As filed with the Securities and Exchange Commission on October 13, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
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: [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================
=============================
Proposed
Proposed
Title of each Amount maximum maximum
class of securities to be offering price aggregate
Amount of
to be registered registered per unit offering
price registration fee
- ----------------------------------------------------------------------------------------
- ---------------------<S> <C> <C>
<C> <C>
Common Stock, no par value 2,400,000 shares $3.25 $7,800,000
$2,301<1>
========================================================================================
=====================<FN>
<1> Calculated pursuant to Rule 457(c) based upon the average of the
high and low prices for the registrant's common stock as reported by the
Nasdaq National Market System on October 8, 1998, solely for the purposes
of computing the registration fee.
</FN>
</TABLE>
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.
-Cover-
<PAGE>
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED ______________, 1998
PROSPECTUS
2,400,000 SHARES
IMAGE ENTERTAINMENT, INC.
COMMON STOCK
-------------
Image Entertainment, Inc. is offering for sale
2,400,000 shares of common stock. Our common stock is
traded on the Nasdaq National Market System under the symbol
"DISK" and its closing price on October 7, 1998 was $3.50
per share. We will consider the factors listed under the
heading "Plan of Distribution" beginning on page 19 of this
prospectus to determine the price at which we will sell
these shares of common stock. We will reserve a portion of
these 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 such
sales on the same terms and conditions available to the
public, except that we will pay a lower commission for
such sales.
---------------
These securities involve a high degree of risk.
See "Risk Factors" beginning on page 3.
---------------
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.
---------------
<TABLE>
<CAPTION>
===========================================================
Placement
Price to Agent's Proceeds to
Public Commission<1> Company<2>
- -----------------------------------------------------------<S>
<C> <C> <C>
Per Share $ $ $Total $
$ $
===========================================================<FN>
<1> We have agreed to pay to MDB Capital Group LLC, as
placement agent, a fee in connection with the arrangement
of this offering, to reimburse them for certain expenses
and to indemnify them against certain liabilities,
including liabilities under the Securities Act of 1933.
<2> Before deducting estimated expenses of $_________ payable
by us (including the placement agent's non-accountable
expense allowance of 2.0% of the gross proceeds from this
offering).
</FN>
</TABLE>
----------------------------
We are offering these shares of common stock on a best
efforts basis to a limited number of institutional and other
accredited investors. We have retained MDB Capital Group
LLC to act as the exclusive placement agent in connection
with the arrangement of this offering. The placement agent
is not required to sell a specific number or dollar amount
of shares but will use its best efforts to sell all of the
shares being offered. This offering will terminate on
December 15, 1998, unless we extend it with the placement
agent's agreement. We will sell the shares when the
placement agent has received commitments to purchase all of
the shares offered or on December 15, 1998 if the placement
agent does not receive commitments to purchase 2,400,000
shares before that date.
MDB Capital Group LLC reserves the right to withdraw,
cancel, modify or reject any order for the purchase of these
shares in whole or in part for any reason. We reserve the
right to terminate this offering at any time. There will
not be any escrow, trust or similar account for the funds to
be received from the sale of these shares. You are not
required to purchase any minimum amount of the shares being
offered to participate in the offering. If we do not
receive proceeds from this offering sufficient to complete
the transaction described in "Recent Developments-the
Acquisition" and we cannot obtain additional financing to
complete such transaction, we will apply the proceeds from
this offering to seek additional exclusive digital video
disc distribution rights, potentially to develop a new web
site for retail sales of digital video discs and laserdiscs
and for general corporate and working capital purposes.
MDB CAPITAL GROUP LLC ______________, 1998
-Cover-
<PAGE>
AVAILABLE INFORMATION
Image Entertainment, Inc. (the "Company") is subject to
the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other
information with the Securities and Exchange Commission (the
"Commission") relating to its business, financial statements
and other matters. Such 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 such material
may be obtained from such offices at prescribed rates set by
the Commission. Certain of the Company'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). The Company's common stock is traded
on the Nasdaq National Market System under the symbol
"DISK." Certain information, reports and proxy statements
of the Company are also available for inspection at the
offices of the Nasdaq Market Reports Section, 1735 K Street,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE; DELIVERIES
The Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998, filed with the Commission on
June 25, 1998 (the "Annual Report"), the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30,
1998, filed with the Commission on August 13, 1998 (the
"Quarterly Report"), and all other reports filed with the
Commission by the Company (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, the
Company is delivering to each person to whom a copy of this
prospectus is delivered copies of the Annual Report, the
Quarterly Report and the Company's Proxy Statement dated
July 29, 1998 (the "Proxy Statement"). Upon oral or written
request therefor, the Company 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.
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking
statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on the
beliefs of the Company's management as well as assumptions
made by and information currently available to the Company's
management. When used in this document, the words
"anticipate," "believe," "may," "estimate," "expect" and
similar expressions, variations of such terms or the
negative of such terms as they relate to the Company or its
management are intended to identify such forward-looking
statements. Such statements are based on management's
current expectations and are subject to certain risks,
uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying
assumptions prove incorrect, the company's actual results,
performance or achievements could differ materially from
those expressed in, or implied by, any such forward-looking
statements. 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. The Company 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.
-ii-
<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 forward-looking statements that
involve risks and uncertainties. Our actual results or
experience could differ significantly from those discussed
in the forward-looking statements.
The Company
Image Entertainment, Inc. is the largest licensee and
wholesale distributor of laserdiscs (LDs) in North America
and has distributed a broad range of LD programming since
1983. With the March 1997 introduction of the digital video
disc (DVD) to the consumer market, we began distributing
DVD titles on a non-exclusive wholesale basis in March 1997
and began releasing exclusively licensed DVD programming in
June 1997. We distribute thousands of titles on LD and over
1,000 titles on DVD, ranging from feature films and music
videos to family, documentary and special interest
programming.
On August 20, 1998, we agreed to acquire certain assets
and liabilities of the digital video disc and laserdisc
retail sales business of Ken Crane's Magnavox City, Inc, including
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 258,370
shares 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 become the Vice President-
General Manager of our subsidiary and will oversee the day-
to-day operations of the newly acquired business.
Our principal executive offices are located at 9333
Oso Avenue, Chatsworth, California 91311 and our telephone
number is (818) 407-9100.
Risk Factors
The shares of common stock that we are offering involve
a high degree of risk and you should carefully consider the
information contained in the "Risk Factors" section
beginning at page 3 of this prospectus along with all of the
other information contained in this prospectus.
The Offering
We are offering 2,400,000 shares of common stock.
If we sell all 2,400,000 shares, we will have 15,948,959 shares of common
stock outstanding after the offering. This is based on the number of
shares outstanding at September 25, 1998 and excludes certain outstanding
options, warrants and other rights to acquire our common stock.
If we sell enough shares to generate sufficient proceeds to consummate the
acquisition of the digital video disc and laserdisc 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. 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, potentially to develop our own web site for retail
sales of DVDs and LDs and for general corporate and working capital
purposes.
Our Nasdaq National Market Symbol is "DISK."
-1-
<PAGE>
Summary Financial Information
We have derived the following summary historical and
pro forma consolidated financial data from: (i) our fiscal
year-end audited financial statements for the fiscal years
ended March 31, 1994 through 1998, (ii) our unaudited
financial statements for the three months ended June 30,
1997 and 1998, and (iii) our unaudited pro forma
consolidated financial statements, which take into account
the completion of the acquisition and this offering.
Operating data for the three months ended June 30, 1998 is
not necessarily indicative of results for the entire year.
You should read this summary information along with the
Selected Historical and Pro Forma Financial Information and
the Unaudited Pro Forma Consolidated Financial Statements
included later in this prospectus, as well as all of 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 and in the Quarterly Report.
<TABLE>
<CAPTION>
================================================================================
================================================
Operating Data (in thousands, except per share data) Three months
ended
June 30,
Fiscal year ended March 31, ---
- ------------------ ----------------------------------------------------------
- -------------
1998
1998 1997 Pro Forma<1> 1998
1997 1996 1995 1994
--------- --------- ----------- ---------
- --------- --------- ------- ----------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Net sales $17,140 $16,902 $84,193 $75,516
$85,650 $95,086 $85,591 $65,578
Income (loss) before
extraordinary item 205 (191) (9,826) (9,581)
972 7,599 7,530 3,739
Extraordinary item, net of taxes - - - -
(127)<2> - (1,219)<2> (378)<2>
Net income (loss) $ 205 (191) (9,826) $(9,581)
$845 $7,599 $6,311 $3,361
<CAPTION>
Balance Sheet (in thousands)
As of June 30,
As of March 31, ---------------
- ------ ----------------------------------------------------------------------
- -
1998
1998 1997 Pro Forma<1> 1998
1997 1996 1995 1994
--------- --------- ----------- ---------
- --------- --------- ------- ----------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Total assets $35,541 $43,078 $43,430 $33,781
$46,448 $39,406 $33,491 $42,526
Total liabilities 26,598 25,014 25,930 25,116
28,397 18,880 16,818 31,412
Net shareholders' equity 8,943 18,064 17,500 8,665
18,051 20,526 16,673 11,114
================================================================================
================================================
<FN>
<1> As adjusted to account for the sale of all 2,400,000
shares offered, the application of the estimated net
proceeds and the Acquisition. Based on the Company's fiscal
year ended March 31, 1998 and the 12 months ended June 30,
1998 of the business being acquired. See our Unaudited Pro
Forma Consolidated Financial Statements and the notes
thereto beginning on page F-2 of this prospectus.
<2> 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>
-2-
<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 the Company and this Offering
No Obligation to Sell Minimum Number of Shares;
Potential Inability to Complete the Acquisition. MDB
Capital Group LLC (the "Placement Agent") 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 Placement Agent is not
required to sell any specific number or dollar amount of
shares. We cannot assure you that the Placement Agent will
be able to sell a sufficient number of shares on our behalf
to allow us to complete the acquisition of the digital video
disc and laserdisc retail sales business of Ken Crane's
Magnavox City, Inc. (the "Acquisition"). If the Placement
Agent 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.
Use of Proceeds if We Do Not Complete the Acquisition.
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 potentially to
develop our own web site for the retail sale of LDs and
DVDs directly to the public. The development of such
a web site would require an investment of significant
resources to acquire suitable computer systems,
acquire or develop appropriate software, market the
web site and undertake other matters to establish
the web site. We cannot assure you that we will be able to
establish a web site that would successfully compete with
existing or future competitors in the LD and DVD retail
sales business. See "-Risks Associated with the KC 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
"-Competition for DVD Rights and Distribution" below for a
discussion of additional risks associated with the Company's
program suppliers and distribution rights.
Lenders' Consents Required to Complete the Acquisition;
Purchase Agreement Termination Date. 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. We cannot assure you
that these lenders will, in fact, consent to the Acquisition
regardless of the amount of funds that we raise. In
addition, if the closing of the Acquisition has not occurred
before January 15, 1999, each of the parties has the right
to terminate the transaction.
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. In September 1997, we raised additional capital
through a private financing 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 for additional information about our liquidity and
capital resources.
-3-
<PAGE>
Integration of New Business and Employees. We will
face significant risks and challenges when we attempt to
integrate the operations of the business we have agreed to
acquire in the Acquisition (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. We expect to incur
considerable expenses in the near future in connection with
the integration of the Acquired Business and cannot assure
you that we will be able to successfully integrate the
systems, employees and other resources of the Acquired
Business.
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.
Competition for LD Rights and Distribution. 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 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. We
cannot assure you that we will be able to continue to secure
LD license and distribution rights on terms acceptable to
us.
Competition for DVD Rights and Distribution. Given the
relative newness of the DVD format and its uncertain
position in the home video software market, none of the
major motion picture studios 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 cannot assure you that we will be able to continue to
secure DVD license and distribution rights on terms
acceptable to us. 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.
Competition from 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. For example,
several recent polls have indicated that the Internet may
surpass all forms of home video entertainment as a leisure
time activity. 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.
-4-
<PAGE>
New Distribution Facility. We have expended
significant time, capital and other resources to construct a
new automated distribution facility in Las Vegas, Nevada.
Although we currently expect the distribution center to be
operational by November 1998, we cannot assure you that it
will actually become operational at that time or that the
automated systems will operate as planned without delay.
Any delay in the opening of the distribution facility and
any inability to correct problems that arise with the
facility's automated systems could have a material adverse
effect on our business, prospects, results of operations and
financial condition.
Ability 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.
Growth of the DVD Market. We believe that the lack of
mass market acceptance of DVD is principally due to the
following factors: (i) the lack of a consumer-priced
recordable DVD player, (ii) the lack of an established
rental market, (iii) consumer confusion regarding the
features, availability and potential of the format, (iv) the
large number of titles currently available on LD, and (v)
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 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.
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.
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. 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: (i)
DVD's negative impact on LD sales; (ii) the popularity of
titles in release during the quarter; (iii) our marketing
and promotional activities; (iv) our rights and distribution
activities; (v) the extension, termination or non-renewal of
existing license and distribution rights; and (vi) general
economic changes affecting the buying habits of our
customers, particularly those changes affecting consumer
demand for LD and DVD hardware and software.
Volatility of Stock Price. 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. See "Price Range of
Common Stock" beginning on page 15 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
-5-
<PAGE>
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 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.
Shares Eligible for Future Sale. As of September 25,
1998, there were outstanding options, warrants and rights to
purchase or acquire 2,767,437 shares of our common stock,
including 2,566,534 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 and
"Description of Capital Stock" below for additional
information regarding registration rights. 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.
Immediate and Substantial Dilution. You will incur
immediate and substantial dilution of $2.50 per share
(assuming that all 2,400,000 of the shares being offered are
sold at an offering price of $3.50 per share). If any
outstanding options, warrants or rights to purchase our
common stock are exercised, you will incur additional
dilution. See "Dilution."
Risks Associated with the KC 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" site on the World Wide Web (the "KC 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 the
Company and this Offering - Use of Proceeds if We Do Not
Complete the Acquisition" on page 3 above.
Competition in the Internet Commerce Industry. 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 KC 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 KC 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 KC Web Site could
suffer reduced operating margins and market share and brand
recognition based on increased competition. We cannot
assure you that the KC Web Site will be able to compete
successfully against current or future competitors.
Rapid Technological Change. 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 KC
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<PAGE>
Web Site will depend, in part, on our ability to:
(i) license leading technologies useful in the Internet
sales business, (ii) enhance the KC Web Site's existing
services, (iii) develop new services and technology that
address the increasingly sophisticated and varied needs of
our customers, and (iv) respond to technological advances
and emerging industry standards and practices on a cost-
effective and timely basis. We cannot assure you that we
will successfully use new technologies effectively or adapt
the KC Web Site or the systems of the Acquired Business to
customer requirements or emerging industry standards.
Dependence on Continued Growth of Internet 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 KC 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. 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.
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 KC Web Site. We believe
that the satisfactory performance, reliability and
availability of the KC 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 KC 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 KC 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.
Even if we are able to develop adequate transaction-
processing systems and to integrate the KC Web Site with the
distribution center in a timely manner, periodic system
interruptions may occur on the
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KC 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 KC 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 KC 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 KC 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.
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 KC 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. We could be
materially adversely affected by any new legislation or
regulation or by the application or interpretation of
existing laws to the Internet.
Year 2000 Compliance with Respect to the KC 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 KC 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 KC 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 KC Web Site. Any
system interruption in the KC Web Site resulting from year
2000 compliance problems could materially adversely affect
our business, results of operations, financial condition and
prospects.
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<PAGE>
THE COMPANY
Image Entertainment, Inc. is the largest licensee and
wholesale distributor of laserdiscs (LDs) in North America
and has distributed a broad range of LD programming since
1983. With the March 1997 introduction of the digital video
disc (DVD), a new optical disc format, to the consumer
market, the Company began distributing DVD titles on a non-
exclusive wholesale basis and shortly thereafter began
releasing exclusively licensed DVD programming in June 1997.
The Company's DVD sales are a rapidly growing part of its
business. For the three months ended June 30, 1998, DVD
sales represented approximately 38% of the Company's net
sales compared to approximately 8% during the same period in
1997. This is also a percentage increase compared to the
Company's fiscal year ended March 31, 1998, during which DVD
sales represented approximately 21% of the Company's net
sales.
The Company 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. The Company 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 the Company exclusive distribution rights
to certain LD titles. In addition, the Company has
exclusive agreements with Universal (50 titles), Orion (12
titles), Playboy (all output) and numerous other program
suppliers granting the Company exclusive distribution rights
to certain DVD titles. The Company also distributes LDs and
DVDs on a non-exclusive basis. The Company is actively
pursuing additional DVD license and distribution rights.
Where the Company 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, the Company's wholly-owned
subsidiary ("Image/KC") agreed to acquire certain assets and
liabilities of the Acquired Business from Ken Crane's
Magnavox City, Inc. (the "Seller"). The Acquired Business
consists of the KC 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. The Company believes
that the Acquisition will enable it to increase its public
presence by reaching its customers directly through the KC
Web Site. The closing of the Acquisition, currently
expected to be completed late in the Company's third fiscal
quarter or early in its fourth fiscal quarter, is contingent
on the Company 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 the Company's
largest customers. During the fiscal year ended March 31,
1998, the Company had net sales to the Acquired Business of
approximately $8.1 million, representing approximately 10.7%
of the Company's net sales during such period. During the
fiscal quarter ended June 30, 1998, the Company had net
sales to the Acquired Business of approximately $1.6
million, representing approximately 9.4% of the Company's
net sales during such period.
The Company 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. The Company
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. The Company maintains its executive
offices at 9333 Oso Avenue, Chatsworth, California 91311 and
its telephone number is (818) 407-9100.
For additional information concerning the Company, see
the Annual Report, the Quarterly Report and the Proxy
Statement delivered concurrently with this prospectus.
-9-
<PAGE>
RECENT DEVELOPMENTS
The Acquisition
On August 20, 1998, our subsidiary Image/KC agreed to
acquire certain assets and liabilities (as described more
fully below) of the digital video disc and laserdisc retail
sales business of the Seller. The Acquired Business, which
sells LDs and DVDs through the KC 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 the Company's largest customers.
During the fiscal year ended March 31, 1998, the Company had
net sales to the Acquired Business of approximately $8.1
million, representing approximately 10.7% of the Company's
net sales during such period. During the fiscal quarter
ended June 30, 1998, the Company had net sales to the
Acquired Business of approximately $1.6 million,
representing approximately 9.4% of the Company's net sales
during such period. Accordingly, the Company 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 the
Company. See "Selected Historical and Pro Forma Financial
Information" below and "Unaudited Pro Forma Consolidated
Financial Statements" beginning on page F-2 of this
prospectus.
The Company 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, the Company expects that by March 1999,
the KC Web Site will be integrated with the Company's new
automated distribution facility in Las Vegas, Nevada
(currently expected to open in November 1998), which the
Company believes will provide increased efficiency in
general, including the ability to fulfill and ship orders
quickly. The Company 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
KC Web Site and an increased volume of orders.
In exchange for certain assets of the Acquired
Business, the Asset Purchase Agreement dated as of
August 20, 1998 between the Seller and Image/KC, as amended
(the "Purchase Agreement") requires that Image/KC: (i) pay
the Seller $3 million plus 258,370 newly issued shares of
common stock, and (ii) assume certain trade payables of the
Seller (the amount of which will be offset by the value of
certain of the assets acquired), the Seller's obligations
under the lease for the Westminster store and certain of the
Seller's obligations with its current LD and DVD suppliers.
Of the cash portion of the purchase price, $500,000 will be
held in escrow for 90 days after the closing and will be
paid to the Seller in full only if no claims for indemnity
arise prior to the expiration of such 90-day period.
The assets purchased by the Company include, among
other things, all rights to the KC 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 its inventory of adult entertainment titles),
all of the Seller's rights under certain license and
distribution agreements, and all of the Seller's intangible
property rights as related to the Acquired Business. The
Company will also receive an exclusive, irrevocable royalty-
free license to use the "Ken Crane's" name and its
derivatives in connection with the Acquired Business. The
exclusivity provision prohibits the Seller from using or
allowing others to use the "Ken Crane's" name in a similar
context to that of the Acquired Business.
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 the Company will record as a general and
administrative expense at the time incurred). 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 be for a term of five years, renewable by
Image/KC for up to two additional one-year terms, and will
provide for him to receive a salary of $150,000 per year
(with 5.0% cumulative annual increases) and a bonus equal to the
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<PAGE>
sum of (i) 0.40% of annual net revenues of Image/KC plus
(ii) 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 will also include standard non-compete terms
preventing Ken Crane, Jr. from competing with Image/KC
during the term of his employment. 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) 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 the Company, 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 the Company's
lenders and the Company's raising sufficient funds to make
all required payments in connection with the Acquisition).
In addition, the Seller has agreed not to compete with the
Company 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 laserdiscs 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 laserdiscs and digital
video discs through the various channels described above.
New Board Member
On September 11, 1998, the Company's shareholders
elected M. Trevenen Huxley, 46, to serve as a director of
the Company. 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
the Company.
Adoption of 1998 Incentive Plan
The Company'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 the Company'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.
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<PAGE>
New Employment Agreements for Management
The Company plans to confirm new employment agreements
during October 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 the Company 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 the Company, 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 the Company "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 the Company "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.
Legal Proceedings
On July 31, 1998, the Company filed a complaint in the
United States District Court for the Central District of
California, Western Division (Case No. CV 98-6203 KMW BQRx),
against PolyGram Video, a division of PolyGram Records,
Inc., PolyGram N.V., and The Seagram Company, Ltd. (the
"Federal Court Action"). The complaint relates to a dispute
concerning, among other things, PolyGram Video's obligations
under a December 23, 1996 license agreement with the
Company. The Company has alleged causes of action for
fraud, recision of written contract, breach of contract,
interference with contract, and unfair business practices.
The complaint in the Federal Court Action seeks general
damages of $3 million for fraud, complete recision of the
1996 license agreement, and recovery of unrecouped advances
in the approximate amount of $2.4 million. In the
alternative, the complaint seeks damages of $6 million for
breach of contract and interference with contract, and
injunctive relief prohibiting the acquisition of PolyGram
N.V. by Seagram, or the sale of all or any part of PolyGram
film divisions to finance such acquisition, as a violation
of certain provisions of the license agreement. The Company
also seeks to recover punitive damages, prejudgment
interest, attorney's fees and costs of suit.
After being served with the complaint in the Federal
Court Action, PolyGram Records filed a separate suit against
the Company in the United States District Court for the
Southern District of New York (Case No. 98 Civ. 6025 (JGK))
seeking $3 million plus attorney's fees and costs of suit for the
Company's
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alleged breach of the 1996 license agreement. The Company
presently intends to prosecute the Federal Court Action
to the fullest extent possible and to vigorously defend the
separate action filed by PolyGram Records.
USE OF PROCEEDS
If the Company sells all 2,400,000 shares of its common
stock being offered, the net proceeds to the Company from
such sale are estimated to be approximately $7.2 million
(assuming an offering price to the public equal to $3.50 per
share, the closing price of the Company's common stock on
October 7, 1998). The Company 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 the Company does not receive net proceeds from this
offering and from alternative financing sources to raise
funds in an amount sufficient to close the Acquisition, the
Company intends to use the net proceeds to seek additional
DVD distribution rights, potentially to develop a web site
for retail sales of DVDs and LDs and for general corporate
and working capital purposes.
DILUTION
As of June 30, 1998, the net tangible book value of the
Company was approximately $8,943,000 or approximately $0.66
per share of common stock. Net tangible book value per
share is equal to the Company's total tangible assets (total
assets less intangible assets) less total liabilities
divided by the 13,533,139 shares of common stock outstanding
at June 30, 1998. Without taking into account any other
changes in such net tangible book value after June 30, 1998,
but giving pro forma effect to the Acquisition and the sale
by the Company of all 2,400,000 shares of common stock being
offered (based on the estimated net proceeds discussed under
"Use of Proceeds" and after deducting fees and other
estimated expenses payable by the Company in connection with
the Acquisition, including non-recurring compensation and
consulting payments to Ken Crane, Jr., Casey Crane and
Pamela Crane aggregating $1,960,000 net of income tax
effect), the net tangible book value of the Company at
June 30, 1998, would have been approximately $16,183,000 or
$1.00 per share. This represents an immediate increase in
the net tangible book value of approximately $0.34 per share
to the existing shareholders, and an immediate dilution of
approximately $2.50 per share to the investors in this
offering, as illustrated below. The following table does
not give effect to the exercise of options, warrants and
rights outstanding as of June 30, 1998 to purchase a total
of 2,620,627 shares of common stock.
<TABLE>
<CAPTION>
Pro Forma Dilutive Impact as of June 30, 1998 <1>
- -----------------------------------------------------------------------------
<S> <C> <C>
Offering price per share of common stock $3.50
Net tangible book value per share of common stock before
this offering (as of June 30, 1998) $0.66
Increase per share of common stock attributable to new
investors $0.34
Pro forma net tangible book value per share of common stock
after this offering and the Acquisition $1.00
Dilution per share of common stock to new investors $2.50
- -----------------------------------------------------------------------------
<FN>
<1> Calculated without taking into account any changes in
the Company's net tangible book value after June 30, 1998
except for giving pro forma effect to the Acquisition
(including non-recurring compensation and consulting
payments to Ken Crane, Jr., Casey Crane and Pamela Crane
aggregating $1,960,000 net of income tax effect) and the
Company's sale of all 2,400,000 shares of common stock at an
assumed offering price of $3.50 per share, the closing price
of the Company's common stock on October 7, 1998. See
"Unaudited Pro Forma Consolidated Financial Statements"
beginning on page F-2 of this prospectus.
</FN>
</TABLE>
-13-
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization
of the Company at June 30, 1998 and (ii) the pro forma
capitalization of the Company at June 30, 1998 as adjusted
at that date to give effect to the Acquisition, the sale of
the shares being offered (hypothetically assuming that all
2,400,000 shares are sold or that only 1,000,000 shares are
sold at an assumed offering price of $3.50 per share, the
closing price of the Company's common stock on October 7,
1998), and the application of the estimated net proceeds to be
received from this offering. See "Use of Proceeds" above,
"Unaudited Pro Forma Consolidated Financial Statements"
beginning on page F-2 of this prospectus and "Management's
Discussion and Analysis of Results of Operations and
Financial Condition" and the financial statements and
related notes included in the Annual Report and the
Quarterly Report.
<TABLE>
<CAPTION>
========================================================================================
========================================
At June 30, 1998
----------------------
- ----------------------------------------
As Adjusted As Adjusted
(maximum) (1,000,000
Actual
offering<1> shares)<2>
---------
- -------------- -----------
(in thousands)
<S> <C>
<C> <C>Total Indebtedness
Revolving Credit Facility $1,459
$1,459 $1,459
Construction Credit Facility 3,174
3,174 3,174
Distribution Equipment Lease Facility 526
526 526
Convertible Subordinated Note Payable 5,000
5,000 5,000
Note Payable 1,350
1,350 1,350
Shareholders' Equity
Preferred Stock, $1 par value, 3,365,385 shares
authorized; no shares issued and outstanding -
- - -
Common Stock, no par value, 25,000,000 shares authorized;
13,533,139 issued and outstanding at June 30, 1998;
16,191,509 issued and outstanding as adjusted for the
maximum offering and the Acquisition; 14,533,139 issued
and outstanding as adjusted for the sale of 1,000,000 Shares and assuming
that the Acquisition is not completed<3> 17,837 27,037
20,627Additional paid-in capital 3,064
3,064 3,064
(Accumulated Deficit) (11,958)
(13,918) (11,958)
---------
- -------------- -----------
Net Shareholders' Equity 8,943
16,183 11,733
- --------- -------------- -----------
Total Capitalization $20,452
$27,692 $23,242
========= ============== ===========
========================================================================================
========================================
<FN>
<1> As adjusted to give effect to the Acquisition
(including non-recurring compensation and consulting
payments to Ken Crane, Jr., Casey Crane and Pamela Crane
aggregating $1,960,000 net of income tax effect), the
Company's sale of all 2,400,000 shares of common stock being
offered at an assumed offering price of $3.50 (the closing
price of the Company's common stock on October 7, 1998) and
the application of the estimated net proceeds therefrom.
<2> As adjusted to give effect to the Company's sale of
1,000,000 shares of common stock being offered at an assumed
offering price of $3.50 (the closing price of the Company's
common stock on October 7, 1998) and the application of the
estimated net proceeds therefrom and assuming that the
Company is unable to complete the Acquisition.
<3> Excludes shares reserved for issuance under any plan,
option or other right.
</FN>
</TABLE>
-14-
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company'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 the Company's common stock as
reported on the Nasdaq National Market System since the
beginning of the Company's 1997 fiscal year.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ----
<S> <C> <C>
Fiscal Year 1999
September 30, 1998 10.00 3.25
June 30, 1998 7.50 3.313
Fiscal Year 1998
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
Fiscal Year 1997
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
</TABLE>
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The selected historical financial data of the Company
presented below as of and for the years ended March 31, 1994
through 1998 are derived from the consolidated financial
statements of the Company, which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants.
The summary historical financial data of the Company
presented below as of June 30, 1998 and 1997 and for the
three months ended June 30, 1998 and 1997 are derived from
unaudited consolidated financial statements of the Company
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 the Company 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 the Company's Annual Report. The
consolidated financial statements of the Company as of
June 30, 1998 and for the three months ended June 30, 1998
and 1997 are contained in the Company's Quarterly Report.
Operating data for the three months ended June 30, 1998 is
not necessarily indicative of results for the entire year.
The summary unaudited pro forma operating data of the
Company for the fiscal year ended March 31, 1998 is derived
from the Unaudited Pro Forma Consolidated Financial
Statements included in this prospectus beginning on page F-2
and reflects adjustments to the summary historical operating
data of the Company to give effect to this offering, the
estimated net proceeds to be received from this offering and
the Acquisition. The summary pro forma operating data is
not necessarily indicative of either future results of
operations or the results that would have occurred if this
offering and the Acquisition had been consummated on the
indicated dates. The following financial information should
be read along with this Selected Historical and Pro Forma
Financial Information: (i) the Company's Unaudited Pro Forma
Financial Statements and related notes, (ii) the information
included under the heading "Capitalization," and (iii) the
historical consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Annual
Report and the Quarterly Report.
-15-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
==============================================
Operating Data (in thousands, Three months endedexcept per share data)
June 30, Fiscal year ended March 31,
- --------------------- --------------------------------------------------------
- --------------
1998
1998 1997 Pro Forma<1> 1998
1997 1996 1995 1994
--------- --------- ------------ ---------
- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Net sales $17,170 $16,902 $84,193 $75,516
$85,650 $95,086 85,591 65,578
Operating costs and expenses 16,773 16,936 93,528
84,605<2> 83,399<3> 86,926 77,851 60,576
Operating income (loss) 367 (34) (9,335) (9,089)
2,251 8,160 7,740 5,002
Interest expense (176) (203) (662) (662)
(415) (155) (1,184) (2,336)
Interest income 25 46 118 118
231 337 518 487
Other expense - - - -
(662)<4> - - -
Amortization of deferred
financing costs - - - -
- - - (111) (270)
Net gain on insurance settlement - - - -
- - - 742 960
Income (loss) before income taxes
and extraordinary item 216 (191) (9,879) (9,633)
1,405 8,342 7,705 3,843
Income tax (expense) benefit 11 - 53 52
(433) (743) (175) (104)
Income (loss) before
extraordinary item 205 (191) (9,826) (9,581)
972 7,599 7,530 3,739Extraordinary item, net of taxes -
- - - - (127)<5> - (1,219)<5> (378)<5>
Net income (loss) $ 205 (191) (9,826) $(9,581)
$845 $7,599 $6,311 $3,361
Income (loss) per share:
Income (loss) before
extraordinary item
Basic $.02 $ (.01) $ (.61) $(.71)
$ .07 $.56 $.57 $.30
Diluted $.02 $ (.01) (.61) $(.71)
$ .07 $.51 $.48 $.26
Net income (loss)
Basic $.02 $ (.01) $ (.61) $(.71)
$ .06 $.56 $.48 $.27
Diluted $.02 $ (.01) (.61) (.71)
.06 $.51 $.40 $.23
Weighted average number
of shares outstanding
Basic 13,506 13,431 16,129 13,471
13,504 13,569 13,255 12,347
Diluted 13,614 13,431 16,129 13,471
13,836 14,802 15,641 14,392
<CAPTION>
Balance Sheet Data(in thousands) As of June 30,
As of March 31 --------------------- ----------
- ------------------------------------------------------------
1998
1998 1997 Pro Forma<1> 1998
1997 1996 1995 1994
--------- --------- ------------ ---------
- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Total assets 35,541 43,078 43,430 $33,781
46,448 39,406 33,491 42,526
Total liabilities 26,598 25,014 25,930 25,116
28,397 18,880 16,818 31,412
Net shareholders' equity 8,943 18,064 17,500 8,665
18,051 20,526 16,673 11,114
================================================================================
==============================================
<FN>
<1> As adjusted to account for the sale of all 2,400,000
shares offered, the application of the estimated net
proceeds and the Acquisition. Based on the Company's fiscal
year ended March 31, 1998 and the Acquired Business's 12
months ended June 30, 1998. See Unaudited Pro Forma
Consolidated Financial Statements and the notes thereto
beginning on page F-2 of this prospectus.
<2> Includes non-cash charges of $8,133,000 and $4,246,000
to reduce the carrying value of the Company's LD inventory
to its net realizable value and 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 the Company's subsidiary,
U.S. Laser Video Distributors, Inc., of which $202,000 is
composed primarily of fees and expenses associated with
facility lease termination and employee severance payments,
and $623,000 (a non-cash charge) is composed of the write-
off of unamortized facility leasehold improvements and
goodwill.
<3> Includes non-cash charges of $1,964,000 and $1,946,000
to reduce the carrying value of the Company's LD inventory
to its estimated net realizable value and to provide for
estimated doubtful accounts receivable, respectively.
<4> Other expense represents a non-recurring charge composed
primarily of legal and accounting fees associated with the
termination of acquisition negotiations.
<5> 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>
-16-
<PAGE>
CERTAIN TRANSACTIONS
Upon consummation of the Acquisition, Image/KC will pay
$3 million in cash to the Seller and will cause the Company
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 the Company's Proxy
Statement for additional information with respect to related
party transactions.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company 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 September 25, 1998, 13,548,959 shares of
common stock were outstanding and held of record by
approximately 1,667 holders. No shares of preferred stock
are issued and outstanding as of the date hereof.
The following description of the Company'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 the Company'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 the
Company'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 September 25, 1998, there were 2,566,534 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 the Company pursuant
to a Credit Agreement (the "Credit Agreement") dated as of
September 29, 1997 between the Company 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: (i) 3,293,169 shares
of common stock beneficially owned by it, and (ii) an
additional 23,899 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 the Company offers shares in a
registered offering on behalf of another shareholder of the
Company. 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 the Company in an amount necessary to maintain their
respective percentage
-17-
<PAGE>
ownership interest in the Company. These rights are
triggered if, among other things, shares of common stock
of the Company are sold for less than 80% of fair market
value or rights to purchase common stock for less than
80% of fair market value are sold. According to
the Company'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. 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 the Company's Annual Report.
The Company 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 the Company'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
The Company 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 the Company 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, the Company has no outstanding preferred stock and
does not plan to issue any preferred stock.
Anti-Takeover Provisions
Certain provisions of the Company'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.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's
common stock is American Securities Transfer & Trust, 938
Quail Street, Suite 101, Lakewood, Colorado 80215.
-18-
<PAGE>
PLAN OF DISTRIBUTION
The common stock is being offered for sale by the
Company on a best efforts basis to a limited number of
accredited investors. MDB Capital Group LLC, the Placement
Agent, has been retained pursuant to a Placement Agent
Agreement to act as the exclusive agent for the Company in
connection with the arrangement of offers and sales of the
common stock on a best efforts basis.
The Placement Agent is not obligated to, and does not
intend itself to, take (or purchase) any of the shares of
common stock being offered. The Placement Agent intends to
obtain indications of interest from potential investors for
the purchase of the shares being offered. The Company
intends to request effectiveness of the Registration
Statement either (i) when the Placement Agent has received
indications of interest for all 2,400,000 shares, or
(ii) if the Placement Agent does not receive indications of
interest for all 2,400,000 shares, at such time prior to the
termination of this offering as the Placement Agent and the
Company deem appropriate. 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 closing
date, which will be scheduled for three business days after
pricing. Once the shares to be sold have been allocated by
the Placement Agent and the Company, investors will receive
confirmation of the acceptance or rejection of their
indication of interest and trades will be settled on the
scheduled closing date, on a delivery versus payment basis
for institutional accredited investors through the Placement
Agent's clearing firm. Accredited investors other than
institutional accredited investors will be required to
establish a securities account with the Placement Agent and
to settle the transaction on the scheduled closing date.
This offering will not continue after December 15, 1998,
unless the Company decides to extend it with the Placement
Agent's agreement. The Placement Agent 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
the Company reserves the right to terminate this offering at
any time.
The offering price for the common stock offered hereby
was determined by the Company and the Placement Agent based
primarily on the closing price of $____ for the Company's
common stock on __________, 1998. In determining the
offering price, the Company and the Placement Agent also
considered general market conditions, trading volume of the
Company's common stock and overall demand for this offering.
The Placement Agent will receive a commission equal to
8.0% of the gross proceeds received by the Company 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.,
the Company's largest shareholder, or its affiliates. The
Placement Agent may allow to certain dealers who are members
of the National Association of Securities Dealers concessions
of not in excess of 4.0%. The Company has agreed to
pay to the Placement Agent, on a non-accountable basis,
2.0% of the gross proceeds ($168,000 assuming the
sale of 2,400,000 shares at $3.50 per share, the closing
price of the Company's common stock on October 7, 1998) from
the sale of the shares to cover the Placement Agent's out-of-
pocket expenses, including, without limitation, counsel
fees. The Company has also agreed to indemnify the
Placement Agent 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 the Company by O'Melveny &
Myers LLP, Los Angeles, California. Certain legal matters
will be passed upon for the Placement Agent by Resch,
Polster Alpert & Berger LLP, Los Angeles, California.
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.
-19-
<PAGE>
INDEX TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements F-2
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended March 31, 1998 F-3
Notes to Unaudited Pro Forma Consolidated Statement of
Operations for the year ended March 31, 1998 F-4
Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1998 F-5
Notes to Unaudited Pro Forma Consolidated Balance Sheet
as of March 31, 1998 F-6
</TABLE>
-F-1-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated
financial information (the "Pro Forma Financial Statements")
of the Company is based upon the historical consolidated
financial statements of the Company incorporated by
reference herein, adjusted to give effect to the Acquisition
and the receipt of proceeds from this offering
(collectively, the "Transactions").
