD programming in June 1997. In fiscal 1998, LD and DVD respectively
represented approximately 79% and 21% of the Company's net sales; however, in
the fourth quarter of fiscal 1998, LD and DVD respectively represented 62% and
38% of the Company's net sales.
The Company distributes thousands of titles on LD and, since DVD's March
1997 introduction, over 1,000 titles on DVD. These titles range from feature
films and music videos to family, documentary and special interest programming.
LD and DVD titles are obtained from major motion picture studios and other
program suppliers under exclusive and nonexclusive license agreements and,
typically, nonexclusive wholesale distribution arrangements. When the Company
acts as a nonexclusive wholesale distributor, it acquires programming in
finished, prepackaged form for resale to retail accounts.
The Company has exclusive LD (license and distribution) agreements with
program suppliers such as Disney's Buena Vista Home Video ("Disney"), Twentieth
Century Fox Home Entertainment ("Fox"), MGM Home Entertainment ("MGM") (under an
agreement with Warner Home Video which controls MGM's LD rights), New Line Home
Video ("New Line"), Orion Home Video ("Orion"), Playboy Home Video ("Playboy"),
PolyGram Video ("PolyGram"), Warner Home Video ("Warner") and The Voyager
Company ("Voyager"). Some of the exclusive LD titles currently available from
the Company include: Alien Resurrection, The Full Monty, Midnight in the Garden
of Good and Evil and The Game. Some of the exclusive LD titles the Company
expects to release in fiscal 1999 include: The Wedding Singer, Armageddon,
Hercules, Lost In Space and The Horse Whisperer. See "Risk Factors -- Release
Date Delays" below.
The Company is a nonexclusive wholesale distributor of LD programming from
Columbia/TriStar and other LD program suppliers with whom the Company does not
have an exclusive LD license. See "Risk Factors" "-- Competition" and "--
Release Date Delays" below. (The Company does not distribute LD programming
from Paramount and no longer distributes new LD programming from Universal, both
Paramount and Universal have exclusive license agreements with Pioneer
Entertainment. See "Risk Factors -- Competition" below).
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Image Entertainment, Inc. 1
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The Company has exclusive DVD license agreements with Orion (12 catalogue
titles), Playboy (output of new release and catalogue titles) and Universal
Studios Home Video ("Universal") (50 catalogue titles), and many independent
program suppliers. Some of the exclusive DVD titles currently available from
the Company include: The Terminator, Silence of the Lambs and Tina Turner: Live
in Amsterdam. Some of the exclusive DVD titles the Company expects to release
in fiscal 1999 include: A&E's Pride and Prejudice, Rolling Stones: Live at the
Max and the THX version of Dances With Wolves. See "Risk Factors -- Release Date
Delays" below.
The Company is a nonexclusive wholesale distributor of DVD programming from
motion picture studios and other DVD program suppliers with whom the Company
does not have an exclusive license, such as Columbia/TriStar, Disney, MGM, New
Line, Universal (the Company has an exclusive license to distribute 50 of
Universal's DVD catalogue titles) and Warner. See "Risk Factors-- Competition"
below.
In preparing titles for LD and DVD replication, the Company uses its in-
house digital postproduction facility to create submasters. DVD's require the
added interim step of authoring and compression which the Company does not do
in-house. The LD and DVD submasters are then delivered to outside replication
facilities. The Company's in-house, full-service creative services/computer
graphics department designs LD and DVD packaging and creative materials for
advertising and marketing. The Company's in-house marketing department
implements marketing programs, issues publicity and publishes Image Preview, a
free, consumer-oriented, monthly magazine available through most LD/DVD
retailers, featuring new releases and containing articles and information of
current interest to the Company's customers.
In addition to its core LD/DVD business, in fiscal 1998 the Company began
distributing exclusively licensed compact disc ("CD") music programming encoded
in the DTS Digital Surround ("DTS") multichannel audio format as well as certain
exclusively licensed niche entertainment programming on videocassette tape
("VHS"). See "Distribution of VHS and DTS Encoded CDs Software" below.
RECENT DEVELOPMENTS
On September 15, 1997, the Company entered into a short-form agreement with
Universal granting the Company the exclusive right to author, compress,
manufacture, market and sell 50 DVD catalogue titles in the United States and
Canada. The parties intend to enter into a long-form agreement which embodies
the terms and conditions of the short-form agreement.
The Company entered into a credit agreement (the "Credit Agreement") with
Image Investors Co. ("IIC"), a principal stockholder of the Company owned and
controlled by John W. Kluge and Stuart Subotnick, dated as of September 29,
1997, pursuant to which the Company borrowed $5 million from IIC, with interest
payable quarterly at 8% per annum, and principal due in five years. The loan is
unsecured and subordinated to the Company's senior lender, Union Bank, and is
convertible into the Company's common stock at any time during the term at a
conversion price of $3.625 per share (the closing price of the Company's common
stock on September 29, 1997). Proceeds from the loan were used to pay down the
Company's outstanding balance under its revolving credit facility with Union
Bank. See Item 7. "Liquidity and Capital Resources -- Financing Activities --
Convertible Subordinated Note Payable."
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2 Image Entertainment, Inc.
<PAGE>
In December 1997, the Company began construction of a 76,000 square foot
warehouse and automated distribution facility on approximately 8.4 acres of the
Company's real property adjacent to McCarren International Airport in Las Vegas,
Nevada. The new facility will replace the Company's leased warehouse space in
Chatsworth, California. The Company expects the facility to be operational by
September 1998. See Item 2. "Properties." See also Item 7. "Liquidity and
Capital Resources -- Las Vegas Warehouse and Distribution Facility and Adjacent
Land."
LD AND DVD BASICS
LDs and DVDs are respectively a 12" and 5" optical disc entertainment
software format encoded with audio and visual information. Just as compact discs
offer distinct advantages over records and audiotapes, LDs and DVDs offer
distinct advantages over VHS, such as higher resolution video, full-fidelity
discrete channel digital audio, instant access to any scene, frame-by-frame
viewing, greater durability and superior interactive capability. Since both LD
and DVD are optical disc-based home video formats, the marketing, sale and
distribution of LDs and DVDs are similar. LDs offer a number of features which
are similar to DVD, however, DVD enjoys the enviable position as the state-of-
the-art delivery system for home entertainment optical disc software. This
section discusses LDs and DVDs basics. For a further discussion of the DVD
format see Item 7. "General" "-- The DVD Format," "-- Potential Competing Format
to DVD," "-- The Company's DVD Distribution," "-- DVD's Continued Negative
Impact on LD Sales," "-- Fourth Quarter Charges Associated with Write-Down of
Carrying Value of LD Inventory and Estimated Losses on LD License and
Distribution Agreements," "-- Coexistence of LD Despite DVD's Success" and "--
Future LD Distribution Strategy."
SOFTWARE AVAILABILITY. All major studios and a large number of independent
---------------------
program suppliers (including the Company) actively release numerous new release
and catalogue programming in the LD format. Over 10,000 titles are currently
available on LD. All of the major motion picture studios participate to some
extent in the DVD format. Twentieth Century Fox Home Entertainment has only
committed to the DIVX DVD format (an alternative DVD format). See Item 7.
"General -- Potential Competing Format to DVD." Several independent program
suppliers, such as the Company, also release DVD programming. Over 1,100 titles
are currently available on DVD. To date, DVD releases have typically consisted
of new "A title" releases and "evergreen" catalogue titles, however, the Company
expects the product mix to change as the DVD market matures, supporting demand
for a greater variety of DVD releases.
HARDWARE AVAILABILITY. LD players generally retail from $399 to $5,000,
---------------------
DVD players generally retail from $350 to $5,500, and LD/DVD combination players
generally retail from $999 to $1,799. Consumer electronic manufacturers have
shifted away from LD hardware to DVD hardware, however, Pioneer Electronics and
several high-end manufacturers still manufacture LD players. DVD players from a
variety of consumer electronic manufacturers (such as Toshiba, Panasonic
Consumer Electronics Company, Pioneer Electronics (USA), Sony Electronics,
Thomson Consumer Electronics and Yamaha Electronics Corporation) are available
through the same retail channels that support LD and LD/DVD combination players,
as well as certain nationally recognized consumer electronic retail chain
stores. The LD/DVD combination player is available at nearly all of the
locations where LD players are sold and most of the locations where DVD players
are sold. Both LD players, DVD players and LD/DVD combination players play CDs.
VIDEO QUALITY. Both DVD and LD are optical disc formats which are read by
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a laser beam. DVD's picture is digital while LD's picture is analog. DVD's
video image is compressed to fit on a 5" disc
________________________________________________________________________________
Image Entertainment, Inc. 3
<PAGE>
while LD's video image is transferred to a 12" disc. Both DVD and LD provide
picture quality superior to VHS. DVD, LD and VHS respectively offer 500 (if
properly compressed), 425 and 240 lines of resolution.
AUDIO QUALITY. Digital audio is offered on all LDs. The audio format
-------------
offered on all DVDs is Dolby Digital (AC-3) (i.e., up to 5.1 channels of
discrete audio), however, many LD titles also offer Dolby Digital. DTS digital
sound (an audio format arguably superior to Dolby Digital) and Dolby Stereo
Surround are also being offered on certain LDs. DVD is also capable of carrying
a DTS audio signal. Consumers must have hardware compatible with Dolby Digital
and DTS technology to take advantage of these audio formats.
CONTENT CAPACITY. A DVD typically holds 133 minutes of compressed
----------------
programming per side for a total of 266 minutes (almost 4 1/2 hours), although
dual layer technology exists allowing for greater per side storage capacity. A
LD can hold 60 minutes of programming per side for a total of 120 minutes (2
hours). Many LD player models will automatically play the second side of a LD
after a several second delay, while low-end LD players require manual flipping
of the disc. A LD program with a run-time in excess of two hours requires two
discs. Most newer DVD releases with run-times in excess of 133 minutes are
encoded on a dual layer disc which does not require manual flipping of the disc.
SOFTWARE FEATURES. DVDs and LDs are playback-only formats, and unlike VHS,
-----------------
neither format can record. Although there is speculation regarding the
availability of an affordable, consumer-oriented recordable DVD machine, the
Company believes that such hardware will not be available for several years.
Both DVD and LD offer chapter stops and random/direct program access akin to
CD's random track access. Both DVD and LD can offer programming with
entertaining and informative ancillary material such as audio commentaries by
film talent, deleted scenes, scripts, photos, alternative endings and multiple
versions such as a "director's cut." DVD can offer an on-screen interactive
menu allowing access to key scenes or chapters, ancillary material and foreign
language dubbing and subtitle choices. LD typically lists such choices on the
back of the LD packaging. LD provides subtitles for foreign films and sometimes
offers foreign language alternatives on separate audio tracks. Although many
initial DVD releases have offered ancillary materials and multiple language and
subtitle choices, it is uncertain whether future DVD releases will continue to
offer the same variety of features and options. LD titles are generally
released in the widescreen version preferred by videophiles. Many DVD releases
offer both widescreen and pan-and-scan (full-format) versions on the same disc;
however, it is unclear whether the future DVD releases will continue to offer
both versions on the same disc. Whether or not all or any of these features
will be included on any LD or DVD is determined by the studio or program
supplier, or in certain instances, licensees such as the Company.
RETAIL SALE AND PRICING. LDs and DVDs are priced for the sell-through
-----------------------
market as opposed to the rental market. Currently, most LD titles sell for
between $29.99 and $39.99 and are generally discounted up to 20% by the
speciality LD retailer, music chain stores and mail order/Internet sources that
sell LDs. Since DVD's introduction, LD retailers and vendors have added DVD
programming to their offerings. Currently, most DVD titles sell for between
$24.99 and $29.99 and are generally discounted up to 20%. Major video/music
software discounters and retailers such as Best Buy, Musicland and Tower are the
DVD market leaders, with large selections of DVD titles. Mass merchants such as
Wal-Mart and Target Stores, with a small presence in DVD, have announced plans
to increase the number of outlets that carry DVD. With increasing DVD hardware
penetration and growing
________________________________________________________________________________
4 Image Entertainment, Inc.
<PAGE>
consumer interest in DVD, an increasing number of video speciality stores are
stocking DVD software for rental and sale.
MANUFACTURING AND PRODUCTION COST. Although the cost of DVD replication is
---------------------------------
generally half that of LD replication, DVD's 5-inch format and on-screen random
access requires costly and time-consuming compression and authoring techniques
which LD does not.
MARKET PENETRATION. LD hardware and software is not supported by mass-
------------------
market retailers and, as a result, the LD market has become a niche market
relative to VHS. DVD is currently being supported by certain mass-merchants and
national hardware and software chain stores, as well as the regional music/video
chain stores, electronics specialty hardware retailers and independent retailers
which support LD. The Company believes that if the market for DVD does not grow
large enough to justify continued mass-market support, DVD will most likely be a
niche market relative to the VHS market. Management believes that the
respective market penetration for VHS, LD and DVD is currently approximately
85%, 2% and 0.3% of estimated television households.
DVD'S IMPACT ON LD. Even though DVD has been marketed as the replacement
------------------
for VHS many early adopters of the format were and continue to be LD consumers.
As a result, the competitive presence of DVD has contributed to a reduction in
the Company's LD sales, and will likely continue to adversely impact the
Company's LD sales as the DVD market evolves. (DVD has not materially impacted
the VHS market if at all.) See Item 7. "General" "-- The DVD Format" and "--
DVD's Continued Negative Impact on LD Sales," "Results of Operations" and
"Summary and Outlook." Notwithstanding the impact of DVD on the Company's LD
business, the Company believes that it is well-positioned to take advantage of
the opportunities presented by DVD and rapidly changing DVD market. The
Company's LD licensing, production, marketing, creative services and
distribution skills are easily applied to the DVD format. In addition, LD is a
well-established videophile format and the disparity between the number of
titles available on LD and the number of titles available on DVD is significant.
The Company is therefore dedicated to continuing its efforts to secure
additional rights in both the LD and DVD formats and to explore and exploit
licensing and distribution opportunities for both formats. See "Risk Factors --
Ability to Sustain LD Business During Transition Period Caused by DVD" below.
ACQUISITION OF LD AND DVD PROGRAMMING
GENERAL. Because the Company does not produce its own LD and DVD
-------
programming, its success depends upon entering into new and renewing existing
licenses and wholesale distribution agreements for feature films and other
programming. There can be no assurance that suppliers of programming will
continue to enter into or renew licenses or distribution agreements on terms
acceptable to the Company. The Company, however, believes that its production,
creative services, marketing and distribution expertise will continue to make it
an attractive partner for such suppliers. See "Risk Factors" "-- Competition,"
"-- Ability to Sustain LD Business During Transition Period Caused by DVD" and
"-- Growth of the DVD Market" below.
Licensed titles accounted for approximately 46% of fiscal 1998 net sales
(of which 37% was derived from LD and 9% was derived from DVD), 56% of fiscal
1997 net sales (the Company did not commence distribution of licensed DVD titles
until fiscal 1998) and 50% of fiscal 1996 net sales.
________________________________________________________________________________
Image Entertainment, Inc. 5
<PAGE>
Wholesale (exclusive and nonexclusive) distribution accounted for
approximately 54% of fiscal 1998 net sales (of which 42% was derived from LD and
12% was derived from DVD), 44% of fiscal 1997 net sales (of which less than 1%
was derived from DVD) and 50% of fiscal 1996 net sales.
LICENSE AGREEMENTS. The Company enters into licenses whereby it acquires
------------------
from suppliers of programming the right to manufacture and distribute their
titles on LD, DVD or both (and in some cases VHS as well). Licenses can be
exclusive or nonexclusive, but are typically exclusive. Licenses either cover
specific titles, or a licensor's existing library (or "catalogue") and future
releases over a designated term. This latter type of license agreement is
commonly referred to as an "output" agreement. When the Company licenses rights
it provides a variety of value-added services relative to the licensed programs
such as creation of the jacket and packaging art work, quality-control,
replication and manufacture of the product, marketing, sales, warehousing and
distribution, and in certain instances the addition of enhancements such as
separate audio tracks, commentaries, foreign language tracks, menus and other
similar ancillary materials.
In return for the grant of rights, the Company pays royalties to its
licensors. Royalties are expressed as a percentage of the Company's net
revenues from sales. In many cases, the Company pays licensors advances or
minimum guarantees which are recoupable against royalties earned on a title-by-
title basis or, if cross-collateralized, against all or certain groups of the
licensed titles. Advances under most output licenses are paid according to
predetermined schedules, regardless of the number and marketability of the
titles subsequently available. In entering into licenses, and evaluating the
required advances, guarantees and other obligations, the Company depends, to a
large extent, on its ability to anticipate the public's changing taste in
programming and to foresee (for output licenses) licensors' future releases.
Generally, the Company's license agreements have terms of two to seven
years and are limited to the United States and Canada, and their respective
territories and possessions. Under most of the Company's output license
agreements, the Company has two to five years to select titles and two to five
years to distribute a title after its release. While efforts are made to
renegotiate and renew licenses prior to expiration, there can be no assurances
that licenses or distribution agreements will be renegotiated or renewed.
Exclusive titles from the following licensors accounted for the largest
percentages of fiscal 1998 net sales (the only percentage equal to or in excess
of 10% is indicated): Disney (17%) (agreement covers LD titles only), New Line
(agreement covers LD titles only), Warner (license agreement for certain classic
MGM/UA and MGM/Turner library titles only) (agreement covers LD titles only),
Polygram (agreement covers LD titles only) and Playboy (includes revenue derived
from the sale of both LD and DVD titles). Exclusive titles from the following
licensors accounted for the largest percentages of fiscal 1997 net sales (only
percentages equal to or in excess of 10% are indicated) (the Company did not
release any exclusively licensed DVD titles in the fiscal 1997): Disney
(26.9%), MGM (10.2%), New Line, Warner (agreement covers certain classic MGM/UA
and MGM/Turner library titles only) and Hallmark. Exclusive titles from the
following licensors accounted for the largest percentages of fiscal 1996 net
sales (the only percentage equal to or in excess of 10% is indicated) (DVD was
not introduced until the end of fiscal 1997): Disney (27.7%), New Line, Orion,
Hallmark and MGM.
The terms for the five licenses which accounted for the largest percentages
of fiscal 1998 net sales are as follows: (1) Under the Company's exclusive LD
output license agreement with Disney, the Company has the right to distribute
Disney programming (i.e., titles from The Walt Disney Company,
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6 Image Entertainment, Inc.
<PAGE>
such as the animated classics Little Mermaid and Hercules, Touchstone, Buena
Vista and Hollywood Pictures, and certain Miramax titles) on LD in the United
States and Canada and their respective territories (although Disney may
distribute to certain accounts if it so elects) through December 31, 1999 (and
in some instances through June 30, 2000), however, Disney can terminate the
license if specified events of default occur, such as a "change in control" (as
defined in the agreement) of the Company. (2) The Company's December 22, 1992
exclusive LD output license with New Line would have expired on December 31,
1997, however, the parties agreed that the term will continue indefinitely
unless terminated by either party upon the giving of 90 days' prior written
notice. (3) The Company's exclusive LD output license agreement with Warner
(that covers certain classic MGM/UA and MGM/Turner library titles only) ended on
May 21, 1998 and the Company is currently in a six month nonexclusive "sell-off
period" with respect to the titles. The Company had the opportunity to extend
the agreement, however, the terms of the extension were not favorable to the
Company given the recent decline in consumer demand for LD. The Company is
currently seeking to negotiate terms of a new agreement; however, there can be
no assurance that the Company will be successful in such negotiations. (4) The
Company's exclusive LD output license agreement with Polygram expires on January
1, 2002. The Company is currently seeking to renegotiate terms more favorable to
the Company; however, there can be no assurance that the Company will be
successful in such negotiations. (5) The Company's exclusive LD output license
agreement with Playboy expires on July 31, 1998; however, the parties are
currently actively negotiating a new agreement which will revise and extend the
grant of LD rights and also incorporate certain of the terms and conditions
embodied in an existing agreement between the parties covering exclusive DVD
rights. The new agreement, which will cover both LD and DVD rights, should
extend the Company's exclusive LD and DVD rights to February 27, 2002 (subject
to early termination of DVD rights, at Playboy's option, should the installed
based of DVD players reach 3 million); however, there can be no assurance that
the Company will be successful in such negotiations.
Historically, the Company has not attempted to obtain foreign (with the
exception of Canadian) distribution rights, since foreign sales, outside of
Canada and certain Pacific Rim countries where such rights are generally
unavailable to United States licensees, have been minimal. Under a special
arrangement, the Company sells Disney LD titles to Disney for distribution to
designated Disney licensees and distributors in foreign territories such as Hong
Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan and Thailand. From
time to time, the Company similarly acts as a fulfillment center servicing
foreign territories for other licensors with respect to LD product. Currently,
the Company has no similar arrangements with respect to DVD product.
WHOLESALE DISTRIBUTION. In addition to its licensing activities, the
----------------------
Company is a wholesale distributor of LD and DVD programming that it acquires
from certain major motion picture studios and other suppliers. In general, the
Company acquires LD and DVD programming for wholesale distribution in finished,
prepackaged form, and thus does not provide any creative services with respect
to such programming. The Company has three exclusive LD distribution agreements
(with Fox, Voyager and Warner) pursuant to which the Company, for a fee,
typically provides all of the same value-added services it provides under
exclusive license agreements (the Company currently has no exclusive DVD
distribution agreements). More typical is the nonexclusive wholesale
distribution arrangement where the program supplier notifies the Company of its
upcoming releases and the Company then solicits its customers and places orders
for the releases; however, the Company generally recognizes higher margins and
revenues from its exclusive distribution agreements. In acquiring LDs and DVDs
for nonexclusive wholesale distribution, the Company is generally required to
pay within 60 days of delivery.
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Image Entertainment, Inc. 7
<PAGE>
Exclusive wholesale distribution under the following agreements accounted
for the largest percentage of fiscal 1998 net sales (the only percentage in
excess of 10% is indicated): Fox (15%) (agreement covers LD titles only),
Voyager (agreement covers LD and certain DVD titles) and Warner (agreement,
which commenced in August 1997, covers LD titles only). Exclusive wholesale
distribution under the following agreements accounted for the largest percentage
of fiscal 1997 net sales (the only percentage in excess of 10% is indicated):
Fox (19%) (agreement covers LD titles only) and Voyager (agreement covers LD and
certain DVD titles). Exclusive wholesale distribution under the following
agreements accounted for the largest percentage of fiscal 1996 net sales (the
only percentage in excess of 10% is indicated): Fox (24%) (agreement covers LD
titles only) and Voyager (agreement covers LD and certain DVD titles).
Generally, the Company's profit margin on exclusive licensed product and
exclusive wholesale distributed product has been greater than its profit margin
on nonexclusive product it distributes wholesale.
The terms for the three exclusive distribution agreements which accounted
for the largest percentages of fiscal 1998 net sales are as follows: (1) Under
the Company's July 1, 1996 exclusive LD output distribution agreement with Fox,
the Company has the right to distribute Fox titles on LD in the United States,
Canada and Puerto Rico (although Fox may distribute to certain accounts if it so
elects) until June 30, 1999. Fox has the right to terminate the agreement if
specified events of default occur, such as a "change in control" (as defined in
the agreements) of the Company. Unlike most of the Company's distribution
agreements (which are nonexclusive), the Company provides the same value added
services under the Warner and Fox distribution agreements (for a fee) as it
customarily provides under a typical license agreement. (2) Under the Company's
November 10, 1992 exclusive output distribution agreement with Voyager, the
Company has the right to distribute Voyager titles in the United States (and in
some instances, Canada) until March 31, 1999. The Voyager agreement also
provides for nonexclusive distribution rights for Voyager's DVD titles. From
time-to-time, the Company sublicenses to Voyager certain rights to DVD titles,
however, the Company retains the exclusive distribution rights to these titles.
(3) Under the Company's August 8, 1997 exclusive LD output distribution
agreement with Warner, the Company has the right to distribute Warner
programming on LD in the United States and Canada until August 7, 2002.
PURSUIT OF DVD RIGHTS. The Company intends to continue to actively pursue
---------------------
DVD license and distribution rights as it has pursued, and will continue to
pursue, LD license and distribution rights. As with LD licensing, the Company
will generally seek programming it deems appropriate for release in the DVD
market and attempt to secure exclusive rights under license agreements which
will most likely provide for advances and royalty payments. Where the Company
is unable to secure licensed rights, it will attempt to purchase and distribute
DVD programming on a wholesale distribution basis. Further, given the
similarities between LD and DVD, and the steps required to bring DVD programming
to the market, the Company believes that its advertising, marketing, production,
sales and creative services departments can offer the DVD licensor high-quality
value-added service and a professional and experienced staff. See "Risk Factors
- -- Competition" below.
SALES, CUSTOMERS AND CREDIT POLICIES
The Company sells both licensed and wholesale LD and DVD product directly
to retailers or through subdistributors subject to the terms of the Company's
dealer sales policies. Sales to the following customers accounted for the
largest percentages of the Company's fiscal 1998 net sales (only percentages
equal to or greater than 10% are indicated) (no customer purchased DVDs in
excess of 10% of fiscal 1998 net sales): Norwalk Record Distributors (10.9%),
Ken Crane's Home Entertainment
________________________________________________________________________________
8 Image Entertainment, Inc.
<PAGE>
(10.6%) and Musicland (10%). LD sales to the following customers accounted for
the largest percentage of the Company's fiscal 1997 net sales (only percentages
equal to or greater than 10% are indicated) (on a per customer basis, DVD sales,
relative to LD sales, were de minimus): Musicland (11.2%), Alliance
Entertainment (which includes its consolidated subsidiaries Bassin Distributors,
one of the Company's top five customers in fiscal 1996, and Abbey Road
Distributors, another of the Company's customers) (10.4%), Ken Crane's Home
Entertainment (10.2%), Norwalk Record Distributors and Trans World Entertainment
Corp. LD sales to the following customers accounted for the largest percentage
of the Company's fiscal 1996 net sales (the only percentage equal to or greater
than 10% is indicated) (DVD was not introduced until the end of fiscal 1997):
Musicland (10.9%), MTS/Tower Records and Video, Trans World Entertainment Corp.,
Ken Crane's Home Entertainment, Bassin Distributors and Norwalk Record
Distributors.
The Company's prospective customers generally submit a credit application
followed by a minimum opening order for LDs. If the application is accepted,
credit terms are assigned. Open account terms generally require payment within
45 to 60 days of delivery. The Company may also require a customer to provide a
purchase money security interest, a personal guarantee, a letter of credit
and/or other collateral. The assignment of certain doubtful receivables to
third parties at return rates more favorable than anticipated resulted in the
Company realizing net recoveries of doubtful accounts receivable of 0.4% of net
sales during fiscal 1998. The provision for doubtful accounts receivable was
2.3% of net sales during fiscal 1997 (the significant increase in fiscal 1997
was attributable to the financial difficulties experienced by several of the
Company's largest customers), and less than 0.2% of net sales during fiscal
1996. The amount of doubtful accounts receivable actually written off in fiscal
1998, 1997 and 1996 was approximately $894,000, $650,000 and $149,000,
respectively. The allowance for doubtful accounts at March 31, 1998 and 1997
was approximately $404,000 and $1,629,000, respectively.
Although sales of LDs and DVDs are generally considered final, the Company
allows customers to return a portion of their stock on a quarterly basis. This
allowance is generally non-cumulative and is generally based on the customer's
prior quarter purchases and is limited on an individual-title basis, however, on
occasion greater return allowances are afforded to certain large customers.
Stock returns, other than for defective product, amounted to approximately 5.0%
of all net sales during fiscal 1998 (includes both LD and DVD), approximately
9.5% of all LDs sold in fiscal 1997 (DVD sales were de minimus in fiscal 1997)
and 7.2% of all LDs sold in fiscal 1996. Returns of defective have been minimal
and are generally covered by manufacturers' warranties.
As of June 15, 1998, the Company had approximately $6.0 million of backlog
orders (including pre-orders of $3.3 million for LD new releases and $2.1
million for DVD new releases), 66% from LD product and 34% from DVD software
product which was launched in March 1997. The Company expects to fill 80% of
the LD backlog orders and substantially all of the DVD backlog orders within the
current fiscal year. As of June 10, 1997, the Company had approximately $7.3
million of backlog orders (including pre-orders of $4.5 million for LD new
releases and $550,000 for DVD new releases), 89% from LD product and 11% from
DVD software product which was launched in the home video market in March 1997
and which the Company commenced selling in March 1997.
THE MARKETING OF LDS AND DVDS
The Company's strategy is to promote its LD and DVD product, in particular,
and the LD and DVD formats, in general. The Company's marketing efforts are
directed toward consumers and video
________________________________________________________________________________
Image Entertainment, Inc. 9
<PAGE>
software and hardware dealers, and involve point-of-sale advertising,
advertising in trade and consumer publications, dealer incentive programs, trade
show exhibits, bulletins featuring new releases and in-stock catalogue titles
and the publication of the Image Preview, a free, full-color, consumer-oriented,
monthly magazine.
Promotion of each new title generally begins eight to sixteen weeks before
the scheduled in-store release with the mailing of the Image Preview magazine
and bulletins. An active telemarketing campaign follows. The Company attempts
to release its titles as close in time as possible to their VHS release date to
capitalize on the extensive VHS advertising and publicity campaigns typically
mounted by the major studios.
The Company also maintains a website on the Internet at www.image-
entertainment.com. The site includes an on-line edition of the Image Preview,
weekly new product announcements and information of general interest to the home
video consumer.
LD AND DVD PRODUCTION AND REPLICATION
Under a typical license, the licensor of a title delivers a program master
and art work to the Company for quality evaluation. If the Company deems the
program master acceptable, the Company's in-house postproduction facility
creates a submaster with specifications for LD or DVD format.
LD submasters are delivered to the LD manufacturer for replication. The
Company currently uses five LD replication facilities (three in the United
States and two in Japan). In fiscal 1998, the following manufacturers supplied
the largest percentages of the LDs replicated for the Company (only percentages
equal to or greater than 10% are indicated): Kuraray (36.3%), Pioneer (32.8%),
Sony's DADC (18.4%), Mitsubishi (12.4%) and 3M. In fiscal 1997, the following
manufacturers supplied the largest percentages of the LDs replicated for the
Company (only percentages equal to or greater than 10% are indicated): Kuraray
(41.1%), Mitsubishi (26.9%), Pioneer (22.8%), Sony's DADC and 3M. While the
Company believes that LD manufacturing facilities currently have the aggregate
capacity to fulfill its orders, if any LD manufacturer used by the Company were
unable to supply the Company with LDs, the Company believes it can shift its
product to other manufacturers (subject to such manufacturers' willingness to
re-prioritize their LD pressing schedules).
DVDs require the additional interim step of authoring and compression which
the Company does not do in-house. The Company uses any one of several
compression facilities for this work, with Pioneer, WAMO (Warner Advanced Media
Operations) and CVC (California Video Center) doing most of the Company's work
in fiscal 1998. After compression work is completed, the DVD submaster is
delivered to an outside manufacturing facility for replication. DVD replication
is faster and less expensive than LD replication. The Company currently
replicates all of its DVDs at WAMO but has agreements in place with other DVD
replication facilities should the need arise. The Company believes it could
easily shift its product to any number of DVD replication facilities, such as
Panasonic, Pioneer, Technicolor, Nimbus, Sony, and Cinram.
The Company attempts to solicit orders from its customers prior to
submitting replication orders. The Company generally must pay for finished discs
within 45 to 90 days of invoicing. The Company's goal is to order for
manufacture that number of units of each title which will enable the Company to
ship the bulk of the order within 30 days of delivery. Attainment of this goal
depends largely upon the Company's ability to predict the popularity of a title.
________________________________________________________________________________
10 Image Entertainment, Inc.
<PAGE>
The LD and DVD package is designed and produced by the Company's creative
services staff and sent to a printer for replication. The LD manufacturer will
either package and shrink-wrap the LDs and ship the completed product to the
Company or ship the LDs in bulk to the Company and the Company will package and
shrink-wrap the LDs at its own facility. The Company estimates that 30% of the
manufactured LD units are received in finished form and 70% of the manufactured
LD units are received in bulk shipments requiring packaging and shrink-wrapping
in-house. Unlike LDs, WAMO currently replicates and packages all of the
Company's DVD product, returning the finished DVD product to the Company for
distribution.
To reduce production costs and expedite the production process, in November
1990 the Company installed an in-house digital postproduction facility, which
has been upgraded from time-to-time. To further increase efficiencies and reduce
costs, in January 1995 the Company purchased computer graphics equipment for the
output of high resolution, four-color separations used for LD and DVD package
printing. These facilities allow the Company to format over 80% of the masters
(from all licensors) it would otherwise contract out to postproduction
facilities and deliver to printers final, color separated film it would
otherwise contract out to outside facilities.
DISTRIBUTION OF VHS AND DTS ENCODED CDS SOFTWARE
In addition to the Company's LD and DVD licensing and distribution
activities, the Company distributes CD music programming encoded in DTS Digital
Surround ("DTS"), as well as certain programming on VHS. The Company's views
its distribution of VHS and DTS encoded CDs programming as a compliment to its
core LD/DVD business.
In fiscal 1998, the Company began licensing certain niche entertainment
programming on VHS for exclusive distribution. When and where feasible, the
Company plans to continue to acquire exclusive VHS distribution rights. Such
rights are often offered as part of a bundle of rights which include LD and DVD
rights. See Item 7. "Summary and Outlook -- Exclusive Distribution of Niche
Entertainment Programming on VHS."
DTS is a multichannel audio format that delivers up to six discrete
channels of audio which surrounds the home theater consumer with 360 degrees of
sound that better approximates a live concert experience. Special decoder
hardware is required to receive the enhanced sound capabilities offered by DTS.
In 1997, the Company entered into two exclusive agreements, with Digital Theater
Systems, Inc. and Miller Nevada, Ltd., both of which grant to the Company
exclusive distribution rights to DTS encoded CDS. See Item 7. "Summary and
Outlook -- Exclusive Distribution of DTS Encoded Software." The Company also
releases certain DTS encoded LDs.
SUBSIDIARY ACTIVITIES
In May 1998, the Company announced the closure of its only active
subsidiary, U.S. Laser Video Distributors, Inc. ("U.S. Laser"), a New Jersey-
based owner-operator of "Digitainment," a retail store which sold optical disc
software (LDs, DVDs and CD-ROMs). U. S. Laser also sold optical disc software
direct to the consumer via mail order and the Internet. The closure is expected
to be finalized by July 1998. See Item 7. "Closure of Subsidiary -- U.S. Laser
Video Distributors, Inc."
________________________________________________________________________________
Image Entertainment, Inc. 11
<PAGE>
TRADEMARKS
The Company has received Federal registration of the trademark "IMAGE" in
the United States Patent and Trademark Office. The Company also uses the
trademarks "Vocal Images," "The Music Disc". "The Finest in Laserdiscs" and "The
Finest in Home Entertainment" and the service marks "Image Post" and "Image
Creative Group."
EMPLOYEES
At June 1, 1998, the Company had 109 full-time employees and 2 part-time
employees. At June 1, 1998, subsidiary U.S. Laser had 7 full-time employees and
1 part-time employee. Upon finalization of U.S. Laser's closure (expected to
occur by July 1998), all but two of U.S. Laser's remaining employees will be
terminated. The remaining two U.S. Laser employees will relocate to the
Company's California offices and become full-time employees of the Company (on
June 1, 1998 a third U.S. Laser employee relocated to California and became a
full-time employee of the Company).
RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on the
beliefs of Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this document,
the words "anticipate," "believe," "may," "estimate," "expect" and similar
expressions, variations of such terms or the negative of such terms as they
relate to the Company or its management are intended to identify such forward-
looking statements. Such statements are based on management's current
expectations and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements.
The Company has made forward-looking statements in this Item 1. and
subsequent Items of this Annual Report concerning, among other things, (i) the
viability of the LD format for several years despite the introduction of DVD;
(ii) Pioneer's continued commitment to the LD/DVD combination player and the
success of the LD/DVD combination player in attracting customers to both
formats; (iii) the recent strengthening of the retail entertainment software
market in which several of the Company's largest customers operate; (iv) the
Company's ability to develop a successful direct-to-consumer LD business; (v)
the Company's ability to renegotiate and/or extend material license and
distribution agreements which have recently expired or which no longer contain
terms favorable to the Company given the recent decline in consumer demand for
LDs; (vi) closing escrow on the sale of one or both parcels comprising the front
8.8 acres of the Company's Las Vegas, Nevada property; (vii) ultimate completion
and full operation by September 1998 of the Las Vegas, Nevada warehouse and
distribution facility; (viii) the possibility that major studios may someday
perceive DVD as a niche business affording the Company greater opportunities to
secure exclusive license rights; and (ix) the Company's ability to continue to
secure additional LD and DVD rights through license or distribution agreements.
The inclusion of such forward-looking information should not be regarded as a
representation by the Company, its management or any other person that the
future events, plans or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publically any updates
or revisions to any such forward-looking statements that may reflect events or
_______________________________________________________________________________
12 Image Entertainment, Inc.
<PAGE>
circumstances occurring after the date of this Annual Report. Factors that
could cause or contribute to such material differences include, but are not
limited to, those discussed below.
COMPETITION.
-----------
COMPETITION FOR LD RIGHTS AND DISTRIBUTION. The Company believes
------------------------------------------
it is the largest LD licensee and distributor in the United States;
however, the Company also faces competition for LD rights from
Pioneer, which also licenses and distributes LDs (and has exclusive LD
output license agreements with Paramount and Universal), and other
independent licensees. The Company also faces competition from LD
subdistributors and Columbia/TriStar, which sells its own programming
directly to retailers, as well as to the Company and other
distributors. The Company currently expects that it will be able to
continue to purchase LD titles on a wholesale basis from
Columbia/TriStar, however, there can be no assurance that the Company
will be able to continue to purchase and distribute such programming
in the event Columbia/TriStar elects to sell direct, increase the
number of entities distributing their programming or limit the
Company's access to programming. Further, there can be no assurance
that the Company will be able to continue to secure LD license and
distribution rights on terms acceptable to the Company.
COMPETITION FOR DVD RIGHTS AND DISTRIBUTION. Given the relative
-------------------------------------------
newness of the DVD format and its uncertain position in the home video
software market, none of the major motion picture studios have yet to
grant exclusive licenses for their new releases and most popular
catalogue titles, preferring to sell this programming directly to
retailers, as well as to the Company and other distributors. Further,
since DVD is positioned as the replacement for VHS (although it
remains to be seen whether this will occur), unlike LD (which is a
confirmed niche market), the Company faces licensing and distribution
competition from significantly more sources (primarily independent
licensing and distribution entities from the VHS sector of the home
video market). Further, there can be no assurance that the Company
will be able to continue to secure DVD license and distribution rights
on terms acceptable to the Company. Finally, the Company currently
expects that it will be able to purchase on a wholesale basis DVD
titles from all participating program suppliers for sale to the
Company's customers, however, there can be no assurance that the
Company will be able to continue to purchase and distribute such
programming in the event DVD program suppliers elect to sell direct,
increase the number of entities distributing their programming or
limit the Company's access to programming.
COMPETITION FROM OTHER FORMS OF HOME VIDEO ENTERTAINMENT. Both
--------------------------------------------------------
the LD and DVD formats face competition from other forms of in-home
entertainment, e.g., VHS, network, syndicated and pay/cable television
and home satellite systems. LD and DVD also face competition from new
and emerging technologies in the entertainment industry (such as
entertainment programming on the Internet, video-on-demand,
high-definition television, digital videotape and optical discs with
greater storage capacity) which offer or may come to offer alternate
forms of leisure-time entertainment, or alter the way in which
existing forms are delivered. Additionally, several recent polls have
indicated that the Internet has surpassed all forms of home video
entertainment as a leisure time activity.
________________________________________________________________________________
Image Entertainment, Inc. 13
<PAGE>
FINANCIAL CONDITION OF KEY CUSTOMERS. Although the entertainment software
------------------------------------
retail sector appears to be strengthening after several years of declining sales
growth and deteriorating profitability which adversely impacted the Company's
business and operations, there can be no assurance that an economic recovery
will be sustained or be sufficient to support the same level of customer
purchasing present before the slump. See Item 7. "Summary and Outlook --
Improving Financial Condition of the Retail Entertainment Software Market."
ABILITY TO SUSTAIN LD BUSINESS DURING TRANSITION PERIOD CAUSED BY DVD.
----------------------------------------------------------------------
Although the Company believes that if the DVD market becomes a niche market
(albeit a much larger niche market than the LD market) the Company could occupy
a role similar to its current role in the niche LD market, there can be no
assurance that the Company will be able to sustain its core LD business until a
transition can be made to DVD, if ever, or whether current LD program suppliers
and LD hardware manufacturers will continue to support the LD format during the
transition period. Further, if the Company can maintain its LD business during
such a transition period there can be no assurance that it will be able to
license and distribute DVD programming with the same success it has experienced
in the LD market, either generally or relative to the breadth of programming it
is now able to offer customers and at the margins it currently enjoys. Finally,
the Company is beginning to distribute its LD (and DVD) inventory through
alternative distribution channels, including direct-to-consumer distribution via
mail order and the Internet, in an effort to increase sales and compensate for
the dramatic reduction in LD purchases by the major music/video software chains
who have long been supporters of the LD format. See Item 7. "General" " -- The
DVD Format," "--DVD's Continued Negative Impact on LD Sales" and "--Future LD
Distribution Strategy."
GROWTH OF THE DVD MARKET. The Company currently believes that the lack of
------------------------
mass market acceptance of DVD is principally due to the lack of a consumer-
priced recordable DVD player, the lack of an established rental market, consumer
confusion regarding the features, availability and potential of the format,
potential competition from the "DIVX" DVD format (see Item 7. "General --
Potential Competing Format to DVD"), and the large number of titles currently
available on LD, all of which may impede the growth and acceptance of DVD.
There can be no assurance that a rental market will develop or that a consumer-
priced recordable DVD player (which could lead to greater mass-market appeal)
will be available in the near future. Further, there can be no assurance that
studios and program suppliers will decide to make an aggressive commitment to
the release of a wide variety of new release and catalogue DVD titles so that
the available library of DVD titles comes to rival that of LD.
LD/DVD PRODUCTION AND REPLICATION. The Company currently expects that it
---------------------------------
will be able to continue utilizing a variety of outside vendors to author,
compress and replicate marketable DVD titles for release under its exclusive DVD
license agreements. Despite LD's decline, the Company also believes it will be
able to use several outside manufacturing facilities to replicate its LD
product. There can be no assurance, however, that the Company's vendors will be
able to continue to provide such services at the same or higher level of quality
and quantity, or that the Company will be able to access or afford alternative
vendors for such services.
