As filed with the Securities and Exchange
Commission on December 16, 1998
Registration No. 333-65611
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
AMENDMENT NO. 3
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
________________________
IMAGE ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its
charter)
California 84-0685613
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification
Number)
organization)
9333 Oso Avenue
Chatsworth, California 91311
(818) 407-9100
(Address, including zip code, and telephone number,
including
area code,
of Registrant's principal executive offices)
________________________
Cheryl Lee
Chief Administrative Officer, General Counsel &
Secretary
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
(818) 407-9100
(Name, address, including zip code, and telephone number,
including area
code, of agent for service)
Copies to:
Richard A. Boehmer, Esq. Aaron A. Grunfeld, Esq.
O'Melveny & Myers LLP Resch Polster Alpert & Berger LLP
400 S. Hope Street 10390 Santa Monica Boulevard
Los Angeles, California 90071 Los Angeles, California
(213) 430-6000 (310) 277-8300
________________________
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act, check the following box: [ ]
If the registrant elects to deliver its latest annual report
to security holders, or a complete and legible facsimile thereof
pursuant to Item 11(a)(1) of this Form, check the following box: [ ]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, check the following box: [ ]
________________________
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933, or
until the Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1998
PROSPECTUS
[Image Entertainment Logo]
2,400,000 SHARES
IMAGE ENTERTAINMENT, INC.
COMMON STOCK
Image Entertainment, Inc. is offering for sale up to
2,400,000 shares of common stock. We will reserve up to
1,000,000 shares to sell directly to Image Investors Co.,
our largest shareholder, or its affiliates. If Image
Investors Co. or its affiliates desire to purchase shares,
we will make the sale to them on the same terms and conditions
available to the public, except that we will pay a lower
commission for the sale. Otherwise, we will make those
shares available to the public.
Our common stock is traded on the Nasdaq National
Market System under the symbol "DISK."
These securities involve a high degree of risk.
See "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved of
these securities or passed upon the accuracy or adequacy of
this prospectus. Any representation to the contrary is a
criminal offense.
There is no minimum number of shares required to be
sold in this offering.
<TABLE>
<CAPTION>
==============================================================
Price to Underwriter's Proceeds to
Public Commission Us
- --------------------------------------------------------------
<S> <C> <C> <C>
Per Share............$ $ $
- --------------------------------------------------------------
Total ...............$ $ $
==============================================================
</TABLE>
The table above assumes that we sell all 2,400,000 shares
and does not include estimated expenses of $____ payable by
us (including the underwriter's non-accountable expense
allowance of 2.0% of the gross proceeds from this offering).
We have retained MDB Capital Group LLC to act as the
exclusive underwriter in connection with the arrangement of
this offering. The underwriter is not obligated to itself
purchase any shares being offered or required to sell a
specific number or dollar amount of shares. The underwriter
will use its best efforts to sell all of the shares being
offered to a limited number of institutional and other
accredited investors. This offering will continue until we
agree with the underwriter that it shall terminate. There
will not be any escrow, trust or similar account for the
funds to be received from the sale of these shares.
MDB CAPITAL GROUP LLC
______________, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
<C>
Prospectus Summary 1 Legal Matters
21
Risk Factors 4 Experts
22
About Image Entertainment 12 Available Information
22
Recent Developments 13 Incorporation of Certain
Use of Proceeds 17 Information
Price Range of Common Stock 17 by Reference; Deliveries
22
Selected Historical Financial Forward Looking Statements
23
Information 17 Company's 10-K for fiscal
year
Certain Transactions 19 ended March 31, 1998, as
amended App. A
Description of Capital Stock 19 Company's 10-Q for fiscal
Plan of Distribution 21 quarter ended September
30,
1998, as amended
App. B
Company's Proxy Statement
dated
July 29, 1998
App. C
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This section is only a summary of the information
contained in this prospectus. You should read this summary
along with the more detailed information and the financial
statements and the notes thereto appearing in other sections
of this prospectus. In addition to historical information,
this prospectus contains certain forward-looking statements
which we believe are within the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on the beliefs of our
management and information currently available to the
Company's management, but involve risks and uncertainties.
Our actual results or experience could differ significantly
from those discussed in the forward-looking statements.
About Image Entertainment
Image Entertainment distributes feature films, music
videos, documentaries and other entertainment video
programming on laserdisc, DVD and videocassette. We have
distributed titles on laserdisc since 1983 and are the
largest licensee and distributor of laserdiscs in North
America. DVD is a new, smaller optical disc format which
became available to consumers in March 1997, at which time
we began distributing titles on DVD. Our primary business
is the distribution of laserdisc and DVD titles, but we
occasionally distribute videocassette titles. The titles we
distribute are produced by major motion picture studios and
other program suppliers. We manufacture and replicate some
of these titles under license agreements or other
arrangements which generally grant us exclusive distribution
rights for the United States and Canada. We also distribute
titles that we purchase in finished form and we generally do
not have exclusive distribution rights to these titles. In
all, we distribute thousands of titles on laserdisc, over
1,000 titles on DVD and a limited number of titles on
videocassette.
Our principal executive offices are located at 9333
Oso Avenue, Chatsworth, California 91311 and our telephone
number is (818) 407-9100.
The Pending Acquisition
On August 20, 1998, we agreed to acquire certain
assets and liabilities of the DVD and LD retail sales business from
the seller, Ken Crane's Magnavox City, Inc. These include
the "kencranes.com" site on the World Wide Web, a mail-order
catalog business and a lease of an approximately 8,000
square foot retail store located in Westminster, California.
The closing of the acquisition depends on the success of
this offering and on obtaining our lenders' consent. Upon
the closing of the acquisition, we will make cash payments
totaling $5,000,000 to the seller, Ken Crane, Jr., Pamela
Crane and Casey Crane, collectively, and will issue
$2,000,000 worth, or 258,370 shares (valued at the time of
signing the asset purchase agreement) of our common stock to
the seller. Ken Crane, Jr., who has over 13 years of
experience in the optical disc retail sales business, will
join us and will manage the newly acquired business.
The Offering
- We are offering 2,400,000 shares of common stock.
- If we sell all 2,400,000 shares, we will have
15,951,038 shares of common stock outstanding after
the offering. This is based on the number of shares
outstanding at November 6,1998 and excludes certain
outstanding options, warrants and other rights
to acquire our common stock.
- Use of Proceeds. If we sell enough shares to
generate sufficient proceeds to consummate the
acquisition of the DVD and LD retail sales business
of Ken Crane's Magnavox City, Inc., we will use
the proceeds to pay all amounts due upon the
closing of such acquisition and for general corporate
and working capital purposes.
- Alternative Use of Proceeds. If we do not sell
enough shares and are unable to find alternative
financing to generate sufficient
proceeds to consummate the acquisition, we will use
the proceeds to seek additional DVD distribution rights, to
potentially develop our own web site for retail sales
of DVDs and LDs and for general corporate and working
capital purposes.
<PAGE>
Summary Financial Information
We have derived the following summary historical consolidated
financial data from our fiscal year-end audited
financial statements for the fiscal years ended March 31, 1994 through 1998
and our unaudited financial statements for the six months ended
September 30, 1997 and 1998. Operating data for the six months ended
September 30, 1998 is not necessarily indicative of results for the entire
year. You should read this summary information along with the
Selected Historical Financial Information included later in
this prospectus and the financial information described
above. You should also consider the information in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations section in the Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and in the Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998.
<TABLE>
<CAPTION>
==============================================================
=========================================================
Statement of Operations Data
(in thousands, except per
share data) Six months ended
September 30,
Fiscal year ended March 31,
--------------------- -
- ---------------------------------------------------------
1998 1997
1998 1997 1996 1995 1994
--------- ---------- -
- -------- --------- --------- --------- -------
<S> <C> <C>
<C> <C> <C> <C> <C>
Net sales $30,974 $33,314
$75,516 $85,650 $95,086 $85,591 $65,578
Income (loss) before (483) (375)
(9,581) 972 7,599 7,530 3,739
extraordinary item
Extraordinary item, net of taxes - -
- - (127) - (1,219) (378)
Net income (loss) (483) (375)
(9,581) 845 7,599 6,311 3,361
Net income (loss) per share
Basic (.04) (.03)
(.71) .06 .56 .48 .27
Diluted (.04) (.03)
(.71) .06 .51 .40 .23
<CAPTION>
Balance Sheet Data
(in thousands) As of September 30,
As of March 31,
--------------------- -
- ---------------------------------------------------------
1998 1997
1998 1997 1996 1995 1994
---------- --------- -
- -------- --------- --------- --------- ---------
<S> <C> <C>
<C> <C> <C> <C> <C>
Total assets $37,465 $42,553
$33,781 $46,448 $39,406 $33,491 $42,526
Total liabilities 29,093 24,518
25,116 28,397 18,880 16,818 31,412
Net shareholders' equity 8,372 18,035
8,665 18,051 20,526 16,673 11,114
</TABLE>
In the above statement of operations data, the
loss before extraordinary item for the fiscal year ended March 31,
1998 includes:
- Non-cash charge of $8,133,000 to reduce the
carrying value of our LD inventory to its net realizable
value,
- Non-cash charge of $4,246,000 to provide for
estimated losses on LD license and exclusive distribution
agreements, and
- Non-recurring charge of $825,000 related to the
closure of our 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 non-cash charge) is
composed of the write-off of unamortized
facilityleasehold improvements and goodwill.
In the above statement of operations data, the
loss before extraordinary item for the fiscal year ended March 31,
1997 includes:
- Non-cash charge of $1,964,000 to reduce the
carrying value of our LD inventory to its estimated net
realizable value,
- Non-cash charge of $1,946,000 to provide for
estimated doubtful accounts receivable, and
<PAGE>
- A non-recurring charge composed primarily of
legal and accounting fees associated with the termination
of acquisition negotiations.
In addition, in the above statement of
operations data, the extraordinary item is composed of costs associated with
early retirement of debt, net of related taxes of $56,000
for 1997, $34,000 for 1995 and $10,000 for 1994.
<PAGE>
RISK FACTORS
The shares of common stock being offered involve a high
degree of risk. You should carefully consider the following
risk factors and all other information contained in this
prospectus before you buy shares of our common stock:
Risks Associated with Image Entertainment and this Offering
No Obligation to Sell Minimum Number of Shares;
Potential Inability to Complete the Acquisition. MDB
Capital Group LLC has agreed to use its best efforts to sell
up to a maximum of 2,400,000 shares on our behalf, but has
not committed to purchase or sell any minimum number of
shares. The underwriter is not required to sell any
specific number or dollar amount of shares. We cannot
assure you that the underwriter will be able to sell a
sufficient number of shares on our behalf to allow us to
complete the acquisition of the DVD and LD retail sales
business of Ken Crane's Magnavox City, Inc. If the
underwriter does not sell a sufficient number of shares to
allow us to complete the acquisition, we will be unable to
complete the acquisition unless we can raise additional
funds to finance the acquisition. We cannot assure you that
we will be able to raise additional funds other than those
generated by this offering.
If We Do Not Complete the Acquisition, We Will use the
Proceeds from the Offering to Seek Additional DVD Rights and
to Potentially Develop a Web Site to Sell LD's and DVD's.
If we do not sell enough shares or otherwise raise
sufficient funds to complete the acquisition, we will use
the net proceeds from this offering to seek additional
exclusive DVD distribution rights and to potentially develop
our own web site for the retail sale of LDs and DVDs
directly to the public. We believe that it would take at
least six months to develop this web site, and at least one
to two years to market this web site, in order to achieve
the level of customer awareness that the "kencranes.com"
site on the World Wide Web currently enjoys. The
development of such a web site would require an investment
of approximately $1.6 to $2.0 million for set-up and
operational costs through the first year of operation.
These costs would include, among other things, the
acquisition of suitable computer systems, the acquisition or
development of appropriate software, marketing costs,
personnel costs and other overhead and related costs. We
cannot assure you that we will be able to establish a web
site that would enjoy the same goodwill that the
kencranes.com web site currently enjoys or that would
otherwise successfully compete with existing or future
competitors in the LD and DVD retail sales business. See
"-Risks Associated with the kencranes.com Web Site and
Retail Sales over the Internet" below for a discussion of
additional risks involved with developing and maintaining a
web site for retail sales of LDs and DVDs. See "-Dependence
on Certain Program Suppliers and Vendors" and "-Potential
Inability to Continue to Secure DVD Rights and Distribution"
below for a discussion of additional risks associated with
our program suppliers and distribution rights.
Potential Inability to Obtain Lenders' Consents
Required to Complete the Acquisition. We cannot close the
acquisition unless our lenders consent to the acquisition.
We believe that our lenders will only consent to the
acquisition if we raise sufficient funds to provide us with
additional working capital to fund continued operations
after the acquisition is completed. However, our lenders
have not communicated to us the actual amount of additional
working capital that they would require us to have for their
consent, and have not given us any assurance that they will
consent to the acquisition. Therefore, we cannot assure you
that these lenders will, in fact, consent to the acquisition
regardless of the amount of funds that we raise.
We Must Close the Acquisition on or before January 15,
1999. We expect to complete this offering, obtain our
lenders' consent to the acquisition (assuming we raise
sufficient funds in this offering), and complete the
acquisition prior to January 15, 1999. However, if the
closing of the acquisition has not occurred before January
15, 1999, each of the parties has the right to terminate the
transaction.
Limited Liquidity and Capital Resources. Because of
certain developments during the second half of fiscal 1997
and the first quarter of fiscal 1998, we became concerned
that our then-current sources of working capital may have
been insufficient to fund working capital requirements in
fiscal 1998.
<PAGE>
These developments included the following:
- the February 1997 suspension of $2.7 million in
accounts receivable due from Musicland (our then-
largest customer),
- the July 1997 Chapter 11 bankruptcy filing by
Alliance Entertainment Corp. (our then-second largest
customer),
- the then-unsuccessful efforts to sell the front 8.8
acres of our Nevada land,
- the ongoing adverse impact of DVD on LD sales, and
- the increased cash requirements to exclusively
license DVD programming.
In September 1997, we raised additional capital by
obtaining a $5 million convertible loan from Image Investors
Co., our largest shareholder, which we believe successfully
alleviated our short-term liquidity constraints. We believe
that the proceeds we will receive from this offering,
together with our existing resources and anticipated cash
flows from operations, will be sufficient to satisfy our
working capital requirements for at least 12 months
following this offering. However, we cannot assure you that
such proceeds, resources and anticipated cash flows will be
sufficient or that we will not require additional financing
within that time period. If we do not have working capital
sufficient to satisfy our requirements, we may seek to raise
additional funds through public or private financing or
other arrangements. Any additional equity financing may be
dilutive to shareholders. We cannot assure you that we
would be able to raise capital on terms to our satisfaction.
If we are unable to raise capital when needed, our business,
financial condition and results of operations could be
materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" in our Annual
Report on Form 10-K for the fiscal year ended March 31, 1998
for additional information about our liquidity and capital
resources.
Potential Difficulties Relating to the New Business and
Employees. We expect to incur considerable expenses in the
near future in connection with the integration of the
business we have agreed to acquire in the acquisition and
cannot assure you that we will be able to successfully
integrate the systems, employees and other resources of the
acquired business. We will face significant risks and
challenges when we attempt to integrate the operations of
the acquired business with ours. In addition to dealing
with the challenges of integrating computer systems, we will
need to integrate approximately 50 employees, including five
managerial employees, into our work-force. We will also
need to combine infrastructure and services to efficiently
support the newly combined businesses.
Dependence on Certain Program Suppliers and Vendors.
We receive a significant amount of our revenues from the
distribution of those LDs and DVDs for which we have
exclusive agreements with program suppliers. For the fiscal
year ended March 31, 1998, approximately 75.3% of our net
sales were from titles covered by exclusive arrangements.
We cannot assure you that we will be able to renew these
exclusive rights as the existing agreements with each
program supplier expire. In addition, we cannot assure you
that our current program suppliers will continue to license
titles to us on the current terms or that we will be able to
establish new program supplier relationships to ensure
acquisition of titles in a timely and efficient manner or on
an exclusive basis. If we cannot maintain relationships
with our program suppliers, on an exclusive basis or
otherwise, we could suffer a material adverse effect on our
business, prospects, financial condition and results of
operations.
Potential Inability to Continue to Secure LD Rights and
Distribution. We cannot assure you that we will be able to
continue to secure LD license and distribution rights on
terms acceptable to us. We compete directly with Pioneer
and other independent licensees for LD distribution rights.
Pioneer licenses and distributes LDs and has exclusive LD
output license agreements with Paramount and Universal. We
also compete with LD sub-distributors and Columbia/TriStar,
which sells its own programming directly to retailers and to
other distributors in addition to its sales to us. We
expect to continue to be able to purchase
<PAGE>
LD titles on a wholesale basis from Columbia/TriStar but we cannot assure
you that we will continue to be able to do so if
Columbia/TriStar elects to sell direct, increase the number
of entities distributing its programming or limit our access
to programming.
Potential Inability to Continue to Secure DVD Rights
and Distribution. We cannot assure you that we will be able
to continue to secure DVD license and distribution rights on
terms acceptable to us. 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
has granted exclusive licenses for its new releases and most
popular catalogue titles. Instead, the major motion picture
studios sell this programming directly to retailers, other
distributors and us. Given that DVD is positioned to become
a replacement for VHS (although it remains to be seen
whether this will occur), we also compete with independent
licensing and distribution entities from the VHS sector of
the home video market. This is different from the LD market
(which is a confirmed niche market) in which we face
licensing and distribution competition from significantly
fewer sources. We expect to be able to purchase DVD titles
on a wholesale basis from all participating program
suppliers for sale to our customers but we cannot assure you
that we will be able to continue to do so if DVD program
suppliers elect to sell direct, increase the number of
entities distributing their programming or limit our access
to their programming.
Potential Inability to Compete Successfully with Other
Forms of Home Video Entertainment. Both the LD and DVD
formats compete with other forms of in-home entertainment,
such as VHS, network, syndicated, cable and pay-per-view
television and home satellite systems. The LD and DVD
formats also compete with 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. These alternate forms of
leisure-time entertainment and novel means of video delivery
could negatively impact the overall market for LD and DVD
sales and us. In addition, emerging technology may allow
consumers to download audio or video programming directly to
the consumer's home computer from the Internet and store
such products on a recordable disc. The development and
advancement of such technology into a viable alternative to
purchasing LDs or DVDs could have a material adverse effect
on our business, prospects, results of operation and
financial condition.
Dependence on Sales to Our Largest Customers. Our
aggregate sales to our three largest customers (Norwalk
Record Distributors, Ken Crane's Home Entertainment and
Musicland) accounted for approximately 31% of our net sales
for the fiscal year ended March 31, 1998. Any significant
delay or reduction in orders from these customers or any
nonpayment or late payment of amounts due by these customers
could have a material adverse effect on our business,
prospects, results of operations and financial condition.
We cannot assure you that these customers will continue
their current buying patterns or that we will be able to
maintain our current relationships with each of them.
Further, if we complete the acquisition, our other large
customers could consider us to be a more direct competitive
threat to their businesses. If so, our customers may reduce
the amount of product they purchase from us which may result
in a material adverse effect on our business, prospects,
results of operations and financial condition.