The Pro Forma Financial Statements were prepared to
illustrate the estimated effects of the Transactions. The
pro forma adjustments are designed to reflect the following
impacts upon the consolidated financial statements: (i) the
inclusion of the results of operations of the Acquired
Business to the consolidated financial statements of the
Company, (ii) the elimination of sales from the Company to
the Acquired Business, (iii) the elimination of accounts
receivable of the Company and accounts payable of the
Acquired Business related to product purchased by the
Acquired Business from the Company, (iv) the elimination of
profit in ending inventory on hand of the Acquired Business
purchased from the Company, (v) the recording of fair value
of the assets acquired in the Acquisition and the related
goodwill, and the amortization thereon, (vi) the incremental
royalty expense resulting from reduced gross margins on
certain sales of exclusivity licensed titles sold by the
Acquired Business, (vii) the income tax effect of the
aforementioned adjustments, and (viii) the effect on
shareholder's equity from the issuance of common stock in
the Transaction. The Pro Forma Financial Statements do not
reflect non-recurring compensation and consulting payments
to be made to Ken Crane, Jr. of $1.5 million and to Pamela
Crane and Casey Crane of $250,000 each. The payment to Ken
Crane, Jr. will be made upon the closing of the Acquisition
and an immediate charge to earnings of $1.5 million will be
recorded. The payments to Pamela Crane and Casey Crane will
be made 50% upon the closing of the Acquisition and 50% in
January 1999 and will be recorded as a charge to earnings
ratably over the term of the consulting agreements, which is
one year.
The pro forma consolidated statements of operations
data give effect to the Transactions as if the Transactions
had occurred on April 1, 1997 and the pro forma consolidated
balance sheet data give effect to the Transactions as if the
Transactions had occurred on March 31, 1998. The pro forma
adjustments are based upon available information and certain
adjustments that the Company believes are reasonable. The
Pro Forma Financial Statements do not purport to represent
what the Company's results of operations or financial
condition for any future period or as of any date. The Pro
Forma Financial Statements should be read in conjunction
with the with the historical consolidated financial
statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Company's Annual
Report and in the Company's Quarterly Report incorporated by
reference herein.
The Acquisition will be accounted for as a purchase.
Under purchase accounting, the total purchase cost and fair
value of the liabilities assumed will be allocated to the
net tangible assets of the Company based upon their
respective fair values as of the closing based on valuations
and other studies that are not yet available. A preliminary
allocation of the purchase cost has been made to the major
categories of assets and liabilities in the accompanying pro
forma consolidated financial information based on the
Company estimates. The actual allocation of purchase cost
and resulting effect on operating income may differ
significantly from the pro forma amounts included herein.
The fiscal year end of the Company is March 31, 1998.
The fiscal year end of the Acquired Business is July 31,
1998. To comply with the Commission's rules and
regulations, the twelve month period ended June 30, 1998 for
the Acquired Business has been utilized for inclusion in the
accompanying pro forma consolidated statement of operations
data. The pro forma consolidated balance sheet includes the
information for the Acquired Business as of June 30, 1998.
The impact of using the June 30, 1998 financial information
instead of July 31, 1998 does not have a material effect
upon the Pro Forma Financial Statements.
-F-2-
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Statement of
Operations
(in thousands, except per share data)
================================================================================
==========================================
The
The Acquired
Company- Business-
Pro Pro Forma-
Year ended Year ended
Forma Year Ended
March 31, 1998 June 30,
1998<b> Adjustments March 31, 1998
-------------- -------------
- --- ----------- ---------------
<S> <C> <C>
<C> <C>Net Sales $75,516
16,746 (8,069)<C> 84,193
Operating costs and expenses 84,605 16,274
93,528
Elimination of cost of sales
(8,069)<C>
Amortization of good will
353 <a>
Increase in royalty expense
200 <e>
Elimination of profit in ending inventory
165 <d>
-------------- ------------
- ---- ----------- ---------------
Operating income(loss) (9,089) 472
(718) (9,335)
Interest expense (662) -
- - (662)
Interest income 118 -
- - 118
-------------- ------------
- ---- ----------- ---------------
Income (loss) before income taxes (9,633) 472
(718) (9,879)
Income tax expense(benefit) (52) -
(1) <f> (53)
-------------- ------------
- ---- ----------- ---------------
Net income (loss) (9,581) 472
(717) (9,826)
==============
================ =========== ===============
Net loss per share:
Basic (0.71)
(0.61)
Diluted (0.71)
(0.61)
Number of weighted average shares used in net
loss per share calculation: Basic
13,471 2,658 16,129
Diluted 13,471
2,658 16,129
================================================================================
==========================================
-F-3-
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement of Operations
<FN>(a)The Acquisition will be accounted for as a purchase.
Under purchase accounting, the total purchase cost and fair
value of the liabilities assumed will be allocated to the
net tangible assets of the Company based upon their
respective fair valued as of the closing based on valuations
and other studies that are not yet available. A preliminary
allocation of the purchase cost has been made to the major
categories of assets and liabilities in the accompanying pro
forma consolidated financial information based on Company
estimates. The actual allocation of purchase cost and
resulting effect on operating income may differ
significantly from the pro form amounts included herein.
The adjustment for estimated pro forma amortization is
based on the estimated fair values. The resulting
goodwill, aggregating $5.3 million, is expected to be
amortized over 15 years at $353,000 per year.
The estimated net realizable value of inventories is
expected to approximate the fair value of the inventory
acquired in the Acquisition.
(b) Reflects the results of operations of the Acquired
Business for the year ended June 30, 1998.
(c) Reflects the elimination of sales made by the Company to
the Acquired Business during the year ended March 31, 1998.
(d) Reflects the elimination of profit in ending inventory
aggregating $165,000 in the Acquired Business for inventory
purchased from the Company during the year ended and on hand
at June 30, 1998.
(e) Reflects the incremental royalty expense aggregating
$200,000 resulting from reduced gross margins on certain
sales of exclusively licensed titles sold by the Acquired
Business.
(f) The tax effects of the pro forma adjustments to income
(loss) before income taxes is based on the estimated
effective tax rate during the period. The pro forma
adjustments assume that no valuation reserves would be
required under SFAS 109, "Accounting for Income Taxes."
</FN>
</TABLE>
-F-4-
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated
Balance Sheet
(in thousands)
================================================================================
=========================================
The
The Acquired
Company- Business-
Pro Forma Pro Forma-
March 31, 1998 June 30,
1998<C> Adjustments March 31, 1998
-------------- ------------
- ---- ----------- -----------------
<S> <C> <C>
<C> <C>
Assets
Cash and Cash equivalents $ 1,015 1
3,825 <a><b> 4,841
Accounts receivable 6,978 -
(613)<d> 6,365
Inventories 11,205 1,234
(165)<e> 12,274
Royalties, distribution fee and license fee
advances 4,566 -
(200)<f> 4,366
Prepaid expenses and other assets 1,094 14
- - 1,108
Property, equipment and improvements 6,223 253
- - 6,476
Land held for sale 2,700 -
- - 2,700
Intangible assets - 5,300<a>
- - 5,300
-------------- -------------
- --- ----------- ----------------
Total assets 33,781 6,802
2,847 43,430
==============
================ =========== ================
Liabilities and Shareholders' equity
Accounts payable and accrued expenses 12,303 1,427
(613)<d> 13,117
Accrued royalties, distribution fees and
license fees 2,003 -
- - 2,003
Notes payable 10,810 -
- - 10,810
-------------- -------------
- --- ----------- --------------
Total liabilities 25,116 1,427
(613) 25,930
-------------- -------------
- --- ----------- --------------
Common stock 17,764 5,375<a>
3,825<b> 26,964
Additional paid in capital 3,064 -
3,064
Accumulated deficit (12,163) -
(365)<e><f> (12,528)
-------------- -------------
- --- ----------- --------------
Net shareholders' equity 8,665 5,375
3,460 17,500
-------------- -------------
- --- ----------- --------------
Total liabilities and shareholders' equity 33,781 6,802
2,847 43,330
==============
================ =========== ==============
================================================================================
=========================================
-F-5-
<PAGE>
<FN>
Notes to Unaudited Pro Forma Consolidated Balance sheet
<a> The Acquisition will be accounted for as a purchase.
Under purchase accounting, the total purchase cost and fair
value of the liabilities assumed will be allocated to the
net tangible assets of the Company based upon their
respective fair values as of the closing based on valuations
and other studies that are not yet available. A preliminary
allocation of the purchase cost has been made to the major
categories of assets and liabilities in the accompanying
pro forma consolidated balance sheet data based on Company
estimates. The actual allocation of purchase cost and
resulting effect on operating income may differ
significantly from the pro forma amounts included herein.
Purchase cost:
Purchase Price:
Cash $3,075,000
Stock 2,000,000
Estimated fees and expenses 300,000
--------
Total purchase cost $5,375,000
Adjusted book value of net assets acquired:
Inventories 1,234,000
Prepaid expenses and cash 15,000
Property and equipment 253,000
Accounts payable assumed (1,427,000)
---------
Unallocated excess (goodwill) $5,300,000
==========
<b> Reflects the issuance of 2,400,000 shares of common stock
at $3.50 per share for aggregate consideration of $8.4
million. Fees and expenses related to the Transactions are
estimated to be $1.2 million.
Also reflects the issuance of 258,370 shares of common
stock at $7.74 per share for aggregate consideration of
$2.0 million in connection with the Company's
acquisition of the Acquired Business.
<C> Reflects the acquired assets and assumed liabilities of
the Acquired Business as of June 30, 1998.
<d> Reflects the elimination of accounts receivable of the
Company and accounts payable of the Acquired Business
related to produce purchased by the Acquired Business from
the Company.
<e> Reflects the elimination of profit in ending inventory
aggregating $165,000 in the Acquired Business for inventory
purchased from the Company during the year ended June 30,
1998.
<f> Reflects the incremental royalty liability aggregating
$200,000 resulting from reduced gross margins on certain
sales of exclusively licensed titles sold by the Acquired
Business.
</FN>
</TABLE>
-F-6-
<PAGE>
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 the Company 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.
----------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Available Information ii
Incorporation of Certain Information by
Reference; Deliveries ii
Forward Looking Statements ii
Prospectus Summary 1
Risk Factors 3
The Company 9
Recent Developments 10
Use of Proceeds 13
Dilution 13
Capitalization 14
Price Range of Common Stock 15
Selected Historical and
Pro Forma Financial Information 15
Certain Transactions 17
Description of Capital Stock 17
Plan of Distribution 19
Legal Matters 19
Experts 19
Unaudited Pro Forma Consolidated
Financial Statements F-1
</TABLE>
-Cover-
<PAGE>
2,400,000 SHARES
IMAGE
ENTERTAINMENT,
INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MDB
CAPITAL
GROUP
LLC
-Cover-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
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
<FN>
*Expenses are estimated for the registration fee.
</FN>
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Restated
Articles that eliminate liability of the directors of the
Company for monetary damages to the fullest extent
permissible under California law and that authorize the
Company to provide for the indemnification of agents (as
defined in Section 317 of the California General Corporation
Law) of the Company to the fullest extent permissible under
California law. Article VI, Section 1 of the Company's
Bylaws provides for indemnification of agents of the Company
to the fullest extent permissible under California law. The
Company'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 the Company, or
is or was serving at the request of the Company 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 the Company 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 the
Company through: (1) a majority vote of a quorum of the
Company'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
the Company 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.
The Company 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 the
Company for such loss for which the Company has lawfully
indemnified the directors and officers.
The Company has entered into Indemnity Agreements with
its directors and officers. The Indemnity Agreements
provide for the indemnification of each of the Company's
officers and directors in certain third-party proceedings
and in certain proceedings by or in the name of the Company.
In addition, the Indemnity Agreements provide for the
advance payment by the Company of expenses incurred by an
indemnitee in such proceedings.
-II-1-
<PAGE>
The Company 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 the Company to maintain
directors' and officers' liability insurance for the benefit
of such officers under certain circumstances.
The Placement Agent Agreement between the Company and
MDB Capital Group LLC provides for indemnification of
certain persons related to the Company (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.
-II-2-
<PAGE>
Item 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
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 the Company'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 the Company'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 the Company,
as to the legality of the common stock offered
hereby (including consent).
10.1 The Company's Restated 1989 Incentive Stock Option Plan,
as amended. Filed as Exhibit 10.1 of the
Company's Form 10-K for the year ended March 31,
1992 and incorporated herein by this reference.
10.2 The Company's 1998 Incentive Plan. Filed as Exhibit A
of the Company's Proxy Statement dated July 29,
1998 and incorporated herein by this reference.
10.3 The Company's 1990 Stock Option Plan. Filed as Exhibit
A of the Company's Proxy Statement dated December
27, 1990 and incorporated herein by this
reference.
10.4 The Company's Restated 1992 Stock Option Plan. Filed as
Exhibit A of the Company's Proxy Statement dated
September 9, 1994 and incorporated herein by this
reference.
10.5 The Company's 1994 Eligible Directors Stock Option Plan
and Form of Eligible Director Non-Qualified Stock
Option Agreement. Filed as Exhibit 10.4 of the
Company's Form 10-K for the year ended March 31,
1995 and incorporated herein by this reference.
10.6 Form of Option Agreement dated October 15, 1991 between
the Company and Martin W. Greenwald. Filed as
Exhibit 10.3 of the Company's 10-Q for the quarter
ended September 30, 1991 and incorporated herein
by this reference.
10.7 Option granted August 13, 1992 by the Company to Cheryl
Lee. Filed as Exhibit 10.12 of the Company's Form
10-K for the year ended March 31, 1994 and
incorporated herein by this reference.
10.8 Form of Option granted May 19, 1994 to Jeff Framer,
Cheryl Lee and David Borshell. Filed as Exhibit
10.24 to the Company's Form 10-K for the year
ended March 31, 1994 and incorporated herein by
this reference.
10.9 Eligible Director Non-Qualified Stock Option Agreement
dated as of July 22, 1998 between the Company and
Stuart Segall.
-II-3-
<PAGE>
10.10 Eligible Director Non-Qualified Stock Option
Agreement dated as of September 17, 1998 between
the Company and Mark Trevenen Huxley.
10.11* Form of Termination Agreement between the Company 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
the Company and Martin W. Greenwald.
10.13* Employment Agreement dated as of July 1, 1998 between
the Company and Cheryl Lee.
10.14* Employment Agreement dated as of July 1, 1998 between
the Company and Jeff Framer.
10.15* Employment Agreement dated as of July 1, 1998 between
the Company and David Borshell.
10.16* Form of Performance Restricted Stock Unit Award
Agreement (and related General Provisions) between
the Company 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 the Company and its
directors and officers. Filed as Exhibit F of the
Company's Proxy Statement dated September 5, 1989
and incorporated herein by this reference.
10.18 Stock Purchase Agreement among the Company, Directors
of the Company and various Buyers dated December
29, 1987. Filed as Exhibit 4.3 of the Company's
Form 8-K dated December 29, 1987 and incorporated
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 the
Company's Form 10-Q for the quarter ended
September 30, 1992 and incorporated herein by this
reference.
10.19 Stock Purchase Agreement among the Company, Directors
of the Company and Image Investors Co. dated June
27, 1990. Filed as Exhibit 10.53 of the Company's
Form 10-K for the year ended March 31, 1990, and
incorporated herein by this reference. The
Company 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 the Company and Image
Investors Co. dated December 30, 1992, including
Warrant. Filed as Exhibit 10.6 of the Company's
Form 10-Q for the quarter ended December 31, 1992
and incorporated herein by this reference.
10.21 Stock Purchase Agreement between the Company and Stuart
Segall dated as of July 12, 1995. Filed as
Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by this reference.
10.22 Stock Purchase Agreement between the Company and Martin
W. Greenwald dated as of June 27, 1996. Filed as
Exhibit 10.2 of the Company's Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by this reference.
-II-4-
<PAGE>
10.23 Purchase and Sale Agreement between the Company and LEI
Partners, L.P. dated December 31, 1990. Filed as
Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended December 31, 1990 and incorporated
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 the Company and
P&R Investment Company. Filed as Exhibit 10.1 of
the Company's Form 10-Q for the quarter ended
December 31, 1993 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 the Company and
P&R Investment Company. Filed as Exhibit 10.2 of
the Company's Form 10-Q for the quarter ended
December 31, 1993 and incorporated 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 the
Company and P&R Investment Company. Filed as
Exhibit 10.20.c of the Company'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 the
Company. Filed as Exhibit 10.19 of the Company's
Form 10-K for the year ended March 31, 1996 and
incorporated herein by this reference.
10.27 Construction Agreement between the Company and Carson
Construction Management, Inc. dated as of November
25, 1996. Filed as Exhibit 10.23 of the Company's
Form 10-K for the year ended March 31, 1997 and
incorporated herein by this reference.
10.28 Business Loan Agreement between the Company and Bank of
America National Trust and Savings Association
dated March 10, 1997. Filed as Exhibit 10.26 of
the Company'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 the Company and
Bank of America National Trust and Savings
Association dated March 10, 1997. Filed as
Exhibit 10.23.a of the Company's Form 10-K for the
year ended March 31, 1998 and incorporated herein
by this reference.
10.29 Lease Intended as Security between the Company and BA
Leasing & Capital Corporation dated March 19,
1997. Filed as Exhibit 10.24 of the Company'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 the Company and BA
Leasing & Capital Corporation dated March 19,
1997. Filed as Exhibit 10.24.a of the Company'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 the Company and BA
Leasing & Capital Corporation dated March 19,
1997. Filed as Exhibit 10.24.b of the Company's
Form 10-K for the year ended March 31, 1998 and
incorporated herein by this reference.
10.30 Agreement for Purchase and Sale dated May 13, 1998
between the Company and Jackson-Shaw Company.
Filed as Exhibit 10.25 of the Company's Form 10-K
for the year ended March 31, 1998 and incorporated
herein by this reference.
-II-5-
<PAGE>
10.31 Loan Agreement between the Company and Union Bank of
California, N.A. dated as of December 17, 1996.
Filed as Exhibit 10.20 of the Company's Form 10-K
for the year ended March 31, 1997 and incorporated
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 the Company and Union Bank of California,
N.A. Filed as Exhibit 10.20.A of the Company's
Form 10-K for the year ended March 31, 1997 and
incorporated 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 the Company and Union Bank of California,
N.A. Filed as Exhibit 10.20.B of the Company's
Form 10-K for the year ended March 31, 1997 and
incorporated 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 the Company and Union Bank of
California, N.A. Filed as Exhibit 10.26.c of the
Company'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 the Company and Union Bank of California,
N.A. Filed as Exhibit 10.26.d of the Company'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 the Company and Union Bank of California,
N.A. Filed as Exhibit 10.26.e of the Company'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 the Company and Union Bank of California,
N.A. Filed as Exhibit 10.26.f of the Company's
Form 10-K for the year ended March 31, 1998 and
incorporated herein by this reference.
10.32 Credit Agreement dated as of September 29, 1997 by and
between the Company and Image Investors Co. Filed
as Exhibit 10.27 of the Company'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 the
Company (included with Exhibit 5).
24 Power of Attorney (included on page II-8).
<FN>
* To be filed by amendment.
</FN>
</TABLE>
-II-6-
<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.
-II-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, the Registrant certifies that it has
reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on October 9, 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
POWER OF ATTORNEY
We, the undersigned officers and directors of
Image Entertainment, Inc., hereby severally constitute and
appoint Martin W. Greenwald and Jeff M. Framer, and each of
them singly, our true and lawful attorneys-in-fact, with
full power to them in any and all capacities, to sign any
amendments to this Registration Statement on Form S-2
(including any post-effective amendments thereto), and to
file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act
of 1933, this 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 October 9, 1998
Martin W. Greenwald Board, Chief
Executive Officer,
President and
Treasurer
/s/ Jeff M. Framer
- ------------------------ Chief Financial October 7, 1998
Jeff M. Framer Officer (Principal
Financial and
Accounting Officer)
/s/ Stuart Segall
- ------------------------ Director October 5, 1998
Stuart Segall
/s/ Ira Epstein
- ------------------------ Director October 5, 1998
Ira Epstein
/s/ M. Trevenen Huxley
- ------------------------ Director October 5, 1998
M. Trevenen Huxley
</TABLE>
-II-8-
<PAGE>
ASSET PURCHASE AGREEMENT
dated as of
August 20, 1998,
between
Ken Crane's Magnavox City, Inc.
d/b/a Ken Crane's Home Entertainment
and
Image Newco, Inc.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Definitions 1
ARTICLE II
SALE OF ASSETS, ASSUMPTIONS OF LIABILITIES AND RELATED
TRANSACTIONS
2.1 Purchase and Sale of Assets 7
2.2 Assumption of Certain Liabilities 10
2.3 Purchase Price and Allocation 11
2.4 Determination of Closing Date Net Assets 12
2.5 Purchase Price Adjustment 13
ARTICLE III
CLOSING
3.1 Closing Date 13
3.2 Items to be Delivered at the Closing By Seller 13
3.3 Buyer. Items to be Delivered at the Closing by Buyer 14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 Organization and Related Matters 15
4.2 Stock 15
4.3 Financial Statements; Changes; Contingencies 15
4.4 Material Contracts 17
4.5 Condition of Property; Leases 17
4.6 Intangible Property 19
4.7 Authorization; No Conflicts 19
4.8 Legal Proceedings 20
4.9 Minute Books 20
4.10 Accounting Records; Internal Controls; Absence of
Certain Payments 20
4.11 Permits 21
4.12 Compliance with Law 21
4.13 Dividends and Other Distributions 21
4.14 Employee Benefits 21
4.15 Certain Interests 22
4.16 Intercompany Transactions 22
4.17 No Brokers or Finders 22
4.18 Accuracy of Information 22
4.19 Inventories 23
4.20 Receivables 23
4.21 Customers and Suppliers 23
4.22 Environmental Compliance 24
4.23 Powers of Attorney 24
4.24 Returns 24
4.25 Seller's Investment Representation 24
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 Organization and Related Matters 25
5.2 Authorization 25
5.3 No Conflicts 25
5.4 No Brokers or Finders 25
5.5 Image Shares 25
ARTICLE VI
COVENANTS WITH RESPECT TO CONDUCT PRIOR TO CLOSING
6.1 Access 26
6.2 Material Adverse Changes; Reports; Financial Statements 26
6.3 Conduct of Business 27
6.4 Notification of Certain Matters 28
6.5 Permits and Approvals; Third Party Consents 29
6.6 Preservation of Business Prior to Closing Date 29
6.7 Sales and Transfer Taxes 29
6.8 No Other Bids 29
6.9 Certain Filings 30
6.10 Elimination of Intercompany and Affiliate Liabilities 30
6.11 Repair of Damage; Condemnation 30
6.12 Financing 31
ARTICLE VII
ADDITIONAL CONTINUING COVENANTS
7.1 Non-competition 31
7.2 Nondisclosure of Proprietary Data 32
7.3 Tax Cooperation 33
7.4 Employment Matters 33
7.5 Post-Closing Collection of Other Purchased Assets 34
7.6 Exchange Right 34
7.7 Sharing of Assets 34
7.8 Sharing of Services 34
7.9 Restrictions on Image Shares 35
ARTICLE VIII
CONDITIONS OF PURCHASE
8.1 General Conditions 35
8.2 Conditions to Obligations of Buyer 35
8.3 Conditions to Obligations of Seller 37
ARTICLE IX
TERMINATION OF OBLIGATIONS; SURVIVAL
9.1 Termination of Agreement 38
9.2 Effect of Termination 39
9.3 Survival of Representations and Warranties 39
ARTICLE X
INDEMNIFICATION
10.1 Obligations of Seller 40
10.2 Obligations of Buyer 40
10.3 Certain Tax Matters 40
10.4 Procedure 41
10.5 Survival 42
10.6 Limitations on Indemnification 42
10.7 Notice by Seller 42
10.8 Not Exclusive Remedy 42
10.9 Offset 42
ARTICLE XI
GENERAL
11.1 Amendments; Waivers 43
11.2 Schedules; Exhibits; Integration 43
11.3 Best Efforts; Further Assurances 43
11.4 Governing Law 43
11.5 No Assignment 44
11.6 Headings 44
11.7 Counterparts 44
11.8 Publicity and Reports 44
11.9 Confidentiality 44
11.10 Parties in Interest 45
11.11 Guaranty of Performance 45
11.12 Notices 45
11.13 Expenses 46
11.14 Remedies; Waiver 47
11.15 Attorney's Fees 47
11.16 Specific Performance 48
11.17 Severability 48
ARTICLE XII
ARBITRATION OF DISPUTES
12.1 Agreement to Arbitrate 48
12.2 Fees and Expenses of Arbitration 49
12.3 Choice of Law 49
12.4 Place of Arbitration 49
12.5 Judgment 49
<PAGE>
EXHIBITS
EXHIBIT A Escrow Agreement
EXHIBIT B Bill of Sale and Assignment
EXHIBIT C Lease Assignment and Assumption Agreement
EXHIBIT D Estoppel Statement from Lessor
EXHIBIT E Special Power of Attorney
EXHIBIT F Assumption Agreement
EXHIBIT G Investment Letter
EXHIBIT H Opinion of Seller's Counsel
EXHIBIT I Letter of Seller Accountant
EXHIBIT J Employment Agreement
EXHIBIT K Consulting Agreement
EXHIBIT L Opinion of Buyer's Counsel
EXHIBIT M Guaranty of Performance
EXHIBIT N Non-competition Agreement
SCHEDULES
SCHEDULE 2.1(a) Purchased Assets List
SCHEDULE 2.2(b) Assumed Liabilities List
SCHEDULE 2.3 Allocation of Purchase Price
SCHEDULE 2.4 Balance Sheet for Purchased Assets and Assumed
Liabilities
SCHEDULE 3.2(m) Related Agreements
SCHEDULE 4.1 Organization and Related Matters
SCHEDULE 4.3 Other Liabilities List
SCHEDULE 4.4 Contract List
SCHEDULE 4.4(a) Contracts Modified or Terminated List
SCHEDULE 4.5 Real Property and Lease List
SCHEDULE 4.6 Intangible Property List
SCHEDULE 4.7 Permits and Approvals List
SCHEDULE 4.8 Litigation List
SCHEDULE 4.11 Excluded Permits List
SCHEDULE 4.15 Certain Interests List
SCHEDULE 4.21 Customer and Supplier List
SCHEDULE 4.22 Environmental Compliance
SCHEDULE 6.3(f) Salary and Benefits List
SCHEDULE 6.3(k) Capital Expenditures
SCHEDULE 7.4 Employee List
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is entered into as of
August 20, 1998, between Image Newco, Inc., a California
corporation ("Buyer") and Ken Crane's Magnavox City, Inc. d/b/a
Ken Crane's Home Entertainment, a California corporation (the
"Seller").
R E C I T A L S
WHEREAS, Seller through its Software Division is
engaged in the business of distributing laserdiscs ("LDs") and
digital video discs ("DVDs") through the Westminster Retail
Store, mail order, and the KC Website (as defined below, the
"Business").
WHEREAS, Seller owns substantially all the operating
assets used in connection with the Business.
WHEREAS, Seller desires to sell, and Buyer desires to
purchase such assets on the terms and conditions set forth in
this Agreement.
A G R E E M E N T
In consideration of the mutual promises contained
herein and intending to be legally bound, the parties agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions.
For all purposes of this Agreement, except as otherwise
expressly provided,
(a) the terms defined in this Article I have the meanings
assigned to them in this Article I and include the plural as well
as the singular
(b) all accounting terms not otherwise defined herein have the
meanings assigned under generally accepted accounting principles,
(c) all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles,
Sections and other subdivisions of the body of this Agreement,
(d) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms, and
(e) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to
any particular Article, Section or other subdivision.
As used in this Agreement and the Exhibits and
Schedules delivered pursuant to this Agreement, all of which are
incorporated by this reference, the following definitions shall
apply.
"Accounts Receivable" has the meaning specified in
Section 2.1(b).
"Action" means any action, complaint, investigation,
petition, suit or other proceeding, whether civil or criminal, in
law or in equity, or before any arbitrator or Governmental
Entity.
"Affiliate" means a Person that directly or indirectly,
through one or more intermediaries, controls, or is controlled
by, or is under common control with, a specified Person. For
purposes of this definition, "control" shall include, but shall
not be limited to, the power described in Rule 405 under the
Securities Act, as well as the exertion of significant influence
over a Person and shall be conclusively presumed as to any 30% or
greater equity interest.
"Agreed Rate" means, as of the date of any
determination of interest to be made by reference thereto, the
interest rate established on such date by Union Bank of
California, N.A. as its "prime" rate, or, if that rate is no
longer established or published, a comparable interest rate.
"Agreement" means this Agreement by and between Buyer
and Seller, as amended or supplemented together with all Exhibits
and Schedules attached or incorporated by reference.
"Approval" means any approval, authorization, consent,
qualification or registration, or any waiver of any of the
foregoing, required to be obtained from, or any notice, statement
or other communication required to be filed with or delivered to,
any Governmental Entity or any other Person.
"Associate" of a Person means (a) corporation or
organization (other than a party to this Agreement) of which such
person is a director, an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
Equity Securities, or upon which such person is able to exert
significant influence; (b) any trust or other estate in which
such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar capacity; and (c)
any relative or spouse of such person or any relative of such
spouse.
"Assumed Liabilities" has the meaning specified in
Section 2.2(b).
"Business" means Seller's business and operations of
distributing Optical Discs through the Westminster Retail Store,
mail order, and the KC Website, and shall be deemed to include
each or any of the following incidents of such businesses:
income, cash flow, operations, condition (financial or other),
Purchased Assets, anticipated revenues (other than in respect of
the Excluded Assets), prospects, Assumed Liabilities, goodwill
and personnel.
"Closing" means the consummation of the transaction
contemplated by this Agreement.
"Closing Date" means the date of the Closing.
"Closing Date Statement of Net Assets" has the meaning
set forth in Section 2.4.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Contract" means any agreement, arrangement, bond,
commitment, franchise, indemnity, indenture, instrument, lease,
license or understanding, whether or not in writing.
"Derivative Work" means (a) without limitation, any
computer program, object code, source code, work product,
service, improvement supplement, modification, alteration,
addition, revision, enhancement, new version, new edition,
remake, sequel, translation, adaption, design, plot, theme,
character, story line, concept, scene, audio-visual display,
interface element or aspect, in any medium, format, use or form
whatsoever, whether interactive or linear and whether now known
or unknown, that is derived in any manner, directly or
indirectly, from the Internet Business, or any part or aspect
thereof, or that uses or incorporates any such Seller property,
or any part or aspect thereof; (b) any "derivative work" of
Seller or the Internet Business or part or aspect of any thereof,
as defined in the Copyright Laws of the U.S., Title 17 U.S.C.
section 101 et. seq. (the "Copyright Law"); and (c) any material
or documentation related to any of the foregoing.
"DVD" has the meaning specified in the Recitals.
"Electronic Commerce" means the on-line sale of a good
or service by digital transmission between computers or other
similar electronic databases, whether or not completed in real-
time. Electronic commerce includes, without limitation, payment
by credit or debit card or other means of electronic payment.
Electronic commerce may include the digital and immediate
distribution of goods which can be so distributed, including
software, pictures and video.
"Encumbrance" means any claim, charge, lease, covenant,
easement, encumbrance, security interest, lien, option, pledge,
rights of others, or restriction (whether on voting, sale,
transfer, disposition or otherwise), whether imposed by
agreement, understanding, law, equity or otherwise, except for
any restrictions on transfer generally arising under any
applicable federal or state securities law.
"Equity Securities" means any capital stock or other
equity interest or any securities convertible into or
exchangeable for capital stock or any other rights, warrants or
options to acquire any of the foregoing securities.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the related regulations and
published interpretations.
"Escrow Agent" means ________________________________,
in its capacity as escrow agent under the Escrow Agreement.
"Escrow Account" has the meaning set forth in Section
2.3.
"Escrow Agreement" has the meaning set forth in Section
2.3.
"Exchange Act" means the Securities Exchange Act of
1934, as amended.
"Excluded Assets" has the meaning specified in Section
2.1(b).
"Excluded Distributions" has the meaning specified in
Section 2.3(a).
"Excluded Liabilities" has the meaning specified in
Section 2.2(a).
"GAAP" means generally accepted accounting principles
in the United States, as in effect from time to time.
"Governmental Entity" means any government or any
agency, bureau, board, commission, court, department, official,
political subdivision, tribunal or other instrumentality of any
government, whether federal, state or local, domestic or foreign.
"Hazardous Substance" means (but shall not be limited
to) substances that are defined or listed in, or otherwise
classified pursuant to, any applicable Laws as "hazardous
substances," "hazardous materials," "hazardous wastes" or "toxic
substances," or any other formulation intended to define, list or
classify substances by reason of deleterious properties such as
ignitibility, corrosivity, reactivity, radioactivity,
carcinogenicity, reproductive toxicity or "EP toxicity," and
petroleum and drilling fluids, produced waters and other wastes
associated with the exploration, development, or production of
crude oil, natural gas or geothermal energy.
"Image" means Image Entertainment, Inc., a California
corporation and parent to Buyer.
"Image Shares" has the meaning specified in Section
2.3(a).
"Indemnifiable Claim" means any Loss for or against
which any party is entitled to indemnification under this
Agreement; "Indemnified Party" means the party entitled to
indemnity hereunder; and "Indemnifying Party" means the party
obligated to provide indemnification hereunder.
"Intangible Property" means any trade secret, secret
process or other confidential information or know-how and any and
all Intellectual Property Rights.
"Intellectual Property Rights" means any and all (by
whatever name or term known or designated) tangible and
intangible and now known or hereafter existing (a) rights
associated with works of authorship, including but not limited to
copyrights (including without limitation the sole and exclusive
right to prepare "derivative works" (as defined in the Copyright
Law) of the copyrighted work and to copy, manufacture, reproduce,
distribute copies of, modify, publicly perform and display the
copyrighted work and all derivative works thereof) and moral
rights (including without limitation any right to identification
of authorship and any limitation on subsequent modification), (b)
rights in and relating to the protection of trademarks, service
marks, trade names, goodwill, rights in packaging, rights of
publicity and privacy, merchandising rights and similar rights,
(c) rights in and relating to the protection of trade secrets and
confidential information, (d) patents, designs, algorithms and
other industrial property rights and rights associated therewith,
(e) other intellectual and industrial property and proprietary
rights (of every kind and nature however designated) relating to
intangible property that are analogous to any of the foregoing
rights (including without limitation logos, character rights,
"rental rights" and rights to renumeration), whether arising by
operation of law, contract, license or otherwise, (f)
registrations, applications, renewals, extensions, continuations,
divisions, or reissues thereof now or hereafter in force
throughout the universe (including without limitation rights in
any of the foregoing), and (g) rights in and relating to the sole
and exclusive possession, ownership and use of any of the
foregoing, including without limitation the right to license and
sublicense, franchise, assign, pledge, mortgage, sell, transfer,
convey, grant, gift over, divide, partition and use (or not use)
in any way any of the foregoing now or hereafter (including
without limitation any claims and causes of action of any kind
with respect to, and nay other rights relating to the enforcement
of, any of the foregoing).
"Interim Statement of Net Assets" has the meaning
specified in Section 4.3(b).
"Internet Business" has the meaning specified is
Section 2.1(a).
"Inventory" has the meaning specified in Section
2.1(a).
"Investment Letter" has the meaning specified in
Section 4.25.
"IRS" means the Internal Revenue Service or any
successor entity.
"KC Marks" means the names and logos and derivations
thereof used by Seller in the operation of its Software Division,
including, but not limited to, "Ken Crane's," "Ken Crane's Home
Entertainment City," "Ken Crane's Laserdisc" and "Ken Crane's
Laserdiscs/DVDs."
"KC Website" has the meaning specified in Section
2.1(a).
"KPMG" means KPMG Peat Marwick, LLP, independent
public accountants to Buyer.
"Law" means any constitutional provision, statute or
other law, rule, regulation, or interpretation of any
Governmental Entity and any Order.
"LD" has the meaning specified in the Recitals.
"Lease" has the meaning specified in Section 4.6.
"Loss" means any action, cost, damage, disbursement,
expense, liability, loss, deficiency, diminution in value,
obligation, penalty or settlement of any kind or nature, whether
foreseeable or unforeseeable, including but not limited to,
interest or other carrying costs, penalties, legal, accounting
and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and
amounts paid in settlement, that may be imposed on or otherwise
incurred or suffered by the specified person.
"Material Contract" means any Contract relating to the
Business as of or after the date hereof or at any time during the
preceding three years and includes but is not limited to those
Contracts deemed material by Section 4.5.
"Optical Disc" means LDs, DVDs, and any and all analog
or digital formats now or hereafter derived.
"Order" means any decree, injunction, judgment, order,
ruling, assessment or writ.
"Permit" means any license, permit, franchise,
certificate of authority, or order, or any waiver of the
foregoing, required to be issued by any Governmental Entity.
"Person" means an association, a corporation, an
individual, a partnership, a trust or any other entity or
organization, including a Governmental Entity.
"Prepaid Expenses" has the meaning specified in Section
2.1(a).
"Purchase Price" has the meaning set forth in Section
2.3.
"Purchased Assets" has the meaning set forth in Section
2.1(a).
"Related Agreements" means those agreements listed on
Schedule 3.2(m).
"SEC" means the Securities and Exchange Commission or
any successor entity.
"Securities Act" means the Securities Act of 1933, as
amended.
"Seller Accountant" means Buster Donelson, certified
public accountant to Seller.
"Seller Shareholder" means any beneficial holder of
outstanding Equity Securities of Seller as of the date hereof.
"Subsequent Contract" has the meaning specified in
Section 6.5(c).
"Subsidiary" means any Person in which Seller has a
direct or indirect equity or ownership interest at or in excess
of 30%.
"Tax" means any foreign, federal, state, county or
local income, sales and use, excise, franchise, real and personal
property, transfer, gross receipt, capital stock, production,
business and occupation, disability, employment, payroll,
severance or withholding tax or charge imposed by any
Governmental Entity, any interest and penalties (civil or
criminal) related thereto or to the nonpayment thereof, and any
Loss in connection with the determination, settlement or
litigation of any Tax liability.
"Tax Return" means a report, return or other
information required to be supplied to a Governmental Entity with
respect to Taxes including, where permitted or required, combined
or consolidated returns for any group of entities that includes
any Subsidiary.
"Termination Date" means the specific date first set
forth in Section 9.1.