SEASONALITY AND VARIABILITY. The Company has generally experienced higher
---------------------------
sales of LDs and DVDs in the quarters ended December 31 and March 31 due to
increased consumer spending associated with the year-end holidays and because
most sales of a title occur in the first few months after its release. In
addition to seasonality issues, other factors have contributed to variability in
the Company's LD and DVD net sales on a quarterly basis. These factors include:
(i) DVD's negative impact on LD sales; (ii) the popularity of titles in release
during the quarter; (iii) the Company's marketing and
________________________________________________________________________________
14 Image Entertainment, Inc.
<PAGE>
promotional activities; (iv) the Company's rights and distribution activities;
(v) the extension, termination or non-renewal of existing license and
distribution rights; and (vi) general economic changes affecting consumer demand
for LD and DVD hardware and software and affecting the buying habits of the
Company's customers.
RELEASE DATE DELAYS. The Company currently expects that all new LD and DVD
-------------------
titles with expected release dates in fiscal 1999 will be released during that
year. In the past, however, the Company's LD licensors, for various reasons,
have from time-to-time delayed releasing certain titles to the LD and VHS
markets. There can be no assurance that delays of this type will not occur in
the future. Although it is too early to tell, the Company believes that its
experience relative to delayed releases for certain LD titles will be the same
for certain DVD titles.
NATURE OF THE ENTERTAINMENT INDUSTRY. Audience acceptance of the Company's
------------------------------------
products represents a response not only to the artistic components of the
products, but also to the level of advertising and promotion by Company, the
studios and distributors, the availability of alternative forms of entertainment
and leisure time activities, changes in public taste, and other intangible
factors, all of which change rapidly and cannot be predicted. This situation
presents a number of risks, including the risk that some of the Company's LD and
DVD titles may not be commercially successful, that costs will not be recouped
or that anticipated profits justifying the Company's commitments will not be
realized.
ACQUISITION OPPORTUNITIES. The Company has explored, and continues to
-------------------------
explore, acquisition opportunities in various businesses compatible with and/or
complementary to those of the Company. To date, however, other than the 1995
acquisition of U.S. Laser (see "Subsidiary Activities" below) no acquisition
agreement has been reached. Furthermore, there can be no assurance that the
Company will enter into any acquisition agreement, nor can the Company currently
predict how such an agreement would impact its results. Any material
acquisition would require the Company to obtain financing. There can be no
assurance that the Company will obtain such financing on terms and conditions
which are reasonable or acceptable to the Company.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends to a
---------------------------
significant degree on the efforts of the Company's executive management: its
President and Chief Executive Officer, Chief Financial Officer, Chief
Administrative Officer and General Counsel, and Senior Vice President of Sales,
Marketing and Operations. The Company's operations may be adversely affected if
one or more members of executive management were to leave the Company.
ITEM 2. PROPERTIES.
----------
The lease for the Company's office space (30,080 square feet) in
Chatsworth, California provides for monthly rent of approximately $14,000
(subject to annual adjustment based upon increases in the consumer price index)
and will expire on March 31, 2000.
The lease for the Company's warehouse space (48,300 square feet) in
Chatsworth, California provides for monthly rent of approximately $23,000
(subject to annual adjustment based upon increases in the consumer price index).
The lease would have expired on March 31, 2000, however, in anticipation of the
completion of the Company's new warehouse and distribution facility in Las
Vegas, Nevada, the Company entered into a Surrender of Lease and Termination
Agreement, dated February
________________________________________________________________________________
Image Entertainment, Inc. 15
<PAGE>
2, 1998, whereby the lease will terminate on August 31, 1998 unless the Company
elects to extend the lease termination date on a month-to-month basis but not
beyond November 30, 1998.
The Company owns approximately 17.2 acres of real property in Las Vegas,
Nevada. In December 1997, the Company commenced construction of a 76,000 square
foot warehouse on the back 8.4 acres. Upon completion of construction in early
June 1998, the Company commenced installation of the facility's automated
distribution equipment. The facility is expected to be operational by September
1998. The architectural building plans provide for room to expand the facility
an additional 74,000 square feet should the need arise. On May 13, 1998, the
Company entered into an Agreement for Purchase and Sale with respect to the sale
of the front 8.8 acres of the property. See Item 7. "Liquidity and Capital
Resources -- Las Vegas Warehouse and Distribution Facility and Adjacent Land."
The Company's leased Chatsworth warehouse is currently operating at maximum
capacity. The Company has also been leasing an 11,060 square foot warehouse
located nearby for approximately $6,000 per month since April 1, 1997 to
accommodate inventory overflow. The lease is currently on a month-to-month
basis. The Company believes that the Chatsworth warehouse and the additional
warehouse will provide adequate capacity to meet its needs until the Las Vegas,
Nevada facility is completed.
The Company's subsidiary, U.S. Laser, leases approximately 8,000 square
feet of combined office and retail space in Whippany, New Jersey. The lease
provides for monthly rent of approximately $8,000 (subject to annual increases).
The lease would have expired on September 15, 2001, however, in anticipation of
the closure of U.S. Laser the Company signed a Lease Termination Agreement in
May 1998 whereby the lease will terminate in July 1998.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
On June 18, 1997, the Company filed a complaint in the Superior Court of
the State of California, County of Los Angeles (Case No. BC173084), against LEI
Partners, L.P. ("LEI") and a number of related entities and individuals, which
relates to a dispute concerning, among other things, LEI's payment obligations
under two promissory notes (the "Superior Court Action"). Item 8. "Note 6.
Default of Notes Receivable" of the Company's Annual Report on Form 10-K for the
year ended March 31, 1997 is incorporated herein by reference. The Company has
alleged, inter alia, breach of contract, intentional misrepresentation,
----- ----
negligent misrepresentation, conspiracy to defraud, interference with economic
relationship, conspiracy to interfere with economic relationship, and
conversion. The complaint seeks compensatory damages of not less than $5
million plus accrued interest, attorney's fees and punitive damages in an amount
to be proven at trial. On September 16, 1997, the Company filed a first amended
complaint against the same defendants and making the same claims, but providing
additional factual details.
In response to the complaint, defendant LEI filed a petition to compel
arbitration and stay the litigation pending completion of the arbitration, based
upon an arbitration provision in one of the two promissory notes in dispute. On
September 18, 1997, the court ordered the Company and LEI to arbitrate before
the American Arbitration Association ("AAA") in Los Angeles, California, and
stayed the remainder of the litigation pending completion of the arbitration.
________________________________________________________________________________
16 Image Entertainment, Inc.
<PAGE>
On November 17, 1997, the Company commenced the court ordered arbitration
proceedings against LEI, seeking damages in excess of $3.7 million, plus
attorney's fees and costs, for breach of the promissory notes. On January 21,
1998, LEI filed an answering statement denying liability. LEI also submitted a
counterclaim against Image and three of its present or former officers or
directors, but refused to pay the AAA filing fee, and the AAA rejected the
counterclaim. Although LEI's counterclaim was rejected and is not pending, it
alleged claims for, inter alia, fraud in the inducement, recission and breach of
----- ----
written contract. The counterclaim sought compensatory damages of $1 million
plus accrued interest, attorney's fees and costs, and also seeks punitive
damages in an amount of $2 million. Should the rejected counterclaim of LEI
ever be filed or prosecuted, the Company intends to contest vigorously its
allegations and purported claims.
On May 4, 1998, LEI and certain other defendants in the Superior Court
Action filed voluntary petitions under Chapter 7 of the Bankruptcy Code in the
United States Bankruptcy Court for the Central District of California. These
bankruptcy filings have automatically stayed the prosecution of the court
ordered arbitration proceedings against LEI, and the prosecution of the Superior
Court Action against LEI and three other defendants. The Company intends to
prosecute the Superior Court Action to the fullest extent possible.
In the normal course of business, the Company and its subsidiary are
subject to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations relating to employment and tax matters. While
it is not possible to predict the outcome of these matters, it is the opinion of
management, based on consultations with legal counsel, that the ultimate
disposition of known proceedings (including the rejected counterclaim in the
above-described arbitration proceeding) will not have a material adverse impact
on the Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
________________________________________________________________________________
Image Entertainment, Inc. 17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers serve at the pleasure of the Company's board of
directors (the "Board"). There is no family relationship between any executive
officer or director. The following information sets forth the position and age
of the Company's executive officers at June 1, 1998 and their business
experience for at least the prior five years:
Executive Officer Age Position & Background
- -------------------------------------------------------------------------------
Martin W. Greenwald 56 Chairman of the Board, Chief Executive
Officer and President since April 1981,
and Treasurer since January 1988. Since
July 1990, Mr. Greenwald has been a Board
Member of the Permanent Charities
Committee of the Entertainment
Industries, an umbrella organization
which coordinates charitable
contributions. Since 1995, Mr. Greenwald
has been the Chairperson of the Optical
Video Disc Association (OVDA) (formerly,
the Laserdisc Association of America).
Cheryl L. Lee 39 Chief Administrative Officer since April
1993 and General Counsel since April
1992; Vice President of Business Affairs
from February 1989 to March 1992; prior
thereto, Counsel, Theatrical Distribution
& Acquisition, Twentieth Century Fox Film
Corporation. Ms. Lee received her A.B.
degree from Stanford University in 1980
and her J.D. degree from New York
University Law School in 1984. Ms. Lee is
a member of the California Bar.
Jeff M. Framer 37 Chief Financial Officer since April 1993;
Controller from September 1990 to March
1993; Senior Manager, KPMG Peat Marwick
LLP, from July 1989 to September 1990;
and, Manager, KPMG Peat Marwick LLP, from
July 1988 to June 1989. Mr. Framer
received his B.S. degree in Business
Administration and Accounting Theory and
Practice from California State University
at Northridge in 1984. Mr. Framer is a
certified public accountant.
David A. Borshell 33 Senior Vice President, Sales, Marketing
and Operations since December 1994;
Senior Vice President, Operations, from
April 1993 to December 1994; Vice
President, Operations, from January 1991
to March 1993; Director of Operations
from July 1990 to December 1990; Director
of Sales from November 1988 to June 1990;
and, Account Executive from February 1986
to November 1988.
________________________________________________________________________________
18 Image Entertainment, Inc.
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "DISK." The Company's common stock has been included on the Nasdaq
National Market since February 19, 1991. The table below presents the quarterly
high and low closing prices on the NASDAQ/NMS during the past two fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1998 High Low
-------------------------------- ------- -------
<S> <C> <C>
Quarter ended June 30, 1997 $ 4.375 $ 3.3125
Quarter ended September 30, 1997 $ 4.125 $ 3.00
Quarter ended December 31, 1997 $ 4.875 $ 3.1875
Quarter ended March 31, 1998 $ 4.375 $ 3.00
Fiscal Year Ended March 31, 1997 High Low
-------------------------------- ------- -------
Quarter ended June 30, 1996 $ 7.9375 $ 5.875
Quarter ended September 30, 1996 $ 6.00 $ 4.75
Quarter ended December 31, 1996 $ 5.125 $ 3.00
Quarter ended March 31, 1997 $ 5.125 $ 3.375
</TABLE>
As of June 1, 1998 there were 1,674 holders of record of the Company's
common stock. The closing price on that date was $6.50.
The Company has never paid a cash dividend on its common stock and
presently intends to retain any future earnings for business development. In
addition, the Company is party to loan agreements which impose restrictions on
its payment of dividends.
________________________________________________________________________________
Image Entertainment, Inc. 19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The selected financial data presented below was derived from the
consolidated financial statements of the Company and should be read in
conjunction with such financial statements, the notes thereto and the other
financial information included therein.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
- ----------------------
Net sales................................... $ 75,516 $ 85,650 $ 95,086 $ 85,591 $ 65,578
Operating costs and expenses................ 84,605/(1)/ 83,399/(2)/ 86,926 77,851 60,576
Operating income (loss)..................... (9,089) 2,251 8,160 7,740 5,002
Interest expense............................ (662) (415) (155) (1,184) (2,336)
Interest income............................. 118 231 337 518 487
Other expense............................... -- (662)/(3)/ -- -- --
Amortization of deferred financing costs.... -- -- -- (111) (270)
Net gain on insurance settlement............ -- -- -- 742 960
Income (loss) before income taxes
and extraordinary item................ (9,633) 1,405 8,342 7,705 3,843
Income tax (expense) benefit................ 52 (433) (743) (175) (104)
Income (loss) before extraordinary item..... (9,581) 972 7,599 7,530 3,739
Extraordinary item, net of taxes............ -- (127)/(4)/ -- (1,219)/(4)/ (378)/(4)/
Net income (loss)........................... $ (9,581) $ 845 $ 7,599 $ 6,311 $ 3,361
Income (loss) per share:
Income (loss) before extraordinary item
Basic.............................. $ (.71) $ .07 $ .56 $ .57 $ .30
Diluted............................ $ (.71) $ .07 $ .51 $ .48 $ .26
Net income (loss)
Basic.............................. $ (.71) $ .06 $ .56 $ .48 $ .27
Diluted............................ $ (.71) $ .06 $ .51 $ .40 $ .23
Weighted average shares outstanding
Basic.............................. 13,471 13,504 13,569 13,255 12,347
Diluted............................ 13,471 13,836 14,802 15,641 14,392
<CAPTION>
MARCH 31,
-------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
- -----------------
Total assets................................ $ 33,781 $ 46,448 $ 39,406 $ 33,491 $ 42,526
Total liabilities........................... 25,116 28,397 18,880 16,818 31,412
Net shareholders' equity.................... 8,665 18,051 20,526 16,673 11,114
</TABLE>
- -----------------
(1) Includes noncash charges of $8,133,000 and $4,246,000 to reduce the carrying
value of the Company's LD inventory to its net realizable value and provide
for estimated losses on LD license and exclusive distribution agreements,
respectively. Also includes a nonrecurring charge of $825,000 related to the
closure of the Company's subsidiary, U.S. Laser Video Distributors, Inc., of
which $202,000 is composed primarily of fees and expenses associated with
facility lease termination and employee severance payments, and $623,000 (a
noncash charge) is composed of the write-off of unamortized facility
leasehold improvements and goodwill.
(2) Includes noncash charges of $1,964,000 and $1,946,000 to reduce the carrying
value of the Company's LD inventory to its estimated net realizable value
and provide for estimated doubtful accounts receivable, respectively.
(3) Other expense represents a nonrecurring charge composed primarily of legal
and accounting fees associated with the termination of acquisition
negotiations.
(4) Extraordinary item is composed of costs associated with early retirement of
debt, net of related taxes of $56,000, $34,000, and $10,000 for fiscal 1997,
1995 and 1994, respectively.
________________________________________________________________________________
20 Image Entertainment, Inc.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Forward-looking statements, within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, are made
throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "may," "expect" and similar expressions,
variations of such terms or the negative of such terms as they relate to the
Company or its management are intended to identify such forward-looking
statements. Such statements are based on management's current expectations and
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, the Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by, any
such forward-looking statements. For a more detailed description of risks and
uncertainties that may affect forward-looking statements see Item 1. "Risk
Factors."
GENERAL
Image Entertainment, Inc. (the "Company"), has licensed and distributed a
broad range of entertainment programming on laserdisc ("LD") since 1983. In
prior fiscal years, the Company's net sales were derived almost entirely from
the distribution of the LD format. In March 1997, a new optical disc video
format, the digital video disc ("DVD"), was introduced. The Company began
distributing DVD programming on a nonexclusive wholesale basis in March 1997 and
began releasing exclusively licensed DVD programming in June 1997. In fiscal
1998, LD and DVD, respectively, represented approximately 79% and 21% of the
Company's net sales; however, in the fourth quarter of fiscal 1998, LD and DVD,
respectively, represented 62% and 38% of the Company's net sales. The Company
also distributes music programming on compact audio disc ("CD") encoded in the
DTS Digital Surround ("DTS") multichannel audio format as well as certain
programming on videocassette tape ("VHS").
THE DVD FORMAT.
--------------
On March 24, 1997, Warner Home Video ("WHV"), currently a leading supplier
of DVD programming, became the first major program supplier to release DVD
software with its launch of DVD software in seven cities including Los Angeles,
New York, San Francisco, Seattle, and Washington, D.C. On August 26, 1997, WHV
became the first nation-wide major DVD program supplier with its release of DVD
programming in the remaining U.S. cities. Since WHV's March 1997 launch of DVD,
most of the major motion picture studios and numerous independent program
suppliers, including the Company, have released DVD programming. In February
1997, Pioneer Electronics released the first DVD player in the U.S. market.
Since then, 20 consumer electronics manufacturers have introduced or announced
introduction of DVD players in the U.S. market. The Electronics Industries
Association ("EIA") reported that from March 1997 to May 29, 1998, approximately
550,000 DVD players have been sold to consumer electronics retailers (this
figure does not reflect the number of DVD players that have actually sold
through to consumers).
DVD software and hardware sales have sustained consistent growth; however,
video software, hardware and retail industry insiders differ regarding whether
DVD will ultimately become a niche
________________________________________________________________________________
Image Entertainment, Inc. 21
<PAGE>
platform replacing LD as the preferred optical video disc format or a mass-
market platform replacing VHS as the primary home video format. DVD's ultimate
market share is dependent upon the following:
. Consumer and retailer acceptance. Management believes that DVD has
--------------------------------
been embraced by early adopters of electronic entertainment
technology, such as LD consumers, who appreciate the features of a
state-of-the-art video format, including its improved video and audio
quality over VHS. DVD is currently a sell-through business (i.e., DVD
software is priced for purchase versus VHS which is priced for
purchase and rental) Major video/music software discounters and
retailers such as Best Buy, Musicland and Tower are the market leaders
in DVD retail with large selections and "sale" pricing (20% off of
suggested retail pricing). Mass merchants such as Wal-Mart and Target
Stores, with a smaller presence in DVD, have announced plans to
increase the number of stores that carry DVD. Many of the larger
retailers have been consistently offering DVD programming at "sale"
pricing bringing the price of many DVD titles below $20. With
increasing DVD hardware penetration and growing consumer interest, an
increasing number of video speciality stores are stocking DVD software
for rental and sale. A December 1997 survey of video speciality stores
conducted by Video Store Magazine, a video software industry trade
publication, indicated that on average, 5% of the retailers responding
to the survey said they currently carry DVD for rental or sale.
Additionally, of the retailers responding to the survey who did not
carry DVD, 27% planned to introduce DVD for rental and 19% planned to
introduce DVD for sale within the next six months. Management believes
that sufficient retail support exists to, at a minimum, ensure DVD's
place as a successful niche market; however, for DVD to supplant VHS
as the primary home video format, retailers and consumers must support
DVD as a rental platform. It is currently unclear whether such support
will develop.
. DVD hardware penetration and hardware availability. Management
--------------------------------------------------
estimates that there are currently approximately 330,000 DVD
households (approximately 60% of the EIA's estimate of approximately
550,000 total DVD players sold through May 29, 1998 to consumer
electronics retailers) representing an approximate 0.3% penetration of
estimated television households. VHS and LD penetration are currently
approximately 85% and 2%, respectively. Consumer electronics
manufacturers (such as Philips Consumer Electronics Company, JVC
Company of America, Panasonic Consumer Electronics Company, Pioneer
Electronics, Sony Electronics, Thomson Consumer Electronics and Yamaha
Electronics Corporation) have introduced or announced plans to
introduce 19 new, second-generation DVD players in the first quarter
of calendar 1998, including two portable models, models with a
multiple disc changer, models with built-in Dolby Digital decoders and
several lower-priced entry-level models.
. Industry support of DVD software. All of the major motion picture
--------------------------------
studios participate in the DVD format (also known as "open" DVD)
and/or the "DIVX" DVD format (also known as "closed" DVD) (see
"Potential Competing Format to DVD" below); however, certain
participating major motion picture studios remain selective in
providing DVD releases, marketing and commitment to the format.
Twentieth Century Fox Home Entertainment, which has only committed to
the DIVX DVD format, and Paramount Home Video, the last major studios
to support the DVD format, announced their participation in February
1998 and May 1998, respectively.
________________________________________________________________________________
22 Image Entertainment, Inc.
<PAGE>
. Availability of DVD software. It is estimated by the DVD Video Group
----------------------------
(a Los Angeles-based, industry-funded nonprofit corporation that
exists expressly to promote consumer awareness of the benefits of DVD
video and to provide updated information to the media and the retail
trade about DVD video players, movies, and music videos) that there
are approximately 1,100 DVD titles currently available in the
marketplace, a significant increase from the approximately 250 DVD
titles available in September 1997 and the 20 DVD titles available at
the format's March 1997 launch. Major studio and independent program
suppliers are increasing the number of new release and catalogue DVD
titles released each month.
. Commitment to sustain DVD software quality and variety of features.
------------------------------------------------------------------
On the whole, DVD quality has steadily improved since its
introduction. Many DVDs offer "extras" (movie trailers, behind-the-
scenes commentaries and performer biographies). Most, but not all, DVD
program suppliers have incorporated these features without raising the
suggested retail price. The variety of releases is growing as many
smaller independent program suppliers are also offering their
programming in the DVD format. A significant challenge for DVD
suppliers, large and small, will be to sustain the quality and variety
of software features DVD consumers have come to expect of DVDs while
maintaining or lowering the price.
Since LD's introduction over 20 years ago, the LD format has catered to a
niche market of videophiles interested in a premium quality delivery system for
home entertainment. During the early '80s, independent industry analysts
predicted that LD consumers would exceed 5 million by the end of that decade.
In actuality LD's market penetration has only reached an estimated 2 million
households in North America. The same scenario may also apply to DVD.
The DVD format has not grown as quickly as predicted prior to its
introduction. Nevertheless, as a new video format, consumer electronics
manufacturers sold almost twice as many DVD players to consumer electronics
retailers, in DVD's first year of availability, than LD players sold at the
height of LD's popularity. Although DVD has been heralded as the replacement for
VHS (due to superior video and sound quality, unique features and video quality
that will not degrade with age or repeated viewings), there is currently limited
mass-market awareness of the DVD format. Management believes DVD is not
currently perceived by most consumers as a replacement for VHS primarily because
it lacks recordability and a rental market. Management also believes DVD will
remain a niche of the home video market, albeit occupying a much larger niche
than LD for many of the same reasons LD has remained a niche. The mass-market
consumer is not dissatisfied with the VHS format, its quality, title
availability, rental and sell-through availability and ease of use. The primary
advantages of DVD are its superior audio and video quality and its extra
features which appeal primarily to audio/videophiles with home theater systems.
POTENTIAL COMPETING FORMAT TO DVD.
---------------------------------
In September 1997, Digital Video Express ("DIVX") announced plans to
release a competing DVD format. In early June 1998, DIVX was launched in two
cities, San Francisco and Richmond, Virginia, with 40 stores offering one player
model and a selection of less than 30 titles, including several unavailable on
"open" DVD. DIVX is a pay-per-view DVD format requiring the purchase of a DIVX
feature-enhanced DVD player (which is reportedly backward compatible with
existing non-DIVX DVD software). The current universe of approximately 550,000
DVD players (sold to retailers) will not
_______________________________________________________________________________
Image Entertainment, Inc. 23
<PAGE>
play DIVX DVD software. Although recently released, DIVX has received
significant attention within the video industry. The developers of the DIVX
technology contend that their technology is an enhancement to current DVD
technology and is intended to appeal to the VHS renter. The developers of "open"
DVD, the early consumers of "open" DVD and certain members of the consumer video
press have expressed negative views regarding the DIVX format. Management
believes there is the potential that a perceived format war could confuse
consumers and stall the growth of both formats in an already small market.
Ultimately, consumer acceptance will decide the DIVX format's success.
THE COMPANY'S DVD DISTRIBUTION.
------------------------------
The Company's quarterly net sales derived from DVD distribution has
steadily increased since DVD's March 1997 introduction. The Company's net sales
from DVD distribution (exclusive and nonexclusive) for the quarters ended March
31, 1998 and December 31, September 30, June 30 and March 31, 1997 were
$6,183,000, $5,021,000, $3,085,000, $1,411,000 and $742,000, respectively. As a
percentage of net sales, DVD net sales were 38%, 19%, 19%, 8% and 1%,
respectively. Since the Company's first exclusive DVD release in June 1997
through March 31, 1998, the Company has released 91 exclusive DVD titles.
The Company believes DVD has significant long-term potential in the video
marketplace and, to remain competitive through diversification of its core LD
business, is aggressively seeking DVD programming for exclusive distribution.
The Company has exclusive agreements with Universal (50 catalogue titles), Orion
(12 catalogue titles), Playboy (output of new releases and catalogue titles) and
has entered into numerous other exclusive distribution agreements with
independent program suppliers for the release of certain titles on DVD. Certain
of the Company's LD license agreements also provided for a broad grant of
optical disc rights including DVD.
According to VideoScan, which tracks point-of-sale data from more than
16,000 stores reportedly accounting for 70 percent of all video sales, the
Company's market share of total DVD unit sales from January 1, 1998 through May
24, 1998 is 2.93%. The Company ranks eighth in market share behind Warner Home
Video (27.65%), Columbia TriStar (15.77%), Universal Home Video (10.63%), Disney
(10.52%), MGM (9.78%), New Line (8.32%) and Artisan Entertainment (formerly LIVE
Home Entertainment) (5.09%). Sales data includes mass merchandisers and
retailers but not most discount outlets.
As the DVD format continues to grow, and assuming the Company can continue
to successfully secure and distribute additional DVD programming, management
believes it is well positioned to enhance its reputation and presence in the DVD
market. Management believes the licensing, sales, production, creative
services, marketing and distribution expertise it has developed as the largest
LD licensee and distributor in North America has and will continue to easily
translate to the DVD format, thereby enhancing the success of the Company's DVD
efforts.
Management further believes, without assurance, that should the DVD format
ultimately become a niche of the home video market, although a much larger niche
than LD, it is possible that the major motion picture studios will decide that
the DVD format, as a percentage of their video business, is not significant
enough to retain in-house control, as is the case with the life cycle of LD, and
ultimately be receptive to licensing exclusive DVD rights on a broader basis.
Management believes, it is therefore possible, although there can be no
assurance, that history could repeat itself and, as with LD, the Company could
eventually distribute a much higher percentage of DVD programming on an
________________________________________________________________________________
24 Image Entertainment, Inc.
<PAGE>
exclusive basis than on a nonexclusive basis. Should DVD ultimately grow large
enough to supplant VHS as the primary home video format, management believes,
without assurance, that the Company's core competencies, developed as the
largest LD licensee and distributor in North America, will position it to be a
leading distributor of DVD software.
DVD'S CONTINUED NEGATIVE IMPACT ON LD SALES.
-------------------------------------------
The DVD format competes directly with the LD format. Most of the same
consumers who were attracted to LD's quality and features are attracted to DVD's
offerings.
The major music/video software retail chains, such as Musicland, Tower and
Trans World (the "Chain Stores"), who have long been supporters of the LD
format, have significantly cut back on their LD purchases, removed LD from
certain of their stores and are replacing floor space previously dedicated to LD
(and in many cases VHS) with DVD programming. To accomplish this, the Chain
Stores have significantly narrowed the breadth of their LD purchases, focusing
on "A" title new releases and popular catalogue programming. The smaller
independent LD retailers have experienced less of a decline in LD sales and
continue to carry a large breadth of new release and catalogue LD programming.
Management believes the Chain Stores are enthusiastically supporting what
they believe to be the video format of the future, due primarily to DVD's less
expensive suggested retail price, smaller size, digital technology, unanimous
consumer electronics manufacturer support, anticipated unanimous support by the
major motion picture studios and other program suppliers and expected success of
DVD-ROM within the computer industry. With the Chain Stores' LD selection
shrinking and their DVD selection growing, management believes that LD consumers
are more inclined to gravitate to the DVD format faster than if full LD
selections were offered.
Management believes that the DVD consumer of today closely mirrors the LD
consumer and that a significant percentage of the DVD players sold through to
consumers to date have been sold to existing LD consumers or were sold to
members of the identified niche market of new consumers (i.e., those likely to
have eventually bought an LD player in the absence of the superior DVD format
and those not of purchasing age during the height of LDs). Those consumers are
interested in a premium quality video delivery system for home entertainment.
In contrast to the approximately 550,000 DVD players sold to consumer
electronics retailers since DVD's launch, the EIA reported that LD player sales,
in calendar 1997, were approximately 49,000 units, down 68.5% from calendar 1996
(DVD/LD combination player sales are included in the EIA DVD sales figures, and
not in the LD sales figures). The EIA projects that only 28,000 LD players will
be sold in calendar 1998. Due to the continued decline in units sold, the EIA
stopped tracking LD player sales in calendar 1998.
Sales of LD programming have declined more rapidly than management
anticipated. Quarterly sales of LD programming for fiscal 1998, with the
exception of the Company's third quarter ended December 31, 1997, have
significantly declined as compared to quarterly LD sales for fiscal 1997. The
Company experienced a 56% decline in LD sales for its fourth quarter ended March
31, 1998 versus the fourth quarter of fiscal 1997. For fiscal 1998 quarter's
ended December 31, September 30, and June 30, 1997, LD sales were down 15%, 25%
and 23%, respectively, from the comparative prior-year periods. Management
believes that, although overall consumer awareness of the DVD format is still
________________________________________________________________________________
Image Entertainment, Inc. 25
<PAGE>
low, both the LD retailer and many LD consumers are embracing the DVD format.
Management believes that DVD's negative impact on LD is permanent. Management
further believes DVD will eventually, over time, be the successor to LD.
FOURTH QUARTER CHARGES ASSOCIATED WITH WRITE-DOWN OF CARRYING VALUE OF LD
-------------------------------------------------------------------------
INVENTORY AND ESTIMATED LOSSES ON LD LICENSE AND DISTRIBUTION AGREEMENTS.
------------------------------------------------------------------------
As discussed in the Company's Form 10-K for fiscal 1997, management has
been making an on-going quarterly assessment of the impact of DVD's growth on
the LD market and the adequacy of the Company's reserves against LD inventory
and LD royalty advances. During the period from early March through June of
1998, management's assessment identified that several LD related trends were
developing more rapidly than had previously been anticipated. The most
significant of these trends involved the greater than expected decline in LD
software sales during the Company's fourth quarter ended March 31, 1998 and the
diminishing support of LDs by the Chain Stores. These rapidly developing trends
have, in management's estimation, had a greater than previously expected impact
on the recoverability of the Company's LD inventory and unrecouped royalty
advances.
Accordingly, the Company recorded pretax noncash charges during the fourth
quarter ended March 31, 1998 of $6,263,000 to reduce the carrying value of its
LD inventory to its estimated net realizable value and $4,246,000 to provide for
estimated losses on LD license and exclusive distribution agreements. During the
fiscal year ended March 31, 1998, the Company recorded provisions for slow-
moving LD inventory and for estimated losses on LD license and exclusive
distribution agreements totaling approximately $8,133,000 and $4,246,000,
respectively. If the aforementioned trends accelerate beyond management's
current estimates, the Company may be required to record additional charges in
the future related to the recoverability of LD related assets.
COEXISTENCE OF LD DESPITE DVD'S SUCCESS.
---------------------------------------
Although the LD market is shrinking faster than management anticipated,
management believes that LD and DVD will coexist for several years. LD is well
established as a videophile format. With an estimated installed base of over 2
million households, the LD customer is not expected to disappear overnight. A
dramatic disparity in the number of available titles on LD (over 10,000) versus
DVD (over 1,000) remains. Management estimates that it will take DVD years to
reach LD's breadth of title availability and there are many titles (whether
popular, less popular, rare or esoteric) currently available only in the LD
format. It may take years for these titles to come out on DVD (if at all).
Despite declining sales and the Company's diversification into DVD programming,
the Company is committed to supporting the LD format. Management believes that
even those LD customers who are now also buying DVD will not rush to replace
their existing LD collections with DVD versions because of LD's comparable
quality. Management believes that the DVD/LD combination player currently
manufactured by Pioneer Electronics will continue to attract consumers to both
formats.
FUTURE LD DISTRIBUTION STRATEGY.
-------------------------------
In addition to distributing through traditional retail distribution
channels, the Company plans to distribute its LD inventory through alternative
distribution channels, including direct-to-consumer via mail order and over the
Internet, in an effort to increase sales and compensate for the reduction in LD
purchases by the Chain Stores. The Company has commenced a series of
direct-to-consumer sales efforts. On future direct-to-consumer sales, the
Company plans to first offer the selected consumer
________________________________________________________________________________
26 Image Entertainment, Inc.
<PAGE>
sale titles to its retail customers, providing them with a window of opportunity
to make purchases at prices less than those offered direct to the public.
Management believes it must now support the significant installed base of LD
consumers who are recently having trouble locating desired LD titles at retail
in certain parts of the country. With over 9,000 different LD titles in the
Company's inventory, the installed LD household base can enjoy the greatest LD
selection available from one source. Management believes there remains a viable
market for the still-growing library of LD programming. Although there can be no
assurance, management believes that with its extensive LD selection of titles,
the Company can develop a successful direct-to-consumer LD business.
CLOSURE OF SUBSIDIARY - U.S. LASER VIDEO DISTRIBUTORS, INC.
In May 1998, the Company announced the closing of its wholly-owned
subsidiary U.S. Laser Video Distributors, Inc. ("U.S. Laser"), located in New
Jersey and acquired by the Company in June 1995 for $3.1 million in cash. The
closure of the subsidiary and its retail store "Digitainment" is expected to be
finalized by July 15, 1998. The closure follows the Company's consolidation of
a majority of U.S. Laser's optical disc distribution activities. U.S. Laser's
only remaining activities consisted of direct-to-consumer optical disc sales
through the "Digitainment" retail store, mail order to a decreasing number of
accounts and the Internet. With the decline of industry-wide LD software and
hardware sales, offset in part by growing DVD software and hardware sales, the
retail store was performing below expectations. The Company plans to refocus its
Internet sales from its corporate office in California, where its creative
services, marketing and management information systems departments reside. The
closure is expected to save future corporate cash flow and boost operational
efficiencies by eliminating the need to hold dual inventories to service the
Company's and U.S. Laser's customers. Based upon U.S. Laser's current and
projected future financial performance, the closing of U.S. Laser is estimated
to save the Company approximately $1.2 million in net cash flow over the next
three years.
Further, in October 1997, U.S. Laser ceased publication of Laserviews as
circulation had diminished in recent years. The Company recently signed an
agreement with the publisher of Widescreen Review Magazine which will give
Laserviews subscribers the opportunity to receive issues of Widescreen Review
Magazine in satisfaction of their subscription.
The operating lease for U.S. Laser's corporate offices, distribution center
and retail store was to expire in September 2001. In May 1998, the Company
signed a Lease Termination Agreement with U.S. Laser's landlord to early
terminate the lease on July 15, 1998.
The closure of U.S. Laser resulted in nonrecurring pretax charges of
$202,000, representing fees and expenses associated with the Lease Termination
Agreement and employee severance payments, and $623,000 (a noncash charge)
covering the write-off of unamortized leasehold improvements and goodwill. The
pretax charges total $825,000 and are included in costs of facility closure
expense for the year ended March 31, 1998.
________________________________________________________________________________
Image Entertainment, Inc. 27
<PAGE>
RESULTS OF OPERATIONS
The following table presents adjusted pretax consolidated operating income
(loss) for the Company, excluding noncash provisions for slow-moving LD
inventory, estimated losses on license and exclusive distribution agreements and
estimated doubtful accounts receivable and nonrecurring charges associated with
the closure of the Company's subsidiary, U.S. Laser:
<TABLE>
<CAPTION>
(In thousands) Years Ended March 31,
------------------------------
1998 1997 1996
----------- --------- ------
<S> <C> <C> <C>
Consolidated operating income (loss), as reported $(9,089) $2,251 $8,160
Provision for slow-moving LD inventory 8,133 1,964 254
Provision for estimated losses on LD license and
exclusive distribution agreements 4,246 -- --
Provision for estimated doubtful accounts receivable,
net of recoveries (331) 1,946 104
Costs of facility closure 825 -- --
------- ------ ------
Adjusted consolidated operating income $ 3,784 $6,161 $8,518
======= ====== ======
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Net sales for the year ended March 31, 1998 declined 11.8% to $75,516,000
from $85,650,000 for the year ended March 31, 1997. Net sales of LD programming
for fiscal 1998 declined 29.6% to $59,816,000 from $84,908,000 for fiscal 1997.
Net sales of DVD programming was $15,700,000 for fiscal 1998 versus $742,000 for
fiscal 1997. Approximately $6,156,000, or 39.2%, of total fiscal 1998 DVD sales
were derived from exclusively distributed or licensed product. The decline in
fiscal 1998 net sales was due to the decline in LD sales, offset in part, by net
sales from the Company's distribution of exclusive and nonexclusive DVD
programming. Net sales from exclusive distribution of DTS encoded software (LDs
and CDs) were $2,079,000 and $311,000 for fiscal 1998 and 1997, respectively.
Cost of optical disc sales (LDs and DVDs collectively) for the year ended
March 31, 1998 increased to $70,256,000, or 93.0% of net sales, from
$68,427,000, or 79.9% of net sales, for fiscal 1997. The increase in cost of
optical disc sales, as a percentage of net sales, for the March 1998 fiscal year
over that of the March 1997 fiscal year was primarily due to the significantly
increased provisions for slow-moving LD inventory and estimated losses on LD
license and exclusive distribution agreements.
The Company currently experiences a comparatively higher gross margin on
sales for DVD programming than LD programming. Gross margins on nonexclusive
DVD sales are comparable to that of nonexclusive LD. Gross margins on exclusive
DVD sales are currently higher than on exclusive LD sales, although DVD
production costs are much higher than those for LD. See paragraph below
detailing amortization of production costs. Although the Company has been
experiencing decreasing replication prices for its exclusive LD programming, the
current DVD replication costs are typically less than half of the replication
costs for LD programming. The Company expects replication costs for DVD
programming to decline in the future.
The Company's cost of optical disc sales, as a percentage of net sales, can
vary period to period depending upon the sales mix of higher-margin exclusive
programming and lower-margin nonexclusive programming. The sales mix of
exclusive and nonexclusive optical disc programming and the cost of
________________________________________________________________________________
28 Image Entertainment, Inc.
<PAGE>
optical disc sales within each category will vary with the availability of new
and catalogue exclusive and nonexclusive titles, the popularity of those titles
and the Company's marketing efforts with respect to those titles. Lower-margin
nonexclusive product sales (LD and DVD collectively) accounted for 24.7% of net
sales in fiscal 1998 compared to 22.3% of net sales in fiscal 1997.
Selling expenses for fiscal 1998 increased 4.0% to $4,943,000, or 6.5% of
net sales, from $4,752,000, or 5.5% of net sales, for fiscal 1997. Fiscal
1998's increase, as a percentage of net sales, was primarily due to higher
personnel and distribution costs associated with DVD and DTS distribution and
higher freight costs due to increased freight rates over the prior year.
General and administrative expenses for fiscal 1998 decreased 31.9% to
$4,841,000, or 6.4% of net sales, from $7,108,000, or 8.3% of net sales, for
fiscal 1997. Fiscal 1997 includes a $1,946,000 provision for estimated doubtful
accounts receivable related to the then distressed condition of the retail
entertainment software market. Exclusive of the fiscal 1997 charge, general and
administrative expenses for fiscal 1998 decreased 6.2% to $4,841,000, or 6.4% of
net sales, from $5,162,000, or 6.0% of net sales, for fiscal 1997. The fiscal
1998 decrease in absolute dollars is primarily due to net recoveries of
previously provided for doubtful accounts receivable from certain customers and
lower overhead for U.S. Laser resulting from the consolidation of certain
administrative support, offset in part by severance payments to former
principals of U.S. Laser and higher professional fees for fiscal 1998 versus
fiscal 1997. The employment of U.S. Laser's former principals ended in December
1997 as part of the Company's consolidation of a majority of U.S. Laser's
distribution activities.
Costs of facility closure for fiscal 1998 consists of a nonrecurring charge
of $825,000 associated with the aforementioned closure of U.S. Laser. See
"Closure of Subsidiary -- U.S. Laser Video Distributors, Inc." above.
Amortization of production costs for fiscal 1998 increased 20.2% to
$3,740,000, or 5.0% of net sales, from $3,112,000, or 3.6% of net sales, for
fiscal 1997. The increase is primarily attributable to costs associated with
the incremental production of exclusive DVD titles as well as the higher
overhead in the Company's creative services and production departments necessary
to produce the greater volume of titles. Certain costs of DVD production are
higher than that of LD due to the complexity and intricacy of the required
processes for DVD. Costs associated with authoring, compressing and mastering
an exclusive DVD title can be 5 times as much as the cost of mastering an
exclusive LD title. The cost of DVD authoring and compression varies depending
on the number of features, complexity and intricacy of those features and the
extent of ancillary materials included. Costs to master and produce a LD title
vary depending on the number of sides containing LD programming as well as the
complexity of ancillary materials included. Amortization of production costs
will vary based upon the mix, timing and number of exclusive DVD and LD titles
placed into production.
Interest expense for fiscal 1998 increased 59.5% to $662,000, or 0.9% of
net sales, from $415,000, or 0.5% of net sales, for fiscal 1997. The increase
is attributable to higher average debt levels during fiscal 1998.
Interest income for fiscal 1998 decreased 48.9% to $118,000, or 0.2% of net
sales, from $231,000, or 0.3% of net sales, for fiscal 1997. The Company had
less cash invested during fiscal 1998 than 1997. Further, interest income for
fiscal 1997 included interest income on notes receivable from LEI Partners L.P.,
who defaulted on the notes in November 1996.
________________________________________________________________________________
Image Entertainment, Inc. 29
<PAGE>
Other expense for fiscal 1997 consists of a nonrecurring charge of
$662,000, composed primarily of professional fees, relating to the terminated
acquisition of Essex Entertainment, Inc., a privately-held independent music
company headquartered in New Jersey.
The extraordinary charge of $127,000, net of taxes of $56,000, for fiscal
1997 was associated with the early retirement of debt. In December 1996, the
Company refinanced its $15 million revolving credit facility with Foothill
Capital Corporation with a facility from Union Bank of California, N.A. ("Union
Bank"). The charge related to a prepayment penalty paid and amortization of
deferred financing costs accelerated as a result of the early retirement
($40,000 represents noncash charges).