Significant Operating and Net Losses; Uncertainty of
Future Profitability. We incurred an operating loss of
$9,089,000 and a net loss of $9,581,000 for the fiscal year
ended March 31, 1998. We cannot assure you that we will
achieve or sustain profitability, and we may have
significant or increasing operating and net losses in the
future. Our losses during the 1998 fiscal year were
primarily a result of DVD's continued negative impact on LD
programming sales. In addition to decreased net sales due
to the decline in LD sales, we experienced a rapid decline
in the net realizable value of our LD-related assets due to
DVD's negative impact. Our decline in net sales was
partially offset by sales from our distribution of DVD
programming. Our ability to increase revenues and achieve
profitability and positive cash flow will depend upon our
ability to transition from LD sales to DVD sales and our
ability to increase DVD programming sales and procure DVD
license and distribution rights. See "-Potential Inability
to Continue to Secure DVD Rights and Distribution" above for
a discussion about risks associated with our ability to
compete successfully in the DVD market.
The Rapid Decline of the LD Industry Has Adversely
Affected Our Business. Due to the growth of the market for
DVDs, LD programming sales decreased significantly during
the fiscal year ended March
<PAGE>
31, 1998. The decrease in LD
programming sales has had a significant adverse impact on
our business operations and profitability, and we incurred
substantial losses during fiscal 1998 due largely to this
decrease. We cannot assure you that the LD market will
stabilize or improve at any time in the future or that we
will be able to distribute LDs profitably at any time in the
future. See "-Potential Inability to Sustain LD Business
During Transition Period Caused by DVD" below for a
discussion about risks associated with our ability to
sustain our core LD business and "-Significant Operating and
Net Losses; Uncertainty of Future Profitability" above for a
discussion about our recent losses resulting from the
decline in our LD business.
Delays in Opening the New Distribution Facility. The
Company has experienced delays in opening its new automated
distribution facility in Las Vegas, Nevada due to delays in customizing the
software used to manage the distribution system. Programmers
from the software vendor have been working to finalize the software
package. We currently expect that the distribution center
will be operational to distribute some new releases by the end of
the year, and that all new releases will be shipping from the new
facility by the end of January 1999. We currently expect the
distribution facility to be capable of shipping all product
(new releases and catalog titles) by the end of February 1999.
However, we cannot assure you that the distribution facility will
actually become operational by these dates or that the automated
systems will operate as planned without further delay. To date, we have
not experienced any material adverse effects from the delayed
opening of the distribution facility because we continue to operate
our existing distribution facility as usual. However, additional
delays or any inability to correct problems that arise with
the facility's automated systems after they become operational
could have a material adverse effect on our business,
prospects, results of operations and financial condition.
Potential Inability to Sustain LD Business During
Transition Period Caused by DVD. We cannot assure you that
we will be able to sustain our core LD business until a
transition can be made to DVD, if ever, or that LD program
suppliers and LD hardware manufacturers will continue to
support the LD format during the transition period. If we
can successfully maintain our LD business during such a
transition period, we cannot assure you that we will be able
to license and distribute DVD programming with the same
success we have experienced in the LD market, either
generally or with the selection and pricing margins we
currently offer our customers.
Dependence on Growth of the DVD Market. Our business
is increasingly dependent on the growth of the market for
DVDs, which have not yet received mass market acceptance.
We believe that the lack of mass market acceptance of DVD is
principally due to the following factors:
- 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,
- the large number of titles currently available on
LD, and
- potential competition from the "DIVX" DVD format
(see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-General-Potential
Competing Format to DVD" in our Annual Report on
form 10-K for the fiscal year ended March 31, 1998 for a
discussion of the "DIVX" DVD format).
All of these factors could impede the growth and
acceptance of DVD. We cannot assure you 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 future. In addition, we cannot assure
you that studios and program suppliers will release a wide
variety of release and catalogue DVD titles to increase
availability and therefore the appeal of the DVD format.
<PAGE>
Reliance on Vendors for LD/DVD Production and
Replication. We expect to be able to continue using various
outside vendors to author, compress and replicate marketable
DVD titles for release under our exclusive DVD license
agreements. Despite LD's decline, we also believe that we
will be able to use several outside manufacturing facilities
to replicate our LD products. However, we cannot assure you
that our vendors will continue to provide such services at
the same or higher level of quality and quantity, or that we
will be able to access or afford alternative vendors for
such services.
Our Results of Operation Fluctuate Based on Seasonality
and Variability. We have 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. Accordingly, our
revenues and results of operations may vary significantly
from period to period, and the results of any one period may
not be indicative of the results of any future periods.
This seasonality also causes our revenues to be concentrated
in the last two quarters of the fiscal year. In addition to
seasonality issues, other factors have contributed to
variability in our LD and DVD net sales on a quarterly
basis. These factors include:
- DVD's negative impact on LD sales,
- the popularity of titles in release during the
quarter,
- our marketing and promotional activities,
- our rights and distribution activities,
- the extension, termination or non-renewal of
existing license and distribution rights, and
- general economic changes affecting the buying
habits of our customers, particularly those changes
affecting consumer demand for LD and DVD hardware
and software.
Our Stock Price Has Been Highly Volatile. The price of
our common stock has historically fluctuated based on many
factors. These factors include our operating results and
financial condition, the perception of the value of our LD
and DVD offerings, overall stock market conditions and the
market for similar securities. In recent months, the
volatility of our stock price has been even higher, as shown
in the table below:
Percentage Change
Date Closing Price from Previous Date
Listed
March 31, 1998 $3.063 N/A
July 17, 1998 $10.00 Increase 226%
October 14, 1998 $3.125 Decrease 69%
November 4, 1998 $5.50 Increase 76%
See "Price Range of Common Stock" beginning on page 17
of this prospectus for additional information regarding the
price range of our common stock.
Dependence on Key Personnel. Our success greatly
depends on the efforts of our executive management,
including the President and Chief Executive Officer, Chief
Financial Officer, Chief Administrative Officer and General
Counsel, and Senior Vice President of Sales, Marketing and
Operations. In addition, our ability to operate the
acquired business successfully will significantly depend on
the services and contributions of Ken Crane, Jr., to whom we
will make a one-time payment of $1.5 million upon the
closing of the acquisition. Although we will enter into an
employment agreement with Ken Crane, Jr. upon the closing of
the acquisition, we cannot assure you that Ken Crane, Jr.
will continue
<PAGE>
his employment for any specified period of time or that the
success he enjoyed operating an independent company can
be matched. Our business and operations may be adversely
affected if one or more key executives or if Ken Crane, Jr.
were to leave.
Potential Adverse Effect on Market Price of Common
Stock Resulting From Shares Eligible for Future Sale. Sales
of substantial amounts of our common stock in the public
market after this offering or the anticipation of such sales
could have a material adverse effect on then-prevailing
market prices. As of November 6, 1998, there were
outstanding options, warrants and rights to purchase or
acquire 2,761,505 shares of our common stock, including
2,564,352 that are exercisable within 60 days after such
date. As of such date, Image Investors Co., our largest
shareholder, had demand registration rights and piggyback
registration rights (not applicable to this offering)
relating to 4,696,378 shares of our common stock owned by
it. See "Security Ownership of Certain Beneficial Owners
and Management" in our Proxy Statement dated July 29, 1998
and "Description of Capital Stock" below for additional
information regarding registration rights.
Risks Associated with the kencranes.com Web Site and Retail
Sales over the Internet
One of our principal business objectives is to increase
our direct-to-consumer sales. To that end, we have recently
agreed to acquire the acquired business, which includes the
kencranes.com web site. If the acquisition is not
completed, we intend to establish our own web site for the
retail sale of DVDs and LDs. In either case, we will face
the risks described below in operating a retail sales
business over the Internet. If we do not complete the
acquisition and instead develop a new web site for retail
sales, we will also face the risks described under the
heading "Risks Associated with Image Entertainment and this
Offering - Use of Proceeds if We Do Not Complete the
Acquisition" on page 4 above.
Potential Inability to Compete Successfully in the
Internet Commerce Industry. We cannot assure you that the
kencranes.com web site will be able to compete successfully
against current or future competitors. The market for
commerce over the Internet is new, rapidly evolving and
intensely competitive. We expect this competition to
intensify in the future due in part to the minimal barriers
to entry and the relatively low cost to launch a new web
site. We will compete with a variety of other companies for
sales of LDs and DVDs over the Internet. Some of these
competitors can devote substantial resources to Internet
commerce in the near future. The kencranes.com web site
will also compete with traditional retailers of LDs and
DVDs, including mail-order houses and video clubs.
We believe that the principal competitive factors we
will face in selling LDs and DVDs through the kencranes.com
web site are brand recognition, selection, availability,
price, effectiveness of advertising, customer service,
technical expertise, convenience, accessibility, quality of
search tools, quality of editorial and other site content
and reliability and speed of fulfillment. Many of the
current and potential competitors of the acquired business
have large customer bases, greater brand recognition and
significantly greater financial, marketing and other
resources than we have. In addition, some competitors may
be able to obtain merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory
availability policies and devote more resources to web site
and systems development than we can. The kencranes.com web
site could suffer reduced operating margins and market share
and brand recognition based on increased competition.
Potential Inability to Keep Pace with Rapid
Technological Change. We cannot assure you that we will
successfully use new technologies effectively or adapt the
kencranes.com web site or the systems of the acquired
business to customer requirements or emerging industry
standards. The technology used in the Internet commerce
industry changes rapidly. This rapid change results in the
availability of many new products and services, new industry
standards and frequent changes in user and customer
requirements and preferences. The success of the
kencranes.com web site will depend, in part, on our ability
to do the following:
- license leading technologies useful in the Internet
sales business,
<PAGE>
- enhance the kencranes.com web site's existing
services,
- develop new services and technology that address
the increasingly sophisticated and varied needs of our
customers, and
- respond to technological advances and emerging
industry standards and practices on a cost-
effective and timely basis.
Dependence on Continued Growth of Internet Commerce.
We cannot assure you that acceptance and use of the Internet
and World Wide Web will continue to develop or that a
sufficiently broad base of consumers will adopt and use the
Internet and World Wide Web as a medium of commerce.
Potential future revenues and profits from sales over the
Internet substantially depend on the widespread acceptance
and use of the Internet as an effective medium of commerce
by consumers. Rapid growth in the use of and interest in the
World Wide Web, the Internet and other on-line services is a
recent phenomenon. For the kencranes.com web site to be
successful, consumers who have historically used traditional
means of commerce to purchase merchandise must accept and
utilize novel ways of conducting business and exchanging
information.
If the Internet and other on-line services continue to
experience significant growth in the number of users, the
frequency of use or bandwidth requirements, the
infrastructure for the Internet could be affected by
capacity constraints. In addition, the Internet could lose
its viability due to delays in the development or adoption
of new standards and protocols required to handle increased
levels of service activity. Changes in or insufficient
availability of telecommunications services to support the
Internet also could result in slower response times and
could adversely affect usage of the Internet. Our business,
prospects, financial condition and results of operations
could be materially adversely affected if use of the
Internet does not continue to grow or grows more slowly than
expected, if the infrastructure for the Internet does not
effectively support growth that may occur, or if the
Internet does not become a viable commercial marketplace.
Internet Commerce Security Risks. Secure transmission
of confidential information over public networks is a
significant barrier to Internet commerce. Advances in
computer capabilities, new discoveries in the field of
cryptography or other developments could compromise the
security measures we employ to protect customer transaction
data. In addition, concerns over the security of
transactions conducted on the Internet and the privacy of
users in general may inhibit the growth of Internet
commerce. To the extent that our activities or the
activities of third-party contractors involve the storage
and transmission of proprietary information, such as credit
card numbers, security breaches could damage our reputation
and expose us to a risk of loss or litigation and possible
liability. We may be required to expend significant capital
and other resources to protect against such security
breaches or to alleviate security-related problems and we
cannot assure you that our security measures will prevent
security breaches. Any compromise of our security systems
could have a material adverse effect on our reputation,
business, prospects, financial condition and results of
operations.
Capacity Constraints; Risks Associated with System
Development. A key element of our business strategy is to
generate a high level of use of the kencranes.com web site.
We believe that the satisfactory performance, reliability
and availability of the kencranes.com web site and the
related transaction-processing systems and network
infrastructure will be critical to our reputation and our
ability to attract and retain customers and to maintain
adequate customer service levels. Accordingly, if the
acquisition is completed, we plan to upgrade or replace all
of the systems that currently operate the kencranes.com web
site and to integrate such systems with the new distribution
facility. The upgrade and/or replacement of the systems may
require substantial amounts of capital investment. We
cannot assure you that we will be able to find sources for
such capital on terms suitable to us. Any inability on our
part to work out any technical problems in the upgrade or
replacement of the kencranes.com web site's transaction-
processing systems or the distribution center integration in
a timely manner could have a material adverse effect on our
business, prospects, financial condition and results of
operations.
<PAGE>
Even if we are able to develop adequate transaction-
processing systems and to integrate the kencranes.com web
site with the distribution center in a timely manner,
periodic system interruptions may occur on the kencranes.com
web site. While we believe that we will be able to upgrade
or install new hardware and software that will be sufficient
to accommodate the anticipated traffic on the kencranes.com
web site, we cannot assure you that periodic system
interruptions will not occur even after the upgrade or
installation. Any substantial increase in the volume of
traffic on the kencranes.com web site or the number of
orders placed by customers will require us to further expand
and upgrade our technology, transaction-processing systems
and network infrastructure. In addition, we are dependent
upon web browser companies and Internet service providers
for access to our products and services. Viewers have
experienced and may in the future experience difficulties
due to system or software failures or incompatibilities not
within our control. Any system interruptions that result in
the unavailability of the kencranes.com web site or reduced
order fulfillment performance would reduce the volume of
goods sold and the attractiveness of our product and service
offerings and could have a material adverse effect on us.
Legal Constraints in Operating on the Internet. We
could be materially adversely affected by any new
legislation or regulation or by the application or
interpretation of existing laws to the Internet. Federal,
state and foreign governmental organizations are currently
considering many legislative and regulatory proposals. If a
government authority were to adopt laws or regulations that
cover Internet-related issues such as user privacy, pricing
and characteristics and quality of products and services
provided, the growth of the Internet could be adversely
affected. This could lead to a decrease in demand for
products offered over the Internet, including those that the
kencranes.com web site offers, and could increase the cost
of doing business on the Internet. In addition, we do not
know how existing laws governing issues such as property
ownership, copyright, trade secret, libel and personal
privacy will be applied to the rapidly-changing Internet.
Problems Relating to Year 2000 Non-Compliance of the
kencranes.com Web Site. We are aware of the issues
associated with the programming code in existing computer
systems as the year 2000 approaches. We intend to install
year 2000 compliant systems for the kencranes.com web site
when we perform the hardware and software upgrades or
replacements described above. However, we cannot assure you
that we will be able to successfully install the new systems
before the time necessary to avoid year 2000 related
problems. In addition, we cannot assure you that the new
systems will actually perform adequately when the year 2000
arrives. Because the kencranes.com web site's systems will
depend on other systems that we do not control, any year
2000 compliance problems in such other systems could
materially adversely affect the kencranes.com web site. Any
system interruption in the kencranes.com web site resulting
from year 2000 compliance problems could materially
adversely affect our business, results of operations,
financial condition and prospects.
<PAGE>
ABOUT IMAGE ENTERTAINMENT
Image Entertainment is the largest licensee and
wholesale distributor of LDs in North America and has
distributed a broad range of LD programming since 1983. With
the March 1997 introduction of the DVD, a new optical disc
format, to the consumer market, Image began distributing DVD
titles on a non-exclusive wholesale basis and shortly
thereafter began releasing exclusively licensed DVD
programming in June 1997. Image's DVD sales are a rapidly
growing part of its business. For the six months ended
September 30, 1998, DVD sales represented approximately 42%
of Image's net sales compared to approximately 13% during
the same period in 1997. This is also a percentage increase
compared to Image's fiscal year ended March 31, 1998, during
which DVD sales represented approximately 21% of Image's net
sales.
Image distributes thousands of titles on LD and over
1,000 titles on DVD. These titles range from feature films
and music videos to family, documentary and special interest
programming. Image has exclusive agreements with Disney's
Buena Vista Home Video, Playboy Home Video, Twentieth
Century Fox Home Entertainment, Warner Home Video, New Line
Home Video, Orion Home Video, The Criterion Collection and
numerous other program suppliers. These agreements provide
Image exclusive distribution rights to certain LD titles.
In addition, Image has exclusive agreements with Universal
(50 titles), Orion (12 titles), Playboy (all output) and
numerous other program suppliers granting Image exclusive
distribution rights to certain DVD titles. Image also
distributes LDs and DVDs on a non-exclusive basis. Image is
actively pursuing additional DVD license and distribution
rights. Where Image is unable to secure such rights, it
will attempt to purchase and distribute DVD programming on a
non-exclusive wholesale basis.
On August 20, 1998, Image's wholly-owned subsidiary
("Image/KC") agreed to acquire certain assets and
liabilities of the acquired business from the seller, Ken
Crane's Magnavox City, Inc. The acquired business consists
of the kencranes.com web site, a mail-order catalog business
and a lease of an approximately 8,000 square foot retail
store located in Westminster, California. The acquired
business had net sales of approximately $16.9 million for
its fiscal year ended July 31, 1998. Image believes that
the acquisition will enable it to increase its public
presence by reaching its customers directly through the
kencranes.com web site. The closing of the acquisition,
currently expected to be completed late in Image's third
fiscal quarter or early in its fourth fiscal quarter, is
contingent on Image raising sufficient funds to make all
payments required in connection with the acquisition. See
"Recent Developments-The Acquisition" and "Use of Proceeds."
The acquired business has historically been one of Image's
largest customers. During the fiscal year ended March 31,
1998, Image had net sales to the acquired business of
approximately $8.1 million, representing approximately 10.7%
of Image's net sales during such period. During the six
months ended September 30, 1998, Image had net sales to the
acquired business of approximately $3.2 million,
representing approximately 10.2% of Image's net sales during
such period.
Image has not paid any cash dividends on its common
stock in recent years and does not anticipate that it will
pay dividends in the foreseeable future. Image was
incorporated in the State of Colorado in April 1975 as Key
International Film Distributors, Inc., adopted its present
name in June 1983 and reincorporated into California in
November 1989. Image maintains its executive offices at
9333 Oso Avenue, Chatsworth, California 91311 and its
telephone number is (818) 407-9100.
For additional information concerning Image, see the
Annual Report on Form 10-K for the fiscal year ended
March 31, 1998, filed with the Securities and Exchange
Commission on June 25, 1998, as amended by Amendment No. 1
thereto, filed with the Commission on November 30, 1998; the
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1998, filed with the Commission on
November 12, 1998, as amended by Amendment No. 1 thereto,
filed with the Commission on November 30, 1998; and the
Proxy Statement dated July 29, 1998 delivered concurrently
with this prospectus.
<PAGE>
RECENT DEVELOPMENTS
The Pending Acquisition
On August 20, 1998, our subsidiary Image/KC agreed to
acquire certain assets and liabilities (as described more
fully below) of the DVD and LD retail sales business of the
seller. The acquired business, which sells LDs and DVDs
through the kencranes.com web site, a mail-order catalog and
an approximately 8,000 square foot retail store located in
Westminster, California, had net sales of approximately
$16.9 million for its fiscal year ended July 31, 1998. The
acquired business has historically been, and currently is,
one of Image's largest customers. During the fiscal year
ended March 31, 1998, Image had net sales to the acquired
business of approximately $8.1 million, representing
approximately 10.7% of Image's net sales during such period.