"Trust" means the Crane's Family Trust, established
December 22, 1984.
"URL" means Uniform Resource Locator and indicates the
address of a Web Page."
"Web" means the World Wide Web, the designation for the
viewing of integrated text, graphics, sound and other media
through software known as a browser over the Internet. Web also
includes any future enhancement to the browsing software or
Internet backbone and protocols that deliver such content.
"Web Page" means a single file displayed through Web
browser software and made available for viewing, by means of a
download to local cache memory, over the Internet through a
common protocol.
"Westminster Retail Store" means all of Seller's
leasehold interests, assets, properties, fixtures, improvements,
machinery, equipment and inventory located at Seller's retail
store at 15251 Beach Boulevard, Westminster, California.
ARTICLE II
SALE OF ASSETS, ASSUMPTIONS OF LIABILITIES
AND RELATED TRANSACTIONS
2.1 Purchase and Sale of Assets.
(a) Purchased Assets. Subject to the terms and conditions of
this Agreement, on the Closing Date, Seller shall sell, convey,
assign, transfer and deliver to Buyer, and Buyer shall purchase,
acquire and accept from Seller, all of the assets, properties,
rights, privileges, claims and contracts of every kind and
nature, real and personal, tangible and intangible, absolute or
contingent, wherever located, owned, held or used or intended for
use in the operation of the Business (the "Purchased Assets") by
Seller, except the assets specifically identified in Section
2.1(b) (the "Excluded Assets"). The Purchased Assets shall
include, but shall not be limited to, the assets set forth on
Schedule 2.4 except as changed by assets acquired or disposed of
in the ordinary course of business of the Business after the date
thereof, and also shall include the following:
(i) Any leasehold interests in real property held by Seller used
or intended for use primarily in the operation of the Business.
(ii) All fixtures and improvements attached to any real property
used or intended for use primarily in the operation of the
Business.
(iii) All machinery, apparatus, furniture, fixtures,
supplies, motor vehicles, and other equipment of every type owned
or leased by Seller that is used or intended for use primarily in
the operation of the Business.
(iv) All inventory of usable goods, including all Optical Discs,
merchandise, finished products and other tangible personal
property held for sale or used or intended for use primarily in
the operation of the Business as of the date hereof other than
adult entertainment material and inventory (the "Inventory"),
together with any additions thereto and subject to any reductions
therefrom received or incurred by Seller operating the Business
in the ordinary course after the date hereof through the Closing
Date.
(v) All of Seller's rights and interests arising under or in
connection with any Contracts to which Seller is a party and
which relate to the Business and other documents relating to the
Business.
(vi) Seller's prepaid expenses as of the date hereof ("Prepaid
Expenses"), together with any additions thereto and subject to
any reductions therefrom made or accrued by Seller in operating
the Business in the ordinary course and in compliance with
Section 6.3 hereof after the date hereof through the Closing
Date.
(vii) Information services systems and software, including,
without limitation, Seller's computerized inventory monitoring
system used for retail, mail order and Internet sales.
(viii) Sales data, customer lists, information relating to
customers, suppliers' and manufacturers' names, mailing lists and
all rights thereto relating to the Business.
(ix) All licenses, consents and other third party rights
necessary to promote, sell or otherwise exploit the Optical
Discs.
(x) Seller's mail order business throughout the United
States and worldwide, including all materials related to Seller's
monthly catalog mailed to the Software Division's most recent
50,000 customers, customer lists and any other assets, equipment
or Contracts related to the operation of such mail order
business.
(xi) Seller's Internet business including all rights to
and ownership of the Web Page at URL "www.kencranes.com" or
"kencranes.com" (the "KC Website"), all computer hardware and
software (including source code) currently used to operate the KC
Website found at that URL, including all service and support
contracts related thereto, any leasehold or ownership interest in
the provision of connectivity or hosting, contracts with any
third party for the promotion of the KC Website or advertising
thereof, software that provides support for Electronic Commerce,
and any other assets, equipment or Contracts related to the
design, programming, development and maintenance of the KC
Website and any Derivative Work with respect to the above listed
items (collectively, the "Internet Business").
(xii) The exclusive, transferable, worldwide, irrevocable,
perpetual royalty-free right to use and exploit the KC Marks in
connection with the Business (including the Internet Business)
and any future development thereof in any form or medium.
(xiii) All of Seller's Intangible Property, and corporate and
trade names and Intellectual Property Rights used or intended for
use in the operation of the Business, including all of Seller's
rights in the corporate names and Intellectual Property Rights in
any location in the United States or in any foreign country; all
goodwill of the Business, point of purchase displays and other
materials, UPC Codes, commercials and other advertising copy and
material, including but not limited to catalogues; all of
Seller's books and records relating to the Business; transferable
Permits; and unemployment compensation, workers' compensation and
other credits, reserves or deposits with applicable Governmental
Entities relating to Seller's employees.
(xiv) Cash on hand in the accounts of Seller in an amount not
to exceed $20,000.
(b) Excluded Assets. The assets that constitute Excluded Assets
shall include only:
(i) The consideration delivered to Seller pursuant to this
Agreement, subject to adjustment pursuant to Section 2.5.
(ii) Seller's articles of incorporation, non-transferable
franchises, corporate seals, minute books, stock books and other
corporate records having to do with the corporate organization
and capitalization of Seller and all income tax records and non-
transferable Permits; provided, however, that copies of such
corporate and tax records and nontransferable Permits shall be
provided to Buyer at the Closing.
(iii) Seller's books of account; provided, however, that
copies of such books of account shall be provided to Buyer at the
Closing.
(iv) Any shares of the capital stock of Seller held as treasury
shares.
(v) All of Seller's cash (except as identified in Section
2.1(a)(xiv)) and accounts receivable (or related credit balances)
related to the Business as of the date hereof (collectively,
"Accounts Receivable"), together with any additions thereto and
subject to any reductions therefrom received or incurred by
Seller in operating the Business in the ordinary course and in
compliance with Section 6.3 hereof after the date hereof through
the Closing Date.
(vi) Any adult entertainment inventory including usable
goods, including Optical Discs, merchandise, finished products
and other tangible personal property
(vii) Any assets that are used by Seller only in its
divisions other than the Software Division.
2.2 Assumption of Certain Liabilities.
(a) Liabilities Not Assumed. Except for the liabilities
and obligations specifically assumed pursuant to and identified in
Section 2.2(b) below, Buyer shall not assume, shall not take
subject to and shall not be liable for, any liabilities or
obligations of any kind or nature, whether absolute, contingent,
accrued, known or unknown, of Seller or any Affiliate of Seller,
(the "Excluded Liabilities"), including, but not limited to, the
following:
(i) Any bank debt, line of credit or other indebtedness
(whether current or long term) of Seller.
(ii) Any debt, accounts or other amounts payable to, or any
other obligations or liabilities to, any Seller Shareholder or any
Affiliate of Seller or its officers, directors or any Seller
Shareholder.
(iii) Any liabilities or obligations incurred arising from or
out of or in connection with Seller's operations, the condition
of its assets or places of business, its ownership of the
Purchased Assets, or the issuance, sale, repayment or repurchase
of any of its securities.
(iv) Any liabilities or obligations incurred, arising from
or out of, in connection with or as a result of claims made by or
against Seller whether before or after the Closing Date.
(v) Any liabilities or obligations incurred, arising from or out
of, in connection with or as a result of any alleged or actual
defect in any product or in connection with any alleged or actual
breach of warranty (whether express or implied) in relation to
any product sold by Seller.
(vi) Any liabilities or obligations (whether assessed or
unassessed) of Seller for any Taxes, including any Taxes arising
by reason of the transactions contemplated herein.
(vii) Any fees and expenses of Seller in connection with the
transactions contemplated herein.
(viii) Any fees and expenses, if any, of Seller in connection
with the withdrawal from the Business by Seller.
(ix) Any liabilities or obligations to former or current
officers, directors, employees, agents, independent contractors,
or Affiliates of Seller, or the Associates of such Persons,
including but not limited to any (A) liabilities or obligations
of Seller in connection with any salary, benefits, or working
conditions or any collective bargaining, labor or employment
agreement (whether written or oral) or other similar arrangement,
(B) obligations in respect of retirees or their health or other
benefits, (C) liabilities or obligations for safety, personal
injuries or worker's compensation, or any claims for the same,
(D) claims in respect of accrued vacation, or (E) claims in
respect of termination of employment.
(x) Any liabilities or obligations of Seller incurred, arising
from or out of or in connection with this Agreement or the events
or negotiations leading up to this Agreement.
(b) Assumed Liabilities. Notwithstanding Section 2.2(a), on the
Closing Date Buyer shall assume the liabilities or obligations
specifically identified on Schedule 2.2(b) (the "Assumed
Liabilities").
2.3 Purchase Price and Allocation.
(a) Buyer shall pay a total purchase price (the "Purchase
Price") to Seller at the Closing in the manner provided below for
the Purchased Assets consisting of (i) the assumption of the
Assumed Liabilities, plus (ii) $3 million, and (iii) newly issued
common stock of Image (the "Image Shares") having an aggregate
value equal to $2 million (i.e., 258,370 shares of common stock),
subject to adjustments described below in Section 2.5. The value
of the Image Shares to be issued upon Closing shall be based upon
the average closing price of Image Shares on the Nasdaq Stock
Market National Market System for the twenty (20) trading days
immediately preceding the date on which a public announcement of
the transactions contemplated hereby is first released by Image;
provided that if the methodology set forth above results in a
value of less than $3.00 per share, the price used to calculate
the number of shares of Image Shares to be issued shall be $3.00
per share and if such methodology results in a value of greater
than $10.00 per share, the price used to calculate the number of
shares of Image Shares to be issued shall be $10.00 per share.
The specific number of Image Shares and the dollar minimum and
maximum for valuing those shares so issuable shall be subject to
proportionate adjustment in the event of any stock split, reverse
stock split, dividend payable in stock, reclassification, or
extraordinary distribution whereby Image issues without
consideration additional shares of its common stock (other than
in "Excluded Distributions," as defined below) with a record date
on or after the 20th trading day prior to the date on which the
public announcement of the transactions contemplated hereby is
first made, but prior to the Closing Date. "Excluded
Distributions" shall mean any issuances of Image common stock by
Image pursuant to its benefit plans, pre-existing conversion,
anti-dilution or other rights outstanding as of the date hereof,
or issuances of rights or shares of Image common stock in
connection with the financing of the acquisition of the Business
by Buyer and related expenses.
(b) The Purchase Price, as adjusted pursuant to Section 2.5,
shall be allocated among the Purchased Assets as set forth in
Schedule 2.3 or as Buyer and Seller may otherwise agree, prior to
Closing. Buyer and Seller agree that such allocation shall be
used, reported and implemented for all federal, state, local and
other tax purposes.
(c) An escrow account (the "Escrow Account") shall be
established pursuant to the Escrow Agreement attached hereto as
Exhibit A (the "Escrow Agreement") into which $500,000 of the
cash portion of the Purchase Price will be deposited at Closing.
The balance will be paid at Closing in immediately available
funds. The escrowed amount will be held in the Escrow Account
for a period of 90 days following the date that Buyer receives
the Closing Date Statement of Net Assets and will be subject to
the Purchase Price adjustments described in Section 2.5 and the
indemnification payments described in Article X.
2.4 Determination of Closing Date Net Assets.
In order to confirm the net assets of the Business at
the Closing Date, as promptly as practicable after the Closing
Date, but in any event within 30 days after the Closing Date,
Seller will cause a balance sheet for the Purchased Assets and
Assumed Liabilities as of the Closing Date to be prepared (i) in
conformity with GAAP as consistently applied and (ii) in the form
set forth on Schedule 2.4 (the "Closing Date Statement of Net
Assets"). The Closing Date Statement of Net Assets shall be
reviewed by KPMG. In connection with the preparation of the
Closing Date Statement of Net Assets, a physical inventory count
of all Inventory will be performed at the Closing Date, which
will include (but will not be limited to) Optical Discs. Buyer
and/or KPMG will be present at the physical inventory to (i)
observe the Inventory count procedures and (ii) to take sample
counts to verify the accuracy and completeness of the Seller's
stated Inventory quantities.
To the extent Seller or its representatives have
prepared any working papers in connection with the Closing Date
Statement of Net Assets, Buyer and KPMG shall be entitled to
review such workpapers, which shall be made available to Buyer
and KPMG as soon as practicable. Within 60 days after the
receipt by Buyer and KPMG of the last of such workpapers, Buyer
and KPMG may propose any adjustments thereto which Buyer deems to
be appropriate. Buyer and Seller (and their respective
representatives) shall work together to resolve promptly any such
proposed adjustments.
In the event that any disagreement between Buyer
and Seller is not resolved by agreement within 30 days after the
adjustments are proposed, Ernst & Young, LLP, independent public
accountants (the "Referee"), will be promptly engaged to render
within 30 days after the date of such engagement its findings
regarding the issue or issues in dispute, and such findings shall
be binding on the parties.
Seller shall pay the fees and expenses of its
representatives, and Buyer shall pay the fees and expenses of its
representatives incurred in connection with this Section 2.4.
Seller and Buyer shall each pay one-half of the fees and expenses
of the Referee.
2.5 Purchase Price Adjustment.
If the net book value of the Purchased Assets
minus the Assumed Liabilities set forth on the Closing Date
Statement of Net Assets (as finally determined pursuant to
Section 2.4) is: (a) less than zero, the Purchase Price shall be
reduced on a dollar for dollar basis, and (b) greater than zero,
the Purchase Price shall be increased on a dollar for dollar
basis. Any adjustments pursuant to clause (a) above shall be
paid by the Escrow Agent to Buyer, on behalf of Seller, in
immediately available funds, from the Escrow Account or, if the
amounts in the Escrow Account are insufficient, by Seller to
Buyer upon demand. Any adjustments pursuant to clause (b) above
shall be paid by Buyer to Seller at such time the proceeds, if
any, of the Escrow Account are released to Seller. Any amounts
paid by either party pursuant to this section will include
interest thereon as provided in the Escrow Agreement, or if not
so provided, at the Agreed Rate, from the Closing Date.
ARTICLE III
CLOSING
3.1 Closing Date.
Upon the terms and subject to the conditions set
forth in this Agreement, the Closing of the transaction shall
take place at the offices of O'Melveny & Myers LLP, 400 South
Hope Street, Los Angeles, California, at 10 a.m., on such other
date as Seller and Buyer may agree.
3.2 Items to be Delivered at the Closing By Seller.
At the Closing, Seller shall deliver or cause to be
delivered to Buyer:
(a) A Bill Of Sale and Assignment, in substantially the form of
Exhibit B.
(b) Lease Assignments and Estoppel Certificates/Statements in
the forms of Exhibits C and D, respectively, with respect to all
leases executed and acknowledged by Seller, as the case may be,
including all necessary consents of lessors.
(c) Instruments of transfer in the form customarily used in Los
Angeles, California in commercial transactions for the types of
property comprising the personal property, sufficient to transfer
each personal property interest owned by Seller.
(d) Such other instruments of transfer necessary or appropriate
to transfer to and vest in Buyer all of Seller's rights, title
and interest in and to the Purchased Assets.
(e) All documentation required to exempt Seller from the
withholding requirement of Section 1445 of the Code, consisting
of (i) an affidavit from Seller to Buyer stating under penalty of
perjury that Seller is not a foreign person and providing
Seller's U.S. taxpayer identification number, or (ii) a sworn
affidavit of Seller that it is not a "U.S. real property holding
corporation," as defined in Section 897 of the Code or (iii) a
"qualifying statement" obtained by Seller from the Internal
Revenue Service.
(f) The opinions, certificates, consents and other documents
referred to herein as then deliverable by Seller.
(g) Special powers of attorney to Buyer, in substantially the
form of Exhibit E.
(h) A list of all Accounts Receivable and the related aging
schedule identifying accounts.
(i) The keys to all locks located on or in the Purchased Assets
(and any and all cards, devices or things necessary to access any
Purchased Assets).
(j) Cash on hand in the accounts of Seller in an amount not to
exceed $20,000.
(k) All Permits and Approvals required to be obtained from any
Governmental Entity and all third party consents required in
connection with the transactions contemplated by the Agreement.
(l) All Inventory and equipment used or primarily intended for
use in the operation of the Business.
(m) All of the Related Agreements listed on Schedule 3.2(m),
duly executed and delivered by Seller.
3.3 Buyer. Items to be Delivered at the Closing by Buyer.
At the Closing, Buyer shall deliver to Seller:
(a) The Purchase Price, subject to adjustment pursuant to
Section 2.5.
(b) An Assumption Agreement, in substantially the form of
Exhibit F.
(c) Such instruments as may reasonably be requested by any
creditor, lessor or any other person whose consent is required to
consummate the transactions contemplated by this Agreement to
evidence the assumption by Buyer of the Assumed Liabilities.
(d) The opinions, certificates, consents and other documents
referred to herein as then deliverable by Buyer.
(e) All of the Related Agreements listed on Schedule 3.2(m) to
which Buyer is a party, duly executed and delivered by Buyer.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents, warrants and agrees as follows:
4.1 Organization and Related Matters.
Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of
California. Seller has all necessary corporate power and
authority to execute, deliver and perform this Agreement and any
related agreements to which it is a party. Seller has no
Subsidiaries. Schedule 4.1 lists each jurisdiction in which
Seller is or is required to be qualified or licensed to do
business as a foreign Person. Seller has all necessary corporate
power and authority to own its properties and assets and to carry
on its businesses as now conducted, including the Business, and
is duly qualified or licensed to do business as a foreign
corporation in good standing in all jurisdictions listed on
Schedule 4.1. Schedule 4.1 correctly lists the directors and
executive officers of Seller. True, correct and complete copies
of the charter documents of Seller as in effect on the date
hereof have been delivered to Buyer. The Seller is not (i) a
registered or reporting company under the Exchange Act or (ii) a
company required to be registered under the Investment Company
Act of 1940, as amended.
4.2 Stock.
There are no outstanding Contracts of Seller to
repurchase, redeem or otherwise acquire any Equity Securities of
Seller.
4.3 Financial Statements; Changes; Contingencies.
(a) Financial Statements. Seller has delivered to Buyer balance
sheets with respect to the Business at July 31, 1997 and at April
30, 1998 (9 month period), and the related statements of
operations, changes in stockholder's equity and changes in
financial position or cash flow for the periods then ended with
respect to the Business. All such financial statements have been
prepared in conformity with GAAP applied on a consistent basis
(except for changes, if any, required by GAAP and disclosed
therein, specifically including the reserve for slow moving,
obsolete or overstocked LD inventory). Such statements of
operations and cash flow present fairly in all material respects
the results of operations and cash flows of Seller for the
respective periods covered, and the balance sheets present fairly
in all material respects the financial condition of the Business
as of their respective dates. Since April 30, 1998, there has
been no change in any of the significant accounting policies,
practices or procedures of Seller with respect to the Business.
(b) Interim Financial Statements. Seller will deliver prior to
the Closing Date, to Buyer (i) a balance sheet with respect to
the Business at July 31, 1998 and the related statements of
operations and cash flows and changes in stockholder's equity for
the period then ended (including quarterly information), and
(ii) a balance sheet for the Purchased Assets and Assumed
Liabilities at July 31, 1998, in the form set forth on Schedule
2.4 (the "Interim Statement of Net Assets"). The financial
statements described in clauses (i) and (ii) above will be
reviewed by the Seller Accountant, and all such financial
statements will be prepared in conformity with GAAP applied on a
consistent basis (except for changes, if any, required by GAAP
and disclosed therein, specifically including the reserve for
slow moving, obsolete or overstocked LD inventory). The
statement of operations and cash flows will present fairly the
results of operations and cash flows of Seller for the period
covered, and the balance sheets referred to in clauses (i) and
(ii) above will present fairly in all material respects the
financial condition of the Business as of its date. All of the
financial statements described in clause (i) and (ii) above will
reflect all adjustments necessary for a fair presentation in
accordance with GAAP consistently applied (except for changes, if
any, required by GAAP and disclosed therein, specifically
including the reserve for slow moving, obsolete or overstocked LD
inventory). Except as set forth as Schedule 4.3, at the date of
the balance sheet described in clause (i) above and the Interim
Statement of Net Assets, Seller did not have, with respect to the
Business, or will not have had, with respect to the business, any
material liability (actual, contingent or accrued) that, in
accordance with GAAP applied on a consistent basis, should be
shown or reflected therein but is not.
(c) No Material Adverse Changes. Since April 30, 1998, whether
or not in the ordinary course of business, there has not been,
occurred or arisen:
(i) any change in or event affecting Seller, the Business,
the Purchased Assets or the Assumed Liabilities that has had or may
reasonably be expected to have a material adverse effect on
Seller, the Business or the Purchased Assets or the Assumed
Liabilities, or
(ii) any agreement, condition, action or omission which
would be proscribed by (or require consent under) Section 6.3 had it
existed, occurred or arisen after the date of this Agreement, or
(iii) any strike or other employment or labor dispute, any
significant increase in workforce turnover or other indication of
workforce unrest or dissatisfaction, or
(iv) any casualty, loss, damage or destruction (whether
or not covered by insurance) of any of the Purchased Assets that is
material or that has involved or may involve aggregate losses to
the Business or Seller of more than $25,000.
(d) No Other Liabilities or Contingencies. Seller does not
have any liabilities of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due,
probable of assertion or not, except liabilities that (i) are
reflected or disclosed in the most recent of the financial
statements referred to in subsection (a) or (b) above, (ii) were
incurred in the ordinary course of business after the date of the
latest balance sheet delivered pursuant to clause (ii) of Section
4.3(b), and in the aggregate do not exceed $25,000, (iii) are set
forth in Schedule 4.3 hereto or (iv) have no effect on the
Business.
4.4 Material Contracts.
Schedule 4.4 lists each contract to which Seller is a
party or to which Seller or any of its properties is subject or
by which any thereof is bound that is deemed a Material Contract
under this Agreement. Unless otherwise so noted in Schedule 4.4,
each such Contract was entered into in the ordinary course of
business. Each Contract that primarily relates to the Business
and (a) after April 30, 1998 obligates Seller to pay an amount of
$50,000 or more, (b) has an unexpired term as of the date hereof
in excess of one year, (c) contains a covenant not to compete,
requires exclusive dealing or otherwise significantly restricts
business activities, (d) provides for the extension of credit
other than consistent with normal credit terms, (e) limits the
ability of Seller to conduct the Business, including as to manner
or place, (f) provides for a guaranty or indemnity by Seller, (g)
grants a power of attorney, agency or similar authority to
another person or entity, (h) contains a right of first refusal,
(i) contains a right of or obligation to any Affiliate, Seller
Shareholder, officer, director or Associate of Seller, or any
Associate of such Persons, (j) constitutes a collective
bargaining agreement or provides for severance benefits to any
officer, director or employee, (k) represents a Contract upon
which the Business is substantially dependent or a Contract which
is otherwise material to the Business, (l) requires Seller to buy
or sell goods or services in connection with the Business with
respect to which there will be material losses or will be costs
and expenses materially in excess of expected receipts (other
than as provided for or otherwise reserved against on the most
recent of the balance sheets referred to in Section 4.3) or (m)
was not made in the ordinary course of business, shall be deemed
to be a Material Contract. True, correct and complete copies of
the agreements appearing on Schedule 4.4, including all
amendments and supplements, have been delivered to Buyer. Each
Material Contract is valid and subsisting; the Seller has duly
performed all its obligations thereunder to the extent that such
obligations to perform have accrued; and no breach or default,
alleged breach or default, or event which would (with the passage
of time, notice or both) constitute a breach or default
thereunder by Seller, as the case may be (or, to the best
knowledge of Seller, any other party or obligor with respect
thereto), has occurred or as a result of this Agreement or its
performance will occur. Except as set forth in Schedule 4.4(a),
consummation of the transactions contemplated by this Agreement
will not (and will not give any person a right to) terminate or
modify any rights of, or accelerate or augment any obligation of,
Seller.
4.5 Condition of Property; Leases.
(a) Seller has good and marketable title to each of the
Purchased Assets, free and clear of any Encumbrances. Seller has
all rights, power and authority to sell, convey, assign, transfer
and deliver the Purchased Assets to Buyer in accordance with the
terms of this Agreement. At the Closing, Seller shall deliver
the Purchased Assets to Buyer, free and clear of any
Encumbrances. The Purchased Assets are in a good state of
maintenance and repair, have been regularly and appropriately
maintained, repaired and replaced, are not materially defective
except for ordinary wear and tear and are adequate for use in the
Business. The Purchased Assets constitute all the property and
assets, tangible and intangible, fixed or contingent, used or
intended for use primarily in the operation of the Business or
otherwise material to the Business. The Purchased Assets include
all licenses, consents and any other third party authorizations
necessary to promote, sell, or otherwise exploit the Optical
Discs consistent with the Seller's current practices.
(b) Schedule 4.5 lists all real property and leasehold
interests held or used by Seller in the conduct of the Business and
specifies those leases under which Seller is the lessee (each a
"Lease"). Seller has not received any notice of any proposed
special assessments, nor any proposed material changes in
property tax or land use laws affecting such real property or
leasehold interests.
(c)
(i) Seller does not own any real property.
(ii) All material leasehold properties held by Seller, as
lessee, are held under valid, binding and enforceable leases, subject
only to such exceptions as are not, individually or in the
aggregate, material to the Business.
(iii) Seller has heretofore delivered to Buyer a true,
correct and complete copy of each Lease, together with all
amendments, modifications, alterations, and other changes
thereto.
(iv) Each Lease constitutes the entire agreement with respect to
the properties which are demised pursuant thereto.
(v) The term of each Lease is accurately set forth on Schedule
4.5. Seller has accepted possession of the property demised
pursuant to each such Lease and is in actual possession thereof
and has not sublet, assigned or hypothecated its leasehold
interest except as set forth on Schedule 4.5.
(vi) As of the date hereof, all conditions precedent to the
enforceability of each Lease have been satisfied and there exists
no breach or default, nor state of facts which, with the passage
of time, notice, or both, would result in a breach or default on
the part of the lessee or the lessor thereunder.
(vii) All space and improvements leased by Seller have been
fully and satisfactorily completed and furnished in accordance
with the provisions of Lease, as the case may be.
(viii) Seller has not received notice of non-compliance with
any restriction encumbering any leased property, nor has Seller
received notice of any zoning violations affecting any leased
property.
(ix) There is no pending or threatened Action that would
materially interfere with the quiet enjoyment of any such
leasehold by Seller, or, after the Closing, by Buyer.
4.6 Intangible Property.
(a) Schedule 4.6 lists any and all Intellectual
Property Rights and other material items of Intangible Property
in which Seller has an interest and the nature of such interest.
Such assets include all Permits or other rights with respect to
any of the foregoing. Except as specifically described in
Schedule 4.6, (i) Seller owns the Intellectual Property Rights
listed on Schedule 4.6 and has sole and exclusive right to use
such Intellectual Property Rights for any goods and services
described in the registrations listed on Schedule 4.6 in the
jurisdictions indicated on said Schedule, and (ii) Seller has
applied for or registered the Intellectual Property Rights listed
on Schedule 4.6 for any goods and services described in the
registrations and applications listed on Schedule 4.6 in the
jurisdictions indicated on said Schedule, and (x) such
registrations are valid and subsisting in such jurisdictions with
respect to such goods and services, (y) such pending applications
were not fraudulently filed and (z) there are no objections or
oppositions by third parties against such registrations or
applications by third parties against such registrations or
applications.
(b) Except as described in clause (a) above, Seller
(i) has complete rights to and ownership of all Intangible
Property required for or used in connection with the Business and
(ii) does not use any Intangible Property by consent of any other
person or pursuant to any obligation to make any payments (and
does not make any payments) to others with respect thereto. The
Intangible Property of Seller is fully assignable free and clear
of any Encumbrances. Seller has in all material respects
performed all obligations required to be performed by it, and is
not in default in any material respect under any Contract
relating to any of the foregoing. Seller has not received any
notice to the effect (or is otherwise aware) that the Intangible
Property or any use by Seller of any such property conflicts with
or infringes (or allegedly conflicts with or infringes) the
rights of any Person in respect of the Business.
4.7 Authorization; No Conflicts.
The execution, delivery and performance of this
Agreement and any related agreements by Seller has been duly and
validly authorized by the Board of Directors of Seller, by the
requisite majority of all the shareholders of Seller and by all
other necessary corporate action on the part of Seller. This
Agreement and any related agreements constitute legally valid and
binding obligations of Seller, enforceable against Seller in
accordance with its terms except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws and equitable principles relating to or
limiting creditors rights generally. The execution, delivery and
performance of this Agreement by Seller and the execution,
delivery and performance of any related agreements or
contemplated transactions by Seller will not violate, or
constitute a breach or default (whether upon lapse of time and/or
the occurrence of any act or event or otherwise) under, the
charter documents or by-laws of Seller or any Material Contract
of Seller, result in the imposition of any Encumbrance against
any assets or properties of Seller or any Affiliate or any of the
Purchased Assets or violate any Law. Schedule 4.7 lists all
Permits and Approvals required to be obtained by Seller to
consummate the transactions contemplated by this Agreement.
Except for matters identified in Schedule 4.7 as requiring that
certain actions be taken by or with respect to a third party or
Governmental Entity, the execution and delivery of this Agreement
by Seller and the performance of this Agreement and any related
or contemplated transactions by Seller or any Affiliate will not
require filing or registration with, or the issuance of any
Permit by, any other third party or Governmental Entity.
4.8 Legal Proceedings.
There is no Order or Action pending, or, to the best
knowledge of Seller, threatened, against or affecting Seller or
any Affiliate or any of its properties or assets that
individually or when aggregated with one or more other Orders or
Actions has or if determined adversely might reasonably be
expected to have a material adverse effect on the Seller, the
Business, the Purchased Assets (or the use, operation or value
thereof), the Assumed Liabilities, Seller's ability to perform
this Agreement, or any aspect of the transactions contemplated by
this Agreement. Schedule 4.8 lists each Order and each Action
that involves a claim or potential claim of aggregate liability
in excess of $10,000 against, or that enjoins or seeks to enjoin
any activity by Seller or any Affiliate that relates to the
Business. There is no matter as to which Seller or any Affiliate
has received any notice, claim or assertion, or, to the best
knowledge of Seller, which otherwise has been threatened or is
reasonably expected to be threatened or initiated, against or
affecting any director, officer, employee, agent or
representative of Seller or any other Person, nor to the best
knowledge of Seller, is there any reasonable basis therefor, in
connection with which any such Person has or may reasonably be
expected to have any right to be indemnified by Seller.
4.9 Minute Books.
The minute books of Seller accurately reflect all
actions and proceedings taken to date by the shareholders, board
of director and committees of Seller, and such minute books
contain true and complete copies of the charter documents of
Seller and all related amendments. The stock record books of
Seller reflect accurately all transactions in its capital stock
of all classes.
4.10 Accounting Records; Internal Controls; Absence of Certain
Payments.
(a) Accounting Records. Seller has records that
accurately and validly reflect its transactions, and accounting
controls sufficient to insure that such transactions are (i)
executed in accordance with management's general or specific
authorization and (ii) recorded in conformity with GAAP so as to
maintain accountability for assets
(b) Data Processing; Access. Such records, to the
extent they contain important information that is not easily and
readily available elsewhere, have been duplicated, and such
duplicates are stored safely and securely pursuant to procedures
and techniques utilized by companies of comparable size in
similar lines of business. The data processing equipment, data
transmission equipment, related peripheral equipment and software
used by Seller in the operation of the Business (including any
disaster recovery facility) to generate and retrieve such records
are comparable in performance, condition and capacity with those
utilized by companies of comparable size in similar lines of
business.
4.11 Permits.
Seller holds all Permits that are required by any
Governmental Entity to conduct the Business as now conducted and
operate the Purchased Assets as they are now operated, and all
such Permits are valid and in full force and effect and will
remain in full force and effect (in the case of Seller's Permits,
for the benefit of Buyer) upon consummation of the transactions
contemplated by this Agreement, except for those Permits
identified on Schedule 4.11 as not transferable to Buyer. Except
as set forth in Schedule 4.11, all such Permits are Purchased
Assets. No suspension, cancellation or termination of any of
such Permits is threatened or imminent.
4.12 Compliance with Law.
(a) Seller is organized and has conducted its
businesses in accordance with applicable Laws, and the forms,
procedures and practices of Seller are in compliance with all
such Laws, to the extent applicable.
(b) The use and operation of the Purchased Assets are
in compliance with all applicable Laws, and there are no
violations of any such Laws.
4.13 Dividends and Other Distributions.
There has been no dividend or other distribution or
payment of assets or securities whether consisting of money,
property or any other thing of value, declared, issued or paid
subsequent to the date of the most recent financial statements
described in Section 4.3 by Seller that affects the Business.
4.14 Employee Benefits.
(a) There are no employee benefit plans, collective
bargaining, employment or severance agreements or other similar
arrangements, whether or not in writing, which Seller is or ever
has been a party or by which it is or ever has been bound,
legally or otherwise, including, without limitation, (a) any
profit-sharing, deferred compensation, bonus, stock option, stock
purchase, pension, retainer, consulting, retirement, severance,
welfare or incentive plan, agreement or arrangement, (b) any
plan, agreement or arrangement providing for "fringe benefits" or
perquisites to employees, officers, directors or agents,
including but not limited to benefits relating to company
automobiles, clubs, vacation, child care, parenting, sabbatical,
sick leave, medical, dental, hospitalization, life insurance and
other types of insurance, (c) any employment agreement, or (d)
any other "employee benefit plan" (within the meaning of Section
3(3) of ERISA).
(b) There are no negotiations, demands or proposals
that are pending or have been made which concern matters now
covered, or that would be covered, by plans, agreements or
arrangements of the type described in this section.
4.15 Certain Interests.
Except as fully described in Schedule 4.15, no
Affiliate of Seller nor any officer, director or shareholder of
any thereof, nor any Associate of any such Person, has any
material interest in any of the Purchased Assets, the Assumed
Liabilities or any property used in or pertaining to the
Business; no such Person is indebted or otherwise obligated to
Seller; and Seller is not indebted or otherwise obligated to any
such Person, except for amounts due under normal arrangements
applicable to all employees generally as to salary or
reimbursement of ordinary business expenses not unusual in amount
or significance. The consummation of the transactions
contemplated by this Agreement will not (either alone, or upon
the occurrence of any act or event, or with the lapse of time, or
both) result in any benefit or payment (severance or other)
arising or becoming due from Seller or the successor or assign of
any thereof to any Person.
4.16 Intercompany Transactions.
Seller has not engaged in any transaction that relates
to the Business with any Affiliate of Seller since July 31, 1997
or (if prior to such date) that remains executory. Seller has no
liabilities or obligations to any Affiliate of Seller and none of
such Affiliates has any obligations to Seller. The consummation
of the transactions contemplated by this Agreement will not
(either alone, or upon the occurrence of any act or event, or
with the lapse of time, or both) result in any payment arising or
becoming due from Seller or the successor or assign of any
thereof to any Affiliate.
4.17 No Brokers or Finders.
No agent, broker, finder, or investment or commercial
banker, or other Person or firm engaged by or acting on behalf of
Seller or any of its Affiliates in connection with the
negotiation, execution or performance of this Agreement or the
transactions contemplated by this Agreement, is or will be
entitled to any brokerage or finder's or similar fee or other
commission as a result of this Agreement or such transactions.
4.18 Accuracy of Information.
All information furnished by or on behalf of Seller to
Buyer, its agents or representatives in connection with Seller,
the Business, the Purchased Assets, the Excluded Assets, the
Assumed Liabilities, the Excluded Liabilities, this Agreement and
the transactions contemplated by this Agreement is true and
complete in all material respects and does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make any statement therein not misleading. None of
the information supplied or to be supplied by or on behalf of
Seller (a) to any Person for inclusion, or included, in any
document or application filed with any Governmental Entity having
jurisdiction over or in connection with the transactions
contemplated by this Agreement or (b) to Buyer, its agents or
representatives in connection with these transactions or this
Agreement, did contain, or at the respective times such
information is delivered or becomes effective, will contain any
untrue statement of a material fact, or omitted or will omit to
state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If
any of such information at any time subsequent to its delivery
becomes untrue or misleading in any material respect, Seller will
promptly notify Buyer in writing of such fact and of the reasons
for such change. All documents required to be filed by Seller or
Affiliate with any Governmental Entity in connection with this
Agreement or the transactions contemplated by this Agreement will
comply in all material respects with the provisions of applicable
Law.
4.19 Inventories.
All Inventories of Seller are of good merchantable
quality free from any technical defects or any other flaws,
reasonable in balance, and salable (in the case of Inventory held
for sale) or currently usable (in the case of other Inventory) in
the ordinary course of business. The value at which Inventories
are carried reflects the customary Inventory valuation policy of
Seller for stating Inventory, in accordance with GAAP
consistently applied.
4.20 Receivables.
(a) All receivables of Seller, whether reflected on
the most recent balance sheet delivered to Buyer pursuant to
Section 4.3 or otherwise, represent sales actually made in the
ordinary course of business, and are current and fully
collectible net of any reserves shown on the balance sheet (which
reserves are adequate and were calculated on a basis consistent
with GAAP and past practices). Seller has delivered to Buyer a
complete and accurate aging list of all receivables of Seller.
(b) No steps have been taken outside of the ordinary
course of business by Seller with respect to its accounts
receivable to cause monies which would otherwise have been
received by Seller before the Closing Date, to be received on or
after that date. Specifically, Seller has not (i) attempted to
delay collection of monies due which would have been paid as a
matter of normal course prior to the Closing Date or (ii)
otherwise attempted to defer or delay any payments owing to the
Business.
4.21 Customers and Suppliers.
Schedule 4.21 lists the names of and describes all
Contracts with and the appropriate percentage of Business
attributable to, the five largest customers and five most
significant suppliers of the Business at the date of this
Agreement, and any sole-source suppliers of significant goods or
services (other than electricity, gas, telephone or water) to
Seller used or intended for use primarily in the operation of the
Business with respect to which alternative sources of supply are
not readily available on comparable terms and conditions.
4.22 Environmental Compliance.
Except as specifically described in Schedule 4.22, (i)
Seller has not generated, used, transported, treated, stored,
released or disposed of, or has suffered or permitted anyone else
to generate, use, transport, treat, store, release or dispose of
any Hazardous Substance in violation of any Law; (ii) there has
not been any generation, use, transportation, treatment, storage,
release or disposal of any Hazardous Substance in connection with
the conduct of the Business or the use of any property or
facility of Seller, or to the knowledge of Seller any nearby or
adjacent properties which has created or might reasonably be
expected to create any liability under any Law or which would
require reporting to or notification of any Governmental Entity;
(iii) no asbestos or polychlorinated biphenyl or underground
storage tank is contained in or located at any facility of
Seller; and (iv) any Hazardous Substance handled or dealt with in
any way in connection with the businesses of Seller, whether
before or during Seller's ownership, has been and is being
handled or dealt with in all respects in compliance with all
applicable Laws.