The Company recorded a net income tax benefit of $52,000 in fiscal 1998,
representing a carry back to fiscal 1997 of a portion of the net operating loss
generated in fiscal 1998. In fiscal 1998, a valuation allowance has been
recorded against the deferred tax asset created by the fiscal 1998 net operating
loss for book and tax purposes. The effective income tax rate of 30.8% for
fiscal 1997 is lower than the statutory rate due to utilization of net operating
loss carryforwards for federal income tax purposes.
For fiscal 1998, the Company recorded a net loss of $9,581,000, or $.71 per
basic and diluted share, as compared to net income of $845,000, or $.06 per
basic and diluted share for fiscal 1997.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net sales for fiscal 1997 decreased 9.9% to $85,650,000 from $95,086,000
for fiscal 1996. For fiscal 1997, the Company experienced weaker net sales of
catalogue titles (previously released LD titles) and, to a lesser extent, weaker
net sales of new LD releases compared to fiscal 1996. Management believes this
to be primarily a result of the distressed condition of the retail entertainment
software market and uncertainty in the LD marketplace caused by the March 1997
introduction of the DVD format. The Company's net sales of DVD titles, all on a
nonexclusive basis, from DVD's March 24, 1997 introduction date through the
fiscal year ended March 31, 1997 totaled $742,000.
Late in calendar 1995, the dedicated entertainment software retail sector
entered a period of declining sales growth and deteriorating profitability.
Management believes that several factors contributed to this trend including,
most significantly, a general softness in consumer demand for music product,
over expansion in the number of retail outlets and the competitive impact of
mass merchants (such as Wal-Mart) and other discounters (such as Best Buy) on
the dedicated entertainment software retailers. This economic slump accelerated
throughout calendar 1996 and continued in calendar 1997 as many of the larger
dedicated entertainment software retailers reported worsening financial results,
store closing programs, violations of bank financing covenants and constrained
cash positions. As a result, throughout calendar 1996 and early calendar 1997,
the Company took steps to mitigate its exposure to bad debts and product returns
from troubled retailers, such as exercising more discretion over product
shipments and carefully monitoring accounts receivable status. In August 1996,
Camelot Music, a then-large customer of the Company, filed Chapter 11 bankruptcy
and, in February 1997, Musicland, the Company's then-largest customer,
indefinitely suspended payments on outstanding amounts owing to its trade
vendors. Additionally, Alliance Entertainment Corp., the Company's then-second
largest customer, was experiencing financial difficulties and ultimately filed
Chapter 11 bankruptcy in July 1997. See Item 7. "Liquidity and Capital
Resources -- Current Status of Liquidity
________________________________________________________________________________
30 Image Entertainment, Inc.
<PAGE>
Constraints Identified in Fiscal 1997 and Results of Management's 1997 Action
Plan" and "Summary and Outlook --Improving Financial Condition of the Retail
Entertainment Software Market."
Cost of optical disc sales (LDs and DVDs collectively) for fiscal 1997
decreased to $68,427,000, or 79.9% of net sales, from $74,387,000, or 78.2% of
net sales, for fiscal 1996. The fiscal 1997 increase in cost of optical disc
sales, as a percentage of net sales, is primarily attributable to an increased
provision for slow-moving LD inventory in response to the continued uncertainty
in the LD market caused by the introduction of DVD as well as the distressed
condition of the retail entertainment software market and a shift in sales mix
toward lower-margin nonexclusive wholesale distribution product. The Company
increased its provision for slow-moving LD inventory to $1,964,000 in fiscal
1997 versus $254,000 in fiscal 1996. The increase in cost of optical disc
sales, as a percentage of net sales, for fiscal 1997 was offset, in part, by
manufacturing cost savings, realized on LDs manufactured in Japan, resulting
from the comparative strength of the U.S. Dollar against the Japanese Yen.
The sales mix of higher-margin exclusive product and lower-margin
nonexclusive product and the margins within each category vary with the
availability and popularity of titles and the Company's marketing emphasis.
Lower-margin nonexclusive product sales, including lower-margin U.S. Laser sales
(U.S. Laser has substantially lower margins because it is solely a nonexclusive
distributor), accounted for 22.3% of net sales in fiscal 1997 compared to 18.8%
of net sales in fiscal 1996.
Selling expenses increased 4.9% to $4,752,000, or 5.5% of net sales, for
fiscal 1997 from $4,531,000, or 4.8% of net sales, for fiscal 1996. This
increase resulted primarily from increased trade and media advertising of
exclusive titles. The increase in selling expenses for fiscal 1997 was offset,
in part, by reduced selling expenses for U.S. Laser for the twelve months of
fiscal 1997 versus the ten months in fiscal 1996.
General and administrative expenses for fiscal 1997 increased 38.7% to
$7,108,000, or 8.3% of net sales, from $5,124,000, or 5.4% of net sales, for
fiscal 1996. This increase resulted primarily from a significant increase in
the provision for estimated doubtful accounts receivable. The provision for
estimated doubtful accounts receivable was $1,946,000 for fiscal 1997 versus
$104,000 for fiscal 1996. The significant increase in the provision for
estimated doubtful accounts receivable was due to the August 1996 Chapter 11
bankruptcy filing of Camelot Music, the February 1997 suspension by Musicland of
$2.7 million in payments owing to the Company, and the overall distressed
condition of the retail entertainment software market. Additionally,
contributing to increased general and administrative expenses for fiscal 1997
were a full twelve months of U.S. Laser's general and administrative expenses in
fiscal 1997 versus ten months in fiscal 1996, expenses related to U.S. Laser's
new retail concept store "Digitainment," which opened in October 1996 and higher
insurance costs for increased coverage, all of which were offset, in part, by
significantly reduced performance-based executive bonuses.
Amortization of production costs for fiscal 1997 increased 7.9% to
$3,112,000, or 3.6% of net sales, from $2,884,000, or 3.0% of net sales, for
fiscal 1996. The increase results from more exclusive LD titles being placed
into production and the higher overhead in the Company's creative services and
production departments necessary to produce the greater volume of exclusive
titles.
Interest expense for fiscal 1997 increased 167.7% to $415,000 from $155,000
for fiscal 1996 due to higher average borrowings outstanding during fiscal 1997.
Interest income for fiscal 1997 decreased 31.4% to $231,000 from $337,000 for
fiscal 1996 due to lower average cash balances during
________________________________________________________________________________
Image Entertainment, Inc. 31
<PAGE>
fiscal 1997. The Company used available cash and borrowings under its revolving
credit facility to purchase 17.2 acres of unimproved property in Las Vegas,
Nevada, pay advance royalties and certain inventory purchase and license fee
obligations under new exclusive LD output license and distribution agreements,
and repurchase common stock under the Company's stock repurchase program.
Other expense consists of a nonrecurring charge of $662,000 composed
primarily of professional fees relating to the terminated acquisition of Essex
Entertainment, Inc.
During fiscal 1997, the Company recorded an extraordinary charge of
$127,000, net of related taxes of $56,000, associated with the early retirement
of debt. In December 1996, the Company refinanced its $15 million revolving
credit and term loan facility with Foothill Capital Corporation with a revolving
credit facility from Union Bank. The charge related to a prepayment penalty and
amortization of deferred financing costs which were accelerated as a result of
the early retirement ($40,000 represents noncash charges).
The effective income tax rate for fiscal 1997 was approximately 30.8%
versus approximately 8.9% for fiscal 1996. Net operating loss carryforwards for
Federal and state tax purposes were utilized to offset taxable income for fiscal
1996. The net operating loss carryforward for state tax purposes was fully
utilized during fiscal 1996 and the net operating loss carryforward for Federal
tax purposes was fully utilized in fiscal 1997, leading to a higher effective
income tax rate for Federal and state tax purposes for fiscal 1997.
Net income for fiscal 1997 decreased 88.9% to $845,000, or $.06 per basic
and diluted share, from $7,599,000, or $.56 and $.51 per basic and diluted
share, respectively, for fiscal 1996.
ACCOUNTING POLICIES
The Company's earnings are significantly affected by accounting policies
required for the entertainment industry. The costs to produce licensed optical
disc programming (the "Production Costs") are capitalized as incurred. Pursuant
to the income forecast method, as discussed in Financial Accounting Standards
Board Statement No. 53, a percentage of the Production Costs is charged to
expense each month based upon (i) a projected revenue stream resulting from
distribution of new and previously released optical disc programming related to
the Production Costs and (ii) management's estimate of the ultimate net
realizable value of the Production Costs. Production Costs include the cost of
converting film prints or tapes into the optical disc format, which includes
mastering and ancillary material production charges for LD and authoring and
compression, replica sample, set up charges and ancillary material production
for DVD, and packaging artwork costs and the overhead of the Company's creative
services and production departments. Estimates of future revenues are reviewed
periodically and amortization of Production Costs is adjusted accordingly. If
estimated future revenues are not sufficient to recover the unamortized balance
of Production Costs, such costs are reduced to estimated net realizable value.
Royalty and distribution fee advances represent fixed minimum payments made
to licensors and program suppliers for exclusive optical disc programming
distribution rights. A program supplier's share of program distribution revenues
is retained by the Company until the share equals the advance(s) paid to the
program supplier. Thereafter, any excess is paid to the program supplier. In
the event of an excess, the Company records, as a cost of optical disc sales, an
amount equal to the program supplier's share of the net distribution revenues.
Royalty and distribution fee advances are charged to operations
________________________________________________________________________________
32 Image Entertainment, Inc.
<PAGE>
as revenues are earned, and are stated at the lower of unamortized cost or
estimated net realizable value on an individual-title or license-agreement
basis.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128") "Earnings per Share." This
statement requires companies to replace the presentation of primary earnings per
share ("EPS") with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the statements of
operations and a reconciliation of the basic EPS computation to the diluted EPS
computation. All prior EPS data has been restated to conform with the
provisions of SFAS No. 128. See Note 4 to the Consolidated Financial Statements
for the reconciliation.
In June 1997, Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130") "Reporting Comprehensive Income" was issued. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 130 in its fiscal year ending March 31, 1999. Currently, the
Company expects that SFAS No. 130 will not have a significant impact on the
Company's reporting and disclosures.
In June 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
No. 131") "Disclosure about Segments of an Enterprise and Related Information"
was issued. SFAS No. 131 requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. SFAS No. 131
is effective for annual periods beginning after December 15, 1997 and interim
periods in the second year of application. The Company will adopt SFAS No. 131
in its fiscal year ending March 31, 1999. Currently, the Company expects that
SFAS No. 131 will not have a significant impact on the Company's reporting and
disclosures.
IMPACT OF YEAR 2000
The Company is aware of the complexity and the significance of the "Year
2000" issue. The Company utilizes information systems throughout its business
to effectively carry out its day-to-day operations. The Company is in the
process of assuring that its systems are capable of recognizing and processing
information properly as the year 2000 approaches. The Company has completed a
preliminary assessment of its Year 2000 compliance and is currently correcting,
upgrading or replacing those systems that are not Year 2000 compliant. The
Company believes that it will be able to modify or replace its affected systems
in time to avoid any interruptions in its operations. The Company does not
anticipate that costs associated with this project will have a material impact
on the Company's financial position or results of operations in future periods.
The Company will gather information concerning the Year 2000 compliance
status of its suppliers. In the event that any of the Company's significant
suppliers do not successfully or timely achieve Year 2000 compliance, the
Company's business or operations may be adversely affected.
________________________________________________________________________________
Image Entertainment, Inc. 33
<PAGE>
INFLATION
Management believes that inflation is not a material factor in the
operation of the Company's business at this time.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements vary primarily with the level of
its licensing, production and distribution activities. The principal recurring
uses of working capital in operations 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. Working capital has historically been provided by cash flows from
operations, private sales of common stock, notes representing long-term debt and
bank borrowings. For the fiscal year ended March 31, 1998, operating activities
provided cash and cash equivalents of $516,000, investing activities used cash
and cash equivalents of $384,000 and financing activities used cash and cash
equivalents of $207,000, resulting in a net decrease in cash and cash
equivalents of $75,000.
SOURCES AND USES OF WORKING CAPITAL -- FISCAL 1998 AND 1997.
-----------------------------------------------------------
For fiscal 1998, the Company's net cash provided from operating activities
was $516,000 as compared to net cash used by operating activities of $2,571,000
for fiscal 1997. The increase in cash provided for fiscal 1998 was due in part
to significantly less expenditures in fiscal 1998 for LD inventory and LD
royalty/distribution advances. During fiscal 1997, the Company made significant
payments for royalty and distribution advances and contractual LD inventory
purchases under exclusive LD license and distribution agreements. The Company's
accounts receivables at March 31, 1998 dropped considerably from those at March
31, 1997, resulting from fiscal 1998's reduced fourth quarter net sales compared
to fiscal 1997. Additionally in fiscal 1998, the Company increased its DVD
inventory and advance royalty/distribution fee expenditures, increased its DVD
related production cost expenditures and significantly paid down its accounts
payable, accrued royalties and liabilities balances as compared to fiscal 1997.
For fiscal 1998, the Company's net cash used by investing activities
decreased to $384,000 from $6,234,000 for fiscal 1997. Excluding construction
and equipment loan funding for the Company's Nevada warehouse and distribution
facility, the Company had significantly less capital expenditures during fiscal
1998 as compared to fiscal 1997. During fiscal 1997, the Company purchased 17.2
acres of unimproved real property in Las Vegas, Nevada for $4,319,000 in cash
and a note payable. See Item 2 "Properties" and "Las Vegas Warehouse and
Distribution Facility and Adjacent Land" below.
For fiscal 1998, the Company's net cash used by financing activities was
$207,000 compared to net cash provided by financing activities of $5,229,000 in
fiscal 1997. In fiscal 1998, the Company received long-term financing from
Image Investors Co. and short-term financing from Pioneer Citizens bank. See
"Financing Activities" below. With funding from those financings, the Company
repaid Nevada land related short-term debt and paid down the Company's revolving
credit facility with Union Bank. In fiscal 1997, the Company had net borrowings
under its revolving credit facility and made significant expenditures to
purchase its stock under its stock buy-back program. In fiscal 1997, the
Company purchased 757,700 shares of its common stock for $3,529,000 as part of
its January 1995 Board of Directors authorized stock buyback program. From
January 1995 through March 31, 1997,
________________________________________________________________________________
34 Image Entertainment, Inc.
<PAGE>
the Company purchased 1,665,800 shares of its common stock for $9,785,000 (at an
average price of $5.87 per share).
CURRENT STATUS OF LIQUIDITY CONSTRAINTS IDENTIFIED IN FISCAL 1997 AND
---------------------------------------------------------------------
RESULTS OF MANAGEMENT'S 1997 ACTION PLAN.
- ----------------------------------------
In the Company's Form 10-K for fiscal 1997, the Company disclosed that
certain significant developments during the second half of fiscal 1997 and the
first quarter of fiscal 1998 caused management to grow concerned that the
Company's then-current sources of working capital may have been insufficient to
fund working capital requirements in fiscal 1998 unless certain discretionary
licensing and capital investment programs were curtailed and additional sources
of working capital were secured. The significant developments included: (i) the
February 1997 suspension of $2.7 million in accounts receivable due from
Musicland (the Company's then-largest customer); (ii) the July 1997 Chapter 11
bankruptcy filing by Alliance Entertainment Corp. (the Company's then-second
largest customer); (iii) the then-unsuccessful efforts to sell the front 8.8
acres of its Nevada land; (iv) the ongoing adverse impact of DVD on LD sales;
and (v) the increased cash requirements to exclusively license DVD programming.
Management's 1997 Action Plan.
-----------------------------
In response to the aforementioned significant developments and the related
liquidity concerns during fiscal 1998, management developed an action plan in
June 1997 ("1997 Action Plan"). The 1997 Action Plan principally involved: (i)
reducing or suspending certain discretionary expenditures such as suspending the
Company's stock buy-back program, reducing or eliminating, when possible, up-
front payments for advance royalties, distribution fees and contractual
inventory purchases on new exclusive license and distribution agreements,
increasing levels of trade vendor support and deferring construction of a
proposed warehouse and distribution facility in Las Vegas, Nevada; and (ii)
seeking additional working capital through such sources as debt and/or equity
financing, monetizing a portion of the delinquent Musicland and Camelot Music
receivables, selling the front 8.8 acres of its Nevada land and generating
revenues from exclusive DVD distribution.
Results of Management's 1997 Action Plan.
----------------------------------------
During fiscal 1998, the Company implemented its 1997 Action Plan. The
Company has indefinitely suspended its stock buy-back program (except in respect
to rights to tender shares in payment of the exercise price under outstanding
employee stock options), worked with its vendors for more favorable payment
terms, reduced or eliminated, when possible, up-front payments for advance
royalties, distribution fees and contractual inventory purchases on new
exclusive LD license and distribution agreements and deferred construction on
its warehouse and distribution facility in Las Vegas, Nevada (until December
1997). In furtherance of its 1997 Action Plan, management took the following
steps:
. During fiscal 1998, the Company began its transition into exclusive
and nonexclusive DVD distribution. See Item 7. "General."
. In July 1997, the Company entered into assignment agreements with
third-party investors whereby the Company assigned its right, title
and interest in and to approximately $2.7 million in accounts
receivable due from Musicland and Camelot
________________________________________________________________________________
Image Entertainment, Inc. 35
<PAGE>
Music. The receivables were irrevocably assigned without recourse as
to the economic risk of Musicland's or Camelot Music's ultimate
inability to pay. The third-party investors purchased the receivables
for cash at certain discounts. Musicland ultimately fully repaid all
of its suppliers by December 1997 including the third party investors
who purchased the delinquent receivables from the Company. See
"Summary and Outlook --Improving Financial Condition of the Retail
Entertainment Software Market."
. In July 1997, the Company borrowed $1,350,000 from Pioneer Citizens
Bank in Nevada. See Item 7. "Liquidity and Capital Resources --
Financing Activities -- Note Payable to Bank."
. In September 1997, the Company entered into a convertible debt
agreement to borrow $5 million from a principal stockholder of the
Company. See Item 7. "Liquidity and Capital Resources -- Financing
Activities --Convertible Subordinated Note Payable."
. In May 1998, the Company announced the closure of its subsidiary, U.S.
Laser. See Item 7. "Closure of Subsidiary -- U.S. Laser Video
Distributors, Inc."
. In May 1998, the Company entered into an Agreement for Purchase and
Sale relating to the 8.8 acres of its Nevada land. See "Financing
Activities-- Las Vegas Warehouse and Distribution Facility and
Adjacent Land -- Sale of Adjacent Land" below.
Management believes that its 1997 Action Plan has successfully alleviated
the Company's short-term liquidity constraints and management further believes
that its internal and external sources of funding are adequate to meet
anticipated needs for fiscal 1999; however, certain elements of the 1997 Action
Plan may be continued or reintroduced depending on future cash flow constraints.
Specifically, the Company intends to maintain its current suspension of its
stock buyback program (except as noted above). The Company continues to seek
investment opportunities in growth oriented companies which would be
complementary to the Company's existing operations, such as propriety content
production or entertainment software distribution businesses. The Company will
seek acquisition financing should suitable investment opportunities arise.
FINANCING ACTIVITIES.
--------------------
Revolving Credit Facility. In December 1996, the Company entered into
-------------------------
a Loan Agreement ("the Agreement") with Union Bank. The latest amendment to the
Agreement was on June 18, 1998 in response to the Company's recorded net loss
for the fiscal year ended March 31, 1998. The Agreement provides for revolving
advances and the issuances of standby letters of credit under a $10 million
(reduced from $15 million) revolving credit facility which expires June 30, 1999
(maturity shortened from December 31, 1999). Borrowings under the Agreement are
at the bank's prime rate plus .50% (increased .25% from the prime rate plus
.25%) (9.00% at March 31, 1998). The Agreement provides the Company the option
of borrowing for fixed periods at the London Interbank Offered Rate ("LIBOR")
plus 3.0% (increased .50% from LIBOR plus 2.5%) (8.71% at March 31, 1998).
Borrowings under the Agreement are secured by substantially all of the Company's
assets located in California and New Jersey. At March 31, 1998, $2,315,000 in
borrowings were outstanding under the Agreement, all of which was borrowed under
the prime rate plus .25% option (amended in June 1998
________________________________________________________________________________
36 Image Entertainment, Inc.
<PAGE>
to the prime rate plus .50%). Funds available for borrowing may not exceed the
borrowing base specified in the Agreement, as amended. The June 18, 1998
amendment, modified the Company's borrowing base by eliminating the Company's
ability to borrow on its eligible nonexclusive optical disc inventory. Prior to
the amendment, the Company was able to borrow on 45% of its eligible
nonexclusive optical disc inventory subject to certain limits. This borrowing
base modification reduced the amount of the Company's additional borrowing
availability at March 31, 1998 from $5,452,000 to $3,819,000, net of amounts
utilized for outstanding standby letters of credit. At June 18, 1998, the
Company had $154,000 in borrowings outstanding under the Agreement and
approximately $4,175,000, net of amounts utilized for outstanding standby
letters of credit, available for borrowing.
The Agreement imposes restrictions on such items as encumbrances and liens,
payment of dividends, other borrowings, stock repurchases and capital
expenditures. The Agreement requires the Company to comply with certain
financial and operating covenants. At March 31, 1998, the Company was in
compliance with the financial and operating covenants or has received waivers of
noncompliance from Union Bank. The June 18, 1998 amendment amended certain
financial covenants on a prospective basis, including the two consecutive
quarter net income measurement and tangible net worth covenants.
At March 31, 1998, the Company had $2.3 million of outstanding standby letters
of credit issued by Union Bank which expire on November 15, 1998. These letters
of credit secure balances due to program suppliers.
Construction Credit Facility. In March 1997, the Company entered into
----------------------------
a Business Loan Agreement (the "Loan Agreement") with Bank of America National
Trust and Savings Association in Nevada for the purpose of financing the
construction of the Nevada warehouse and distribution facility. See "Las Vegas
Warehouse and Distribution Facility and Adjacent Land" below. The Loan
Agreement, as amended, provides for a construction line of credit (the
"Construction Line") through September 30, 1998. The maximum available under
the line ( the "Maximum Commitment") is $3,434,000. Interest under the
Construction Line is at the bank's prime rate plus 1.25% (9.75% at March 31,
1998). At March 31, 1998, there were $1,619,000 in borrowings outstanding under
the Construction Line. The Loan Agreement provides for the Construction Line to
convert to a revolving line of credit (the "Revolving Line") on September 30,
1998.
Under the Revolving Line, the Company may repay and reborrow principal amounts
provided the Revolving Line does not exceed the Maximum Commitment, which shall
be reduced quarterly beginning December 31, 1998 by $43,000. The Revolving Line
is available from October 1, 1998 through its maturity date of January 31, 2008.
The Loan Agreement provides the Company the option, under the Revolving Line, to
borrow at the bank's prime rate plus 1.25% or for fixed periods at LIBOR plus
either 2.25% or 2.65% depending on the level of the Company's debt service
coverage ratio, as defined in the Loan Agreement.
Borrowings under the Loan Agreement are secured by a deed of trust on the
approximate 8.4 acres of land in Las Vegas, Nevada on which the Company is
constructing a new warehouse and distribution facility, as well as any of the
Company's personal property located in Nevada, excluding inventory held for
sale. The Loan Agreement contains cross-default provisions to other borrowing
agreements and imposes restrictions on such items as payment of dividends and
stock repurchases. The Loan Agreement requires the Company to comply with
certain quarterly financial and operating covenants.
________________________________________________________________________________
Image Entertainment, Inc. 37
<PAGE>
At March 31, 1998, the Company was in compliance with the financial and
operating covenants or has received waivers of noncompliance from the bank.
Distribution Equipment Lease Facility. In March 1997, the Company
-------------------------------------
entered into a Lease Intended As Security Agreement (the "Lease") with
BankAmerica Leasing & Capital Corporation. The Lease, as amended, provides the
Company the ability to lease a substantial portion of the warehouse and
distribution system equipment to be constructed and utilized in the Company's
warehouse and distribution facility in Las Vegas, Nevada. The maximum amount
available under the Lease is $2.5 million. The aggregate amount of
installation, transportation, applicable taxes, software costs or licensing fees
with respect to the aggregate borrowings under the lease may not exceed 20%.
The Lease provides for advances for the purchase of equipment prior to its
delivery date (the "Advance Rent Period") which cannot extend past September 30,
1998. Interest during the Advance Rent Period is at the three-month LIBOR plus
2.5% (8.12% - 8.18% at March 31, 1998). There were $526,000 in borrowings
outstanding under the Lease at March 31, 1998.
Subsequent to the delivery and installation of the equipment and on the date the
equipment is accepted by the Company (the "Base Date"), the base rent period
("Base Rent Period") begins. During the Base Rent Period, the outstanding
borrowings on each equipment schedule will be amortized over 24 consecutive
quarterly installments, to a $1 purchase option, with the first such installment
due one quarter after the Base Date. The variable implicit interest for each
leased unit is the three-month LIBOR plus 2.719%. Under the Lease, during the
Base Rent Period, the Company may convert to a fixed implicit interest rate.
The fixed implicit interest rate will be the bond-equivalent yield per annum for
U.S. Treasury obligations with a maturity most closely matching to the nearest
month of the remaining average life of each equipment schedule plus a spread of
3.137%.
Borrowings under the Lease are secured by the underlying equipment leased. The
Lease contains cross-default provisions with other borrowing agreements, early
termination charges and a $1.5 million minimum utilization requirement. The
Lease requires the Company to meet the same quarterly financial and operating
covenants contained in the Loan Agreement with Bank of America National Trust
and Savings Association above. At March 31, 1998, the Company was in compliance
with the financial and operating covenants or has received waivers of
noncompliance from the bank.
Convertible Subordinated Note Payable. The Company entered into a
-------------------------------------
credit agreement (the "Credit Agreement") with Image Investors Co. ("IIC"), a
principal stockholder of the Company owned and controlled by John W. Kluge and
Stuart Subotnick, dated as of September 29, 1997, pursuant to which the Company
borrowed $5 million from IIC, with interest payable quarterly at 8% per annum,
and principal due in five years. The loan is unsecured and subordinated to any
obligations to Union Bank and is convertible into the Company's common stock at
any time during the term at a conversion price of $3.625 per share, the closing
price of the Company's common stock on September 29, 1997. Proceeds from the
loan were used to pay down the Company's outstanding balance under its revolving
credit facility with Union Bank.
Note Payable to Bank. In July 1997, the Company borrowed $1,350,000
--------------------
under a Business Loan Agreement (the "Business Loan Agreement") with Pioneer
Citizens Bank in Nevada. The Business Loan Agreement, as amended in February
1998, bears interest at prime plus 1.75% (10.25% at March 31, 1998), matures on
August 1, 1998 and is secured by a deed of trust on the approximately 8.8 acres
of land adjacent to the Company's 8.4 acre warehouse and distribution facility
construction site in Las Vegas, Nevada.
________________________________________________________________________________
38 Image Entertainment, Inc.
<PAGE>
OTHER OBLIGATIONS.
-----------------
At March 31, 1998, the Company had future license obligations for royalty
advances, minimum guarantees and other fees of $6,740,000 due during fiscal
1999, $1,453,000 due during fiscal 2000 and $120,000 due during fiscal 2001.
These advances and guarantees are recoupable against royalties earned by the
licensors and program suppliers, respectively. Depending upon the competition
for license and exclusive distribution rights, the Company may have to pay
increased advances, guarantees and/or royalty rates in order to acquire or
retain such rights in the future.
EXPIRATION OF LICENSE AGREEMENT FOR DISTRIBUTION OF MGM LD PROGRAMMING.
----------------------------------------------------------------------
The Company has decided not to extend, for an additional three years, its
May 1996 exclusive LD output license and distribution agreement for the
exclusive distribution of MGM programming on LD through the year 2001. The
agreement's initial term was for 2 years with a sell-off period. A 3-year
extension required the Company to put up a substantial standby letter of credit
and to pay an additional royalty advance of approximately $10 million. Given
DVD's adverse effect on LD sales, including the fact that MGM is generally
releasing their new release DVD programming day-and-date with the VHS and LD
versions of the same program, it was not cost beneficial for the Company to
extend the agreement (the agreement was negotiated almost a year prior to DVD's
introduction). The Company plans to negotiate an extension of certain elements
of the agreement with MGM on terms more favorable to the Company that take the
current state of the LD marketplace into account; however, there is can be no
assurance that the Company will be successful in any such negotiations.
LAS VEGAS WAREHOUSE AND DISTRIBUTION FACILITY AND ADJACENT LAND.
---------------------------------------------------------------
In December 1997, the Company began construction of a 76,000 square foot
warehouse and automated distribution facility on approximately 8.4 acres of the
Company's real property adjacent to McCarren International Airport in Las Vegas,
Nevada. The Company expects the facility to be operational by September 1998.
Sale of Adjacent Land. In May 1998, the Company entered into an
---------------------
Agreement for Purchase and Sale (the "Sale Agreement") with Jackson-Shaw
Company, a Texas corporation (the "Buyer"), for the sale of the Company's
approximately 8.8 acres of unimproved real property located in Las Vegas,
Nevada. The ultimate purchase price of the property is $3,100,000 with
$1,550,000 allocated to the first half of the property ("Parcel A") and
$1,550,000 allocated to the second half of the property ("Parcel B").
The Company has entered escrow on Parcel A. The close of escrow and ultimate
sale of Parcel A is subject to a 75 day feasibility period and delivery of
acceptable title. The escrow period expires August 31, 1998. Upon the
successful close of Parcel A's escrow, the Buyer will receive an option to
purchase Parcel B from the Company upon delivery of a non-refundable payment of
$50,000. The Buyer has until December 31, 1998, to notify the Company of its
intent to exercise its option. Should the Company receive this notice, the
escrow on Parcel B is limited to 60 days from the date of notice by Buyer. The
escrow on Parcel B can be extended by Buyer to June 30, 1999 upon the non-
refundable payment of another $75,000. All non-refundable payments will be
applied to the purchase price of Parcel B upon the successful closing of escrow
on Parcel B.
________________________________________________________________________________
Image Entertainment, Inc. 39
<PAGE>
There can be no assurance that one or both escrows will close and that the
ultimate sale of one or both parcels will occur.
SUMMARY AND OUTLOOK
Management believes the Company's long-term operating cash flow and
liquidity will depend upon the success and extent of the Company's licensing and
distribution of DVD software, the viability of the LD marketplace and the
Company's ability to reach the installed LD household base through alternative
distribution channels.
To a lesser extent, future operating cash flow may be positively affected
by the success and extent of the Company's exclusive distribution of
complimentary entertainment programming in other video/audio formats.
IMPROVING FINANCIAL CONDITION OF THE RETAIL ENTERTAINMENT SOFTWARE MARKET.
-------------------------------------------------------------------------
During the past nine months, the dedicated retail entertainment software
market in which several of the Company's largest customers operate, appears to
be experiencing improving financial performance relative to the three-year
period ended mid-calendar 1997. Certain major entertainment software retailers
continue to report improved same-store sales, overall sales, and cash flow
improvement during the 1997 holiday season and the first quarter of calendar
1998 versus the comparable 1996 and 1997 periods. Cyclical improvement in the
music industry, highlighted by certain successful major artists releases,
combined with continued growth in video sales drove improved financial
performance in the 1997 holiday season and the first quarter of calendar 1998.
Additionally, major entertainment software retailers have recently implemented
certain operating strategies which are having a positive effect on their
financial performance. Management is guardedly optimistic that this positive
trend will continue.
Management believes that recent contraction in excess numbers of retail
stores, cyclical improvement in the music industry, anticipated improvements in
target demographics for entertainment software and continued development of more
effective retailing strategies should have a positive effect on the
entertainment software retailing sector in the long-term. For a discussion on
the current buying habits of the Chain Stores, see Item 7. "General -- DVD's
Continued Negative Impact on LD Sales."
EXCLUSIVE DISTRIBUTION OF DTS ENCODED SOFTWARE.
----------------------------------------------
In September 1997, the Company entered into a three-year agreement with
Digital Theater Systems, Inc., for the exclusive distribution of CDs encoded in
the DTS Digital Surround ("DTS") multichannel audio format that delivers six
channels (5.1) of master-quality, 20-bit audio.
In December 1997, the Company entered into a three-year agreement with
Miller Nevada, Ltd., Inc. ("Miller") for the exclusive distribution of all of
Miller's DTS encoded CDs. Miller releases third party music programming encoded
with DTS sound under the "HDS" label.
DTS distribution is a complement to the Company's existing DVD and LD
licensing and distribution activities and affords the Company an opportunity to
diversify its core exclusive distribution business. Although the Company
continues to market and sell DTS encoded LDs and may release DVDs
________________________________________________________________________________
40 Image Entertainment, Inc.
<PAGE>
encoded in DTS, the Company believes that the largest potential for DTS software
growth is in DTS encoded CDs. The Company began its exclusive sale of DTS/CDs in
January 1998.
Software encoded with DTS multichannel audio can only be played in DTS when
processed through a DTS decoder. To date, several high-end audio component
producers have brought decoders to the market. As a relatively new technology,
the DTS enabled hardware has been priced beyond the price range of most
consumers. Several mainstream audio hardware manufacturers have announced plans
to introduce or have introduced DTS enabled hardware in calendar 1998. This
hardware will decode DTS multichannel audio from all types of DTS encoded
software (LD, CD and DVD). As a result, the Company believes that prices for
DTS enabled hardware with the ability to decode all DTS multichannel audio
platforms will decline in the future.
EXCLUSIVE DISTRIBUTION OF NICHE ENTERTAINMENT PROGRAMMING ON VHS.
----------------------------------------------------------------
During fiscal 1998, as a compliment to the Company's existing DVD, LD and
DTS licensing and distribution activities, the Company has begun licensing
certain niche entertainment programming on VHS for exclusive distribution
through expanded distribution channels. When practicable, the Company plans to
continue to acquire exclusive VHS distribution rights when offered as part of a
bundle of rights (e.g., DVD, LD and VHS). Net sales from distribution of VHS
programming during fiscal 1998 were not material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report......................................................... 42
Consolidated Balance Sheets at March 31, 1998 and 1997............................... 43
Consolidated Statements of Operations for the years ended March 31, 1998, 1997
and 1996............................................................................. 45
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1998,
1997 and 1996........................................................................ 46
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997
and 1996............................................................................. 47
Notes to Consolidated Financial Statements........................................... 50
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 1998,
1997 and 1996........................................................................ 69
</TABLE>
________________________________________________________________________________
Image Entertainment, Inc. 41
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We have audited the accompanying consolidated financial statements of Image
Entertainment, Inc. and subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Image Entertainment,
Inc. and subsidiary as of March 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
May 29, 1998 except for Note 8,
as to which the date is June 18, 1998
________________________________________________________________________________
42 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS
(In thousands) 1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents $ 1,015 $ 1,090
Accounts receivable, net of allowances of
$4,604 - 1998; $4,809 - 1997 6,978 10,759
Inventories (Note 5) 11,205 17,644
Royalties, distribution fee and license fee advances 4,566 8,453
Prepaid expenses and other assets 1,094 823
Property, equipment and improvements, net (Notes 6 and 7) 6,223 4,979
Land held for sale (Note 6) 2,700 2,700
------- -------
$33,781 $46,448
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
Image Entertainment, Inc. 43
<PAGE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) 1998 1997
--------- --------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $ 12,303 $15,922
Accrued royalties, distribution fees and license fees 2,003 3,481
Revolving credit facility (Note 8) 2,315 8,709
Construction credit facility (Note 9) 1,619 --
Distribution equipment lease facility (Note 10) 526 --
Convertible subordinated note payable (Note 11) 5,000 --
Note payable (Notes 6 and 11) 1,350 285
-------- -------
Total liabilities 25,116 28,397
-------- -------
Commitments and Contingencies (Notes 6 and 15)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,366,000 shares authorized;
none issued and outstanding -- --
Common stock, no par value, 25 million shares authorized;
13,493,000 and 13,343,000 issued and outstanding
in 1998 and 1997, respectively (Note 12) 17,764 17,642
Stock warrants (Note 14) -- (73)
Additional paid-in capital 3,064 3,064
Accumulated deficit (12,163) (2,582)
-------- -------
Net shareholders' equity 8,665 18,051
-------- -------
$ 33,781 $46,448
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
44 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES $75,516 $85,650 $95,086
OPERATING COSTS AND EXPENSES:
Cost of optical disc sales 70,256 68,427 74,387
Selling expenses 4,943 4,752 4,531
General and administrative expenses 4,841 7,108 5,124
Costs of facility closure 825 -- --
Amortization of production costs 3,740 3,112 2,884
------- ------- -------
84,605 83,399 86,926
------- ------- -------
OPERATING INCOME (LOSS) (9,089) 2,251 8,160
OTHER EXPENSES (INCOME):
Interest expense 662 415 155
Interest income (118) (231) (337)
Other -- 662 --
------- ------- -------
544 846 (182)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (9,633) 1,405 8,342
INCOME TAX EXPENSE (BENEFIT) (Note 13) (52) 433 743
------- ------- -------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (9,581) 972 7,599
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES (Note 8) -- 127 --
------- ------- -------
NET INCOME (LOSS) $(9,581) $ 845 $ 7,599
======= ======= =======
NET INCOME (LOSS) PER SHARE (Note 4):
Income (loss) before extraordinary item:
Basic $ (.71) $ .07 $ .56
Diluted $ (.71) $ .07 $ .51
Extraordinary item -- (.01) --
Net income (loss):
Basic $ (.71) $ .06 $ .56
======= ======= =======
Diluted $ (.71) $ .06 $ .51
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
Image Entertainment, Inc. 45
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 12 AND 14)
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Common Stock Stock Additional Accumulated
-----------------
(In thousands) Shares Amount Warrants Paid-in Capital Deficit
------- -------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, March 31, 1995 13,797 $25,216 $ (582) $ 3,064 $ (11,026)
Exercise of options 412 294 -- -- --
Stock repurchased (653) (4,388) -- -- --
Amortization of stock warrants -- -- 349 -- --
Net income -- -- -- -- 7,599
------ ------- -------- ----------- ----------
BALANCES, March 31, 1996 13,556 21,122 (233) 3,064 (3,427)
Exercise of options 544 49 -- -- --
Stock repurchased (757) (3,529) -- -- --
Amortization of stock warrants -- -- 160 -- --
Net income -- -- -- -- 845
------ ------- -------- ----------- ----------
BALANCES, March 31, 1997 13,343 17,642 (73) 3,064 (2,582)
Exercise of options 150 122 -- -- --
Amortization of stock warrants -- -- 73 -- --
Net loss -- -- -- -- (9,581)
------ ------- -------- ----------- ----------
BALANCES, March 31, 1998 13,493 $17,764 $ -- $ 3,064 $ (12,163)
====== ======= ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
46 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(9,581) $ 845 $ 7,599
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Amortization of production costs 3,740 3,112 2,884
Depreciation and other amortization 999 857 798
Amortization of stock warrants 73 160 349
Provision for estimated doubtful accounts,
net of recoveries (331) 1,946 104
Provision for slow-moving optical
disc inventories 8,133 1,964 254
Provision for estimated losses on LD license
and exclusive distribution agreements 4,246 -- --
Loss on disposition of assets 460 34 --
Changes in assets and liabilities
associated with operating activities, net of
acquired business:
Accounts receivable 4,112 628 1,422
Optical disc inventory (1,314) (4,207) (864)
Royalty, distribution and license fee
advances, net (359) (5,284) 234
Production cost expenditures (4,121) (3,369) (3,054)
Prepaid expenses and other assets (444) 220 252
Accounts payable, accrued royalties
and liabilities (5,097) 523 382
------- ------- -------
Net cash provided (used) by
operating activities 516 (2,571) 10,360
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (384) (6,234) (552)
Acquisition of business, less cash acquired -- -- (3,131)
------- ------- -------
Net cash used by investing activities (384) (6,234) (3,683)
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
Image Entertainment, Inc. 47
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 35,330 $ 56,127 $ 27,801
Proceeds from issuance of convertible
subordinated note payable 5,000 -- --
Proceeds from issuance of note payable 1,350 -- --
Repayment of advances under revolving
credit facility (41,724) (47,418) (27,801)
Repayment of short-term debt (285) -- --
Principal payments under capital lease
obligations -- -- (104)
Repurchase of warrant and common stock -- (3,529) (4,388)
Net proceeds from exercise of stock options 122 49 294
-------- -------- --------
Net cash provided (used) by
financing activities (207) 5,229 (4,198)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (75) (3,576) 2,479
Cash and cash equivalents at beginning of year 1,090 4,666 2,187
-------- -------- --------
Cash and cash equivalents at end of year $ 1,015 $ 1,090 $ 4,666
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 656 $ 417 $ 115
Income taxes $ 90 $ 668 $585
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
48 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
During fiscal 1998, the Company incurred $2,145,000 relating to the design,
engineering, planning and construction of the Nevada warehouse and distribution
facility. These costs were funded under the Company's construction credit and
distribution equipment lease facilities. See "Note 9. Construction Credit
Facility" and "Note 10. Distribution Equipment Lease Facility."
In January 1997, the Company purchased approximately .7 acres of unimproved real
property in Las Vegas, Nevada (adjacent to the 16.5 acres purchased in November
1996 discussed below) for approximately $331,000 which included a note payable
for approximately $285,000. See "Note 6. Purchase of Nevada Real Property."
In November 1996, the Company purchased 16.5 acres of unimproved real property
in Las Vegas, Nevada for approximately $4,034,000 which included a note payable
of approximately $950,000. See "Note 6. Purchase of Nevada Real Property."
In June 1995, the Company acquired certain assets and assumed certain
liabilities of U.S. Laser for $3,066,000. See "Note 2. Closure of Subsidiary --
U.S. Laser Video Distributors, Inc.":
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value of assets acquired......................... $ 4,724
Excess of purchase price over fair value
of net assets acquired recorded as goodwill....... 190
Cash paid for net assets acquired..................... (3,066)
Expenses incurred in connection with the acquisition.. (65)
-------
Liabilities assumed................................... $ 1,783
=======
</TABLE>
Fully amortized production costs retired from production costs totaled
$2,625,000, $3,221,000 and $2,767,000 at March 31, 1998, 1997 and 1996,
respectively.
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
Image Entertainment, Inc. 49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND BUSINESS.
Image Entertainment, Inc. (the "Company") was incorporated in Colorado on April
1, 1975. In November 1989, the Company reincorporated in California. The
Company's primary business is the distribution of programming on optical disc
(Laserdisc ("LD") and Digital Video Disc ("DVD")) under exclusive and
nonexclusive license and wholesale distribution agreements.
NOTE 2. CLOSURE OF SUBSIDIARY -- U.S. LASER VIDEO DISTRIBUTORS, INC.