During the six months ended June 30, 1998, Image had net
sales to the acquired business of approximately $3.2
million, representing approximately 10.2% of Image's net
sales during such period. Accordingly, Image will eliminate
all significant intercompany balances and transactions when
it consolidates the financial position and results of
operations of the acquired business with those of Image.
Selected unaudited financial information regarding the
acquired business for the year ended July 31, 1998 is as
follows (in thousands)(1):
Net sales $16,900
Cost of goods sold $16,428(2)
-------
Net Income $ 472
=======
- --------------------
(1) The financial information is unaudited; however,
the information for the acquired business gives
effect to all adjustments (which include normal
recurring accruals) necessary, in the opinion of
management of the acquired business, to present
fairly the selected financial information for the
year ended July 31, 1998.
(2) Includes purchases from Image aggregating $8,069,
which are marked-up by various percentages and then
sold to consumers by the acquired business.
Image believes that the acquired business will generate
future operating benefits by providing a wider distribution
channel for Image's products in the form of increased access
to Internet, mail order and retail. The net assets of the
acquired business are expected to be minimal. Accordingly,
a significant portion of the purchase price will be
allocated to intangible assets including goodwill and
covenants not to compete. The allocation of the purchase
price, including the intangible assets, will be based upon
the estimated fair values of the respective assets. The
goodwill will be amortized over a 15 year period and the
covenants not to compete will be amortized over 5 years,
except that the value assigned to the consulting agreements
described below for Pamela Crane and Casey Crane will be
amortized over the one-year life of those agreements.
Image believes that the acquired business will be able
to take advantage of the growing level of commerce conducted
over the Internet. Aggregate product sales made over the
World Wide Web in 1997 reached approximately $3.4 billion,
representing an increase of approximately 216% from 1996.
In addition, Image expects that by March 1999, the
kencranes.com web site will be integrated with Image's new
automated distribution facility in Las Vegas, Nevada
(currently expected to be shipping product by December 31,
1998), which Image believes will provide increased
efficiency in general, including the ability to fulfill and
ship orders quickly. Image believes this will be a key
feature in ensuring customer satisfaction and customer
loyalty and that it will ultimately result in increased
traffic volume on the kencranes.com web site and an
increased volume of orders.
<PAGE>
The kencranes.com web site differs from Image's current
web site at www.Image-Entertainment.com because visitors to
the kencranes.com web site can purchase LDs and DVDs
directly from the kencranes.com web site. The kencranes.com
web site lists retail prices, has "shopping cart" and "check
out" features, allows for consumer interaction via e-mail,
lists over 10,000 items that can be purchased directly from
the site and provides synopses of each such item. Image's
existing web site does not sell product, but rather simply
provides information regarding Image, its new releases (and
suggested retail prices of same) and other general Company
and industry news.
The Asset Purchase Agreement dated as of August 20,
1998 between the seller and Image/KC, as amended (the
"Purchase Agreement"), contains the following material
provisions:
- Image/KC will acquire certain assets of the seller,
including, among other things:
- all rights to the kencranes.com web site and
the seller's mail-order business,
- all leasehold interests (and fixtures and
improvements) of the acquired business
(including the Westminster store),
- all of the acquired business's inventory
(other than adult entertainment titles),
- all of seller's rights under certain license
and distribution agreements, and
- all of seller's intangible property rights
relating to the acquired business.
- Image/KC will receive an exclusive, irrevocable,
royalty-free license to use the "Ken Crane's" name
and its derivatives in connection with the acquired
business and no other person (including the seller)
may use the name in a similar context.
- Image/KC will pay the seller $3 million in cash, of
which $500,000 will be held in escrow for 90 days
and will be paid to the seller in full only if no
claims for indemnity arise prior to the expiration
of the 90-day period.
- Image will issue to the seller $2,000,000 worth of
its common stock, or 258,370 shares, based on the
average closing price of the common stock for the
10 trading days prior to the signing of the Purchase
Agreement.
- Image/KC will assume: (1) certain trade payables of
the seller (the amount of which will be offset by
the value of a portion of the assets acquired), (2)
the seller's obligations under the Westminster
store lease, and (3) the seller's obligations with
respect to certain of its LD and DVD suppliers.
In addition, the Purchase Agreement requires that Ken
Crane, Jr. execute an employment agreement with Image/KC
upon the closing of the acquisition. Upon doing so, Ken
Crane, Jr. will become the Vice President - General Manager
of Image/KC and will receive a one-time signing bonus of
$1.5 million (which Image will record as a component of the
purchase price). Ken Crane, Jr. has over 13 years of
experience in the optical disc retail sales business and has
been primarily responsible for building the acquired
business. Ken Crane, Jr.'s employment agreement will also
include the following material terms:
- A five-year term, renewable by Image/KC for up to
two additional one-year terms,
- Ken Crane, Jr. will receive a salary of $150,000
per year (with 5.0% cumulative annual increases),
<PAGE>
- Ken Crane, Jr. will receive a bonus equal to the
sum of (1) 0.40% of annual net revenues of Image/KC
plus (2) 5.0% of Image/KC's pre-tax profits (which will
be determined by adjusting the operating income of
Image/KC (after any extraordinary items, as
defined) to reflect particular income and/or expense items,
including, without limitation, inter-company
allocations of corporate overhead, as defined), and
- Standard non-compete terms preventing Ken Crane,
Jr. from competing with Image/KC during the term of his
employment.
The total purchase price for the acquired business is
as follows (in thousands):
Cash payments to seller $3,000
Common Stock of Image
issued to the seller $2,000
Signing bonus paid to Ken
Crane, Jr. $1,500
Consulting payments to
Pamela and Casey Crane $ 500
Costs and expenses $ 300
------
$7,300
======
Ken Crane, Jr. will oversee day-to-day management of
the retail sales business of Image/KC. Pursuant to
consulting agreements to be executed with Image/KC, which
will include standard confidentiality and non-compete terms
during the term of the agreements, Pamela Crane and Casey
Crane, the sister and brother of Ken Crane, Jr., will also
each receive payments totaling $250,000 (which will be paid
half at closing and half in January 1999 and will be
recorded as a component of the purchase price) for their
consulting services pursuant to consulting agreements that
include confidentiality and non-compete provisions.
The Purchase Agreement grants the seller an exchange
right with respect to the common stock being issued to the
seller in the event that Image, through a subsidiary,
undertakes an underwritten, registered public offering of
the stock of a company that owns the assets of the acquired
business within one year after the closing of the
acquisition. In that event, the seller would have the
right, subject to applicable legal limits and conditioned
upon the closing of such offering, to exchange up to 50% of
the shares of common stock acquired by the seller upon the
closing of the acquisition, for shares of such company based
on a pricing formula established in the Purchase Agreement.
The Purchase Agreement includes standard
representations and warranties by the seller regarding the
acquired business and mutual indemnification obligations of
the parties, as well as standard closing conditions
(including obtaining the consent of certain of Image's
lenders and Image's raising sufficient funds to make all
required payments in connection with the acquisition). In
addition, the seller has agreed not to compete with Image
for a period of five years after the date of the closing of
the acquisition in certain locations.
The seller, d/b/a Ken Crane's Home Entertainment, is a
family run business which was founded by Charles K. Crane.
Charles K. Crane, the father of Ken Crane, Jr., has managed
the business, either directly or through a family trust,
since its inception. The seller's primary business has
traditionally consisted of retail sales of home video and
audio equipment through its hardware division. Ken Crane,
Jr. has been involved in the family business since 1972, and
in 1985 began selling LDs to the public and established the
acquired business. Since that time, Ken Crane, Jr. has been
primarily responsible for the management of the acquired
business, overseeing its growth into its current status as a
retail seller of LDs and DVDs through the various channels
described above.
<PAGE>
New Board Member
On September 11, 1998, Image's shareholders elected M.
Trevenen Huxley, 46, to serve as a director of Image. Mr.
Huxley's election filled the vacancy created when Mr. Russ
Harris passed away on July 31, 1998. In 1990, Mr. Huxley co-
founded Muze, Inc., a provider of digital information about
music, books and movies. From 1992 to March 1998, Mr.
Huxley served as the President and Chief Executive Officer
of Muze, Inc. and is currently its Executive Vice President
for Business Development. Mr. Huxley is also a member of
Muze, Inc.'s Board of Directors. Muze, Inc. is a closely-
held corporation which is controlled by John W. Kluge.
Stuart Subotnick also owns a minority interest in Muze, Inc.
Messrs. Kluge and Subotnick, through Image Investors Co.,
are also the largest shareholders of Image.
Adoption of 1998 Incentive Plan
Image's shareholders approved the Image Entertainment,
Inc. 1998 Incentive Plan at the Annual Meeting of
Shareholders held on September 11, 1998. For a description
of the material provisions of the 1998 Incentive Plan, see
"Proposal 2-Approval of 1998 Incentive Plan" beginning at
page 16 of Image's Proxy Statement delivered with this
prospectus. The complete text of the 1998 Incentive Plan
has been filed as an exhibit to the electronic version of
the Proxy Statement and can be reviewed on the Commission's
web site at http://www.sec.gov.
New Employment Agreements for Management
Image confirmed new employment agreements during
November 1998 with each of Martin Greenwald, Cheryl Lee,
Jeff Framer and David Borshell, which agreements would be
effective from July 1, 1998 and would remain effective for a
term of two years (subject to evergreen annual extensions
thereafter absent at least six months advance notice of
termination by either Image or the executive). In addition
to the salary, bonus, allowance and stock award amounts
described in the Proxy Statement, the new employment
agreements provide for different benefits upon a termination
of employment. Such benefits vary depending upon the reason
for the termination and when it occurs. (Capitalized terms
used but not defined below have the meanings assigned to
them in the employment agreements.)
If an employment agreement is terminated prior to the
expiration of the Term and prior to a Change in Control
"Without Cause" (which generally means for any reason other
than (a) death or disability, (b) for Cause or (c) a
voluntary termination), the executive will continue to
receive base salary (and, for Mr. Greenwald, allowances) and
bonus compensation earned, certain fringe benefits
(including medical, dental, short and long-term disability
and life insurance), and any options and other stock-based
awards consistent with the terms of the awards
(collectively, the "Aggregate Compensation"), through the
remainder of the Term. The executive will also receive
severance benefits consisting of an additional six months
continuation of salary and insurance and a pro rata portion
of any bonus payable for six months or for any partial
fiscal year that has occurred prior to the expiration of the
Term, whichever is greater (the "Severance Benefits"). If
the employment agreement is terminated prior to the
expiration of the Term but upon or after a Change in Control
(1) for any reason other than (a) death or disability, (b)
for Cause or (c) a voluntary termination (other than a
termination for "Good Reason"), or (2) by the executive for
"Good Reason" (which generally includes a material reduction
in duties, status, compensation or benefits, a material
breach by Image, or a forced relocation), the executive will
be entitled to the Aggregate Compensation for the longer of
one year after the termination or through the expiration of
the Term, plus the Severance Benefits.
In addition, all unvested existing options granted to
the executive will immediately vest if the agreement is
terminated by Image "Without Cause", or by the executive for
"Good Reason" after a Change in Control. Any unvested
portion of the executive's Restricted Stock Unit Award that
has not expired will vest immediately if the agreement is
terminated by Image "Without Cause" within one year after a
Change in Control, or less than three months prior to and in
express anticipation of an announced Change in Control, but
not earlier than December 6, 1998.
<PAGE>
USE OF PROCEEDS
If Image sells all 2,400,000 shares of its common stock
being offered, the net proceeds to Image from such sale are
estimated to be approximately $9.8 million (assuming an
offering price to the public equal to $4.75 per share, the
closing price of Image's common stock on November 24, 1998).
Image intends to use $5 million of the net proceeds to make
the payments required to be made upon the closing of the
acquisition, including $3 million to the seller, $1.5
million to Ken Crane, Jr. upon the execution of his
employment agreement and $250,000 to each of Pamela Crane
and Casey Crane for consulting services to be rendered to
Image/KC. Additional net proceeds will be used for general
corporate and working capital purposes.
If Image does not receive net proceeds from this
offering and from alternative financing sources to raise
funds in an amount sufficient to close the acquisition,
Image intends to use approximately $1.6 to $2.0 million of
the proceeds to develop and operate a new web site for
retail sales of LDs and DVDs. Image intends to use the
balance of the proceeds for the acquisition of additional
exclusive DVD rights and for general corporate and working
capital purposes.
PRICE RANGE OF COMMON STOCK
Image's common stock is traded on the Nasdaq National
Market System under the symbol "DISK" and has been included
on the Nasdaq National Market System since February 19,
1991. The following table sets forth the high and low
closing prices for Image's common stock as reported on the
Nasdaq National Market System since the beginning of Image's
1997 fiscal year.
Quarter Ended High Low
December 31, 1998 (through
November 24, 1998) $ 5.50 $3.125
September 30, 1998 10.00 3.25
June 30, 1998 7.50 3.313
March 31, 1998 4.375 3.00
December 31, 1997 4.875 3.1875
September 30, 1997 4.125 3.00
June 30, 1997 4.375 3.3125
March 31, 1997 5.125 3.375
December 31, 1996 5.125 3.00
September 30, 1996 6.00 4.75
June 30, 1996 7.9375 5.875
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial data of Image
presented below as of and for the years ended March 31, 1994
through 1998 are derived from the consolidated financial
statements of Image, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The
summary historical financial data of Image presented below
as of September 30, 1998 and 1997 and for the six months
ended September 30, 1998 and 1997 are derived from unaudited
consolidated financial statements of Image that, in the
opinion of management, contain all necessary adjustments of
a normal recurring nature to present the financial
statements in conformity with generally accepted accounting
principles. The consolidated financial statements of Image
as of March 31, 1998 and 1997 and for each of the years in
the three-year period ended March 31, 1998 and the
independent auditors' report thereon are contained in
Image's Annual Report. The consolidated financial
statements of Image as of September 30, 1998 and for the six
months ended September 30, 1998 and 1997 are contained in
Image's Quarterly Report. Operating data for the six months
ended September 30, 1998 is not necessarily indicative of
results for the entire year. The historical consolidated
financial statements and related notes and "Management's
Discussion and
<PAGE>
Analysis of Financial Condition and Results
of Operations" included in the Annual Report and the
Quarterly Report should be read along with this Selected
Historical Financial Information.
<TABLE>
<CAPTION>
==============================================================
==================================================
Statement of Operations Data
(in thousands, except per Six months ended
share data) September 30,
Fiscal year ended March 31,
--------------------- -----
- --------------------------------------------------
1998 1997
1998 1997 1996 1995 1994
--------- --------- ------
- --- --------- --------- --------- --------
<S> <C> <C> <C>
<C> <C> <C> <C>
Net sales $30,974 $33,314
$75,516 $85,650 $95,086 $85,591 $65,578
Operating costs and expenses 31,140 33,416
84,605<1> 83,399<2> 86,926 77,851 60,576
Operating income (loss) (166) (102)
(9,089) 2,251 8,160 7,740 5,002
Interest expense (354) (332)
(662) (415) (155) (1,184) (2,336)
Interest income 48 53
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 (472) (381)
(9,633) 1,405 8,342 7,705 3,843
Income tax (expense) benefit (11) 6
52 (433) (743) (175) (104)
Income (loss) before
extraordinary item (483) (375)
(9,581) 972 7,599 7,530 3,739
Extraordinary item, net of taxes - - -
(127)<4> - (1,219)<4> (378)<4>
Net income (loss) $ (483) (375)
(9,581) 845 7,599 6,311 3,361
Income (loss) per
share:
Income (loss) before
extraordinary item
Basic (.04) (.03)
(.71) .07 .56 .57 .30
Diluted (.04) (.03)
(.71) .07 .51 .48 .26
Net income (loss)
Basic (.04) (.03)
(.71) .06 .56 .48 .27
Diluted (.04) (.03)
(.71) .06 .51 .40 .23
Weighted average number
of shares outstanding
Basic 13,526 13,457
13,471 13,504 13,569 13,255 12,347
Diluted 13,526 13,457
13,471 13,836 14,802 15,641 14,392
<CAPTION>
Balance Sheet Data(in thousands)
As of September 30,
As of March 31,
--------------------- ------
- --------------------------------------------------
1998 1997 1988
1997 1996 1995 1994
---------- --------- -------
- - --------- --------- --------- ----------
<S> <C> <C> <C>
<C> <C> <C> <C>
Total assets $ 37,465 $ 42,553 $
33,781 $ 46,448 $ 39,406 $ 33,491 $ 42,526
Total liabilities 29,093 24,518
25,116 28,397 18,880 16,818 31,412
Net shareholders' equity 8,372 18,035
8,665 18,051 20,526 16,673 11,114
==============================================================
==================================================
<FN>
<1> Includes non-cash charges of $8,133,000 and $4,246,000
to reduce the carrying value of Image's LD inventory to its
net realizable value and to provide for estimated losses on
LD license and exclusive distribution agreements,
respectively. Also includes a non-recurring charge of
$825,000 related to the closure of Image'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 non-cash charge) is composed of the write-
off of unamortized facility leasehold improvements and
goodwill.
<2> Includes non-cash charges of $1,964,000 and $1,946,000
to reduce the carrying value of Image's LD inventory to its
estimated net realizable value and to provide for estimated
doubtful accounts receivable, respectively.
<3> Other expense represents a non-recurring 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.
</FN>
</TABLE>
<PAGE>
CERTAIN TRANSACTIONS
Upon consummation of the acquisition, Image/KC will pay
$3 million in cash to the seller and will cause Image to
issue 258,370 shares of its common stock to the seller, of
which the Crane Family Trust, dated December 22, 1984 (the
"Trust"), a revocable trust, is the sole shareholder.
Charles K. Crane, the father of Ken Crane, Jr., is the sole
trustee of the Trust. Ken Crane, Jr., Pamela Crane (the
sister of Ken Crane, Jr.) and Casey Crane (the brother of
Ken Crane, Jr.) are the sole beneficiaries of the Trust.
Upon the closing of the acquisition, Ken Crane, Jr. will
execute an employment agreement with Image/KC, will become
the Vice President - General Manager of Image/KC and will
receive a signing bonus, an annual salary and a bonus based
on Image/KC's performance. In addition, Pamela Crane and
Casey Crane will each receive payments of $250,000 (half
upon the closing of the acquisition and half in January
1999) for consulting services. See "Recent Developments -
The Acquisition" and "Use of Proceeds."
See "Certain Transactions" in Image's Proxy Statement
for additional information with respect to related party
transactions.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Image consists of
25,000,000 shares of common stock, no par value per share,
and 3,365,385 shares of preferred stock, $1 par value per
share. As of November 6, 1998, 13,551,038 shares of common
stock were outstanding and held of record by approximately
1,665 holders. No shares of preferred stock are issued and
outstanding as of the date hereof.
The following description of Image's capital stock is a
summary of its material terms. It is not complete and is
subject in all respects to applicable California law and to
the provisions of Image's Restated Articles of Incorporation
("Restated Articles") and Bylaws, copies of which have been
incorporated by reference as exhibits to the Registration
Statement of which this prospectus is a part.