4.23 Powers of Attorney.
Seller has not given any power of attorney (irrevocable
or otherwise) to any person or entity for any purpose relating to
the Business, Purchased Assets or Assumed Liabilities, other than
powers of attorney given to regulatory authorities in connection
with routine qualifications to do business.
4.24 Returns.
No attempt has been made and no steps have been taken
by Seller to cause, induce or encourage any customer of Seller to
not return any Optical Discs or other merchandise that such
customer (a) otherwise would have returned prior to the Closing
Date if such customer had returned the Optical Discs or other
merchandise in accordance with its normal course of business in
the past or (b) has evidenced an intent to return.
4.25 Seller's Investment Representation.
Seller is acquiring the Image Shares for Seller's own
account for investment purposes only and not with a view to or
for sale in connection with a distribution thereof except for a
permitted transfer to an Affiliate of Seller. At the Closing,
Seller and any intended Affiliate transferee shall deliver to
Buyer an investment letter in form and substance substantially as
set forth in Exhibit G (the "Investment Letter"). Seller
acknowledges that the Image Shares will not be registered under
and therefore will be "restricted securities" under the
Securities Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents, warrants and agrees as follows:
5.1 Organization and Related Matters.
Buyer is a corporation duly organized, validly existing
and in good standing under the laws of California. Buyer has all
necessary corporate power and authority to carry on its business
as now being conducted. Buyer has the necessary corporate power
and authority to execute, deliver and perform this Agreement and
any related agreements to which it is a party.
5.2 Authorization.
The execution, delivery and performance of this
Agreement and any related agreements by Buyer has been duly and
validly authorized by the Board of Directors of Buyer and by all
other necessary corporate action on the part of Buyer. This
Agreement constitutes the legal, valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms
except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws and
equitable principles relating to or limiting creditors' rights
generally.
5.3 No Conflicts.
The execution, delivery and performance of this
Agreement and any related agreements by Buyer will not violate
the provisions of, or constitute a breach or default whether upon
lapse of time and/or the occurrence of any act or event or
otherwise under (a) the charter documents or bylaws of Buyer, (b)
any Law to which Buyer is subject or (c) subject to any consents
of its lenders, any Contract to which Buyer is a party that is
material to the financial condition, results of operations or
conduct of the business of Buyer.
5.4 No Brokers or Finders.
No agent, broker, finder or investment or commercial
banker, or other Person or firms engaged by or acting on behalf
of Buyer or its Affiliates in connection with the negotiation,
execution or performance of this Agreement or the transactions
contemplated by this Agreement, is or will be entitled to any
broker's or finder's or similar fees or other commissions as a
result of this Agreement or such transactions except for Buyer's
engagement of MDB Capital Group LLC, as to which Seller shall
have no liability.
5.5 Image Shares.
As of August 7, 1998, the authorized capital stock of
Image consists of 25,000,000 shares of Common Stock, no par
value, of which 13,548,959 shares were issued and outstanding,
and 3,366,000 shares of Preferred Stock, par value $1 per share,
of which no shares are issued and outstanding. Upon issuance in
accordance with the terms of this Agreement, the Image Shares
will be validly issued, fully paid and nonassessable. Image
contemplates a significant offering of additional shares and
warrants to finance the acquisition contemplated hereby and to
pay related fees and expenses and certain ongoing associated
expenses.
ARTICLE VI
COVENANTS WITH RESPECT TO CONDUCT
PRIOR TO CLOSING
6.1 Access.
Seller will authorize and permit Buyer and its
representatives (which term shall be deemed to include its
independent accountants and counsel and representatives of
prospective financing institutions of Buyer) to have (to the
extent lawful) unlimited access during normal business hours,
upon reasonable notice and in such manner as will not
unreasonably interfere with the conduct of Seller's businesses,
to all of its properties, books, records, reports (including,
without limitation, all reports and documentation supporting the
Inventory as are customarily maintained by Seller), personnel and
health and safety files, operating instructions and procedures,
Tax Returns and all other information with respect to the
Business as Buyer may from time to time request, and to make
copies of such books, records and other documents and to discuss
its businesses with such third Persons, including, without
limitation, its directors, officers, employees, accountants,
counsel, licensors, manufacturers, customers and creditors, as
Buyer considers necessary or appropriate for the purposes of
familiarizing itself with the Business, the Purchased Assets or
the Assumed Liabilities, obtaining any necessary Approvals of or
Permits for the transactions contemplated by this Agreement and
conducting an evaluation of the organization of Seller and the
Business.
6.2 Material Adverse Changes; Reports; Financial Statements.
(a) Seller will promptly notify Buyer of any event of
which Seller obtains knowledge which has had or might reasonably
be expected to have a material adverse effect on the Business or
any of the Purchased Assets or Assumed Liabilities or which if
known as of the date hereof would have been required to be
disclosed to Buyer.
(b) Seller will furnish to Buyer (i) as soon as
available, and in any event within 10 days after it is prepared,
any report by Seller for submission to its board of directors and
other operating or financial reports (including any projections
and budgets) prepared for management of the Business, together
with any working papers related thereto, (ii) as soon as
available, copies of all portions of all reports, renewals,
filings, certificates, statements and other documents filed with
any Governmental Entity, (iii) monthly and quarterly balance
sheets, statements of operations and cash flow and changes in
stockholder's equity of Seller, and (iv) such other reports as
Buyer may reasonably request relating to Seller. Each of the
financial statements delivered pursuant to this Section 6.2(b)
shall be prepared in accordance with GAAP, consistently applied
(except as disclosed therein), except that such financial
statements may omit footnote disclosures required by GAAP to the
extent the content thereof would not materially differ from those
disclosures reported in the most recent audited period and year-
end adjustments to the extent not material. Each of the
financial statements delivered pursuant to this Section 6.2(b)
shall be accompanied by a certificate of the chief financial
officer of Seller to the effect that such financial statements
present fairly the financial condition and changes in equity and
results of operations and cash flow of Seller for the periods
covered and reflect all adjustments (which consist only of normal
recurring adjustments not material in amount) necessary for a
fair presentation.
6.3 Conduct of Business.
Seller will not, without the prior consent in writing
of Buyer, in respect of the Business:
(a) conduct the Business except in the ordinary
course, consistent with past practices; or, except as required by
its terms, amend, terminate, renew or renegotiate any Material
Contract or default (or take or omit to take any action that with
or without the giving of notice or passage of time or both, would
constitute a default) in any of its obligations under any
Material Contract or any Lease or enter into any new Material
Contract or any Lease; or
(b) terminate or fail to renew any existing insurance
coverage; or
(c) terminate, amend or fail to renew or preserve any
Permits; or
(d) incur or agree to incur any obligation or
liability (absolute or contingent) that is not consistent with
Seller's past practices; or
(e) enter into any transaction with, make any loan,
guaranty or other extension of credit to or for the benefit of,
or enter into any commitment to make any loan, guaranty or other
extension of credit to or for the benefit of, any Affiliate,
Associate, director, officer, employee, Seller Shareholder or any
of its Associates or Affiliates; or
(f) grant any general or uniform increase in the rates
of pay or benefits to officers, directors or employees (or a
class thereof) or any material increase in salary or benefits of
any officer, director, employee or agent or pay any bonus to any
person, except as set forth in Schedule 6.3(f); or
(g) sell, transfer, mortgage, encumber or otherwise
dispose of any assets or any liabilities, including the Purchased
Assets and Assumed Liabilities, except (i) for dispositions of
property not material in amount, or (ii) in the ordinary course
of business; or
(h) issue, sell, redeem or acquire for value, or agree
to do so, any debt obligations or Equity Securities of Seller; or
(i) declare, issue, make or pay any dividend or other
distribution, whether consisting of money, securities, other
personal property, real property or other thing of value, to its
shareholders, or split, combine, dividend, distribute or
reclassify any shares of its Equity Securities; or
(j) change or amend any of its charter documents or
bylaws; or
(k) make any capital expenditures or commitments with
respect thereto, except as set forth in Schedule 6.3(k); or
(l) make special or extraordinary payments to any
Person; or
(m) make any material investment, by purchase,
contribution to capital, property transfer, or otherwise, in any
other Person; or
(n) dispose of or permit to lapse any Intangible
Property or any rights to its use; or
(o) compromise or otherwise settle any claims, or
adjust any assertion or claim of a deficiency in Taxes, or file
any appeal from an asserted deficiency, except in a form
previously approved by Buyer in writing, or file or amend any Tax
Return, in any matters that involves or may involve any of the
Assumed Liabilities or Purchased Assets, before furnishing a copy
to Buyer and affording Buyer an opportunity to consult with
respect thereto; or
(p) make any Tax election, change any method or period
of accounting or change any significant accounting policy,
practice or procedure, or introduce any new method of management
or operation in respect of the Business; or
(q) fail to maintain or repair any Purchased Asset in
accordance with good and prudent maintenance and repair
procedures; or
(r) agree to or make any commitment to take any action
that is or would be prohibited by this Section 6.3.
6.4 Notification of Certain Matters.
Seller shall give prompt notice to Buyer, and Buyer
shall give prompt notice to Seller, of (i) the occurrence, or
failure to occur, of any event that would be likely to cause any
of its representations or warranties contained in this Agreement
to be untrue or inaccurate in any material respect at any time
from the date of this Agreement to the Closing Date and (ii) any
failure on its part to comply with or satisfy, in any material
respect, any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement.
6.5 Permits and Approvals; Third Party Consents.
(a) Seller and Buyer each agree to cooperate and use
their best efforts to obtain (and will immediately prepare all
registrations, filings and applications, requests and notices
preliminary to obtaining all) Approvals and Permits that may be
necessary or that may be reasonably requested by Buyer to
consummate the transactions contemplated by this Agreement.
(b) To the extent that the Approval of a third party
with respect to any Contract is required in connection with the
transactions contemplated by this Agreement, Seller shall use its
best efforts to obtain such Approval prior to the Closing Date
and in the event that any such Approval is not obtained (but
without limitation on Buyer's rights under Section 8.2), Seller
shall cooperate with Buyer to ensure that Buyer obtains the
benefits of each such Contract and shall indemnify and hold
harmless Buyer for and against any and all Losses as a result,
directly or indirectly, of the failure to obtain any such
Approval.
(c) From the date of this Agreement to the Closing
Date, Seller agrees to include in each Contract entered into
subsequent to the date of this Agreement ("Subsequent Contract")
a provision permitting the assignment of any such Subsequent
Contract to Buyer and providing that upon such assignment, Buyer
shall succeed to all of Seller's rights, title and interests
thereunder subject only to Buyer's express assumption of all
Seller's duties, powers and obligations under such Subsequent
Contract.
6.6 Preservation of Business Prior to Closing Date.
During the period beginning on the date hereof and
ending on the Closing Date, (a) Seller will use its best efforts
to preserve the Business and to preserve the goodwill of
customers, licensors, manufacturers and others having business
relations with Seller and (b) Seller and Buyer will consult with
each other concerning, and Seller will cooperate to keep
available to Buyer, the services of the officers and employees of
Seller that Buyer may wish to retain. Nothing in this Section
shall obligate Buyer after the Closing to retain or offer
employment to any officer or employee of Seller.
6.7 Sales and Transfer Taxes.
Seller shall pay all real and personal property
transfer taxes, if any, and all sales, use and other similar
taxes, if any, imposed on or in connection with the purchase,
sale or transfer of the Purchased Assets to, and the assumption
of the Assumed Liabilities by, Buyer pursuant to this Agreement
or on the use thereof by Buyer after the Closing Date. In
accordance with the provisions of Sections 10.1, 10.3 and 10.4
hereof, Seller shall indemnify and hold harmless Buyer from and
against any Losses related to the failure of Seller to pay when
due such transfer, sales, use and similar taxes.
6.8 No Other Bids.
Seller (either directly or indirectly) and its
Affiliates, representatives and agents shall not initiate,
solicit or encourage any inquiry, offer or proposal with respect
to, any acquisition, merger, tender or exchange offer or other
form of business combination, or any acquisition or disposition
of all or any substantial part of the assets or the stock or
other securities of Seller. Seller will promptly notify Buyer of
the details of any discussions with or proposal or offer from any
other Person relating to an acquisition, merger, tender or
exchange offer or other form of business combination involving
Seller or any of its securities or substantial assets or any
other proposal, the acceptance of which would be inconsistent
with the consummation of this Agreement in accordance with its
terms. Compliance with this Section shall not relieve Seller of
any other express or implied obligations under this Agreement or
under applicable Law.
6.9 Certain Filings.
Seller and Buyer shall furnish each other such
necessary information and reasonable assistance as the other may
request in connection with its preparation of necessary filings
or submissions under the provisions of such laws. Seller and
Buyer will supply each other with copies of all correspondence,
filings or communications, including file memoranda evidencing
telephonic conferences, with representatives of any Governmental
Entity or member of its staff, with respect to the transactions
contemplated by this Agreement and any related or contemplated
transactions.
6.10 Elimination of Intercompany and Affiliate Liabilities.
Prior to the Closing Date, Seller shall cause to be
repaid by the appropriate borrowers any and all loans or other
extensions of credit made or guaranteed by Seller that relate to
the Business to or for the benefit of any Affiliate, Associate,
director, officer, shareholder, or employee of, or any of such
Persons' Affiliates or Associates. Buyer shall not have any
continuing commitment, obligation or liability of any kind with
respect to the Persons referred to in the preceding sentence as a
result of this Agreement. Seller agrees to indemnify Buyer for
any Losses of Buyer with respect to any such commitment,
obligation or liability not assumed by Buyer. Seller further
represent and warrant that the transactions contemplated by this
Section will have no adverse effect on the Business.
6.11 Repair of Damage; Condemnation.
(a) In the event that prior to the Closing there is
any "Non-Material" (as defined in subsection (c) hereof) damage
to the Purchased Assets, or any part thereof, at Buyer's option
either (i) Seller shall at its cost and in a good and workmanlike
manner repair or replace such damage prior to the Closing, or
(ii) Buyer shall accept such Purchased Assets in their then-
current condition, with an abatement or reduction in the Purchase
Price in the amount necessary to fully repair and restore such
damaged Purchased Assets, less (provided Buyer shall be entitled
to all such insurance proceeds) the amount of insurance proceeds
received by Buyer with respect to such damage, and Buyer and
Seller shall proceed with the Closing.
(b) In the event that prior to the Closing, any Non-
Material portion of the Purchased Assets is subject to a taking,
Buyer shall accept the Purchased Assets in their then-current
condition and proceed with the Closing, in which case Buyer shall
be entitled to an assignment of all of Seller's rights to any
award in connection with such taking. In the event of any such
Non-Material taking, Seller shall not compromise, settle or
adjust any claims to such award without Buyer's prior written
consent.
(c) For the purpose of this Section 6.11, damage to
the Purchased Assets or a taking of a portion thereof shall be
deemed to be "Non-Material" if the reasonably estimated cost of
restoration or repair of such damage or the amount of the
condemnation award with respect of such taking shall not exceed
$150,000.
(d) Seller agrees to give Buyer prompt notice of any
taking, damage or destruction of the Purchased Assets.
6.12 Financing.
Buyer will use its best efforts to obtain financing for
the transactions contemplated by this Agreement and the
anticipated ongoing cash needs of the Business on terms
satisfactory to it in an amount not less than $5,800,000 in cash
in exchange for debt and/or equity securities of Image or Buyer
without the need for approval of the shareholders of Image (the
"Financing"). Seller will cooperate fully with Buyer in its
efforts to obtain the Financing and will cause personnel of
Seller to meet with and respond promptly to questions of Persons
proposing to provide the Financing and, upon request, to assist
Buyer by reviewing and commenting upon draft documents. Seller
will also use its best efforts to provide or cause to be provided
any certificates, legal opinions and other documentation
reasonably requested by the Persons supplying the Financing.
ARTICLE VII
ADDITIONAL CONTINUING COVENANTS
7.1 Non-competition.
(a) Restrictions on Competitive Activities. Seller
agrees that, after the Closing, Buyer shall be entitled to the
goodwill and going concern value of the Business and to protect
and preserve the same to the maximum extent permitted by law.
Seller also acknowledges that its management contributions to the
Business have been uniquely valuable and involve proprietary
information that would be competitively unfair to make available
to any competitor of the Business. For these and other reasons
and as an inducement to Buyer to enter into this Agreement,
Seller agrees that for a period of five years after the date
hereof such Seller will not, directly or indirectly, for its own
benefit or as agent for another, carry on or participate in the
ownership, management or control of, or the financing of, or be
employed by, or consult for or otherwise render services to, or
allow its name or reputation to be used in or by any other
present or future business enterprise that competes with Buyer,
in activities similar to the Business as of the Closing Date (i)
in the counties of Los Angeles, and Orange in which the Seller
now operates and (ii) in the state of California.
(b) Restrictions on use of KC Marks in Competitive
Activities. Seller agrees that Seller will not, directly or
indirectly, for its own benefit or as agent for another, use or
permit another Person to use the KC Marks in connection with the
sale or distribution of Optical Discs through any medium,
including retail stores, mail order or Internet sales.
(c) Exceptions. Nothing contained herein shall limit
the right of Seller solely as an investor to hold and make
investments in securities of any corporation or limited
partnership that is registered on a national securities exchange
or admitted to trading privileges thereon or actively traded in a
generally recognized over-the-counter market, provided the
Seller's aggregate equity interest therein does not exceed 5% of
the outstanding shares or interests in such corporation or
partnership.
(d) Restrictions on Soliciting Employees. In
addition, to protect Buyer against any efforts by Seller to cause
employees of the Business to terminate their employment, Seller
agrees that for a period of five years following the Closing
Date, Seller will not directly or indirectly (i) induce any
employee of the Business with a then current compensation of more
than $30,000 annually to leave Buyer or to accept any other
employment or position, or (ii) assist any other entity in hiring
any such employee.
(e) Special Remedies and Enforcement. Seller
recognizes and agrees that a breach by Seller of any of the
covenants set forth in this Section 7.1 could cause irreparable
harm to Buyer, that Buyer's remedies at law in the event of such
breach would be inadequate, and that, accordingly, in the event
of such breach a restraining order or injunction or both may be
issued against Seller, in addition to any other rights and
remedies which are available to Buyer. If this Section 7.1 is
more restrictive than permitted by the Laws of any jurisdiction
in which Buyer seeks enforcement hereof, this Section 7.1 shall
be limited to the extent required to permit enforcement under
such Laws. In particular, the parties intend that the covenants
contained in the preceding portions of this Section 7.1 shall be
construed as a series of separate covenants, one for each
location specified. Except for geographic coverage, each such
separate covenant shall be deemed identical in terms. If, in any
judicial proceeding, a court shall refuse to enforce any of the
separate covenants deemed included in this paragraph, then such
unenforceable covenant shall be deemed eliminated from these
provisions for the purpose of those proceedings to the extent
necessary to permit the remaining separate covenants to be
enforced.
(f) Allocation. For purposes of Section 2.3 above,
Buyer and Seller agree that $0 (zero) of the Purchase Price under
this Agreement shall be allocated to the covenants in this
Section 7.1.
7.2 Nondisclosure of Proprietary Data.
Neither Seller nor any of its representatives shall, at
any time, make use of, divulge or otherwise disclose, directly or
indirectly, any trade secret or other proprietary data
(including, but not limited to, any customer list, record or
financial information) concerning the Business or the business or
policies of Seller related to the Business that Seller or any
representative of Seller may have learned as an owner,
shareholder, employee, officer or director of the Business. In
addition, neither Seller nor any of its representatives shall
make use of, divulge or otherwise disclose, directly or
indirectly, any confidential information concerning the Business
that may have been learned in any such capacity to persons other
than Buyer.
7.3 Tax Cooperation.
After the Closing, Seller shall, and shall cause its
Affiliates to, cooperate fully with Buyer in the preparation of
all Tax Returns and shall provide, or cause to be provided at
Seller's sole cost and expense, to Buyer any records and other
information requested by such parties in connection therewith as
well as access to, and the cooperation of, the Seller Accountant.
After the Closing, Seller shall, and shall cause its Affiliates
to, cooperate fully with Buyer in connection with any Tax
investigation, audit or other proceeding relating to the
Business. Any information obtained pursuant to this Section 7.3
or pursuant to any other Section hereof providing for the sharing
of information or the review of any Tax Return or other schedule
relating to Taxes shall be subject to Section 11.9.
7.4 Employment Matters.
(a) Non-Represented Employees. At or before the
Closing Date, Buyer may, at its option, offer employment
conditioned upon the Closing to any employee of Seller employed
in the Business that is not represented by a collective
bargaining organization on such terms and conditions as may be
mutually agreed upon by Buyer and such employees. Seller shall
use its best efforts to assist Buyer in hiring any such employees
with respect to whom Buyer elects to offer employment. Seller
shall not take any action, directly or indirectly, to prevent or
discourage any such employee from being employed by Buyer as of
the Closing Date and shall not solicit, invite, induce or entice
any such employee to remain in the employ of Seller or otherwise
attempt to retain the services of any such employee, except with
the prior written consent of Buyer. Seller agrees to consult
with Buyer on any significant oral or written communications or
meetings primarily regarding future employment with such
employees.
(b) Employee Benefits. All obligations for
compensation, wages, bonuses, severance pay, vacation time, pay
in lieu of vacation, sickness and accident benefits, leaves of
absence, and similar employee benefits provided by Seller shall
be settled and paid by Seller through the Closing Date.
(c) Worker Adjustment and Retraining Notification
(WARN). Seller represents and warrants that it has complied with
any and all requirements under WARN. In making this
representation, Seller may assume that Buyer will initially hire
or offer employment to the persons associated with the Business
listed on Schedule 7.4.
(d) No Third Party Beneficiaries. Notwithstanding any
possible inferences to the contrary, neither Seller nor Buyer
intend for this Section 7.4 to create any rights or obligations
except as between Seller and Buyer, and no past, present or
future employees of Seller or Buyer shall be treated as third-
party beneficiaries of this Section 7.4.
7.5 Post-Closing Collection of Other Purchased Assets.
Seller covenants that, if it receives any payments with
regard to any Purchased Asset, after the Closing Date, it will
promptly pay to Buyer the amount actually collected, less any out-
of-pocket expenses associated with the collection. Buyer
covenants that, if it receives any payment with regard to any
Excluded Asset after the Closing Date, it will promptly pay to
Seller the amount actually collected, less any out-of-pocket
expenses associated with the collection. Seller agrees that any
rights in other assets of a type included in the Purchased
Assets, acquired by Seller after the Closing Date shall
constitute part of the Purchased Assets and shall be deemed to
have been automatically assigned to Buyer. In any event, neither
Seller nor anyone authorized by Seller subsequent to the Closing
Date shall exploit or attempt to exploit any such assets of a
type included in the Purchased Assets in any manner whatsoever.
7.6 Exchange Right.
If, within one year after the Closing, a subsidiary of
Image files a registration statement in connection with an
underwritten, SEC registered public offering (the "Spin-off
Offering") of its stock (the "Spin-off Subsidiary"), and the
assets of the Spin-off Subsidiary include all or substantially
all of the assets of the Business, Seller shall have the right,
subject to any applicable legal limits and conditioned upon the
completion of the Spin-off Offering, to exchange up to 129,185
Image Shares acquired by it as described in Section 2.3(a) for
shares of the Spin-off Subsidiary. Upon such exchange, Seller
shall receive such number of shares of stock of the Spin-off
Subsidiary so that Seller's ownership percentage of the
outstanding shares of stock of the Spin-off Subsidiary shall
equal a ratio where the numerator shall be $1,000,000 and the
denominator shall be the value attributed to the entire Spin-off
Subsidiary based on the pricing of the Spin-off Offering. Image
shall have no duty to undertake a Spin-off Offering and the
decision whether or not to pursue a Spin-off Offering shall be
made by Image in its sole discretion.
7.7 Sharing of Assets.
If assets used or intended for use in the operation of
the Business are used by the other businesses and operations of
Seller, Buyer and Seller agree to enter into equitable
arrangements for the sharing of the costs and benefits of such
shared assets. Each of the parties will use its best efforts to
reduce the need for dual use of such assets and in no event will
either party be required to provide the same to the other after
the six months following the Closing.
7.8 Sharing of Services.
Seller shall provide to Buyer, during the period of six
months following the Closing or such shorter period as Buyer may
elect, the administrative and support services listed on Schedule
7.8, that have been historically provided by Seller in the
ordinary course to the Business. Seller shall be compensated by
Buyer for such services at Seller's cost plus allocated overhead.
7.9 Restrictions on Image Shares.
Seller will not sell, transfer or otherwise dispose of
the Image Shares except in a registered offering or in accordance
with Rule 144 under the Securities Act or in privately negotiated
transactions exempt from federal and state securities laws
registration requirements. The restrictions and procedures
applicable to any resale of Image shares by the Seller shall
include those set forth in the Investment Letter.
ARTICLE VIII
CONDITIONS OF PURCHASE
8.1 General Conditions.
The obligations of the parties to effect the Closing
shall be subject to the following conditions unless waived in
writing by all parties:
(a) No Orders; Legal Proceedings. No Law or Order
shall have been enacted, entered, issued, promulgated or enforced
by any Governmental Entity, nor shall any Action have been
instituted and remain pending or, to the best knowledge of
Seller, have been threatened and remain so at what would
otherwise be the Closing Date, that prohibits or restricts or
would (if successful) prohibit or restrict the transactions
contemplated by this Agreement. No Governmental Entity shall
have notified any party to this Agreement that consummation of
the transactions contemplated by this Agreement would constitute
a violation of any Laws of any jurisdiction or that it intends to
commence proceedings to restrain or prohibit such transactions or
force divestiture or rescission, unless such Governmental Entity
shall have withdrawn such notice and abandoned any such
proceedings prior to the scheduled Closing, unless nationally
recognized counsel known to have expertise as to such matters on
behalf of the party against whom such action or proceeding was or
would be instituted renders to the parties a favorable opinion
that such action or proceeding is or would be without merit.
(b) Approvals. To the extent required by applicable
Law, all Permits and Approvals required to be obtained from any
Governmental Entity and any third party consents shall have been
received or obtained on or prior to the Closing Date without the
imposition of any burdens or conditions materially adverse to the
party or parties entitled to the benefit thereof.
(c) Escrow. The Escrow Agreement shall have been
executed and delivered by all parties thereto.
8.2 Conditions to Obligations of Buyer.
The obligations of Buyer to effect the Closing shall be
subject to the following conditions except to the extent waived
in writing by Buyer:
(a) Representations and Warranties and Covenants of
Seller. The representations and warranties of Seller herein
contained shall be true in all material respects at the Closing
Date with the same effect as though made at such time; Seller
shall have in all material respects performed all obligations and
complied with all covenants and conditions required by this
Agreement to be performed or complied with by them at or prior to
the Closing Date, and Seller shall have delivered to Buyer a
certificate of Seller in form and substance satisfactory to
Buyer, dated the Closing Date and signed by the Chief Executive
Officer and Chief Financial Officer of Seller, to such effect.
(b) No Material Adverse Change. There shall not have
been any material adverse change in or affecting the Business,
Seller or any of the Purchased Assets or Assumed Liabilities
subsequent to April 30, 1998.
(c) Opinion of Counsel. Buyer shall receive at the
Closing from Michael Lanning, counsel to Seller, an opinion dated
the Closing Date, in form and substance substantially as set
forth in Exhibit H.
(d) Consents. Seller shall have obtained and provided
to Buyer evidence of the receipt of all required Approvals and
Permits listed on Schedule 4.7, each in form and substance
satisfactory to Buyer.
(e) Comfort Letter. Buyer shall receive at the
Closing from Seller Accountant a comfort letter dated not more
than (5) business days prior to the Closing Date, in
substantially the form of Exhibit I.
(f) Due Diligence. Buyer shall not, in the course of
its ongoing business investigation, have discovered information
not previously disclosed by Seller, that Buyer reasonably
believes has or is likely to have a materially adverse effect on
the Business or the Purchased Assets or Assumed Liabilities or
that is materially inconsistent with information disclosed to
Buyer prior to the date hereof.
(g) Changes in Law. No Law or Order shall have been
enacted, entered, issued, promulgated or enforced by any
Governmental Entity, nor shall any Action have been instituted
and remain pending or, to the best knowledge of Seller, have been
threatened and remain so at what would otherwise be the Closing
Date which would not permit the Business as presently conducted
to be continued by Buyer unimpaired following the Closing Date.
(h) No Violation/Occupancy Certificates. Seller shall
have obtained and furnished to Buyer any and all certificate(s)
of continued occupancy or similar documents required from any
lessor and/or applicable Governmental Entity in connection with
Buyer's acquisition of the Purchased Assets and Seller's interest
in the Leases
(i) Financing; Lender Consent. Buyer shall have
received the Financing contemplated by Section 6.12, on terms
satisfactory to Buyer, and shall have received the consent of its
lenders to enter this Agreement.
(j) Key Persons. Ken Crane, Jr. shall have entered
into an employment agreement as contemplated by and substantially
in the form attached hereto as Exhibit J, and Casey Crane and Pam
Crane shall have each entered into consulting agreements as
contemplated by and substantially in the form attached hereto as
Exhibit K.
(k) Liabilities, Encumbrances and Contingencies.
Seller shall have (i) duly paid all debts and paid or provided
for all known liabilities of Seller related to the Business other
than the Assumed Liabilities, (ii) discharged all liens and
encumbrances against the Purchased Assets and (iii) adequately
reserved for all contingencies of the Seller that are not
expressly assumed by Buyer pursuant to this Agreement.
(l) Related Party Advances. None of the receivables
constituting Purchased Assets shall include or represent any
obligations of the Seller or its shareholder or related parties,
including any director or officer (or any Associate or Affiliate
of such Persons. Seller and its shareholder shall have provided
a complete release to Buyer of any liability of Buyer or the
Business in respect of any advances, payables or other debt.
(m) Related Agreements. The Related Agreements listed
on Schedule 3.2(m) shall have been executed and delivered by all
parties thereto.
(n) Acceptance For Listing. The Image Shares issued
pursuant to this Agreement shall have been accepted for listing
on the Nasdaq National Market System.
8.3 Conditions to Obligations of Seller.
The obligations of Seller to effect the Closing shall
be subject to the following conditions, except to the extent
waived in writing by Seller:
(a) Representations and Warranties and Covenants of
Buyer. The representations and warranties of Buyer herein
contained shall be true in all material respects at the Closing
Date with the same effect as though made at such time; Buyer
shall have performed all obligations and complied with all
covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing Date,
and Buyer shall have delivered to Seller a certificate of Buyer
in form and substance satisfactory to Seller, dated the Closing
Date and signed by chief executive officer and chief financial
officer of Buyer, to such effect.
(b) Opinion of Counsel. Seller shall receive at the
Closing from Cheryl Lee, Esq., General Counsel of Buyer, an
opinion dated the Closing Date, in form and substance
substantially as set forth in Exhibit L.
ARTICLE IX
TERMINATION OF OBLIGATIONS; SURVIVAL
9.1 Termination of Agreement.
Anything herein to the contrary notwithstanding, this
Agreement (except to the extent provided in Section 9.2) and the
transactions contemplated by this Agreement may be terminated by
notice by either party after November 17, 1998 [90 days after
signing] unless this date is extended by mutual consent in
writing of Buyer and Seller and may otherwise be terminated at
any time before the Closing as follows and in no other manner:
(a) Mutual Consent. By mutual consent in writing of
Buyer and Seller.
(b) Conditions to Buyer's Performance Not Met. By
Buyer upon written notice to Seller if any event occurs which
would render impossible the satisfaction of one or more
conditions to the obligations of Buyer to consummate the
transactions contemplated by this Agreement as set forth in
Section 8.1 or 8.2.
(c) Conditions to Seller's Performance Not Met. By
Seller upon written notice to Buyer if any event occurs which
would render impossible the satisfaction of one or more
conditions to the obligation of Seller to consummate the
transactions contemplated by this Agreement as set forth in
Section 8.1 or 8.3.
(d) Inaccurate Information. By Buyer if any material
information (whether or not in writing) delivered by or on behalf
of Seller to Buyer is inaccurate or incomplete in any material
respect.
(e) Financing. By Buyer or Seller if Buyer has not
received the Financing contemplated by Section 6.12 by November
17, 1998 [90 days after signing].
(f) Material Breach. By Seller or Buyer if there has
been a material misrepresentation or material breach on the part
of Buyer (in the case of a termination by Seller) or Seller (in
the case of a termination by Buyer) in its representations,
warranties or covenants set forth herein; provided, however, that
if such breach or misrepresentation is susceptible to cure,
Seller or Buyer, as the case may be, shall have 10 business days
after receipt of notice from the other party of its intention to
terminate this Agreement pursuant to this Section 9.1(f) if such
misrepresentation or breach continues in which to cure such
breach or misrepresentation before the other party may so
terminate this Agreement.
(g) Pursuit of Other Offers. By Buyer, if Seller
solicits, encourages, initiates or negotiates any other sale or
combination of Seller's businesses or of the Business or any
substantial part thereof.
(h) Destruction or Condemnation. By Buyer, if any of
the Purchased Assets are damaged, destroyed or taken, and if such
damage, destruction or condemnation is not "Non-Material" as such
term is described in Section 6.11.
(i) Diligence Investigation. By Buyer upon delivery
of written notice of termination to Seller (A) no later than 10
business days after the delivery by Seller of the last of the
documents requested prior to the date hereof by Buyer to complete
its diligence, or (B) if Buyer in the reasonable exercise of its
judgment in the course of its ongoing business investigation of
Seller shall determine after reviewing information, projections
and assumptions developed by Seller and their representatives and
delivered to Buyer that such information, projections and
assumptions are not commercially reasonable in light of current
business conditions or otherwise are likely to be so materially
inaccurate that Buyer does not have reasonable assurance that
such projections are in a range in which it is probable that such
projections will be met.
9.2 Effect of Termination.
If this Agreement is terminated pursuant to Section
9.1, all further obligations of the parties under this Agreement
shall terminate without further liability of any party to
another; except that the obligations of the parties contained in
Article X [Indemnification] and Article XII [Arbitration] and
Sections 11.9 [Confidentiality], 11.13 [Expenses], 11.15
[Attorney's Fees] and 11.16 [Specific Performance] shall survive
any such termination. A termination under Section 9.1 shall not
relieve any party of any liability for a breach of, or for any
misrepresentation under this Agreement, or be deemed to
constitute a waiver of any available remedy (including specific
performance if available) for any such breach or
misrepresentation.
9.3 Survival of Representations and Warranties.
The representations and warranties contained in or made
pursuant to this Agreement shall expire on the fifth anniversary
of the Closing except that (i) the representations and warranties
contained in Sections 4.1 [Organization and Related Matters],
4.2. [Stock of Subsidiaries], 4.7 [Authorization; No Conflicts],
4.13 [Dividends and other Distributions], 4.15 [Certain
Interests], 4.17 [No Brokers or Finders], 4.18 [Accuracy of
Information], 4.22 [Environmental Compliance], 5.1 [Organization
and Related Matters], 5.2 [Authorization], 5.4 [No Brokers or
Finders], 6.7 [Sales Tax], and 6.11 [Repair of Damage;
Condemnation] and Section 7.1(b) shall survive the Closing and
shall remain in full force and effect indefinitely, and (ii) if a
claim or notice is given under Article X [Indemnification] with
respect to any representation or warranty prior to the applicable
expiration date, such representation or warranty shall continue
indefinitely until the applicable claim is finally resolved and
settled.
ARTICLE X
INDEMNIFICATION
10.1 Obligations of Seller.
Seller agrees to indemnify and hold harmless Buyer and
its directors, officers, employees, affiliates, agents and
assigns from and against any and all Losses of Buyer, directly or
indirectly, as a result of, or based upon or arising from:
(a) any inaccuracy in or breach or nonperformance of
any of the representations, warranties, covenants or agreements
made by Seller in or pursuant to this Agreement whether or not of
a material nature; or
(b) any other matter as to which Seller in other
provisions of this Agreement has agreed to indemnify Buyer; or
(c) any liability or obligation of Seller or any of
its Affiliates not expressly assumed by Buyer pursuant to Section
2.2(b) hereof or in excess of any amount set forth on Schedule
2.2(b) for the type of liability or obligation; or
(d) any third party claims in respect of the Business
(or regarding the conduct of the Business) prior to the Closing
that are asserted after the Closing, except as provided in
Section 2.2(b) hereof.
10.2 Obligations of Buyer.
Buyer agrees to indemnify and hold harmless Seller from
and against any Losses of Seller, directly or indirectly, as a
result of, or based upon or arising from any inaccuracy in or
breach or nonperformance of any of the representations,
warranties, covenants or agreements made by Buyer in or pursuant
to this Agreement.
10.3 Certain Tax Matters.
(a) Seller's Tax Indemnity. Seller agrees to
indemnify, defend and hold harmless Buyer against (i) any Tax
payable by or on behalf of Seller or any of its Affiliates, (ii)
any Tax liability arising out of the transfer of the Purchased
Assets, or assumption of the Assumed Liabilities, and (iii) with
respect to any Taxes payable by Buyer with respect to the
operation of the Business and the ownership of the Purchased
Assets (other than Buyer's income or franchise taxes) for
periods commencing prior to and ending after the Closing Date
(whether or not assessed prior to the Closing Date), a pro-rata
share of such Taxes, calculated as if the period ended on the
Closing Date.
(b) Audit Matters. Seller shall have the
responsibility for, at Seller's expense, the audit (and
disposition thereof) of any Tax Return relating to periods ending
on or prior to the Closing Date and shall have the right to
participate in the disposition of the audit of any Tax Return
relating to the periods ending after the Closing Date if and to
the extent that such audit or disposition thereof could give rise
to a claim for indemnification hereunder. Buyer shall have the
right directly or through its designated representatives, to
review in advance and comment upon all submissions made in the
course of audits or appeals thereof to any Governmental Entity
relating to periods ending (or treated by this Agreement as
ending) on or prior to the Closing Date and to approve the
disposition of any audit adjustment with respect to such periods
if such disposition will or might reasonably be expected to
result in an increase in Taxes of Buyer for any period beginning
at or after the Closing.