In May 1998, the Company announced the closing of its wholly-owned subsidiary
U.S. Laser Video Distributors, Inc. ("U.S. Laser"), located in New Jersey and
acquired by the Company in June 1995 for $3.1 million in cash. The closure of
the subsidiary and its retail store "Digitainment" is expected to be finalized
by July 15, 1998. The closure follows the Company's consolidation of a majority
of U.S. Laser's optical disc distribution activities. U.S. Laser's only
remaining activities consisted of direct-to-consumer optical disc sales through
the "Digitainment" retail store, mail order to a decreasing number of accounts
and the Internet. With the decline of industry-wide LD software and hardware
sales, offset in part by growing DVD software and hardware sales, the retail
store was performing below expectations.
Further, in October 1997, U.S. Laser ceased publication of Laserviews as
circulation had diminished in recent years. The Company recently signed an
agreement with the publisher of Widescreen Review Magazine which will give
Laserviews subscribers the opportunity to receive issues of Widescreen Review
Magazine in satisfaction of their subscription.
The operating lease for U.S. Laser's corporate offices, distribution center and
retail store was to expire in September 2001. In May 1998, the Company signed a
Lease Termination Agreement with U.S. Laser's landlord to early terminate the
lease on July 15, 1998.
The closure of U.S. Laser resulted in nonrecurring pretax charges of $202,000,
representing fees and expenses associated with the Lease Termination Agreement
and employee severance payments, and $623,000 (a noncash charge) covering the
write-off of unamortized leasehold improvements and goodwill. The pretax
charges total $825,000 and are included in costs of facility closure expense for
the year ended March 31, 1998.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Consolidation. The consolidated financial statements include those of the
- -------------
Company and its wholly-owned subsidiary, U.S. Laser (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. See "Note 2. Closure of Subsidiary -- U.S. Laser
Video Distributors, Inc."
Cash and Cash Equivalents. The Company considers all highly liquid investments
- -------------------------
purchased with maturities of three months or less to be cash equivalents.
Accounts Receivable. At March 31, 1998 and 1997, the allowance for doubtful
- -------------------
accounts was $404,000 and $1,629,000, respectively, and the allowance for sales
returns was $4,200,000 and $3,180,000, respectively.
________________________________________________________________________________
50 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Amortization of Production Costs. The Company amortizes capitalized production
- --------------------------------
costs in accordance with the provisions of Statement of Financial Accounting
Standards No. 53 ("SFAS No. 53"). Pursuant to the income forecast method, a
percentage of the production costs is charged to expense each month based upon
(i) a projected revenue stream resulting from distribution of new and previously
released optical disc programming related to the production costs and (ii)
management's estimate of the ultimate net realizable value of the production
costs. Estimates of future revenues are reviewed periodically and amortization
of production costs is adjusted accordingly. If estimated future revenues are
not sufficient to recover the unamortized balance of production costs, such
costs are reduced to the estimated net realizable value.
Revenue Recognition. Revenue is recognized upon shipment. The Company's return
- -------------------
policy allows customers to return a percentage of optical discs purchased on a
quarterly basis. Generally, this allowance is noncumulative, is generally based
on the customer's prior quarter purchases and is generally limited on an
individual-title basis. On occasion, greater return allowances are given to
major customers. The Company provides for estimated returns when product is
shipped to customers.
Major Customers. Customers which individually accounted for more than 10% of
- ---------------
fiscal year net sales approximated 31.5% of fiscal 1998 net sales (Norwalk
Records 10.9%, Ken Crane's Home Entertainment 10.6%, and Musicland 10.0%), 31.8%
of fiscal 1997 net sales (Musicland 11.2%, Alliance Entertainment 10.4% and Ken
Crane's Home Entertainment 10.2%) and 10.9% of fiscal 1996 net sales (Musicland
10.9%).
Royalty and Distribution Fee Advances. Royalty and distribution fee advances
- -------------------------------------
represent fixed minimum payments made to program suppliers for optical disc
programming distribution rights. A program supplier's share of program
distribution revenues is retained by the Company until the share equals the
advance(s) paid to the program supplier. Thereafter, any excess is paid to the
program supplier. In the event of an excess, the Company records, as a cost of
optical disc sales, an amount equal to the licensor/program supplier's share of
the distribution revenues. Royalty and distribution fee advances are charged to
operations as revenues are earned, and are stated at the lower of unamortized
cost or estimated net realizable value on an individual-title or license-
agreement basis.
Depreciation and Amortization of Property, Equipment and Improvements.
- ---------------------------------------------------------------------
Depreciation of property and equipment is provided for using the straight-line
method over the estimated useful lives of the related assets, generally five
years. Leasehold improvements are amortized over the shorter of the estimated
useful lives of the improvements, generally five years, or the remaining lease
term. The cost of repairs and maintenance is charged to operations when
incurred.
Interest Capitalization. Interest costs on the construction of the Nevada
- -----------------------
warehouse and distribution facility are capitalized as part of the cost of the
facility. See "Note 6. Purchase of Nevada Real Property" and "Note 9.
Construction Credit Facility."
Goodwill. The excess of purchase price over the value of the net assets
- --------
acquired is included in prepaid expenses and other assets and is amortized on a
straight-line basis over a 20-year period. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining useful life can be recovered through
undiscounted future operating cash flows from the acquired operation. The
Company has written off its unamortized
________________________________________________________________________________
Image Entertainment, Inc. 51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
balance of goodwill at March 31, 1998 due to the pending closure of U.S. Laser.
See "Note 2. Closure of Subsidiary --U.S. Laser Video Distributors, Inc."
Income Taxes. The Company accounts for income taxes pursuant to the provisions
- ------------
of Financial Accounting Standards Board Statement No. 109 ("SFAS No. 109").
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and the future tax benefits
derived from operating loss and tax credit carryforwards.
Stock Option Plan. Prior to April 1, 1996, the Company accounted for its stock
- -----------------
option plan in accordance with provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," which permits entities to recognize, as expense over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income disclosures
for employee stock option grants made in 1996 and future years as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123. Accordingly, the adoption
of SFAS No. 123 did not have a material effect on the Company's consolidated
financial statements. See "Note 12. Stock Options and Warrants."
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. The
- -----------------------------------------------------------------------
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of," on April 1, 1996. The statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. Adoption of SFAS No. 121 did not have
a material impact on the Company's consolidated financial statements.
Fair Value of Financial Instruments. The carrying amounts reflected in the
- -----------------------------------
Company's consolidated balance sheets for all financial instruments approximate
their respective fair values.
Use of Estimates. The preparation of the Company's consolidated financial
- ----------------
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. The significant areas
requiring the use of management estimates related to allowances for slow-moving
inventory, doubtful accounts receivables, unrecouped royalty/distribution fee
advances and sales returns. Although these estimates are based on management's
knowledge of current events and
________________________________________________________________________________
52 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
actions management may undertake in the future, actual results may ultimately
differ from those estimates.
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
- ------------------------------------
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These statements, which are
effective for fiscal years beginning after December 15, 1997, expand or modify
disclosures and the Company currently expects will have an insignificant impact
on its consolidated financial position, results of operations and cash flows.
Reclassifications. Certain fiscal 1997 and 1996 balances have been reclassified
- -----------------
to conform with the fiscal 1998 presentation.
NOTE 4. NET INCOME (LOSS) PER SHARE.
In February 1997, Statement of Financial Standards No. 128 ("SFAS No. 128")
"Earnings Per Share" was issued. SFAS No. 128 supersedes Accounting Principles
Board Opinion No. 15, "Earnings Per Share" and specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock. SFAS No. 128 is effective for both
interim and annual periods ending after December 15, 1997. The Company adopted
SFAS No. 128 in the fiscal year ending March 31, 1998.
Accordingly, the accompanying net income (loss) per share information, including
all information restated for the two years prior to fiscal 1998, has been
calculated and presented in accordance with the provisions of SFAS No. 128. In
accordance with SFAS No. 128, the Company has presented both basic and diluted
net income (loss) per share in its consolidated financial statements.
Basic net income (loss) per share was calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the years
presented.
For fiscal 1997 and 1996, diluted net income per share was calculated in a
manner consistent with basic net income per share except that the weighted
average number of common shares outstanding also includes the dilutive effect of
stock options and warrants outstanding (using the treasury stock method). For
fiscal 1998, the calculation of diluted net loss per share did not include
common equivalents (stock options and warrants) as their effect would be
antidilutive.
_______________________________________________________________________________
Image Entertainment, Inc. 53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following presents a reconciliation of the numerators and denominators used
in computing basic and diluted net income (loss) per share for the three years
ended March 31, 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Income (loss) before extraordinary item (basic and
diluted numerator) $(9,581) $ 972 $ 7,599
======= ======= =======
Net income (loss) (basic and diluted numerator) $(9,581) $ 845 $ 7,599
======= ======= =======
Weighted average common shares outstanding
(basic denominator) 13,471 13,504 13,569
======= ======= =======
Effect of dilutive stock options and warrants -- 332 1,233
------- ------- -------
Weighted average common shares outstanding
(diluted denominator) 13,471 13,836 14,802
======= ======= =======
Net income (loss) per share:
Income (loss) before extraordinary item:
Basic $ (.71) $ .07 $ .56
======= ======= =======
Diluted $ (.71) $ .07 $ .51
======= ======= =======
Net income (loss):
Basic $ (.71) $ .06 $ .56
======= ======= =======
Diluted $ (.71) $ .06 $ .51
======= ======= =======
</TABLE>
During fiscal 1998, 1997 and 1996, there were 1,417,000, 2,150,000 and 734,000,
respectively, of outstanding stock options and warrants which were not included
in the computation of diluted net income (loss) per share as their effect would
be antidilutive. The exercise prices of stock options and warrants were greater
than the average market price of the common stock for the years ended March 31,
1997 and 1996.
_______________________________________________________________________________
54 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. INVENTORIES.
Inventories at March 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Optical disc inventory
LD $16,779 $18,935
DVD 1,567 203
------- -------
18,346 19,138
Reserve for slow-moving inventory (9,098) (3,070)
------- -------
9,248 16,068
Production costs, net 1,957 1,576
------- -------
$11,205 $17,644
======= =======
</TABLE>
Optical disc inventory consists of finished optical discs (LDs and DVDs) for
sale and is stated at the lower of average cost or market.
The costs to produce licensed optical disc programming include the cost of
converting film prints or tapes into the optical disc format, which includes
mastering and ancillary material production for LD and authoring and
compression, replica sample, set up charges and ancillary material production
for DVD, and packaging artwork costs and the overhead of the Company's creative
services and production departments. As discussed in Note 3 above, the Company
amortizes its production costs in accordance with SFAS No. 53. Production costs
are net of accumulated amortization of $6,013,000 and $5,011,000 at March 31,
1998 and 1997, respectively. The Company expects to amortize substantially all
of the March 31, 1998 production costs by March 31, 2001.
NOTE 6. PURCHASE OF NEVADA REAL PROPERTY.
In November 1996, the Company purchased approximately 16.5 acres of unimproved
real property adjacent to McCarran International Airport in Las Vegas, Nevada
for $4,034,000 cash. In January 1997, the Company purchased an additional
approximately 0.7 acres of unimproved real property adjacent to the November
1996 real property purchase for $331,000. The purchase price for the 0.7 acres
consisted of cash and a $285,000 note payable which was repaid in July 1997.
See "Note 11. Other Notes Payable." The property was subdivided with the intent
of selling the front 8.8 acres and building an approximately 76,000 square foot
warehouse and automated distribution facility on the back 8.4 acres. The
carrying value of the 8.4 acres, on which the Company is building a warehouse
and distribution facility, is reflected as a component of property, equipment
and improvements in the accompanying consolidated balance sheets at March 31,
1998 and 1997. The carrying value of the front 8.8 acres, which is currently in
escrow to be sold, is reflected as land held for sale in the accompanying
consolidated balance sheets at March 31, 1998 and 1997.
Construction of the Nevada warehouse and distribution facility began in December
1997 and is expected to be operational in September 1998. A total of $2,644,000
of costs incurred to date relating to the design, engineering and planning of
the construction of the Nevada warehouse and distribution facility is reflected
as construction in progress, a component of property, equipment and
improvements,
_______________________________________________________________________________
Image Entertainment, Inc. 55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
in the accompanying consolidated balance sheet at March 31, 1998. See "Note 9.
Construction Credit Facility" and "Note 10. Distribution Equipment Lease
Facility."
In May 1998, the Company entered into an Agreement for Purchase and Sale (the
"Sale Agreement") with Jackson-Shaw Company, a Texas corporation (the "Buyer"),
for the sale of the aforementioned 8.8 acres of unimproved real property. The
ultimate purchase price of the property is $3,100,000 with $1,550,000 allocated
to the first half of the property ("Parcel A") and $1,550,000 allocated to the
second half of the property ("Parcel B").
The Company has entered escrow on Parcel A. The close of escrow and ultimate
sale of Parcel A is subject to a 75 day feasibility period and delivery of
acceptable title. The escrow period expires August 31, 1998. Upon the
successful close of Parcel A's escrow, the Buyer will receive an option to
purchase Parcel B upon delivery of a non-refundable payment of $50,000. The
Buyer has until December 31, 1998, to notify the Company of its intent to
exercise its option. Should the Company receive this notice, the escrow on
Parcel B is limited to 60 days from the date of notice by Buyer. The escrow on
Parcel B can be extended by the Buyer to June 30, 1999 upon the non-refundable
payment of another $75,000. All non-refundable payments will be applied to the
purchase price of Parcel B upon the successful closing of escrow on Parcel B.
There can be no assurance that one or both escrows will close and the ultimate
sale of one or both parcels will occur.
NOTE 7. PROPERTY, EQUIPMENT AND IMPROVEMENTS.
Property, equipment and improvements, stated at cost, at March 31, 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- -------
<S> <C> <C>
Land (Note 6) $ 2,155 $ 2,091
Construction in progress (Note 6) 2,644 510
Furniture, fixtures and equipment 4,920 4,863
Leasehold improvements 794 1,250
Other 280 237
------- -------
10,793 8,951
Less accumulated depreciation and amortization (4,570) (3,972)
------- -------
$ 6,223 $ 4,979
======= =======
</TABLE>
Depreciation and amortization of property, equipment and improvements was
$826,000, $846,000 and $792,000 for fiscal 1998, 1997 and 1996, respectively.
Interest capitalized for fiscal 1998 was $18,000. The Company did not
capitalize interest during fiscal 1997 and 1996.
_______________________________________________________________________________
56 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. REVOLVING CREDIT FACILITY.
In December 1996, the Company entered into a Loan Agreement ("the Agreement")
with Union Bank. The latest amendment to the Agreement was on June 18, 1998 in
response to the Company's recorded net loss for the fiscal year ended March 31,
1998. The Agreement provides for revolving advances and the issuances of
standby letters of credit under a $10 million (reduced from $15 million)
revolving credit facility which expires June 30, 1999 (maturity shortened from
December 31, 1999). Borrowings under the Agreement are at the bank's prime rate
plus .50% (increased .25% from the prime rate plus .25%) (9.00% at March 31,
1998). The Agreement provides the Company the option of borrowing for fixed
periods at the London Interbank Offered Rate ("LIBOR") plus 3.0% (increased .50%
from LIBOR plus 2.5%) (8.71% at March 31, 1998).
Borrowings under the Agreement are secured by substantially all of the Company's
assets located in California and New Jersey. At March 31, 1998, $2,315,000 in
borrowings were outstanding under the Agreement, all of which was borrowed under
the prime rate plus .25% option (amended in June 1998 to the prime rate plus
.50%). Funds available for borrowing may not exceed the borrowing base
specified in the Agreement, as amended. The June 18, 1998 amendment, modified
the Company's borrowing base by eliminating the Company's ability to borrow on
its eligible nonexclusive optical disc inventory. Prior to the amendment, the
Company was able to borrow on 45% of its eligible nonexclusive optical disc
inventory subject to certain limits. This borrowing base modification reduced
the amount of the Company's additional borrowing availability at March 31, 1998
from $5,452,000 to $3,819,000, net of amounts utilized for outstanding standby
letters of credit. At June 18, 1998, the Company had $154,000 in borrowings
outstanding under the Agreement and approximately $4,175,000, net of amounts
utilized for outstanding standby letters of credit, available for borrowing.
The Agreement imposes restrictions on such items as encumbrances and liens,
payment of dividends, other borrowings, stock repurchases and capital
expenditures. The Agreement requires the Company to comply with certain
financial and operating covenants. At March 31, 1998, the Company was in
compliance with the financial and operating covenants or has received waivers of
noncompliance from Union Bank. The June 18, 1998 amendment amended certain
financial covenants on a prospective basis, including the two consecutive
quarter net income measurement and tangible net worth covenants.
Concurrent with the signing of the Agreement, the Company terminated its three-
year $15 million Loan and Security Agreement with Foothill Capital Corporation
which bore interest at prime plus 1.5% and was due to expire on November 15,
1997. The accelerated amortization of deferred financing costs and penalty
resulting from the early retirement of debt totaled $183,000 of which $40,000
represented a noncash charge. The extraordinary charge is recorded net of taxes
of $56,000 in fiscal 1997.
NOTE 9. CONSTRUCTION CREDIT FACILITY.
In March 1997, the Company entered into a Business Loan Agreement (the "Loan
Agreement") with Bank of America National Trust and Savings Association in
Nevada for the purpose of financing the construction of the Nevada warehouse and
distribution facility. See "Note 6. Purchase of Nevada Real Property." The Loan
Agreement, as amended, provides for a construction line of credit (the
"Construction Line") through September 30, 1998. The maximum available under the
line (the "Maximum Commitment") is $3,434,000. Interest under the Construction
Line is at the bank's prime
_______________________________________________________________________________
Image Entertainment, Inc. 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
rate plus 1.25% (9.75% at March 31, 1998). At March 31, 1998, there were
$1,619,000 in borrowings outstanding under the Construction Line. The Loan
Agreement provides for the Construction Line to convert to a revolving line of
credit (the "Revolving Line") on September 30, 1998.
Under the Revolving Line, the Company may repay and reborrow principal amounts
provided the Revolving Line does not exceed the Maximum Commitment, which shall
be reduced quarterly beginning December 31, 1998 by $43,000. The Revolving Line
is available from October 1, 1998 through its maturity date of January 31, 2008.
The Loan Agreement provides the Company the option, under the Revolving Line, to
borrow at the bank's prime rate plus 1.25% or for fixed periods at LIBOR plus
either 2.25% or 2.65% depending on the level of the Company's debt service
coverage ratio, as defined in the Loan Agreement.
Borrowings under the Loan Agreement are secured by a deed of trust on the
approximate 8.4 acres of land in Las Vegas, Nevada on which the Company is
constructing a new warehouse and distribution facility, as well as any of the
Company's personal property located in Nevada, excluding inventory held for
sale. The Loan Agreement contains cross-default provisions to other borrowing
agreements and imposes certain restrictions on such items as payment of
dividends and stock repurchases. The Loan Agreement requires the Company to
comply with certain quarterly financial and operating covenants. At March 31,
1998, the Company was in compliance with the financial and operating covenants
or has received waivers of noncompliance from the bank.
NOTE 10. DISTRIBUTION EQUIPMENT LEASE FACILITY.
In March 1997, the Company entered into a Lease Intended As Security Agreement
(the "Lease") with BankAmerica Leasing & Capital Corporation. The Lease, as
amended, provides the Company the ability to lease a substantial portion of the
warehouse and distribution system equipment to be constructed and utilized in
the Company's warehouse and distribution facility in Las Vegas, Nevada. The
maximum amount available under the Lease is $2.5 million. The aggregate amount
of installation, transportation, applicable taxes, software costs or licensing
fees with respect to the aggregate borrowings under the lease may not exceed
20%. The Lease provides for advances for the purchase of equipment prior to its
delivery date (the "Advance Rent Period") which cannot extend past September 30,
1998. Interest during the Advance Rent Period is at the three-month LIBOR plus
2.5% (8.12% - 8.18% at March 31, 1998). There were $526,000 in borrowings
outstanding under the Lease at March 31, 1998.
Subsequent to the delivery and installation of the equipment and on the date the
equipment is accepted by the Company (the "Base Date"), the base rent period
("Base Rent Period") begins. During the Base Rent Period, the outstanding
borrowings on each equipment schedule will be amortized over 24 consecutive
quarterly installments, to a $1 purchase option, with the first such installment
due one quarter after the Base Date. The variable implicit interest for each
leased unit is the three-month LIBOR plus 2.719%. Under the Lease, during the
Base Rent Period, the Company may convert to a fixed implicit interest rate.
The fixed implicit interest rate will be the bond-equivalent yield per annum for
U.S. Treasury obligations with a maturity most closely matching to the nearest
month of the remaining average life of each equipment schedule plus a spread of
3.137%.
Borrowings under the Lease are secured by the underlying equipment leased. The
Lease contains cross-default provisions with other borrowing agreements, early
termination charges and a $1.5 million minimum utilization requirement. The
Lease requires the Company to meet the same quarterly
_______________________________________________________________________________
58 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
financial and operating covenants contained in the Loan Agreement with Bank of
America National Trust and Savings Association above. At March 31, 1998, the
Company was in compliance with the financial and operating covenants or has
received waivers of noncompliance from the bank.
NOTE 11. OTHER NOTES PAYABLE.
Convertible Subordinated Note Payable. The Company entered into a Credit
- -------------------------------------
Agreement (the "Credit Agreement") with Image Investors Co. ("IIC"), a principal
stockholder of the Company owned and controlled by John W. Kluge and Stuart
Subotnick, dated as of September 29, 1997, pursuant to which the Company
borrowed $5 million from IIC, with interest payable quarterly at 8% per annum,
and principal due in five years. The loan is unsecured and subordinated to any
obligations to Union Bank and is convertible into the Company's common stock at
any time during the term at a conversion price of $3.625 per share, the closing
price of the Company's common stock on September 29, 1997. Proceeds from the
loan were used to pay down the Company's outstanding balance under its revolving
credit facility with Union Bank.
Note Payable to Bank. In July 1997, the Company borrowed $1,350,000 under a
- --------------------
Business Loan Agreement (the "Business Loan Agreement") with Pioneer Citizens
Bank in Nevada. The Business Loan Agreement, as amended in February 1998, bears
interest at prime plus 1.75% (10.25% at March 31, 1998), matures on August 1,
1998 and is secured by a deed of trust on the approximately 8.8 acres of land
adjacent to the Company's 8.4 acre warehouse and distribution facility
construction site in Las Vegas, Nevada.
A portion of the proceeds from the loan were used to repay a note payable in the
amount of $285,000 which represented unpaid purchase consideration for the
January 1997 purchase of a portion of the aforementioned Nevada land. See "Note
6. Purchase of Nevada Real Property."
NOTE 12. STOCK OPTIONS AND WARRANTS.
The Company has three employee stock option plans. Incentive stock options may
be granted under one plan, and incentive stock options and nonstatutory options
under the other two. Under the plans, the exercise price of an incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The exercise price of a nonstatutory option generally may not be
less than 85% of the fair market value on the date of grant. The term of an
option may be no more than 10 years from the date of grant. The Company also
has a directors' stock option plan providing for an initial and annual award of
an option to purchase 15,000 shares of common stock to each director eligible to
participate under the plan. Only nonstatutory options may be granted under the
directors' plan. The directors' plan also provides for an exercise price of
$0.25 over the fair market value of the common stock on the date of grant for
initial grants to directors. Thereafter, the directors' plan provides for an
exercise price at fair market value of the common stock of the date of grant,
fixed vesting, and a ten-year term. In addition to options under the three
employee plans and the directors plan, the Company has granted options
(including the antidilution rights described below and warrants in connection
with program acquisition agreements described in Note 14 to the consolidated
financial statements) to officers, shareholders, creditors and others for
various business purposes.
_______________________________________________________________________________
Image Entertainment, Inc. 59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Stock option transactions for the three years ended March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Per-Share
(In thousands, except per share data) Shares Price Range
------ -----------
<S> <C> <C>
Outstanding, March 31, 1995 7,030 $ .59-10.25
Granted 295 6.875-7.75
Exercised (412) .59-7.00
Surrendered (855) 5.85
Canceled (51) 5.625-7.25
------
Outstanding, March 31, 1996 6,007 .59-10.25
Granted 180 5.813-6.75
Exercised (544) .743-6.00
Surrendered (1,427) .817-6.00
Canceled (1,832) .743-7.25
------
Outstanding, March 31, 1997 2,384 .743-10.25
Granted 30 3.25
Exercised (150) .743-1.857
Surrendered (10) 7.00
Canceled (837) 4.16-7.00
------
Outstanding, March 31, 1998 1,417 $.743-10.25
======
</TABLE>
Of the options reflected as outstanding on March 31, 1998, 1997 and 1996,
options to purchase approximately 1,295,891, 2,243,159 and 5,833,689 shares of
common stock were exercisable, respectively.
A December 29, 1987 stock purchase agreement (the "Agreement") provides for the
grant of antidilution rights (the "Rights") to various persons (the
"Investors"). Each Investor is entitled to Rights in connection with certain
issuances of common stock. The Agreement was amended in July 1992 pursuant to
which the Agreement will expire in July 2002.
Upon the exercise of certain options outstanding as of December 29, 1987 (the
"Management Options"), each Investor will be granted Rights to purchase shares
of common stock pursuant to a formula based in part on the percentage of the
outstanding shares of common stock owned by the Investor on December 29, 1987.
Rights to purchase an aggregate of 507,016 shares of common stock may be granted
to the Investors if all the Management Options are exercised. As of March 31,
1998, all Rights to purchase 507,016 shares had been granted, Rights to purchase
472,088 shares had been exercised (as to 19,697 shares in fiscal 1998, 22,039
shares in fiscal 1997 and 84,168 shares in fiscal 1996, at per-share exercise
prices ranging from $.74 to $1.07) and Rights to purchase 34,928 shares were
outstanding.
Rights granted in connection with the exercise of a Management Option are
exercisable for two years from the date of grant and have a per-share exercise
price equal to the greater of (a) $.74 or (b) the exercise price of the
Management Option.
Upon certain issuances of shares of common stock other than pursuant to the
exercise of Management Options, each Investor will be granted a Right (the
"Other Right") so that the equity interest
_______________________________________________________________________________
60 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
represented by the Agreement shares held by the Investor (excluding the shares
purchased upon the exercise of Rights issued in connection with the exercise of
Management Options) will not be diluted. As of March 31, 1998, Other Rights to
purchase approximately 851,616 shares of common stock had been exercised (none
exercised in fiscal 1998, 433 shares in fiscal 1997 and 2,720 shares in fiscal
1996, at per-share exercise prices ranging from $.59 to $9.29).
The Company applies APB Opinion No. 25 in accounting for its stock option plans,
and accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's consolidated net income (loss) and net
income (loss) per share would have been decreased (or increased in the case of
the net loss) to the pro forma amounts indicated below for the three years ended
March 31, 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
--------- ----- ------
<S> <C> <C> <C>
Consolidated Net Income (Loss):
As reported $ (9,581) $ 845 $7,599
Pro forma $(10,076) $ 372 $6,993
======== ===== ======
Consolidated Net Income (Loss) per Share:
As reported
Basic $ (.71) $ .06 $ .56
Diluted $ (.71) $ .06 $ .51
======== ===== ======
Pro forma
Basic $ (.75) $ .03 $ .52
Diluted $ (.75) $ .03 $ .47
======== ===== ======
</TABLE>
The weighted-average fair value of options granted during fiscal 1998, 1997 and
1996 was $3.25, $7.19 and $6.59, respectively, using the Black-Scholes option-
pricing model with the following weighted-average assumptions: Fiscal 1998,
1997 and 1996 - expected volatility of 60%, risk-free interest rates of 5.7% -
6.7%, no expected dividends and an expected life of three to five years.
Pro forma consolidated net income (loss) and net income (loss) per share
reflects only options granted in fiscal 1998, 1997 and 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma consolidated net income (loss) and net
income (loss) per share amounts presented above because compensation cost is
reflected over the option vesting periods of up to four years and compensation
cost for options granted prior to April 1, 1995 are not considered.
_______________________________________________________________________________
Image Entertainment, Inc 61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13. INCOME TAXES.
Income tax (benefit) expense for the three years ended March 31, 1998, all
current, are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal $ (55) $ 32 $ 165
State 3 345 578
-------- -------- --------
$ (52) $ 377 $ 743
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets at March 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 3,639 $ 1,228
Net operating loss carryforwards 1,293 --
Other 457 294
Installment sales 396 398
Sales returns reserve 388 294
Store closure expenses 265 --
Royalty reserves 198 669
Bad debt reserve 162 654
------- -------
Deferred tax assets 6,798 3,537
Less valuation allowance (6,743) (3,537)
------- -------
Net deferred tax assets $ 55 $ --
======= =======
</TABLE>
At March 31, 1997, the Company had fully utilized its net operating loss
carryforwards for Federal income tax purposes as well as its Alternative Minimum
Tax credit carryforwards.
________________________________________________________________________________
62 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Expected income tax expense based on Federal statutory rates for the three years
ended March 31, 1998 differed from actual tax expense as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Expected income tax expense (benefit) $(3,275) $ 415 $ 2,784
State income taxes, net of
Federal benefit 3 73 503
Change in valuation allowance 3,206 (28) (2,361)
Exercise of stock options -- (4) (24)
Other 14 (79) (159)
------- ------- --------
$ (52) $ 377 $ 743
======= ======= ========
</TABLE>
NOTE 14. OTHER ITEMS -- STATEMENTS OF OPERATIONS.
Fourth Quarter Adjustments. During the fourth quarter of fiscal 1998, the
- --------------------------
Company recorded pretax noncash charges of $6,263,000 and $4,246,000 to reduce
the carrying value of its LD inventory to its net realizable value and to
provide for estimated losses on LD license and exclusive distribution
agreements, respectively. The provisions were in response to a greater than
expected decline in the Company's quarterly LD sales and the continued adverse
effect DVD is having on the LD market. The charges are reflected as a component
of cost of optical disc sales in the accompanying consolidated statements of
operations for fiscal 1998.
Also during the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring pretax charge of $825,000 associated with the closure of its
subsidiary, U.S. Laser. See "Note 2. Closure of Subsidiary -- U.S. Laser Video
Distributors, Inc." The charge is reflected as costs of facility closure in the
accompanying consolidated statement of operations for fiscal 1998.
During the fourth quarter of fiscal 1997, the Company recorded pretax provisions
for slow-moving LD inventory and estimated doubtful accounts receivable of
$1,214,000 and $792,000, respectively. The charges are reflected as a component
of cost of optical disc sales and general and administrative expenses,
respectively, in the accompanying consolidated statement of operations for
fiscal 1997.
Acquisition Expenses. During the third quarter of fiscal 1997, the Company
- --------------------
recorded a nonrecurring pretax charge of $662,000 consisting primarily of
professional fees incurred in connection with negotiations to acquire Essex
Entertainment, Inc., a privately held New Jersey-based corporation. Acquisition
negotiations were terminated in December 1996. The charge is reflected as other
expense in the accompanying consolidated statement of operations for fiscal
1997.
Amortization of Warrants Associated with Program Acquisition Agreements. The
- -----------------------------------------------------------------------
value of warrants issued in connection with program acquisition agreements
entered into during fiscal 1992 and 1993 and their respective issuance costs are
amortized ratably over the term of the related agreements. Amortization totaled
$73,000, $160,000 and $349,000 for the years ended March 31, 1998, 1997 and
1996, respectively, and were recorded as cost of optical disc sales in the
accompanying consolidated statements of operations. Stock warrants were fully
amortized at March 31, 1998.
_______________________________________________________________________________
Image Entertainment, Inc. 63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. COMMITMENTS AND CONTINGENCIES.
The lease for the Company's corporate office space in Chatsworth, California
provides for monthly rent of $14,000 (subject to annual adjustment based upon
increases in the consumer price index) and expires March 31, 2000.
The lease for the Company's warehouse space in Chatsworth, California provides
for monthly rent of $23,000 (subject to annual adjustment based upon increases
in the consumer price index). The Company plans to relocate its warehousing and
distribution operations to Nevada. See "Note 6. Purchase of Nevada Real
Property." On February 2, 1998, the Company entered into a Surrender of Lease
and Termination Agreement (the "Agreement"). The Agreement provides for the
Company to surrender the lease for the warehouse space on August 31, 1998
("Termination Date"). The Company can extend the Termination Date on a month-
to-month basis until November 1998. However, the Agreement is deemed null and
void and the Chatsworth warehouse lease would be restored if the Company does
not vacate the premises by November 30, 1998. In consideration for the early
termination of the lease which would have otherwise terminated on March 31,
2000, the Company will pay the sum of $50,000 on or before the Termination Date.
The Company also has leased additional warehouse space in Chatsworth, California
on a month-to-month lease for a monthly rent of $6,000.
Concurrent with the closure of U.S. Laser, the lease for the Company's New
Jersey combined office and retail space, with current monthly rent of $8,000,
which was due to expire on September 15, 2001, will be terminated early on July
15, 1998. See "Note 2. Closure of Subsidiary -- U.S. Laser Video Distributors,
Inc."
Future minimum annual rental payments at March 31, 1998 are approximately as
follows:
<TABLE>
<CAPTION>
Fiscal Amount
------------ ------------
(In thousands)
<S> <C>
1999 $ 521
2000 172
------------
$ 693
============
</TABLE>
Rent expense was $570,000, $538,000 and $476,000 for fiscal 1998, 1997 and 1996,
respectively.
At March 31, 1998, the Company had $2.3 million of outstanding standby letters
of credit which expire on November 15, 1998. These letters of credit secure
balances due to program suppliers.
_______________________________________________________________________________
64 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
At March 31, 1998, the Company's future obligations for royalty advances,
minimum guarantees and exclusive distribution fee guarantees under the terms of
existing licenses and an exclusive distribution agreement, respectively, are as
follows:
<TABLE>
<CAPTION>
Fiscal Amount
---------- ------------
(In thousands)
<S> <C>
1999 $ 6,740
2000 1,453
2001 120
------------
$ 8,313
============
</TABLE>
In the normal course of business, the Company and its subsidiary are subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations relating to employment and tax matters. While it is not
possible to predict the outcome of these matters, it is the opinion of
management, based on consultations with legal counsel, that the ultimate
disposition of known proceedings will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.
NOTE 16. RELATED PARTY TRANSACTIONS.
Two individuals, who may be deemed to beneficially own more than 5% of the
Company's common stock as the sole shareholders of Image Investors Co., may be
deemed to have indirectly controlled Orion Pictures Corporation ("OPC") during
fiscal 1997 and through the first quarter of fiscal 1998. OPC's wholly-owned
subsidiary Orion Home Video Corporation ("OHVC") licenses programs to the
Company in the ordinary course of its business. The Company believes that the
terms of its license agreements with OHVC are comparable to the terms of similar
agreements between the Company and unaffiliated parties. During fiscal 1997,
the Company paid OHVC royalties of approximately $850,000. OHVC was sold to
Metro-Goldwyn-Mayer, Inc. in July 1997. Royalties paid to OHVC during fiscal
1998 through its sale date were immaterial.
In June 1996, the Company's Board of Directors approved the Company's purchase
of 138,000 shares of the Company's common stock from the Company's President and
Chief Executive Officer at $5.8125 per share. The closing price of the common
stock on the date of purchase was $6.125.
_______________________________________________________________________________
Image Entertainment, Inc. 65
<PAGE>
NOTE 17. QUARTERLY FINANCIAL DATA. (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
(In thousands, expect per share data) June 30, September 30, December 31,
------------------------ ----------------------- ---------------------
1997 1996 1997 1996 1997 1996
--------- ----------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 16,902 $ 20,146 $ 16,412 $ 17,762 $ 26,297 $ 24,948
Operating income (loss)................. (34) 850 (68) 583 1,467 1,087
Income (loss) before
extraordinary item..................... (191) 606 (184) 496 1,087 301/(2)/
Net income (loss)....................... (191) 606 (184) 496 1,087 158/(3)/
Net income (loss) per share:/(5)/
Basic................................. $ (.01) $ .04 $ (.01) $ .04 $ .08 $ .01
Diluted............................... $ (.01) $ .04 $ (.01) $ .04 $ .08 $ .01
<CAPTION>
---------------------------
(In thousands, expect per share data) March 31,
---------------------------
1998 1997
------------- ----------
<S> <C> <C>
Net sales............................... $ 15,905 $ 22,794
Operating income (loss)................. (10,454)/(1)/ (269)/(4)/
Income (loss) before
extraordinary item..................... (10,293)/(1)/ (431)
Net income (loss)....................... (10,293)/(1)/ (415)
Net income (loss) per share:/(5)/
Basic................................. $ (.76) $ (.03)
Diluted............................... $ (.76) $ (.03)
</TABLE>
_____________________
(1) Includes noncash charges of $6,263,000 and $4,246,000 to reduce the carrying
value of the Company's LD inventory to its net realizable value and provide
for estimated losses on LD license and exclusive distribution agreements,
respectively. Also includes nonrecurring charges totaling $825,000 relating
to the closure of subsidiary, U.S. Laser Video Distributors, Inc.
(2) Includes nonrecurring charges totaling $662,000 relating to the write-off of
acquisition expenses.
(3) Net of extraordinary charge, net of taxes, related to early retirement of
debt of $127,000.
(4) Includes noncash charges of $1,214,000 and $792,000 to reduce the carrying
value of the Company's LD inventory to its estimated net realizable value
and provide for estimated doubtful accounts receivable, respectively.
(5) Net income (loss) per share are computed independently for each of the
quarters represented in accordance with SFAS No. 128 as described in detail
in Note 4 to the Consolidated Financial Statements. Therefore, the sum of
the quarterly net income (loss) per share may not equal the total computed
for the fiscal year or any cumulative interim period.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Election of Directors" in
the Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1998 Annual Meeting of Shareholders. See also,
PART I "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Executive Compensation" in
the Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive proxy
statement to be filed with the Commission in connection with the Company's 1998
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement to be filed
with the Commission in connection with the Company's 1998 Annual Meeting of
Shareholders.
_______________________________________________________________________________
Image Entertainment, Inc. 67
<PAGE>
- ------------------------------------------------------------------------------
PART IV
- ------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT. Page
----
<S> <C>
1. Financial Statements:
Independent Auditors' Report.................................................... 42
Consolidated Balance Sheets at March 31, 1998 and 1997.......................... 43
Consolidated Statements of Operations for the years ended March 31, 1998,
1997 and 1996................................................................... 45
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996................................................... 46
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997
and 1996........................................................................ 47
Notes to Consolidated Financial Statements...................................... 50
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts................................. 69
3. Exhibits: See the Exhibit Index on pages i to v.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
_______________________________________________________________________________
68 Image Entertainment, Inc.
<PAGE>
SCHEDULE II
-- VALUATION AND QUALIFYING ACCOUNTS --
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
-------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1998: $ 1,629 $ (331) $ (894) $ 404
========== ============ =========== ===========
For the Year Ended March 31, 1997: $ 333 $ 1,946 $ (650) $ 1,629
========== ============ =========== ===========
For the Year Ended March 31, 1996: $ 200 $ 282* $ (149) $ 333
========== ============ =========== ===========
<CAPTION>
Allowance for Sales Returns
---------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1998: $ 3,180 $ 5,457 $ (4,437) $ 4,200
=========== ============ =========== ===========
For the Year Ended March 31, 1997: $ 2,850 $ 9,385 $ (9,055) $ 3,180
=========== ============ =========== ===========
For the Year Ended March 31, 1996: $ 2,500 $ 6,791 $ (6,441) $ 2,850
=========== ============ =========== ===========
<CAPTION>
Reserve for Slow-Moving Inventory
---------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1998: $ 3,070 $ 8,133 $ (2,105) $ 9,098
=========== ============ =========== ===========
For the Year Ended March 31, 1997: $ 1,219 $ 1,964 $ (113) $ 3,070
=========== ============ =========== ===========
For the Year Ended March 31, 1996: $ 1,131 $ 254 $ (166) $ 1,219
=========== ============ =========== ===========
</TABLE>
____________________________
* Includes $177,000 representing the allowance for doubtful accounts of U.S.
Laser as of its June 1995 acquisition date. See Item 7. "Closure of
Subsidiary -- U.S. Laser Video Distributors, Inc."
________________________________________________________________________________
Image Entertainment, Inc. 69
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.,
a California corporation
Dated: June 24, 1998 By:/s/ MARTIN W. GREENWALD
---------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive
Officer,
President & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ MARTIN W. GREENWALD
---------------------------------------
Dated: June 24, 1998 MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive
Officer,
President & Treasurer
/s/ JEFF M. FRAMER
---------------------------------------
Dated: June 24, 1998 JEFF M. FRAMER,
Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ STUART SEGALL
---------------------------------------
Dated: June 24, 1998 STUART SEGALL,
Vice President & Director
/s/ IRA EPSTEIN
---------------------------------------
Dated: June 24, 1998 IRA EPSTEIN,
Director
/s/ RUSSELL HARRIS
---------------------------------------
Dated: June 24, 1998 RUSSELL HARRIS,
Director
________________________________________________________________________________
70 Image Entertainment, Inc.
<PAGE>
- ----------------------------------------------------------------------------
EXHIBIT INDEX
- ----------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Articles of Incorporation. Filed as Exhibit 3.1 of the
Company's Form 10-K for the year ended March 31, 1995, and
incorporated by reference herein.
3.2 Bylaws. Filed as Exhibit 3.2 of the Company's Form 10-K for the
year ended March 31, 1995, and incorporated by reference herein.
10.1 + The Company's Restated 1989 Incentive Stock Option Plan, as
amended. Filed as Exhibit 10.1 of the Company's Form 10-K for the
year ended March 31, 1992, and incorporated by reference herein.
10.2 + The Company's 1990 Stock Option Plan. Filed as Exhibit A of the
Company's Proxy Statement dated December 27, 1990, and
incorporated by reference herein.
10.3 + The Company's Restated 1992 Stock Option Plan. Filed as Exhibit A
of the Company's Proxy Statement dated September 9, 1994, and
incorporated by reference herein.
10.4 + The Company's 1994 Eligible Directors Stock Option Plan and Form
of Eligible Director Non-Qualified Stock Option Agreement. Filed
as Exhibit 10.4 of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.5 + Form of Option Agreement dated October 15, 1991 between the
Company and Martin W. Greenwald. Filed as Exhibit 10.3 of the
Company's 10-Q for the quarter ended September 30, 1991, and
incorporated by reference herein.
10.6 + Option granted August 13, 1992 by the Company to Cheryl Lee.