Common Stock
Subject to the rights of the holders of any preferred
stock which may be outstanding, each holder of common stock
on the applicable record date is entitled to receive such
dividends as may be declared by the Board of Directors out
of funds legally available therefor and, in the event of
liquidation, to share pro rata in any distribution of
Image's assets after the payment or providing for the
payment of liabilities and the liquidation preference of any
outstanding preferred stock. Each holder of common stock is
entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of
shareholders. The holders of common stock have cumulative
voting rights with respect to the election of directors to
the extent provided in Section 708 of the California General
Corporation Law. Except as described below, there are no
preemptive, subscription, conversion or redemption rights
pertaining to the shares of common stock.
As of November 6, 1998, there were 2,564,352 shares of
common stock underlying options, warrants and other
conversion rights exercisable within 60 days of such date.
Included in such options, warrants and conversion rights are
1,379,310 shares of common stock, subject to anti-dilution
adjustments, issuable upon conversion of a $5 million loan
made by Image Investors Co. ("IIC") to Image pursuant to a
Credit Agreement (the "Credit Agreement") dated as of
September 29, 1997 between Image and IIC. The Credit
Agreement provides IIC with demand and piggyback
registration rights with respect to all of such shares of
common stock. IIC also has demand and piggyback
registration rights with respect to: (1) 3,293,680 shares
of common stock beneficially owned by it, and (2) an
additional 23,388 shares of common stock that IIC may
acquire upon exercise of certain anti-dilution rights
granted to it pursuant to a Stock Purchase Agreement dated
as of December 29, 1987, as amended (the "12-29-87
Agreement"). IIC's piggyback registration rights are
applicable only when Image offers shares in a registered
offering on behalf of another shareholder of Image. The 12-
29-87 Agreement also provides IIC and certain other
investors with anti-dilution protection allowing them to
acquire additional shares of common stock of Image in an
amount necessary to maintain their respective percentage
ownership interest in Image. These rights are triggered if,
among other things, shares of common stock of Image are sold
for less than 80% of
<PAGE>
fair market value or rights to purchase
common stock for less than 80% of fair market value are
sold. According to Image's records, as of September 25,
1998, these rights apply to shares of common stock amounting
to up to approximately 13.3% of the total shares of
outstanding common stock. Investors who have anti-dilution
rights under the 12-29-87 Agreement also have registration
rights with respect to shares issued pursuant to such anti-
dilution rights. Such registration rights apply to 32,746
shares issuable upon outstanding anti-dilution rights
(including the 23,388 shares issuable to IIC as described
above). The anti-dilution rights under the 12-29-87
Agreement expire on July 7, 2002. See Note 12 of the Notes
to the financial statements in Image's Annual Report.
Image has not paid dividends on its common stock in
recent years and does not anticipate that it will pay
dividends in the foreseeable future. In addition, the terms
of certain of Image's loan agreements impose restrictions on
its ability to pay dividends on its common stock. All of
the outstanding shares of common stock are fully paid and
non-assessable, and these shares of common stock will be
fully paid and non-assessable when issued.
Preferred Stock
Image is authorized to issue 3,365,385 shares of
preferred stock, $1 par value per share. The Board of
Directors has the authority to issue preferred stock in one
or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and
the number of shares constituting any series, or the
designation of such series, without further vote or action
by the shareholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a
change in control of Image without further action by the
shareholders and may adversely affect the voting and other
rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. At
present, Image has no outstanding preferred stock and does
not plan to issue any preferred stock.
Anti-Takeover Provisions
Certain provisions of Image's Restated Articles and
Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a tender offer or takeover attempt
that a shareholder might consider to be in such
shareholder's best interest, including those attempts that
might result in a premium over the market price for the
shares held by shareholders. The following is a brief
summary of these anti-takeover provisions:
- - The Restated Articles authorize the Board of Directors to
issue and to establish the series, rights, preferences
and limitations of up to 3,365,385 shares of preferred stock
without shareholder approval.
- - The Bylaws limit the ability of persons other than the
Board of Directors to call special meetings of the
shareholders.
- - The Bylaws require that the Board of Directors consist of
a minimum of four (4) and a maximum of seven (7) directors.
The provision establishing the minimum number of directors
may not be amended if the votes cast against such an
amendment are equal to or greater than 16-2/3 % of the
outstanding shares entitled to vote. No amendment may
change the maximum number of authorized directors to a
number greater than two times the stated minimum number
of directors minus one. No reduction of the authorized
number of directors has the effect of removing any director
before the expiration of such director's term of office.
- - The Bylaws require advance notice of nominations, other
than by the Board of Directors, for elections of
directors.
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for Image's common
stock is American Securities Transfer & Trust, 938 Quail
Street, Suite 101, Lakewood, Colorado 80215.
PLAN OF DISTRIBUTION
The common stock is being offered for sale by Image on
a best efforts basis to a limited number of accredited
investors. MDB Capital Group LLC, the underwriter, has been
retained pursuant to a Placement Agent Agreement to act as
the exclusive agent for Image in connection with the
arrangement of offers and sales of the common stock on a
best efforts basis.
The underwriter is not obligated to, and does not intend
itself to, take (or purchase) any of the shares of common stock being
offered. The underwriter intends to obtain indications of
interest from potential investors for the purchase of the
shares being offered and will use its best efforts to sell all
2,400,000 shares. Image intends to request effectiveness of
the Registration Statement either (1) when the underwriter
has received indications of interest for all 2,400,000 shares,
or (2) if the underwriter does not receive indications of
interest for all 2,400,000 shares, at such time prior to the
termination of this offering as the underwriter and Image
deem appropriate. Although the underwriter is not required
to sell any minimum number of shares, Image and the
underwriter believe that the Registration Statement becoming effective at
or about the time when the underwriter has received indications
of interest for all of the shares will prove attractive to
potential investors who will receive registered shares at or about the
time of payment. Investors' funds will not be accepted prior to
effectiveness of the Registration Statement. Notifications of
intentions to purchase and definitive prospectuses will be
distributed to all investors at the time of pricing, informing
investors of the settlement date, which will be scheduled for
three business days after pricing. Once the shares to be sold
have been allocated by the underwriter and Image, investors
will receive confirmation of the acceptance or rejection of
their indication of interest and trades will be settled on
the scheduled settlement date, on a delivery versus payment
basis for institutional accredited investors through the
underwriter's clearing firm. Accredited investors other than
institutional accredited investors will be required to
establish securities accounts with the underwriter and to settle the
transaction on the scheduled settlement date. This offering
will continue until such time as Image and the underwriter
agree that enough indications of interest have been received.
The underwriter reserves the right to withdraw, cancel, modify
or reject an order for the purchase of shares in whole or in
part for any reason and Image reserves the right to terminate
this offering at any time.
The offering price for the common stock offered hereby
was determined by Image and the underwriter based primarily
on the closing price of $____ for Image's common stock on
__________, 1998. In determining the offering price, Image
and the underwriter also considered general market
conditions, trading volume of Image's common stock and
overall demand for this offering.
The underwriter will receive a commission equal to 8.0%
of the gross proceeds received by Image upon the sale of
these securities, except that the commission will be reduced
to 4.0% for the sale of shares to Image Investors Co.,
Image's largest shareholder, or its affiliates. The
underwriter may allow to certain dealers who are members of
the National Association of Securities Dealers concessions
of not in excess of 5.0%. Image has agreed to pay to the
underwriter, on a non-accountable basis, 2.0% of the gross
proceeds ($228,000 assuming the sale of 2,400,000 shares at
$4.75 per share, the closing price of Image's common stock
on November 24, 1998) from the sale of the shares to cover
the underwriter's out-of-pocket expenses, including, without
limitation, counsel fees. Image has also agreed to
indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of common stock being
offered will be passed upon for Image by O'Melveny & Myers
LLP, Los Angeles, California. Certain legal matters will be
passed upon for the underwriter by Resch Polster Alpert &
Berger LLP, Los Angeles, California.
<PAGE>
EXPERTS
The financial statements of Image Entertainment, Inc.,
as of March 31, 1998, and for each of the years in the three-
year period ended March 31, 1998, have been incorporated
herein by this reference and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated
herein by this reference, and upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Image is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and in
accordance therewith files periodic reports and other
information with the Commission relating to its business,
financial statements and other matters. These periodic
reports may be inspected at the Commission's principal
offices at 450 Fifth Street, NW, Washington, D.C.
20549. Information on the operation of the Commission's
reference room may be obtained by calling the Commission at
(800) SEC-0330. Copies of these materials may be obtained
from the Commission's offices at prescribed rates set by
the Commission. Some of Image's reports and registration,
proxy and information statements that have been filed with
the Commission through the Electronic Data Gathering,
Analysis and Retrieval System are publicly available
through the Commission's web site (http://www.sec.gov).
Some information, reports and proxy statements of Image
are also available for inspection at the offices of the
Nasdaq Market Reports Section, 1735 K Street, Washington,
D.C. 20006.
We have not authorized any dealer, salesperson or other
individual to give any information or to make any
representations in connection with this offering except for
those contained in or incorporated into this prospectus.
You should not rely on any information provided to you or
representations made to you except as contained in or
incorporated into this prospectus. There may have been
changes in the affairs of Image since the date of this
prospectus. You should not imply that the information
contained in or incorporated into this prospectus has been
updated even though it is delivered to you, or your purchase
of shares occurs, after the date of this prospectus. We are
not offering shares or soliciting offers to buy shares to or
from anyone in any State in which such offer or solicitation
is not authorized or in which we are not qualified to do so.
We are not offering shares or soliciting offers to buy
shares to or from anyone to whom it is unlawful to make such
offer or solicitation.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE;
DELIVERIES
Image's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998, filed with the Commission on June 25,
1998, as amended by Amendment No. 1 thereto, filed with the
Commission on November 30, 1998; Image's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998,
filed with the Commission on November 12, 1998, as amended
by Amendment No. 1 thereto, filed with the Commission on
November 30, 1998; and all other reports filed with the
Commission by Image (File No. 0-11071) pursuant to Sections
13(a) or 15(d) of the Exchange Act since March 31, 1998 are
incorporated herein by this reference.
Concurrently with the delivery of this prospectus,
Image is delivering to each person to whom a copy of this
prospectus is delivered copies of the Annual Report, the
Quarterly Report and Image's Proxy Statement dated July 29,
1998. Upon oral or written request therefor, Image will
provide free of charge to any person, including any
beneficial owner, to whom a copy of this prospectus is
delivered, any or all of the documents incorporated herein
by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference
into the information that this prospectus incorporates by
reference). Requests for any such documents should be made
to Image Entertainment, Inc., 9333 Oso Avenue, Chatsworth,
California 91311, Telephone (818) 407-9100, Attention:
Corporate Secretary.
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking
statements which we believe are 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 Image's management as
well as assumptions made by and information currently
available to Image'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
Image 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, Image's actual
results, performance or achievements could differ materially
from those expressed in, or implied by, any such forward-
looking statements. Important factors that could cause or
contribute to such difference include those discussed under
"Risk Factors" in this prospectus and in the Annual Report.
Prospective investors are cautioned not to place undue
reliance on such forward-looking statements, which speak
only as of their dates. Image undertakes no obligation to
update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise.
Prospective investors should carefully consider the
information set forth under "Risk Factors" in this
prospectus.
<PAGE>
[Image Entertainment Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee $2,500
NASD filing fee $1,500
Nasdaq listing application $17,500
Printing and engraving expenses $10,000
Accounting fees and expenses $75,000
Legal fees and expenses $125,000
Miscellaneous expenses $43,500
Total $275,000
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Image has adopted provisions in its Restated Articles
that eliminate liability of the directors of Image for
monetary damages to the fullest extent permissible under
California law and that authorize Image to provide for the
indemnification of agents (as defined in Section 317 of the
California General Corporation Law) of Image to the fullest
extent permissible under California law. Article VI,
Section 1 of Image's Bylaws provides for indemnification of
agents of Image to the fullest extent permissible under
California law. Image's Bylaws establish that, for purposes
of Article VI of the Bylaws, an agent is any person who is
or was a director, officer employee or other agent of Image,
or is or was serving at the request of Image as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or
was a director, officer, employee or agent of a predecessor
corporation of Image or of another enterprise at the request
of such predecessor corporation.
Under California law, indemnification for expenses,
including amounts paid on settling or otherwise disposing of
a threatened or pending action or defending against the same
can be made in certain circumstances by action of Image
through: (1) a majority vote of a quorum of Image's Board
of Directors consisting of directors who are not party to
the proceedings; (2) approval of the shareholders, with the
shares owned by the person to be indemnified not being
entitled to vote thereon; or (3) such court in which the
proceeding is or was pending upon application by designated
parties. Under certain circumstances, an agent can be
indemnified even when found liable. Indemnification is
mandatory where the agent's defense is successful on the
merits. California law allows Image to make advances of
expenses for certain actions upon the receipt of an
undertaking that the agent will reimburse the corporation if
the agent is found liable.
Image maintains a directors' and officers' insurance
and company reimbursement policy. With certain exceptions,
the policy insures directors and officers against losses
arising from certain wrongful acts in their capacities as
directors and officers and reimburses Image for such loss
for which Image has lawfully indemnified the directors and
officers.
Image has entered into Indemnity Agreements with its
directors and officers. The Indemnity Agreements provide
for the indemnification of each of Image's officers and
directors in certain third-party proceedings and in certain
proceedings by or in the name of Image. In addition, the
Indemnity Agreements provide for the advance payment by
Image of expenses incurred by an indemnitee in such
proceedings.
Image has also entered into employment agreements with
certain of its officers that include indemnification
provisions. The employment agreements provide for
indemnification of such officers to the maximum extent
permitted by law and require Image to maintain directors'
and officers' liability insurance for the benefit of such
officers under certain circumstances.
<PAGE>
The Placement Agent Agreement between Image and MDB
Capital Group LLC provides for indemnification of certain
persons related to Image (including directors and officers)
in certain limited circumstances.
See Item 17 below for information regarding the
position of the Commission with respect to the effect of any
indemnification for liabilities arising under the Securities
Act.
Item 16. EXHIBITS
Exhibit
Number Description of Exhibit
1 Form of Placement Agent Agreement.
2.1* Asset Purchase Agreement dated as of August 20, 1998
by and between Image Newco, Inc. and Ken Crane's
Magnavox City, Inc.
2.2* First Amendment to Asset Purchase Agreement dated as
of October 3, 1998 by and between Image Newco, Inc.
and Ken Crane's Magnavox City, Inc.
3.1 Restated Articles of Incorporation. Filed as
Exhibit 3.1 of Image's Form 10-K for the year ended March 31,
1995 and incorporated herein by this reference.
3.2 Bylaws. Filed as Exhibit 3.2 of Image's Form 10-K
for the year ended March 31, 1995 and incorporated
herein by this reference.
4* Specimen Common Stock certificate.
5 Opinion of O'Melveny & Myers LLP, counsel to
Image, as to the legality of the common stock offered hereby
(including consent).
10.1 Image's Restated 1989 Incentive Stock Option Plan,
as amended. Filed as Exhibit 10.1 of Image's Form 10-
K for the year ended March 31, 1992 and
incorporated herein by this reference.
10.2 Image's 1998 Incentive Plan. Filed as Exhibit A of
Image's Proxy Statement dated July 29, 1998 and
incorporated herein by this reference.
10.3 Image's 1990 Stock Option Plan. Filed as Exhibit A
of Image's Proxy Statement dated December 27, 1990
and incorporated herein by this reference.
10.4 Image's Restated 1992 Stock Option Plan. Filed as
Exhibit A of Image's Proxy Statement dated
September 9, 1994 and incorporated herein by this
reference.
10.5 Image's 1994 Eligible Directors Stock Option Plan
and Form of Eligible Director Non-Qualified Stock
Option Agreement. Filed as Exhibit 10.4 of
Image's Form 10-K for the year ended March 31,
1995 and incorporated herein by this reference.
10.6 Form of Option Agreement dated October 15, 1991
between Image and Martin W. Greenwald. Filed as Exhibit
10.3 of Image's 10-Q for the quarter ended
September 30, 1991 and incorporated herein by this
reference.
10.7 Option granted August 13, 1992 by Image to Cheryl
Lee. Filed as Exhibit 10.12 of Image's Form 10-K for
the year ended March 31, 1994 and incorporated
herein by this reference.
<PAGE>
10.8 Form of Option granted May 19, 1994 to Jeff Framer,
Cheryl Lee and David Borshell. Filed as Exhibit
10.24 to Image's Form 10-K for the year ended
March 31, 1994 and incorporated herein by this
reference.
10.9* Eligible Director Non-Qualified Stock Option
Agreement dated as of July 22, 1998 between Image and Stuart
Segall.
10.10* Eligible Director Non-Qualified Stock Option
Agreement dated as of September 17, 1998 between
Image and Mark Trevenen Huxley.
10.11* Form of Termination Agreement between Image and each
of Martin W. Greenwald, Cheryl Lee, Jeff Framer
and David Borshell (relating to the termination of
their former employment agreements).
10.12* Employment Agreement dated as of July 1, 1998
between Image and Martin W. Greenwald.
10.13* Employment Agreement dated as of July 1, 1998
between Image and Cheryl Lee.
10.14* Employment Agreement dated as of July 1, 1998
between Image and Jeff Framer.
10.15* Employment Agreement dated as of July 1, 1998
between Image and David Borshell.
10.16* Form of Performance Restricted Stock Unit Award
Agreement (and related General Provisions) between
Image and each of Martin W. Greenwald, Cheryl Lee,
Jeff Framer and David Borshell (appended as
Exhibit A to Exhibits 10.12 through 10.15).
10.17 Form of Indemnity Agreement between Image and its
directors and officers. Filed as Exhibit F of
Image's Proxy Statement dated September 5, 1989
and incorporated herein by this reference.
10.18 Stock Purchase Agreement among Image, Directors of
Image and various Buyers dated December 29, 1987.
Filed as Exhibit 4.3 of Image's Form 8-K dated
December 29, 1987 and incorporated herein by this
reference.
10.18.a Form of First Amendment dated July 7, 1992 to the
Stock Purchase Agreement referenced in Exhibit
10.18 above. Filed as Exhibit 10.5 of Image's
Form 10-Q for the quarter ended September 30, 1992
and incorporated herein by this reference.
10.19 Stock Purchase Agreement among Image, Directors of
Image and Image Investors Co. dated June 27, 1990.
Filed as Exhibit 10.53 of Image's Form 10-K for
the year ended March 31, 1990, and incorporated
herein by this reference. Image and Image
Investors Co. are also parties to the 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 which
were incorporated by reference therein. The
number of shares purchased under the prior
agreements were 85,124, 118,778, 297,977,
1,187,783, 593,891 and 673,077, respectively.
10.20 Stock Purchase Agreement between Image and Image
Investors Co. dated December 30, 1992, including
Warrant. Filed as Exhibit 10.6 of Image's Form 10-
Q for the quarter ended December 31, 1992 and
incorporated herein by this reference.
10.21 Stock Purchase Agreement between Image and Stuart
Segall dated as of July 12, 1995. Filed as
Exhibit 10.1 of Image's Form 10-Q for the quarter
ended September 30, 1996 and incorporated herein
by this reference.
<PAGE>
10.22 Stock Purchase Agreement between Image and Martin W.
Greenwald dated as of June 27, 1996. Filed as
Exhibit 10.2 of Image's Form 10-Q for the quarter
ended September 30, 1996 and incorporated herein
by this reference.