10.4 Procedure.
(a) Notice. Any party seeking indemnification (an
"Indemnified Party") with respect to any Loss shall give notice
thereof to the party required to provide indemnity hereunder (the
"Indemnifying Party"). Notwithstanding the foregoing, (i) no
Indemnified Party shall have any obligation to give any notice of
any asserted liability by a third party unless such assertion is
in writing, and (ii) the rights of any Indemnified Party to be
indemnified in respect of any Loss resulting from the asserted
liability shall not be adversely affected by the Indemnified
Party's failure to give or delay in giving notice unless (and
then only to the extent that) the Indemnifying Party is
materially prejudiced thereby.
(b) Defense. If any claim, demand or liability is
asserted by any third party against any Indemnified Party, the
Indemnifying Party shall upon the written request of the
Indemnified Party, defend any action or proceeding brought
against the Indemnified Party in respect of matters embraced by
the indemnity, but the Indemnified Party shall have the right to
conduct and control the defense, compromise or settlement of any
Indemnifiable Claim if the Indemnified Party chooses to do so, on
behalf of and for the account and risk of the Indemnifying Party
who shall be bound by the result so obtained to the extent
provided herein. If, after a request to defend any action or
proceeding, the Indemnifying Party neglects or refuses to defend
the Indemnified Party, a recovery against the latter suffered by
it in good faith, is conclusive in its favor against the
Indemnifying Party, provided however that, if the Indemnifying
Party has not received reasonable notice of the action or
proceeding against the Indemnified Party, or is not allowed to
control its defense, judgment against the Indemnified Party is
only presumptive evidence against the Indemnifying Party. In
connection with the defense of any claim, each party shall make
available to the party controlling such defense, any books,
records or other documents within its control that are necessary
or appropriate for such defense.
(c) Insurance Matters. The provisions of this Article
X are subject to the rights of any Indemnified Party's insurer
which may be defending any such claim. If the Indemnifying Party
makes any payment hereunder of a Loss, the Indemnifying Party
shall be subrogated, to the extent of such payment, to the rights
of the Indemnified Party against any insurer or third party with
respect to such Loss. Nothing in this Section 10.4 shall be
deemed to obligate any person to maintain any insurance or to
pursue any claim against any insurer or third party.
10.5 Survival.
This Article X shall survive any termination of this
Agreement and shall survive the Closing.
10.6 Limitations on Indemnification.
Seller shall not be required to indemnify Buyer, and
Buyer shall not be required to indemnify Seller, for a breach of
a representation, warranty or covenant until the aggregate amount
of all Losses for which indemnity would otherwise be payable by
such Indemnifying Party exceeds $250,000 (the "Basket"). If the
aggregate amount of all such Losses exceeds the Basket, the
Indemnifying Party shall be liable for the full amount of all
Losses including amounts under $250,000; provided, however, that
the Basket shall not apply to Losses of the type described in
Sections 10.1(c) and 10.1(d) (and no such Losses, to the extent
indemnified by Seller, shall be included in the Basket). The
foregoing two sentences notwithstanding, the Purchase Price
adjustments described in Section 2.5 hereof shall be calculated
and effected without regard to the Basket or the limitations set
forth in this Section 10.6, but to the extent that any
adjustments are made pursuant to Section 2.5, no such amounts
shall be included in the Basket. The indemnity obligations of
Seller and of Buyer, respectively, shall each be limited, in the
aggregate, to $5,000,000; provided, however, that if an
Indemnifying Party shall be found to have committed an
intentional misrepresentation, the limitations on indemnification
under this Section 10.6 shall be ignored.
10.7 Notice by Seller.
Seller agrees to notify Buyer of any liabilities,
claims or misrepresentations, breaches or other matters covered
by this Article X upon discovery or receipt of notice thereof
(other than from Buyer), whether before or after Closing.
10.8 Not Exclusive Remedy.
This Article X shall not be deemed to preclude or
otherwise limit in any way the exercise of any other rights or
pursuit of other remedies for the breach of this Agreement or
with respect to any misrepresentation.
10.9 Offset.
If any matter as to which Buyer may be able to assert a
claim hereunder is pending or unresolved at the time any payment
is due from Buyer to Seller or the Seller Shareholder (including
under the Escrow Agreement), Buyer shall have the right, in
addition to other rights and remedies (whether under this
Agreement or applicable Law), to withhold from such payment an
amount or value equal to the amount of the claim (provided it has
been or is then asserted in writing against Seller in accordance
with the provisions of this Article X) until such matters are
resolved. If it is finally determined that such claims are
covered by this Article, the amount of such claims may be offset
against the retained payments and the remainder, if any, shall be
delivered to Seller pursuant to this Agreement together with
interest on such remainder payable from the date such remainder
was withheld until paid at the Agreed Rate.
ARTICLE XI
GENERAL
11.1 Amendments; Waivers.
This Agreement and any schedule or exhibit attached
hereto may be amended only by agreement in writing of all
parties. No waiver of any provision nor consent to any exception
to the terms of this Agreement or any agreement contemplated
hereby shall be effective unless in writing and signed by the
party to be bound and then only to the specific purpose, extent
and instance so provided.
11.2 Schedules; Exhibits; Integration.
Each schedule and exhibit delivered pursuant to the
terms of this Agreement shall be in writing and shall constitute
a part of this Agreement, although schedules need not be attached
to each copy of this Agreement. Capitalized terms used in the
schedules and exhibits to this Agreement shall, unless otherwise
specified, have the meanings assigned to them in this Agreement.
This Agreement, together with such schedules and exhibits,
constitutes the entire agreement among the parties pertaining to
the subject matter hereof and supersedes all prior agreements and
understandings of the parties in connection therewith including,
but not limited to the letter of intent dated June 2, 1998.
11.3 Best Efforts; Further Assurances.
Each party will use its best efforts to cause all
conditions to its obligations to be timely satisfied and to
perform and fulfill all obligations on its part to be performed
and fulfilled under this Agreement, to the end that the
transactions contemplated by this Agreement shall be effected in
accordance with its terms as soon as feasible. The parties shall
cooperate with each other in such actions and in securing
requisite Approvals. Each party shall execute and deliver both
before and after the Closing such further certificates,
agreements and other documents and take such other actions as may
be necessary or appropriate to consummate or implement the
transactions contemplated hereby or to evidence such events or
matters.
11.4 Governing Law.
This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the
laws of the State of California applicable to contracts made and
performed in such State and without regard to conflicts of law
doctrines except to the extent that certain matters are preempted
by federal law or are governed by the law of the jurisdiction of
incorporation of the respective parties.
11.5 No Assignment.
Neither this Agreement (nor related agreements pursuant
to this Agreement) nor any rights or obligations under any of
them are assignable except that Buyer may assign its rights
(including but not limited to its rights under Article X) to any
wholly-owned subsidiary of Image or to any post-Closing
purchaser(s) of all of the capital stock of Buyer or of
substantially all of the Purchased Assets. Buyer shall remain
liable to Seller for the payment of the Purchase Price and other
obligations of Buyer hereunder notwithstanding a permitted
assignment.
11.6 Headings.
The descriptive headings of the articles, sections and
subsections of this Agreement are for convenience only and do not
constitute a part of this Agreement.
11.7 Counterparts.
This Agreement and any amendment hereto or any other
agreement (or document) delivered pursuant hereto may be executed
in one or more counterparts and by different parties in separate
counterparts. All of such counterparts shall constitute one and
the same agreement (or other document) and shall become effective
(unless otherwise therein provided) when one or more counterparts
have been signed by each party and delivered to the other party.
11.8 Publicity and Reports.
Seller and Buyer shall jointly coordinate all publicity
relating to the transactions contemplated by this Agreement, and
no party shall issue any press release, publicity statement or
other public notice relating to this Agreement, or the
transactions contemplated by this Agreement, without the prior
written consent of the other party, other than as required by
securities laws. Notwithstanding the foregoing sentence, Buyer
may issue a press release regarding this Agreement or the
transactions contemplated herein at any time if Buyer determines
in its reasonable discretion that it is prudent, or Buyer is
obligated, to do so in light of Buyer's status as a public
company. Seller acknowledges that Buyer may issue a press
release upon the execution of this Agreement. If either party is
required by law to (or Buyer concludes that it should) disclose
to any person any information regarding the parties'
negotiations, the parties will endeavor to mutually agree on the
content and timing of any such disclosure to the extent
practicable.
11.9 Confidentiality.
All information disclosed by any party (or its
representatives) whether before or after the date hereof, in
connection with the transactions contemplated by, or the
discussions and negotiations preceding, this Agreement to any
other party (or its representatives) or its shareholders shall be
kept confidential by such other party, its representatives and
shareholders and shall not be used by any such Persons other than
as contemplated by this Agreement, except to the extent that such
information (i) was known by the recipient when received, (ii) it
is or hereafter becomes lawfully obtainable from other sources,
(iii) is necessary or appropriate to disclose to a Governmental
Entity having jurisdiction over the parties, (iv) as may
otherwise be required by law or (v) to the extent such duty as to
confidentiality is waived in writing by the other party. If this
Agreement is terminated in accordance with its terms, each party
shall use all reasonable efforts to return upon written request
from the other party all documents (and reproductions thereof)
received by it or its representatives from such other party (and,
in the case of reproductions, all such reproductions made by the
receiving party) that include information not within the
exceptions contained in the first sentence of this Section 11.9,
unless the recipients provide assurances reasonably satisfactory
to the requesting party that such documents have been destroyed.
11.10 Parties in Interest.
This Agreement shall be binding upon and inure to the
benefit of each party, and nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights
or remedies of any nature whatsoever under or by reason of this
Agreement. Nothing in this Agreement is intended to relieve or
discharge the obligation of any third person to or to confer any
right of subrogation or action over against, any party to this
Agreement.
11.11 Guaranty of Performance.
The Seller Shareholder and the Trust shall each have
entered into a guaranty of performance of Seller's obligations
under this Agreement substantially in the form of Exhibit M
hereto.
11.12 Notices.
Any notice or other communication hereunder must be
given in writing and either (a) delivered in person, (b)
transmitted by telex, telefax or telecommunications mechanism or
(c) mailed, postage prepaid, as follows:
If to Buyer, addressed to:
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311-6089
Attention: Cheryl Lee, Esq.
Fax: (818) 407-9331
With a copy to:
O'Melveny & Myers LLP
400 S. Hope Street
Los Angeles, CA 90017
Attention: Diana L. Walker, Esq.
Fax: (213) 430-6407
If to Seller, addressed to:
Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 90250
Attention: Linnea Shine
Fax: (310) 219-0375
With a copy to:
Buster Donelson
188831 Mount Morgan Circle
Fountain Valley, CA 92708
Fax: (714) 964-6009
or to such other address or to such other person as either party
shall have last designated by such notice to the other party.
Each such notice or other communication shall be effective (i) if
given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 11.12 and an
appropriate answerback is received, (ii) if given by mail, three
days after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (iii) if
given by any other means, when actually delivered at such
address.
11.13 Expenses.
(a) If (i) this Agreement is terminated (x) by Seller
without the consent of Buyer for any reason other than pursuant
to Section 9.1(c), 9.1(e) (unless Buyer's inability to obtain
Financing is primarily due to a representation or warranty of
Seller not being true and correct in all material respects or
Seller having not performed an obligation under this Agreement)
or 9.1(f), or (y) by Buyer pursuant to Section 9.1(b), 9.1(d),
9.1(f), 9.1(g) or 9.1(h), or (ii) prior to or within 3 months
after the termination of this Agreement an entity or person (as
defined in Section 13(d)(3) of the Exchange Act) other than the
Buyer or any of its Affiliates, acquires beneficial ownership of
5% or more of the outstanding capital stock, or assets or
business, of Seller, then in either such case Seller will, within
five days after Buyer's submission of a reasonably detailed
statement of its expenses, reimburse Buyer for all out-of-pocket
expenses and fees incurred by it or on its behalf, or incurred by
financial institutions or other Persons and assumed by Buyer, in
connection with the preparation, negotiation, execution and
performance of this Agreement and any Financing referred to in
Section 6.12 ("Buyer's Expenses").
(b) If this Agreement is terminated (x) by Buyer
without the consent of Seller for any reason other than pursuant
to Section 9.1(b), 9.1(d), 9.1(f), 9.1(g) or 9.1(h) or (y) by
Seller pursuant to Section 9.1(c), 9.1(e) (unless Buyer's
inability to obtain Financing is primarily due to a
representation or warranty of Seller not being true and correct
in all material respects or Seller having not performed an
obligation under this Agreement) or 9.1(f), then Buyer will,
within five days after Seller's submission of a reasonably
detailed statement of their expenses, reimburse Seller for all
out-of pocket expenses and fees incurred by them or on their
behalf, or incurred by other persons and assumed by Seller, in
connection with the negotiation, preparation, execution and
performance of this Agreement ("Seller's Expenses").
(c) If Seller fail to pay any of the Buyer's Expenses
when due, then Seller will also be obligated to pay to Buyer all
costs and expenses (including reasonable attorneys' fees and
expenses) incurred by Buyer in connection with the collection
thereof plus interest on the amount of the Buyer's Expenses not
paid from the date such payment was required to be made, at the
Agreed Rate until paid.
(d) If Buyer fails to pay any of the Seller's Expenses
when due, then it will also be obligated to pay to Seller all
costs and expenses (including reasonable attorneys' fees and
expenses) incurred by Seller in connection with the collection
thereof plus interest on the amount of the Seller's Expenses not
paid from the date such payment was required to be made, at the
Agreed Rate until paid.
(e) Except as otherwise provided in Sections 11.13 or
12.2, Seller and Buyer shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and
the transactions contemplated hereby, including but not limited
to the fees, expenses and disbursements of its investment
bankers, accountants and counsel and of securing third party
consents and approvals required to be obtained by it.
(f) Seller shall pay any documentary transfer tax,
real property transfer or gains tax, document recording fees and
charges, any amounts due under Division 6 of the California
Commercial Codes or other bulk sales laws, and any income,
franchise or revenue tax or excise tax (and any surtax thereon)
due in connection with the consummation of the transactions
contemplated by this Agreement.
11.14 Remedies; Waiver.
To the extent permitted by Law, all rights and remedies
existing under this Agreement and any related agreements or
documents are cumulative to, and not exclusive of, any rights or
remedies otherwise available under applicable Law. No failure on
the part of any party to exercise or delay in exercising any
right hereunder shall be deemed a waiver thereof, nor shall any
single or partial exercise preclude any further or other exercise
of such or any other right.
11.15 Attorney's Fees.
Attorneys fees and other expenses incurred in enforcing
any judgment in respect of this Agreement shall be recoverable as
a separate item. The preceding sentence is intended to be
severable from the other provisions of this Agreement and to
survive any judgment and, to the maximum extent permitted by law,
shall not be deemed merged into any such judgment.
11.16 Specific Performance.
Seller and Buyer each acknowledge that, in view of the
uniqueness of the Business and the transactions contemplated by
this Agreement, Seller or Buyer, as the case may be, would not
have an adequate remedy at law for money damages in the event
that this Agreement has not been performed in accordance with its
terms. Seller and Buyer therefore agree that Seller, on the one
hand, and Buyer, on the other hand, shall be entitled to specific
enforcement of the terms hereof in addition to any other remedy
to which it may be entitled, at law or in equity.
11.17 Severability.
If any provision of this Agreement is determined to be
invalid, illegal or unenforceable by any Governmental Entity, the
remaining provisions of this Agreement to the extent permitted by
Law shall remain in full force and effect provided that the
essential terms and conditions of this Agreement for all parties
remain valid, binding and enforceable and provided that the
economic and legal substance of the transactions contemplated is
not affected in any manner materially adverse to any party. In
the event of any such determination, the parties agree to
negotiate in good faith to modify this Agreement to fulfill as
closely as possible the original intents and purposes hereof. To
the extent permitted by Law, the parties hereby to the same
extent waive any provision of Law that renders any provision
hereof prohibited or unenforceable in any respect.
ARTICLE XII
ARBITRATION OF DISPUTES
12.1 Agreement to Arbitrate.
Any controversy, dispute or claim under, arising out
of, in connection with or in relation to this Agreement,
including but not limited to the negotiation, execution,
interpretation, construction, coverage, scope, performance, non-
performance, breach, termination, validity or enforceability of
this Agreement or any alleged fraud in connection therewith, or
this Article XII shall be settled, at the request of either Buyer
or Seller by arbitration conducted in accordance with the
Commercial Arbitration Rules or then existing rules for
commercial arbitration of the American Arbitration Association.
The arbitration shall be governed by the Federal Arbitration Act
(9 U.S.C. 1-16). The arbitration of such issues, including
the determination of any amount of damages suffered by any party
hereto by reason of the acts or omissions of any party, shall be
final and binding upon the parties to the maximum extent
permitted by law, except that the arbitrator shall not be
authorized to award punitive damages with respect to any such
claim, dispute or controversy. No party shall seek punitive
damages relating to any matter under, arising out of, in
connection with or relating to this Agreement. The arbitrator
appointed pursuant to this Article XII shall, upon resolving or
settling any controversy, dispute or claim, deliver written
notice of such resolution or settlement to Seller and Buyer. The
parties intend that this Article shall be valid, binding,
enforceable and irrevocable and shall survive the termination of
this Agreement.
12.2 Fees and Expenses of Arbitration.
Subject to Section 11.13, each party shall pay the fees
of its own attorneys, expenses of witnesses and all other
expenses connected with the presentation of such party's case.
One-half the cost of any arbitration to which Buyer is a party,
including the cost of the record or transcripts thereof, if any,
administrative fees, and all other fees involved, shall be paid
by Buyer, and the balance shall be paid by Seller, except as the
arbitrator may otherwise direct.
12.3 Choice of Law.
Proceedings under and the provisions of this Article
XII shall be subject to Section 11.4 (Governing Law) of this
Agreement.
12.4 Place of Arbitration.
Any arbitration proceedings hereunder shall be held in
Los Angeles, California.
12.5 Judgment.
Judgment upon any award rendered by the arbitrator(s)
may be entered by any court having jurisdiction thereof.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be executed by its duly authorized
officers as of the day and year first above written.
BUYER
/s/ Martin Greenwald
By: Martin Greenwald
Its: President
SELLER
/s/ Charles K. Crane
By: Charles K. Crane
Its: President
<PAGE>
EXHIBIT A
FORM OF ESCROW AGREEMENT
<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is
entered into as of ___________, 1998, by and among Ken
Crane's Magnavox City, Inc., d/b/a Ken Crane's, a California
corporation ("Seller"), Image Newco, Inc., a California
corporation ("Buyer"), and ________________, a
_____________, as escrow agent ("Escrow Agent").
R E C I T A L S
WHEREAS, pursuant to that certain Asset Purchase
Agreement, dated as of ____________, 1998 (the "Asset
Purchase Agreement"), by and between Seller and Buyer, Buyer
has agreed to purchase, acquire and accept from Seller, and
Seller has agreed to sell, convey, assign, transfer and
deliver to Buyer, certain assets of Seller on the terms
described in the Asset Purchase Agreement;
WHEREAS, each of Seller and Buyer have made or
given certain agreements, covenants, representations,
warranties and indemnities in the Asset Purchase Agreement
and have agreed that a portion of the Purchase Price (as
defined in the Asset Purchase Agreement) shall be placed and
maintained in an escrow account to be administered pursuant
to this Agreement and the Asset Purchase Agreement; and
WHEREAS, the parties desire to arrange for such
escrow and to appoint Escrow Agent as escrow agent in
accordance with the terms hereof.
A G R E E M E N T
In consideration of the mutual promises contained
herein and for other good and valuable consideration,
receipt of which is hereby acknowledged, and intending to be
legally bound, the parties agree as follows:
1. Interpretation and Definitions. This
Agreement is being executed and delivered pursuant to
Section 2.3 of the Asset Purchase Agreement and is the
Escrow Agreement referred to therein. The terms and
conditions of the Asset Purchase Agreement are hereby
incorporated by reference into this Agreement, but only for
such purposes as the context of this Agreement may require.
The provisions of this Agreement shall not in any event be
construed so as to enlarge or diminish the rights of Seller
or Buyer under the Asset Purchase Agreement. Capitalized
terms used and not defined herein shall have the meanings
given to them in the Asset Purchase Agreement.
2. Appointment of Escrow Agent. Escrow Agent is
hereby appointed to act as escrow agent in accordance with
the terms hereof, and Escrow Agent hereby accepts such
appointment. Escrow Agent shall have all the rights,
powers, duties and obligations provided herein.
3. Deposit of Funds. On the Closing Date, Buyer
shall deliver $500,000 by wire transfer of immediately
available funds to Escrow Agent. Escrow Agent shall deposit
such funds and hold such funds, and any accrued interest or
earnings thereon, in a form of interest-bearing escrow
account (the "Escrow Account"). The amount in the Escrow
Account at any time, including accrued interest and earnings
on such amount, is referred to herein as the "Escrow
Amount."
Escrow Agent shall invest and reinvest the Escrow
Amount as directed in writing from time to time by Buyer and
Seller; provided, however, that if Buyer and Seller are
unable to reach an agreement as to the appropriate
investment for all or any portion of the Escrow Amount, the
Escrow Amount (or such portion thereof) shall be invested
and reinvested in negotiable certificates of deposit (having
a term not in excess of [90] days) in a commercial bank
having a combined capital and surplus of at least
$_____ million, representing at least ____% of its assets.
Escrow Agent shall (to the extent permitted by the terms of
the applicable investment) sell or redeem any such
investment as necessary to make any payments required
pursuant to this Agreement and shall not be responsible for
any losses or penalties incurred as a result of any such
sale or redemption.
4. Accrued Interest on the Escrow Amount.
(a) Interest and earnings accrued on the Escrow
Amount in the Escrow Account shall be added to the Escrow
Amount and shall be held by Escrow Agent and shall be
available for any payment to be made by Escrow Agent under
this Agreement. Buyer and Seller acknowledge and agree that
for federal and state income tax purposes, the amount earned
on any investment of the Escrow Amount, or portion thereof,
is for the benefit of Seller and shall be received by Escrow
Agent as the nominee of Seller and that such amount shall be
the income of Seller for federal and state income tax
purposes. Escrow Agent is directed to file all required
reports and returns with the appropriate taxing authorities
reflecting that the income earned on the Escrow Amount is
the income of Seller. Seller shall provide to Escrow Agent
such information regarding Seller as may be necessary to
enable Escrow Agent to make any tax filings in connection
with this Agreement, including but not limited to their
taxpayer identification numbers.
(b) Notwithstanding subparagraph (a) above, if
any funds are paid to Buyer from the Escrow Amount pursuant
to Sections 5 and 6 hereof, Buyer shall also receive a pro
rata share of the interest and earnings that have accrued on
the Escrow Amount to the date of such payment. The pro rata
share shall be determined by dividing the amount to be paid
to Buyer pursuant to Sections 5 and 6 by the Escrow Amount
at the time of such payment (excluding any interest and
earnings accrued thereon) and multiplying such number by the
total interest and earnings that have accrued on the Escrow
Amount (as it exists at the date of such payment) to the
date of such payment.
5. Duration of Escrow.
(a) Escrow Agent shall hold the Escrow Amount
(including without limitation the interest accrued on such
amount from the Closing Date) in escrow until the date (the
"Settlement Time") that is the later of (i) ninety (90) days
after the Closing Date, (ii) the date upon which all
deficiencies payable to Buyer pursuant to Section 2.5 of the
Asset Purchase Agreement (together with any amounts payable
under Section 4(b)) have been fully paid and (iii) if any
Disputed Claim (as defined in Section 9 below) arises during
such ninety day period, the date of the final resolution of
any and all such Disputed Claims under Section 10 hereof.
(b) Immediately after the Settlement Time, Escrow
Agent shall disburse any amounts owed on Disputed Claims to
Buyer (together with any amounts payable under Section 4(b))
and shall pay to itself any unpaid fees owed by Seller under
Section 15. Escrow Agent shall then disburse the remaining
Escrow Amount in the Escrow Account to Seller and the escrow
shall terminate; provided, however, that if at any time
prior to the Settlement Time the Escrow Amount shall equal
zero, then the escrow shall terminate at such earlier time.
6. Purposes of Escrow Account. As between Buyer
and Seller, the purpose of the Escrow Amount shall be, and
the Escrow Amount shall be applied to, (a) any payments
required to be made to Buyer pursuant to Section 2.5 of the
Asset Purchase Agreement, subject to the terms and
conditions set forth therein and (b) any payments required
to be made to Buyer pursuant to Article X of the Asset
Purchase Agreement, subject to the terms and conditions set
forth therein.
7. Escrow Amount Not Exclusive Remedy. The
availability of the Escrow Amount for the payment of any
amounts due to Buyer under Section 2.5 and Article X of the
Asset Purchase Agreement shall not limit in any way or
restrict any other remedies available to Buyer under the
Asset Purchase Agreement or applicable law.
8. Assertion of Claim.
(a) At any time prior to the Settlement Time,
Buyer or its successors may assert (i) a claim (a "Claim")
for payment pursuant to Section 2.5 of the Asset Purchase
Agreement and/or (ii) a Claim for payment pursuant Article X
of the Asset Purchase Agreement, and, to the extent of the
Escrow Amount, may demand satisfaction thereof from the
Escrow Account.
(b) To assert any Claim, Buyer shall deliver a
written notice to Escrow Agent and Seller (a "Certificate of
Claim") stating the amount of the Claim in dollars and the
date the notice is being sent (the "Notice Date").
9. Settlement of Claim. Escrow Agent, without
concerning itself with Buyer's explanation as to the basis
for the Claim, may disburse the Escrow Amount, or any
portion thereof, to Buyer to settle the Claim asserted by
Buyer:
(a) Upon receipt by Escrow Agent of a
written instruction executed by Seller and Buyer;
or
(b) In the case of a Claim for funds
for payment pursuant to Section 2.5 of the Asset
Purchase Agreement, upon receipt of a written
resolution from the Referee (as defined in Section
2.4 of the Asset Purchase Agreement); or
(c) Fifteen (15) days after the Notice
Date, provided that the following conditions have
been satisfied:
(i) Buyer has delivered to
Escrow Agent and Seller a Certificate of
Claim;
(ii) Buyer has delivered to
Escrow Agent an affidavit of mailing or
certification stating that Buyer has
delivered or transmitted for delivery to
Seller a Certificate of Claim with respect to
such Claim at least ten (10) days in advance
of the anticipated date of disbursement of
the Escrow Amount or portion thereof; and
(iii) Escrow Agent has not
received from Seller a written objection to
the disbursement (an "Objection").
Any Objection by Seller shall include a statement
in reasonable detail of Seller's basis for such Objection,
and Seller shall deliver a copy of any Objection to Buyer.
If Seller delivers to Escrow Agent an Objection prior to the
satisfaction of such Claim from the Escrow Amount, the Claim
(a "Disputed Claim") shall remain pending until resolved as
provided herein, and Escrow Agent, without concerning itself
as to the grounds for the Objection, shall not disburse the
Escrow Amount or any portion thereof to satisfy the Disputed
Claim. If, after receiving an Objection from Seller, Escrow
Agent receives (1) the written consent of Seller to the
disbursement by Escrow Agent of the amount of the Disputed
Claim, (2) a written agreement executed by Buyer and Seller
revising the amount of such Disputed Claim and instructing
Escrow Agent to disburse to Buyer such revised amount or
(3) a written notice from the arbitrator selected pursuant
to the provisions of Article XII of the Asset Purchase
Agreement stating that the Disputed Claim has been resolved
and stating the resolution of such Disputed Claim, then
Escrow Agent shall be authorized to and shall promptly
disburse the Escrow Amount, or portion thereof, in
accordance with such documents.
10. Resolution of Disputed Claim. A Disputed
Claim that cannot be resolved by Buyer and Seller shall be
finally resolved by the arbitration procedures set forth in
Article XII of the Asset Purchase Agreement. The arbitrator
appointed pursuant to such Article XII shall, upon resolving
or settling a Disputed Claim, deliver written notice of such
resolution or settlement to Escrow Agent, Seller and Buyer.
If the arbitrator's resolution or settlement concludes that
Buyer is entitled to receive any payment from the Escrow
Amount, the arbitrator shall deliver written instructions to
Escrow Agent to disburse to Buyer the amount of such payment
from the Escrow Amount. Escrow Agent shall, after receiving
any such notice from the arbitrator, disburse such amount to
Buyer.
11. Recovery of Attorneys' Fees and Court Costs.
In the event of any Action (other than disputes fully
resolved by the Referee) arising out of the subject matter
of this Agreement, the prevailing party in such Action shall
be entitled to recover its reasonable attorneys' fees and
other costs and expenses, including all amounts paid to or
on behalf of Escrow Agent, incurred in connection with such
Action. If Buyer is entitled to reimbursement of such fees,
costs and expenses, it may recover them from the Escrow
Amount, but its rights to recover and remedies shall not be
limited to the Escrow Amount. To recover such amount from
the Escrow Amount, Buyer shall deliver to Escrow Agent a
copy of the adjudication resulting from such Action in which
it was the prevailing party and a self-certified statement
of its fees, costs and expenses, and Escrow Agent shall be
authorized to disburse to Buyer the total amount thereof.
If Seller is entitled to reimbursement of such fees, costs
and expenses, Seller shall deliver to Buyer a self-certified
statement of its fees, costs and expenses and Buyer shall
promptly reimburse such amount to Seller.
12. Escrow Agent Qualifications. Escrow Agent
shall at all times be a bank, savings and loan association
or trust company in good standing, organized and doing
business under the laws of the United States or a state of
the United States, having combined capital and surplus of
not less than $100 Million and shall be authorized under the
laws governing its organization to exercise corporate trust
powers and shall be authorized under such laws and the laws
of the State of California to enter into and perform this
Agreement. If Escrow Agent shall at any time cease to have
the foregoing qualifications, Escrow Agent shall give notice
of resignation to Buyer and Seller as provided in
Section 16, and Seller and Buyer agree to thereupon promptly
appoint a qualified successor escrow agent in accordance
with Section 17.
13. Limitations on Liability of Escrow Agent.
(a) Escrow Agent may act upon any written notice,
certificate, instrument, request, waiver, consent, paper, or
other document that Escrow Agent in good faith reasonably
believes to be genuine and to have been made, sent, signed,
prescribed, or presented by the proper person or persons.
Escrow Agent shall not be liable for any action taken or
omitted by it in connection with the performance of its
duties and obligations hereunder, except for its own
negligence or willful misconduct. Escrow Agent shall be
under no obligation to institute or defend any action, suit
or legal proceeding in connection with this escrow or this
Agreement unless it is indemnified to its satisfaction by
the party or parties who desire that it undertake such
action.
(b) Escrow Agent shall be under no obligation or
liability for failure to inform Buyer or Seller regarding
any transaction or facts within Escrow Agent's knowledge,
even though the same may concern the matters described
herein, provided they do not prevent or interfere with
Escrow Agent's compliance with this Agreement, nor shall
Escrow Agent be liable for the sufficiency, correctness or
genuineness as to form, manner of execution or validity of
any instrument deposited, nor as to identity, authority, or
rights of any person executing the same, except as above
provided.
(c) Should Escrow Agent during or after the term
of the escrow receive or become aware of any conflicting
demands or claims with respect to the Escrow Amount or the
rights of any of the parties hereto, or any money or
property deposited herein or affected hereby, Escrow Agent
shall have the right to discontinue any or all further acts
on its part until such conflict is resolved to its and the
parties' satisfaction, and Escrow Agent shall have the
further right to commence or defend any action or proceeding
for the determination of such conflict. In the event Escrow
Agent should file suit in interpleader, it shall be fully
released and discharged from all further obligations under
this Agreement.
(d) Escrow Agent may consult with legal counsel
satisfactory to it in connection with any dispute, the
construction of any provision of this Agreement or the
duties and obligations of Escrow Agent under this Agreement.
14. Release of Escrow Agent. The retention and
distribution of the Escrow Amount in accordance with the
terms and provisions of this Agreement shall fully and
completely release Escrow Agent from any obligations or
liabilities assumed under this Agreement with respect to the
Escrow Amount.
15. Compensation of Escrow Agent. Escrow Agent
shall be entitled to reasonable compensation and
reimbursement of fees, costs and expenses, including
reasonable attorneys' fees, suffered or incurred by Escrow
Agent in connection with the performance of its duties and
obligations hereunder, including but not limited to, any
suit in interpleader brought by Escrow Agent. Buyer, on the
one hand, and Seller, on the other hand, shall be severally
responsible for one-half of such compensation, fees, costs
and expenses.
16. Resignation and Removal of Escrow Agent.
Escrow Agent or any successor to it may resign and be
discharged of its duties and obligations hereunder by
delivering written notice to Buyer and Seller specifying the
effective date of such resignation, which date shall not be
earlier than 30 days following the receipt by Buyer and
Seller of the notice of resignation. Such resignation shall
take effect on the date specified in the notice of
resignation, unless a successor escrow agent has been
appointed in accordance with the provisions of Section 17
and has accepted such appointment, in which case such
resignation shall take effect immediately upon receipt by
such successor escrow agent of the Escrow Amount. Escrow
Agent may be removed by the joint action of Buyer and
Seller, with or without cause, at any time upon 15 days'
prior written notice to Escrow Agent, which notice may be
waived by Escrow Agent.
Notwithstanding any resignation or removal of
Escrow Agent pursuant to this Section 16, Escrow Agent shall
continue to serve in its capacity as escrow agent until
(a) a successor escrow agent is appointed in accordance with
the provisions of Section 17 and has accepted such
appointment and (b) the Escrow Amount has been transferred
to and received by such successor escrow agent. Buyer and
Seller shall promptly take the necessary action to appoint a
successor escrow agent in accordance with the provisions of
Section 17.
17. Appointment of Successor Escrow Agent. If at
any time Escrow Agent shall resign, be removed or otherwise
become incapable of acting as escrow agent pursuant to this
Agreement, or if at any time a vacancy shall occur in the
office of escrow agent for any other cause, a successor
escrow agent that meets the qualifications set forth in
Section 12 shall be appointed by Buyer by a written
instrument delivered to the successor escrow agent. If no
successor escrow agent has been appointed at the effective
date of resignation or removal of Escrow Agent or within 30
days after the time Escrow Agent became incapable of acting
or a vacancy occurred in the office of escrow agent, any
party hereto may petition a court of competent jurisdiction
for an appointment of a successor escrow agent and Escrow
Agent shall have the right to refuse to make any payments
from the Escrow Amount until a successor escrow agent is
appointed and has accepted such appointment. Upon the
appointment and acceptance of any successor escrow agent
hereunder, Escrow Agent shall transfer the Escrow Amount to
its successor. Upon receipt by the successor escrow agent
of the Escrow Amount, Escrow Agent shall be discharged from
any continuing duties or obligations under this Agreement,
but such discharge shall not relieve Escrow Agent from any
liability incurred prior to such event, and the successor
escrow agent shall be vested with all rights, powers, duties
and obligations of Escrow Agent under this Agreement.
18. Parties in Interest. This Agreement shall be
binding upon and inure to the benefit of each party, and
nothing in this Agreement, express or implied, is intended
to confer upon any other person any rights or remedies of
any nature whatsoever by, under or by reason of this
Agreement. Nothing in this Agreement is intended to relieve
or discharge the obligation of any third person to, or to
confer any right of subrogation or action over against, any
party to this Agreement.
19. Notices. Any notice or other communication
hereunder must be given in writing and either (a) delivered
in person, (b) transmitted by telefax or other
telecommunications mechanism or (c) mailed, postage prepaid,
receipt requested, as follows:
(a) If to Buyer:
Image Newco, Inc.
c/o Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attention: Chief Administrative Officer and
General Counsel
Fax: (818) 407-9331
With a copy to:
O'Melveny & Myers LLP
400 S. Hope Street
Los Angeles, CA 90017
Attention: Diana L. Walker, Esq.
Fax: (213) 430-6407
(b) If to Seller:
Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 990250
Attention: Linnea Shine
Fax:(310) 219-0375
With a copy to:
Lanning, Adams & Peterson
4676 Admiralty Way, Suite 619
Marina del Rey, CA 90292
Attention: Michael K. Lanning, Esq.
Fax: (310) 823-5273
(c) If to Escrow Agent:
Attention:
Fax:
or to such other address or to such other Person (as defined
in the Asset Purchase Agreement) as either party shall have
last designated by such notice to the other party. Each
such notice or other communication shall be effective (i) if
given by telecommunication, when transmitted to the
applicable number so specified in (or pursuant to) this
Section 19, (ii) if given by mail, three business days after
such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid or (iii) if
given by any other means, when actually delivered at such
address.
20. Amendments; Waivers. This Agreement may be
amended only by an agreement in writing of all parties. No
waiver of any provision nor consent to any exception to the
terms of this Agreement shall be effective unless in writing
and signed by the party to be bound, and then only to the
specific purpose, extent and instance so provided.
21. Counterparts. This Agreement and any other
agreement (or document) delivered pursuant hereto may be
executed in one or more counterparts and by different
parties in separate counterparts. All of such counterparts
shall constitute one and the same agreement and shall become
effective when one or more counterparts of this Agreement
have been signed by each party and delivered to the other
parties.
22. Assignment; Successors and Assigns. Neither
this Agreement nor any rights or obligations under it are
assignable, except that Buyer may assign its rights under
this Agreement and in the Escrow Account to any Person to
whom Buyer may assign its rights under the Asset Purchase
Agreement. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the successors and
permitted assigns of the respective parties.
23. Governing Law. This Agreement and the legal
relations among the parties shall be governed by and
construed in accordance with the laws of the State of
California applicable to contracts made and performed in
such State without regard to conflicts of law doctrines.
24. Integration. This Agreement and the
agreements referred to herein, constitute the entire
agreement and understanding of the parties with respect to
the subject matter of this Agreement and supersede all prior
agreements and understandings with respect thereto.
25. Severability. If any provision of this
Agreement is held invalid by any court, governmental agency
or regulatory body, the other provisions to the extent
permitted by law shall remain in full force and effect. To
the extent permitted by applicable law, the parties hereby
waive any provision of law that renders any provision hereof
prohibitive or unenforceable in any respect.
26. Headings. The descriptive headings of the
Sections of this Agreement are for convenience only and do
not constitute a part of this Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has
caused this Escrow Agreement to be executed on the day and
year first written above.