Filed as Exhibit 10.12 of the Company's Form 10-K for the year
ended March 31, 1994, and incorporated by reference herein.
10.7 + Form of Option granted May 19, 1994 to Jeff Framer, Cheryl Lee
and David Borshell. Filed as Exhibit 10.24 to the Company's Form
10-K for the year ended March 31, 1994, and incorporated by
reference herein.
10.8 + Employment Agreement of Martin W. Greenwald dated July 1, 1994.
Filed as Exhibit 10.8 of the Company's Form 10-K for the year
ended March 31, 1995, and incorporated by reference herein.
10.8.a + Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Martin W. Greenwald dated July 1, 1994.
Filed as Exhibit 10.1 of the Company's 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference herein.
________________________________________________________________________________
Image Entertainment, Inc. i
<PAGE>
10.8.b + Amendment No. 2 dated and effective as of July 1, 1996 to
Employment Agreement of Martin W. Greenwald dated July 1, 1994.
Filed as Exhibit 10.3 of the Company's 10-Q for the quarter ended
September 30, 1996, and incorporated herein by reference herein.
10.8.c + * Amendment No. 3 dated and effective as of June 1, 1997 to
Employment Agreement of Martin W. Greenwald dated July 1, 1994.
10.9 + Employment Agreement of Cheryl Lee dated July 1, 1994. Filed as
Exhibit 10.9 of the Company's Form 10-K for the year ended March
31, 1995, and incorporated by reference herein.
10.9.a + Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Cheryl Lee dated July 1, 1994. Filed as
Exhibit 10.2 of the Company's 10-Q for the quarter ended June 30,
1995, and incorporated herein by reference herein.
10.10 + Employment Agreement of Jeff Framer dated July 1, 1994. Filed as
Exhibit 10.10 of the Company's Form 10-K for the year ended March
31, 1995, and incorporated by reference herein.
10.10.a + Amendment No. 1 dated and effective as of July 1, 1995 to
Employment Agreement of Jeff Framer dated July 1, 1994. Filed as
Exhibit 10.3 of the Company's 10-Q for the quarter ended June 30,
1995, and incorporated herein by reference herein.
10.11 + Employment Agreement of David Borshell dated July 1, 1994. Filed
as Exhibit 10.11 of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.11.a + Amendment No. 1 dated and effective as of September 1, 1994 to
Employment Agreement of David Borshell dated July 1, 1994. Filed
as Exhibit 10.11.A of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.12 + Form of Indemnity Agreement between the Company and its directors
and officers. Filed as Exhibit F of the Company's Proxy Statement
dated September 5, 1989, and incorporated by reference herein.
10.13 Stock Purchase Agreement among the Company, Directors of the
Company and various Buyers dated December 29, 1987. Filed as
Exhibit 4.3 of the Company's Form 8-K dated December 29, 1987,
and incorporated by reference herein.
10.13.a Form of First Amendment dated July 7, 1992 to the Stock Purchase
Agreement referenced in Exhibit 10.19 above. Filed as Exhibit
10.5 of the Company's Form 10-Q for the quarter ended September
30, 1992, and incorporated by reference herein.
_______________________________________________________________________________
ii Image Entertainment, Inc.
<PAGE>
10.14 Stock Purchase Agreement among the Company, Directors of the
Company and Image Investors Co. dated June 27, 1990. Filed as
Exhibit 10.53 of the Company's Form 10-K for the year ended March
31, 1990. The Company and Image Investors Co. are parties to
Stock Purchase Agreements dated July 14, 1988, November 30, 1988,
January 11, 1989, February 14, 1989, May 10, 1989 and June 20,
1990, which are virtually identical to this Exhibit except for
the number of shares of Common Stock purchased, and incorporated
by reference herein.
10.15 Stock Purchase Agreement between the Company and Image Investors
Co. dated December 30, 1992, including Warrant. Filed as Exhibit
10.6 of the Company's Form 10-Q for the quarter ended December
31, 1992, and incorporated by reference herein.
10.16 Stock Purchase Agreement between the Company and Stuart Segall
dated as of July 12, 1995. Filed as Exhibit 10.1 of the Company's
Form 10-Q for the quarter ended September 30, 1996, and
incorporated by reference herein.
10.17 Stock Purchase Agreement between the Company and Martin W.
Greenwald dated as of June 27, 1996. Filed as Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended September 30, 1996, and
incorporated by reference herein.
10.18 Purchase and Sale Agreement between the Company and LEI Partners,
L.P. dated December 31, 1990. Filed as Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended December 31, 1990, and
incorporated by reference herein.
10.19 Standard Industrial Lease for 9333 Oso Avenue, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.1 of the Company's Form 10-Q for the quarter ended December
31, 1993.
10.20 Standard Industrial Lease for 20350 Prairie Street, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.2 of the Company's Form 10-Q for the quarter ended December
31, 1993, and incorporated by reference herein.
10.20.a * Surrender of Lease and Termination Agreement for 20350 Prairie
Street, Chatsworth, California, dated and effective February 2,
1998, between the Company and P&R Investment Company.
10.21 Agreement for Purchase and Sale dated June 5, 1996 between
Airport Center Partnership and the Company. Filed as Exhibit
10.19 of the Company's Form 10-K for the year ended March 31,
1996, and incorporated by reference herein.
10.22 Construction Agreement between the Company and Carson
Construction Management, Inc. dated as of November 25, 1996.
Filed as Exhibit 10.23 of the Company's Form 10-K for the year
ended March 31, 1997, and incorporated by reference herein.
_______________________________________________________________________________
Image Entertainment, Inc. iii
<PAGE>
10.23 * Business Loan Agreement between the Company and Bank of America
National Trust and Savings Association dated March 10, 1997.
10.23.a * Amendment No. 1 dated as of February 4, 1998 to Business Loan
Agreement between the Company and Bank of America National Trust
and Savings Association dated March 10, 1997.
10.24 * Lease Intended as Security between the Company and BA Leasing &
Capital Corporation dated March 19, 1997.
10.24.a * (First) Amendment dated March 19, 1997 to Lease Intended as
Security between the Company and BA Leasing & Capital Corporation
dated March 19, 1997.
10.24.b * Second Amendment dated February 8, 1998 to Lease Intended as
Security between the Company and BA Leasing & Capital Corporation
dated March 19, 1997.
10.25 * Agreement for Purchase and Sale dated May 13, 1998 between the
Company and Jackson-Shaw Company.
10.26 Loan Agreement between the Company and Union Bank of California,
N.A. dated as of December 17, 1996. Filed as Exhibit 10.20 of the
Company's Form 10-K for the year ended March 31, 1997, and
incorporated by reference herein.
10.26.a Amendment No. 1 dated as of February 5, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and
Union Bank of California, N.A. Filed as Exhibit 10.20.A of the
Company's Form 10-K for the year ended March 31, 1997, and
incorporated by reference herein.
10.26.b Amendment No. 2 dated as of February 25, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and
Union Bank of California, N.A. Filed as Exhibit 10.20.B of the
Company's Form 10-K for the year ended March 31, 1997, and
incorporated by reference herein.
10.26.c * Amendment No. 3 dated as of September 27, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and
Union Bank of California, N.A.
10.26.d * Amendment No. 4 dated as of October 31, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and
Union Bank of California, N.A.
10.26.e * Amendment No. 5 dated as of January 28, 1998 to Loan Agreement
dated as of December 17, 1996 by and between the Company and
Union Bank of California, N.A.
_______________________________________________________________________________
iv Image Entertainment, Inc.
<PAGE>
10.26.f * Amendment No. 6 dated as of June 18, 1998 to Loan Agreement dated
as of December 17, 1996 by and between the Company and Union Bank
of California, N.A.
10.27 * Credit Agreement dated as of September 29, 1997 by and between
the Company and Image Investors Co.
21 * Subsidiaries of the Registrant.
23 * Consent Letter of KPMG Peat Marwick LLP, Independent Certified
Public Accountants.
27.1 * Financial Data Schedule Fiscal Year Ended March 31, 1998.
27.2 * Financial Data Schedule Fiscal Year Ended March 31, 1997
(Restated).
27.3 * Financial Data Schedule Fiscal Year Ended March 31, 1996
(Restated).
27.4 * Financial Data Schedule Nine Months Ended December 31, 1996
(Restated).
__________________
* EXHIBIT(S) NOT PREVIOUSLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
+ MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS.
_______________________________________________________________________________
Image Entertainment, Inc. v
<PAGE>
EXHIBIT 10.8.C
AMENDMENT #3 TO
EMPLOYMENT AGREEMENT DATED JULY 1, 1994
Reference is made to that certain Employment Agreement dated as of July 1,
1994 (the "Agreement"), by and between Image Entertainment, Inc., a California
---------
corporation ("Image"), and Martin W. Greenwald, an individual ("Executive").
----- ---------
All defined terms not defined herein will have the meanings set forth in the
Agreement.
1. EFFECTIVE DATE. All of the terms and conditions of this Amendment will be
applicable commencing on and effective as of June 1, 1997 (the "Effective
---------
Date").
----
2. FISCAL 1998 GUARANTEED BONUS. The parties hereby agree to amend the terms
of Paragraph 3(b) of the Agreement to provide that Executive will be
entitled to receive a discretionary, guaranteed bonus for the fiscal year
ending March 31, 1998, as follows:
a. GUARANTEED BONUS AMOUNT. In addition to the Bonus Compensation
described in Paragraph 3(b) of the Agreement, Executive will be
entitled to receive a discretionary, guaranteed, non-returnable, non-
reimbursable bonus in the total amount of $90,000.00 for the fiscal
year ending March 31, 1998 (the "Guaranteed Bonus").
----------------
b. PAYOUT OF GUARANTEED BONUS. The Guaranteed Bonus will be paid to
Executive in equal biweekly installments of $4,050.00 commencing June
1, 1997.
c. GUARANTEED BONUS APPLIED AGAINST BONUS COMPENSATION FOR FISCAL 1998.
If any monies are earned by Executive under the Bonus Plan for fiscal
1998, Executive will only be entitled to receive the difference
between the amount of the Bonus Compensation and the amount of the
Guaranteed Bonus. [(The following examples are for illustration
purposes only and are not intended to be contractual provisions.)
Example 1: If the Executive earns $100,000.00 of Bonus Compensation
under the Bonus Plan, Executive would only be entitled to receive
$10,000.00 of the $100,000.00 (i.e., $100,000.00 Bonus Compensation -
$90,000.00 Guaranteed Bonus). Example 2: If Executive earns $50,000.00
of Bonus Compensation under the Bonus Plan, Executive would
nevertheless continue to receive the full amount of the Guaranteed
Bonus but would not be entitled to receive any Bonus Compensation.
Example 3: If Executive earns no monies under the Bonus Plan,
Executive would nevertheless continue to receive the full amount of
the Guaranteed Bonus.]
3. GENERAL PROVISIONS.
a. Headings. Article and paragraph headings, as used in this Amendment,
--------
are for convenience only and are not a part hereof, and will not be
used to interpret any provision of this Amendment or the Agreement.
b. Integration. The parties hereby acknowledge and agree that the
-----------
Agreement as amended hereby constitutes the entire agreement between
the parties with respect to the subject matter hereof.
c. Severability. In the event that any provision of the Agreement as
------------
amended hereby will be held invalid or unenforceable, such provision
will be severable from, and such invalidity or unenforceability will
not be construed to have any effect on, the remaining provisions of
the Agreement.
<PAGE>
d. Ratification and Confirmation of Agreement. Except as set forth herein
------------------------------------------
to the contrary, the Agreement is hereby ratified and affirmed;
provided, however, that in the event of any inconsistencies, the
-------- --------
terms, conditions and definitions set forth herein will control.
IN WITNESS WHEREOF, each of the parties has executed and entered into this
Amendment as of the Effective Date set forth above.
"Image Entertainment, Inc.": "Executive"
------------------------- ---------
/s/ MARTIN W. GREENWALD /s/ MARTIN W. GREENWALD
- ------------------------------- ----------------------------------------
Martin W. Greenwald, President Martin W. Greenwald, an individual
<PAGE>
EXHIBIT 10.20.A
SURRENDER OF LEASE AND
TERMINATION AGREEMENT
THIS AGREEMENT is made and entered into this 2nd day of February, 1998 by and
between IMAGE ENTERTAINMENT, INC., a California corporation ("Lessee") and P & R
INVESTMENT COMPANY, a California General Partnership ("Lessor").
RECITALS
A. On or about December 1, 1993, Lessee and Lessor entered into a lease
(the "Lease") for certain premises (the "Premises") located at 20350 Prairie
St., Chatsworth, California.
B. The Lease term was for six (6) years, commencing on April 1, 1994 and
ending on March 31, 2000.
C. Lessee desires to surrender the Lease and all rights to possession of
the Premises and to release Lessor from all further obligations under the Lease,
and Lessor desires to accept the surrender of the Lease and to release Lessee
from all further obligations under the Lease (with certain exceptions) upon the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, the parties agree as follows:
1. Lessee agrees to surrender the Lease and deliver possession of the
Premises to Lessor at 5:00 PM on August 31, 1998 (the "Termination Date") and
Lessor agrees to accept such surrender of the Lease and possession of the
Premises, subject to the terms and conditions set forth herein. Lessee can
extend the termination date on a month-to-month basis by providing written
notice to Lessor. However, this Surrender of Lease and Termination Agreement is
deemed null and void if Lessee does not vacate premises by November 30, 1998.
2. Lessee agrees to pay Rent and all other sums due under the Lease, and
to continue to perform all of its obligations under the Lease, through the
Termination Date. Any adjustments for real estate taxes, common area
maintenance expenses or insurance which are to be made pursuant to the Lease
shall be made effective as of the Termination Date or other date mutually agreed
to by the parties if occupancy is surrendered at a date other than the
Termination Date. Any sums due to Lessor by Lessee shall be paid at that time.
Lessor may offset any sums due from Lessee against Lessee's security deposit,
and the balance due, if any, shall be paid by Lessee to Lessor forthwith.
3. Lessee agrees to surrender the Premises to Lessor in the condition
provided under Paragraph 7.1 and 7.2 of the Lease. Additionally, prior to the
Termination Date, Lessee shall, at its sole cost and expense, perform the
following work to the Premises:
a. Maintain and leave all doors, roll up and pedestrian, in good
operating condition.
b. Remove the Easterly metal canopy as required in subparagraph 5b
on the Addendum to Lease.
Page 1 of 3
<PAGE>
c. Provide to Lessor a copy of the final sign off inspection card
for the office improvements at rear of premises.
d. Repair any non-operating HVAC units to a good working condition.
All such work shall be done in a good and workmanlike manner, and the Premises
shall at all times be kept free from all mechanic's or materialmen's liens.
Upon completion of the work, Lessee shall furnish Lessor evidence that the work
has been fully paid for, including such lien releases or waivers as Lessor may
reasonably require Lessor reserves the right to supervise the work.
4. Provided that Lessee fully performs its obligations under this
Agreement, Lessee's security deposit, after any offset as provided in Section 2
above, shall be returned to Lessee within thirty (30) days after the Termination
Date.
5. Lessee represents and warrants to Lessor that:
a. It has not assigned the Lease or any interest therein to any
person or entity.
b. It has not sublet the Premises or any part thereof to any person
or entity.
c. No person or entity other than Lessee is in possession of the
Premises.
d. It has not encumbered its interest in the Lease or caused such
interest of the Premises to be subject to any voluntary security interest or
lien except for inventory loans and their corresponding liens which shall be
removed from the record title of the premises.
e. It has not caused or suffered its interest in the Lease or the
Premises to be subject to any involuntary lien, charge, claim or encumbrance.
f. It has not caused or permitted any Hazardous Material (as defined
herein) to be released, brought upon, stored, produced, emitted, disposed or
used upon, about or beneath the Premises. Hazardous Material is defined as
follows: any hazardous or toxic substance, material or waste which is regulated
by any federal, state or local governmental authority including, without
limitation, substances defined as "hazardous substances", "hazardous materials",
"hazardous waste", or "toxic substances" in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or any other
similar federal, state or local law.
Lessee agrees that the foregoing representations and warranties shall also
be true and correct as of the Termination Date. Lessee agrees to indemnify,
defend and hold Lessor free and harmless from any and all claims, demands,
costs, expenses, actions and other liabilities (including reasonable attorney's
fees and costs) resulting from the untruthfulness or inaccuracy of any of the
foregoing representations and warranties. This provision shall expressly
survive the Termination of the Lease.
6. Provided that Lessee fully performs all of its obligations under this
Agreement, Lessor hereby releases and discharges Lessee from all further
obligations under the Lease after the Termination Date, as respects to the
Premises, except for those obligations and indemnifications under the Lease and
this Agreement which expressly survive the termination or expiration of the
Lease.
Page 2 of 3
<PAGE>
7. Lessee shall pay to Lessor, on or before the Termination Date, the sum
of Fifty Thousand Dollars ($50,000.00) which sum represents additional
consideration for the early termination of the Lease.
8. Lessee shall cooperate with Lessor so that Lessor may perform certain
work to the premises during Lessee's occupancy without interfering with Lessee's
use of the Premises and with no adjustment to Lessee's rent.
9. Each individual executing this Surrender of Lease and Termination
Agreement on behalf of Lessee represents and warrants that he or she is duly
authorized to execute and deliver this Surrender of Lease and Termination
Agreement on behalf of Lessee. Lessee shall, within thirty (30) days after
execution of this document deliver a certified copy of a Corporation Resolution
of Lessee adopting or confirming this Surrender of Lease and Termination
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
P & R INVESTMENT COMPANY IMAGE ENTERTAINMENT, INC.
a California General Partnership A California corporation
/s/ SANFORD P. PARIS /s/ MARTIN W. GREENWALD
- ------------------------------------- --------------------------------
Sanford P. Paris, General Partner Martin Greenwald
Its: President & CEO
/s/ MAX RAMBERG, Trustee
- -------------------------------------
Max Ramberg, Trustee of The Max
and Constance Ramberg Trust of
1982 (Restated)
General Partner
Page 3 of 3
<PAGE>
EXHIBIT 10.23
BUSINESS LOAN AGREEMENT
-----------------------
This Agreement dated as of March 10, 1997, is among Bank of America
National Trust and Savings Association (the "Bank"), and Image Entertainment,
Inc., a California corporation (the "Borrower").
1. DEFINITIONS
-----------
1.1 Definitions. The following terms where used in this Agreement shall
-----------
have the meanings set forth below. Other capitalized terms used in this
Agreement not defined below shall have the meanings set forth in the body of
this Agreement.
"Addendum" means the Addendum to this Agreement which sets forth
--------
the terms and conditions for advances hereunder from the date hereof
until the Construction Advance Expiration Date.
"Architect" means any other architect selected by the Borrower in
---------
connection with the design of the Improvements and deemed acceptable
by the Bank in the reasonable exercise of its discretion.
"Architect Contract" means that certain "Standard Form of
------------------
Agreement between Owner and Architect" dated July 22, 1996, between
the Architect and the Borrower relating to the design and construction
of the Improvements and the preparation of the Construction Plans,
including any amendments, supplements or modifications thereto.
"Banking Day" shall have the meaning set forth in Section 6.4.
-----------
"Borrowing Date" means any date on which an advance is made under
--------------
Section 6.
"Capital Lease" has the meaning specified in the definition of
-------------
Capital Lease Obligations.
"Capital Lease Obligations" means the portion of all monetary
-------------------------
obligations of the Borrower under any leasing or similar arrangement
which, in accordance with GAAP, is required to be shown on the balance
sheet of the Borrower in respect of any lease or similar arrangement
classified as a capital lease ("Capital Lease").
-------------
"Cash" means all monetary and non-monetary items owned by any
----
person that are treated as cash in accordance with GAAP.
"Cash Interest Expense" means Interest Expense that is paid or
---------------------
currently payable in Cash.
"Collateral" means the Real Property and Improvements and all
----------
personal property and proceeds thereof now owned or hereafter acquired
by the Borrower in or upon which a lien now or hereafter exists in
favor of the Bank, whether under this Agreement or under any
Collateral Document.
"Collateral Documents" means, collectively, (i) the Deed of
--------------------
Trust, all other security agreements, lease assignments and other
similar agreements between the Borrower and the Bank now or hereafter
delivered to the Bank as security for all or a part of the
Obligations, and all financing statements (or comparable documents now
or hereafter filed
1
<PAGE>
in accordance with the UCC or comparable law) against the Borrower as
debtor in favor of the Bank and (ii) any amendments, supplements,
modifications, renewals, replacements, consolidations, substitutions
and extensions of any of the foregoing.
"Completion of Construction" means the completion of the
--------------------------
Improvements in a workmanlike manner in material conformity to the
Construction Plans and the Cost Breakdown, as evidenced by: (a) the
issuance of a temporary certificate of occupancy for the Improvements
by the City of Las Vegas and Clark County; (b) the due recording of a
notice of completion in accordance with applicable Laws; (c) the
payment, or the satisfactory provision for payment, of all
materialmen's claims, mechanics' liens or other liens or claims for
liens directly related to the Improvements (other than those created
pursuant to the Loan Documents); (d) the delivery of certificates by
the Architect, the Contractor and by an officer of the Borrower, to
the Bank certifying that the Improvements have been substantially
completed in accordance with the Construction Plans and in substantial
compliance with all applicable Laws; (e) the Improvements being in a
physical condition (including installation of fixtures, furnishings
and equipment) to permit the Borrower to engage in its operations in
the ordinary course of business at the Improvements; and (f) the
granting to the Borrower of all necessary licenses, permits and
consents to operate the Improvements. For the purposes of the
preceding sentence, satisfactory provision for payment of
materialmen's claims, mechanics' liens or other liens or claims for
liens shall be deemed to have been made if the Borrower provides a
bond, cash deposit or other security which the Bank in the exercise of
its reasonable judgment determines to be satisfactory.
"Completion Date" means the date as of which Completion of
---------------
Construction occurs.
"Construction Advance Expiration Date" means January 31, 1998.
------------------------------------
"Construction Availability Period" has the meaning specified in
--------------------------------
Section 2.2(a).
"Construction Contract" means, collectively, that certain
---------------------
"Standard Form of Agreement Between Owner and Contractor" dated
November 25, 1996, between Contractor and the Borrower, relating to
the construction of the Improvements.
"Construction Draw Request" has the meaning specified in Section
-------------------------
3.1 of the Addendum.
"Construction Plans" means all drawings, plans and specifications
------------------
prepared by or for the Borrower, as the same may be amended or
supplemented from time to time, and, if required, submitted to and
approved by Bank, for the construction of the Improvements and the
labor and materials necessary for the construction thereof.
"Contractor" means Carson Construction or any other licensed
----------
general contractor selected by the Borrower in connection with the
construction of the Improvements and deemed acceptable by the Bank in
the reasonable exercise of its discretion.
"Cost Breakdown" means a detailed breakdown of construction,
--------------
financing and other costs relating to the construction of the
Improvements, as approved by the Bank, as amended from time to time in
accordance with the Addendum, a copy of which has been attached to the
Addendum as Schedule 1 thereto.
2
<PAGE>
"Debt Service Coverage Ratio" means, as of the last day of each
---------------------------
fiscal quarter (including the last day of a fiscal quarter which is
also the last day of a fiscal year), the ratio of (a) EBITDA
(calculated for the immediately preceding four fiscal quarters)
divided by (b) the sum of (i) Cash Interest Expense calculated for the
----------
immediately preceding four fiscal quarters plus (ii) the current
----
portion of Funded Debt (including the scheduled Commitment reductions
required by Section 2), for the four fiscal quarters immediately
following the end of such fiscal quarter, plus (iii) any other
----
required principal payment of long-term debt or capital leases for the
four (4) fiscal quarters immediately following the end of such fiscal
quarter.
"Deed of Trust" has the meaning specified in Section 5.1.
-------------
"EBITDA" means, for any period, for the Borrower, the sum of (a)
------
Net Income for that period plus (b) any extraordinary loss reflected
----
in such Net Income, minus (c) any extraordinary gain reflected in such
-----
Net Income, plus (d) cash Interest Expense for such period, plus (e)
---- ----
depreciation, amortization and all other non-cash expenses for that
period, in each case as determined in accordance with GAAP and, in the
case of items (d) and (e) only to the extent deducted in the
determination of Net Income for that period.
"Event of Default" means any event described in Sections 11.1
----------------
through 11.1b of the Agreement.
"Funded Debt" means as of the last day of any fiscal quarter
-----------
(including the last day of a fiscal quarter which is also the last day
of a fiscal year), without duplication, the average outstanding for
the final day of each month of the applicable fiscal quarter of (a)
the principal amount of all indebtedness of the Borrower for borrowed
money, plus (b) the aggregate amount of all Capital Lease Obligations
----
of the Borrower, all as determined in accordance with GAAP.
"GAAP" means, as of any date of determination, accounting
----
principles (a) set forth as generally accepted in then currently
effective Opinions of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (b) set forth as generally
accepted in then currently effective Statements of the Financial
Accounting Standards Board or (c) that are then approved by such other
entity as may be approved by a significant segment of the accounting
profession in the United States. The term "consistently applied," as
used in connection therewith, means that the accounting principles
applied are consistent in all material respects with those applied at
prior dates or for prior periods.
"Governmental Authority" means any nation or government, any
----------------------
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Improvements" mean the improvements and facilities to be
------------
constructed on the Real Property, including, but not limited to, a
76,000 square foot automated distribution facility and related
furnishings, fixtures, fittings and equipment.
"Indemnity" has the meaning specified in Section 10.
---------
3
<PAGE>
"Interest Expense" means, for any period, the sum of (a) gross
----------------
interest expense for the period (including all commissions, discounts,
fees and other similar charges in connection with standby letters of
credit and similar instruments for the Borrower), plus (b) the
----
portions of rent payable with respect to that fiscal period under
Capital Leases that should be treated as interest in accordance with
GAAP less (c) interest income for that period as determined in
----
accordance with GAAP.
"Loan Documents" means this Agreement, the Collateral Documents,
--------------
the Indemnity, the Notices of Borrowing, and all certificates,
agreements or documents of any type or nature hereafter delivered to
the Bank in connection therewith, in each case as originally executed
or as the same may from time to time be supplemented, modified,
amended, restated, extended or supplanted.
"Material Adverse Effect" means (a) a material adverse change in,
-----------------------
or a material adverse effect upon, the operations, business,
properties, condition (financial or otherwise) or prospects of the
Borrower; (b) a material impairment of the ability of the Borrower to
perform its respective obligations under any Loan Document; or (c) a
material adverse effect upon (i) the legality, validity, binding
effect or enforceability of any Loan Document, or (ii) the perfection
or priority of any lien granted to the Bank under any of the
Collateral Documents.
"Net Income" means, with respect to any fiscal period, the
----------
consolidated net income of the Borrower for that period, determined in
accordance with GAAP, consistently applied; provided, however, with
respect to the third fiscal quarter of 1996, the total of $805,000.00
in non-recurring expenses related to acquisitions and early retirement
of debt will not be included in the determination of Net Income.
"Notice of Borrowing" means a written request for an advance
-------------------
under this Agreement following the Construction Availability Period,
but prior to the Maturity Date substantially in the form of Exhibit B,
---------
signed by a Responsible Officer of Borrower.
"Obligations" means all advances, loans, debts, liabilities,
-----------
obligations, covenants and duties owing by the Borrower to the Bank,
of any kind or nature, present or future, arising under this
Agreement, under any other Loan Document, whether or not evidenced by
any note, guaranty or other instrument, whether or not for the payment
of money, whether arising by reason of an extension of credit, loan,
guaranty, indemnification or in any other manner, whether direct or
indirect (including those acquired by assignment), absolute or
contingent, due or to become due, now existing or hereafter arising
and however acquired.
"Operating Lease" means any lease of real or personal property by
---------------
Borrower which is not a Capital Lease.
"Ordinary Course of Business" means, in respect of any
---------------------------
transaction involving the Borrower, the ordinary course of the
Borrower's business, as conducted by Borrower in accordance with past
practice and undertaken by Borrower in good faith and not for purposes
of evading any covenant or restriction in any Loan Document.
"Quarterly Payment Date" means December 31, 1997, and each March
----------------------
31, June 30, September 30 and December 31 thereafter.
4
<PAGE>
"Real Property" means the real property described in Exhibit A,
------------- ---------
including the Improvements, together with all easements and other
rights now or hereafter made appurtenant thereto, all improvements and
fixtures now or hereafter located thereon, and all additions and
accretions thereto.
"Requirement of Law" means, (i) as to Borrower, Borrower's
------------------
organizational documents and any law or judgment, award, decree, writ
or determination of an arbitrator or of a Governmental Authority, in
each case applicable to or binding upon the Borrower or any of its
Properties or to which the Borrower or any of its Properties are
subject; and (ii) as to the Real Property, all laws, restrictions and
requirements of, and all agreements with and commitments to, all
governmental, judicial or legal authorities having jurisdiction over
the Real Property, including those pertaining to the construction,
operation or financing of the Improvements, and all recorded covenants
and restrictions affecting the Real Property.
"Responsible Officer" means the chief executive officer or the
-------------------
president or any other officer having substantially the same authority
and responsibility of the Borrower; or, with respect to delivery of
Construction Draw Requests, any of the foregoing officers of Borrower
or other officers of the Borrower designated in a writing signed by
the chief executive officer of the Borrower and delivered to the Bank.
"Revolving Availability Period" has the meaning set forth in
-----------------------------
Section 2.2(b).
"Total Liabilities" means the sum of current liabilities plus
-----------------
long-term liabilities.
"Tangible Net Worth" means the gross book value of the Borrower's
------------------
assets (excluding goodwill, patents, trademarks, tradenames,
organizational expense, treasury stock, unamortized debt discount and
expense, deferred research and development costs, deferred marketing
expenses and other like intangibles and monies due from affiliates,
officers, directors, or shareholders of the Borrower) less Total
Liabilities, including, but not limited to, accrued and deferred
income taxes, and any reserve assets.
1.2 Other Interpretive Provisions.
-----------------------------
(a) Unless otherwise specified herein or therein, all terms defined
in this Agreement shall have the defined meanings when used in any certificate
or other document made or delivered pursuant hereto. The meaning of defined
terms are equally applicable to the singular and plural forms of the defined
terms.
(b) The words "hereof," "herein," "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, section, schedule and exhibit references are to this
Agreement unless otherwise specified.
(c) (1) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.
(2) The term "including" is not limiting and means
"including without limitation."
5
<PAGE>
(3) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding,"
and the word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i) references
to agreements (including this Agreement) and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document; and (ii) references to any statute
or regulation are to be construed as including all statutory and regulatory
provisions consolidating, amending, replacing, supplementing or interpreting the
statute or regulation.
(e) The captions and headings of this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
(f) This Agreement and other Loan Documents may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result
of negotiations among and have been reviewed by counsel to the Bank, the
Borrower, and the other parties, and are the products of both parties.
Accordingly, they shall not be construed against the Bank merely because of the
Bank's involvement in their preparation.
2. LINE OF CREDIT AMOUNT AND TERMS
-------------------------------
2.1 Line of Credit Amount.
---------------------
(a) During the availability periods described below, the Bank will
provide a line of credit to the Borrower (the "Line of Credit"). The maximum
amount of the Line of Credit (the "Maximum Commitment Amount") from the date
hereof through the Construction Advance Expiration Date shall be Three Million
Four Hundred Thirty Three Thousand Five Hundred Dollars ($3,433,500.00). On
each Quarterly Payment Date the Maximum Commitment Amount shall be reduced by an
amount equal to Forty Two Thousand Nine Hundred Eighteen and 75/100 Dollars
($42,918.75).
(b) This is a construction line of credit which converts to a
reducing revolving line of credit on the Construction Advance Expiration Date.
During the Construction Availability Period, Borrower may request advances under
the Line of Credit up to the Maximum Commitment Amount. During the Revolving
Availability Period, the Borrower may repay principal amounts and reborrow them,
provided the Borrower agrees not to permit the outstanding principal balance of
the Line of Credit to exceed the applicable Maximum Commitment Amount.
2.2 Availability Periods.
--------------------
(a) Construction Availability Period. The construction line of credit
--------------------------------
is available between the date of this Agreement and the Construction Advance
Expiration Date, unless the Borrower is in default (the "Construction
Availability Period").
(b) Revolving Availability Period. The revolving line of credit is
-----------------------------
available between the Construction Advance Expiration Date and January 31, 2008
(the "Maturity Date"), unless the Borrower is in default (the "Revolving
Availability Period").
6
<PAGE>
2.3 Interest Rate.
-------------
(a) During the Construction Availability Period, the interest rate is
the Bank's Reference Rate plus one and one quarter percentage point (1.25) (the
----
"Reference Rate Option"). During the Revolving Availability Period, unless the
Borrower elects a LIBOR Rate Option as described in Section 3 below, the
interest rate will be the Reference Rate Option.
(b) Bank of America National Trust and Savings Association's
Reference Rate is the rate of interest publicly announced from time to time by
Bank as its Reference Rate. Bank's Reference Rate is set based on various
factors, including Bank's costs and desired return, general economic conditions,
and other factors, and is used as a reference point for pricing some loans. The
Bank may price loans to its customers at, above, or below the Reference Rate.
Any change in the Bank's Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in Bank's
Reference Rate.
2.4 Repayment Terms.
---------------
(a) During the Construction Availability Period, the Borrower will
pay interest on the last day of the first calendar month in which the first
advance hereunder is made, and then monthly thereafter on the last day of each
month through the Construction Advance Expiration Date. During the Revolving
Availability Period, for those portions of the Line of Credit accruing interest
at the Reference Rate Option, the Borrower will pay interest on the last day of
each month until payment in full of any principal outstanding under the Line of
Credit. For those portions of the Line of Credit accruing interest at a LIBOR
Rate Option, the Borrower will pay interest at the end of the applicable
interest period, except in the case of interest periods exceeding three (3)
months, in which case interest will be paid at the end of each ninety (90) day
period.
(b) On each Quarterly Payment Date, the Borrower will be required to
pay quarterly principal reduction payments to the extent necessary to reduce the
outstanding principal balance of the Line of Credit to the applicable Maximum
Commitment Amount set forth in Paragraph 2.1(a) above. On the Maturity Date,
the Borrower will repay the remaining principal and unpaid interest in full.
3. OPTIONAL INTEREST RATE
----------------------
3.1 LIBOR Rate Option. During the Revolving Availability Period, the
-----------------
Borrower may elect to have all or portions of the principal balance of the Line
of Credit bear interest at the LIBOR Rate Option plus the applicable margin.
The applicable margin shall be equal to 2.65 percentage points when the Debt
Service Coverage Ratio is equal to or less than 3.0 to 1.0, and the applicable
margin shall be equal to 2.25 percentage points when the Debt Service Coverage
Ratio exceeds 3.0 to 1.0.
Designation of any LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate Option will be in
effect will be three (3), six (6), nine (9) or twelve (12) months. The last day
of the interest period will be determined by the Bank using the practices of the
London inter-bank market.
(b) Each LIB0R Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000) and in multiples of One Hundred Thousand
Dollars ($100,000).
(c) The Borrower shall irrevocably request a LIBOR Rate portion no
later than 9:00 a.m. pacific coast time three (3) Banking Days before the
commencement of the interest period.
7
<PAGE>
(d) The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100th of one percent. (All
amounts in the calculation will be determined by the Bank as of the first day of
the interest period.)
LIBOR Rate = London Rate
-----------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward
to the nearest 1/100th of one percent) at which the BofA California's
London Branch would offer U.S. Dollar deposits for the applicable interest
period to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100th of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(e) The Borrower may not elect a LIBOR Rate Option with respect to
any principal amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at
the LIBOR Rate Option will not be converted to a different rate during its
interest period.
(g) Each prepayment of a LIBOR Rate portion whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment fee
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank
by placing the amount prepaid on deposit in the London inter-bank market
for a period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion (or the scheduled payment
date for the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a
LIBOR Rate portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods
equal to the interest period, of a LIBOR Rate portion are not available in
the London inter-bank market; or
(ii) the LIBOR Rate Option does not accurately reflect the cost
of a LIBOR Rate portion.
8
<PAGE>
(i) Borrower may not elect to have more than five (5) LIBOR Rate
portions outstanding at any one time.
(j) Any LIBOR Rate portion shall automatically convert to bearing
interest at the Reference Rate Option at the end of the applicable interest
period unless Borrower makes another election of a LIBOR Rate Option in
accordance with this Section 3.
4. FEES AND EXPENSES
-----------------
4.1 Upfront Fee. The Borrower agrees to pay an upfront origination fee of
-----------
Thirty Four Thousand Three Hundred Thirty-Five and 00/100 Dollars ($34,335.00)
upon the execution hereof ("Upfront Fee").
4.2 Conversion Fee. Upon the expiration of the Construction Availability
--------------
Period, the Borrower agrees to pay to Bank a conversion fee of Seventeen
Thousand One Hundred Sixty Seven and 50/100 Dollars ($17,167.50) (the
"Conversion Fee").
4.3 Commitment Fee. From and after the Construction Advance Expiration
--------------
Date, the Borrower shall pay to the Bank a commitment fee on the average daily
unused portion of the Maximum Commitment Amount, computed on a quarterly basis
in arrears each Quarterly Payment Date, based upon the daily utilization for
that quarter as calculated by the Bank, calculated at either (i) one half of one
percent (.50%) when the Debt Service Coverage Ratio is equal to or less than 3.0
to 1.0; and (ii) three eighths of one percent (.375%) when the Debt Service
Coverage Ratio exceeds 3.0 to 1.0.
4.4 Expenses.
--------
(a) The Borrower agrees to immediately repay the Bank for expenses
that include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees, survey fees, and documentation fees.
(b) The Borrower agrees to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
(c) During the Construction Availability Period the Borrower agrees
to reimburse the Bank for the cost of the inspections conducted by the Bank, or
Bank's agent.
5. COLLATERAL
----------
5.1 Real Property. The Borrower's obligations to the Bank under this
-------------
Agreement will be secured by the Real Property, together with the Improvements,
and all rents, leases, revenues, issues and profits arising from the Real
Property and Improvements. To evidence this security, Borrower will execute a
deed of trust in favor of the Bank as beneficiary (the "Deed of Trust"), which
Deed of Trust will be recorded in the official records of Clark County, Nevada.
5.2 Personal Property. The Borrower's obligations to the Bank under this
-----------------
Agreement will be secured by a security interest in and lien on all of the
furniture, fixtures, equipment, accounts and revenues located on, relating to or
to be used in connection with the Real Property and Improvements (other than
equipment leased by Borrower and Borrower's inventory and receivables), which
security interest and lien is to be evidenced by the Deed of Trust.
9
<PAGE>
5.3 Partial Release. The Real Property currently consists of
---------------
approximately sixteen (16) acres. The Borrower intends to subdivide the Real
Property into two (2) separate legal parcels consisting of approximately eight
(8) acres each. Upon completion of the subdivision process for the Real
Property in accordance with applicable Nevada law, and subject to the additional
conditions precedent set forth below, Bank will cause to be recorded in the
official records of Clark County, Nevada, a partial release and reconveyance
("Partial Release") relating to that parcel of the Real Property upon which the
Improvements will not be located. The following are conditions precedent to the
---
recording of the Partial Release:
(a) Bank shall have received and approved a copy of the final parcel
map for the Real Property approved by Clark County;
(b) Bank shall have received a commitment from United Title of Nevada
to issue an endorsement, or endorsements, to Bank's policy of title insurance,
insuring the validity and priority of the Bank's Deed of Trust upon the
recording of the Partial Release; and
(c) Borrower shall have paid to Bank all fees and costs, including
title insurance costs, incurred by Bank in connection with the recording of the
Partial Release.
6. DISBURSEMENTS, PAYMENTS AND COSTS
---------------------------------
6.1 Requests for Advances. Each request for an advance under this
---------------------
Agreement will be made in writing in a manner acceptable to the Bank, or by
another means acceptable to the Bank. With respect to any disbursement requests
during the Construction Availability Period ("Construction Draw Requests"), the
terms and conditions of the Addendum attached hereto and incorporated herein by
this reference shall control. With respect to any disbursement requests during
the Revolving Availability Period, but prior to the Maturity Date, Borrower
shall provide Bank with a Notice of Borrowing.
6.2 Disbursements and Payments. Each disbursement by the Bank and each
--------------------------
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the
Bank from time to time;
(b) made for the account of the Bank's branch selected by the Bank
from time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may,
at its discretion, require the Borrower to sign one or more promissory notes.
6.3 Telephone Authorization.
-----------------------
(a) The Bank may honor telephone instructions for repayments given by
any one of the individual signer(s) of this Agreement or a person or persons
authorized by any one of the signer(s) of this Agreement in writing.
(b) Repayments will be withdrawn from the Borrower's accounts with
the Bank as designated in writing by the Borrower.
10
<PAGE>
(c) The Borrower indemnifies and excuses the Bank (including its
officers, employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone instructions it reasonably
believes are made by a signer of this Agreement or a person authorized by a
signer. This indemnity and excuse will survive this Agreement's termination.
6.4 Banking Days. Unless otherwise provided in this Agreement, a banking
------------
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in Nevada ("Banking Day"). All payments and disbursements which would
be due on a day which is not a Banking Day will be due on the next Banking Day.
All payments received on a day which is not a Banking Day will be applied to the
credit on the next Banking Day.
6.5 Taxes. The Borrower will not deduct any taxes from any payments it
-----
makes to the Bank. If any Governmental Authority imposes any taxes or charges
on any payments made by the Borrower, the Borrower will pay the taxes or
charges. Upon request by the Bank, the Borrower will confirm that it has paid
the taxes by providing the Bank official tax receipts (or notarized copies)
within thirty (30) days after the due date. However, the Borrower will not pay
the Bank's net income taxes.
6.6 Interest Calculation. Except as otherwise stated in this Agreement,
--------------------
all interest and fees, if any, will be computed on the basis of a three hundred
sixty (360) day year and the actual number of days elapsed. This results in
more interest or a higher fee than if a three hundred sixty-five (365) day year
is used.
6.7 Interest on Late Payments. In the event any payment required
-------------------------
hereunder is received by the Bank fifteen (15) days after its due date, a late
charge of five percent (5.00%) of each overdue payment may be charged for the
purpose of defraying the expenses incident to handling said delinquent payments
and as an inducement to the Borrower to make timely payment. Acceptance of a
scheduled payment fifteen (15) days after its due date shall not waive any
appropriate late charge, nor shall it constitute a waiver of any Event of
Default.