10.23 Purchase and Sale Agreement between Image and LEI
Partners, L.P. dated December 31, 1990. Filed as
Exhibit 10.1 of Image's Form 10-Q for the quarter
ended December 31, 1990 and incorporated herein by
this reference.
10.24 Standard Industrial Lease for 9333 Oso Avenue,
Chatsworth, California, dated December 1, 1993 and
effective April 1, 1994, between Image and P&R
Investment Company. Filed as Exhibit 10.1 of
Image's Form 10-Q for the quarter ended December
31, 1993 and incorporated herein by this
reference.
10.25 Standard Industrial Lease for 20350 Prairie Street,
Chatsworth, California, dated December 1, 1993 and
effective April 1, 1994, between Image and P&R
Investment Company. Filed as Exhibit 10.2 of
Image's Form 10-Q for the quarter ended December
31, 1993 and incorporated herein by this
reference.
10.25.a Surrender of Lease and Termination Agreement for
20350 Prairie Street, Chatsworth, California,
dated and effective February 2, 1998, between
Image and P&R Investment Company. Filed as
Exhibit 10.20.c of Image's Form 10-K for the year
ended March 31, 1998 and incorporated herein by
this reference.
10.26 Agreement for Purchase and Sale dated June 5, 1996
between Airport Center Partnership and Image.
Filed as Exhibit 10.19 of Image's Form 10-K for
the year ended March 31, 1996 and incorporated
herein by this reference.
10.27 Construction Agreement between Image and Carson
Construction Management, Inc. dated as of November
25, 1996. Filed as Exhibit 10.23 of Image's Form
10-K for the year ended March 31, 1997 and
incorporated herein by this reference.
10.28 Business Loan Agreement between Image and Bank of
America National Trust and Savings Association
dated March 10, 1997. Filed as Exhibit 10.26 of
Image's Form 10-K for the year ended March 31,
1998 and incorporated herein by this reference.
10.28.a Amendment No. 1 dated as of February 4, 1998 to
Business Loan Agreement between Image and Bank of
America National Trust and Savings Association
dated March 10, 1997. Filed as Exhibit 10.23.a of
Image's Form 10-K for the year ended March 31,
1998 and incorporated herein by this reference.
10.28.b Amendment No. 2 dated as of June 29, 1998 to
Business Loan Agreement between Image and Bank of America
National Trust and Savings Association dated March
10, 1997. Filed as Exhibit 10.3 of Image's Form
10-Q for the quarter ended June 30, 1998 and
incorporated herein by this reference.
10.29 Lease Intended as Security between Image and BA
Leasing & Capital Corporation dated March 19, 1997. Filed
as Exhibit 10.24 of Image's Form 10-K for the year
ended March 31, 1998 and incorporated herein by
this reference.
10.29.a (First) Amendment dated March 19, 1997 to Lease
Intended as Security between Image and BA Leasing
& Capital Corporation dated March 19, 1997. Filed
as Exhibit 10.24.a of Image's Form 10-K for the
year ended March 31, 1998 and incorporated herein
by this reference.
10.29.b Second Amendment dated February 8, 1998 to Lease
Intended as Security between Image and BA Leasing &
Capital Corporation dated March 19, 1997. Filed
as Exhibit
<PAGE>
10.24.b of Image's Form 10-K for the
year ended March 31, 1998 and incorporated herein
by this reference.
10.29.c Third Amendment dated September 25, 1998 to Lease
Intended as Security between Image and BA Leasing
& Capital Corporation dated March 19, 1997. Filed
as Exhibit 10.1 of Image's Form 10-Q for the
quarter ended September 30, 1998 and incorporated
herein by this reference.
10.30 Agreement for Purchase and Sale dated May 13, 1998
between Image and Jackson-Shaw Company. Filed as
Exhibit 10.25 of Image's Form 10-K for the year
ended March 31, 1998 and incorporated herein by
this reference.
10.31 Loan Agreement between Image and Union Bank of
California, N.A. dated as of December 17, 1996.
Filed as Exhibit 10.20 of Image's Form 10-K for
the year ended March 31, 1997 and incorporated
herein by this reference.
10.31.a Amendment No. 1 dated as of February 5, 1997 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.20.A of Image's Form 10-K for
the year ended March 31, 1997 and incorporated
herein by this reference.
10.31.b Amendment No. 2 dated as of February 25, 1997 to
Loan Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.20.B of Image's Form 10-K for
the year ended March 31, 1997 and incorporated
herein by this reference.
10.31.c Amendment No. 3 dated as of September 27, 1997 to
Loan Agreement dated as of December 17, 1996 by
and between Image and Union Bank of California,
N.A. Filed as Exhibit 10.26.c of Image's Form 10-K
for the year ended March 31, 1998 and incorporated
herein by this reference.
10.31.d Amendment No. 4 dated as of October 31, 1997 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.26.d of Image's Form 10-K for
the year ended March 31, 1998 and incorporated
herein by this reference.
10.31.e Amendment No. 5 dated as of January 28, 1998 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.26.e of Image's Form 10-K for
the year ended March 31, 1998 and incorporated
herein by this reference.
10.31.f Amendment No. 6 dated as of June 18, 1998 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.26.f of Image's Form 10-K for
the year ended March 31, 1998 and incorporated
herein by this reference.
10.31.g Amendment No. 7 dated as of July 13, 1998 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.2 of Image's Form 10-Q for the
quarter ended June 30, 1998 and incorporated
herein by this reference.
10.31.h Amendment No. 8 dated as of October 23, 1998 to Loan
Agreement dated as of December 17, 1996 by and
between Image and Union Bank of California, N.A.
Filed as Exhibit 10.2 of Image's Form 10-Q for the
quarter ended September 30, 1998 and incorporated
herein by this reference.
<PAGE>
10.32 Credit Agreement dated as of September 29, 1997 by
and between Image and Image Investors Co. Filed as
Exhibit 10.27 of Image's Form 10-K for the year
ended March 31, 1998 and incorporated herein by
this reference.
15 Letter re: Unaudited Interim Financial Information.
23.1 Consent Letter of KPMG Peat Marwick LLP, Independent
Certified Public Accountants.
23.2 Consent Letter of O'Melveny & Myers LLP, counsel to
Image (included with Exhibit 5).
24* Power of Attorney (included on page II-8).
- --------------
*Previously filed.
<PAGE>
Item 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act of 1933:
(1) the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed
by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it
was declared effective; and
(2) each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors,
officers or controlling persons of the registrant pursuant
to the provisions described in Item 15 above, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, the Registrant has duly caused this
Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized,
in the City of Los Angeles, State of California, on December
16, 1998.
IMAGE ENTERTAINMENT, INC.,
a California corporation
By: /s/ Martin W. Greenwald
-----------------------------
MARTIN W. GREENWALD,
Chairman of the Board,
Chief Executive Officer, President and Treasurer
Pursuant to the requirements of the Securities Act of
1933, this Amendment No. 3 to the Registration Statement has
been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Martin W. Greenwald
- ----------------------- Chairman of the December 16, 1998
Martin W. Greenwald Board, Chief
Executive Officer,
President and
Treasurer
/s/ Jeff M. Framer
- ------------------------ Chief Financial December 16, 1998
Jeff M. Framer Officer (Principal
Financial and
Accounting Officer)
*
- ------------------------ Director December 16, 1998
Stuart Segall
*
- ------------------------ Director December 16, 1998
Ira Epstein
*
- ------------------------ Director December 16, 1998
M. Trevenen Huxley
- -------------------------
* By /s/ Martin w. Greenwald
---------------------------------
Martin W. Greenwald
Attorney-in-Fact
</TABLE>
<PAGE>
2,400,000 Shares of Common Stock
PLACEMENT AGENT AGREEMENT
between
IMAGE ENTERTAINMENT, INC.
a California Corporation and
MDB Capital Group, LLC
Dated: December , 1998
PLACEMENT AGENT AGREEMENT Between Image
Entertainment, Inc. a
California corporation and
MDB Capital Group, LLC
MDB Capital Group, LLC
100 Wilshire Boulevard
17th Floor
Santa Monica, California 90401
Dear Sirs:
Image Entertainment, Inc., a California corporation (the
"Company"), hereby confirms its agreement with you (the
"Placement Agent" or "you") as follows:
1. Sale of Common Stock on Best Efforts Basis.
1.1 Appointment of Placement Agent. On the basis of the
representations, warranties and covenants contained in
this
Agreement, and subject to the terms and conditions herein
set forth, the Company hereby appoints you, and you agree
to act, as the Company's exclusive agent during the
Offering Period (as defined below) for the purpose of
finding, on a best efforts basis "accredited investors"
(as
defined below) to subscribe for up to 2,400,000 shares of
common stock of the Company (the "Shares").
Your appointment as Placement Agent shall be sole
and
exclusive as of October 13, 1998 and during the Offering
Period
defined in paragraph 1.2 below, provided, however, that you
acknowledge and agree that the Company may set aside up to
1,000,000 of the Shares to be sold to Image Investors Co. or
its
affiliates and for which your compensation will be reduced in
accordance with Section 3.6 below. The Shares shall be sold
only to qualified "accredited investors" as such term is
defined
in Rule 501 promulgated under the Securities Act of 1933, as
amended (the "Act") and are to be sold in accordance with the
terms of the Registration Statement.
1.2 Offering Period and Closing. The "Offering Period" shall
mean that period commencing from the effective date (the
"Effective Date") of the Registration Statement (as such
term is defined below) and continuing until the earlier
of
(i) the date on which all of the Shares have been sold by
the Company, or (ii) December 31, 1998, unless mutually
extended by the Company and the Placement Agent.
1.3 Selected Dealers. You may, in your sole discretion,
request other registered dealers ("Selected Dealers" and,
in the singular, a "Selected Dealer") who are members in
good standing with the National Association of Securities
Dealers, Inc. to assist you as your agents in the efforts
to locate and make offers of the Shares to qualified
persons. Subject to the second paragraph of Section 1.1,
the allocation of Shares to be sold by you and the
Selected
Dealers shall be made by you. Before the Placement Agent
obtains such assistance from any Selected Dealer, the
Placement Agent will cause such Selected Dealer to
execute
an agreement pursuant to which, amount other matters,
such
Selected Dealer is appointed an agent of the Placement
Agent and not of the Company.
2. Representations and Warranties of the Company. The
Company
represents and warrants to the Placement Agent that:
2.1 Filings Under Securities Laws.
2.1.1 Pursuant to the Act. On October 13, 1998
the Company filed with the Securities and Exchange
Commission (the "Commission") a registration statement on
Form S-2 (Registration No. 333-65611), including any
related preliminary prospectus (a "Preliminary
Prospectus"), for the registration of the Shares under
the
Act. On October 22, 1998 the Company filed
Amendment No. 1 to the Registration Statement, on
November
30, 1998 the Company filed Amendment No. 2 to the
Registration Statement and on December 16, 1998 the
Company
filed Amendment No. 3 to the Registration Statement. The
Company either (i) will prepare and file, prior to the
effective date of such registration statement, an
amendment
to such registration statement, including a final
prospectus, or (ii) if the Company shall elect to rely on
Rule 430A promulgated under the Act ("Rule 430A"), will
promptly prepare and file a prospectus, in
accordance with the provisions of Rule 430A and Rule
424(b)
promulgated under the Act ("Rule 424(b)") promptly after
the effectiveness of such registration statement. Except
for information provided by the Placement Agent with
respect to the manner of the offering, such registration
statement, amendment(s) and/or prospectuses have been and
all amendments made subsequent to the date of this
agreement will be prepared by the Company in conformity
with the requirements of the Act, and the rules and
regulations of the Commission under the Act (the
"Regulations"). The registration statement, as amended,
on
file with the Commission at the time it becomes effective
(including the Final Prospectus (as defined below),
financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein
by reference and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule
430A ) is hereinafter called the "Registration
Statement,"
and the form of the Final Prospectus (including the
financial statements and all documents incorporated
therein
by reference), dated the Effective Date or
filed with the Commission pursuant to Rule 424(b), as the
case may be, is hereinafter called the "Prospectus."
2.1.2 Pursuant to the Exchange Act. The Company
has filed with the Commission such forms as may be
appropriate under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in connection with an
offering of the Shares.
2.2 No Stop or Other Orders. Neither the Commission,
nor
any state regulatory authority, has issued any order
preventing or suspending the use of any Preliminary
Prospectus or has instituted or threatened to
institute any proceedings with respect to such an
order. Each Preliminary Prospectus and any
amendment
or supplement thereto at the time of filing thereof,
conformed in all material respects to the
requirements
of the Act and the regulations promulgated
thereunder
("Regulations") and did not contain any untrue
statement of a material fact or omit to state a
material fact required to be stated therein or
necessary to make the statements therein, in light
of
the circumstances under which they were made, not
misleading.
2.3 Disclosures in Registration Statement.
2.3.1 Representation as to Contents. At the
time
the Registration Statement became effective and at all
times subsequent thereto up to the date of the closing of
the transactions contemplated hereby (the "Closing
Date"),
the Registration Statement and the Prospectus shall
contain
all material statements that are required to be stated
therein in accordance with the Act and the Regulations,
and
shall in all material respects conform to the
requirements
of the Act and the Regulations; neither the Registration
Statement nor the Prospectus, nor any amendment or
supplement thereto, on such dates, shall contain any
untrue
statement of a material fact or omit to state any
material
fact required to be stated therein or necessary to make
the
statements therein, in light of the circumstances under
which they were made, not misleading. The representation
and warranty made in this Section 2.3.1 does not apply to
statements made or statements omitted in reliance upon
and
in conformity with information furnished to the Company
by
the Placement Agent expressly for use in the Registration
Statement or Prospectus or any amendment thereof or
supplement thereto. The Company acknowledges that such
information consists solely of the information under the
heading "Plan of Distribution" in the Prospectus and the
Registration Statement.
2.3.2 Disclosure Regarding Contracts. The
description in the Registration Statement and the
Prospectus of contracts, instruments and other documents
is
accurate in all material respects. Neither the Company
nor
Image Distributing, Inc., a Nevada corporation wholly-
owned
by the Company (the "Subsidiary"), is a party to any
contracts, instruments or other documents of a character
required to be described in the Registration Statement or
the Prospectus or to be filed with the Commission as
exhibits to the Registration Statement which have not
been
so described or filed. Each material contract, material
instrument and other material document (however
characterized or described) to which the Company or the
Subsidiary is a party or by which the property or
business
of the Company or of the Subsidiary is or may be bound or
affected and which is referred to in the Prospectus, or
is
material to the business of the Company and the
Subsidiary
taken as a whole, has been duly and validly executed by
the
Company or by the Subsidiary, as the case may be, is in
full force and effect and is enforceable against the
parties thereto in accordance with its terms except as
such
enforceability may be limited by bankruptcy, insolvency
and
creditors' rights generally and except as would not
reasonably be expected to have a material adverse effect
on
the financial condition, results of operations, business
or
properties of the Company and the Subsidiary taken as a
whole. None of the Company, the Subsidiary, nor, to the
best knowledge of the Company, any other party to any
such
material contract is in default thereunder and, to the
Company's best knowledge, no event has occurred which,
with
the lapse of time or the giving of notice, or both, would
constitute a material default by the Company or the
Subsidiary, as the case may be, thereunder.
2.3.3 Prior Securities Transactions. No
securities of the Company have been sold by or for the
benefit of the Company, within one year prior to the date
hereof, except as disclosed in the Registration Statement
(including documents incorporated therein by reference)
and
except for securities issued pursuant to employee plans
or
other outstanding rights to purchase securities.
2.4 No Material Adverse Change. From the date hereof
and
through the Closing Date, except as otherwise
specifically stated in the Registration Statement
and
the Prospectus, (i) there has been no material
adverse
change in the financial condition, results of
operations, assets, properties or business of the
Company and of the Subsidiary (taken as a whole),
including, but not limited to, any material loss or
interference with its business from fire, storm,
explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or
court or governmental action, order or decree,
whether
or not arising in the ordinary course of business,
and
(ii) there have been no transactions entered into by
the Company or the Subsidiary, other than those in
the
ordinary course of business, which are material with
respect to the financial condition, results of
operations, or business of the Company and of the
Subsidiary (taken as a whole).
2.5 Independent Accountants. To the Company's
knowledge,
KPMG Peat Marwick LLP, whose report is filed with
the
Commission as part of the Registration Statement,
are
independent accountants as required by the Act and
the
Regulations.
2.6 Financial Statements. The financial statements,
including the notes thereto and supporting
schedules,
if any, included in the Registration Statement (or
incorporated therein by reference) fairly present in
all material respects the financial position, the
results of operations and cash flows of the Company
at
the dates and for the periods to which they apply;
and, except as otherwise indicated in the
Registration
Statement, such financial statements have been
prepared in conformity with United States generally
accepted accounting principles, consistently applied
throughout the periods involved (except, in the case
of interim financial statements, for ordinary year-
end
adjustments); and the supporting schedules, if any,
included in the Registration Statement (or
incorporated therein by reference) present fairly
the
information required to be stated therein. No other
financial statements or schedules are required to be
included in the Registration Statement (or to be
incorporated therein by reference).
2.7 Capitalization. The Company had, at the date or
dates
indicated in the Registration Statement and
Prospectus, duly authorized, issued and outstanding
capitalization as set forth in the Registration
Statement and the Prospectus. Based on the
assumptions
stated in the Registration Statement and the
Prospectus, except for shares of common stock sold
or
issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation
plans or pursuant to outstanding options, rights or
warrants described in the Registration Statement,
the
Company will have on the Closing Date the adjusted
stock capitalization set forth therein. Except as
set
forth in the Registration Statement and the
Prospectus
and except for those issued pursuant to employee
benefit plans, qualified stock option plans or other
employee compensation plans, on the Effective Date
there will be no options, warrants, or other rights
to
purchase or otherwise acquire any authorized but
unissued shares of Common Stock or preferred stock
or
any security convertible into shares of Common Stock
or preferred stock, or any contracts or commitments
to
issue or sell shares of Common Stock or Preferred
Stock or any such options, warrants, rights or
convertible securities.
2.8 Representations Regarding Securities.
2.8.1 Outstanding Securities. All issued and
outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-
assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and
none of such securities were issued in violation of the
preemptive rights of any holder of any security of the
Company or similar contractual rights granted by the
Company. The outstanding options and warrants, if any, to
purchase shares of Common Stock constitute the valid and
binding obligations of the Company, enforceable in
accordance with their terms. The authorized Common Stock,
the preferred stock, and any outstanding options and
warrants to purchase shares of Common Stock conform to
all
statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the
outstanding Common Stock, and any options and warrants to
purchase shares of Common Stock and the preferred stock,
were at all relevant times either registered under the
Act
and applicable state securities or Blue Sky Laws or were
exempt from such registration requirements.
2.8.2 Securities Sold Hereunder. The Shares
have
been duly authorized and, when issued and paid for, will
be
validly issued, fully paid and non-assessable and the
holders thereof are not and will not be subject to
personal
liability by reason of being such holders. Except as
described in the Registration Statement, the Shares are
not
and will not be subject to the preemptive rights of any
holders of any security of the Company or similar
contractual rights granted by the Company; and all
corporate action required to be taken for the
authorization, issuance and sale of the Shares has been
duly and validly taken.