"Seller"
KEN CRANE'S MAGNAVOX CITY, INC.,
a California corporation
_______________________________
Name:__________________________
Title:_________________________
"Buyer"
IMAGE NEWCO, INC.,
a California corporation
_______________________________
Name:__________________________
Title:_________________________
"Escrow Agent"
[ESCROW AGENT],
a ___________________
_______________________________
Name:__________________________
Title:_________________________
<PAGE>
EXHIBIT B
FORM OF BILL OF SALE AND ASSIGNMENT
<PAGE>
BILL OF SALE AND ASSIGNMENT
For good and valuable consideration, receipt of which
is hereby acknowledged, and pursuant to the Asset Purchase
Agreement, dated as of __________________, 1998 (the
"Agreement"), between Ken Crane's Magnavox City, Inc., d/b/a Ken
Crane's ("Seller"), and Image Newco, Inc. ("Buyer"), and
intending to be legally bound hereby, Seller does hereby
unconditionally and irrevocably sell, convey, assign transfer and
deliver to Buyer, its successors and assigns, all of the business
and assets, properties, rights, privileges, claims and contracts
of every kind and nature, real and personal, tangible and
intangible, absolute or contingent, wherever located, owned, held
or used or intended for use primarily in Seller's business and
operation of distributing laserdiscs and digital video discs
(collectively, the "Purchased Assets"), including, without
limitation, the items described more particularly in Schedule 1
attached hereto and incorporated herein by reference.
Terms used herein and not defined have the meanings
assigned to them in the Agreement. Nothing herein is intended to
limit or supersede in any way the representations and warranties
of Seller set forth in the Agreement.
Seller hereby represents and warrants that (i) the
Purchased Assets are free and clear of any Encumbrance, (ii) that
it has good and marketable title to the Purchased Assets, and no
agreements or understandings exist which limit or restrict the
right of Seller to transfer the Purchased Assets to Buyer and
(iii) the Purchased Assets are the assets described in Section
2.1(a) of the Agreement.
Seller, for itself and its successors and assigns,
hereby covenants and agrees that, without further consideration,
at any time and from time to time after the date hereof, it will
execute and deliver to Buyer such further instruments of sale,
conveyance, assignment, transfer and delivery, and take such
other action, all upon the reasonable request of Buyer, in order
more effectively to sell, convey, assign, transfer and deliver
all or any portion of the Purchased Assets to Buyer, to assure
and confirm to any other person the ownership of the Purchased
Assets by Buyer, and to permit Buyer to exercise any of the
franchises, rights, licenses or privileges intended to be sold,
conveyed, assigned, transferred and delivered by Seller to Buyer
pursuant to this Bill of Sale and Assignment.
<PAGE>
IN WITNESS WHEREOF, Seller has caused this Bill of Sale
and Assignment to be executed as of this ____ day of ___________,
1998.
SELLER
KEN CRANE'S MAGNAVOX CITY,
INC., a California corporation
_______________________________
Name:__________________________
Title:_________________________
ACCEPTED AND AGREED:
BUYER
IMAGE NEWCO, INC.,
a California corporation
___________________________________
Name:______________________________
Title:_____________________________
<PAGE>
SCHEDULE 1
PURCHASED ASSETS
[List to Come]
<PAGE>
EXHIBIT C
FORM OF LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT
<PAGE>
LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN
TO:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071
Attention: Diana L. Walker
LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT (this
"Assignment") is made as of the ______________________ day of
_____________, 1998, by and between Ken Crane's Magnavox City,
Inc., d/b/a Ken Crane's, a California corporation ("Assignor"),
and Image Newco, Inc., a California corporation ("Assignee").
Terms used herein and not otherwise defined shall have the
meanings assigned to them in that certain Asset Purchase
Agreement, dated ____________, 1998, between Assignor and
Assignee (the "Agreement").
W I T N E S S E T H :
WHEREAS, pursuant to the Agreement, Assignor has agreed
to sell, convey, assign, transfer and deliver and Assignee has
agreed to purchase, acquire and accept certain assets described
in the Agreement including, without limitation, the interest of
Assignor under the Lease attached hereto as Exhibit 1 (the
"Lease");
WHEREAS, prior to the transfer of the assets pursuant
to the Agreement (the "Closing"), certain consents must be
obtained and other requirements must be satisfied;
WHEREAS, in order to expedite the consent of the lessor
to the transfer of the Lease by Assignor to Assignee, the parties
desire to execute this Agreement prior to the Closing but
effective only upon the Closing; and
WHEREAS, Assignee has agreed under the Agreement to
assume and discharge under the Lease all obligations that first
arise after the Closing with respect to the Lease.
NOW, THEREFORE, with reference to the foregoing
recitals which are incorporated herein by this reference and for
other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as
follows:
1. Assignor does hereby SELL, CONVEY, ASSIGN, TRANSFER AND
DELIVER to Assignee all of its right, title and interest as
tenant under the Lease demising that certain real property
located in the City of Westminster, in the County of Orange and
the State of California, which real property is more particularly
described in Exhibit 1 attached hereto and by this reference
incorporated herein (the "Real Property"). The foregoing sale,
conveyance, assignment, transfer and delivery shall become
effective on the date of the Closing. Nothing contained in this
Agreement shall be deemed to transfer to Assignee any right or
interest of Assignor in, to or under the Lease prior to the
Closing or, prior to the Closing, to otherwise constitute an
assignment, agreement or arrangement in contravention of, or
which would adversely affect the rights granted to Assignor or to
be assigned to Assignee under, the Lease.
2. Effective as of the date of the Closing, Assignee accepts
the foregoing assignment and assumes and agrees to perform and to
pay or discharge when due any and all obligations of the tenant
under the Lease arising from and after the Closing.
3. Assignor hereby agrees not to further sell, convey, assign,
transfer, deliver, mortgage, pledge or otherwise encumber all or
any portion of its interest in the Lease. Any attempted further
sale, conveyance, assignment, transfer, delivery, mortgage,
pledge or other encumbrance, whether made voluntarily or
otherwise, shall be void and of no effect.
4. Assignor further agrees that until the Closing it will fully
perform and discharge, as and when due, any and all of its
obligations under the Lease (including, without limitation, any
and all payment obligations thereunder). Assignor represents to
Assignee that Exhibit 1 constitutes a true and complete copy of
the Lease, including all amendments, modifications and
supplements thereto. Assignor shall not hereafter amend, modify,
surrender, terminate or waive its rights under the Lease or
otherwise take any action or omit to take any action with respect
to the Lease which might adversely affect the rights of tenant
thereunder without the prior consent in writing of Assignee.
5. Assignor hereby agrees to indemnify, defend and hold
harmless Assignee from and against any and all Losses (as defined
in the Agreement) arising out of or resulting from (a) the filing
of any mechanic's, materialman's or other similar lien against
the Real Property or the estate of Assignor under the Lease, (b)
any breach or default by Assignor in the performance of any of
the Assignor's obligations under the Lease or (c) any negligence
of Assignor, or any of Assignor's agents, contractors, employees
or invitees (collectively, "Assignor's Agents") if any such Loss
accrued or resulted from any act or omission of Assignor or any
of Assignor's Agents occurring on or before the Closing. The
provisions of Article X of the Agreement shall apply to claims
for indemnity hereunder.
6. The persons executing this Assignment and any Consent
attached hereto hereby represent and warrant that they are duly
authorized to execute and deliver this Agreement or such Consent
on behalf of Assignor, Assignee or such consenting party, as the
case may be.
7. If the Agreement is terminated, then this Assignment shall,
on the date of such termination, terminate and be of no force or
effect.
8. This Assignment and any Consent attached hereto may be
executed in any number of counterparts, each of which shall be
deemed an original, but all of which together shall constitute
only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Lease Assignment and Assumption Agreement to be executed as of
the date first written above.
"Assignor"
KEN CRANE'S MAGNAVOX CITY,
INC., a California corporation
________________________________
Name:___________________________
Title:__________________________
"Assignee"
IMAGE NEWCO, INC.,
a California corporation
_______________________________
Name:__________________________
Title:_________________________
<PAGE>
EXHIBIT 1
THE LEASE
<PAGE>
CONSENT
Sound Investments, a California general partnership
("Lessor"), hereby confirms that it is the lessor under the Lease
referred to in the foregoing Lease Assignment and Assumption
Agreement (the "Assignment"), consents to the foregoing
Assignment of the Lease (the "Lease") described therein by Ken
Crane's Magnavox City, Inc., d/b/a Ken Crane's ("Assignor"), to
Image Newco, Inc. ("Assignee") and agrees to the release of
Assignor from any further obligation under the terms of said
Lease arising from and after the effective date of the
Assignment. Lessor confirms that Exhibit 1 to the Assignment
constitutes a true, correct and complete copy of the Lease.
Lessor acknowledges that, as of the date hereof, the Lease is in
full force and effect, Assignor is not in default under the Lease
and Lessor has not assigned or otherwise transferred its interest
in or under the Lease. Lessor agrees to promptly notify Assignee
of any change in such status or of any default (or event which
upon the giving of notice or passage of time or both would become
a default) under the Lease prior to the effective date of the
Assignment.
"Lessor"
SOUND INVESTMENTS,
a California general
partnership
_______________________________
Name:__________________________
Title:_________________________
Dated:_________________________
<PAGE>
EXHIBIT D
FORM OF ESTOPPEL STATEMENT FROM LESSOR
<PAGE>
ESTOPPEL STATEMENT FROM LESSOR
Image Newco, Inc.
c/o Image Entertainment
9333 Oso Avenue
Chasworth, CA 91311
Ladies and Gentlemen:
The undersigned is making this statement to you in
connection with the assignment by Ken Crane's Magnavox City,
Inc., d/b/a Ken Crane's ("Seller"), of its right, title and
interest in and to that certain "Lease" described herein with the
understanding that you will rely on this statement in acquiring
said Lease. You are entitled to rely upon the statements
contained herein.
The undersigned hereby represents and certifies as follows:
1. That it is the sole fee owner of the premises demised under
that certain Lease, dated as of November 2, 1992, executed by
Sound Investments, a California general partnership, as lessor
("Lessor"), and Ken Crane's Magnavox City, Inc. d/b/a Ken Crane's
Home Entertainment, as tenant ("Tenant"), a true, correct and
complete copy of which, together with all amendments,
modifications and supplements thereto and extensions and renewals
thereof, is attached hereto (collectively, the "Lease").
2. That the Lease is in full force and effect and there are no
amendments, modifications, waivers or supplements, whether
written or oral, thereto, except as attached hereto.
3. That the Lease constitutes the sole and entire agreement
between the undersigned and Tenant with respect to the property
described therein.
4. That Tenant is not in any respect in default in the
performance of its obligations under the Lease, nor is there any
circumstance which, with the giving of notice or the passage of
time, or both, would constitute a default under the Lease by the
undersigned or Tenant. Lessor has not, nor to the best of
Lessor's knowledge has Tenant, assigned, transferred or
hypothecated its interest under the Lease or further leased or
subleased all or any portion of the demised premises.
5. That the term of the Lease commenced on November 23, 1992,
and will expire on November 22, 2002. Tenant has accepted
possession of the premises described in the Lease and continues
to occupy the same.
6. That the monthly rental payable under the Lease is
$____________; [that such monthly rental will increase to $______
on ________, 19____;] and that rent is due on the first day of
each month for the duration of the term of the Lease.
7. That the security deposit under the Lease is $_______; that
the Lessor has received the full amount of such deposit; that
there are no circumstances known to the Lessor entitling the
Lessor to apply all or any portion of said security deposit; and
that the Lessor has not heretofore applied all or any portion of
said security deposit.
8. That all improvements to be completed under the Lease have
been completed in accordance with the provisions of the Lease,
and that as of the date hereof no condition has occurred or
remains unfulfilled that would allow cancellation or termination
of the Lease by either party thereto.
9. That the undersigned has no knowledge of any processing,
use, storage, disposal, presence, release or treatment of any
hazardous or toxic materials or substances on or about the leased
premises.
10. That Tenant has satisfied all commitments made to induce
Lessor to enter into the Lease.
11. That there are no offsets or credits against rentals payable
under the Lease.
12. The undersigned agrees that it shall not, without your prior
written consent, at any time prior to the earlier of the closing
of your acquisition of the Lease and January 1, 1999, agree to
any (i) cancellation or surrender of the Lease; (ii)
modification, amendment, change, alteration or waiver of any
provision of the Lease; or (iii) pledge or assignment of the
Lease except for the contemplated assignment to you.
13. The undersigned hereby consents to the assignment of the
Lease to Assignee.
This statement shall bind the successors and assigns of
the undersigned and shall inure to the benefit of your successors
and assigns.
"Lessor"
SOUND INVESTMENTS,
a California general
partnership
_______________________________
Name:__________________________
Title:_________________________
Dated:_________________________
<PAGE>
EXHIBIT E
FORM OF SPECIAL POWER OF ATTORNEY
<PAGE>
SPECIAL POWER OF ATTORNEY
Ken Crane's Magnavox City, Inc., d/b/a Ken Crane's
("Seller"), does hereby constitute and appoint Image Newco, Inc.
("Buyer") the true and lawful attorney-in-fact of Seller in its
name, place and stead, in connection with the acquisition,
pursuant to that certain Asset Purchase Agreement, dated as of
_______________, 1998, between Buyer and Seller (the
"Agreement"), of the Business (as defined in the Agreement) by
Buyer:
(i) to execute, acknowledge and deliver all such
further assignments, transfers, conveyances, deeds, bills of sale
or other instruments, documents or assurances as may be required
to transfer to or vest in Buyer or to protect the right, title
and interest of Buyer in the Purchased Assets (the "Purchased
Assets") conveyed (or intended to be conveyed) by Seller to Buyer
pursuant to the Agreement; and
(ii) to accept and endorse and deposit for Buyer's own
account instruments, drafts, checks, notes and other similar
items payable to Seller (or presented in payment to Buyer) for
any of the Purchased Assets.
This power of attorney may be exercised on behalf of
Buyer by any officer or employee of Buyer by affixing the manual
or facsimile signature of any such officer or employee of Buyer
to any such instrument or other document.
Seller further gives and grants to its said attorney-in-
fact full power and authority to do and perform every act
necessary and proper to be done in the exercise of the foregoing
powers as fully as Seller might or could do, with full power of
substitution and revocation, hereby ratifying and confirming all
that said attorney-in-fact shall lawfully do or cause to be done
by virtue hereof.
This Special Power of Attorney is coupled with an
interest and is irrevocable.
IN WITNESS WHEREOF, Seller has executed this Special
Power of Attorney this ____ day of ____________, 1998, at
________________________.
"Seller"
KEN CRANE'S MAGNAVOX CITY,
INC, a California corporation
_______________________________
Name:__________________________
Title:_________________________
<PAGE>
STATEMENT OF WITNESSES
I declare under penalty of perjury under the laws of
California that the person who signed or acknowledged this
document is personally known to me (or proved to me on the basis
of convincing evidence) to be the principal, that the principal
signed or acknowledged this power of attorney in my presence and
that the principal appears to be of sound mind and under no
duress, fraud or undue influence.
Signature:_______________________
Print Name:______________________
Date:____________________________
Residence Address:_______________
_________________________________
_________________________________
Signature:_______________________
Print Name:______________________
Date:____________________________
Residence Address:_______________
_________________________________
_________________________________
<PAGE>
STATE OF )
) SS
COUNTY OF )
On _____________________, 19__, before me
____________________, a Notary Public for the State of
California, personally appeared ___________________________ and
_______________________, known to me to be the
________________________________ and _________________________,
respectively, of Ken Crane's Magnavox City, Inc., d/b/a Ken
Crane's, the corporation that executed the within power of
attorney, and acknowledged to me that such corporation executed
the same.
_____________________________
Notary Public for the State
of California
[SEAL]
My Commission Expires:
_____________________________
<PAGE>
EXHIBIT F
FORM OF ASSUMPTION AGREEMENT
<PAGE>
ASSUMPTION AGREEMENT
For good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, and pursuant to that
certain Asset Purchase Agreement, dated as of ____________, 1998
(the "Agreement"), between Ken Crane's Magnavox City, Inc., d/b/a
Ken Crane's ("Seller"), and Image Newco, Inc. ("Buyer"), Seller
hereby assigns and Buyer hereby assumes and agrees to pay and
otherwise perform the liabilities and obligations (the "Assumed
Liabilities") set forth on Schedule A attached hereto and
incorporated herein by this reference.
This Assumption Agreement shall be binding upon and
inure to the benefit of Buyer and Seller and their respective
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this
Assumption Agreement to be executed this ___ day of ____________,
1998.
"Buyer"
IMAGE NEWCO, INC.,
a California corporation
______________________________
Name:_________________________
Title:________________________
"Seller"
KEN CRANE'S MAGNAVOX CITY,
INC., a California corporation
_____________________________
Name:________________________
Title:_______________________
<PAGE>
SCHEDULE A
ASSUMED LIABILITIES
[To come]
<PAGE>
EXHIBIT G
FORM OF INVESTMENT LETTER
<PAGE>
INVESTMENT LETTER
The undersigned, Ken Crane's Magnavox City, Inc., d/b/a
Ken Crane's, a California corporation ("Seller"), hereby
certifies to and agrees with Image Newco Inc., a California
corporation ("Buyer"), as follows, and makes the following
representations to Buyer, with the intent that Buyer rely thereon
to assure compliance with applicable securities laws. This
certificate is being delivered pursuant to Section 4.25 of that
certain Asset Purchase Agreement, dated as of ___________, 1998,
by and between Buyer and Seller (the "Agreement"). Capitalized
terms used but not defined herein have the meanings set forth in
the Agreement.
1. Seller has been provided copies of, and has read
and understood the Agreement, all exhibits and schedules
attached thereto and all other agreements contemplated
thereby to which Seller or any of its Affiliates is a party;
that certain Confidential Private Placement Memorandum
prepared by Buyer, dated _________, 1998; and all
information concerning Buyer and/or Buyer's Common Stock
that has been provided to Seller in writing in connection
therewith.
2. Seller has such knowledge and experience in
business and financial matters that Seller is capable of
utilizing the information provided about Buyer to evaluate
the risks and merits of the exchange of the Purchased Assets
for Buyer's Common Stock and Seller's other rights and
duties under the Agreement and hereunder.
3. Seller has adequate means of providing for
Seller's current financial needs and possible contingencies
and has no need in the foreseeable future to sell or pledge
any securities issued by Buyer.
4. Seller is acquiring certain of Buyer's securities
pursuant to the Agreement for Seller's own account for
investment without a view to or for sale in connection with
any distribution thereof, and will not sell or distribute
any of such securities in violation hereof or of the
Agreement or any other agreements contemplated thereby, the
Securities Act, the General Rules and Regulations of the SEC
promulgated thereunder, or any other applicable securities
laws, including but not limited to those of the United
States and the State of California.
5. Seller acknowledges and agrees that:
(a) Buyer's Common Stock must be held for a
period of not less than one year, and neither such
stock nor any interest therein may be sold, transferred
or otherwise disposed of, unless any transfer thereof
is then registered or qualified under the Securities
Act and any other applicable state securities laws or
Buyer has received a written opinion of counsel to
Seller with expertise in securities laws, which opinion
must be satisfactory (as to content and legal authority
for the positions expressed therein) to counsel for
Buyer, to the effect that an exemption from such
registration and qualification is available with
respect to such action;
(b) if such opinion relies on the exemption from
registration in Section 4(1) or 4(2) of, or any rule
interpretation derived therefrom under, the Securities
Act (or any analogous exemptions under state securities
laws) Seller shall obtain, to the extent required by
such opinion or by Buyer, and deliver to Buyer a copy
of the prospective transferee's: (i) representations
to Buyer, similar to those contained herein or
otherwise customary in the circumstances as to the
transferee's non-distributive intent, sophistication,
understanding of (and ability to bear) risk, and access
to information, (ii) acknowledgement concerning
restrictions on transfer of Buyer's Common Stock and
(iii) assumption of obligations of Seller hereunder;
(c) Buyer's registrar and transfer agent will
maintain a stop transfer order against the registration
or transfer of Buyer's Common Stock held by Seller to
assure compliance with applicable securities laws; and
(d) the certificate(s) representing Buyer's
Common Stock to be held by Seller will bear a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER ANY
STATE OR FEDERAL LAW AND NEITHER THE SHARES NOR
ANY INTEREST THEREIN MAY BE SOLD OR TRANSFERRED
WITHOUT COMPLYING WITH SUCH LAWS AND PROVIDING TO
THE ISSUER A WRITTEN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM
REGISTRATION OR QUALIFICATION UNDER APPLICABLE
STATE AND FEDERAL LAWS IS THEN AVAILABLE. THESE
SECURITIES ARE SUBJECT TO CERTAIN OTHER
RESTRICTIONS PURSUANT TO AN AGREEMENT BETWEEN THE
ISSUER AND HOLDER, DATED AS OF __________, 1998.
6. Seller does not have in mind any sale of Buyer's
Common Stock either currently or after the passage of a
fixed or determinable period of time or upon the occurrence
or nonoccurrence of any specific event or circumstance; has
no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment
providing for, or which is likely to compel a disposition of
Buyer's Common Stock or any interest therein, by pledge or
otherwise; and is not aware of any circumstances presently
in existence that are likely in the future to prompt such a
transfer or other disposition thereof.
7. Seller agrees to indemnify Buyer and hold Buyer
harmless from and against any Losses incurred on account of
or arising out of any inaccuracy in Seller's declarations,
representations, and covenants set forth herein, the
disposition of any of Buyer's Common Stock that Seller will
receive contrary to its foregoing declarations,
representations, and covenants, and any action, suit or
proceeding based upon the claim that Seller's declarations,
representations, or covenants were inaccurate or misleading
or otherwise cause for obtaining damages or redress from
Buyer or the disposition of any of Buyer's Common Stock or
any part thereof in violation hereof or of any securities
laws.
Executed this __________ day of _______, 1998.
"Seller"
KEN CRANE'S MAGNAVOX CITY, INC.,
a California corporation
___________________________________
Name:______________________________
Title:_____________________________
<PAGE>
EXHIBIT H
FORM OF OPINION OF SELLER'S COUNSEL
<PAGE>
FORM OF OPINION OF
SELLER'S COUNSEL
[DATE]
Image Newco, Inc.
c/o Image Entertainment
9333 Oso Avenue
Chatsworth, California 91311
Ladies and Gentlemen:
We have acted as counsel for Ken Crane's Magnavox City,
Inc., d/b/a Ken Crane's ("Seller"), The Crane Family Trust (the
"Trust") and Ken Crane, Sr. ("Ken Crane") in connection with the
sale by Seller and the purchase by Image Newco, Inc. ("Buyer") of
substantially all of the assets of Seller's business of
distributing laserdiscs and digital video discs, pursuant to that
certain Asset Purchase Agreement, dated as of ________ __, 1998,
between Buyer and Seller and each other agreement or instrument
contemplated thereby to which Seller, the Trust and/or Ken Crane
is a party (collectively, the "Agreement"). This opinion is
being delivered to you pursuant to Section 8.2 of the Agreement.
Capitalized terms used herein without definition have the same
meanings as set forth in the Agreement.
In our capacity as such counsel, we have examined originals
or copies of the Agreement and such corporate records of Seller,
certificates of public officials and of officers of Seller, and
other documents as we have deemed necessary for the purpose of
this opinion. We have assumed the genuineness of the signatures
(except for those of the officers of Seller executing the
Agreement), the authenticity of all items submitted to us as
originals, the conformity with originals of all items submitted
to us as copies and the due authority of all persons executing
the same. As to material matters of fact, we have, when relevant
facts were not independently established, relied upon the
statements and certificates furnished to us.
On the basis of such examination and our consideration of
such questions of law as we have deemed relevant in the
circumstances, we are of the opinion, subject to the assumptions
and limitations set forth herein, that:
1. Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of California with
all necessary corporate power and authority to carry on its
business as now being conducted and to execute, deliver and
perform the Agreement and any related agreements to which it is a
party. Each of the Trust and Ken Crane has all necessary power
and authority to execute, deliver and perform any agreements to
which it is a party.
2. Neither the execution and delivery of the Agreement nor the
consummation of the transactions contemplated by it will violate
the provisions of, or constitute a breach or default, whether
upon lapse of time and/or the occurrence of any act or event or
otherwise, under the charter documents or bylaws of Seller or any
Material Contract known to us to which Seller is a party or is
bound, or result in the imposition of any Encumbrance against any
asset of Seller, or violate any Order or Law applicable to Seller
or any of its assets.
3. The Agreement has been duly and validly authorized by all
necessary corporate action on the part of Seller. Each of the
Agreement and any related agreements has been duly executed and
delivered by Seller, the Trust and/or Ken Crane, as applicable,
and constitutes a legally valid and binding obligation of Seller,
the Trust and/or Ken Crane, as applicable, enforceable against
such party in accordance with its terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally. We advise you that
the enforceability of the Agreement is subject to the effect of
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.
4. Except for those Permits and Approvals described on Schedule
4.7 to the Agreement, the consummation of the sale of the
Purchased Assets and Assumed Liabilities by Seller pursuant to
the Agreement does not require any order, consent, approval of,
or filing or registration with any other third party or
Governmental Entity. All required proceedings and other action
to assure compliance with applicable bulk sales laws and asset
transfer laws have been duly taken.
In rendering our opinion in Clause 2 with regard to
material agreements, we are relying on Seller's certifications as
to their material agreements attached hereto and with your
consent have confined our review to the indicated agreements.
In rendering the opinions expressed in Clause 3, we
have assumed that the Agreement has been duly authorized,
executed and delivered by Buyer, that Buyer has the requisite
power and authority to execute, deliver and perform the
Agreement, that the Agreement constitutes the legal, valid and
binding obligation of Buyer, enforceable against it in accordance
with its terms (as so qualified), that Buyer has obtained all
necessary Approvals and Permits required to be obtained by Buyer
in order to consummate the transactions contemplated by the
Agreement, that all items submitted as originals are authentic
and that all items submitted as copies conform to the originals,
and we have not independently verified such assumptions.
We express no opinion concerning the laws of any
jurisdiction other than California or the United States or choice
of law, securities or antitrust law matters.
This opinion is solely for your benefit in connection
with your acquisition of the Purchased Assets and related
transaction and may not be relied upon by, nor may copies be
delivered to, any other Person, or used for any other purpose,
without our prior written consent.
Respectfully submitted,
Lanning, Adams & Peterson
<PAGE>
EXHIBIT I
FORM OF LETTER OF SELLER ACCOUNTANT
<PAGE>
SUBSTANCE OF LETTER OF SELLER ACCOUNTANT
1. Buster Donelson serves as certified public
accountant to Seller.
2. On the basis of a reading of the latest available
interim financial statements of Seller, inquiries of officials of
Seller responsible for financial and accounting matters and other
specified procedures, nothing came to my attention that caused me
to believe that:
(a) the financial statements of Seller dated as of
April 30, 1998 and July 31, 1998 delivered to Buyer (the
"Unaudited Statements") are not fairly presented, in
conformity with generally accepted accounting principles
("GAAP") (except for changes, if any, required by GAAP and
disclosed therein, specifically including the reserve for
slow moving, obsolete or overstocked LD inventory) applied
on a basis consistent with that of the financial statements
of Seller, dated as of July 31, 1997; or
(b) at the date of the latest available balance sheet
read by me, or at a subsequent specified date not more than
five days prior to the date hereof, the consolidated net
assets related to the Business as of the date of such
Interim Statement of Net Assets were less than $_________.
<PAGE>
EXHIBIT J
FORM OF EMPLOYMENT AGREEMENT*
* NOTE: The Form of Employment Agreement will be modified
prior to execution pursuant to Attachment 1 to this Exhibit J.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into as of this __ day of __________, 1998, by and
between IMAGE NEWCO, INC., a California corporation ("Image
Newco"), and CHARLES K. CRANE, II, an individual ("Executive").
RECITALS
WHEREAS, Image Newco entered into that certain Asset
Purchase Agreement, dated as of _____________, 1998 (the "Asset
Purchase Agreement"), with Ken Crane's Magnavox City, Inc.
("Seller"), d/b/a Ken Crane's, a California corporation, pursuant
to which Image Newco, a wholly-owned subsidiary of Image
Entertainment, Inc. ("Image"), a publicly-held company, acquired
substantially all of the operating assets of Seller used in
connection with Seller's business of distributing laserdiscs and
digital video discs (the "Software Division");
WHEREAS, Executive has served as Vice President, Video Disc
Division of Seller since ___________________, 19__ and Image
Newco desires to obtain the benefit of continued service by
Executive on an exclusive basis, and Executive desires to render
services to Image Newco on an exclusive basis; and
WHEREAS, the Board of Directors of Image Newco has
determined that, because of Executive's substantial experience
and business relationships in connection with the business of the
Software Division and Executive's familiarity with the clientele
served by the Software Division, it is in the best interests of
Image Newco and its sole stockholder, Image, to secure the
services of Executive and to provide Executive with the
compensation and benefits set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto agree as follows:
1. TERM OF AGREEMENT
(a) Term. The term of this Agreement shall be the period
commencing on the date hereof and ending on the fifth anniversary
of the date hereof (the "Term"); provided, however, that the Term
may be extended by Image Newco pursuant to Section 1(b) and, if
so extended, the Term shall include such extension(s).
(b) Extension of Term. If Executive receives written
notice from Image Newco, on or before 180 days prior to the
expiration of the stated Term of this Agreement, of Image Newco's
intention to extend the stated Term of this Agreement for one
additional year, then the Term shall be automatically extended as
of the expiration date for one additional year. Notwithstanding
the preceding sentence, the Term of this Agreement shall not
extend beyond the seventh anniversary of the date hereof.
2. ENGAGEMENT
Subject to the terms and conditions contained herein, Image
Newco hereby engages the services of Executive (the "Services")
and Executive hereby accepts such engagement and agrees to render
Executive's Services to Image Newco for the Term. Executive
initially shall serve as the Vice President - General Manager of
Image Newco.
(a) Extent of Services and Duties. Executive shall be
principally responsible for the operations and activities of
Image Newco and shall perform such duties as are consistent
with Executive's position and as the Chief Executive Officer
and/or the Board of Directors (the "Board") of Image Newco
may reasonably direct, which duties initially shall include,
but not be limited to, the items set forth on Schedule A
hereto and made a part hereof. In rendering the Services to
Image Newco, Executive shall devote his full business time
and energy and shall use his reasonable best efforts and
ability to maintain, further and promote the interests and
welfare of Image Newco. At the request of Image Newco or
Image, Executive shall serve as an officer or director of
Image or any entity controlled by Image or in which it has a
substantial direct or indirect interest, without additional
compensation; provided that Executive is included on any
such entity's directors and officers insurance policy (if
any). Executive agrees to observe and comply with the
policies, rules and regulations of Image Newco and Image, as
adopted by their respective Boards with reference to the
performance of Executive's duties and agrees to carry out
and perform orders, directions and policies of Image and
Image Newco as they may be, from time to time, stated either
orally or in writing. For the term of this Agreement,
Executive shall report directly to the Chief Executive
Officer of Image Newco or, if there is none, the Chairman of
the Board of Image Newco, who shall initially be the Chief
Executive Officer and President of Image.
(b) Exclusive Engagement. Executive hereby acknowledges
and agrees that the engagement of Executive by Image Newco
under this Agreement is exclusive to Image Newco, and he
shall not render services to any other entity, whether for
compensation or otherwise, without the prior written consent
of Image Newco and Image.
(c) Conduct of Ongoing Business. Executive agrees to use
his reasonable best efforts to preserve the goodwill of the
Software Division for the benefit of Image Newco and to
implement, with respect to Image Newco (including, but not
limited to, the business acquired from Seller), the policies
of the Boards of Image Newco and Image that are delivered to
him in writing (including, if applicable, accounting
principles and practices).
(d) No Inconsistent Commitments. Executive represents to
Image Newco and Image that Executive has no outstanding
commitments inconsistent with any of the terms of this
Agreement or the Services to be rendered hereunder.
(e) Locale. Executive shall be assigned to Orange County
as his permanent locale, subject to change only by mutual
agreement of the parties hereto.
3. COMPENSATION
(a) Base Salary. During the term of this Agreement, Image
Newco hereby agrees to pay Executive for Services to be
rendered hereunder a base salary ("Base Salary") at the
following rates:
Period Annual Rate
Year ending on the first anniversary of the date hereof $150,000 per year
Year ending on the second anniversary of the date hereof $157,500 per year
Year ending on the third anniversary of the date hereof $165,375 per year
Year ending on the fourth anniversary of the date hereof $173,644 per year
Year ending on the fifth anniversary of the date hereof $182,326 per year
In the event the Term is extended pursuant to Section 1(b),
the Base Salary for each such extension shall be (i) the
Base Salary for the year ending on the expiration date of
the Term prior to the extension plus (ii) an amount equal to
five percent (5%) of such Base Salary.
The Base Salary will be payable in equal biweekly
installments or as otherwise provided in accordance with the
regular executive officer compensation procedures in effect
from time to time for Image and its subsidiaries.
(b) Annual Bonus Compensation. Subject to Sections 9, 10,
and 11(b) below, if Executive remains in the continuous
employ of Image Newco through the last day of the applicable
Bonus Period (as defined below), Executive shall receive a
bonus (each an "Annual Bonus") equal to (i) 0.40% of Image
Newco's Net Sales (as defined below) for such Bonus Period
and (ii) 5.0% of Image Newco's Pre-Tax Profits (as defined
below) for the Bonus Period. Bonus Periods shall coincide
with each fiscal year for Image Newco, i.e., April 1, 1999
through March 31, 2000 (each such period beginning on April
1 and ending on the following March 31 being a "Bonus
Period"); provided, however, that the initial Bonus Period
shall be the date hereof through March 31, 1999. The right
to receive any Annual Bonus shall be deemed vested as of the
last day of the applicable Bonus Period, and the Annual
Bonus (if any) shall be payable on the earliest practicable
date following the completion of Image Newco's year-end
audit (as conducted by Image's independent certified public
accountants) for the fiscal period ended on the last date of
the applicable Bonus Period.
(c) Signing Bonus. On the date hereof, Executive shall be
entitled to a one-time signing bonus equal to $1.5 million
in cash equivalent.
(d) Definitions.
(i) "Net Sales" means reported net sales of Image
Newco less allowances for returns and other appropriate
reserves.
(ii) "Pre-Tax Profits" means the operating income
before taxes of Image Newco, but after any
extraordinary items, adding back as to loss or expense
items or deducting as to income or gain items:
(A) capital gains or losses;
(B) non-operating gains or losses, but including,
but not limited to, any insurance settlement net
of related capitalized or previously expensed
costs;
(C) inter-company allocations of corporate
overhead, including, but not limited to, shipping
expenses, shipping supplies and accounting
expenses; and
(D) the accrual or payment of all bonuses based
upon Pre-Tax Profits to Executive (Pre-Tax Profits
to be reduced by all bonuses/commissions paid or
accrued to Image Newco's other employees and
officers.
All financial terms used in these definitions are used
herein as used in or applied under GAAP, except as may be
specifically otherwise provided in the applicable defined
term, in connection with the preparation in the ordinary
course of Image Newco's financial statements.
4. FRINGE BENEFITS
Image Newco agrees to provide Executive with medical,
dental, and life insurance, expense allowances, and vacation time
as described below:
(a) Medical, Dental, Life & Long-Term Disability Insurance.
During the Term, Image Newco shall purchase (or, if
applicable, maintain) medical, dental, life, and long-term
disability insurance for Executive, and shall provide
coverage under such medical and dental insurance policies
for Executive's direct dependent beneficiaries (e.g., spouse
and minor children), on terms generally available to other
senior officers of Image Newco and Image, to the extent
Executive meets the applicable eligibility requirements of
such policies (collectively, "Insurance").
(b) Business/Travel Expenses. Executive shall be
reimbursed in full for all reasonable and actual out-of-
pocket business and travel expenses incurred in the
performance of Executive's Services, on the same terms
applicable to other senior officers of Image Newco and
Image; provided, however, that (i) such expenses must
satisfy the criteria under the Internal Revenue Code for
deductibility by Image Newco for federal income tax purposes
as ordinary and necessary business expenses and (ii)
Executive shall first present an itemized account of such
expenditures together with supporting vouchers in accordance
with Image's policies and procedures applicable to senior
officers generally.
(c) Vacation Time. Executive is entitled to four (4) weeks
of paid vacation time per Image Newco fiscal year during the
Term (with a prorated amount of vacation time for the period
from the date hereof to March 31, 1999). Any unused
vacation time will continue to accrue throughout the Term
and will not be subject to any offset, reduction, or
deduction; provided, however, that Executive shall be
limited to six (6) weeks of accrued paid vacation time.
(d) Working and Other Facilities. During the Term,
Executive shall be furnished with such working facilities
and other services as shall be suitable to Executive's
position and adequate for the performance of Executive's
duties.
(e) Stock Options. Executive shall be entitled during the
Term of this Agreement to all rights and benefits for which
he is otherwise eligible under any stock option plan which
Image may provide for him or for senior officers of Image's
subsidiaries generally (solely in their capacities as senior
officers thereof) or for employees of Image's subsidiaries
generally. The vesting and post-termination exercise rights
of and under any then outstanding stock options held by
Executive upon termination of his employment shall be
governed by the applicable terms and conditions thereof.
(f) Benefit Changes. Image and Image Newco each reserve
the right to modify, suspend, or discontinue (whether before
or after termination of employment) any and all of the
benefits, practices, policies, and programs referenced in
this Section 4, without notice to or recourse by Executive,
so long as such action is taken generally in respect of
senior officers similarly situated and does not single out
Executive.
5. WITHHOLDING
There shall be deducted from all compensation payable to
Executive hereunder, such sums, including, without limitation,
social security, income tax withholding and disability and
unemployment insurance and other payroll taxes, as Image Newco is
by law obligated to deduct.
6. PROPRIETARY INFORMATION AND CONFIDENTIALITY
In consideration of the payments to be received hereunder,
Executive acknowledges and agrees as follows:
(a) During the Term of this Agreement, Executive will have
access to and become acquainted with various Trade Secrets
(as defined below) and other confidential and proprietary
information of Image Newco and of Image, including entities
in which either of them has or acquires an interest. Except
as Executive's duties may require or as Image may otherwise
consent to in writing, Executive will not at any time either
during or subsequent to the Term hereof, disclose or use to
the detriment of Image Newco or Image or for the personal
benefit of Executive, either directly or indirectly, any
such information, knowledge, or data he receives in
confidence or acquires from Image Newco or Image or which
relates to the Trade Secrets of Image Newco or Image. For
purposes of this Agreement, Trade Secrets ("Trade Secrets")
shall include, but not be limited to:
(i) Financial information, such as Image Newco's or
Image's earnings, assets, debts, prices, pricing
structure, volume of purchases or sales, or other
financial data, whether relating to Image Newco or
Image generally, or to particular products, services,
geographic areas, or time periods;
(ii) Supply and service information, such as goods and
services, supplier's names or addresses, terms of
supply or service contracts, terms of particular
transactions, or related information about potential
suppliers, to the extent that such information is not
generally known to the public and to the extent that
the combination of suppliers or use of a particular
supplier, though generally known or available, yields
advantages to Image Newco or Image, the details of
which are not generally known;
(iii) Marketing information, such as details about
ongoing or proposed marketing programs or agreements by
or on behalf of Image Newco or Image, sales forecasts,
results of marketing efforts, or information about
impending transactions;
(iv) Licensing or distribution information, such as
details about ongoing or proposed negotiations or
agreements by or on behalf of Image Newco or Image,
terms and details of such negotiations or agreements,
results of licensing or distribution efforts, or
information about impending transactions; and
(v) Customer information, such as any compilation of
past, existing, or prospective customers, customers'
proposals or agreements between customers, the status
of customers' accounts or credit, or related
information about actual or prospective customers.