6.8 Default Rate. Upon the occurrence and during the continuation of any
------------
Default under this Agreement, advances hereunder will, at the option of the
Bank, bear interest at a rate per annum which is three percentage points (3.00%)
higher than the rate of interest otherwise provided under this Agreement (the
"Default Rate"). Failure by the Bank to assess the Default Rate where
appropriate will not constitute a waiver of any Event of Default.
7. CONDITIONS
----------
In addition to those conditions precedent for construction advances as set
forth in the Addendum, the Bank must receive the following items, in form and
content acceptable to the Bank, before it is required to extend any credit to
the Borrower under this Agreement.
7.1 Authorizations. Evidence that the execution, delivery and performance
--------------
by the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
7.2 Governing Documents. A copy of Borrower's articles of incorporation
-------------------
and bylaws.
7.3 Legal Opinions. Upon Bank's request, the Borrower shall provide the
--------------
Bank with an opinion of the Borrower's counsel, satisfactory to the Bank, that:
(1) the Borrower is authorized to enter into the transactions evidenced by this
Agreement and Collateral Documents; and (2) the subject transactions do not
require the approval of any Governmental Authority, except as otherwise
specified. The legal opinion shall
11
<PAGE>
also cover such additional matters as the Bank may require. The legal counsel
and the terms of the opinion must be acceptable to the Bank.
7.4 Resolution. With this Agreement, a resolution, passed by the
----------
Borrower's board of directors, authorizing the Borrower to enter into this
Agreement and any instrument or agreement required under this Agreement. Such
resolution shall also authorize specific individuals to execute this Agreement
and any instrument or agreement required under this Agreement.
7.5 Collateral Agreements. Signed Collateral Documents, as well as
---------------------
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
7.6 Evidence of Priority. Evidence that security interests and liens in
--------------------
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
7.7 Title Insurance. An ALTA lender's title insurance policy and from a
---------------
title company acceptable to Bank, for at least $3,433,500.00, insuring the lien
of the Bank's Deed of Trust as a first and prior lien on the Real Property and
Improvements subject only to those matters approved in writing by Bank.
7.8 Insurance. Evidence of insurance coverage, as required in the
---------
"Covenants" section of this Agreement, and as required by the Addendum.
7.9 Other Items. Any other items that the Bank reasonably requires,
-----------
including, but not limited to the following:
(a) Copy of ALTA/ASCM survey of the Real Property acceptable to the
Bank.
(b) Executed copy of an Assignment of Construction Agreements and
Consent of Contractor.
(c) Executed copy of an Assignment of Agreements, Plans and
Specifications and Consent of Architect.
8. REPRESENTATIONS AND WARRANTIES
------------------------------
When the Borrower signs this Agreement, and until the Bank is repaid in
full, the Borrower makes the following representations and warranties. Each
request for an extension of credit constitutes a renewed representation:
8.1 Organization of the Borrower. The Borrower is a corporation duly
----------------------------
formed and existing under the laws of the State of California.
8.2 Authorization. This Agreement, and any instrument or agreement
-------------
required hereunder, are within the Borrower's powers, have been duly authorized,
and do not conflict with any of its organizational papers.
8.3 Enforceable Agreement. This Agreement is a legal, valid and binding
---------------------
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding, and enforceable.
12
<PAGE>
8.4 Good Standing. In each jurisdiction in which the Borrower does
-------------
business, it is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
8.5 No Conflicts. This Agreement does not conflict with any law,
------------
agreement, or obligation by which the Borrower is bound.
8.6 Financial Information. All financial and other information that has
---------------------
been or will be supplied to the Bank, including, but not limited to, the
Borrower's 1996 audited financial statements dated as of March 31, 1996, are:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
Since the date of the financial statement(s) specified above, there has been no
Material Adverse Effect with respect to the assets or the financial condition of
the Borrower.
8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
--------
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
8.8 Collateral. All Collateral required in this Agreement is owned by the
----------
grantor of the security interest free of any title defects or any liens or
interests of others.
8.9 Permits, Franchises. The Borrower possesses all permits, memberships,
-------------------
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged without conflict of the rights
of others.
8.10 Other Obligations. The Borrower is not in default on any obligation
-----------------
for borrowed money; any purchase money obligation; or any other material lease,
commitment, contract, instrument, or obligation.
8.11 No Event of Default. There is no event which is, or with notice or
-------------------
lapse of time or both would be, an event of Default under this Agreement.
8.12 ERISA Plans.
-----------
(a) The Borrower has fulfilled its obligations, if any, under the
minimum funding standards of ERISA and the Code with respect to each Plan and is
in compliance in all material respects with the presently applicable provisions
of ERISA and the Code, and has not incurred any liability with respect to any
Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA
for which the PBGC requires 30 days notice.
(c) No action by the Borrower to terminate or withdraw from any Plan
has been taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA.
13
<PAGE>
(d) No proceeding has been commenced with respect to a Plan under
Section 4042 of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of
this Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained
or contributed to by the Borrower and insured by the Pension Benefit
Guaranty Corporation under Title IV of ERISA.
8.13 Location of Borrower. The Borrower's place of business (or, if the
--------------------
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
9. COVENANTS
---------
In addition to the special covenants relating to the construction of the
Improvements set forth in the Addendum, the Borrower agrees, so long as credit
is available under this Agreement and until the Bank is repaid in full:
9.1 Use of Proceeds. During the Construction Availability Period, to use
---------------
the proceeds of the line of credit for the development and construction of the
Improvements. From and after the Construction Advance Expiration Date, to use
the proceeds of the Line of Credit for general working capital.
9.2 Financial Information. To provide the following financial information
---------------------
and statements and such additional information as requested by the Bank (in a
form and content acceptable to the Bank) from time to time:
(a) Within ninety (90) days of the Borrower's fiscal year end, the
Borrower's annual financial statements. These financial statements must be
audited with an unqualified opinion by a Certified Public Accountant ("CPA")
acceptable to the Bank.
(b) Within ninety (90) days of the end of each of Borrower's fiscal
year ends, Borrower's capital expenditure budget and annual operating budget
projections.
(c) Within forty five (45) days of the period's end, excluding the
fiscal year end period, the Borrower's quarterly financial statements. These
financial statements may be Borrower prepared.
(d) Copies of any annual reports, proxy statements, financial
statements, reports or communications sent to shareholders, and copies of any
annual, regular, periodic or special reports or registration statements filed
with the SEC within fifteen (15) days after the same become available.
14
<PAGE>
9.3 Debt Service Coverage Ratio. To maintain a minimum Debt Service
---------------------------
Coverage Ratio of not less than 2.0 to 1.0.
9.4 Maximum Total Liabilities to Tangible Net Worth. To maintain a ratio
-----------------------------------------------
of Total Liabilities to Tangible Net Worth of not more than 2.0 to 1.0.
9.5 Maximum-Loan-to-Value Ratio. At all times during the term of this
---------------------------
Agreement, the ratio of the applicable Maximum Commitment Amount of the Line of
Credit to the discounted value of the Real Property and Improvements at
stabilized occupancy ("Discounted Stabilized Value") shall at no time exceed
seventy percent (70%)(the "Maximum Loan-to-Value Ratio"). For purposes of this
Section 9.5, Bank shall determine the Discounted Stabilized Value of the Real
Property and Improvements using a methodology which (i) conforms to then-current
regulatory requirements, (ii) is considered by Bank to be appropriate under the
circumstances, and (iii) takes into account then-current market conditions,
including vacancy factors, estimated date of stabilization, discount rates, and
rental rates and concessions, all as determined by Bank.
9.6 Other Liens. Not to create, assume, or allow any security interest or
-----------
lien (including judicial liens) on the Real Property and Improvements, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
9.7 Notices to the Bank. To promptly notify the Bank in writing of:
-------------------
(a) any lawsuit over One Million Dollars ($1,000,000) against the
Borrower.
(b) any substantial dispute between the Borrower and any Governmental
Authority.
(c) any failure to comply with this Agreement.
(d) any Material Adverse Effect with respect to the Borrower's
financial condition or operations.
(e) any change in the Borrower's name, legal structure, place of
business, or chief executive office if the Borrower has more than one place of
business.
9.8 Books and Records. To maintain adequate books and records.
-----------------
9.9 Audits and Site Visits.
----------------------
(a) Upon written notice to Borrower, to allow the Bank and its agents
to inspect the Borrower's properties and examine, audit, and make copies of
books and records at any reasonable time. If any of the Borrower's properties,
books or records are in the possession of a third party, the Borrower authorizes
that third party to permit the Bank or its agents to have access to perform
inspections or audits and to respond to the Bank's requests for information
concerning such properties, books and records.
(b) In addition to those rights granted to the Bank under the
Addendum during the Construction Availability Period, to allow the Bank and its
agents and representatives to enter and visit the Real Property upon advance
notice during normal business hours for the purposes of:
15
<PAGE>
(i) performing an appraisal;
(ii) inspecting the Real Property and Improvements;
(iii) taking soil or groundwater samples; and
(iv) conducting tests, among other things, to investigate for
the presence of hazardous substances, as defined in Section 10 hereof.
In each instance, the Bank shall give the Borrower notice before entering
the Real Property and Improvements. The Bank shall make an effort to avoid
interfering with the Borrower's use of the Real Property and Improvements when
exercising any of the rights granted in this paragraph 9.9(b). The Bank is under
no duty to visit or observe the Real Property and Improvements, or to examine
any books or records. Any site visit, observation or examination by the Bank
shall be solely for the purpose of protecting the Bank's security and preserving
the Bank's rights under this Agreement and the Security Documents. The Bank
owes no duty of care to protect the Borrower or any other party against, or to
inform the Borrower or any other party of, any adverse condition affecting the
Real Property and Improvements, including any defects in the design or
construction of any improvements on the Real Property and Improvements or the
presence of any hazardous substances on the Real Property and Improvements.
9.10 Compliance with Laws. To comply with the laws (including any
--------------------
fictitious name statute), regulations, and orders of any Governmental Authority.
9.11 Preservation of Rights. To maintain and preserve all rights,
----------------------
privileges, and franchises the Borrower now has.
9.12 Maintenance of Properties. To make any repairs, renewals, or
-------------------------
replacements to keep the Borrower's properties in good working condition.
9.13 Perfection of Liens. To help the Bank perfect and protect its
-------------------
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.
9.14 Cooperation. To take any action requested by the Bank to carry out
-----------
the intent of this Agreement.
9.15 Insurance. In addition to those requirements set forth in the
---------
Addendum:
(a) Insurance Covering Collateral. To maintain all risk property
-----------------------------
damage insurance policies covering the tangible property comprising the
Collateral. Each insurance policy must be in an amount acceptable to the Bank.
The insurance must be issued by an insurance company acceptable to the Bank and
must include a lender's loss payable endorsement in favor of the Bank in a form
acceptable to the Bank.
(b) General Business Insurance. To maintain insurance satisfactory to
--------------------------
the Bank as to amount, nature, and carrier covering property damage (including
loss of use and occupancy) to any of the Borrower's properties, public liability
insurance including coverage for contractual liability, product liability and
workers' compensation, and any other insurance which is usual for the Borrower's
business.
(c) Evidence of Insurance. Upon the request of the Bank, deliver to
---------------------
the Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
16
<PAGE>
9.16 Dividends/Stock Reimbursement. Not to declare any dividends on
-----------------------------
outstanding shares of Borrower's capital stock. Not to enter into any purchase,
redemption or acquisition of the Borrower's capital stock, or create any sinking
fund in relation thereto, in excess of the two million five hundred thousand
(2,500,000) shares previously authorized by Borrower's board of directors as of
January 7, 1997.
9.17 Additional Negative Covenants. Not to, without the Bank's written
-----------------------------
consent:
(a) engage in any business activities substantially different from
the Borrower's present business of distributing home entertainment software.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture,
syndicate, or other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's
business or the Borrower's assets.
(e) acquire or purchase a business or its assets outside of the home
entertainment software industry.
9.18 ERISA Plans. To give prompt written notice to the Bank of:
-----------
(a) The occurrence of any reportable event under Section 4043(b) of
ERISA for which the PBGC requires 30 day notice.
(b) Any action by the Borrower to terminate or withdraw from a Plan
or the filing of any notice of intent to terminate under Section 4041 of ERISA.
(c) Any notice of noncompliance made with respect to a Plan under
Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA.
10. HAZARDOUS WASTE INDEMNIFICATION
-------------------------------
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal, or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under, or about the Borrower's property
or operations or property leased to the Borrower. The indemnity includes, but
is not limited to, attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries, and all of their directors, officers, employees,
agents, successors, attorneys, and assigns. For these purposes, the term
"hazardous substances" means any substance which is or becomes designated as
"hazardous" or "toxic" under any federal, state, or local law. This indemnity
will survive repayment of the Borrower's obligations to the Bank. The Borrower
agrees to execute a separate secured indemnity agreement on the Bank's form to
evidence this indemnity (the "Indemnity").
17
<PAGE>
11. DEFAULT
-------
If any of the following events of default occur, the Bank may do one or
more of the following: declare the Borrower in default, terminate this
Agreement, stop making any additional credit available to the Borrower, and
require the Borrower to repay its entire debt immediately and without further
notice; provided, however that if any bankruptcy or insolvency petition is filed
with respect to the Borrower, or the default relates to an event described in
paragraph 11. 4 or 11. 5, the entire debt outstanding under this Agreement will
automatically become due immediately.
11.1 Failure to Pay. The Borrower fails to make a payment under this
--------------
Agreement when due.
11.2 Lien Priority. The Bank fails to have an enforceable first lien
-------------
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this loan.
11.3 False Information. The Borrower has given the Bank false or
-----------------
misleading information or representations.
11.4 Bankruptcy. The Borrower files a bankruptcy petition, a bankruptcy
----------
petition is filed against the Borrower and such involuntary petition is not
dismissed within forty-five (45) days thereafter, or the Borrower makes a
general assignment for the benefit of creditors.
11.5 Receivers. A receiver or similar official is appointed for the
---------
Borrower's business, or the business is terminated.
11.6 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more
--------
trade creditors against the Borrower in an aggregate amount of Five Million
Dollars ($5,000,000) or more in excess of any insurance coverage.
11.7 Judgments. Any judgments or arbitration awards are entered against
---------
the Borrower, or the Borrower enters into any settlement agreements with respect
to any litigation or arbitration, in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage .
11.8 Government Action. Any Governmental Authority takes action that the
-----------------
Bank believes cause a Material Adverse Effect.
11.9 Material Adverse Effect. The occurrence of a Material Adverse Effect.
-----------------------
11.10 Cross-default. Any default occurs under any agreement in connection
-------------
with any credit the Borrower has obtained from anyone else or which the Borrower
has guaranteed.
11.11 Default Under Related Documents. Any default occurs under any of the
-------------------------------
other documents required by this Agreement, which default remains uncured after
any applicable cure period.
11.12 Other Bank Agreements. The Borrower fails to meet the conditions
---------------------
of, or fails to perform any obligation under any other agreement the Borrower
has with the Bank or any affiliate of the Bank.
11.13 Other Breach Under Agreement. The Borrower fails to meet the
----------------------------
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article, and such failure
continues for thirty (30) days ("Initial Cure Period") after written notice from
Bank to Borrower. So long as Borrower begins within the Initial Cure Period and
diligently continues to cure the failure, and Bank,
18
<PAGE>
in its sole judgment, determines that the cure cannot reasonably be completed at
or before expiration of the Initial Cure Period, then the Initial Cure Period
may be extended by a period not to exceed ninety (90) days.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
---------------------------------------
12.1 GAAP. Except as otherwise stated in this Agreement, all financial
----
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied. References
herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of
Borrower.
12.2 Governing Law. This Agreement shall be governed, interpreted and
-------------
construed in accordance with the laws of the State of Nevada.
12.3 Successors and Assigns. This Agreement is binding on the Borrower's
----------------------
and the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of setoff against the Borrower.
12.4 Arbitration.
-----------
(a) This paragraph concerns the resolution of any controversies or
claims between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business
conducted between the Borrower and the Bank, including claims for injury to
persons, property or business interests (torts).
(b) Any such controversies or claims will be settled by arbitration
in accordance with the United States Arbitration Act. The United States
Arbitration Act will apply even though this Agreement provides that it is
governed by the laws of the State of Nevada. All arbitrators shall be selected
from a list of arbitrators within the State of Nevada as provided by the
American Arbitration Association.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration; except as otherwise provided herein.
(d) For purposes of the application of the statute of limitations,
the filing of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated under
this paragraph is subject to any applicable statute of limitations. The
arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss the
arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
19
<PAGE>
(f) The decision that results from an arbitration proceeding may be
submitted to the appropriate court of law to be confirmed and enforced.
(g) This provision does not limit the right of the Borrower or the
Bank to exercise self-help remedies such as setoff.
12.5 Severability; Waivers. If any part of this Agreement is not
---------------------
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives any Event of
Default, it may enforce a later Event of Default. Any consent or waiver under
this Agreement must be in writing.
12.6 Costs. If the Bank incurs any expenses in connection with
-----
administering or enforcing this Agreement, or if the Bank takes collection
action under this Agreement, it is entitled to costs and reasonable attorneys'
fees, including any allocated costs of in-house counsel.
12.7 Attorneys' Fees. In the event of a lawsuit or arbitration proceeding,
---------------
the prevailing party is entitled to recover costs and reasonable attorneys' fees
(including any allocated costs of in-house counsel) incurred in connection with
the lawsuit or arbitration proceeding, as determined by the court or arbitrator.
12.8 One Agreement. This Agreement and any related security or other
-------------
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between
the Bank and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank
and the Borrower concerning this credit, and
(c) are intended by the Bank and the Borrower as the final,
complete, and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
12.9 Exchange of Information. The Borrower agrees that the Bank may
-----------------------
exchange financial information about the Borrower with BankAmerica Corporation
affiliates and other related entities.
12.10 Notices. All notices required under this Agreement shall be
-------
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses as
the Bank and the Borrower may specify from time to time in writing.
12.11 Headings. Article and paragraph headings are for reference only and
--------
shall not affect the interpretation or meaning of any provisions of this
Agreement.
12.12 Counterparts. This Agreement may be executed in as many
------------
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute but one and the same
agreement.
20
<PAGE>
This Agreement is executed as of the date stated at the top of the first
page.
BANK OF AMERICA NATIONAL IMAGE ENTERTAINMENT, INC.,
TRUST AND SAVINGS ASSOCIATION a California corporation
By: /s/ JUDY CROSSWHITE By: /s/ JEFF M. FRAMER
--------------------------- --------------------------------
Judy Crosswhite Name: Jeff M. Framer
Vice President Title: Chief Financial Officer
Address where notices to the Address where notices to the
Bank are to be sent: Borrower are to be sent:
Commercial Banking Division - South 9333 Oso Avenue
300 South Fourth Street, 2nd Floor Chatsworth, California 91311-6089
Las Vegas, Nevada 89101
21
<PAGE>
EXHIBIT 10.23.A
AMENDMENT NO. 1
This Amendment No. 1 (the "Amendment") dated as of February 4, 1998, is between
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and IMAGE
ENTERTAINMENT, INC., a California corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of March 10, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
-----------
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 Section 1.1 (Definitions) (Construction Advance Expiration Date) of
the Agreement, the date "September 30, 1998" is substituted for the
date "January 31, 1998."
2.2 Section 1.1 (Definitions) (EBITDA) of the Agreement, is amended in its
entirety to read as follows:
"EBITDA" means, for any period, for the Borrower, the sum of (a) Net
Income for that period plus (b) any extraordinary loss reflected in
----
such Net Income, minus (c) any extraordinary gain reflected in such
-----
Net Income, plus (d) cash Interest Expense for such period, plus (e)
---- ----
income taxes, plus (f) depreciation, amortization and all other non-
----
cash expenses for that period, in each case as determined in
accordance with GAAP and, in the case of items (d), (e) and (f) only
to the extent deducted in the determination of Net Income for that
period.
2.3 Section 1.1 (Definitions) (Quarterly Payment Date) of the Agreement,
is amended in its entirety to read as follows:
"Quarterly Payment Date" means December 31, 1998, and each March 31,
----------------------
June 30, September 30 and December 31 thereafter.
2.4 A new paragraph 9.19 (Minimum EBITDA) is added to the Agreement to
read as follows:
9.19 Minimum EBITDA. To earn a minimum EBITDA of at least Five
--------------
Million and No/100 Dollars ($5,000,000.00) to be calculated at
the end of each fiscal quarter, using the results of that quarter
and each of the three (3) immediately preceding quarters.
3. CONDITIONS. This Amendment will be effective when the Bank receives the
----------
following items, in form and content acceptable to the Bank:
3.1 A duly executed original of this Amendment.
3.2 A loan fee in the amount of Eight Thousand Five Hundred Eighty-Three
and 75/100 Dollars ($8,583.75).
1
<PAGE>
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NATIONAL TRUST IMAGE ENTERTAINMENT, INC.,
AND SAVINGS ASSOCIATION A CALIFORNIA CORPORATION
By: /s/ JUDY CROSSWHITE By: /s/ JEFF M. FRAMER
------------------------------- ---------------------------
Judy Crosswhite, Vice President Name: Jeff M. Framer
Title: Chief Financial Officer
2
<PAGE>
EXHIBIT 10.24
Lease No. 970001
LEASE INTENDED AS SECURITY ("Lease") dated as of March 19,1997, between BA
LEASING & CAPITAL CORPORATION, a California corporation, with an office at
555 California Street, 4th Floor, San Francisco, California, 94104
("Lessor") and IMAGE ENTERTAINMENT, a California corporation, with its
principal office at 9333 Oso Avenue, Chatsworth, California 91311-6089
("Lessee").
Section 1 PROCUREMENT, DELIVERY AND ACCEPTANCE.
- --------- ------------------------------------
1.1 Lessee has ordered or shall order the Units pursuant to one or more
purchase orders or other contracts of sale ("Purchase Agreements") from one or
more vendors ("Vendors"). Lessee shall, on the date of each Appendix, assign to
Lessor all of Lessee's right, title and interest in and to the Purchase
Agreements for the Units described in the Appendix by executing and delivering
to Lessor a Purchase Agreement Assignment in the form of Exhibit A (a "Purchase
---------
Agreement Assignment"). Lessor agrees to (a) accept the assignment and (b)
subject to Section 1.2, assume the obligations of Lessee under the Purchase
Agreements to purchase and pay for the Units, but no other duties and
obligations thereunder. Nevertheless, Lessee shall remain liable to Vendor with
respect to its duties and obligations in accordance with the Purchase
Agreements.
1.2 The obligation of Lessor to pay for each Unit is subject to satisfaction of
the conditions precedent set forth in Paragraph B.2 of the relevant Appendix.
If any of those conditions is not met with respect to any Unit, Lessor shall
assign to Lessee all of Lessor's right, title and interest in and to the Unit
and any bill of sale or Purchase Agreement previously assigned to Lessor as it
relates to the Unit.
1.3 Lessee shall execute and deliver to Lessor, within 15 days of the Delivery
Date of each Unit, an Acceptance Certificate in the form of Exhibit B (an
---------
"Acceptance Certificate") confirming the Delivery Date of the Unit and Lessee's
acceptance of the Unit under this Lease as of its Delivery Date. The Delivery
Date of each Unit is the date Lessee receives it or, if it requires installation
and testing, when that is completed. Each Acceptance Certificate shall be
accompanied by the original invoice relating to each Unit covered by the
Acceptance Certificate and, if Lessee has received title to or possession of the
Unit before executing and delivering to Lessor a Purchase Agreement Assignment
relating thereto, a bill of sale conveying title to the Unit to Lessor. Upon
paying the Purchase Price (as defined in the relevant Appendix) for the Units
described in an Acceptance Certificate, Lessor and Lessee shall execute and
deliver a Schedule to the Acceptance Certificate in the form of Exhibit C (a
---------
"Schedule") based upon the criteria in the relevant Appendix and the information
in the relevant Acceptance Certificate.
Section 2 TERM, RENT AND PAYMENT.
- --------- ----------------------
2.1 The term of this Lease for each Unit (its "Lease Term") shall begin on the
date of the Appendix describing the Unit and continue as specified in its
Appendix and Schedule.
2.2 Lessee shall pay Lessor rent for each Unit in the amounts and at the times
specified in its Appendix and Schedule.
1
<PAGE>
2.3 Rent and all other sums due Lessor hereunder shall be paid at the office of
Lessor set forth below, unless otherwise specified by Lessor.
2.4 THIS LEASE IS A NET LEASE AND LESSEE SHALL NOT BE ENTITLED TO ANY ABATEMENT
OR REDUCTION OF RENT OR ANY SETOFF AGAINST RENT, WHETHER ARISING BY REASON OF
ANY PAST, PRESENT OR FUTURE CLAIM OF ANY NATURE BY LESSEE AGAINST LESSOR OR
OTHERWISE. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THIS LEASE SHALL NOT
TERMINATE, NOR SHALL THE OBLIGATIONS OF LESSOR OR LESSEE BE OTHERWISE AFFECTED
BY ANY CIRCUMSTANCE, including, without limitation, (a) any defect in, damage
to, loss of possession or use or destruction of any Unit, however caused, (b)
the attachment of any lien, encumbrance, security interest or other right or
claim of any third party to any Unit, (c) any prohibition or restriction of or
interference with Lessee's use of any Unit by any person or entity, (d) the
insolvency of or the commencement by or against Lessee of any bankruptcy,
reorganization or similar proceeding, or (e) any other cause, whether similar or
dissimilar to the foregoing, any present or future law to the contrary
notwithstanding. IT IS THE INTENTION OF THE PARTIES THAT ALL RENT AND OTHER
AMOUNTS PAYABLE BY LESSEE HEREUNDER SHALL BE PAYABLE IN ALL EVENTS IN THE MANNER
AND AT THE TIMES HEREIN PROVIDED UNLESS LESSEE'S OBLIGATIONS IN RESPECT THEREOF
HAVE BEEN TERMINATED PURSUANT TO EXPRESS PROVISIONS HEREOF.
2.5 Payments shall be applied in the following order: (a) Lessor's expenses,
including without limitation those set forth in Sections 8.4 and 19; (b)
interest on late payments; and (c) rent and all other sums due hereunder.
Payments shall be conclusively evidenced by entries in records maintained by
Lessor.
Section 3 WARRANTIES.
- --------- ----------
LESSEE ACKNOWLEDGES AND AGREES THAT (A) EACH UNIT IS OF A SIZE, DESIGN, CAPACITY
AND MANUFACTURE SELECTED BY LESSEE, (B) LESSEE IS SATISFIED THAT THE SAME IS
SUITABLE FOR ITS PURPOSES, (C) LESSOR IS NOT A MANUFACTURER THEREOF NOR A DEALER
IN PROPERTY OF SUCH KIND AND (D) LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE,
ANY REPRESENTATION, WARRANTY OR COVENANT WITH RESPECT TO THE TITLE,
MERCHANTABILITY, CONDITION, QUALITY, DESCRIPTION, DURABILITY, FITNESS FOR
PURPOSE OR SUITABILITY OF ANY UNIT IN ANY RESPECT OR IN CONNECTION WITH OR FOR
THE PURPOSES AND USES OF LESSEE. Lessor hereby assigns to Lessee, to the extent
assignable, any warranties, covenants and representations of Vendor with respect
to any Unit, but any action taken by Lessee by reason thereof shall be at
Lessee's expense and shall be consistent with Lessee's obligations under Section
2.
Section 4 POSSESSION, USE AND MAINTENANCE.
- --------- -------------------------------
4.1 Lessee shall not (a) use, operate, maintain or store any Unit improperly,
carelessly or in violation of any applicable law or regulation of any government
authority, (b) abandon any Unit, (c) sublease any Unit or permit its use by
anyone other than Lessee without the prior written
2
<PAGE>
consent of Lessor, (d) permit any Unit to be removed from the location or
principal base, as the case may be, specified in the relevant Appendix or permit
any Unit that is a motor vehicle to be registered in any state other than as
specified in the relevant Appendix without the prior written consent of Lessor,
(e) affix or place any Unit to or on any other personal property or any real
property without first obtaining and delivering to Lessor such waivers as Lessor
may reasonably require to assure Lessor's legal title and security interest and
right to remove the Unit free from any lien, encumbrance, right or claim
asserted by any third party or (f) sell, assign or transfer, or directly or
indirectly create, incur or suffer to exist any lien, encumbrance, right or
claim of any kind on any of its rights hereunder or in any Unit.
4.2 Lessee shall at its expense maintain each Unit during its Lease Term in
good operating order, repair, condition and appearance and in accordance with
the manufacturer's recommended procedures.
4.3 Lessee shall not alter any Unit or install any accessory, equipment or
device on any Unit if that would impair any applicable warranty, the originally
intended function or the value of the Unit. All repairs, parts, accessories,
equipment and devices furnished, affixed to or installed on any Unit, excluding
temporary replacements, shall thereupon become subject to the security interest
of Lessor.
4.4 If Lessor supplies Lessee with a label, plate or other marking stating that
each Unit is leased from Lessor, Lessee shall affix and keep it on a prominent
place on each Unit during its Lease Term.
4.5 Upon prior notice to Lessee, Lessor and its designees shall have the right
at all reasonable times to inspect any Unit, observe its use and inspect records
related thereto.
Section 5 GENERAL TAX INDEMNITY.
- --------- ---------------------
5.1 Lessee shall pay or reimburse Lessor for, and indemnify and hold Lessor
harmless from, all fees (including, but not limited to, license, documentation,
recording or registration fees) and all sales, use, gross receipts, property,
occupational, value-added or other taxes, posts, duties, assessments, charges or
withholdings of any nature whatsoever, together with any penalties, fines or
additions to tax, or interest thereon (each of the foregoing being hereafter
referred to as an "Imposition"), arising at any time before or during the Lease
Term, or upon any termination of this Lease or return of the Units to Lessor,
and levied or imposed on Lessor, directly or otherwise, by any federal, state or
local government or taxing authority in the United States or by foreign country
or foreign or international taxing authority on or with respect to (a) any Unit,
(b) the exportation, importation, registration, purchase, ownership, delivery,
leasing, possession, use, operation, storage, maintenance, repair,
transportation, return, sale, transfer of title or other disposition thereof,
(c) the rents, receipts, or earnings arising from any Unit or (d) this Lease or
any payment made hereunder, excluding, however, taxes measured by Lessor's net
income imposed or levied by the United States or any state thereof unless such
taxes are in lieu of or in substitution for any Impositions Lessee would
otherwise have been obligated to pay, reimburse or indemnify hereunder.
3
<PAGE>
5.2 Lessee shall pay on or before the time or times prescribed by law each
Imposition for which Lessee is primarily responsible under applicable law and
any other Imposition (except any Imposition excluded by Section 5. 1), but
Lessee shall have no obligation to pay an Imposition that Lessee is contesting
in good faith and by appropriate legal proceedings and the nonpayment thereof
does not, in the opinion of Lessor, adversely affect the title, property, use,
disposition or other rights of Lessor with respect to the Units. If any
Imposition (except an Imposition excluded by Section 5. 1) is charged or levied
against Lessor directly and paid by Lessor, Lessee shall reimburse Lessor on
presentation of an invoice therefor.
5.3 If Lessor is not entitled to a corresponding and equal deduction with
respect to any Imposition Lessee is required to pay or reimburse under Section
5.1 or 5.2 and the payment or reimbursement constitutes income to Lessor, then
Lessee shall also pay to Lessor the amount of any Imposition Lessor is obligated
to pay in respect of (a) such payment or reimbursement by Lessee and (b) any
payment by Lessee made pursuant to this Section 5.3.
5.4 Lessee shall prepare and file, in a manner satisfactory to Lessor, any
reports or returns required with respect to the Units. Lessee shall furnish on
Lessor's request reports or returns so filed.
Section 6 RISK OF LOSS; WAIVER AND INDEMNITY.
- --------- ----------------------------------
6.1 If any Unit is worn out, lost, stolen, destroyed or irreparably damaged,
from any cause whatsoever, or taken or requisitioned by condemnation or
otherwise (any such occurrence being hereinafter called a "Casualty Occurrence")
before or during its Lease Term, Lessee shall give Lessor prompt notice thereof.
On the first rent payment date after the Casualty Occurrence or, if there is no
such rent payment date, 30 days after the Casualty Occurrence, Lessee shall pay
to Lessor, in addition to any amounts then due and owing, an amount equal to the
then "Balance Due" (as hereinafter defined) for the Unit and any "Other Charges"
required under the relevant Appendix. The Balance Due for each Unit is the sum
of
(a) any and all amounts with respect to such Unit which under the terms of
this Lease may be then due (other than any Other Charges) or which may have
accrued to such payment date (computing the rent for any number of days less
than a full rent period by multiplying the rent for such rental period by a
fraction of which the numerator is such number of days and the denominator is
the total number of days in such full rent period); plus
(b) before the Base Date for such Unit, as set forth in the relevant
Appendix, the amount Lessor is obligated to pay for such Unit, and thereafter,
the sum of (i) the present value, as of such payment date, of the entire unpaid
balance of all rent for such Unit that would otherwise have accrued hereunder
from such payment date to the end of its Lease Term and (ii) the present value,
as of such payment date, of the Purchase Amount therefor as defined in the
relevant Appendix.
Present values are to be computed in each case by discounting at the applicable
Implicit Interest Rate set forth in the relevant Appendix.
4
<PAGE>
Upon the making of such payment by Lessee in respect of any Unit, the rent for
the Unit shall cease to accrue, its Lease Term shall terminate and Lessee shall
be entitled to possession of such Unit. If Lessor receives the Balance Due and
Other Charges for a Unit, Lessee shall be entitled to the proceeds of any
recovery in respect of the Unit, from insurance or otherwise, and Lessor,
subject to the rights of any insurer insuring the Units as provided herein,
shall execute and deliver, to Lessee, or to its assignee or nominee, a bill of
sale (without representations or warranties except that the Unit is free and
clear of all claims, liens, security interests and other encumbrances by or in
favor of any person claiming by, through or under Lessor) for the Unit, and such
other documents as may be required to release the Unit from this Lease and to
transfer title thereto to Lessee or such assignee or nominee, in such form as
may reasonably be requested by Lessee, all at Lessee's expense. Except as
provided in this Section 6. 1, Lessee shall not be released from its obligations
hereunder in the event of, and shall bear the risk of, any Casualty Occurrence
to any Unit before or during its Lease Term.
6.2 Lessee waives and releases any claim now or hereafter existing against
Lessor, any company controlled by, controlling, or under common control with
Lessor and all of their directors, officers, employees, agents, attorneys,
successors and assigns (each, an "Indemnified Person") on account of, and shall
indemnify, reimburse and hold each Indemnified Person harmless from, any and all
claims (including, but not limited to, claims based on or relating to copyright,
trademark or patent infringement, environmental liability, negligence, strict
liability in tort, statutory liability or violation of laws), losses, damages,
obligations, penalties, liabilities, demands, suits, judgments or causes of
action (collectively, "Claims"), and all legal proceedings, and any reasonable
costs or expenses in connection therewith, including reasonable attorneys' fees,
including reasonable allocated time charges of internal counsel, in each case
imposed on, incurred by or asserted against the Indemnified Person in any way
relating to or arising in any manner out of (a) the registration, purchase,
taking or foreclosure of a security interest in, or the ownership, delivery,
condition, lease, assignment, storage, transportation, possession, use,
operation, return, repossession, sale or other disposition of, any Unit, before
or during its Lease Term, (b) any alleged or actual defect in any Unit (whether
arising from the material or any article used therein, the design, testing, use,
maintenance, service, repair or overhaul thereof or otherwise) regardless of
when such defect is discovered or alleged, whether or not the Unit is in
Lessee's possession and no matter where it is located or (c) this Lease or any
other related document, the enforcement hereof or thereof or the consummation of
the transactions contemplated hereby or thereby, other than any Claim resulting
solely from the gross negligence or willful misconduct of Lessor (other than any
gross negligence or willful misconduct of another party imputed to Lessor),
unless covered by the insurance Lessee is required to maintain hereunder.
Section 7 INSURANCE.
- --------- ---------
Lessee, at its own cost and expense, shall keep each Unit insured against all
risks, in no event for less than the amount set forth in Section 6.1(b) with
respect to such Unit, and shall maintain public liability insurance against such
risks and for such amounts as Lessor may require. All such insurance shall be
in such form and with such companies as Lessor shall approve, shall specify
Lessor and Lessee as insureds and shall provide that such insurance may not be
canceled as to Lessor or altered in any way that would affect the interest of
Lessor without at least 30 days prior written notice to Lessor (10 days in the
case of nonpayment of premium). All insurance shall be
5
<PAGE>
primary, without right of contribution from any other insurance carried by
Lessor, shall contain a "breach of warranty" provision satisfactory to Lessor,
and shall provide that all amounts payable by reason of loss or damage to the
Units shall be payable solely to Lessor, unless Lessor otherwise agrees. Lessee
shall provide Lessor with evidence satisfactory to Lessor of the required
insurance at the time specified in Paragraph B.2 of the relevant Appendix.
Section 8 DEFAULTS; REMEDIES.
- --------- ------------------
8.1 The following shall constitute events of default ("Events of Default")
hereunder:
(a) Lessee fails to make any payments to Lessor when due hereunder;
(b) any representation or warranty of Lessee contained herein or in any
document furnished to Lessor in connection herewith is incorrect or misleading
in any material respect when made;
(c) Lessee fails to observe or perform any other covenant, agreement or
warranty made by Lessee hereunder or under any document delivered pursuant
hereto and such failure continues for 30 days after written notice thereof to
Lessee;
(d) any default occurs under any other agreement for borrowing money or
receiving credit under which Lessee or any guarantor or general partner of
Lessee may be obligated as borrower, lessee or guarantor, if such default (i)
consists of the failure to pay any indebtedness when due or perform any other
obligation thereunder and (ii) gives the holder of the indebtedness the right to
accelerate the indebtedness;
(e) Lessee, any guarantor of this Lease or any general partner of Lessee
makes an assignment for the benefit of creditors or files any petition or action
under any bankruptcy, reorganization, insolvency or moratorium law, or any other
law or laws for the relief of, or relating to, debtors;
(f) any guarantor of this Lease breaches or fails to perform any covenant
in its guaranty, or any letter of credit required by this Lease expires or
terminates without Lessor's consent, or Lessor receives notice that the letter
of credit will not be renewed in accordance with its terms;
(g) an involuntary petition is filed under any bankruptcy statute against
Lessee, any guarantor of this Lease or any general partner of Lessee, or any
receiver, trustee, custodian or similar official is appointed to take possession
of the properties of Lessee, any guarantor of this Lease or any general partner
of Lessee, unless such petition or appointment is set aside or withdrawn or
ceases to be in effect within 45 days from the date of the filing or
appointment;
(h) Lessee, any guarantor of this Lease or any general partner of Lessee
liquidates, dissolves, dies or enters into any partnership, joint venture (other
than in its ordinary course of business), consolidation, merger or other
combination, or sells, leases or disposes of a substantial portion of its
business or assets without the prior written consent of Lessor;
6
<PAGE>
(i) Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of Five Million Dollars
($5,000,000) or more in excess of any insurance coverage;
(j) Any judgment or arbitration awards are entered against the Lessee, or
the Lessee enters into any settlement agreements with respect to any litigation
or arbitration, in an aggregate amount of One Million Dollars ($1,000,000) or
more in excess of any insurance coverage;
(k) Any Governmental Authority takes action that the Lessor believes cause
a Material Adverse Effect. "Material Adverse Affect" is defined in that certain
Bank Loan Agreement dated as of _______ between Lessee and Bank of America
NT&SA; or
(l) The occurrence of a Material Adverse Affect.
8.2 If any Event of Default occurs, Lessor, at its option, may:
(a) proceed by appropriate court action or actions either at law or in
equity, to enforce performance by Lessee of the applicable covenants of this
Lease or to recover damages for the breach thereof; or
(b) by notice in writing to Lessee terminate this Lease, whereupon all
rights of Lessee to retain possession of and use the Units shall terminate, but
Lessee shall remain liable as hereinafter provided, and Lessor may, at its
option, do any one or more of the following: (i) declare the aggregate Balance
Due with respect to the Units and all Other Charges immediately due and payable
and recover any damages and expenses in addition thereto Lessor sustains by
reason of the breach of any covenant, representation or warranty contained in
this Lease other than for the payment of rent; (ii) enforce the security
interest given hereunder pursuant to the Uniform Commercial Code or any other
law; (iii) enter upon the premises where any of the Units may be and take
possession of all or any of such Units; and (iv) require Lessee to return the
Units as provided in Section 9.
8.3 Lessor shall have any and all rights given to a secured party by law, and
may, but is not required to, sell the Units in one or more sales. Lessor may
purchase the Units at such sale. Lessee acknowledges that sales for cash or on
credit to a wholesaler, retailer or user of the Units, or at public or private
auction, are all commercially reasonable. The proceeds of such sale shall be
applied in the following order: First, to the reasonable expenses of retaking,
-----
holding, preparing for sale and selling, including the allocated time charges,
costs and expenses of internal counsel for Lessor and any other attorneys' fees
and expenses incurred by Lessor; Second, to the amounts, except those specified
------
below, which under the terms of this Lease are due or have accrued; Third, to
-----
late charges; and Fourth, to the aggregate Balance Due. Any surplus shall be
------
paid to the person or persons entitled thereto. If there is a deficiency,
Lessee will promptly pay the same to Lessor.
8.4 Lessee agrees to pay all allocated time charges, costs and expenses of
internal counsel for Lessor and any other attorneys' fees, expenses or out-of-
pocket costs incurred by Lessor in enforcing this Lease.
7
<PAGE>
8.5 The remedies herein provided in favor of Lessor shall not be deemed
exclusive, but shall be cumulative, and shall be in addition to all other
remedies in its favor existing at law or in equity.
8.6 If Lessee fails to perform any of its agreements contained herein, Lessor
may perform such agreement, and Lessee shall pay the expenses incurred by Lessor
in connection with such performance upon demand.
Section 9 RETURN OF UNITS.
- --------- ---------------
If Lessor rightfully demands possession of any Unit pursuant to this Lease or
otherwise, Lessee, at its expense, shall forthwith deliver possession of the
Unit to Lessor, in the condition required by Section 4 and any additional return
requirements specified in the relevant Appendix, by preparing for shipment and,
at the option of Lessor, (a) surrendering it to Lessor at its location or base
specified in the relevant Appendix or (b) loading the Unit on board such carrier
as Lessor shall specify and shipping the same, freight collect, to Lessor at the
place designated by Lessor in the state where the Unit was located or based
pursuant to the relevant Appendix.
Section 10 ASSIGNMENT.