2.9 No Registration Rights. Except as set forth in the
Registration Statement, no holder of any securities
of
the Company or of any options or warrants of the
Company exercisable for or convertible or
exchangeable
into securities of the Company has the right to
require the Company to register any such securities
of
the Company under the Act or to include any such
securities in a registration statement to be filed
by
the Company, including the Registration Statement.
2.10 Representations Regarding This Agreement. The
Company
has full corporate power and authority to enter into
this Agreement. This Agreement has been duly and
validly authorized by the Company and constitutes
the
valid and binding agreement of the Company,
enforceable against the Company in accordance with
its
terms, except (a) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or
similar laws offering creditors' rights generally,
(b)
as enforceability of any indemnification and
contribution provision may be limited under the
federal and state securities laws, and (c) that the
remedy of specific performance and injunctive and
other forms of equitable relief may be subject to
equitable defenses and to the discretion of the
court
before which any proceeding therefor may be brought.
The execution, delivery and performance by the
Company
of this Agreement, the consummation by the Company
of
the transactions herein contemplated and the
compliance by the Company with the terms and
conditions hereof have been duly authorized by all
necessary corporate action and do not and will not,
with or without the giving of notice or the lapse of
time or both, (i) result in a breach of, or conflict
with any of the terms and provisions of, or
constitute
a default under, or result in the creation,
modification, termination or imposition of any lien,
charge or encumbrance upon any property or assets of
the Company pursuant to the terms of any indenture,
mortgage, deed of trust, note, loan or credit
agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company
is
a party or by which the Company may be bound or to
which any of the property or assets of the Company
is
subject, which breach, conflict or default would
have
a material adverse effect on the condition
(financial
or other), business, or properties of the Company;
(ii) result in any violation of the provisions of
the
Articles of Incorporation or the Bylaws of the
Company; or (iii) violate any existing applicable
law,
rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign,
having jurisdiction over the Company or any of its
properties or business which would reasonably be
expected to have a material adverse effect on the
financial condition, results of operations, business
or properties of the Company.
2.11 No Improper Payments. Neither the Company, the
Subsidiary, nor any director, officer, employee,
agent
or other person associated with or acting on behalf
of
the Company or of the Subsidiary has, directly or
indirectly: used any funds of the Company or of the
Subsidiary ("Company Funds") for unlawful
contributions, gifts, entertainment or other
unlawful
expenses relating to political activity; made any
unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic
political parties or campaigns from Company Funds;
violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any
bribe,
rebate, payoff, influence payment, kickback, or
other
unlawful payment; or otherwise received or retained
any funds in violation of any law, rule, regulation
or
ordinance, or of a character required to be
disclosed
in the Prospectus.
2.12 No Defaults; Violations. Except as set forth in the
Prospectus, no default exists in the due performance
and observance by the Company or by the Subsidiary
of
any material term, covenant or condition of any
license, contract, indenture, mortgage, deed of
trust,
note, loan or credit agreement, or any other
agreement
or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which
the Company or the Subsidiary is a party or by which
the Company or the Subsidiary may be bound or to
which
any of the properties or assets of the Company or
the
Subsidiary are subject, except for those which would
not reasonably be expected to have a material
adverse
effect on the financial condition, results of
operations, business or properties of the Company
and
the Subsidiary taken as a whole. Neither the
Company
nor the Subsidiary is in violation of any term or
provision of its Articles of Incorporation or any
amendments thereto or of its Bylaws. Neither the
Company nor the Subsidiary is in violation of any
franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having
jurisdiction over the Company, the Subsidiary, or
any
of their respective properties or business, which
violation would reasonably be expected to have a
material adverse effect on the condition (financial
or
other), business or properties of the Company and
the
Subsidiary (taken as a whole).
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. Each of the Company
and the Subsidiary has all requisite corporate power and
authority, and has all necessary material authorizations,
approvals, orders, licenses, certificates and permits of
and from all governmental regulatory officials and bodies
to own or lease its properties and conduct its business
as
described in the Prospectus, and each of the Company and
the Subsidiary is and has been doing business
in compliance with all such authorizations, approvals,
orders, licenses, certificates and permits and all
federal,
state and local laws, rules and regulations, except where
the failure to so comply would not have a material
adverse
effect on the condition (financial or other), business or
properties of the Company and the Subsidiary (taken as a
whole).
2.13.2 Required Consents. Except as set forth in
the Prospectus, the Company has obtained all consents,
authorizations, approvals and orders required in
connection
with the execution and delivery of this Agreement and the
performance of its obligations hereunder, except for
those
which would not reasonably be expected to have a material
adverse effect on the financial condition, results of
operations, business or properties of the Company. No
consent, authorization or order of, and no filing with,
any
court, government agency or other body is required for
the
valid issuance, sale and delivery of the Shares pursuant
to
this Agreement and as contemplated by the Prospectus,
except those required under applicable federal and state
securities laws.
2.13.3 Subsidiaries. The Company owns all of the
outstanding capital stock of U.S. Laser Video
Distributors,
Inc. ("U.S. Laser") and Image Newco, Inc., a California
corporation ("Image/KC"). Neither U.S. Laser nor
Image/KC
conducts any material business activities or owns any
material assets, except that Image/KC is a party to that
certain Asset Purchase Agreement dated as of August 20,
1998 between Ken Crane's Magnavox City, Inc. d/b/a Ken
Crane's Home Entertainment (the "Seller") and Image/KC
pursuant to which Image/KC has agreed to acquire the
retail
LD and DVD sales business of the Seller.
2.14 Title to Property; Insurance. Except as described
in
the Registration Statement, each of the Company and
the Subsidiary has good and marketable title to, or
valid and enforceable leasehold interests in, all
items of real and personal property (tangible and
intangible) owned or leased by it, free and clear of
all liens, encumbrances, claims, security interests,
defects and restrictions of any material nature
whatsoever. Each of the Company and the Subsidiary
maintains such property, casualty and other
insurance
as is usually maintained by companies engaged in the
same business or in similar businesses.
2.15 Litigation. Except as set forth in the Registration
Statement, there is no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or
governmental proceeding pending or, to the knowledge
of the Company, threatened against, or involving the
properties or business of, the Company or of the
Subsidiary which would materially adversely affect
the
financial position or the properties or the business
of the Company and the Subsidiary taken as a whole,
or
which question the validity of the capital stock of
the Company or this Agreement or of any action taken
or to be taken by the Company pursuant to, or in
connection with, this Agreement. There are no
outstanding orders, judgments or decrees of any
court,
governmental agency or other tribunal naming the
Company or the Subsidiary and enjoining the Company
or
the Subsidiary from taking, or requiring the Company
or the Subsidiary to take, any action, or to which
the
Company or the Subsidiary or its respective
properties
or business, is bound or subject.
2.16 Organization; Good Standing. Each of the Company
and
the Subsidiary has been duly incorporated and is
validly existing as a corporation and is in good
standing under the laws of its state of
incorporation.
Each of the Company and the Subsidiary is duly
qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which
ownership or leasing of any properties or the
character of its operations requires such
qualification or licensing.
2.17 Taxes. The Company has filed all returns required
to be filed with taxing authorities prior to the
date
hereof or has duly obtained extensions of time for
the
filing thereof. The Company has paid all taxes shown
as due on such returns that were filed and has paid
all taxes imposed on or assessed against the
Company.
No issues have been raised (and are currently
pending)
by any taxing authority in connection with any of
the
returns or taxes asserted as due from the Company,
and
no waivers of statutes of limitation with respect to
the returns or collection of taxes have been given
by
or requested from the Company or any subsidiary.
2.18 Transactions Affecting Disclosure to NASD.
2.18.1 Finders' Fees. To the Company's
knowledge,
other than this Agreement, there are no claims, payments,
issuances, arrangements or understandings for services in
the nature of finders' or origination fees with respect
to
the sale of the Shares hereunder or any other
arrangements,
agreements, understandings, payments or issuances with
respect to the Company that may affect the Placement
Agent's compensation, as determined by the National
Association of Securities Dealers, Inc. (the "NASD").
2.18.2 Payments Within Twelve (12) Months. The
Company has not made any direct or indirect payments (in
cash, securities or otherwise) to (i) any person, as a
finder's fee, investing fee or otherwise, in
consideration
of such person raising capital for the Company or
introducing to the Company persons who provided capital
to
the Company, (ii) to any NASD member that is
participating
in the transactions contemplated hereby, or (iii) to any
person or entity that had any direct or indirect
affiliation with any NASD member prior to October 23,
1994,
and that is participating in the transactions
contemplated
hereby. 2.18.3 Use of Proceeds. Except a set forth in
the Registration Statement, none of the net proceeds of
the
offering will be paid by the Company to any NASD member
that is participating in the transactions contemplated
hereby or any of its affiliates.
2.18.4 Insiders' NASD Affiliation. No officer,
director or, to the Company's knowledge, holder of five
percent (5%) or more of any class of securities of the
Company has any direct or indirect affiliation or
association with any NASD member. No beneficial owner of
the Company's unregistered securities has any direct or
indirect affiliation or association with any NASD member
that is participating in the transactions contemplated
hereby.
2.19 Internal Accounting Controls. The Company
maintains a system of internal accounting control
sufficient to provide reasonable assurance that
(i)
transactions are executed in accordance with
management's general or specific authorization;
(ii) transactions are recorded as necessary to
permit preparation of financial statements in
conformity with generally accepted accounting
principles and to maintain accountability for
assets; (iii) access to assets is permitted only
in
accordance with management's general or specific
authorization; and (iv) the recorded
accountability
for assets is compared with existing assets at
reasonable intervals and appropriate action is
taken with respect to any differences.
2.20 Nasdaq NMS Listing. The Shares have been (or as
of
the Effective Date will be) approved for listing
on
the National Association of Securities Dealers
Automated Quotation National Market System
("Nasdaq
NMS").
2.21 Intangibles. Each of the Company and the
Subsidiary owns or possesses the requisite
licenses
or rights to use all trademarks, service marks,
service names, trade names, patents and patent
applications, copyrights and other rights
(collectively, the "Intangibles") owned or used
by
it, except to the extent that the lack of
ownership, license or right to use the same would
not reasonably be expected to have a material
adverse effect on the financial condition,
results
of operations, business or properties of the
Company and of the Subsidiary taken as a whole.
There is no claim or action by any person, or
proceeding pending or, to the Company's
knowledge,
threatened, and neither the Company nor the
Subsidiary has received any notice of conflict
with
the asserted rights of others, which challenges
the
right of the Company or the Subsidiary with
respect
to any Intangibles used in the conduct of the
Company's business or in the conduct of the
Subsidiary's business. To the Company's
knowledge,
the Intangibles and products, services and
processes of the Company and of the Subsidiary do
not infringe on any Intangibles held by any third
party. To the best of the Company's knowledge, no
others have infringed or are infringing upon the
Intangibles of the Company or of the Subsidiary.
2.22 Employee Matters. The Company and the Subsidiary
are in compliance with all federal, state and
local
laws and regulations respecting the employment of
its employees and employment practices, terms and
conditions of employment and wages and hours
relating thereto, except to the extent that the
failure to so comply would not reasonably be
expected to have a material adverse effect on the
financial condition, results of operations,
business or properties of the Company or of the
Subsidiary. There are no pending investigations
involving the Company or of the Subsidiary by the
U.S. Department of Labor or any other
governmental
agency responsible for the enforcement of such
federal, state or local laws and regulations.
There
is no unfair labor practice charge or complaint
against the Company or the Subsidiary pending
before the National Labor Relations Board or any
strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or
involving
the Company or the Subsidiary or any predecessor
entity, and none has ever occurred. No issue
concerning representation exists respecting the
employees of the Company or of the Subsidiary and
no collective bargaining agreement or
modification
thereof is currently being negotiated by the
Company or the Subsidiary. No grievance or
arbitration proceeding is pending or threatened
under any expired or existing collective
bargaining
agreement of the Company or of the Subsidiary, if
any.
2.23 Investment Company Representations. The Company
is
not an "investment company" or an "affiliated
person" of, or "promoter" or "principal
underwriter" for, an "investment company," as
such
terms are defined in the Investment Company Act
of
1940, as amended.
2.24 No Stabilization or Manipulation. Neither the
Company, the Subsidiary, nor any of their
respective officers, directors or controlling
persons, has taken, directly or indirectly, any
action designed, or which reasonably might be
expected, to cause or result, under the Act or
otherwise, in, or that has constituted,
stabilization or manipulation of the price of any
security of the Company or to facilitate the sale
or
resale of the Shares.
2.25 Absence of Certain Proceedings. Neither the
Company
nor any of the officers or directors of the
Company:
(i) Has filed a registration statement which is
the subject of any pending proceeding or examination under
Section 8
of the Act or is the subject of any refusal order or stop
order
thereunder within five years prior to the date of this
Agreement;
(ii) Is subject to any pending proceeding under Rule a
261
or any similar rule adopted under Section 3(b) of the Act or
to
an order entered thereunder within five years prior to the
date
of this Agreement;
(iii) Has been convicted within five years prior to the
date of this Agreement of any felony or misdemeanor in
connection with the purchase or sale of any security or
involving the making of any false filing with the Commission;
(iv) Is subject to any order, judgment or decree of any
court of competent jurisdiction temporarily or preliminary
restraining or enjoining, or is subject to any order, judgment
or decree or any court of competent jurisdiction entered
within
five years prior to the date of this Agreement permanently
restraining or enjoining such person from engaging in or
continuing any conduct or practice in connection with the
purchase or sale of any security or involving the making of
any
false filing with the Commission;
(v) Is subject to a United States Postal Service false
representation order entered under Section 3005 of Title 39,
United States Code, within five years prior to the date of
this
Agreement or is subject to a temporary restraining order or
preliminary injunction entered under Section 3007 of Title 391
United States Code, with respect to conduct alleged to have
violated Section 3005 of Title 391 United States Code;
(vi) Is subject to an order of the Commission entered pursuant
to Section 15(b), 15B(a) or 15B(c) of the Exchange Act or is
subject to any order of the Commission entered pursuant to
Section 203(3) or (f) of the Investment Advisers Act of 1940;
(vii) Is suspended or expelled from membership in or
suspended or barred from association with a member of an
exchange registered as a national securities exchange pursuant
to Section 6 of the Exchange Act, an association registered as
a
national securities association under Section 15A of the
Exchange Act, or a Canadian securities exchange or
association
for any act or omission to act constituting conduct
inconsistent
with just and equitable principles of trade; or
(viii) Is currently the subject of a Formal Order of
Investigation issued by the Commission.
3. Covenants of the Company. The Company covenants and
agrees with the Placement Agent as follows:
3.1 Amendments to Registration Statement. The
Company
shall deliver to the Placement Agent, prior to filing, any
amendment
or supplement to the Registration Statement or Prospectus
proposed
to be filed after the Effective Date and shall not file any
such
amendment or supplement to which the Placement Agent shall
reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a
Prospectus is required to be delivered under the Act, the
Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, the Regulations and
the
Exchange Act and by the regulations under the Exchange Act, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Shares in
accordance
with the provisions hereof and the Prospectus. If at any time
when a Prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or
counsel for the Placement Agent, the Prospectus, as then
amended or supplemented, includes any untrue statement of a
material fact or omits to state any material fact required to
be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company shall notify
the
Placement Agent promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate
amendment or supplement in accordance with Section 10 of the
Act.
3.2.2 Filing of Prospectus. The Company shall
file the Prospectus (in form and substance reasonably
satisfactory to the Placement Agent) with the Commission
pursuant to the requirements of Rule 424 of the Regulations.
3.3 Blue Sky Filings. The Company shall endeavor in
good
faith, in cooperation with the Placement Agent and counsel to
the Placement Agent, at or prior to the time the Registration
Statement becomes effective, to qualify the Shares for
offering
and sale under the securities laws of such jurisdictions as
the
Placement Agent may reasonably designate, provided that no
such
qualification shall be required in any jurisdiction where, as
a
result thereof, the Company would be subject to service of
general process or would be required to qualify to do business
as a foreign corporation. In each jurisdiction where such
qualification shall be effected, the Company shall, unless the
Placement Agent agrees that such action is not at the time
necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may be
required by the laws of such jurisdiction.
3.4 Delivery of Filings to Placement Agent. The Company
shall deliver to the Placement Agent, without charge, from
time
to time during the period when the Prospectus is required to
be
delivered under the Act, such number of copies of each
Preliminary Prospectus and the Prospectus as the Placement
Agent
may reasonably request and, immediately after the Registration
Statement or any amendment or supplement thereto is filed,
deliver to the Placement Agent five (5) original executed
Registration Statements, or conformed copies thereof,
including
exhibits, and all post-effective amendments thereto and copies
of documents filed therewith and all original executed
consents
of certified experts.
3.5 Effectiveness and Events Requiring Notice to the
Placement Agent. The Company shall cause the Registration
Statement to remain effective and shall notify the Placement
Agent immediately and shall promptly confirm the notice in
writing of (i) the effectiveness of the Registration Statement
and any amendment thereto, (ii) the issuance by the Commission
of any stop order or of the initiation, or the threatening,
of
any proceeding for that purpose, (iii) the issuance by any
state
securities commission of any proceedings for the suspension of
the qualification of the Shares for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) the mailing and delivery to
the Commission for filing of any amendment or supplement to
the
Registration Statement or Prospectus, (v) the receipt of any
comments or request for any additional information from the
Commission, and (vi) the happening of any event during the
period described in Section 3.4 hereof that makes any
statement
of a material fact made in the Registration Statement or the
Prospectus untrue or that requires the making of any changes
in
the Registration Statement or the Prospectus in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading. If the Commission or any
state securities commission shall enter a stop order or
suspend
such qualification at any time, the Company shall make every
reasonable effort to obtain promptly the lifting of such
order.
3.6 Compensation of Placement Agent. Funds from the sale of
Shares will be forwarded or caused to be forwarded directly
to
the Company on the Closing Date. The Company shall pay you
eight percent (8%) of the gross proceeds from the sale of
Shares; provided, however, that with respect to any Shares
sold
by the Company to Image Investors Co. or its affiliates (as
contemplated by Section 1.1), the Company shall pay you four
percent (4%) of the gross proceeds from the sale of such
Shares. The Company shall remit your compensation, including
the expenses referenced in Section 3.7.2 below, on the Closing
Date.
3.7 Payment of Expenses.
3.7.1 General Expenses. The Company shall bear
and pay all expenses incident to the performance of the
obligations of the Company under this Agreement, including,
but
not limited to, (i) the preparation, printing, filing and
mailing (including the payment of postage with respect to such
mailing) of the Registration Statement, the Preliminary
Prospectuses and the Prospectus and the printing and mailing
of
this Agreement and related documents, including the cost of
all
copies thereof and any amendments or supplements thereto
supplied to the Placement Agent in quantities as reasonably
may
be required by the Placement Agent, (ii) the printing,
engraving, issuance and delivery of the Shares, including any
transfer taxes and other taxes payable thereon, (iii) to the
extent applicable, the qualification of the Shares under state
or foreign securities or Blue Sky laws, including the costs of
printing and mailing the "Preliminary Blue Sky Registration
Statement," and all amendments and supplements thereto, fees
and disbursements for the Placement Agent's counsel and fees
and
disbursements of local counsel, if any, retained for such
purpose, (iv) filing fees incurred in registering the offering
with the NASD, (v) fees and disbursements of the transfer
agent,
(vi) any listing of the Shares on NASDAQ NMS, and (vii) all
other costs and expenses incident to the performance of its
obligations hereunder that are not otherwise specifically
provided for in this Section 3.7.1. The Placement Agent may
deduct or cause to be deducted from the net proceeds of the
offering payable to the Company, the expenses set forth herein
to be paid by the Company if not paid by the Company. If this
Agreement shall not be carried out for any reason whatsoever,
the Company shall remain liable for all of its actual out-of-
pocket expenses pursuant to this Section 3.7.1.