Trade Secrets shall not include information or
materials (i) that become part of the public domain other
than by reason of Executive's breach of this Agreement or
negligence, (ii) to the extent required to be disclosed by
court order or other legal process, or (iii) that are
already known to Executive and generally a matter of public
knowledge in the industry.
(b) All files, records, documents, data information and
customer lists are special, valuable and unique assets of
Image Newco and Image and are essential to their continued
business success, and, under no circumstance during the Term
hereof or any time during the five years subsequent thereto,
will Executive disclose or use for any purpose, without the
prior written consent of Image and Image Newco, any files,
records, documents, data, information, customer lists, or
any other proprietary information of Image Newco or Image.
(c) All inventions, designs, improvements, patents,
trademarks, tradenames, copyrights, and discoveries
conceived by Executive during the Term that are useful in or
directly or indirectly related to the business of Image
Newco or to any work-in-progress carried on by Image Newco,
shall be the property of Image Newco. Executive shall
promptly and fully disclose to Image Newco all such
inventions, designs, improvements, patents, trademarks,
tradenames, copyrights, and discoveries (whether developed
individually or with other persons), and shall take all
steps necessary and reasonably required to assure Image
Newco's ownership thereof, and to assist Image Newco in
protecting or defending Image Newco's proprietary rights
therein.
(d) Any violation of the terms of this Section 6 or of
Section 7 shall constitute a material breach of this
Agreement and shall cause Image Newco and Image immediate
and irreparable harm and that the damages that Image Newco
and/or Image shall suffer may be difficult or impossible to
measure. Therefore, upon any actual or impending violation
of this Section 6 or of Section 7, Image Newco or Image, as
the case may be, shall be entitled to the issuance of
restraining order(s), preliminary injunction(s), and
permanent injunction(s), without bond, restraining or
enjoining such violation by Executive or any entity or
person acting in concert with Executive. Such remedy shall
be additional to and not in limitation of any other remedy
which may otherwise be available to Image Newco and/or
Image.
7. NON-COMPETITION COVENANTS
(a) Covered Activities. Executive agrees that, until the
later of the fifth anniversary of the date hereof or the
expiration of the stated Term, Executive shall not at any
time, directly or indirectly, within any of the States of
the United States or Provinces of Canada in which Image
Newco or Image does business or sells or delivers products:
(i) own, manage, operate, control, or be connected in
any manner with the ownership, management, operation,
or control of any person or entity that engages in the
same or similar type of business as the business of
Image Newco or Image or that engages in a business
competitive with such business (a "Competitive
Business"), which includes, but is not limited to,
acting as a director, officer, agent, employee,
consultant, member, partner, or stockholder of a
Competitive Business;
(ii) engage in any activity which is the same as,
similar to or in competition with the business of Image
Newco or Image;
(iii) interfere with, disrupt, or attempt to
disrupt any contractual relationship (whether or not
in writing) between Image Newco or Image and any
supplier, lessee or employee of Image Newco or Image;
(iv) render advice to any Competitive Business; or
(v) otherwise allow his skill, knowledge, or
experience to be used in or by any Competitive
Business.
(b) Non-Solicitation. Executive agrees that during the
Term hereof and for a period of one (1) year after the
termination of employment, Executive will not, on behalf of
himself of on behalf of any other individual, association or
entity, call on any of the customers of Image Newco or of
any present affiliate of Image Newco (a "Related Company")
for the purpose of soliciting or inducing any of such
customers to acquire (or providing to any of such customers)
any product or service provided by Image Newco or any
Related Company, nor will Executive in any way, directly or
indirectly, as agent or otherwise, in any other manner
solicit, influence or encourage such customers to take away
or to divert or direct their business to Executive or any
other person or entity by or with which Executive is
employed, associated, affiliated or otherwise related (an
"Executive Related Entity").
(c) No Raiding of Employees. Executive agrees that during
the Term hereof and for a period of one (1) year after the
termination of Executive's employment, Executive will not,
directly or indirectly, disrupt, damage, impair or interfere
with Image Newco's business by soliciting, influencing,
encouraging or recruiting any employee of Image Newco or any
Related Company to work for Executive or any Executive
Related Entity.
(d) Restriction on Use of KC Marks in Competitive Business.
Executive agrees that during the Term hereof and for a
period of one (1) year after the termination of Executive's
employment, Executive will not, directly or indirectly, for
his own benefit or as agent for another, use, lend or permit
his name (including any derivative thereof) or his
reputation to be used by or in connection with any
Competitive Business.
(e) Investment Exception. Notwithstanding anything in this
Section 7 to the contrary, nothing in this Agreement shall
limit the right of Executive as a passive investor to hold
and make investments not in excess of five percent (5%) of
the outstanding securities of any corporation, the
securities of which are listed on a nationally recognized
securities exchange or traded in a nationally recognized
over-the-counter market.
(f) Termination Exception. Notwithstanding anything to the
contrary in this Agreement, (i) if this Agreement is
terminated by Image Newco for Cause (as defined in Section
11) or by Executive, the covenants in this Section 7 shall
continue for the periods set forth herein and (ii) if this
Agreement is terminated by Image Newco Without Cause (as
defined in Section 11), the covenants in this Section 7
shall continue for any period as to which Image Newco is
obligated to make (and makes) payments required upon such
termination, rather than for the period established herein.
8. INDEMNIFICATION OF EXECUTIVE; INSURANCE
Image Newco will, to the extent permitted by California law,
indemnify and hold Executive harmless against expenses, including
reasonable attorney's fees, judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with
any proceeding arising by reason of Executive's employment by
Image Newco hereunder. Image Newco shall advance to Executive
any expenses incurred in defending any proceeding to the maximum
extent permitted by California law. Image Newco will use its
reasonable best efforts to cause Executive to be covered under
any Director and Officer liability policy maintained from time to
time by Image for which he is eligible under standard provisions
and exclusions.
9. DEATH
In the event of Executive's death, this Agreement shall
terminate on the last day of the calendar month of Executive's
death. In such event, Executive's personal representatives,
heirs or beneficiaries entitled by will or the laws of descent
and distribution shall be entitled to receive only:
(a) Base Salary continuation (i) for a period of twelve
(12) months or (ii) until the expiration of the Term,
whichever occurs first;
(b) a prorated portion of the Annual Bonus, if any,
otherwise payable pursuant to Section 3(b), (i) for a period
of twelve (12) months or (ii) any partial fiscal year that
has occurred prior to the effective date of termination,
whichever is greater; and
(c) dependent insurance continuation for (i) a period of
twelve (12) months or (ii) until the expiration of the Term,
whichever occurs first, or for any longer period required by
COBRA.
10. PERMANENT DISABILITY/SUSPENSION
If Executive fails, because of physical or mental illness,
incapacity or injury ("disability") to perform Executive's usual
duties for a period of longer than 60 consecutive calendar days
or shorter periods aggregating 90 weekdays, Image Newco's
obligation to pay Base Salary and its other obligations hereunder
shall be suspended. If the disability is reasonably determined
to be total and permanent by a physician selected by Image Newco
and acceptable to Executive (whose agreement shall not be
unreasonably withheld) or the suspension because of disability is
reasonably anticipated to exceed 180 consecutive days within a
360-day period, Image Newco may terminate this Agreement
effective upon 30 days prior written notice to Executive. In
such event, Executive shall be entitled to receive:
(a) Base Salary reinstatement from the date of suspension
(i) until six (6) months after the date of termination or
(ii) until the expiration of the Term, whichever occurs
first;
(b) a prorated portion of the Annual Bonus, if any,
otherwise payable pursuant to Section 3(b) for (i) a period
of six (6) months or (ii) any partial fiscal year that has
occurred prior to the effective date of termination,
whichever is greater; and
(c) Insurance continuation for (i) a period of six (6)
months after the date of termination or (ii) until the
expiration of the Term, whichever occurs first.
Disagreement as to the severity, characterization or
anticipated duration of a disability or suspension and/or the
date the disability/suspension commenced shall be settled by the
majority decision of three neutral arbitrators (or licensed
physicians, if the parties so agree) - one to be selected by each
party to the dispute, the two so appointed to choose the third,
and the three so appointed to constitute the board of
arbitration. Such board, acting by majority vote within thirty
(30) days after choosing the third arbitrator, shall resolve such
disagreement, and their decision shall be final and binding on
Executive, Image Newco, and any other person with an interest in
the matter.
11. TERMINATION
This Agreement may be terminated by Image Newco either for
Cause (as defined below) or Without Cause (as defined below) at
any time, pursuant to the provisions of this Section 11,
effective upon delivery by Image Newco of written notice to
Executive.
(a) Cause. Image Newco may terminate this Agreement for
Cause, as provided below. In such event, all of Image
Newco's obligations hereunder shall terminate without
further liability. Moreover, Executive shall not be
entitled to receive any severance, fringe benefits,
compensation or other rights hereunder, nor shall Executive
be entitled to receive any Bonus Compensation otherwise
payable pursuant to Section 3(b) or Section 3(c). For
purposes of this Agreement, "Cause" shall include, but is
not limited to, Executive's: (i) fraud, dishonesty or breach
of fiduciary duty, (ii) willful misconduct or negligence in
the performance of Executive's duties hereunder, (iii)
willful or negligent violation (including conduct in respect
of Executive's supervisory responsibilities) of any law,
rule or regulation, (iv) conviction of a felony or
misdemeanor (other than minor traffic violations or similar
offenses), (v) breach of any material provision of this
Agreement or any other material agreement between Executive
and Image Newco or Image which is entered into by Executive
on, prior to or after the date hereof or (vi) any material
breach by Seller of the Asset Purchase Agreement.
(b) "Without Cause." Notwithstanding anything contained in
this Agreement to the contrary, in the event this Agreement
is terminated by the Company prior to expiration of the Term
for any reason other than pursuant to Sections 9, 10 or
11(a), this Agreement shall be deemed to have been
terminated "Without Cause" ("Without Cause"), Executive
shall be entitled to receive (except as provided in the next
sentence), as and when otherwise payable under this
Agreement, the Base Salary and other remaining compensation,
rights and benefits described in Sections 3 and 4 through
the expiration of the Term (including any extension(s)
thereof pursuant to this Agreement), as if this Agreement
were in full force and effect. If Image Newco terminates
this Agreement Without Cause, the Annual Bonus, as set forth
in Section 3(b), if any, shall be payable only for the
fiscal year in which the termination occurs and such Annual
Bonus shall be payable as and when otherwise payable under
Section 3(b).
12. GENERAL PROVISIONS
(a) Successors and Assigns. This Agreement is binding upon
and shall inure to the benefit of Image Newco and any
successors in interest (including any successor by merger or
person acquiring substantially all of its assets as an
entirety ("Asset Sale")). The parties hereto agree that
Executive's services are personal to Executive and may not
be delegated. Executive shall have no right to sell,
transfer or assign this Agreement or any rights or benefits
hereunder in any manner whatsoever, except by will or laws
of descent and distribution. Upon any merger of Image Newco
or Asset Sale or change in control of Image Newco, the
surviving entity or successor to the business of Image
Newco, if any, shall expressly assume its obligations
hereunder.
(b) Amendment. This Agreement shall not be modified,
amended or altered except by an instrument in writing
executed by the parties hereto.
(c) Severability. In the event that one or more of the
provisions contained in this Agreement (or any portion of
any such provision) shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provision of this Agreement (or any portion of any such
provision), but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision (or portion
thereof) had never been contained herein. It is the desire
and intent of the parties hereto that the provisions of this
Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought. If any
particular provision or portion of this Agreement shall be
adjudicated to be invalid or unenforceable, such
adjudication shall apply only with respect to the operation
of this Agreement in the particular jurisdiction in which
such adjudication is made.
(d) Waiver. The failure by either party, at any time, to
require performance by the other of any of the provisions
hereof shall not be deemed a waiver of any kind nor shall it
in any way affect such party's rights thereafter to enforce
the same.
(e) Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in
writing and shall be deemed to have been given 24 hours
after deposit thereof for mailing at any general or branch
United States Post Office, enclosed in a registered, express
or certified postage pre-paid envelope, or delivered by
nationally recognized courier, and addressed as follows:
If to Image Newco:
Image Newco, Inc.
c/o Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
Attn: Martin Greenwald, Chairman
If to Executive:
Charles K. Crane, II
8752 Hudson River Circle
Fountain Valley, CA 90278
The parties hereto may designate a different place at
which notice shall be given, provided, however, that any
such notice of change of address shall be effective only
upon receipt or rejection thereof.
(f) Good Faith. The parties hereto shall perform, fulfill
and discharge their duties and obligations hereunder in a
reasonable matter in good faith.
(g) Governing Law. This Agreement and all rights,
obligations and liabilities arising hereunder shall be
construed and enforced in accordance with the laws of the
State of California without regard to conflicts of law
doctrines, except to the extent that certain matters are
preempted by federal law.
(h) Attorneys' Fees. In the event it becomes necessary to
commence any proceeding or action to enforce the provisions
of this Agreement, the court before whom the same shall be
tried may award the prevailing party all costs and expenses
thereof, including without limitation, reasonable attorneys'
fees, the usual, customary and lawfully recoverable court
costs, and all other expenses in connection therewith.
(i) Advice of Counsel. The parties represent and warrant
that in executing this Agreement, they have each had the
opportunity to obtain independent financial, legal, tax and
other appropriate advice, and are not relying upon any other
party (or the attorneys or other agents of such other party)
for any advice.
(j) Subject Headings and Defined Terms. Subject headings
and choice of defined terms are included for convenience
only and shall not be deemed part of this Agreement.
(k) Cumulative Rights and Remedies. The rights and
remedies provided for in this Agreement shall be cumulative;
resort to one right or remedy shall not preclude resort to
another or to any other right or remedy provided for by law
or in equity.
(l) Unique Services; Specific Performance. The parties
hereto agree that the services to be rendered by Executive
pursuant to this Agreement, the rights and privileges
granted to Image Newco pursuant to this Agreement and the
rights and privileges granted to Executive by virtue of his
position are all of a special, unique, extraordinary and
intellectual character, which gives each of them a peculiar
value, the loss of which cannot be reasonably or adequately
compensated in damages in any action at law, and that a
breach by Executive of any of the terms of this Agreement
will cause Image Newco severe and irreparable injury and
damage. Executive hereby expressly agrees that Image Newco
shall be entitled to the remedies of injunction, specific
performance and other equitable relief to prevent a breach
of this Agreement by Executive. This Section 12(l) shall
not be construed as a waiver of any other rights or remedies
which Image Newco may have for damages or otherwise.
(m) No Restrictions on Corporate Authority. The provisions
of Section 3 and 9 through 11 shall not be deemed to
restrict in any way any rights of the shareholder(s) or the
Board of Image Newco, acting in good faith, during the Term
of this Agreement to dissolve, reorganize (by merger, Asset
Sale, recapitalization, or otherwise) or take any other
action or make any other change (fundamental or otherwise)
affecting the structure, existence, organization, operations
or business of Image Newco, including but not limited to any
material acquisition; provided that, in the case of any
reorganization, any successor to its business by
reorganization assumes Image Newco's obligations hereunder
or such obligations are then guaranteed by Image.
(n) Section 162(m) Deferral. If at the time an Annual
Bonus would be payable hereunder Executive is a person whose
compensation is subject to limitations on deductibility
under Section 162(m) of the Internal Revenue Code and the
Annual Bonus would not qualify as performance based
compensation thereunder, then (to the extent that the
payment would cause Executive's compensation to be non-
deductible to Image Newco) the date of payment of the Annual
Bonus shall be deferred at the election of Image Newco until
the earliest time at which such compensation can be paid and
deducted by Image Newco and/or Image for federal income tax
purposes, but in no event later than the 76th day after the
fiscal year following the fiscal year in which a termination
of service occurs.
(o) Entire Agreement. This Agreement constitutes the
entire understanding and agreement between the parties
pertaining to the subject matter hereof and supersedes (i)
any and all prior and preliminary discussions, (ii) any and
all prior written or oral agreements and (iii) any and all
contemporaneous written or oral agreements, understandings
and/or negotiations between the parties. There are no
warranties, representations or other agreements between the
parties in connection with the subject matter hereof except
as set forth or referred to herein.
(p) Survival. Sections 6 and 7 and all express post-
termination benefit provisions shall survive the termination
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first written above.
"Image Newco"
IMAGE NEWCO, INC.,
a California corporation
_____________________________________
By:__________________________________
Title:_________________________________
"Executive"
_____________________________________
Charles K. Crane, II
<PAGE>
Schedule A
Principal Responsibilities of Executive
Subject to reasonable direction by the Chief Executive
Officer and/or the Board of Directors of Image Newco, Executive
shall be responsible for all day-to-day operational activities of
Image Newco. Executive's areas of responsibility shall include,
without limitation:
1. Personnel (including, without limitation, ensuring that
all personnel comply with all laws related to the day-to-day
operational activities of Image NewCo);
2. Customer Service;
3. Marketing;
4. Internet Design;
5. Product Sales;
6. Product Promotions; and
7. Daily Accounting Functions.
<PAGE>
Attachment 1
[Image Entertainment, Inc. Letterhead]
September 11, 1998
Mr. Charles K. Crane
Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 90250
Re: Charles K. Crane, II / Image Newco, Inc.
Employment Agreement
Dear Mr. Crane:
Pursuant to that certain Asset Purchase Agreement, dated as
of August 20, 1998, between Ken Crane's Magnavox City, Inc. and
Image Newco, Inc. ("Image Newco"), Image Newco has agreed to
enter into an employment agreement with Charles K. Crane, II upon
the closing of the acquisition (" Ken Crane, Jr.'s Employment
Agreement"). Except as discussed below, Ken Crane, Jr.'s
Employment Agreement will be substantially in the form attached
to the Asset Purchase Agreement as Exhibit J.
As you are aware, the form of employment agreement for Image
Entertainment's executive officers (the "Officers' Employment
Agreement") is currently being revised. In particular, the Board
of Directors of Image entertainment has decided to rewrite the
"Cause" termination provision included in the Officers'
Employment Agreement. You have expressed the concern that
differences might exist between the definition of "Cause"
included in Section 11 of Ken Crane, Jr.'s Employment Agreement
and the definition of "Cause" found in the Officers' Employment
Agreement. Although the Officers' Employment Agreement has not
yet been finalized, I am writing to assure you that, upon
approval of the form of the Officers' Employment Agreement by the
Chairman of our Compensation Committee of the Board of Directors,
the form of Ken Crane, Jr.'s Employment Agreement will be
adjusted so that the definition of "Cause" included therein
(except as such definition is tailored in subsection (vi) to
include a material breach of the Asset Purchase Agreement by Ken
Crane's Magnavox City, Inc.) will match the corresponding
definition in the Officers' Employment Agreement.
I very much look forward to working with your son and I
sincerely hope that this letter allays any concerns you might
have regarding the form of his employment agreement.
Very truly yours,
/s/ Martin W. Greenwald
Martin W. Greenwald
President and Chief Executive Officer
cc: Charles K. Crane, II
Buster Donelson
Michael Lanning, Esq.
Diana Walker, Esq.
<PAGE>
EXHIBIT K
FORM OF CONSULTING AGREEMENT
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into
as of this ___ day of _________, 1998, by and between IMAGE
NEWCO, INC., a California corporation ("Image Newco"), and
__________ CRANE, an individual ("Consultant").
RECITALS
WHEREAS, Image Newco entered into that certain Asset
Purchase Agreement, dated as of _____________, 1998 (the "Asset
Purchase Agreement"), with Ken Crane's Magnavox City, Inc.
("Seller"), d/b/a Ken Crane's, a California corporation, pursuant
to which Image Newco, a wholly-owned subsidiary of Image
Entertainment, Inc. ("Image"), a publicly-held company, acquired
substantially all of the assets of Seller used in connection with
Seller's business of distributing laserdiscs and digital video
discs (the "Software Division");
WHEREAS, Consultant has served as an [officer and] employee
of Seller since ___________________, 19__ and Image Newco desires
to obtain the benefit of continued service by Consultant on a
consulting basis, and Consultant desires to render services to
Image Newco on a consulting basis;
WHEREAS, the Board of Directors of Image Newco (the "Board")
has determined that, because of Consultant's substantial
experience and business relationships in connection with the
business of Seller, it is in the best interests of Image Newco
and its sole stockholder, Image, to secure the services of
Consultant and to provide Consultant with the compensation and
benefits set forth herein; and
WHEREAS, pursuant to this Agreement, Consultant will provide
general consulting services to Image Newco and Consultant will
make additional commitments to preserve Image Newco's goodwill.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto agree as follows:
1. TERM OF AGREEMENT
Except as otherwise expressly set forth herein, the term of
this Agreement shall be the period commencing on the date hereof
and ending on the first anniversary of the date hereof (the
"Consulting Term").
2. ENGAGEMENT OF CONSULTING SERVICES
(a) Nature of Services. Image Newco hereby engages
Consultant to provide the consulting services set forth
herein throughout the Consulting Term, at reasonable times
and upon reasonable notice, as an advisor and consultant to
Image Newco in matters affecting its business, taking into
account Consultant's other business commitments and
activities. Consultant's services shall be compatible with
Consultant's position as a consultant to Image Newco and
shall consist of (i) those services set forth in Schedule A
hereto and made a part hereof and (ii) those services that
the President and/or Chief Executive Officer of Image Newco
may reasonably and lawfully request consistent with
Consultant's position (collectively, the "Services").
During the Consulting Term, Consultant shall use his or her
reasonable efforts and abilities to promote Image Newco's
interests.
(b) Consulting Fee. In consideration of the Services to be
performed during the Consulting Term and provided those
Services are performed in accordance with the terms hereof,
the Consultant shall be entitled to receive a consulting fee
of $250,000. One half of the consulting fee ($125,000)
shall be advanced on the date hereof. The remaining portion
of the consulting fee ($125,000) shall be paid to Consultant
no earlier than January 1, 1999 and no later than
January 10, 1999.
(c) Taxes. Consultant agrees to accept exclusive liability
for the payment of all federal and state taxes or
contributions for unemployment insurance or old age pensions
or annuities or social security payments which are measured
by payments to Consultant for the performance of the
Services. Consultant agrees fully to defend, indemnify and
hold harmless Image Newco from the payment of taxes,
interest, penalties or contributions which are required of
Image Newco by any government agency at any time as the
result of payment of the amounts set forth in this Section 2
or which Image Newco may otherwise be compelled to pay
(except to the extent required by law to be withheld and in
fact withheld by Image Newco). Consultant further agrees to
comply with all valid administrative regulations respecting
the assumption of liability for such taxes and
contributions.
(d) Independent Contractor Relationship. This Agreement
establishes between Consultant and Image Newco an
independent contractor relationship and all the terms and
conditions of this Agreement shall be interpreted in light
of that relationship. There is no intention to create, by
way of this Agreement, an employer-employee relationship
with Consultant and Consultant shall not serve as an officer
or director of Image Newco. Except where expressly agreed
upon in writing by an executive officer of Image Newco (an
"Authorized Officer") or authorized by the Board, Consultant
shall not have or represent that he/she has general
authority to enter into, nor shall he/she enter into, any
agreement or obligation on behalf of or in the name of Image
Newco or any affiliate or otherwise purport to bind Image
Newco or any affiliate.
(e) Work-Product Owned by Image Newco. All information
developed under this Agreement, of whatever type relating to
the work performed under this Agreement, shall be the
exclusive property of Image Newco. All writings,
instruments or other items produced or assembled by
Consultant pursuant to this Agreement, shall be the
exclusive property of Image Newco.
(f) No Inconsistent Commitments. Consultant represents to
Image Newco that Consultant has no outstanding commitments
inconsistent with any of the terms of this Agreement or the
Services to be rendered hereunder.
3. COMPLIANCE; CONFLICTS
In rendering the Services hereunder, Consultant shall obtain
and maintain all necessary or appropriate licenses, permits and
registrations and shall comply with all applicable laws and
regulations and policies of Image Newco. Consultant shall not
pursue any business opportunities that constitute or may
constitute or appear to constitute a conflict of interest or
which materially interfere with, delay, jeopardize or otherwise
conflict with Consultant's duties under this Agreement, without
the prior written consent of the Chief Executive Officer of Image
Newco, which consent (in the case of possible or apparent
conflicts (as distinguished from actual conflicts)) shall not be
unreasonably withheld.
4. TERMINATION; RECAPTURE OF PAYMENTS
Consultant's Services hereunder shall be terminated and all
of his/her rights to retain consulting fees hereunder in respect
of the remaining Consulting Term shall terminate in the event
that (a) Consultant is found guilty by a court or regulatory body
of having committed fraud or theft against Image Newco or any
governmental entity or having committed a felony involving moral
turpitude; (b) Consultant, in the reasonable judgment of the
Board, compromises trade secrets or other proprietary information
of Image Newco and such breach or compromise has a significant
adverse effect on Image Newco; (c) Consultant breaches in any
material respect the terms of this Agreement and fails to cure
such breach within 30 days after written notice from Image Newco;
(d) in the reasonable judgment of the Board, Consultant neglects
or willfully fails or refuses to perform material assigned duties
and such failure or refusal continues for 30 days after written
notice from Image Newco specifying the manner in which he/she has
neglected, or willfully failed or refused to perform such duties;
or (e) in the reasonable judgment of the Board, Consultant has
engaged in gross or willful misconduct that causes substantial
and material harm to the business, operations or reputation of
Image Newco or a subsidiary or any affiliate.
If Consultant fails or refuses to perform the Services in
the manner specified in Section 3 and fails to cure such breach
within 30 days after written notice from Image Newco or Image
Newco terminates Consultant pursuant to any of the provisions of
this Section 4, Image Newco shall so notify Consultant and, in
addition to the other rights and remedies of Image Newco for
breach of this Agreement, Image Newco shall be entitled (a) to
offset against the amount that is due and payable to Consultant
under this Agreement or any other agreement an amount equal to
(i) $250,000 multiplied by x (where x equals 365 days less the
number of days before termination) divided by (ii) 365 days (the
"Recapture Amount") or (b) if the Recapture Amount exceeds the
amount that is due and payable to Consultant, to obtain a refund
(a "Refund") of the Recapture Amount, or any portion thereof,
from Consultant with respect to payments made to Consultant by
Image Newco. If Image Newco is entitled to a Refund of the
Recapture Amount, or any portion thereof, pursuant to this
Section 4, Image Newco shall be entitled to recover the costs of
obtaining such Refund from Consultant, including, but not limited
to, reasonable attorneys' fees.
5. CONFIDENTIALITY; COOPERATION WITH LEGAL PROCESS; NON-
SOLICITATION
(a) Confidentiality. Consultant acknowledges that he/she
has held a management position within Seller and that, by
virtue of having held such position, has had access to and
has learned confidential and proprietary information and
trade secrets pertaining to the business and operations of
the Software Division. Consultant further acknowledges
that, as a consultant for Image Newco, Consultant may have
access to and learn confidential and proprietary information
and trade secrets pertaining to the business and operations
of Image Newco and its affiliates. Examples of such
proprietary information and trade secrets include, but are
not limited to, information as to the Software Division's
and/or Image Newco's products, services, systems, software,
finances (including prices, costs and revenues), marketing
plans, programs, methods of operation, prospective and
existing contracts, other business arrangements or business
plans, procedures, strategies (including acquisition
strategies), customer lists, referral sources, and other
information concerning Image Newco's practices and
procedures. Consultant represents that he/she has held all
such information confidential and will continue to do so and
that he/she will not disclose any such information to any
other person, except as may be required by law or as may
(with the consent of the Chief Executive Officer of Image
Newco) be necessary in furtherance of the performance of the
Services hereunder. Without limiting the generality of the
foregoing, Consultant hereby agrees that he/she will not
respond to or in any way participate in or contribute to any
public discussion, notice or other publicity concerning or
in any way related to proprietary or confidential
information concerning the Software Division or Image Newco
or its subsidiaries, affiliates, operations, officers or
directors, or any matters concerning his/her consulting for
Image Newco. Consultant further agrees that any disclosure
of any of the information referred to herein or any
solicitation in violation of Section 5(c) hereof shall
constitute a material breach of this Agreement and, in
addition to other remedies available to Image Newco, shall
entitle it to reimbursement any payments hereunder
consistent with the formula in Section 4.
(b) Cooperation With Legal Process. The parties agree that
no provision of this Section 5 or any other provision of
this Agreement shall be construed or interpreted in any way
to limit, restrict or preclude either party hereto from
cooperating with any governmental agency in the performance
of its investigatory or other lawful duties or producing
materials or giving testimony pursuant to a court
proceeding, or restrict Consultant in the performance of the
Services. Consultant agrees that if he/she receives a
subpoena or is otherwise required by law to provide
information to a governmental entity or other person
concerning the activities of the Image Newco or his/her
activities in connection with the Image Newco's business,
he/she will immediately notify Image Newco of such subpoena
or requirement and deliver to Image Newco a copy of such
subpoena or other notice, unless such disclosure would in
the opinion of a recognized legal expert on such matters, be
prohibited by law.
(c) Non-Solicitation. Consultant agrees that he/she will
not solicit any employee of Image Newco or its affiliates
for employment or other services for himself/herself or any
other entity.
(d) Nondisclosure of this Agreement. Consultant agrees
that he/she will keep the terms, amounts and facts of this
Agreement completely confidential and will not hereafter
disclose any information concerning this Agreement or the
Services to anyone except his/her attorneys or accountants,
including, but not limited to, any past, present, or
prospective employees of the Software Division or of Image
Newco or any of its affiliates, except, in each case, as may
be required by law or as permitted in writing by Image Newco
or as may be necessary in furtherance of the performance of
the Services hereunder.
6. GENERAL PROVISIONS
(a) Successors and Assigns. This Agreement is binding upon
and shall inure to the benefit of Image Newco and any
successors in interest (including any successor by merger or
person acquiring substantially all of its assets as an
entirety ("Asset Sale")). The parties hereto agree that
Consultant's services are personal to Consultant and may not
be delegated. Consultant shall have no right to sell,
transfer or assign this Agreement or any rights or benefits
hereunder in any manner whatsoever, except by will or laws
of descent and distribution. Upon any merger, Asset Sale or
change in control of Image Newco, the surviving entity or
successor to the business of Image Newco, if any, shall
expressly assume its obligations hereunder.
(b) Amendment. This Agreement shall not be modified,
amended or altered except by an instrument in writing
executed by the parties hereto.
(c) Severability. In the event that one or more of the
provisions contained in this Agreement (or any portion of
any such provision) shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provision of this Agreement (or any portion of any such
provision), but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision (or portion
thereof) had never been contained herein. It is the desire
and intent of the parties hereto that the provisions of this
Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought. If any
particular provision or portion of this Agreement shall be
adjudicated to be invalid or unenforceable, such
adjudication shall apply only with respect to the operation
of this Agreement in the particular jurisdiction in which
such adjudication is made.
(d) Waiver. The failure by either party, at any time, to
require performance by the other of any of the provisions
hereof shall not be deemed a waiver of any kind nor shall it
in any way affect such party's rights thereafter to enforce
the same.
(e) Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in
writing and shall be deemed to have been given 24 hours
after deposit thereof for mailing at any general or branch
United States Post Office, enclosed in a registered, express
or certified postage pre-paid envelope, or delivered by
nationally recognized courier, and addressed as follows:
If to Image Newco:
Image Newco, Inc.
c/o Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
Attn: Martin Greenwald, Chairman
If to Consultant:
[__________] Crane
c/o Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 90250
The parties hereto may designate a different place at
which notice shall be given, provided, however, that any
such notice of change of address shall be effective only
upon receipt or rejection thereof.
(f) Good Faith. The parties hereto shall perform, fulfill
and discharge their duties and obligations hereunder in a
reasonable matter in good faith.
(g) Governing Law. This Agreement and all rights,
obligations and liabilities arising hereunder shall be
construed and enforced in accordance with the laws of the
State of California without regard to conflicts of law
doctrines, except to the extent that certain matters are
preempted by federal law.
(h) Attorneys' Fees. In the event it becomes necessary to
commence any proceeding or action to enforce the provisions
of this Agreement, the court before whom the same shall be
tried may award the prevailing party all costs and expenses
thereof, including without limitation, reasonable attorneys'
fees, the usual, customary and lawfully recoverable court
costs, and all other expenses in connection therewith.
(i) Advice of Counsel. The parties represent and warrant
that in executing this Agreement, they have each had the
opportunity to obtain independent financial, legal, tax and
other appropriate advice, and are not relying upon any other
party (or the attorneys or other agents of such other party)
for any advice.
(j) Subject Headings and Defined Terms. Subject headings
and choice of defined terms are included for convenience
only and shall not be deemed part of this Agreement.
(k) Cumulative Rights and Remedies. The rights and
remedies provided for in this Agreement shall be cumulative;
resort to one right or remedy shall not preclude resort to
another or to any other right or remedy provided for by law
or in equity.
(l) Enforceability Representation. Each party to this
Agreement represents that this Agreement constitutes the
legally valid and binding obligation of such party,
enforceable against such party 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.
(m) Consent Representation. Each party to this Agreement
represents that such party is not required to submit any
notice, report or other filing to or obtain any consent or
approval from any governmental authority or third party
under any agreement to which the party is a party or under
any law to which it is subject in order to execute, deliver
and perform this Agreement as contemplated hereby.
(n) Construction. Each party has cooperated in the
drafting and preparation of this Agreement. Accordingly,
this Agreement shall not be construed against any party on
the basis that the party was the drafter.
(o) Counterparts. This Agreement may be executed in
counter-parts, and each counterpart, when executed, shall
have the efficacy of a signed original. Photostatic copies
of signed counterparts may be used in lieu of the originals
for any purpose.
(p) Entire Agreement. This Agreement constitutes the
entire agreement between the parties pertaining to the
subject matter hereof and supersedes all prior agreements
and understandings of the parties in connection therewith.
(q) Injunctive Relief. Consultant hereby acknowledges and
agrees that, because of the unique services and
relationships contemplated by Section 3 hereof and for other
reasons, any breach of or default under this Agreement will
cause damage to Image Newco in an amount difficult to
ascertain. Accordingly, in addition to any other relief to
which Image Newco may be entitled, Image Newco shall be
entitled, without proof of actual damages, to such
injunctive relief as may be ordered by any court of
competent jurisdiction including, but not limited to, an
injunction restraining any violation of Section 5 hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Consulting Agreement as of the date first written above.
"Image Newco"
IMAGE NEWCO, INC.,
a California corporation
____________________________________
Name:_______________________________
Title::_____________________________
"Consultant"
____________________________________
[_____________] Crane
<PAGE>
Schedule A
Services of Consultant
The Services of Consultant shall include, without
limitation, consultation regarding the following aspects of Image
Newco's business and operations:
[Casey Crane:
1. Sales and marketing of laserdiscs, digital video discs,
VHS software and, if applicable, game software ("Software");
2. Merchandising techniques with respect to Software sales
at the retail store level; and
3. Merchandising techniques with respect to Software sales
on the Internet.]
[For Pamela J. Crane:
1. Promotional and advertising campaigns;
2. Merchandising techniques with respect to the sale of
laserdiscs, digital video discs, VHS software and, if applicable,
game software ("Software") at the retail store level; and
3. Merchandising techniques with respect to Software sales
on the Internet.]
<PAGE>
EXHIBIT L
FORM OF OPINION OF BUYER'S COUNSEL
<PAGE>
FORM OF OPINION OF BUYER'S COUNSEL
___________, 1998
Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, California 90250
Ladies and Gentlemen:
I am General Counsel of Image NewCo, Inc., a California
corporation ("Buyer"), and as such I am delivering this opinion
in connection with the acquisition by Buyer of substantially all
of the assets of Ken Crane's Magnavox City, Inc., d/b/a Ken
Crane's, a California corporation ("Seller") used in connection
with Seller's business of distributing laserdiscs and digital
video discs, pursuant to that certain Asset Purchase Agreement,
dated as of ____________ 1998, between Buyer and Seller (the
"Agreement"). This opinion is rendered to you pursuant to
Section 8.3 of the Agreement.
In my capacity as such counsel, I have examined
originals or copies of the Agreement and such corporate records
of Buyer, certificates of public officials and of officers of
Buyer, and other documents as I have deemed necessary for the
purpose of this opinion. I have assumed the genuineness of the
signatures (except for those of the officers of Buyer executing
the Agreement), the authenticity of all items submitted to me as
originals, the conformity with originals of all items submitted
to me as copies and the due authority of all persons executing
the same. As to material matters of fact, I have, when relevant
facts were not independently established, relied upon the
statements and certificates furnished to me.
On the basis of such examination and my consideration
of such questions of law as I have deemed relevant in the
circumstances, I am of the opinion, subject to the assumptions,
qualifications and limitations set forth herein, that:
1. Buyer has been duly incorporated and is validly
existing and in good standing under the laws of California with
all necessary corporate power to carry on its business as now
being conducted, to enter into the Agreement and to carry out the
provisions of the Agreement, and to purchase the Purchased Assets
(as defined in the Agreement) and assume the Assumed Liabilities
(as defined in the Agreement).
2. Neither the execution and delivery of the
Agreement nor consummation of the transactions contemplated by it
will violate the provisions of, or constitute a breach or default
whether upon lapse of time and/or the occurrence of any act or
event or otherwise under (a) the charter documents or bylaws of
Buyer, (b) any Law (as defined in the Agreement) to which Buyer
is subject or (c) subject to any consents of its lenders, any
Contract (as defined in the Agreement) to which Buyer is a party
that is material to the financial condition, results of
operations or conduct of the business of Buyer.
3. The Agreement has been duly authorized by all
necessary corporate action on the part of Buyer. The Agreement
has been duly executed and delivered by Buyer and constitutes a
legally valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights, generally. I advise you that
the enforceability of the Agreement is subject to the effect of
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.