- ---------- ----------
Lessor may at any time assign or transfer all or any of the right, title or
interest of Lessor in and to this Lease, and the rights, benefits and advantages
of Lessor hereunder, including the rights to receive payment of rent or any
other payment hereunder, Lessor's title to the Units and any and all obligations
of Lessor in connection herewith. Lessor may disclose to any potential or
actual assignee or transferee any information in the possession of Lessor or any
of its affiliates relating to Lessee or this Lease. Any such assignment or
transfer shall be subject and subordinate to this Lease and the rights and
interests of Lessee hereunder. NO ASSIGNMENT OF THIS LEASE OR ANY RIGHT OR
OBLIGATION HEREUNDER MAY BE MADE BY LESSEE OR ANY ASSIGNEE OF LESSEE WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR.
Section 11 OWNERSHIP AND SECURITY INTEREST; FURTHER ASSURANCES.
- ---------- ---------------------------------------------------
Unless assigned by Lessor, or applicable law otherwise provides, title to and
ownership of the Units shall remain in Lessor as security for the obligations of
Lessee hereunder until Lessee has fulfilled all of its obligations hereunder.
Lessee hereby grants to Lessor a continuing security interest in the Units to
secure the payment of all sums due hereunder.
Lessee confirms there is no pending litigation, tax claim, proceeding or dispute
that may adversely affect its financial condition or impair its ability to
perform its obligations hereunder. Lessee will, at its expense, maintain its
legal existence in good standing and do any further act and execute,
acknowledge, deliver, file, register and record any further documents Lessor may
reasonably request in order to protect Lessor's title to and security interest
in the Units and Lessor's rights and benefits under this Lease.
Section 12 LATE PAYMENTS.
- ---------- -------------
Lessee shall pay to Lessor, on demand, interest at the rate set forth in the
relevant Appendix on
8
<PAGE>
the amount of any payment not made when due hereunder from the date due until
payment is made.
Section 13 EFFECT OF WAIVER.
- ---------- ----------------
No delay or omission to exercise any right, power or remedy accruing to Lessor
upon any breach or default of Lessee hereunder shall impair any such right,
power or remedy nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein or of any similar breach or default
thereafter occurring, nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of Lessor of any breach or default under this Lease must be in writing
specifically set forth.
Section 14 SURVIVAL OF COVENANTS.
- ---------- ---------------------
All obligations of Lessee under Sections 1, 2, 4, 5, 6, 7, 8, 9, 11 and 12
hereof and under each Appendix shall survive the expiration or termination of
this Lease to the extent required for their full observance and performance.
Section 15 APPLICABLE LAW; SEVERABILITY.
- ---------- ----------------------------
This Lease shall be governed by and construed under the laws of California, to
the jurisdiction of which, and of federal courts in California, the parties
hereto submit. If any provision hereof is held invalid, the remaining
provisions shall remain in full force and effect.
Section 16 FINANCIAL INFORMATION.
- ---------- ---------------------
Lessee shall keep its books and records in accordance with generally accepted
accounting principles and practices consistently applied and shall deliver to
Lessor annual audited financial statements bearing an unqualified opinion within
90 days of each fiscal year end and annual reports, proxy, report of
communications sent to shareholders and a copy of annual, regular, periodic or
special reports or registration statements filed within 15 days after the same
are available and information as may be set forth in the relevant Appendix or as
Lessor may reasonably request. Lessee shall also deliver to Lessor company
prepared annual operating projection and capital expenditure budgets within 90
days of each fiscal year end. Credit information relating to Lessee may be
disseminated among Lessor and any of its affiliates and any of their respective
successors and assigns.
Section 17 NOTICES.
- ---------- -------
All demands, notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given when personally delivered or when
deposited in the mail, first class postage prepaid, or delivered to an express
carrier, charges prepaid, or sent by facsimile transmission (with electronic
confirmation of receipt) addressed to each party at the address set forth below
the signature of such party on the signature page, or at such other address as
may hereafter be furnished in writing by such party to the other.
9
<PAGE>
Section 18 COUNTERPARTS.
------------
Two counterparts of this Lease have been executed by the parties hereto. One
counterpart has been prominently marked "Lessor's Copy." One counterpart has
been prominently marked "Lessee's Copy". Only the counterpart marked "Lessor's
Copy" shall evidence a monetary obligation of Lessee.
Section 19 TRANSACTION COSTS.
- ---------- -----------------
Lessee will reimburse Lessor for any out-of-pocket costs or expenses incurred in
connection with the preparation and negotiation of the lease documents,
including but not limited to UCC searches, UCC filings, appraisals, title
searches and title insurance. If Lessor uses counsel in connection with
negotiating, drafting or altering this Lease or any related documents, Lessee
shall reimburse Lessor for any legal expenses of Lessor (including allocated
time charges of internal counsel for Lessor).
Section 20 NONINTERFERENCE.
- ---------- ---------------
So long as no Event of Default or event that, upon giving of notice or lapse of
time, could become an Event of Default exists, Lessor will not interfere with
the rights of enjoyment and use of the Units by Lessee.
Section 21 EFFECT AND MODIFICATION OF LEASE.
- ---------- --------------------------------
This Lease exclusively and completely states the rights of Lessor and Lessee
with respect to the leasing of the Units and supersedes all prior agreements,
oral or written, with respect thereto. No variation or modification of this
Lease shall be valid unless in writing.
The parties hereto have executed this Lease as of the day and year first
written above.
BA LEASING & CAPITAL CORPORATION IMAGE ENTERTAINMENT, INC.
By: /s/ GAIL D. SMEDAL By: /s/ JEFF M. FRAMER
----------------------- ------------------------
Title: Vice President Title: Chief Financial Officer
Address: Address:
555 California Street 9333 Oso Avenue
4th Floor Chatsworth, California 91311-6089
San Francisco, CA 94104
Attn: Contract Administration
Telecopier No.: Telecopier No.: (818) 407-9331
10
<PAGE>
EXHIBIT 10.24.a
AMENDMENT TO LEASE entered into as of March 19, 1997, between BA Leasing and
Capital Corporation, a California corporation with its
principal office at 555 California Street, 4th Floor,
San Francisco, California 94104 ("Lessor") and IMAGE
ENTERTAINMENT, a California corporation, with its principal
office at 9333 Oso Avenue, Chatsworth, California 91311
("Lessee") with reference to the following:
A. Lessor and Lessee have entered into a Lease Intended as Security dated
as of March 19, 1997 (the "Lease"); all defined terms therein not otherwise
defined herein being used with their meanings as defined therein); and
B. Lessor and Lessee now desire to amend the Lease as hereinafter set
forth:
NOW, THEREFORE, the parties hereto agree as follows:
1. Section B of the Appendix No. 1 entitled "Purchase Price; Conditions
Precedent" is amended to paragraph 3 as follows: "3. Advances. Lessor agrees,
--------
during the Utilization Period, to advance funds for the purchase of a Unit
before its Delivery Date ("Advances") if, with respect to each Advance, (a)
Lessee executes and delivers to Lessor, no later than three days before the date
of such advance, a Request for Advance substantially in the form of Exhibit D to
the Lease Agreement (an "Advance Request") and (b) the conditions specified in
Paragraph B.2 (except clauses (a) and (b) thereof) are satisfied. "Advance
Rent" will accrue on each Advance and be payable as set forth below. If Lessee
fails to accept, pursuant to Section 1.3 of the Lease Agreement, any Unit for
which Lessor advances funds as set forth above, Lessee shall on demand of Lessor
purchase the Unit from Lessor for the amount of the funds advanced by Lessor or
which Lessor may be obligated to advance and any other costs or obligations
incurred by Lessor in connection therewith, plus all accrued and unpaid Advance
Rent with respect to a Unit to the date of purchase of the Unit by Lessee from
Lessor"; and
2. Section E of the Appendix No. 1 entitled "Rent" is amended to insert new
paragraph 1 as follows: "1. Advance Rent. Advance Rent shall accrue from, and
------------
including, the date of any Advance with respect to a Unit pursuant to an Advance
Request to, but excluding, its Funding Date. Advance Rent shall be computed on
the amount of such advance at a rate per annum equal to 2.5 percentage points
in excess of the LIBOR, as defined below, in effect on the date the funds are
advanced by Lessor as reported in Telerate System Page 3750 (or any successor
page).
Advance Rent is determined, in part, on the basis of a 360-day year and
actual days elapsed which results in a higher rent than if a 365-day year is
used. Advance Rent is due and payable when billed by Lessor."
Except as is herein specifically amended, all of the terms, covenants, and
provisions of the Lease remain in full force and effect.
1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Lease as of the day and year written above.
BA LEASING & CAPITAL CORPORATION IMAGE ENTERTAINMENT, INC.
By: /s/ KIM LEE By: /s/ JEFF M. FRAMER
------------------------- -----------------------
Title: Vice President Title: Chief Financial Officer
Address: 555 California Street Address: 9333 Oso Avenue
4th Floor Chatsworth, CA 91311
San Francisco, CA 94104
Attn: Contract Administration
Telecopier No.: 415/765-7373 Telecopier No.: 818/407-9331
2
<PAGE>
EXHIBIT 10.24.b
SECOND AMENDMENT TO LEASE entered into as of February 8, 1998 BA LEASING &
CAPITAL CORPORATION, a California corporation with its principal office at 555
California Street, 4th Floor, San Francisco, California 94104 ("Lessor") and
IMAGE ENTERTAINMENT, INC., a California corporation, with its principal office
at 9333 Oso Avenue, Chatsworth, California 91311 ("Lessee") with reference to
the following:
A. Lessor and Lessee have entered into a Lease Intended as Security, dated as
of March 18, 1997 and an Amendment To Lease dated as of March 19, 1997 (the
"Lease"; all defined terms therein not otherwise defined herein being used with
their meanings as defined therein); and
B. Lessor and Lessee now desire to amend the Lease further as hereinafter set
forth:
NOW, THEREFORE, the parties hereto agree as follows:
1. The Utilization set forth in paragraph D of the Appendix shall be
extended from "January 31, 1998" to "September 30, 1998."
Except as is herein specifically amended, all of the terms, covenants, and
provisions of the Lease remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
to Lease as of the day and year written above.
BA LEASING & CAPITAL CORPORATION IMAGE ENTERTAINMENT, INC.
By: /s/ KIM LEE By: /s/ JEFF M. FRAMER
--------------------- --------------------------
Title: Vice President Title: Chief Financial Officer
Address: 555 California Street Address: 9333 Oso Avenue
4th Floor Chatsworth, CA 91311
San Francisco, CA 94104 Attn: Jeff Framer
Attn: Contract Administration
Facsimile No. (415) 765-7373 Facsimile No. (818) 407-9331
<PAGE>
EXHIBIT 10.25
AGREEMENT FOR PURCHASE AND SALE
-------------------------------
This Agreement is made and entered into this 13th day of May 1998, by and
between IMAGE ENTERTAINMENT, INC., a California corporation, whose address is
9333 Oso Avenue, Chatsworth, California 91311 ("Seller") and JACKSON-SHAW
COMPANY, a Texas corporation, whose, address is 3753 Howard Hughes Parkway,
Suite 200, Las Vegas, Nevada 89109 ("Buyer").
1. Recitals. Seller is the owner of that certain unimproved real property
--------
located in the vicinity of Sunset Road and Spencer Street in Clark County,
Nevada, comprising approximately 8.8 acres, and more particularly described in
Exhibit "1" hereto (the "Property").
2. Purchase and Sale. Through escrow and at closing as hereinafter
-----------------
provided, and conditioned upon full performance by Buyer and Seller of their
obligations under this Agreement, Seller agrees to sell and Buyer agrees to buy
the Property.
3. Purchase Price. The purchase price for the property is Three Million
--------------
One Hundred Thousand Dollars ($3,100,000.00). One Million Five Hundred Fifty
Thousand Dollars ($1,550,000.00) shall be allocated to Parcel A as described on
Exhibit "1" and One Million Five Hundred Fifty Thousand Dollars ($1,550,000.00)
be allocated to Parcel B as described on Exhibit "1", payable as follows:
A. Parcel A.
--------
(1) Upon execution of this Agreement, Buyer shall deposit
Twenty-five Thousand Dollars ($25,000.00) ("Earnest Money Deposit") with United
Title Company, escrow holder, as and for earnest money, which, together with any
interest accrued thereon, shall be released to Seller at Close of Escrow (as
hereinafter defined). The Opening of Escrow shall occur upon execution of this
Agreement, simultaneously with the delivery of the Earnest Money Deposit of
Twenty-five Thousand Dollars ($25,000.00) with Sharon Rhodes at United Title
Company, 3980 Howard Hughes Parkway, Suite #100, Las Vegas, Nevada 89109, and
the delivery to Seller the Preliminary Title Report referred to in Paragraph
5(B) and the survey ("Opening of Escrow"). The escrow relating to Parcel A shall
close on or before one hundred and five (105) days after the Opening of Escrow.
(2) The balance of the purchase price for Parcel A shall be
deposited in escrow with United Title Company, by cash or cashier's check, at or
before the Close of Escrow, and released to Seller at closing. At the end of the
Feasibility Period as defined herein, the Earnest Money Deposit shall be non-
refundable except in the event of Seller's default. The parties agree that if
Buyer fails to perform its obligations under this Agreement, Seller will be
entitled to compensation for the detriment so caused but that it is extremely
difficult and impractical to ascertain the extent of the detriment, therefore,
if Buyer breaches this Agreement, Seller, as its sole remedy shall be entitled
to retain the Earnest Money as liquidated damages.
<PAGE>
B. Parcel B.
--------
(1) At the Close of Escrow of Parcel A, Buyer shall deliver
Fifty Thousand Dollars ($50,000.00) directly to Seller ("Option Payment")
outside of Escrow for an option to purchase Parcel B for One Million Five
Hundred Fifty Thousand Dollars ($1,550,000.00). Said payment becomes the
immediate property of Seller whether or not Buyer exercises the option. Buyer
shall have up to and including December 31, 1998, to notify Seller in writing of
Buyer's intent to exercise the option ("Notice to Exercise Option"). The Close
of Escrow on Parcel B, by and through a separate escrow from Parcel A, shall
occur within sixty (60) days after the date of the Notice to Exercise Option,
however, said closing cannot occur later than March 1, 1999. At the Close of
Escrow the remainder of the purchase price of One Million Five Hundred Thousand
Dollars ($1,500,000.00) shall be deposited in escrow with Buyer having been
given credit for the Fifty Thousand Dollar ($50,000.00) Option Payment.
(2) Buyer may extend the period in which to exercise its option
until June 30, 1999 by paying an additional Seventy-five Thousand Dollars
($75,000.00) directly to Seller outside of escrow prior to December 31, 1998.
Said payment shall become the immediate property of Seller whether or not the
Buyer exercises the option. If Buyer extends the option period, Buyer shall have
until June 30, 1999 to close the escrow with Buyer. Buyer shall deposit the
remaining balance due and owing on the purchase price with credit given to Buyer
for any option payments previously made on Parcel B, however, if the Close of
Escrow does not occur on or before June 30, 1999, this Agreement shall terminate
as to Parcel B and Seller may retain all Option Payments in its possession.
4. Escrow and Escrow Instructions. After the Opening of Escrow the
------------------------------
parties shall promptly execute and deliver such escrow instructions, and
additional documents as may be required to consummate this Agreement, directed
to United Title Company, attn: Sharon Rhodes (the "Escrow"), to consummate the
purchase and sale of the Property in accordance with the terms and provisions of
this Agreement. In the event of any conflict between the escrow instructions
and this Agreement, this Agreement will prevail.
5. Conditions. This Agreement is subject to the following conditions:
----------
A. Feasibility Period. Buyer shall have seventy-five (75) days from
------------------
the date of the Opening of Escrow ("Feasibility Period") within which to conduct
studies of the Property, including, but not limited to: soils testing,
environmental study, biological study (including but not limited to tortoise
study), hydrology tests, design criteria and feasibility. Said studies and tests
shall be at no cost or detriment to Seller and Buyer shall deliver to Seller
copies of all reports as they are completed. Such tests and studies shall
hereinafter be collectively referred to as the "Studies". Buyer shall be
entitled to enter the Property to conduct its Studies as provided for under
Section 7 of this Agreement. Furthermore, Seller agrees to cooperate with Buyer
and Buyer's agents in conducting said Studies and, if required, by signing any
documents needed by Buyer to conduct those Studies. Seller will provide Buyer
any documents in its possession or control which pertain to the Property. Buyer
has the obligation to notify Seller of any problems
<PAGE>
that result from these Studies. If Buyer does not provide Seller with written
notification of its approval during the 75-day period, this Agreement shall
terminate and the Earnest Money Deposit shall be returned to Buyer with no
further duties on the part of Buyer or Seller, save and except Buyer shall pay
any title and escrow costs that may have accrued to that date.
B. Preliminary Title Report. Seller shall furnish Buyer, at Seller's
------------------------
expense, a Preliminary Title Report on the Property and by execution of this
Agreement, Buyer acknowledges receipt of said report. Buyer shall have fifteen
(15) days after receipt of the Preliminary Title Report and ALTA Survey to
disapprove in writing any exceptions to title. In the event of such disapproval,
Seller, at its election, may cancel Escrow and cause return to Buyer of the
Earnest Money Deposit or may have until the date of Close of Escrow within which
to attempt to eliminate any disapproved exceptions from the policy of title
insurance to be issued in favor of Buyer at Close of Escrow, and if not
eliminated, Escrow shall be canceled and the Earnest Money Deposit shall be
returned to Buyer, unless Buyer then elects to waive its prior disapproval.
Failure of Buyer to disapprove any exceptions within the above mentioned time
limit shall be deemed approval of the Preliminary Title Report. Any exceptions
to which no disapproval is made shall be deemed Permitted Exceptions.
C. Condition of Property. Except as provided in Section 7, Buyer
---------------------
acknowledges that Seller has not made, and will not make, any representation or
warranty respecting the Property, its condition, its suitability for any
purpose, the availability of utilities or any other matter or thing respecting
the Property. The Property is being sold "AS-IS", and the determination of its
actual size, condition, or viability of Buyer's intended use through Studies
and/or other analysis shall be based on Buyer's own independent investigation
and be the sole responsibility of Buyer.
D. Assignment. Buyer may assign this Agreement to an entity in which
----------
Buyer shall have an ownership interest or a right of management.
6. Right of Entry and Inspection. Buyer shall have the right to enter
-----------------------------
upon the Property at any reasonable time prior to Close of Escrow to make such
inspections, environmental audits, tests, surveys and investigations as Buyer
may deem appropriate. All entry and activities by Buyer upon the Property shall
be at Buyer's sole cost, risk and expense. Buyer agrees to restore and repair
any damages to the Property during the performance of its Studies. Buyer
covenants and agrees to hold Seller harmless from all claims arising from or
connected to the Studies conducted on the Property and to provide adequate
insurance during the performance of the Studies.
7. Warranties of Seller. Seller hereby warrants that, to the best of
--------------------
Seller's knowledge, each of the following statements is true:
A. Actions, Suits or Proceedinqs. There are no actions, suits or
-----------------------------
proceedings which are pending or threatened before any governmental department,
commission, board,
<PAGE>
bureau, agency or instrumentality that would materially and adversely affect the
Property or the right to occupy or utilize it.
B. No Notice of Pending Condemnation. There are no pending or
---------------------------------
threatened condemnation or eminent domain proceedings affecting the Property, or
any part thereof.
C. Consent. No consent or approval of this Agreement is required to
-------
be obtained by Seller from any third party in order for Seller to consummate
this Agreement.
D. Possessory Rights. No person, except as disclosed by this
-----------------
Agreement or otherwise in writing to Buyer, has any right to possession of the
Property.
E. Mechanics' Liens. There are no unsatisfied mechanics' or
----------------
materialman's lien rights concerning the Property.
F. Bankruptcy Proceedings. Neither Seller nor any part of the
----------------------
Property is the subject of any bankruptcy proceedings.
G. Hazardous Materials. Seller has not received any written notice,
-------------------
nor to the best of Seller's actual knowledge, any other information indicating
that the Property is in violation of any Environmental Law. As used herein,
"Environmental Law" shall mean any Federal, State or local law, ordinance or
regulation relating to flammable explosives, radioactive materials, hazardous
wastes, toxic substances, underground storage tanks or related materials,
including, but not limited to asbestos, petroleum or any petroleum by-products,
urea formaldehyde, foam insulation, polychlorinated biphenlys, and those
substances defined as "hazardous substances," "hazardous materials," or "toxic
substances" in the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA") as amended, 42 U.S.C. (S)(S)9601 et seg.; the Resource
-- ---
Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)(S)6901 et seg.; Nevada
-- ---
Revised Statutes Chapter 459 (Hazardous Materials); or in any regulations
adopted in publications promulgated pursuant to such laws and amendments
thereto.
H. Zoning. Seller, to the best of Seller's knowledge, represents and
------
warrants that the Property is zoned MD (Design Manufacturing) by Clark County.
I. Documents Provided by Seller. All information furnished to Buyer
----------------------------
by or on behalf of Seller prior to the execution of this Agreement is to the
best of Seller's knowledge true and correct in all material respects and fairly
and accurately reflects the condition or statement of facts reported to be
represented.
J. Authority. Seller has the requisite corporate authority to
---------
execute this Agreement and consummate this transaction pursuant to the terms of
this Agreement. All persons executing this Agreement hereunder on behalf of
Seller are duly authorized to do so by the corporate action of the Seller.
<PAGE>
8. Warranties of Buyer. In addition to other covenants, promises and
-------------------
warranties contained in the other parts of this Agreement, Buyer hereby
represents and warrants for the benefit and reliance of Seller:
A. That Buyer is a Texas corporation duly formed, validly existing,
and in good standing as of the date hereof, and is conducting business in Nevada
at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada 89109, Clark County,
Nevada.
B. That all corporate consents and approvals necessary and proper to
empower Buyer to enter into this Agreement and have been duly and validly sought
and obtained; and that copies thereof shall be delivered to Seller at Seller's
request (but in no event later than Close of Escrow).
C. That the signatories executing this Agreement on behalf of Buyer,
are incumbent officers of Buyer and possessed with appropriate corporate
authority to enter into this Agreement on behalf of Buyer.
D. That Buyer and its officers have not concealed, or neglected or
failed to inform Seller of, any material facts or circumstances which would
adversely affect Buyer's ability to consummate or perform the transaction
contemplated hereby, or which would act to impair or negate any security
interest of Seller hereunder.
9. Close of Escrow.
---------------
A. The Close of Escrow on Parcel A shall occur no later than one
hundred five (105) days from the Opening of Escrow. The Close of Escrow on
Parcel B shall occur no later than sixty (60) days after the date of the Notice
to Exercise Option, subject to any extension contained in Section 3 of this
Agreement, but in no event may Close of Escrow occur after June 30, 1999.
B. As to each respective Parcel, Seller shall deliver to Buyer, at
Close of Escrow:
(1) a general grant, bargain, sale deed conveying good and
marketable title to Seller; and
(2) a standard CLTA Owner's Title Insurance Policy insuring
Buyer in the amount of the Purchase Price and showing the Property to be subject
to no exceptions other than the Permitted Exceptions and such other exceptions
as may be expressly approved by Buyer in writing. Buyer may elect to pay for
ALTA land survey and title policy, but shall be credited the costs of the CLTA
policy.
C. At Close of Escrow, each of the parties shall deliver, to the
escrow agent such sums, instruments and documents as are required by this
Agreement or are customary in
<PAGE>
similar transactions in Clark County, Nevada, and they shall do all of the
things reasonably necessary to close this transaction and carry out the purpose
and intent of this Agreement.
D. Taxes on a Parcel shall be prorated as of the date of Close of
Escrow. The recording fees for the deed, and any transfer taxes thereon shall be
paid by Seller. Fees of the escrow agent shall be paid one-half by Seller and
one-half by Buyer.
10. Notices. All notices, requests, demands and other communications
-------
under this Agreement shall be in writing and shall be deemed to have been fully
given on the date of service if served personally, certified mail, postage
prepaid, and return receipt requested, Federal Express (or other nationally
recognized overnight delivery service) or by facsimile transmission (followed by
a hard copy sent by certified mail or Federal Express) on a business day during
normal business hours on the party to whom notice is to be given, or on the
third day after mailing, if mailed to the party to whom notice is to be given,
postage prepaid and properly addressed to the parties as follows:
To: Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Cheryl Lee, Esq.
Chief Administrative Officer and General Counsel
To: Jackson-Shaw Company
Attn: Jill Warren
4890 Alpha Rd.
Dallas, TX 75244
w/copy to: Jeff LaPar
3753 Howard Hughes Pkwy.
Las Vegas, NV 89109
Any party may change its address for purposes of paragraph by giving the other
party written notice of the new address in the manner set forth above.
11. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties relating to the subject matter contained in it and
supersedes all prior or contemporaneous agreements, representations and
understanding of the parties. No waiver of any of the provisions of this
Agreement shall be deemed, nor shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
wavier. No supplement, modification or amendment of this Agreement nor any
waiver of any provision shall be binding unless executed in writing by all the
parties.
12. Exhibits. The Exhibits to this Agreement form an integral part of
--------
this Agreement.
<PAGE>
13. Force Majeure. In addition to the specific provisions of this
-------------
Agreement, performance by any party hereunder shall not be deemed to be in
default where delays or defaults are due to war, insurrection, strikes, lock-
outs, riots, floods, earthquakes, fires, casualties acts of God, acts of the
public enemy, epidemics, quarantine restrictions, freight embargoes, lack of
transportation, governmental restrictions or priority, litigation (including
delays beyond the reasonable control of the party) to include, but not be
limited to: unusually severe weather, inability to secure necessary labor,
materials or tools, delays of any contractor, subcontractor or supplier, acts of
another party, acts or the failure to act of any public or governmental agency
or entity, or any other causes beyond the control or without the fault of the
party claiming an extension of time to perform. An extension of time for any
such cause shall only be for the period of the enforced delay, which period
shall commence to run from the time of the commencement of the cause.
14. Attorney Fees. In the event any legal action or proceeding, including
-------------
an arbitration, is commenced to enforce this Agreement, the prevailing party
shall be entitled to recover its attorney's fees and costs.
15. Binding Agreement. This Agreement shall be binding upon and shall
-----------------
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
16. Applicable Law and Venue. The laws of the State of Nevada shall apply
------------------------
to the interpretation, construction and enforcement of this Agreement and the
exclusive venue for any litigation relating to this Agreement will be the state
or federal courts sitting in Clark County, Nevada and the parties hereby consent
to such jurisdiction.
17. Time of The Essence. Time shall be of the essence of this Agreement.
-------------------
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts. A set of counterparts containing the signatures of all parties
hereto shall have the same effect as a single Agreement containing the
signatures of all parties.
19. Joint Preparation. The provisions of this document have been
-----------------
negotiated by all parties hereto and should therefore not be interpreted or
construed in favor of or with prejudice against any particular party, but in
accordance with the general tenor of the language used.
20. Brokers. Seller and Buyer each represent and warrant to the other
-------
that they have not entered into any written agreement with any real estate
broker for the payment of real estate commissions in regards to the sale of the
Property under the terms of this Agreement nor have they, by written contract,
retained the services the services of any real estate broker regarding the sale
of the Property.
21. Additional Documents. Before, at and after the Close of Escrow, the
--------------------
parties hereby agree to execute, acknowledge and deliver such additional
documents and instruments as may be reasonably necessary to carry out the full
intent and purpose of this Agreement.
<PAGE>
22. Memorandum of Option. The parties agree that Buyer shall have the
--------------------
right to record a memorandum of the option granted pursuant to Section 3(b) of
this Agreement and Seller hereby agrees to execute, in recordable form, a short
form memorandum of option agreement.
Dated as of the year and date above first written.
IMAGE ENTERTAINMENT, INC., JACKSON-SHAW COMPANY,
a California corporation, a Texas corporation,
By: /s/ JEFF M. FRAMER By: /s/ J. MICHAEL BRAY
------------------ -------------------
Its: CFO Its: Vice President
<PAGE>
EXHIBIT 10.26.C
THIRD AMENDMENT
TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Agreement") dated this 27th day
of September, 1997, by and between IMAGE ENTERTAINMENT, INC. a California
Corporation ("Borrower") and UNION BANK OF CALIFORNIA, N. A. ("Bank").
Whereas, Borrower and Bank have previously entered into that certain Loan
Agreement, dated December 17, 1996, (the "Loan Agreement"), pursuant to which
Bank has agreed to make certain loans and advances to Borrower and Amendments
thereto dated February 5, 1997 and February 28, 1997 (the "Agreement").
Whereas, Borrower has requested that Bank agree to amend certain provisions
contained in the Loan Agreement; and
Whereas, Borrower and Bank have agreed and intend to hereby amend the Loan
Agreement.
Now, therefore, the parties hereby agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meaning assigned thereto in the Agreement.
2. AMENDMENT TO THE AGREEMENT.
(a) Section 1.1 The Revolving Loan shall be deleted in its entirety
and a new section 1.1 shall be added as follows:
1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not
to exceed Fifteen Million Dollars ($15,000,000) outstanding in
the aggregate at any one time (the "Revolving Loan"). Borrower
may borrow, repay and reborrow all or part of the Revolving Loan
in amounts of not less than One Hundred Thousand Dollars
($100,000) in accordance with the terms of the Revolving Note.
All borrowings of the Revolving Loan must be made before November
30, 1998 at which time all unpaid principal and interest of the
Revolving Loan shall be due and payable. The Revolving Loan shall
be evidenced by a promissory note (the "Revolving Note") on the
standard form used by Bank for commercial loans. Bank shall enter
each amount borrowed and repaid in Bank's records and such
entries shall be deemed to be the amount of the Revolving Loan
outstanding absent manifest error. Omission of Bank to make any
such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
(b) Section 1.3 The Borrowing Base shall be deleted in its entirety
and a new section 1.3 shall be added as follows:
1.3 BORROWING BASE. Notwithstanding any other provision of this
Agreement, Bank shall advance funds under the Revolving Loan,
eighty percent (80%) of Borrower's Eligible Accounts for
outstandings up to Fifteen Million Dollars ($15,000,000) plus
forty-five percent (45%) of Borrower's Eligible Inventory. In no
event, however, shall the aggregate amount of advances based on
Eligible Inventory exceed, at any one time, the sum of Six
Million Dollars ($6,000,000). If the aggregate dilution rate as
measured on a two quarter consecutive basis, is ten percent (10%)
or greater of the accounts, the advance rate against accounts
<PAGE>
receivable shall not exceed seventy-five percent (75%); and if
the Aggregate dilution rate as measured on a consecutive two
quarter basis, is Fifteen percent (15%) or greater of all
accounts, the advance rate against accounts receivable shall not
exceed seventy percent (70%). If at any time Borrower's
obligations to Bank under the above facilities exceed the sum so
permitted, Borrower shall immediately repay to Bank such excess.
3. Except as modified hereby, the Loan Agreement shall remain otherwise
unchanged and in full force and effect and this Agreement shall be effective
from the date hereof and shall have no retroactive effect whatsoever.
In Witness Whereof, Borrower has executed and delivered this Agreement.
"Borrower"
Image Entertainment, Inc.
By: /s/ JEFF M. FRAMER
-----------------------------
Jeff Framer, CFO
Accepted and effected this 27th of September, 1997, at Bank's place of
business in the City of Los Angeles, Sate of California.
"Bank"
Union Bank of California, N.A.
By: /s/ RONALD L. WATTERWORTH
-----------------------------
Ronald L. Watterworth, Vice President
<PAGE>
EXHIBIT 10.26.d
FOURTH AMENDMENT
TO LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Fourth Amendment") dated as
of October 31, 1997, is made and entered into by and between IMAGE
ENTERTAINMENT, INC., a California corporation ("Borrower"), and UNION BANK OF
CALIFORNIA, N.A., a national banking association ("Bank").
RECITALS:
---------
A. Borrower and Bank are parties to that certain Loan Agreement dated as of
December 17, 1996, as amended by that certain First Amendment dated as of
February 5, 1997, that certain Second Amendment dated as of February 28, 1997
and that certain Third Amendment dated as of September 27, 1997 (as so amended,
the "Agreement"), pursuant to which Bank agreed to extend credit to Borrower in
the aggregate principal amount at any one time outstanding not to exceed the
lesser of (i) Fifteen Million Dollars ($15,000,000) and (ii) the Borrowing Base
(as described in Section 1.3 of the Agreement).
B. Pursuant to that certain Credit Agreement dated as of September 29, 1997
(as in effect as of the date of this Fourth Amendment, the "Credit Agreement"),
by and between Image Investors Co., a Delaware corporation ("Subordinated
Creditor"), and Borrower, Subordinated Creditor agreed to make, and did make, an
unsecured loan (the "Subordinated Loan") to Borrower in the principal sum of
Five Million Dollars ($5,000,000). Borrower's obligation to repay the principal
amount of the Subordinated Loan, together with accrued interest thereon, is
evidenced by that certain Convertible Subordinated Promissory Note dated as of
October 29, 1997 issued by Borrower in favor of Subordinated Creditor, a true
and correct copy of which is attached hereto as Exhibit A (the "Subordinated
Note"). Borrower has requested that Bank consent to the incurrence by Borrower
of the indebtedness provided for in the Credit Agreement and evidenced by the
Subordinated Note, which would otherwise be prohibited by the terms of Section
5.2 of the Agreement. Bank is willing to so consent, but subject to the terms
and conditions of this Fourth Amendment.
AGREEMENT:
---------
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
-------------
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. CONSENT. Bank hereby consents to the incurrence by Borrower of the
-------
indebtedness provided for in the Credit Agreement and evidenced by the
Subordinated Note, which would otherwise be prohibited by the terms of Section
5.2 of the Agreement. Notwithstanding anything to the contrary contained in the
Subordinated Note, including without limitation paragraph 5 thereof, so long as
no Event of Default has occurred and is continuing, Borrower shall be entitled
to make regularly scheduled payments (i.e., no prepayments or payments made as a
result of acceleration) of the principal of and accrued interest on the
Subordinated Note. Borrower shall not be entitled to make any prepayment of the
principal of or accrued interest on the Subordinated Note without the prior
written consent of Bank.
3. AMENDMENTS TO THE AGREEMENT.
---------------------------
(a) The last sentence of Section 5.2 of the Agreement is hereby, amended to
read in full as
<PAGE>
follows:
"Borrower will not borrow any money, become contingently liable to borrow
money, nor enter into any agreement to directly or indirectly obtain borrowed
money, except (a) the purchase money indebtedness owing to Bank of America, NT &
SA in connection with the financing of the Las Vegas real property and
equipment, (b) the obligations owing to Subordinated Creditor under the
Subordinated Loan and evidenced by the Subordinated Note; provided, however,
that the aggregate outstanding principal amount of the Subordinated Note shall
not exceed Five Million Dollars ($5,000,000) at any one time and (c) pursuant to
agreements made with Bank."
(b) Section 6.4 of the Agreement is hereby amended to read in full as
follows:
"6.4 Borrower shall default in any other material indebtedness with
respect to the payment of borrowed monies, bonds, debentures, notes or
similar instruments, including without limitation the indebtedness
owing to Subordinated Creditor under the Subordinated Loan, as
evidenced by the Subordinated Note."
4. EFFECTIVENESS OF THIS FOURTH AMENDMENT. This Fourth Amendment shall become
--------------------------------------
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) A counterpart of this Fourth Amendment, duly executed by Borrower and
acknowledged by U.S. Laser Video Distributors, Inc., in its capacity as
guarantor, where indicated herein below; and
(b) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
5. RATIFICATION.
-------------
(a) Except as specifically amended herein above, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed; and
(b) Upon the effectiveness of this Fourth Amendment, each reference in the
Agreement to "this Agreement," "hereunder," "herein," "hereof" or words of like
import referring to the Agreement shall mean and be a reference to the Agreement
as amended by this Fourth Amendment.
6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
------------------------------
follows:
(a) Each of the representations and warranties contained in Section 3 of
the Agreement, as amended hereby, is hereby reaffirmed as of the date hereof,
each as if set forth herein;
(b) The execution, delivery and performance of this Fourth Amendment are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action, have received all necessary approvals, if any, and do not
contravene any law or any contractual restriction binding on Borrower;
(c) This Fourth Amendment is the legal, valid and binding obligations of
Borrower, enforceable against Borrower in accordance with its terms; and
(d) No event has occurred and is continuing or would result from this
Fourth Amendment which constitutes an Event of Default under the Agreement, or
would constitute an Event of Default but
<PAGE>
for the requirement that notice be given or time elapse or both.
7. GOVERNING LAW. This Fourth Amendment shall be deemed a contract under and
-------------
subject to, and shall be construed for all purposes and in accordance with, the
laws of the State of California.
8. COUNTERPARTS. This Fourth Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
IMAGE ENTERTAINMENT, INC.
By: /s/ JEFF M. FRAMER
------------------
Title: Chief Financial Officer
UNION BANK OF CALIFORNIA, N.A.
By: /s/ BITA ARDALAN
----------------
Title: Vice President
Acknowledgment of Guarantor
---------------------------
The undersigned, as Guarantor pursuant to that certain Continuing Guaranty
dated as of August 4, 1997 (the "Guaranty"), hereby consents to the foregoing
Fourth Amendment and acknowledges and agrees, without in any manner limiting or
qualifying its obligations under the Guaranty, that payment of the Obligations
(as such term is defined in the Guaranty) and the punctual and faithful
performance, keeping, observance and fulfillment by Borrower of all of the
agreements, conditions, covenants and obligations of Borrower contained in the
Agreement are and continue to be unconditionally guaranteed by the undersigned
pursuant to the Guaranty.
U.S. LASER VIDEO DISTRIBUTORS, INC.
By: /s/ JEFF M. FRAMER
------------------
Title: Chief Financial Officer
<PAGE>
EXHIBIT 10.26.E
FIFTH AMENDMENT
TO LOAN AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AGREEMENT (this "Agreement") dated this 28th day
of January, 1998, by and between IMAGE ENTERTAINMENT, INC. a California
Corporation ("Borrower") and UNION BANK OF CALIFORNIA, N. A. ("Bank").
Whereas, Borrower and Bank have previously entered into that certain Loan
Agreement, dated December 17, 1996, (the "Loan Agreement"), pursuant to which
Bank has agreed to make certain loans and advances to Borrower and Amendments
thereto dated February 5, 1997 and February 28, 1997, September 27, 1997, and
October 31, 1997, (the "Agreement").
Whereas, Borrower has requested that Bank agree to amend certain provisions
contained in the Loan Agreement; and
Whereas, Borrower and Bank have agreed and intend to hereby amend the Loan
Agreement.
Now, therefore, the parties hereby agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meaning assigned thereto in the Agreement
2. AMENDMENT TO THE AGREEMENT.
(a) Section 1.1 The Revolving Loan shall be deleted in its entirety
and a new section 1.1 shall be added as follows:
1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not to
exceed Fifteen Million Dollars ($15,000,000) outstanding in the
aggregate at any one time (the "Revolving Loan"). Borrower may
borrow, repay and reborrow all or part of the Revolving Loan in
amounts of not less than One Hundred Thousand Dollars ($100,000) in
accordance with the terms of the Revolving Note. All borrowings of
the Revolving Loan must be made before December 31, 1999 at which time
all unpaid principal and interest of the Revolving Loan shall be due
and payable. The Revolving Loan shall be evidenced by a promissory
note (the "Revolving Note") on the standard form used by Bank for
commercial loans. Bank shall enter each amount borrowed and repaid in
Bank's records and such entries shall be deemed to be the amount of
the Revolving Loan outstanding absent manifest error. Omission of
Bank to make any such entries shall not discharge Borrower of its
obligation to repay in full with interest all amounts borrowed.
(b) Section 1.11 The Borrowing Base shall be deleted in its entirety and a
new section 1.11 shall be added as follows:
1.11 THE STANDBY LETTER OF CREDIT SUBLIMIT. As a sublimit to the
revolving loan, Bank shall issue, for the account of borrower, one or
more irrevocable standby letters of credit (individually, an "L/C" and
collectively, the "L/Cs"). All such standby L/Cs shall be drawn on
such terms and conditions as are acceptable to Bank. The aggregate
amount available to be drawn under all outstanding L/Cs and the
aggregate amount of unpaid reimbursement obligations under drawn L/Cs
shall not exceed six million dollars ($6,000,000) and shall reduce,
dollar for dollar, the maximum amount available at such
<PAGE>
time under the revolving loan. No L/C shall expire after December 31,
1999.
3. Except as modified hereby, the Loan Agreement shall remain otherwise
unchanged and in full force and effect and this Agreement shall be effective
from the date hereof and shall have no retroactive effect whatsoever.
In Witness Whereof, Borrower has executed and delivered this Agreement.
"Borrower"
Image Entertainment, Inc.
By: /s/ JEFF M. FRAMER
-------------------------------------
Jeff Framer, CFO
Accepted and effected this ____ day of January, 1998; at Bank's place of
business in the City of Los Angeles, State of California.
"Bank"
Union Bank of California, N.A.
By: /s/ RONALD L. WATTERWORTH
-------------------------------------
Ronald L. Watterworth, Vice President
<PAGE>
EXHIBIT 10.26.f.
June 18, 1998
Jeff Framer, C.F.O.
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311-6089
Re: Sixth Amendment and Waiver ("Amendment") to the Loan Agreement dated
December 17, 1996 (the Loan Agreement, together with all prior amendments,
is called the "Agreement")
Dear Jeff:
In reference to the Agreement between UNION BANK OF CALIFORNIA, N.A.
("Bank") and IMAGE ENTERTAINMENT, INC. ("Borrower"), Bank and Borrower desire to
amend the Agreement. Initially, capitalized terms used herein which are not
otherwise defined shall have the meanings given them in the Agreement.
1. Amendments to the Agreement
(a) SECTION 2.3 GUARANTIES shall be deleted in its entirety.
(b) SECTION 1.3.2 ELIGIBLE INVENTORY shall be deleted in its entirety.
(c) SECTION 1.1 THE REVOLVING LINE shall be deleted in its entirety and a
new Section 1.1 shall be added as follows:
(d) SECTION 1.11 LOAN FEE of the Agreement is hereby added in its entirety
as follows:
SECTION 1.11 LOAN FEE. Borrower shall pay a fee of Twenty-Five Thousand
Dollars ($25,000) on or before the date of execution of this agreement.
Thereafter, Borrower shall pay a fee of One Thousand Dollars ($1,000) for
any waiver made to the Agreement.