3.7.2 Placement Agent's Expenses. The Company further
agrees that, in addition to the expenses payable pursuant to
Section 3.7.1, upon the sale of the Shares, it shall pay to
the
Placement Agent, as a nonaccountable expense allowance, an
amount equal to two percent (2%) of the gross proceeds payable
to the Company from the sale of the Shares by certified or
cashier's check or, at the election of the Company, by
deduction
from the proceeds of the offering contemplated hereby. If the
offering contemplated by this Agreement is not consummated for
any reason, the Company shall be liable for the reasonable
actual documented out-ofpocket expenses of the Placement
Agent,
including fees and costs billed by counsel to the Placement
Agent.
3.8 Application of Net Proceeds. The Company shall
apply
the net proceeds from the offering received by it in a manner
consistent with the application described under the caption
"Use
of Proceeds" in the Prospectus and shall file such reports, if
any, with the Commission with respect to the sale of the
Shares
and the application of the proceeds therefrom as may be
required
pursuant to Rule 463 under the Act.
3.9 Press Releases. After the date hereof, except with
respect to press releases issued by the Company in the
ordinary
course of business relating to new LD or DVD releases, the
Company shall not issue a press release or engage in any other
publicity until twenty-five (25) days after the Effective
Date,
without the Placement Agent's prior written consent, which
consent shall not be unreasonably withheld.
4. Representations and Warranties and Covenants of the
Placement Agent. You represent and warrant to the Company and
agree that:
4.1 This Agreement has been duly authorized, executed
and
delivered by you and is a valid and binding agreement on your
part in accordance with its terms.
4.2 The consummation of the transactions contemplated
herein and those contemplated by the Registration Statement
will
not result in any breach of any of the terms or conditions of
or
constitute a default under any agreement or instrument to
which
you are a party, or by which you are bound, or any existing
law,
rule, regulation or existing order, writ injunction or decree
of
any government, governmental instrumentality, agency or body,
arbitration tribunal or court, domestic or foreign, directed
to
you and over which such body has jurisdiction.
4.3 You are a broker-dealer duly registered pursuant to
the provisions of the Exchange Act and are a member in good
standing of the NASD and you are duly licensed as a broker-
dealer under the applicable statutes and regulations of each
state in which you propose to and do offer or sell the
Shares.
You agree to maintain all of the foregoing registrations in
good
standing throughout the term of the offer and sale of the
Shares and you agree to comply with all statutes and other
requirements applicable to you as a broker-dealer pursuant to
those requirements or in respect of your activities in
connection with the offer or sale of the Shares.
4.4 Pursuant to your appointment:
(i) You will use your best efforts to sell the Shares
but will limit your offering of the Shares to persons whom
you have
reasonable grounds to believe and do believe are "accredited
investors," as such term is defined in Regulation D.
(ii) You will provide each offeree with a complete copy
of the Prospectus and all amendments and supplement(s) thereto
during the course of the offering and prior to sale and you
will
not deliver, and have not delivered, any Prospectus,
Registration Statement or Preliminary Prospectus without
delivering all items required to be delivered therewith in
accordance with the Act, as described under the caption
"Incorporation of Certain Information by Reference;
Deliveries"
in the Registration Statement.
(iii) In the event you utilize any sales materials,
reports or other analyses other than the Prospectus, you will
refrain from providing any such materials to any offeree of
the
Shares unless such specific materials are approved in advance
and in writing by the Company and Prospectus are also
delivered
to a purchaser before such purchaser acquires any Shares.
(iv) Until the termination of this Agreement, if any event
affecting the Company or you shall occur which, in the opinion
of the Company's counsel, should be set forth in a supplement
or
amendment to the Prospectus, you agree to distribute such
supplement or amendment to all persons who have previously
received a copy of the Prospectus from you and further agree
to
include such supplement or amendment in all further deliveries
of the Prospectus. The Company will at its own expense prepare
and furnish to you a reasonable number of copies of that
supplement or amendment for such distribution.
(v) You will promptly notify the Company in writing: (A)
when any event shall have occurred as a result of which any of
your representations or warranties herein would not be true
and
(B) of the receipt of any notification with respect to the
modification, rescission, withdrawal or suspension of the
qualification or registration of the Shares, or of an
exemption
from such registration or qualification, in any jurisdiction.
4.5 All of the information relating to you in the
Prospectus, or any amendment or supplement thereto, is true
and
correct, and there is no material information available to you
which should be included in the Prospectus in order to comply
with applicable securities laws that is not so included. With
respect only to information contained in the Prospectus
supplied
by you (including, without limitation, the information
contained
under the caption "Plan of Distribution"), the Prospectus, on
the date of issuance, will be accurate in all material
respects
and will not contain any untrue statement of a material fact
or
omit to state any material fact necessary in order to make the
statements contained therein supplied by you, in light of the
circumstances existing at such dates, not misleading, and the
Prospectus will include all material information required to
be
included under applicable securities laws.
4.6 You will not offer the Shares for sale in any state
until the Company's counsel has advised you that the Shares
may
be offered for sale in such state(s). Upon being so advised,
you
shall offer the Shares for sale in any such state only in such
a
manner as shall be exempt from registration or qualification
with the applicable governmental authority of such state.
4.7 Neither you nor any of your officers, directors or
controlling persons, has taken, directly or indirectly, any
action designed, or which reasonably might be expected, to
cause
or result, under the Act or otherwise, in, or that has
constituted, stabilization or manipulation of the price of any
security of the Company or to facilitate the sale or resale of
the Shares.
5. Conditions of the Placement Agent's Efforts. The efforts
of the Placement Agent to sell the Shares on behalf of the
Company, as provided herein, shall be subject to the
continuing
accuracy of the representations and warranties of the Company
as
of the date hereof, to the accuracy of the statements of
officers of the Company made pursuant to the provisions hereof
and to the performance by the Company of its obligations
hereunder and to the following conditions:
5.1 Regulatory Matters.
5.1.1 Effectiveness of Registration Statement. The
Registration Statement shall have become effective not later
than 5:00 P.M., Los Angeles time, on January 15, 1998, or such
later date and time as shall be consented to in writing by
you,
and, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no
proceedings
for the purpose shall have been instituted or shall be pending
or contemplated by the Commission and any request on the part
of
the Commission for additional information shall have been
complied with to the reasonable satisfaction of Resch Polster
Alpert & Berger LLP, counsel to the Placement Agent.
5.1.2 NASD Clearance. On or before the
Effective Date, the Placement Agent shall have received
clearance from the Corporate Financing Department of the NASD
as to the amount of compensation allowable or payable to the
Placement Agent as described in the Registration Statement.
5.1.3 No Blue Sky Stop Orders. No order
suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 3.3 hereof shall have
been issued and no proceedings for that purpose shall have
been instituted or shall be Contemplated.
5.2 Company Counsel Matters.
5.2.1 Opinion of Counsel. On the Closing Date,
the Placement Agent shall have received the favorable opinion
of Cheryl L. Lee, general counsel of the Company, dated the
Effective Date and the Closing Date, respectively, addressed
to the Placement Agent and in form and substance reasonably
satisfactory to Resch Polster Alpert & Berger LLP, counsel to
the Placement Agent, to the effect that, subject to certain
assumptions, qualifications and exceptions:
(i) Each of the Company and the Subsidiary has been
duly
organized and is validly existing as a corporation and is in
good standing under the laws of its state of incorporation.
Each of the Company and the Subsidiary is duly qualified and
licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such
qualification or licensing (except where the failure to be so
qualified or licensed would not have a material adverse effect
on the Company and the Subsidiary taken as a whole).
(ii) To such counsel's knowledge, each of the Company and
the Subsidiary has all requisite corporate power and
authority,
and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all
governmental
or regulatory officials and bodies to own or lease its
properties and to conduct its business as described in the
Prospectus, and the Company is, to such counsel's knowledge,
in
compliance with all such authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and
local laws, rules and regulations. Each of the Company and
the
Subsidiary has all requisite corporate power and authority to
enter into this Agreement and to carry out the terms and
conditions hereof. No consents, approvals, authorizations or
orders of, and no known filing with any court or governmental
agency or body (other than such as may be required under the
Act
and applicable Blue Sky laws), is required for the valid
authorization, issuance, sale and delivery of the Shares, and
the consummation of the transactions and agreements
contemplated
by this Agreement and as contemplated by the Prospectus or, if
required, all such authorizations, approvals, consents,
orders,
registrations, licenses and permits have been duly obtained
and
are in full force and effect and have been disclosed to the
Placement Agent.
(iii) The outstanding securities of the
Company have been duly authorized by all necessary corporate
action and are validly issued, fully paid and non-assessable.
The outstanding options, warrants and rights to purchase
shares
of Common Stock have been duly authorized by all necessary
corporate action on the part of the Company and have been
validly issued by the Company. To such counsel's knowledge,
the
authorized and outstanding capital stock of the Company set
forth within the Registration Statement are correct.
(iv) The Shares have been duly authorized and when issued
and delivered in accordance herewith will be, validly issued,
fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being
such holders. The Shares are not and will not be subject to
the
preemptive rights of any holders of any security of the
Company
or, to the best of such counsel's knowledge after due inquiry,
similar contractual rights granted by the Company. All
corporate
action required to be taken by the Company for the
authorization, issuance and sale of the Shares has been duly
and validly taken. (v) Except as set forth in the Prospectus,
no holder of any securities of the Company or of any options,
warrants or securities of the Company exercisable for or
convertible or exchangeable into securities of the Company has
the right to require the Company to register any such
securities
of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company,
including the Registration Statement.
(vi) The Shares have been approved for listing on Nasdaq
NMS.
(vii) The Company's execution and delivery of, and
performance of its obligations on or prior to the date of this
opinion under, the Agreement, and the Company's issuance of
the
Shares, do not (a) violate the Company's Articles or Bylaws,
(b)
violate, breach or result in a default under any existing
obligation of or restriction on the Company under any other
agreement listed as an exhibit to the Registration Statement
(the "Other Agreements") or (c) to my knowledge, breach or
otherwise violate any existing obligation of or restriction on
the Company under any order, judgment or decree of any
California or federal court or governmental authority binding
on
the Company provided that counsel need express no opinion as
to
the effect of the Company's performance of its obligations in
the Agreement on the Company's compliance with financial
covenants in the Other Agreements.
(viii) The Shares and all other securities issued or
issuable by the Company conform in all material respects to
the
description thereof contained in the Registration Statement
and
the Prospectus. Statements in the Prospectus (other than those
supplied by the Placement Agent and set forth under the
caption
"Plan of Distribution"), insofar as they refer to statements
of
law, descriptions of statutes, licenses, rules or regulations
have been reviewed by such counsel and are correct in all
material respects. No statute or regulation or legal or
governmental proceeding required to be described in the
Prospectus is not described as required, nor are any
contracts,
instruments or other documents known to such counsel, after
due
inquiry, of a character required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement not so described or
filed
as required.
(ix) Such counsel has participated in conferences with
officers and other representatives of the Company,
representatives of the independent public accountants for the
Company, Placement Agent at which the contents of the
Registration Statement and Prospectus and related matters were
discussed and, although such counsel is not passing upon and
does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as otherwise
expressly set forth in her opinion), on the basis of the
foregoing (relying as to the factual matters upon the
statements
of officers and other representatives of the Company and state
officials) no facts have come to the attention of such counsel
that caused her to believe that the Registration Statement
(other than the financial statements and notes thereto and
other
financial, numerical, statistical and accounting data included
therein, or omitted therefrom, as to which no opinion is
requested or need be rendered) as amended or supplemented, at
the time such Registration Statement became effective,
contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading (other than
information omitted therefrom in reliance on Rule 430A under
the
Act), or the Prospectus (other than the financial statements
and
notes thereto and other financial, numerical, statistical and
accounting data included therein, or omitted therefrom, as to
which no opinion is requested or need be rendered) as amended
or
supplemented, as of its date and the date of this Agreement,
contained an untrue statement of material fact or omitted to
state a material fact necessary in order to make the
statements
therein, in light of the circumstances under which they were
made, not misleading.
(x) The Registration Statement is effective under the
Act and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or, to such counsel's
knowledge, are pending or threatened under the Act or
applicable state securities laws. (xi) To such counsel's
knowledge, except as described in the Prospectus, no material
default exists in the due performance and observance of any
term, covenant or condition of any material license, contract,
indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other material agreement, instrument or
other document evidencing an obligation for borrowed money, or
any other material agreement, instrument or other document to
which the Company is a party or by which the Company may be
bound or to which any of the properties or assets of the
Company is subject. The Company is not in violation of any
term or provision of its Articles of Incorporation, including
any amendments thereto, or Bylaws, or, to such counsel's
knowledge, any material franchise, license, permit, applicable
law, rule, regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over
the Company or any of its properties or business, except as
described in the Prospectus.
(xii) To such counsel's knowledge after due inquiry,
except as described in the Registration Statement, the Company
does not own any interest in any corporation, partnership,
joint venture, trust or other business entity.
(xiii) To counsel's knowledge after due inquiry,
except as set forth in the Prospectus, there is no action,
suit or proceeding before or by any court of governmental
agency or body, domestic or foreign, now pending, or
threatened against the Company, which would have a material
adverse effect on the Company.
(xiv) To the knowledge of such counsel, since the
effective date of the Registration Statement, no event has
occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus
which has not been set forth in such an amendment or
supplement.
5.2.2 Closing Date Opinion of Outside Counsel. On
the Closing Date, the Placement Agent shall have received the
favorable opinion of O'Melveny & Myers LLP, outside counsel to
the Company, and dated the Closing Date, addressed to the
Placement Agent and in form and substance reasonably
satisfactory to Resch Polster Alpert & Berger LLP, counsel to
Placement Agent, to the effect that subject to certain
assumptions, qualifications and exceptions:
(i) The Company has been duly incorporated, and is
validly existing in good standing under the laws of the State
of California, with corporate power to own its properties and
assets, to carry on its business as described in the
Prospectus, to enter into the Agreement and to perform its
obligations under the Agreement.
(ii) The authorized capital stock of the Company consists
of 25,000,000 shares of Common Stock and 3,365,385 shares of
Preferred Stock.
(iii) The Shares have been duly authorized by all
necessary corporate action on the part of the Company and,
upon payment for
and delivery of the Shares in accordance with the Agreement
and the countersigning of the certificate or certificates
representing the Shares by a duly authorized signatory of the
registrar for the Company's Common Stock, the Shares will be
validly issued, fully paid, and non-assessable.
(iv) No personal liability for the debts of the Company
will be imposed on any holders of the Shares under the laws of
the State
of California solely as a result of the ownership of the
Shares.
(v) Holders of the outstanding shares of Common Stock of
the Company are not entitled to any preemptive right to
subscribe to
any additional shares of the Company's capital stock pursuant
to
the Company's Restated Articles or Bylaws.
(vi) The execution, delivery and performance of the
Agreement have been duly authorized by all necessary corporate
action on the part of the Company, and the Agreement has been
duly executed and delivered by the Company.
(vii) The Company's execution and delivery of, and
performance of its obligations on or prior tot he date of this
opinion under, the Agreement, and the Company's issuance of
the Shares, do not violate the Company's Restated Articles or
the Bylaws.
(viii) No order, consent, permit or approval of any
California or federal governmental authority that such counsel
has, in the exercise of customary professional diligence,
recognized as applicable to the Company or to transactions of
the type contemplated by the Agreement is required on the part
of the Company for the execution and delivery of the Agreement
or for the issuance and sale of the Shares, except such as
have been obtained under the Act and such as may be required
under applicable Blue Sky or state securities laws.
(ix) The Registration Statement, on the date it was
filed, appeared on its face to comply in all material respects
with the requirements as to form for registration statements
on Form S-2 under the Act and the related rules and
regulations in effect at
the date of filing, except that we express no opinion
concerning (a) the financial statements and other financial
information contained or incorporated by reference therein or
(b) the information provided by you included under the caption
"Plan of Distribution."
(x) The statements in the Prospectus under the caption
"Description of Capital Stock," insofar as they summarize
provisions of the Company's Restated Articles and Bylaws,
fairly present the information required by Form S-2.
(xi) The Registration Statement has been declared
effective under the Act and, to such counsel's knowledge, no
stop order
suspending the effectiveness of the registration Statement has
been issued or threatened by the Commission.
(xii) The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as
amended.
(xiii) The execution, delivery and performance of the
Acquisition Agreement have been duly authorized by all
necessary corporate action on the part of Image/KC, and the
Acquisition Agreement has been duly executed and delivered by
Image/KC.
(xiv) The Acquisition Agreement constitutes the
legally valid and binding obligation of Image/KC, enforceable
against Image/KC
in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium, or similar
laws relating to or affecting creditors' rights generally
(including, without limitation, fraudulent conveyance laws)
and by general principles of equity, including, without
limitation, concepts of materiality, reasonableness, good
faith, and fair dealing and the possible unavailability of
specific performance or injunctive relief, regardless of
whether considered in a proceeding in equity or at law.
(xv) Image/KC's execution and delivery of, and
performance of its obligations on or prior to the date of this
opinion under, the
Acquisition Agreement do not violate Image/KC's Articles of
Incorporation or Bylaws.
5.2.3 Reliance. In rendering such opinions, such
counsel may rely (i) as to matters involving the application
of laws other than the laws of the United States, the laws of
the state of California and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Placement
Agent' counsel) of other counsel reasonably acceptable to
Placement Agent's counsel, familiar with the applicable laws,
and (ii) as to matters of fact, to the extent they deem
proper, (A) on certificates or other written statements of
responsible officers of the Company and (B) on certificates or
other written statements of officers of departments of various
jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be
delivered to Placement Agent's counsel. Opinions of each
counsel shall include a statement to the effect that they may
be relied upon by counsel for the Placement Agent. Such
opinion may assume the due authorization, execution and
delivery of all documentation referred to therein by the
parties thereto other than the Company.