In rendering the opinions expressed in Clause 3, I have
assumed that the Agreement has been duly authorized, executed and
delivered by Seller, that Seller has the requisite power and
authority to execute, deliver and perform the Agreement, that the
Agreement constitutes the legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms
(as so qualified), that Seller has obtained all necessary
Approvals (as defined in the Agreement) and Permits (as defined
in the Agreement) required to be obtained by Seller in order to
consummate the transactions contemplated by the Agreement, that
all items submitted as originals are authentic and that all items
submitted as copies conform to the originals, and I have not
independently verified such assumptions.
I express no opinion concerning the laws of any
jurisdiction other than California.
This opinion is solely for your benefit in connection
with your sale of the Purchased Assets and related transactions
and may not be relied upon by, nor may copies be delivered to,
any other Person, or used for any other purpose, without my prior
written consent.
Respectfully submitted,
Cheryl Lee, Esq.
General Counsel
<PAGE>
EXHIBIT M
FORM OF GUARANTY OF PERFORMANCE
<PAGE>
GUARANTY
THIS GUARANTY (this "Guaranty") is made and entered into as
of ___________, 1998 by and among Charles K. Crane, an
individual, and the Crane Family Trust (the "Trust"), established
December 22, 1984 (each a "Guarantor" and, collectively, the
"Guarantors"), and Image Newco, Inc., a California corporation
("Buyer"), with reference to the following facts:
RECITALS
WHEREAS, Ken Crane's Magnavox City, Inc., d/b/a Ken Crane's,
a California corporation ("Seller"), and Buyer are entering into
that certain Asset Purchase Agreement, dated as of even date
herewith (the "Asset Purchase Agreement"), pursuant to which
Buyer has agreed to acquire substantially all of the operating
assets of Seller used in connection with Seller's business of
distributing laserdiscs and digital video discs;
WHEREAS, the Trust, a revocable trust, owns all of the
Common Stock of Seller, and Charles K. Crane is the sole settlor
and trustee of the Trust;
WHEREAS, each Guarantor controls, directly or indirectly,
Seller and will benefit from the transactions contemplated by the
Asset Purchase Agreement; and
WHEREAS, in consideration of Buyer's entering into the Asset
Purchase Agreement, each Guarantor has agreed, at the request of
Seller, to guarantee certain of Seller's obligations under the
Asset Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals
and the mutual covenants herein contained, the parties hereto
agree as follows:
1. Continuing Guaranty. In the event that Seller fails to pay,
perform, satisfy or discharge any obligation or liability set
forth in the Asset Purchase Agreement, when and as such
obligations and liabilities shall become due in accordance with
the terms of the Asset Purchase Agreement, including any
applicable cure periods (collectively, the "Obligations"),
Guarantors, jointly and severally, fully, irrevocably and
unconditionally guarantee and promise to cause any Obligation not
paid, performed, satisfied or discharged, within 10 days after
written notice to either Guarantor, to be paid, performed,
satisfied or discharged in accordance with the terms of the Asset
Purchase Agreement (except that any Obligation that may be
performed, satisfied or discharged only by the taking of an
action or actions other than the payment of money shall, to the
extent of such action or actions, be paid, performed, satisfied
or discharged only to the extent reasonably possible) by
Guarantors.
2. Limitations on Guaranty. The indemnity and other payment
Obligations of the Guarantors shall be limited, in the aggregate,
to $5,000,000; provided, however, that if a Guarantor or Seller
shall be found to have committed an intentional
misrepresentation, the limitations on indemnification under this
Section 2 shall be ignored.
3. Discharge Only Upon Satisfaction in Full; Reinstatement in
Certain Circumstances. Each Guarantor's obligations hereunder
shall remain in full force and effect until all Obligations shall
have been paid, performed, satisfied and discharged in full. If,
at any time, whether before or after the discharge of all
Obligations, any payment of any amount paid by or payable by
Seller under the Asset Purchase Agreement is rescinded or must be
otherwise restored or returned, upon the insolvency, bankruptcy
or reorganization of Seller, or otherwise, each Guarantor's
obligations hereunder with respect to such payment shall be
reinstated as though such payment had been due but not made at
such time.
4. Representations and Warranties of Guarantor. Each Guarantor
represents, warrants and agrees as follows:
(a) Guarantor is now and shall continue to be familiar with
the prospects, business, operations and financial condition of
Seller.
(b) Guarantor has the full capacity, right, power and
authority to enter into this Guaranty. This Guaranty has been
duly executed and delivered by Guarantor and is enforceable in
accordance with its terms.
(c) Guarantor is not a party to, subject to or bound by any
Law (as defined in the Asset Purchase Agreement), and no Action
(as defined in the Asset Purchase Agreement) is pending against
Guarantor or, to Guarantor's knowledge, threatened, that would
prevent or adversely affect the execution, delivery or
performance of this Guaranty by Guarantor.
(d) Neither the execution and delivery of this Guaranty nor
the fulfillment of the terms hereof by Guarantor violates or will
violate, or results or will result in, any augmentation or
acceleration of rights, benefits or obligations of any party
under any Contract (as defined in the Asset Purchase Agreement)
to which Guarantor is a party or is bound, or any Order (as
defined in the Asset Purchase Agreement) applicable to Guarantor.
5. Transfer of Lease. In connection with the transactions
contemplated by the Asset Purchase Agreement, each Guarantor has
taken, and will continue to take, all steps necessary to cause
Seller to (a) assign to Buyer, effective as of the Closing, all
of Seller's interests under the Lease (as defined in the Asset
Purchase Agreement), and (b) obtain all Permits (as defined in
the Asset Purchase Agreement) and Approvals (as defined in the
Asset Purchase Agreement), including third party consents, that
may be necessary or that may be reasonably requested by Buyer to
complete, evidence or validate the assignment of the Lease to
Buyer, without any additional liability or expense to Buyer.
6. Restrictions on Soliciting Employees.
(a) To protect Buyer against any efforts by Guarantors to
cause employees, sales or other representatives or venturers,
partners or members of Buyer ("Covered Persons") to terminate
their employment or relationship with Buyer, each Guarantor
agrees that (i) in the case of an employee or sales or other
representative, for so long as such person is employed or engaged
by Buyer; and (ii) in the case of a venture, partnership or other
joint business arrangement, until the expiration of any
contractual arrangement between Buyer, on the one hand, and the
applicable Covered Person, on the other hand, the Securityholder
will not directly or indirectly (A) induce any Covered Person to
leave or cease doing business with Buyer or to accept any other
employment or position, (B) assist any other entity in hiring or
doing business with any Covered Person or (C) otherwise interfere
with Buyer's relationship (contractual or otherwise) with any
Covered Person.
(b) Guarantors recognize and agree that a breach by either
of them of this non-solicitation covenant could cause irreparable
harm to Buyer, that Buyer's remedies at law in the event of such
breach would be inadequate, and that, accordingly, in the event
of such breach a restraining order or injunction or both may be
issued against any Guarantor, in addition to any other rights and
remedies which are available to Buyer. If this Section 6 is more
restrictive than permitted by the Laws (as defined in the Asset
Purchase Agreement) of any jurisdiction in which Buyer seeks
enforcement hereof, this Section 6 shall be limited to the extent
required to permit enforcement under such Laws. If, in any
judicial proceeding, a court shall refuse to enforce any of the
covenants deemed included in this Section 6 in any place or as to
any Covered Person, then the unenforceable covenant shall be
deemed eliminated from these provisions for the purpose of those
proceedings only to the extent necessary to permit the remaining
covenants to be enforced as to other locations or Covered
Persons.
7. Incorporation by Reference. The provisions of Section 7.2
[Nondisclosure of Proprietary Data], 7.3 [Tax Cooperation] and
Article IX [Termination of Obligations; Survival] of the Asset
Purchase Agreement shall apply mutatis mutandis to the provisions
of this Guaranty.
8. Notices. Any notice or other communication hereunder must
be given in writing and either (i) delivered in person,
(ii) transmitted by facsimile or (iii) mailed, postage prepaid,
as follows:
a. If to Guarantors:
Mr. Charles K. Crane
c/o Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 90250
Facsimile: (310) 219-0375
and
Crane Family Trust
10 Caballeros Road
Rolling Hills, CA 90274
Attn: Charles K. Crane, Trustee
b. If to Buyer:
Image Newco, Inc.
c/o Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Chief Executive Officer
Facsimile: (818) 407-9331
or to such other address or to such other Person (as defined in
the Asset Purchase Agreement) as a party shall have last
designated by such notice to the other parties. Each such notice
or other communication shall be effective (i) if given by
facsimile, when transmitted to the applicable number so specified
in (or pursuant to) this Section 8 and an appropriate answerback
is received, (ii) if given by mail, three days after such
communication is deposited in the mails with first class postage
prepaid, addressed as aforesaid or (iii) if given by any other
means, when actually delivered at such address.
9. Governing Law; Jurisdiction. This Guaranty shall be
construed and enforced in accordance with the laws of the State
of California, without giving effect to the conflict of law
provisions thereof. Except as provided in Section 13 below, any
and all disputes between the parties which may arise pursuant to
this Guaranty will be heard and determined before an appropriate
federal or state court located in Los Angeles, California. The
parties hereto acknowledge that such court has the jurisdiction
to interpret and enforce the provisions of this Guaranty and,
except pursuant to Section 13 below, the parties waive any and
all objections that they may have as to jurisdiction or venue in
any of the above courts.
10. Amendment of Asset Purchase Agreement. Any modification of
the Asset Purchase Agreement shall not release Guarantors of any
obligation hereunder, except to the extent Guarantors are
materially prejudiced thereby. Guarantors specifically agree
that their obligations hereunder shall not be released, modified
or otherwise affected by any failure or delay on Buyer's part to
enforce any of Buyer's rights or remedies under the Asset
Purchase Agreement, whether pursuant to the terms thereof, or at
law or in equity. Guarantors hereby waive notice of acceptance
of this Guaranty, and any right to require Buyer to pursue or
exhaust any other remedy Buyer may have against Seller (or any
successor or assign) before proceeding against Guarantors.
11. Attorneys' Fees. Should any litigation or arbitration be
commenced (including any proceedings in a bankruptcy court)
between the parties hereto or their representatives concerning
any provision of this Guaranty or the rights and duties of any
Person hereunder, solely as between the parties hereto or their
successors, the party prevailing in such proceeding as determined
by the court or arbitrator will be entitled to the attorneys'
fees and expenses of counsel and court costs incurred by reason
of such litigation.
12. Complete Agreement. This Guaranty and any documents
referred to herein or executed contemporaneously herewith
constitute the parties' entire agreement with respect to the
subject matter hereof and supersede all agreements,
representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the
subject matter hereof.
13. Arbitration of Disputes. Any controversy, dispute or claim
under, arising out of, in connection with or in relation to this
Guaranty, including but not limited to the negotiation,
execution, interpretation, construction, coverage, scope,
performance, non-performance, breach, termination, validity or
enforceability of this Guaranty or any alleged fraud in
connection therewith, shall be settled, at the request of either
Guarantor or Buyer, by arbitration conducted in accordance with
the arbitration procedure set forth in Article XII of the Asset
Purchase Agreement.
14. Subrogation. So long as Guarantors continue to comply with
and perform the terms of this Guaranty and are not otherwise in
default of their obligations hereunder, Guarantors shall not be
required to withhold, limit or otherwise restrict any rights of
subrogation or contribution they may have against Seller or any
other party with respect to such obligations.
15. Lien or Security Interest. This Guaranty is not secured and
does not create a lien upon or a security interest in any
property or assets of either Guarantor or obligate either
Guarantor to grant a security interest to Buyer in any of
Guarantors' property or assets.
16. Counterparts. This Guaranty and any amendment hereto or any
other agreement (or document) delivered pursuant hereto may be
executed in one or more counterparts and by different parties in
separate counterparts. All of such counterparts shall constitute
one and the same agreement (or other document) and shall become
effective (unless otherwise therein provided) when one or more
counterparts have been signed by each party and delivered to the
other party.
17. Assignment; Successors and Assigns. Neither this Guaranty
nor any rights or obligations under it are assignable, except
that Buyer may assign its rights under this Guaranty to any
Person (as defined in the Asset Purchase Agreement) to whom Buyer
may assign its rights under the Asset Purchase Agreement. This
Guaranty shall be binding upon, inure to the benefit of and be
enforceable by the successors, beneficiaries and permitted
assigns of the respective parties.
IN WITNESS WHEREOF, the parties have executed this Guaranty
as of the day and year first written above.
"Guarantor"
_______________________________
Charles K. Crane
"Guarantor"
CRANE FAMILY TRUST,
established December 22, 1984
_______________________________
Charles K. Crane
Trustee
"Buyer"
IMAGE NEWCO, INC.,
a California corporation
_______________________________
Name:__________________________
Title:_________________________
<PAGE>
EXHIBIT N
FORM OF NON-COMPETITION AGREEMENT
<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (this "Agreement") is
made and entered into as of __________, 1998 by and among Charles
K. Crane, an individual ("Crane"), the Crane Family Trust,
established December 22, 1984 (the "Trust"), and Image Newco,
Inc., a California corporation ("Buyer").
RECITALS
WHEREAS, Ken Crane's Magnavox City, Inc., d/b/a Ken Crane's,
a California corporation ("Seller"), and Buyer are entering into
that certain Asset Purchase Agreement, dated as of even date
herewith (the "Asset Purchase Agreement"), pursuant to which
Buyer has agreed to acquire substantially all of the operating
assets of Seller used in connection with Seller's business of
distributing laserdiscs and digital video discs (the "Software
Division"), together with the goodwill thereof;
WHEREAS, the Trust, a revocable trust, owns all of the
Common Stock of Seller, and Crane is the sole settlor and trustee
of the Trust;
WHEREAS, both Crane and the Trust are both, directly or
indirectly, shareholders of Seller and will benefit from the
transactions contemplated by the Asset Purchase Agreement; and
WHEREAS, to induce Buyer to enter into the Asset Purchase
Agreement and to consummate the transactions contemplated
thereby, and to enable Buyer to protect and preserve the value of
the Software Division and of the business assets and goodwill of
the Software Division over which Buyer gains control upon the
consummation of the transactions contemplated by the Asset
Purchase Agreement, Crane and the Trust have agreed to enter into
this Non-competition Agreement and to provide certain covenants
to Buyer for the benefit of Buyer and Buyer's parent corporation,
Image Entertainment, Inc. ("Image"), a California corporation.
NOW, THEREFORE, in consideration of the foregoing recitals
and the mutual covenants herein contained, the parties hereto
agree as follows:
1. Substance and Scope.
(a) Restrictions on Competitive Activities. Crane and
the Trust agree that until the day before the fifth anniversary
of this Agreement, neither of them will directly or indirectly,
for their own benefit or as agent for another, carry on or
participate in the ownership, management, control or financing
of, be employed by, serve as director of, consult for, license or
provide know how to, otherwise render services to (as a
consultant, independent contractor or otherwise) or allow either
of their names or reputations to be used in or by any other
present or future business enterprise that competes with Buyer,
in activities similar to the Business (as defined below) of the
Software Division as of the Closing Date (as defined in the Asset
Purchase Agreement) (i) in the counties in which Seller now
operates: Los Angeles and Orange and (ii) in the state of
California ((i) and (ii), collectively, shall be the
"Locations"); provided that nothing contained herein shall limit
the right of either Crane or the Trust, as an investor, to hold
and make investments in securities of any corporation or limited
partnership that is registered on a national securities exchange
or admitted to trading privileges thereon or actively traded in a
generally recognized over-the-counter market, provided that the
aggregate equity interest of both Crane and the Trust therein
does not, directly or indirectly, exceed 5% of the outstanding
shares or equity interests in such corporation or partnership.
The business (the "Business") of the Software Division shall
include Seller's business and operations of distributing
laserdiscs, digital video discs and any and all other analog or
digital formats now or hereafter derived through retail stores,
mail order and Internet sales.
(b) Restrictions on use of KC Marks in Competitive
Activities. Crane and the Trust agree that neither of them will,
directly or indirectly, for its own benefit or as agent for
another Person (as defined in the Asset Purchase Agreement) use
the KC Marks (as defined below) in connection with the sale or
distribution of Optical Discs (as defined in the Asset Purchase
Agreement) through any medium, including retail stores, mail
order and Internet sales. The term "KC Marks" shall mean the
names and logos and derivations thereof used by Seller in the
operation of the Software Division, including, but not limited
to, "Ken Crane's", "Ken Crane's Home Entertainment City", "Ken
Crane's Laserdisc" and "Ken Crane's Laserdiscs/DVDs".
2. Reasonableness of Restrictions and Enforceability.
Given Crane and the Trust's positions, directly or indirectly, as
sole shareholder of Seller and Crane's strong business and
community ties significant to the business and growth of Seller
and, in particular, the Software Division, Crane and the Trust
acknowledge that the restrictions set forth in this Agreement are
reasonable both individually and in the aggregate and that the
duration, geographic scope, extent and application of each of
such restrictions are no greater than is necessary for the
protection of the legitimate business interests of Buyer, which
include but are not limited to the Software Division's trade
secrets and other valuable confidential business information, the
Software Division's substantial relationships with prospective or
existing customers and suppliers, and the goodwill associated
with the Software Division's Business. It is the desire and
intent of the parties hereto that the provisions of this
Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction
in which enforcement is sought. If any particular provision or
portion of this Agreement shall be adjudicated to be invalid or
unenforceable, such adjudication shall apply only with respect to
the operation of such provision to that extent and in the
particular jurisdiction in which such adjudication is made.
Further, in the event that any restriction herein shall be found
to be void or unenforceable for its term or scope but would be
valid or enforceable if some part or parts thereof were deleted
or the period or area of application reduced, each of the parties
hereby agrees that the applicable restriction shall apply with
such modifications as may be necessary to make it valid and
enforceable.
3. Miscellaneous Provisions.
(a) Third Party Beneficiaries. The parties agree and
intend that Image and its subsidiaries and other affiliates
are and will be express third party beneficiaries of the
covenants set forth in this Agreement.
(b) Construction. Each party has cooperated in the
drafting and preparation of this Agreement. Accordingly,
this Agreement shall not be construed against any party on
the basis that the party was the drafter.
(c) Counterparts. This Agreement may be executed in
counterparts, and each counterpart, when executed, shall
have the efficacy of a signed original. Photostatic copies
of such signed counterparts may be used in lieu of the
originals for any purpose.
(d) Consent to Jurisdiction. This Agreement and the
legal relations between the parties shall be governed by and
construed in accordance with the laws of the State of
California applicable to contracts made and performed in
such State and without regard to conflicts of law doctrines
except to the extent that certain matters are preempted by
federal law.
(e) Enforceability Representation. Each party to this
Agreement represents that this Agreement constitutes the
legally valid and binding obligation of such party,
enforceable against such party 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.
(f) Consents. Neither Crane nor the Trust is required
to submit any notice, report or other filing to or obtain
any consent or approval from any governmental authority or
third party under any agreement to which either Crane or the
Trust is a party in order to execute, deliver and perform
this Agreement as contemplated hereby.
(g) Waivers. No waiver of any breach of any term or
provision of this Agreement shall be construed to be, or
shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by
the party waiving the breach.
(h) Cooperation. All parties agree to cooperate fully
and to execute any and all supplementary documents and to
take all additional actions that may be necessary or
appropriate to give full force to the basic terms and intent
of this Agreement and which are not inconsistent with its
terms.
(i) Opportunity to Review. Crane and the Trust each
represent and agree that each of them has discussed all
aspects of this Agreement with an attorney of his/its
choice, has carefully read and fully understands all of the
provisions of this Agreement and is voluntarily entering
into this Agreement.
(j) Attorney's Fees. In the event of any action by
any party arising under or out of, in connection with or in
respect of this Agreement, the prevailing party shall be
entitled to reasonable costs, expenses and attorneys' fees
incurred in such action. Attorney's fees incurred in
enforcing any judgment in respect of this Agreement are
recoverable as a separate item. The parties intend that the
preceding sentence be severable from the other provisions of
this Agreement, survive any judgment and, to the maximum
extent permitted by law, not be deemed merged into such
judgment.
(k) No Reliance. Each of Crane and the Trust
represent and acknowledge that in executing this Agreement,
he/it does not rely and has not relied on any
representations or statements made by Buyer, or any of
Buyer's agents, representatives or attorneys with regard to
the subject matter, basis or effect of this Agreement, or
otherwise.
(l) Severable Covenants. The parties hereto intend
that the covenants set forth in Sections 1 hereof shall be
construed as a series of separate covenants, each consisting
of the covenants set forth in Sections 1 for each of the
Locations. Except for such Locations, all such separate
covenants shall be deemed identical. It is the desire and
intent of the parties hereto that the provisions of this
Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought. Without
limiting the generality of Section 2 hereof, if any
particular provision or portion of this Agreement shall be
adjudicated to be invalid or unenforceable, such
adjudication shall apply only with respect to the operation
of this Agreement in the particular jurisdiction in which
such adjudication is made.
(m) Entire Agreement; Changes. This Agreement
constitutes the entire agreement and final understanding
between the parties concerning the subject hereof and
supersedes any prior negotiations and all agreements whether
existing, proposed or otherwise, whether written or oral,
concerning the subject hereof. No modification of this
Agreement shall be valid unless made in writing and signed
by the parties hereto.
(n) Succession. This Agreement shall inure to the
benefit of and shall be binding upon the parties and, as to
Buyer and the Trust, their respective successors and
permitted assigns, but without the prior written consent of
Crane and the Trust this Agreement may not be assigned other
than to a transferee of all or a substantial part of the
Business and/or its associated goodwill, to a purchaser of
more than 10% of the stock of Buyer or to Image or any of
its affiliates or subsidiaries. The obligations and duties
of each of Crane and the Trust hereunder shall be personal
and not assignable.
(o) Injunctive Relief. Each of Crane and the Trust
hereby acknowledge and agree that any breach of or default
under this Agreement will cause damage to Buyer and Image in
an amount difficult to ascertain. Accordingly, in addition
to any other relief to which Buyer may be entitled, Buyer
and Image shall be entitled, without proof of actual
damages, to such injunctive relief as may be ordered by any
court of competent jurisdiction including, but not limited
to, an injunction restraining any violation of Section 1
hereof.
(p) Independent Agreements and Remedies. This
Agreement is in addition to the Asset Purchase Agreement and
the parties' rights and remedies under this Agreement and
under the Asset Purchase Agreement shall be independent,
separate and distinct, but also shall be cumulative.
(q) Notice. For purposes of this Agreement, notices
and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly
given when hand delivered, sent by overnight courier, or
mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, or transmitted by
telegram, telecopy or telex, addressed as follows:
a. If to Crane:
Mr. Charles K. Crane
c/o Ken Crane's Magnavox City, Inc.
4900 W. 147th Street
Hawthorne, CA 90250
Facsimile: (310) 219-0375
b. If to the Trust:
Crane Family Trust
10 Caballeros Road
Rolling Hills, CA 90274
Attn: Charles K. Crane, Trustee
c. If to Buyer:
Image Newco, Inc.
c/o Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Chief Executive Officer
Facsimile: (818) 407-9331
with a copy (which shall not constitute
notice but shall be essential to a valid
notice to Buyer):
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Chief Administrative Officer and
General Counsel
Facsimile: (818) 407-9331
IN WITNESS WHEREOF, the parties hereto, having first read
the same, have set their names hereto as of the date first
written above.
"Crane"
_________________________________
Charles K. Crane
"The Trust"
CRANE FAMILY TRUST,
established December 22, 1984
_________________________________
Charles K. Crane
Trustee
"Buyer"
IMAGE NEWCO, INC.,
a California corporation
_________________________________
Name:____________________________
Title:___________________________
<PAGE>
FIRST AMENDMENT TO
ASSET PURCHASE AGREEMENT
This First Amendment (this "Amendment") to that certain
Asset Purchase Agreement (the "Asset Purchase Agreement"), dated
as of August 20, 1998, between Image Newco, Inc., a California
corporation (the "Buyer") and Ken Crane's Magnavox City, Inc., a
California corporation (the "Seller"), is entered into as of this
3rd day of October 1998 by and between the Buyer and the Seller
(collectively, the "Parties"). Capitalized of Mandalay Sports
Enterprises LLC, dated as of January 8, 1997 (as amended, the
"Operating Agreement"). Capitalized terms used in this Amendment
without definition shall have the meanings assigned to such terms
in the Asset Purchase Agreement.
WHEREAS, the Parties desire to amend the Asset Purchase
Agreement as hereinafter provided.
NOW THEREFORE, in consideration of the mutual premises
contained herein, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the Parties hereby
agree as follows:
1. Amendment to Asset Purchase Agreement. Section 9.1 is
hereby amended by replacing it in its entirety with the
following:
"9.1 Termination of Agreement.
Anything herein to the contrary notwithstanding, this
Agreement (except to the extent provided in Section 9.2) and the
transactions contemplated by this Agreement may be terminated
prior to the Closing by written notice by either party after
January 15, 1999 unless this date is extended by mutual consent
in writing of Buyer and Seller and may otherwise be terminated at
any time before the Closing as follows and in no other manner:
(a) Mutual Consent. By mutual consent in writing of
Buyer and Seller.
(b) Conditions to Buyer's Performance Not Met. By
Buyer upon written notice to Seller if any event
occurs which would render impossible the
satisfaction of one or more conditions to the
obligations of Buyer to consummate the
transactions contemplated by this Agreement as set
forth in Section 8.1 or 8.2.
(c) Conditions to Seller's Performance Not Met. By
Seller upon written notice to Buyer if any event
occurs which would render impossible the
satisfaction of one or more conditions to the
obligation of Seller to consummate the
transactions contemplated by this Agreement as set
forth in Section 8.1 or 8.3.
(d) Inaccurate Information. By Buyer if any material
information (whether or not in writing) delivered
by or on behalf of Seller to Buyer is inaccurate
or incomplete in any material respect.
(e) Certain Conditions. By Seller if the Closing has
not occurred by that date which is five (5)
business days after the date of receipt by Buyer
of the Financing by Buyer as contemplated by
Section 6.12 and the Nasdaq listing contemplated
by Section 8.2(n), provided Seller has performed
all obligations of Seller and has delivered the
documents to be delivered by or on behalf of
Seller under Section 8.2.
(f) Material Breach. By Seller or Buyer if there has
been a material misrepresentation or material
breach on the part of Buyer (in the case of a
termination by Seller) or Seller (in the case of a
termination by Buyer) in its representations,
warranties or covenants set forth herein;
provided, however, that if such breach or
misrepresentation is susceptible to cure, Seller
or Buyer, as the case may be, shall have 10
business days after receipt of notice from the
other party of its intention to terminate this
Agreement pursuant to this Section 9.1(f) if such
misrepresentation or breach continues in which to
cure such breach or misrepresentation before the
other party may so terminate this Agreement.
(g) Pursuit of Other Offers. By Buyer, if Seller
solicits, encourages, initiates or negotiates any
other sale or combination of Seller's businesses
or of the Business or any substantial part
thereof.
(h) Destruction or Condemnation. By Buyer, if any of
the Purchased Assets are damaged, destroyed or
taken, and if such damage, destruction or
condemnation is not "Non-Material" as such term is
described in Section 6.11.
(i) Diligence Investigation. By Buyer upon delivery
of written notice of termination to Seller (A) no
later than 10 business days after the delivery by
Seller of the last of the documents requested
prior to the date hereof by Buyer to complete its
diligence, or (B) if Buyer in the reasonable
exercise of its judgment in the course of its
ongoing business investigation of Seller shall
determine after reviewing information, projections
and assumptions developed by Seller and their
representatives and delivered to Buyer that such
information, projections and assumptions are not
commercially reasonable in light of current
business conditions or otherwise are likely to be
so materially inaccurate that Buyer does not have
reasonable assurance that such projections are in
a range in which it is probable that such
projections will be met."
2. No Other Changes. Except as modified by the provisions of
this Amendment, the Asset Purchase Agreement shall remain
unchanged and in full force and effect.
3. Counterparts. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more
counterparts have been signed by each of the Parties and
delivered to the other Party. Any actions previously taken on
behalf of the Parties by their respective officers consistent
with the terms of the Asset Purchase Agreement as amended by this
Amendment are hereby ratified, confirmed and approved as the
proper and valid actions of the applicable Party.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has
caused this Amendment to be duly executed as of the date first
above written.
"Seller"
KEN CRANE'S MAGNAVOX CITY, INC.,
a California corporation
By: /s/ Charles K. Crane
-----------------------------
Name: Charles K. Crane
Title: President
"Buyer"
IMAGE NEWCO, INC.,
a California corporation
By: /s/ Martin W. Greenwald
------------------------------
Name: Martin W. Greenwald
Title: President
The undersigned, on its own behalf and as sole
shareholder of the Seller, hereby confirms its approval of the
foregoing Amendment.
APPROVED:
CRANE FAMILY TRUST,
established December 22, 1984
/s/ Charles K. Crane
- -----------------------------
Charles K. Crane
Trustee
<PAGE>
Number Image Shares
Entertainment
Incorporated Under the Laws of the State of California
Common Stock 25,000,000 Shares CUSIP 452439 20 1
NO PAR VALUE SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, NO PAR VALUE COMMON STOCK, OF
IMAGE ENTERTAINMENT, INC. transferable on the books of the
Corporation by the holder hereof in person or by duly
authorized attorney, upon surrender of this certificate
properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the
provisions of the Articles of Incorporation and Bylaws of the
Corporation as now or hereafter amended (a copy of which is
on file with the Transfer Agent), to all of which the holder
by acceptance hereof assents. This certificate is not valid
unless countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and
the facsimile signatures of its duly authorized officers.
Dated
Secretary President
IMAGE ENTERTAINMENT, INC.
CORPORATE
[SEAL]
CALIFORNIA
COUNTERSIGNED:
American Securities Transfer, Inc.
P.O. Box 1596
Denver, Colorado 80201
By_____________________________________
Transfer Agent & Registrar Authorized Signature
<PAGE>
[reverse side]
Image Entertainment, Inc.
TRANSFER FEE: $15.00 PER NEW CERTIFICATE ISSUED
The following abbreviations when used in the
inscription on the face of this certificate, shall be
construed as though they were written out in full according
to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -.....Custodian......
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN - as joint tenants Act..........................
with right of (State)
survivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list.
_________________________________________________________________________
For Value Received, _____________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
____________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP
CODE, OF ASSIGNEE)
____________________________________________________________
____________________________________________________________
_______________________________________________ Shares
of the Common Stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
____________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the
premises.
Dated ___________________________
__________________________________
__________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
____________________________________________
The signature(s) should be guaranteed by an eligible
guarantor institution (Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions with membership in an
approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
IMAGE ENTERTAINMENT, INC.
ELIGIBLE DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of the 22d day of July,
1998, between Image Entertainment, Inc., a California
corporation (the "Corporation"), and Stuart Segall (the
"Director").
W I T N E S S E T H
WHEREAS, the Corporation has adopted (subject to
shareholder approval) a 1998 Incentive Plan (the "Plan").
WHEREAS, pursuant to Section 1.3 of the Plan, the
Corporation has granted an option (this "Option") to the
Director upon the terms and conditions evidenced hereby, as
contemplated by the Plan. This Option is not intended as
and shall not be deemed to be an incentive stock option
within the meaning of Section 422 of the Code.
NOW, THEREFORE, in consideration of the services
rendered and to be rendered by the Director, the Corporation
and the Director agree to the terms and conditions set forth
herein, as contemplated by the terms of the Plan.
1. Option Grant. This Agreement evidences the
grant to the Director, as of July 22, 1998 (the "Option
Date"), of an Option to purchase an aggregate of 15,000
shares of Common Stock (the "Shares"), subject to the terms
and conditions and to adjustment as set forth herein or in
or pursuant to the Plan and the 1994 Eligible Directors
Stock Option Plan, as amended (the "1994 Plan").
2. Exercise Price. This Option entitles the
Director to purchase (subject to the terms of Sections 3
through 5 below), all or any part of the shares at a price
per share of $7.94.
3. Option Exercisability and Term. This Option
shall first become and remain exercisable as to 7,500 shares
on January 13, 1999 and as to an additional 3,750 shares on
each of July 13, 1999 and January 13, 2000, subject to
shareholder approval of the Plan, to adjustments under the
Plan and Section 3.4 of the 1994 Plan, and to the
acceleration provisions under Section 3.5 of the 1994 Plan.
This Option shall terminate on July 12, 2008, unless
earlier terminated in accordance with the terms of Section 4
below.
4. Service and Effect of Termination of Service
or Other Event. The Director agrees to serve as a director
in accordance with the provisions of the Corporation's
Articles of Incorporation, Bylaws and applicable law. If
the Director's services as a member of the Board shall
terminate or in the other circumstances addressed in Article
3 of the 1994 Plan, this Option shall terminate at the times
and to the extent set forth therein, to the same extent as
if this Option had been granted under the 1994 Plan.
5. General Terms. This Option and this
Agreement are subject to, and the Corporation and the
Director agree to be bound by, the provisions of the 1994
Plan that apply to annual option grants and to the
provisions of the Plan that are applicable to discretionary
option grants thereunder. Such provisions are incorporated
herein by this reference. The Director acknowledges
receiving a copy of the Plan and the 1994 Plan and reading
their applicable provisions.
6. Nontransferability. This Option shall be non-
transferable as provided in Section 3.2 of the 1994 Plan.
7. Shareholder Approval. This Option is subject
to shareholder approval of the 1998 Plan and shall be
rescinded if shareholder approval of the 1998 Plan is not
obtained by December 31, 1998.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
IMAGE ENTERTAINMENT, INC.
(a California corporation)
By /s/ Martin W. Greenwald
--------------------------
Title President
Optionee Director: Stuart Segall
/s/ Stuart Segall
- -----------------------------
(Signature)
c/o Image Entertainment, Inc.
(Address)
9333 Oso Ave.
Chatsworth, CA 91311
(City, State, Zip Code)
<PAGE>
SPOUSAL CONSENT
In consideration of the execution of the foregoing
Stock Option Agreement by Image Entertainment, Inc., I,
Wendy Segall, the spouse of the Director
therein named, do hereby agree to be bound by all of the
terms and provisions thereof and of the Plans referred to
therein.
DATED: 8/23/98
/s/ Wendy Segall
(Signature of Spouse)
<PAGE>
IMAGE ENTERTAINMENT, INC.
ELIGIBLE DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of the 17th day of
September, 1998, between Image Entertainment, Inc., a
California corporation (the "Corporation"), and Mark
Trevenen Huxley (the "Director").
W I T N E S S E T H
WHEREAS, the Corporation has adopted (subject to
shareholder approval) a 1998 Incentive Plan (the "Plan").
WHEREAS, pursuant to Section 1.3 of the Plan, the
Corporation through the Board of Directors may grant a
discretionary option to a person in connection with his
becoming a director; and
WHEREAS, concurrently with the adoption of the
Plan, the shareholders elected the Director as a new
director and the Board desires to provide for his
compensation on substantially the same terms as the other
non-employee directors for the current year; and
WHEREAS, the Board of Directors on September 17,
1998 authorized the grant of an option (this "Option") to
the Director upon the terms and conditions evidenced hereby,
as contemplated by the Plan.
NOW, THEREFORE, in consideration of the services
rendered and to be rendered by the Director and as a further
inducement to those services, the Corporation and the
Director agree to the terms and conditions set forth herein,
as contemplated by the terms of the Plan.
1. Option Grant. This Agreement evidences the
grant to the Director of an Option to purchase an aggregate
of 15,000 shares of Common Stock (the "Shares"), subject to
the terms and conditions and to adjustment as set forth
herein or in or pursuant to the Plan and (except as
expressly provided herein) the 1994 Eligible Directors Stock
Option Plan, as amended (the "1994 Plan"). Director
acknowledges that this grant is in lieu of any grant under
the 1994 Plan.
2. Exercise Price. This Option entitles the
Director to purchase (subject to the terms of Sections 3
through 5 below), all or any part of the Shares at a price
per share of $7.94.
3. Option Exercisability and Term. This Option
shall first become and remain exercisable as to 7,500 shares
on January 13, 1999 and as to an additional 3,750 shares on
each of July 13, 1999 and January 13, 2000, subject to
shareholder approval of the Plan, to adjustments under the
Plan and Section 3.4 of the 1994 Plan, and to the
acceleration provisions under Section 3.5 of the 1994 Plan.
This Option shall expire on July 12, 2008, unless earlier
terminated in accordance with the terms of Section 4 below.
4. Service and Effect of Termination of Service
or Other Event. The Director agrees to serve as a director
in accordance with the provisions of the Corporation's
Articles of Incorporation, Bylaws and applicable law. If
the Director's services as a member of the Board shall
terminate or in the other circumstances addressed in Article
3 of the 1994 Plan, this Option shall terminate prior to its
expiration at the times and to the extent set forth therein,
to the same extent as if this Option had been granted under
the 1994 Plan.
5. General Terms. Except as expressly provided
herein, this Option and this Agreement are subject to, and
the Corporation and the Director agree to be bound by, the
provisions of the 1994 Plan that apply to annual option
grants and to the provisions of the Plan that are applicable
to discretionary option grants thereunder. Such provisions
are incorporated herein by this reference. The Director
acknowledges receiving a copy of the Plan and the 1994 Plan
and reading their applicable provisions.
6. Nontransferability. This Option shall be non-
transferable.
7. Miscellaneous. This Option is not intended as
and shall not be deemed to be an incentive stock option
within the meaning of Section 422 of the Code.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
IMAGE ENTERTAINMENT, INC. Optionee Director: Mark Trevenen Huxley
(a California corporation)
/s/ Mark Trevenen Huxley
------------------------------------
By /s/ Martin W. Greenwald (Signature)
-----------------------
Title President 39 Broadway
-------------------- ------------------------------------
(Address)
Brooklyn, NY 11211
------------------------------------
(City, State, Zip Code)
<PAGE>
SPOUSAL CONSENT
In consideration of the execution of the foregoing
Stock Option Agreement by Image Entertainment, Inc., I,
____________________________, the spouse of the Director
therein named, do hereby agree to be bound by all of the
terms and provisions thereof and of the Plans referred to
therein.
DATED: 9/29, 1998
-----, ----
/s/ Kathleen D. Huxley
--------------------------------
(Signature of Spouse)
<PAGE>
Image Entertainment, Inc.
Chatsworth, California
Re: Unaudited Financial Information
We acknowledge our awareness of the use herein of our report dated
August 7, 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 12 of the Act.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
October 9, 1998
<PAGE>
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
October 9, 1998