1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not to
exceed Ten Million Dollars ($10,000,000) outstanding in the aggregate at
any one time (the "Revolving Loan"). Borrower may borrow, repay and
reborrow all or part of the Revolving Loan in the amounts of not less than
One Hundred Thousand Dollars ($100,000) in accordance with the terms of the
Revolving Note. All borrowings of the Revolving Loan must be made before
June 30, 1999 at which time all unpaid principal and interest of the
Revolving Loan shall be due and payable. The Revolving Loan shall be
evidenced by a promissory note (the "Revolving Note") on the standard form
used by Bank for commercial loans. Bank shall enter each amount borrowed
and repaid in Bank's record and such entries shall be deemed to be the
amount of the Revolving Loan outstanding absent manifest error. Omission
of Bank to make any such entries shall not discharge Borrower of its
obligation to repay in full with interest all amounts borrowed.
(d) SECTION 4.7 CONSOLIDATED TANGIBLE NET WORTH shall be deleted in its
entirety and a new Section 4.7 shall be added as follows:
4.7 CONSOLIDATED TANGIBLE NET WORTH. Borrower will maintain Consolidated
Tangible Net
1
<PAGE>
Worth of not less than $13.2MM for the first quarter ending 06/30/98, not
less than $13.45MM for the second quarter ending 09/30/98, not less than
$14.85MM for the third quarter ending 12/31/98 and not less than $16MM for
the fourth quarter ending 03/31/99. "Consolidated Tangible Net Worth" shall
mean net worth increased by indebtedness of Borrower and its subsidiaries
subordinated to Bank and decreased by patents, licenses, trademarks of
Borrower and its subsidiaries, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
(e) SECTION 4.9 PROFITABILITY shall be deleted in its entirety and a new
Section 4.9 shall be added as follows:
4.9 PROFITABILITY. Borrower will maintain two quarter consecutive average
net profit, after provisions for income taxes, not less than $5.4MM for the
first quarter ending 06/30/98, not less than $125M for the second quarter
ending 09/30/98, not less than $500M for the third quarter ending 12/31/98
and not less than $500M for the fourth quarter ending 03/31/99.
2. Waiver
(a) Bank hereby waives Borrower's breach of Section 4.7 (Tangible Net
Worth), Section 4.9 (Profitability), Section 5.3 (Sale of Assets,
Liquidation or Merger) and Section 5.7 (Parent and Subsidiary Property) of
the Agreement occurring on March 31, 1998. Any further breach of the
section is not waived.
Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed. This Amendment shall not
be a waiver of any existing or future default or breach of a condition or
covenant unless specified herein.
This Amendment shall become effective when Bank shall have received the
acknowledgment copy of this Amendment executed by Borrower, which Bank must be
received before June 30, 1998.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By: /s/ JOHN KASE
---------------------------------------
John Kase
Title: Vice President
Agreed and Accepted to this 18th day of June, 1998.
IMAGE ENTERTAINMENT, INC.
By: /s/ Jeff M. Framer
------------------
Jeff Framer
Title: C.F.O.
2
<PAGE>
EXHIBIT 10.27
CREDIT AGREEMENT, dated as of September 29, 1997, between IMAGE INVESTORS
CO., a Delaware corporation (the "Lender"), and IMAGE ENTERTAINMENT, INC., a
------
California corporation and its subsidiary ("Borrower").
--------
The parties hereto hereby agree as follows:
SECTION A DEFINITIONS
---------------------
DEFINED TERMS. As used in this Agreement, the following terms shall have
-------------
the following meanings:
"AGREEMENT": this Credit Agreement, as amended, supplemented or otherwise
---------
modified from time to time.
"BUSINESS DAY": a day other than a Saturday, Sunday or other day on which
------------
commercial banks in New York City are authorized or required by law to close.
"CLOSING DATE": the date on which the conditions precedent set forth in
------------
Section 3 shall be satisfied or waived by Lender.
"CODE": the Internal Revenue Code of 1986, as amended from time to time.
----
"COMMITMENT": the obligation of the Lender to loan to the Borrower
----------
hereunder the principal amount of Five Million Dollars ($5,000,000).
"COMMITMENT PERIOD": the period from and including the Closing Date to but
-----------------
not including the Termination Date or such earlier date on which the Commitment
shall terminate as provided herein.
"CONTRACTUAL OBLIGATION": as to any Person, any provision of any security
----------------------
issued by such Person or of any material agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"DEFAULT": any of the events specified in Section 5, whether or not any
-------
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied.
"DOLLARS" AND "$": dollars in lawful currency of the United States of
------- -
America.
"EQUITY INTEREST": any and all shares, interests, participations or other
---------------
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation),
including, without limitation, all partnership interests in any Person, and any
and all warrants or options to purchase any of the foregoing.
"EVENT OF DEFAULT": any of the events specified in Section 5, provided
---------------- --------
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
1
<PAGE>
"GAAP": generally accepted accounting principles in the United States of
----
America in effect from time to time.
"GOVERNMENTAL AUTHORITY": any nation or government, any state or other
----------------------
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"INTEREST PAYMENT DATE": the first day of each December, March, June,
---------------------
September during the Commitment Period, beginning December 1, 1997.
"LOAN": as defined in subsection 1.1.
----
"LOAN DOCUMENTS": this Agreement, the Note and the acknowledgment by
--------------
Borrower concerning the Registration Statement.
"MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business,
-----------------------
operations, property, financial condition of the Borrower or (b) the validity or
enforceability of this Agreement, the Note or any of the other Loan Documents or
the rights or remedies of the Lender hereunder or thereunder.
"NOTE": as defined in subsection 1.2.
----
"PERSON": an individual, partnership, corporation, business trust, joint
------
stock company, trust, unincorporated association, joint venture, Governmental
Authority or other entity of whatever nature.
"REGISTRATION STATEMENT": as defined in Subsection 1.10.
----------------------
"REGULATION U": Regulation U of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"REQUIREMENT OF LAW": as to any Person, the Certificate of Incorporation
------------------
and By-Laws or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.
"RESPONSIBLE OFFICER": the President and Chief Executive Officer of the
-------------------
Borrower.
"TERMINATION DATE": October 1, 2002.
----------------
OTHER DEFINITIONAL PROVISIONS. The words "hereof," "herein" and
-----------------------------
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and Section, subsection, Exhibit references are to this Agreement
unless otherwise specified.
2
<PAGE>
The meanings given to terms defined herein shall be equally applicable to
both the singular and plural forms of such terms.
SECTION 1 AMOUNT AND TERMS OF COMMITMENT
----------------------------------------
1.1 COMMITMENT. Subject to the terms and conditions hereof, the Lender
----------
agrees to loan (the "Loan") to the Borrower on the Closing Date and for the
----
Commitment Period an aggregate principal amount of the Lender's Commitment.
Such commitment will be sent to Borrower by wire transfer on the Closing Date.
1.2 NOTE. The Loan made by the Lender shall be evidenced by a convertible
----
promissory note of the Borrower, substantially in the form of Exhibit A (the
"Note"), payable to the order of the Lender and in a principal amount equal to
- -----
$5,000,000.
1.3 OPTIONAL PREPAYMENTS. The Borrower may at any time and from time to
--------------------
time upon three (3) days advance notice to the Lender, prepay the Loan, in whole
or in part, without premium or penalty. Upon receipt of such notice, Lender may
no longer convert the principal amount of the Loan in accordance with Subsection
1.7. Such prepayment shall be applied first to interest and then to principal.
1.4 INTEREST RATES AND PAYMENT DATES.
--------------------------------
1.4.1 The Loan shall bear interest (the "Interest Rate") at a rate
equal to eight percent (8%) per annum.
1.4.2 If (i) the principal amount of the Loan, or (ii) any interest
payable thereon shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such overdue amount shall bear interest at a rate
per annum which is 8% plus 2% in each case from the date of such non-payment
until such amount is paid in full.
1.4.3 Interest shall be payable in arrears on each Interest Payment
Date.
1.5 COMPUTATION OF INTEREST. Interest shall be calculated on the basis
-----------------------
of a 365-day year for the actual days elapsed.
1.6 PAYMENTS. All payments (including prepayments) to be made by the
--------
Borrower hereunder and under the Note, whether on account of principal,
interest, or otherwise, shall be made without set off or counterclaim and shall
be made prior to 12:00 Noon, New York City time, on the due date thereof to the
Lender by wire transfer in immediately available funds. If any payment
hereunder becomes due and payable on a day other than a Business Day, such
payment shall be extended to the next succeeding Business Day, and, with respect
to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.
3
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1.7 CONVERSION.
----------
1.7.1 The Lender may, at its option, at any time and in accordance
with the terms and conditions of the Note, convert all or any portion of the
outstanding principal amount of such Note into the number of shares of common
stock of Borrower equal to the dollar amount converted divided by $3.625, the
closing price of the Borrower's stock on September 29, 1997.
1.7.2 In the event of any reorganization or recapitalization of
Borrower or in the event Borrower consolidates with or merges with or into
another corporation or transfers all or substantially all its assets to another
entity, then and in each such event, the Lender, upon conversion of the Note at
any time after the consummation of such reorganization, recapitalization,
consolidation, merger or transfer, shall be entitled to receive the stock or
other securities or property to which the Lender would have been entitled if the
Lender had converted the Note immediately prior thereto. In such case, the terms
of the Note shall survive the consummation of any such reorganization,
recapitalization, consolidation, merger or transfer and shall be applicable to
such shares of stock or other securities or property receivable on the
conversion of the Note after such consummation.
1.8 PAYMENT DATE. Unless otherwise prepaid in accordance with Subsection
------------
1.3, the principal amount and any unpaid interest outstanding hereunder shall be
due and payable in full on the Termination Date.
1.9 NORTH OPTION. At the Closing, the Borrower will execute the
------------
Assignment Agreement attached hereto as Exhibit B pursuant to which Borrower
will assign to Lender its option to purchase 2% of the stock of North
Communications, Inc. In consideration for such agreement, Lender will pay to
the Borrower $50,000 by wire transfer upon the execution of the Assignment
Agreement.
1.10 REGISTRATION RIGHTS.
-------------------
1.10.1 At any time after the execution of this Agreement, Lender
shall, subject to all of the provisions of this Section 1.10, if requested in
writing to do so by Borrower, file with the Securities and Exchange Commission
under the Securities and Exchange Act of 1933, as amended (the "Act"), a
registration statement on an appropriate form covering the 1,379,310 Shares (the
"Shares") of Common Stock issuable upon conversion of the Loan which Lender
requests to be registered. Borrower shall keep effective the registration
statement filed pursuant to this subsection 1.10.1 during the period commencing
on the initial effective date of such registration statement and ending on the
earlier of (i) eighteen (18) months thereafter or (ii) the completion of the
sale of the Shares owned by Lender which are covered thereby.
1.10.2 If at any time or times Borrower shall propose to file a
registration statement under the Act covering any of its Common Stock being sold
by any stockholder of Borrower, Borrower agrees that it shall, each such time,
give written notice to Lender of such proposal not later than twenty (20)
business days prior to the date such registration statement is proposed to be
filed and such notice shall offer Lender the opportunity to register its Shares
therein. Upon the written request of Lender, which request must be received by
Borrower no fewer than seven (7)
4
<PAGE>
business days prior to the date of such proposed filing and must specify the
number of Shares it is requesting to be included in such registration statement,
Borrower shall include therein, or shall cause the managing underwriter or
underwriters, if any, of a proposed underwritten offering to include therein,
the Shares on the same terms and conditions as the other common stock included
in such registration statement. Borrower agrees that it shall keep effective
any registration statement which pursuant to this subsection 1.10.2 includes any
of the Shares during the period commencing on the initial effective date of such
registration statement and ending on the earlier of (i) eighteen (18) months
thereafter and (ii) the completion of the sale of the Shares which are covered
thereby.
1.10.3 If the managing underwriter or underwriters of an underwritten
public offering made pursuant to any registration statement pursuant to Section
1.10 above delivers a written opinion to Lender that the total number or kind of
securities which Lender and any other person or entities intend to include in
such offering would materially and adversely affect the success of such offering
(including, without limitation, the marketing of the shares of Common Stock to
be sold thereunder), then the number of Shares of Lender and such other persons
or entities to be included in such offering may be reduced to the extent
necessary to reduce the total number of shares of common stock to be included in
such offering to the number recommended by such managing underwriter. Any such
reduction shall be a proportionate reduction to all such persons based upon the
number of shares proposed to be registered by each such person.
1.10.4 Borrower's obligations under this Section 1.10 with respect to
Lender shall be conditioned upon such Lender's furnishing to Borrower such
information and material as may be reasonably requested by Borrower or its
counsel in connection with such registration statement and any public offering
thereunder, including information and material concerning Lender as may be
required to be included in such registration statement under the Act and the
applicable rules and regulations of the Securities and Exchange Commission, and
upon the further condition that Lender shall undertake to take all reasonable
steps to comply with the Act and the applicable rules and regulations thereunder
and with the securities laws of the states in which any such public offering is
made. Borrower agrees to take all reasonable steps to comply in all respects
with the Act and all applicable rules and regulations thereunder and with the
securities laws of the states in which any such public offering is made.
1.10.5 Borrower shall bear all costs and expenses in connection with
any registration statement demanded by Lender pursuant to Section 1.10.1 hereof,
and of each registration statement filed pursuant to Section 1.10.2 hereof,
including the fees and expenses for the audited and other financial statements
of Borrower included in such registration statements, and the expenses of
printing, filing, legal and Blue Sky and other similar expenses. In connection
with any registration statement pursuant to Section 1.10 including any Shares
owned by Lender, Borrower agrees to take all reasonable steps to comply with
such Blue Sky or state securities laws as may be reasonably requested by Lender
(except that it shall in no event be required to qualify as a foreign
corporation or give a general consent to the service of process), and to furnish
to Buyer such number of prospectuses or other documents incident to such
registration as it may from time to time reasonably request.
5
<PAGE>
1.10.6 In connection with any registration statement which pursuant
to this Section 1.10 includes any of the Shares, Borrower will indemnify and
hold harmless Lender against and in respect of any losses, claims, damages or
liabilities (including legal or other expenses reasonably incurred by Lender in
connection with investigating or defending any such loss, claim, damage,
liability or action), to which Lender may become subject under the Act or
otherwise insofar as such losses, claims, damages or liabilities (or actions
with respect thereto) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading.
1.10.7 In connection with any registration statement which pursuant
to this Section 1.10 includes any of the Shares, Lender will indemnify and hold
harmless Borrower, its officers and its directors and any controlling persons of
Borrower against and in respect of any losses, claims, damages or liabilities
(including legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action) to which Borrower or any such persons may become subject
under the Act or otherwise insofar as such losses, claims, damages or
liabilities (or actions with respect thereto) arise out of or are based upon any
untrue statement or alleged untrue statement, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, but
only to the extent that any such untrue statement or omission is based upon
information furnished in writing to Borrower by Lender or any of its authorized
representatives for inclusion in such registration statement.
1.10.8 Any party(ies) seeking indemnification (the "Indemnitee")
shall give prompt written notice to the party(ies) from whom it is seeking
indemnification (the "Indemnitor") of any claim by the Indemnitee against the
Indemnitor based on the indemnities contained in Sections 1.10.6 and 1.10.7
hereof, or any claim against the Indemnitee, which might give rise to a claim
based on the aforesaid indemnitees, stating the nature and basis of such claim
and the amount thereof. Failure by the Indemnitee to give the Indemnitor prompt
written notice of any such claim shall not release the Indemnitor from liability
with respect thereto unless such failure to give notice has a materially adverse
effect on the Indemnitor's ability to defend such claim. Prompt written notice
shall mean within thirty (30) days after the Indemnitee receives notice of the
claim from the person asserting the claim. The Indemnitee shall permit the
Indemnitor a reasonable opportunity to assume the defense, settlement or
compromise (herein called "defense" or "defend"), of any such claim. Failure by
the Indemnitor to notify the Indemnitee of its election to defend within thirty
(30) days after such notice thereof shall have been given shall be deemed a
waiver by the Indemnitor of its right to defend any such claim. If the
Indemnitor elects to defend such claim, it shall do so at its expense through
counsel or other representatives of its own choosing. If Lender is involved in
such action, suit or proceeding it shall make available to Borrower, its
attorneys and accountants all books and records relating to any such action,
suit or proceeding, and Borrower shall make available to Lender, its attorneys
and accountants, all books and records of Borrower relating to any such action,
suit or proceeding, as the case may be. Lender and Borrower agree to render to
each other such assistance as may reasonably be required in order to insure the
proper and adequate defense of any such action, suit or proceeding.
6
<PAGE>
1.10.9 Lender shall not make any settlement of any claims which might
give rise to liability of Borrower under the indemnities contained in Section
10.1.6 hereof, without the prior written consent of Borrower, which consent
shall not be unreasonably withheld. Borrower shall not make any settlement of
any claims which might give rise to liability of Lender under the indemnities
contained in Section 10.1.7 hereof, without the prior written consent of the
Lender, which consent shall not be unreasonably withheld.
1.11 SUBORDINATION. The Loan shall be subordinated to "Senior
-------------
Indebtedness", as defined and set forth in the Note.
SECTION 2 REPRESENTATIONS AND WARRANTIES
----------------------------------------
To induce the Lender to enter into this Agreement and to make the Loan, the
Borrower hereby represents and warrants to the Lender that:
2.1 EXISTENCE; COMPLIANCE WITH LAW. The Borrower:
------------------------------
2.1.1 is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization,
2.1.2 has the corporate power and authority, and the legal right, to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently engaged, and
2.1.3 is in compliance with all Requirements of Law except to the
extent that the failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
2.2 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower has the
---------------------------------------------
corporate power and authority, and the legal right, to make, deliver and perform
the Loan Documents and to borrow hereunder and the Borrower has taken all
necessary action to authorize the borrowings on the terms and conditions of this
Agreement and the Note and to authorize the execution, delivery and performance
of the Loan Documents. No consent or authorization of, filing with, notice to
or other act by or in respect of, any Governmental Authority or any other Person
is required in connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of the Loan Documents. This
Agreement and each other Loan Document has been duly executed and delivered on
behalf of the Borrower. This Agreement and each other Loan Document constitutes
a legal, valid and binding obligation of the Borrower enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
2.3 NO LEGAL BAR. The execution, delivery and performance of the Loan
------------
Documents, the borrowings hereunder and the use of the proceeds thereof will not
violate any Requirement of
7
<PAGE>
Law or Contractual Obligation of the Borrower and will not result in, or
require, the creation or imposition of any Lien on any of its properties or
revenues pursuant to any such Requirement of Law or Contractual Obligation,
except to the extent such violations could not, in the aggregate, be reasonably
expected to have a Material Adverse Effect.
2.4 NO MATERIAL LITIGATION. No litigation, investigation or proceeding of
----------------------
or before any arbitrator or Governmental Authority is pending or threatened in
writing by or against the Borrower or against any of its properties or revenues
(a) with respect to any of the Loan Documents or any of the transactions
contemplated hereby or thereby, or (b) which could reasonably be expected to
have a Material Adverse Effect.
2.5 NO DEFAULT. Except as set forth on Schedule 2.5, the Borrower is not
----------
in default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.
2.6 TAXES. The Borrower has filed or caused to be filed all tax returns
-----
which are required to be filed or applied for extensions and have paid all taxes
that are due and payable as set forth in such returns, and have paid any
assessments made against Borrower or its property and all other taxes, fees or
other charges imposed on it or any of its property by any Governmental Authority
(other than any taxes, assessments, fees or other charges the amount of which
are currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been provided on the
books of the Borrower).
2.7 NO UNTRUE STATEMENT. No statement contained in this Agreement, nor in
-------------------
any certificate or other document delivered to the Lender by the Borrower (or
its representatives) in connection with this Agreement or the transactions
contemplated hereby, contains any untrue statement of a material fact, or omits
to state a material fact necessary in order to make the statements contained
therein or herein not misleading.
2.8 FEDERAL REGULATIONS. No part of the proceeds of the Loan will be used
-------------------
for "purchasing" or "carrying" any "margin stock" within the respective meanings
of each of the quoted terms under Regulation G or Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect or for any purpose which violates the provisions of the Regulations of
such Board of Governors.
2.9 INVESTMENT COMPANY ACT. The Borrower is not an "investment company"
----------------------
or a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
2.10 FINANCIAL STATEMENTS. The financial statements of the Borrower on
--------------------
Form 10-K for the year ended March 31, 1997 and all Forms 10-Q filed subsequent
thereto have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved and fairly
present the financial position of the Borrower as of the dates thereof and the
results of their operations for the periods then ended (subject, in the case of
any
8
<PAGE>
unaudited interim financial statements, to normal year-end adjustments and to
the lack of complete footnotes).
2.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the most
------------------------------------
recent financial statements, there has not been: (i) any material adverse change
in the business, assets, financial condition or the results of operations of the
Borrower ; (ii) any declaration, payment or setting aside for payment of any
dividend or any redemption, purchase or other acquisition of any shares of
capital stock or securities of the Borrower; (iii) any return of any capital or
other distribution of assets to stockholders of the Borrower; (iv) any material
investment of a capital nature by the Borrower either by the purchase or any
property or assets or by any acquisition (by merger, consolidation or
acquisition of stock or assets) of any corporation partnership or other business
organization or division thereof except in the ordinary course of business; (v)
any agreement to take, whether in writing or otherwise, any action which, if
taken prior to the date hereof, would have made any representation or warranty
in this Section 2 untrue or incorrect in any material respect; and (vi) any
failure by the Borrower to conduct its business only in the ordinary course
consistent with past practice.
2.12 COMPLIANCE WITH LAWS. The business of the Borrower has been operated
--------------------
in compliance with all laws, ordinances, regulations and orders of all
governmental entities, except for any instances of non-compliance which do not
and will not reasonably be expected to have a Material Adverse Effect.
2.13 LIABILITIES. Except as set forth on its most recent financial
-----------
statements or as does not and will not reasonably be expected to have a Material
Adverse Effect, the Borrower does not have any direct or indirect liabilities,
whether or not of a kind required by generally accepted accounting principles to
be set forth in its financial statements. Except as set forth in the most recent
financial statements, the Borrower does not have material (i) obligations in
respect of borrowed money, (ii) obligations evidenced by bonds, debentures,
notes or other similar instruments, (iii) obligations which would be required by
generally accepted accounting principles to be classified as "capital leases",
(iv) obligations to pay the deferred purchase price of property or services,
except trade accounts payable arising in the ordinary course of business and
payable not more than twelve (12) months from the date of incurrence, and (v)
any guaranties of any obligations of any other person.
2.14 INTELLECTUAL PROPERTY. (i) The Borrower owns, or is licensed to, or
---------------------
otherwise has, the right to use all patents, trademarks, service marks, trade
names, copyrights and franchises it uses and (ii) the Borrower's rights in the
property in such patents, service marks, trademarks, trade names, copyrights and
franchises are free and clear of any liens or other encumbrances and the
Borrower has not received written notice of any adversely-held patent,
invention, trademark, service mark or trade name of any other person, or notice
of any charge or claim of any person relating to such intellectual property or
any process or confidential information of the Borrower and the Borrower does
not know of any basis for any such charge or claim, and (iii) the Borrower, and
its predecessors, if any, have not conducted business at any time during the
period beginning five years prior to the date hereof under any corporate or
partnership, trade or fictitious names, except in the case of clauses (i) and
(ii) above, any of the foregoing which do not and will not have a Material
Adverse Effect.
9
<PAGE>
2.15 REAL ESTATE.
-----------
(a) All of the real property the Borrower owns is free and clear of any
liens or other encumbrances except for the liens on the Borrower's Las Vegas
property.
(b) The Borrower holds the leasehold estate under and interest in each
lease, sublease, license or other agreement under which it uses or occupies any
real property or improvements thereon (the "Real Property Leases") free and
clear of all material liens, encumbrances and other rights of occupancy. All
Real Property Leases are valid and binding on the lessors thereunder in
accordance with their respective terms and there is not under any such Real
Property Leases any existing default, or any condition, event or act which with
notice or lapse of time or both would constitute such a default, which in either
case, considered individually or in the aggregate with all such other Real
Property Leases under which there is such a default, condition, event or act,
would reasonably be expected to have a Material Adverse Effect.
2.16 TITLE TO AND CONDITION OF PERSONAL PROPERTY. The Borrower has good
-------------------------------------------
and marketable title to the material personal property reflected in its
financial statements or that it currently uses in the operation of its business
(other than leased property or personal property which is not material to the
business of the Borrower and such equipment is the sole security for any
financing associated therewith), and such property is free and clear of all
liens, claims, charges, security interests, options, or other title defects or
encumbrances. All such personal property is in good operating condition and
repair, is suitable for the use to which the same is customarily put, is free
from defects and is merchantable and is of a quality and quantity presently
usable in the ordinary course of the operation of the business of the Borrower,
other than such matters as would not have a Material Adverse Effect.
2.17 NO ADVERSE ACTIONS. There is no existing, pending or threatened in
------------------
writing termination, cancellation, limitation, modification or change in the
business relationship of the Borrower with any supplier, customer or other
person or entity except those which do not and will not reasonably be expected
to have a Material Adverse Effect. Neither the Borrower, nor any director,
officer or employee of Borrower has used any corporate funds for unlawful
contributions, payments, gifts, entertainment or other unlawful expenses
relating to political activity, or governmental or regulatory officials.
2.18 INSURANCE. The Borrower has not received notice of default under, or
---------
intended cancellation or nonrenewal of, any material policies of insurance which
insure the properties, business or liability of the Borrower.
The Lender represents and warrants to the Borrower as follows:
2.19 Lender hereby represents, warrants and covenants to Borrower, which
representations and warranties shall survive the execution of this Credit
Agreement and the consummation of the transactions contemplated hereby, as
follows:
2.19.1 Lender has the financial ability to bear the economic risk
of its investment in the Note and in the Shares (i.e., Lender can afford a
complete loss of its investment).
10
<PAGE>
2.19.2 Lender has adequate means of providing for its current needs
and possible contingencies, and has no need for liquidity in the investment in
the Note and in the Shares and has no reason to anticipate any change in
circumstances, financial or otherwise, which may cause or require any sale or
distribution of the Shares.
2.19.3 Lender's overall commitment to investments which are not
readily marketable is not disproportionate to its net worth and its investment
in the Note and in the Shares will not cause such overall commitment to become
excessive. Lender has determined that the purchase of the Shares is consistent
with its investment objectives and income prospects.
2.19.4 Lender has the requisite knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of an investment in the Note and in the Shares.
2.19.5 Lender understands that the Note and the Shares have not
been registered under the Securities Act of 1933, as amended (the "Act"), or
under applicable state securities laws.
2.19.6 Lender is acquiring the Note and the Shares solely for its
own account, for investment purposes only and not with the intention of, or a
view toward, the subdivision, resale, transfer or further distribution thereof
or for sale in connection with any distribution.
2.19.7 Lender shall not sell or otherwise dispose of the Shares
unless and until a registration statement covering such proposed disposition
shall be in effect under the Act, and under applicable state securities laws, or
the disposition of such shares is made pursuant to the requirements of Rule 144
promulgated by the Securities and Exchange Commission or Borrower shall have
received a written opinion of counsel to Lender to the effect that such proposed
disposition would be exempt from the registration requirements of the Act and of
applicable state securities laws.
2.19.8 Lender understands that the foregoing representations,
warranties and covenants are being relied upon by Borrower in connection with
Borrower's entering into this Credit Agreement.
2.19.9 Lender has not engaged or dealt with any person or entity
who would be entitled to any broker's or finder's fee or commission with respect
to the execution of this Credit Agreement or any of the transactions described
herein and contemplated hereby.
2.19.10 Lender has been given an opportunity to speak to management
of Borrower regarding the business and financial condition of Borrower.
2.19.11 Lender agrees and acknowledges that the stock certificates
evidencing the Shares will each bear a restrictive legend in substantially the
following form:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD UNLESS THERE IS A
REGISTRATION STATEMENT IN EFFECT COVERING SUCH SHARES OR THE DISPOSITION OF
11
<PAGE>
SUCH SHARES IS MADE PURSUANT TO THE REQUIREMENTS OF RULE 144 PROMULGATED BY THE
SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL TO THE HOLDER OF
THE SHARES IS OBTAINED TO THE EFFECT THAT THE TRANSFER OF THE SHARES SATISFIES
THE CONDITIONS FOR AN EXEMPTION FROM THE SECURITIES ACT OF 1933, AS AMENDED."
2.19.12 Lender agrees and acknowledges that stop transfer orders
will be placed in Borrower's records with respect to the Shares.
SECTION 3 CONDITIONS PRECEDENT
------------------------------
3.1 CONDITIONS TO LOAN. The agreement of the Lender to make the Loan is
------------------
subject to the satisfaction, immediately prior to or concurrently with the
making of such Loan on the Closing Date, of the following conditions precedent:
3.1.1 LOAN DOCUMENTS. The Lender shall have received (i) this
--------------
Agreement, executed and delivered by a duly authorized officer of the Borrower,
(ii) the Note, executed and delivered by a duly authorized officer of the
Borrower, and (iii) the North Option Assignment, executed by the Borrower.
3.1.2 CORPORATE PROCEEDINGS OF THE BORROWER. The Lender shall have
-------------------------------------
received a copy of the resolutions, in form and substance satisfactory to the
Lender, of the Borrower authorizing (i) the execution, delivery and performance
of this Agreement, the Note and the other Loan Documents and (ii) the borrowing
contemplated hereunder and certified by the Secretary or an Assistant Secretary
of the Borrower as of the Closing Date, which certificate shall be in form and
substance satisfactory to the Lender and shall state that the resolutions
thereby certified have not been amended, modified, revoked or rescinded.
3.1.3 BORROWER INCUMBENCY CERTIFICATE. The Lender shall have
-------------------------------
received a Certificate of the Borrower dated the Closing Date, as to the
incumbency and signature of the officers of the Borrower executing any Loan
Document satisfactory in form and substance to the Lender, executed by the
President or any senior officer and the Secretary or any Assistant Secretary of
the Borrower.
3.1.4 OPINIONS. The Lender shall have received opinion of counsel
--------
to the Borrower, in the form of Exhibit C of this Agreement.
3.1.5 REPRESENTATIONS AND WARRANTIES. Each of the representations
------------------------------
and warranties made by the Borrower in or pursuant to the Loan Documents shall
be true and correct in all material respects on and as of such date as if made
on and as of such date.
3.1.6 NO DEFAULT. No Default or Event of Default shall have occurred
----------
and be continuing on such date or after giving effect to the Loan.
12
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SECTION 4 COVENANTS
-------------------
The Borrower hereby agrees that, so long as the Note remains outstanding
and unpaid or any other amount is owing to the Lender hereunder, the Borrower
shall:
4.1 USE OF PROCEEDS. The proceeds of the Loan shall be used by the
---------------
Borrower for general working capital purposes.
4.2 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or
----------------------
before maturity or before they become delinquent, as the case may be, all of its
material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower.
4.3 COMPLIANCE OF LAWS. Comply with all applicable laws regulations, and
------------------
orders of Governmental Authorities and obtain and comply with and maintain any
and all material licenses, approvals, notifications, registrations or permits
required by applicable laws, regulations or orders, except in each such case to
the extent that failure to do so could not reasonably be expected to have a
Material Adverse Effect.
4.4 MAINTENANCE OF EXISTENCE. Preserve, renew and keep in full force and
------------------------
effect its existence and take all reasonable action to maintain all its
respective rights, privileges and franchises in the normal conduct of its
business.
4.5 MAINTENANCE OF PROPERTY; INSURANCE. Keep all property necessary to
----------------------------------
its business in good working order and condition; maintain with financially
sound and reputable insurance companies insurance on all its property in at
least such amounts and against at least such risks (but including in any event
public liability, product liability and business interruption) as are usually
insured against in the same general area by companies engaged in the same or a
similar business; and furnish to the Lender, upon written request, full
information as to the insurance carried.
4.6 NOTICES. Promptly give notice to the Lender of:
-------
4.6.1 the occurrence of any Default or Event of Default; and
4.6.2 the occurrence of any event which causes any representation or
warranty of the Borrower to cease to be true or a breach of any covenant of the
Borrower set forth in this Agreement; and
4.6.3 any material adverse change in the business, operations,
property, financial condition of the Borrower or any development or event which
could reasonably be expected to have a Material Adverse Effect.
4.7 MAINTENANCE OF ASSETS. Except in the ordinary course of business, not
---------------------
pledge, sell or transfer any of its assets without the express written consent
of Lender; provided however,
13
<PAGE>
that the Borrower may pledge, sell or transfer its assets if the Lender
expressly agrees that the proceeds of any such pledge, sale or transfer will be
used by the Borrower to pay to Lender the payments set forth in section 1
hereof.
SECTION 5 EVENTS OF DEFAULT
---------------------------
If any of the following events shall occur and be continuing:
5.1 The Borrower shall fail to pay any principal of the Note when due in
accordance with the terms hereof; or the Borrower shall fail to pay any interest
on the Note, or any other amount payable hereunder, within three (3) Business
Days after written notice thereof is delivered to Borrower; or
5.2 Any representation or warranty made or deemed made by the Borrower
herein or in any other Loan Document or which is contained in any certificate,
document or financial or other statement furnished by it at any time under or in
connection with this Agreement or any such other Loan Document shall prove to
have been incorrect in any material respect on or as of the date made or deemed
made and the same is not cured within thirty (30) Business Days after written
notice thereof is delivered to Borrower; or
5.3 The Borrower shall default in the observance or performance of any
other agreement contained in this Agreement or any other Loan Document, and such
default shall continue unremedied for a period of five thirty (30) Business Days
after written notice thereof is delivered to Borrower; or
5.4 (i) The Borrower shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to adjudicate
it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or substantially all of
its assets, or the Borrower shall make a general assignment for the benefit of
its creditors or (ii) there shall be commenced against the Borrower any case,
proceeding or other action of a nature referred to in clause (i) above which (A)
results in the entry of an order for relief or any such adjudication or
appointment or (B) remains undismissed, undischarged or unbonded for a period of
60 days; or (iii) there shall be commenced against the Borrower any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or substantially all of its
assets which results in the entry of an order for any such relief which shall
not have been vacated, discharged, or stayed or bonded pending appeal within 60
days from the entry thereof; or (iv) the Borrower shall take any action in
furtherance of, or indicating its consent to, approval of, or acquiescence in,
any of the acts set forth in clause (i), (ii), or (iii) above; or
5.5 One or more judgments or decrees shall be entered against the Borrower
involving in the aggregate liability (not paid or fully covered by insurance) of
$250,000 or more, and all such
14
<PAGE>
judgments or decrees shall not have been vacated, discharged, stayed or bonded
pending appeal within 60 days from the entry thereof; or
5.6 Any warrant of attachment, levy or execution involving an amount in
excess of $250,000 shall be issued or levied against the Borrower and such
warrant of attachment, levy or execution shall not be released, vacated, stayed
or bonded within 60 days of its issue or levy; or
5.7 A material adverse change in the business, operations, property,
financial condition of the Borrower shall have occurred since the date of this
Agreement; then, and in any such event, the Loan (with accrued interest thereon)
and all other amounts owing under this Agreement and the Note shall immediately
become due and payable. Except as expressly provided above in this Section,
demand, protest upon the giving of notice to Borrower and all other notices of
any kind are hereby expressly waived.
SECTION 6 MISCELLANEOUS
-----------------------
6.1 AMENDMENTS AND WAIVERS. Neither this Agreement, the Note or any other
----------------------
Loan Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in an instrument executed by the Lender and the Borrower in
accordance with the provisions of this subsection. The Lender may, from time to
time, waive, on such terms and conditions as the Lender may specify in such
instrument, any of the requirements of this Agreement, the Note or the other
Loan Documents or any Default or Event of Default and its consequences. Any
such wavier and any such amendment, supplement or modification shall be binding
upon the Borrower and the Lender. In the case of any waiver, the Borrower and
the Lender shall be restored to their former position and rights hereunder and
under the Note and any other Loan Documents, and any Default or Event of Default
waived shall be deemed to be cured and not continuing; but no such waiver shall
extend to any subsequent or other Default or Event of Default, or impair any
right consequent thereon.
6.2 COSTS AND EXPENSES. The Borrower agrees to pay or reimburse the
------------------
Lender for all of its costs and expenses incurred in connection with the
enforcement of any rights under this Agreement, the Note or any other Loan
Documents, including, without limitation, the reasonable fees and disbursements
of outside counsel to the Lender.
6.3 FURTHER ASSURANCES. From and after the date hereof, upon the
------------------
reasonable request of any party to this Agreement, the other party shall
execute, acknowledge and deliver, all such further agreements, instruments and
assurances as may be necessary and appropriate to carry out the transactions
contemplated by this Agreement and the other Loan Documents.
6.4 NOTICES. All notices, requests and demands to or upon the respective
-------
parties hereto to be effective shall be in writing (including by telecopy), and,
unless otherwise expressly provided herein, shall be deemed to have been duly
given or made when delivered, or three days after being deposited in the mail,
postage prepaid, or, in the case of telecopy notice, when received, addressed as
follows, or to such other address as may be hereafter notified by the respective
parties hereto and any future holders of the Note:
15
<PAGE>
The Lender: Image Investors Co.
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Attention: General Counsel
The Borrower: Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311-6089
Attention: General Counsel
6.5 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay
------------------------------
in exercising, on the part of the Lender, any right, remedy, power or privilege
hereunder or under the other Loan Documents shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
6.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
------------------------------------------
warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the Note and the
making of the Loan hereunder.
6.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
----------------------
inure to the benefit of the Lender and its successors and assigns; the Borrower
may not assign or transfer any of its rights or obligations under this Agreement
without the prior written consent of the Lender.
6.8 COUNTERPARTS. This Agreement may be executed by one or more of the
------------
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
6.9 SEVERABILITY. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
6.10 INTEGRATION. This Agreement and the other Loan Documents represent
-----------
the agreement of the Borrower and the Lender with respect to the subject matter
hereof, and there are no promises, undertakings, representations or warranties
by the Lender relative to the subject matter hereof not expressly set forth or
referred to herein or in the other Loan Documents.
6.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTE AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED
16
<PAGE>
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers this
29th day of October, 1997.
LENDER:
IMAGE INVESTORS CO.
By: /s/ STUART SUBOTNICK
-----------------------------------
Name: Stuart Subotnick
Title: Executive Vice President
BORROWER:
IMAGE ENTERTAINMENT, INC.
By: /s/ MARTIN W. GREENWALD
-----------------------------------
Name: Martin W. Greenwald
Title: President
17
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
U.S. Laser Video Distributors, Inc.,
a New Jersey corporation
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
Image Entertainment, Inc.
Chatsworth, California
We consent to incorporation by reference in the registration statements (Nos.
33-43241, 33-55393 and 33-57336) all on Form S-8 of Image Entertainment, Inc. of
our report dated May 29, 1998 except for Note 8, as to which the date is June
18, 1998, relating to the consolidated balance sheets of Image Entertainment,
Inc. as of March 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended March 31, 1998, and the related schedule, which report
appears in the March 31, 1998 annual report on Form 10-K of Image Entertainment,
Inc.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
June 24, 1998 except for Note 8,
as to which the date is June 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *10-K MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,015
<SECURITIES> 0
<RECEIVABLES> 11,582
<ALLOWANCES> 4,604
<INVENTORY> 11,205
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,793
<DEPRECIATION> 4,570
<TOTAL-ASSETS> 33,781
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 17,764
<OTHER-SE> (9,099)
<TOTAL-LIABILITY-AND-EQUITY> 33,781
<SALES> 75,516
<TOTAL-REVENUES> 75,516
<CGS> 70,256
<TOTAL-COSTS> 70,256
<OTHER-EXPENSES> 3,740
<LOSS-PROVISION> (331)
<INTEREST-EXPENSE> 662
<INCOME-PRETAX> (9,633)
<INCOME-TAX> (52)
<INCOME-CONTINUING> (9,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,581)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *10-K MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,090
<SECURITIES> 0
<RECEIVABLES> 15,568
<ALLOWANCES> 4,809
<INVENTORY> 17,776
<CURRENT-ASSETS> 0<F1>
<PP&E> 11,590
<DEPRECIATION> 3,972
<TOTAL-ASSETS> 46,448
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 17,642
<OTHER-SE> 409
<TOTAL-LIABILITY-AND-EQUITY> 46,448
<SALES> 85,650
<TOTAL-REVENUES> 85,650
<CGS> 68,427
<TOTAL-COSTS> 68,427
<OTHER-EXPENSES> 3,112
<LOSS-PROVISION> 1,946
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> 1,405
<INCOME-TAX> 433
<INCOME-CONTINUING> 972
<DISCONTINUED> 0
<EXTRAORDINARY> 127
<CHANGES> 0
<NET-INCOME> 845
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM * 10-K MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 4,665,942
<SECURITIES> 0
<RECEIVABLES> 16,516,372
<ALLOWANCES> 3,183,000
<INVENTORY> 18,445,137
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,124,558
<DEPRECIATION> 3,145,347
<TOTAL-ASSETS> 39,405,668
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 21,121,582
<OTHER-SE> (596,153)
<TOTAL-LIABILITY-AND-EQUITY> 39,405,668
<SALES> 95,086,164
<TOTAL-REVENUES> 95,086,164
<CGS> 74,386,545
<TOTAL-COSTS> 74,386,545
<OTHER-EXPENSES> 2,884,322
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,530
<INCOME-PRETAX> 8,341,665
<INCOME-TAX> 742,617
<INCOME-CONTINUING> 7,599,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,599,048
<EPS-PRIMARY> .56
<EPS-DILUTED> .51
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *10-Q
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,131,623
<SECURITIES> 0
<RECEIVABLES> 19,303,504
<ALLOWANCES> 4,642,000
<INVENTORY> 19,612,382
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,992,132
<DEPRECIATION> 3,747,178
<TOTAL-ASSETS> 53,549,566
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 18,813,582
<OTHER-SE> 800,051
<TOTAL-LIABILITY-AND-EQUITY> 53,549,566
<SALES> 62,855,934
<TOTAL-REVENUES> 62,855,934
<CGS> 49,581,725
<TOTAL-COSTS> 49,581,725
<OTHER-EXPENSES> 2,307,550
<LOSS-PROVISION> 1,154,017
<INTEREST-EXPENSE> 226,106
<INCOME-PRETAX> 1,820,611
<INCOME-TAX> 417,000
<INCOME-CONTINUING> 1,403,611
<DISCONTINUED> 0
<EXTRAORDINARY> 143,308
<CHANGES> 0
<NET-INCOME> 1,260,303
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
</FN>
</TABLE>