5.3 Cold Comfort Letter. At the Effective Date and at
the Closing Date, you shall have received a letter, addressed
to the Placement Agent and in form and substance reasonably
satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in
clause (iii) below) to you of KPMG Peat Marwick LLP dated,
respectively, as of the date of this Agreement and as of the
Closing Date:
(i) Confirming that they are independent accountants
with respect to the Company within the meaning of the Act and
the applicable Regulations;
(ii) Stating that in their opinion the financial
statements of the Company included in the Registration
Statement and Prospectus (or incorporated by reference
therein) comply as to form in all material respects with the
applicable accounting requirements of the Act and the
Regulations;
(iii) Stating that, on the basis of a limited review
which included a reading of the latest available unaudited
interim financial statements of the Company (with an
indication of the date of such unaudited financial
statements), a reading of the latest available minutes of the
stockholders and Board of Directors of the Company and the
various committees of the Board of Directors of the Company,
consultations with officers and other employees of the Company
responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (a) the
unaudited financial statements of the Company included in the
Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the Regulations or are not fairly presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements of the Company included in the
Registration Statement, (b) at a date not later than five (5)
days prior to the Effective Date and Closing Date (or other
date as may be agreed upon between them and the Placement
Agent) as the case may be, there was any change in the capital
stock or long-term debt of the Company, or any decrease in the
stockholders' equity of the Company as compared with amounts
shown in the most recent balance sheet included in the
Registration Statement (or incorporated by reference therein),
other than as set forth in or contemplated by the Registration
Statement, or, if there was any decrease, setting forth the
amount of such decrease, and (c) during the period from
October 1, 1998 to a specified date not later than five (5)
days prior to the Effective Date or Closing Date, if any, as
the case may be, there was any decrease in revenues, net
earnings or net earnings per share of Common Stock, in each
case as compared with the corresponding period in the
preceding year, other than as set forth in or contemplated by
the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
(iv) Stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings and other financial information pertaining to the
Company set forth in the Prospectus in each case to the extent
that such amounts, numbers, percentages and information may be
derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring
an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and
other appropriate procedures (which procedures do not
constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found
them to be in agreement; and
(v) Statements as to such other matters incident to the
transactions contemplated hereby as you may reasonably
request.
5.4 Certificates.
5.4.1 Officers' Certificates. At the Closing
Date, the Placement Agent shall have received a certificate of
the Company signed by each of the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Closing
Date, to the effect that the Company has performed in all
material respects all covenants and complied in all material
respects with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of
the Closing Date, and that the conditions set forth in Section
5.5 hereof have been satisfied as of such date and that, as of
the Closing Date, the representations and warranties of the
Company set forth in Section 2 hereof are true and correct in
all material respects. In addition, the Placement Agent shall
have received such other and further certificates of officers
of the Company as the Placement Agent may reasonably request.
5.4.2 Secretary's Certificate. At the Closing
Date, the Placement Agent shall have received a certificate of
the Company signed by the Secretary of the Company, dated the
Closing Date, certifying (i) that the Articles of
Incorporation, as amended, and Bylaws, as amended, of the
Company are true and complete, have not been modified and are
in full force and effect, (ii) that the resolutions relating
to the offering contemplated by this Agreement and the
transactions contemplated hereby are in full force and effect
and have not been modified, (iii) all correspondence between
the Company or its counsel and the Commission, (iv) all
correspondence between the Company or its counsel and Nasdaq
and (v) as to the incumbency of the officers of the Company.
The documents referred to in such certificate shall be
attached to such certificate.
5.5 No Material Changes. Prior to and on the Closing
Date, (i) there shall have been no material adverse change in
the financial condition or the business of the Company from
the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus, (ii) there shall
have been no transaction, not in the ordinary course of
business, entered into by the Company from the latest date as
of which the financial condition of the Company is set forth
in the Registration Statement and the Prospectus which has
been materially adverse to the Company, (iii) the Company
shall not be in default under any provision of any instrument
relating to any outstanding indebtedness which default would
have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been
pledged or mortgaged, except as described in the Registration
Statement, (v) no action, suit or proceeding, at law or in
equity, shall be pending or threatened against the Company or
affecting any of its property or business before or by any
court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling
or finding may materially adversely affect the business,
operations, or financial condition of the Company, except as
set forth in the Registration Statement or Prospectus, (vi) no
stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or threatened
by the Commission, and (vii) the Registration Statement and
the Prospectus and any amendments or supplements thereto shall
contain all material statements that are required to be stated
therein in accordance with the Act and the Regulations and
shall conform in all material respects to the requirements of
the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact
or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading.
5.6 Opinion of Counsel for the Placement Agent. All
proceedings taken in connection with the authorization,
issuance or sale of the Shares as herein contemplated shall be
reasonably satisfactory in form and substance to you and to
counsel to the Placement Agent, and you shall have received
from such counsel a favorable opinion, dated the Closing Date
with respect to such of these proceedings as you may
reasonably require. On or prior to the Closing Date, counsel
for the Placement Agent shall have been furnished with such
documents, certificates and opinions as they may reasonably
require for the purpose of enabling them to review or pass
upon the matters referred to in this Section 5.6, or in order
to evidence the accuracy, completeness or satisfaction of any
of the representations, warranties or conditions herein
contained.
6. Indemnification.
6.1 Indemnification of the Placement Agent.
6.1.1 General. Subject to the conditions set
forth below, the Company agrees to indemnify and hold harmless
the Placement Agent, its directors, officers and employees and
each person, if any, who controls the Placement Agent (a
"controlling person") within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever (subject
to the Company's right to assume the defense as set forth in
Section 6.1.2, including but not limited to any and all legal
or other expenses reasonably incurred in investigating,
preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) to which they or any of
them may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws
of foreign countries, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact
contained in (i) the Registration Statement, any Preliminary
Prospectus or the Prospectus (as from time to time each may be
amended or supplemented); (ii) in any post-effective amendment
or amendments or any new registration statement and prospectus
in which the Shares are included; or (iii) any application or
other document or written communication (in this Section 6
collectively called "application") executed by the Company or
based upon written information furnished by the Company in any
jurisdiction in order to qualify the Shares under the
securities laws thereof or filed with the Commission, any
state securities commission or agency, or Nasdaq NMS; or the
omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading, unless such statement or
omission was made in reliance upon and in conformity with
written information furnished to the Company with respect to
the Placement Agent by or on behalf of the Placement Agent
expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, or in any application, as the case may be.
The Company agrees promptly to notify the Placement Agent of
the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling
persons in connection with the issue and sale of the Shares or
in connection with the Registration Statement or the
Prospectus.
6.1.2 Procedure. If any action is brought against
the Placement Agent or controlling person in respect of which
indemnity may be sought against the Company pursuant to
Section 6.1.1, the Placement Agent shall promptly notify the
Company in writing of the institution of such action, (but the
failure or delay to so notify the Company shall not relieve it
from any liability it may have hereunder, except to the extent
that such failure or delay results in the forfeiture by the
Company of rights or defenses or any other loss to the
Company) and the Company shall have the right to assume the
defense of such action, including the employment and fees of
counsel (which counsel shall be reasonably satisfactory to the
Placement Agent) and payment of actual expenses incurred in
connection therewith. The Placement Agent or controlling
person shall have the right to employ its or their own counsel
in any such case, but the fees and expenses of such counsel
shall be at the expense of the Placement Agent or such
controlling person unless (i) the employment of such counsel
shall have been authorized in writing by the Company in
connection with the defense of such action, (ii) the Company
shall not have employed counsel to have charge of the defense
of such action, or (iii) counsel for such indemnified party or
parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or
in addition to those available to the Company and which are
not being pursued by the Company (in which case the Company
shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of
which events the fees and expenses of not more than one
additional firm of attorneys selected by the Placement Agent
and/or controlling person shall be borne by the Company;
provided that the person seeking indemnity shall provide the
Company with reasonably prompt notice in writing if separate
counsel is employed for the reasons set forth in clauses (ii)
or (iii) above.
Notwithstanding anything to the contrary contained herein, if
the Placement Agent or controlling person shall assume the
defense of such action as provided above, the Company shall
have the right to approve the terms of any settlement of such
action which approval shall not be unreasonably withheld.
6.2 Indemnification of the Company. The Placement Agent
agrees to indemnify and hold harmless the Company against any
and all loss, liability, claim, damage and expense described
in the foregoing indemnity from the Company to the Placement
Agent, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions
directly relating to the transactions effected by the
Placement Agent in connection with this offering made in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto or in any
application in reliance upon, and in strict conformity with,
written information furnished to the Company by the Placement
Agent (including the information contained in the Prospectus
under the caption "Plan of Distribution") expressly for use in
such Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto or in any
such application. In case any action shall be brought against
the Company, based on any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or
supplement thereto or any application, and in respect of which
indemnity may be sought against the Placement Agent, the
Placement Agent shall have the rights and duties given to the
Company and the Company shall have the rights and duties given
to the Placement Agent by the provisions of Section 6.1.2.
Notwithstanding anything in this Agreement to the contrary,
the maximum liability of the Placement Agent for
indemnification or contribution under this Agreement shall not
exceed the amount of commissions received by the Placement
Agent at Closing.
6.3 Contribution. In order to provide for just and
equitable contribution under the Act in any case in which (i)
any person entitled to indemnification under this Section 6
makes claim for indemnification pursuant hereto but it is
judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 6 provides for
indemnification in such case, or (ii) contribution under the
Act, the Exchange Act or otherwise may be required on the part
of any such person in circumstances for which indemnification
is provided under this Section 6, then, and in each such case,
each applicable indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses,
liabilities, claims, damages and expenses of the nature
contemplated by said indemnity agreement (i) in such
proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Placement
Agent on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the
Company on the one hand and the Placement Agent on the other
hand; provided, however, that, no person guilty of a
fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this
paragraph 6.3, the Placement Agent shall not be required to
contribute in the aggregate any amount in excess of the
limitation set forth in the last sentence of paragraph 6.2.
For purposes of this Section 6, each respective director,
officer and employee of the Placement Agent, and each
respective person, if any, who controls the Placement Agent
within the meaning of Section 15 of the Act shall have the
same rights to contribution as the Placement Agent.
7. Representations and Agreements to Survive Delivery.
Except as the context otherwise requires, all representations,
warranties and agreements contained in this Agreement shall be
deemed to be representations, warranties and agreements at the
Closing Date, and such representations, warranties and
agreements of the Placement Agent and the Company, including
the indemnity agreements contained in Section 6 hereof, shall
remain operative and in full force and effect regardless of
any investigation made by or on behalf of the Placement Agent,
the Company or any controlling person, and shall survive
termination of this Agreement or the issuance and delivery of
the Shares.
8. Effective Date of This Agreement and Termination Hereof.
8.1 Effective Date. This Agreement shall become
effective upon its execution.
8.2 Termination.
8.2.1 Termination by Placement Agent. You shall
have the right to terminate this Agreement at any time prior
to the Closing Date: (i) if trading on the New York Stock
Exchange or the American Stock Exchange, or in the over-the-
counter market shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities shall have been
required in the over-the-counter market by the NASD or by
order of the Commission or any other government authority
having jurisdiction and such suspension or limitation has not
been lifted or removed within three business days of first
being implemented, (ii) if a banking moratorium has been
declared by a New York State or federal authority and such
moratorium has not been lifted or removed within three
business days of first being implemented, (iii) if a
moratorium on foreign exchange trading has been declared which
materially adversely impacts the United States securities
market and such moratorium has not been lifted or removed
within three business days of first being implemented, (iv) if
the Company shall have sustained a material loss by fire,
flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act which, whether or not such
loss shall have been insured, will, in your opinion, make it
impossible to sell the Shares, (v) if the Company has breached
any of its representations, warranties or obligations
hereunder in any material respect, or failed to expeditiously
proceed with the offering or to cooperate with you in
requesting effectiveness of the Registration Statement at such
time as you may deem appropriate, (vi) if the Placement Agent
shall have become aware after the date hereof of such a
material adverse change in the financial condition or business
of the Company as in your judgment would make it impracticable
to proceed with the offering, sale and/or delivery of the
Shares or to enforce contracts made by the Placement Agent for
the sale of the Shares, or (vii) if the Placement Agent shall
have become aware after the date hereof of such material
adverse change in general market conditions as in your
judgment would make it impracticable to proceed with the
offering, sale and/or delivery of the Shares or to enforce
contracts made by the Placement Agent for the sale of the
Shares.
8.2.2 Termination by the Company. The Company
shall have the right to terminate this Agreement at any time
prior to the Closing Date if: (i) the Placement Agent shall
have failed, refused or been unable to perform any of its
material obligations hereunder; (ii) any other material condition
hereunder which is required to be fulfilled by the Placement
Agent is not fulfilled; (iii) the Asset Purchase Agreement
dated as of August 20, 1998 between the Company and Ken
Crane's Magnavox City, Inc., as amended, is abandoned or
terminated; (iv) the parties are unable to agree on a price
for which the Shares are to be sold or the price necessary to
sell the Shares would result in any existing shareholder of
the Company having the right to purchase additional shares of
common stock of the Company in accordance with anti-dilution
rights held by such shareholders; (v) the Company shall have
become aware after the date hereof of such a material adverse
change in general market conditions or in the market for the
Company's common stock as would make it impracticable for the
Company to proceed with the offering contemplated hereby for
the purposes for which such offering is contemplated; or (vi)
the Board of Directors of the Company, in its sole discretion,
determines that it would not be in the best interests of the
Company or its shareholders for the Company to consummate the
transactions contemplated hereby.
8.3 Notice. If either party elects to terminate this
Agreement as provided in paragraph 8.2, the other party shall
be notified on the same day as such election is made by
telephone or telecopy, confirmed by letter.
8.4 Expenses. In the event that this Agreement shall
not be carried out for any reason whatsoever within the time
specified herein or any extensions thereof pursuant to the
terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall
be governed by paragraph 3.7 hereof.
8.5 Indemnification. Notwithstanding any contrary
provision contained in this Agreement, any election hereunder
or any termination of this Agreement, and whether or not this
Agreement is otherwise carried out, the provisions of Section
6 shall not be in any way affected by such election or
termination or failure to carry out the terms of this
Agreement or any part hereof.
9. Miscellaneous.
9.1 Notices. All communications hereunder, except as
herein otherwise specifically provided, shall be in writing
and shall be mailed, delivered or telecopied and confirmed:
If to the Placement Agent:
MDB Capital Group LLC
100 Wilshire Boulevard
17th Floor
Santa Monica, California 90401
Attention: Christopher A. Marlett
Telecopier No.: (310) 917-5665
Copy (not constituting notice) to:
Resch Polster Alpert & Berger LLP
10390 Santa Monica Blvd., 4th Floor
Los Angeles, California 90025
Attention: Aaron A. Grunfeld
Telecopier No.: (310) 552-3209
If to the Company:
Image Entertainment Inc.
9333 Oso Avenue
Chatsworth, California
Attention: Martin W. Greenwald
Chief Executive Officer
Telecopier No.: (818) 407-5775
Copy (not constituting notice) to:
O'Melveny & Meyers LLP
400 South Hope Street
Los Angeles, California 90071
Attention: Diana L. Walker
Telecopier No.: (213) 430-6407
9.2 Headings. The headings contained herein are for the
sole purpose of convenience of reference, and shall not in any
way limit or affect the meaning or interpretation of any of
the terms or provisions of this Agreement.
9.3 Amendment. This Agreement may only be amended by a
written instrument executed by each of the parties hereto.
9.4 Entire Agreement. This Agreement (together with the
other agreements and documents being delivered pursuant to or
in connection with this Agreement) constitute the entire
agreement of the parties hereto with respect to the subject
matter hereof,
and supersede all prior agreements and understandings of the
parties, oral and written, with respect to the subject matter
hereof.
9.5 Binding Effect. This Agreement shall inure
solely to the benefit of and shall be binding upon, the
Placement Agent, the Company, and the controlling persons,
directors and officers referred to in Section 9 hereof, and
their respective successors, legal representatives and
assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions
herein contained.
9.6 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the
State of California, without giving effect to conflict of laws
rules of such State. In the event of any action between the
Company and the Placement Agent, the prevailing party in any
action shall be entitled to recover from the other party all
of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with
the preparation therefor.
9.7 Bound Volumes. The Company shall supply to the
Placement Agent and the Placement Agent's counsel, at the
Company's cost, not less than three bound volumes each of all
relevant documents and other materials relating to the
offering, the Closing, and related post-Closing materials.
9.8 Execution in Counterparts. This Agreement may be
executed in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which shall
be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by
each of the parties hereto and delivered to each of the other
parties hereto.
9.9 Waiver, Etc. The failure of any of the parties
hereto to at any time enforce any of the provisions of this
Agreement shall not be deemed or construed to be a waiver of
any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of
the parties hereto to thereafter enforce each and every
provision of this Agreement. No waiver of any breach, non-
compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written
instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of
any such breach, non-compliance or non-fulfillment shall be
construed or deemed to be a waiver of any other or subsequent
breach, non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding
among the Placement Agent and the Company, please so indicate
in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among us.
Very truly yours,
IMAGE ENTERTAINMENT, INC.
By:
Martin W. Greenwald,
Chairman of the
Board and Chief Executive Officer
Accepted as of the date first
above written
Los Angeles, California
MDB CAPITAL GROUP LLC
By:
Christopher A. Marlett Managing Director
<PAGE>
[O'MELVENY & MYERS LETTERHEAD]
December 16, 1998 OUR FILE NUMBER
409,989-11
WRITER'S DIRECT
DIAL
213-430-6000
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
Re: Image Entertainment, Inc.
Ladies and Gentlemen:
We have acted as counsel to Image Entertainment, Inc., a
California corporation (the "Company"), and as such we are
providing this opinion to you at your request.
In our capacity as such counsel, we have examined: (a)
the
Registration Statement on Form S-2, File No. 333-65611, as
amended (the "Registration Statement"), filed by the Company
with
the Securities and Exchange Commission for the purpose of
registering the offer and sale of up to 2,400,000 shares of
the
Company's Common Stock, no par value per share (the "Shares"),
under the Securities Act of 1933, as amended, (b) the
prospectus
constituting part of the Registration Statement (the
"Prospectus"), and (c) originals or copies of the Company's
Restated Articles of Incorporation, Bylaws and corporate
minute
books. We have also examined originals or copies of the
Company's records of corporate proceedings taken in connection
with the approval of the Registration Statement and the
issuance
and sale of the Shares and other records and documents we
considered appropriate. We have assumed the genuineness of
all
signatures, the authenticity of all items submitted to us as
originals and the conformity with originals of all items
submitted to us as copies.
On the basis of such examination, our reliance upon the
assumptions in this opinion and our consideration of those
questions of law we considered relevant, and subject to (a)
the
limitations and qualifications in this opinion and (b) the
completion of the additional proceedings being taken as
contemplated by the Registration Statement prior to the
issuance
and sale of the Shares, we are of the opinion that the Shares
will have been duly authorized by all necessary corporate
action
on the part of the Company and, upon payment for and delivery
of
the Shares in accordance with the terms described in the
Registration Statement and the countersigning of the
certificate
or certificates representing the Shares by a duly authorized
signatory of the registrar for the Company's Common Stock, the
Shares will be validly issued, fully paid and non-assessable.
This opinion is expressly limited to the matters set
forth
above and we render no opinion, whether by implication or
otherwise, as to any other matters. We assume no obligation
to
update or supplement this opinion to reflect any facts or
circumstances which may hereafter come to our attention, or
any
changes in laws which may hereafter occur.
We hereby consent to the use of this opinion as an
exhibit
to the Registration Statement and to reference to our firm
name
under the heading "Legal Matters" in the Prospectus.
Respectfully submitted,
/s/ O'Melveny & Myers LLP
<PAGE>
Image Entertainment, Inc.
Chatsworth, California
Re: Unaudited Financial Information
We acknowledge our awareness of the use herein of our report
dated October 30, 1998 related to our review of interim
financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7
and
11 of the Act.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
December 15, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Image Entertainment, Inc.:
We consent to the use of our reports incorporated by reference
herein and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
December 15, 1998
<PAGE>
