SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
JANUARY 11, 1999
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 000-11071 84-0685613
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification No.)
Incorporation)
9333 OSO AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(818)407-9100
NOT APPLICABLE.
(Former name or former address, if changed since last report.)
<PAGE>
<PAGE>
IMAGE ENTERTAINMENT, INC.
AMENDMENT NO. 1
The undersigned hereby amends the following items,
financial statements, exhibits or other portions of its Current
Report on Form 8-K filed with the Commission on January 22, 1999
(the "Current Report") as set forth herein relating to the
acquisition of certain assets and liabilities of the digital
video disc and laserdisc retail sales business (the "Acquired
Business") of Ken Crane's Magnavox City, Inc.:
The Current Report is hereby amended by deleting Item 7
thereof and replacing it in its entirety with the following:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Financial Statements for the Acquired Business required
by this item are incorporated herein by reference to
Exhibit 99.2.
(b) Pro forma financial information.
Pro forma consolidated financial statements for Image
Entertainment, Inc. and the Acquired Business required
by this item are incorporated herein by reference to
Exhibit 99.3
(c) Exhibits.
Exhibit Description
Number
2.1 Asset Purchase Agreement dated as of August 20, 1998 by
and between Image Newco, Inc. and Ken Crane's Magnavox
City, Inc. Filed as Exhibit 2.1 of Image's
Registration Statement on Form S-2 (Registration No.
333-65611) and incorporated herein by this reference.
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. Filed as Exhibit 2.2
of Image's Registration Statement on Form S-2
(Registration No. 333-65611) and incorporated herein by
this reference.
23 Consent Letter of KPMG LLP, Independent Certified
Public Accountants.
99.1 Press release issued January 12, 1999. Filed on January 22,
1999 as part of the initial filing of this Current Report on
Form 8-K.
99.2 Audited financial statements of the Acquired Business
for the fiscal year ended July 31, 1998 and the
independent auditors' report of KPMG LLP with respect
thereto.
99.3 Pro Forma consolidated financial statements for Image
Entertainment, Inc. and the Acquired Business.
<PAGE>
<PAGE>
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
IMAGE ENTERTAINMENT, INC.
By: /S/ Jeff M. Framer
--------------------------------
Jeff M. Framer
Chief Financial Officer
Date: March 23, 1999
<PAGE>
<PAGE>
Exhibit Index
Exhibit Description
Number
2.1 Asset Purchase Agreement dated as of August 20, 1998 by
and between Image Newco, Inc. and Ken Crane's Magnavox
City, Inc. Filed as Exhibit 2.1 of Image's Registration
Statement on Form S-2 (Registration No. 333-65611) and
incorporated herein by this reference.
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. Filed as Exhibit 2.2 of
Image's Registration Statement on Form S-2 (Registration
No. 333-65611) and incorporated herein by this reference.
23 Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
99.1 Press release issued January 12, 1999. Filed on January 22,
1999 as part of the initial filing of this Current Report
on Form 8-K.
99.2 Audited financial statements of the Acquired Business for
the fiscal year ended July 31, 1998 and the independent
auditors' report of KPMG LLP with respect thereto.
99.3 Pro Forma consolidated financial statements for Image
Entertainment, Inc. and the Acquired Business.
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
Image Entertainment, Inc.
Chatsworth, California
We consent to incorporation by reference in the registration statements
(Nos. 033-43241, 033-57336, 033-59353, 033-65121, and 333-69623) all
on Form S-8 of Image Entertainment, Inc. of our report dated February 5,
1999 relating to the balance sheet of Ken Crane's Laserdisc, a division
of Ken Crane's Magnavox City, Inc., as of July 31, 1998 and the related
statements of operations and divisional deficiency and cash flows for
the year then ended, which report appears in the January 22, 1999
current report on Form 8-K of Image Entertainment, Inc., as amended.
/S/ KPMG LLP
Los Angeles, California
March 19, 1999
Independent Auditors' Report
The Board of Directors
Ken Crane's Laserdisc, a division of
Ken Crane's Magnavox City, Inc.:
We have audited the accompanying balance sheet of Ken Crane's
Laserdisc, a division of Ken Crane's Magnavox City, Inc. as of
July 31, 1998 and the related statements of operations and
divisional deficiency and cash flows for the year then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Ken Crane's Laserdisc, a division of Ken Crane's Magnavox
City, Inc. as of July 31, 1998 and the results of its operations
and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
February 5, 1999
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KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Balance Sheet
July 31, 1998
(In thousands)
Assets
<TABLE>
<S> <C>
Cash $ 1
Accounts receivable 238
Inventories 1,330
Prepaid expenses and other assets 49
Property and equipment, net (note 3) 253
--------
Total assets $ 1,871
========
LIABILITIES AND DIVISIONAL DEFICIENCY
Accounts payable and accrued liabilities (note 4) $ 1,969
Customer deposits 38
--------
Total liabilities 2,007
Divisional deficiency (136)
Commitments (note 5) --------
Total liabilities and divisional deficiency $ 1,871
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Statement of Operations and Divisional Deficiency
Year ended July 31, 1998
(In thousands)
<TABLE>
<S> <C>
Net sales $16,899
-------
Operating costs and expenses:
Cost of sales 14,188
Selling expenses 1,583
General and administrative expenses 897
-------
16,668
-------
Income before income taxes 231
Income taxes (note 4) 92
-------
Net income 139
Divisional deficiency, beginning of year (275)
--------
Divisional deficiency, end of year $ (136)
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Statement of Cash Flows
Year ended July 31, 1998
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 139
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 71
Loss on disposal of property and equipment 25
Provision for slow moving inventory 342
Change in assets and liabilities:
Accounts receivable 299
Inventories (249)
Due from Ken Crane's Magnavox City, Inc. (1,012)
Prepaid expenses and other assets (49)
Accounts payable and accrued expenses 561
Customer deposits 38
-------
Net cash provided by operating activities 165
Net cash flows from investing activities - purchase
of property and equipment (164)
--------
Net increase in cash 1
Cash at beginning of year --
--------
Cash at end of year $ 1
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<PAGE>
KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Notes to Financial Statements
July 31, 1998
(1)BASIS OF PRESENTATION
Ken Crane's Laserdisc (the "Company") is a division of Ken Crane's
Magnavox City, Inc. (the "Parent"). The Company is in the
business of selling entertainment programming on the laserdisc and
digital video disc ("DVD") formats via its Internet website, mail-
order catalogs and its retail store in Westminster, California.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue when products are purchased at
the retail store or when products are shipped to the customer.
(b) Inventory
Inventory consists primarily of laserdisc and DVD programming.
Inventory is stated at the lower of cost or estimated net
realizable value. Cost is determined on the first-in,
first-out ("FIFO") basis using a weighted-average method.
Inventory is net of an inventory reserve of $342,000.
(c) Property and Equipment
Property and equipment is stated at cost. Depreciation and
amortization are calculated utilizing the straight-line method
over the assets' estimated useful life, generally five years.
(d) Income Taxes
Income taxes are recorded using the asset and liability method
whereby deferred tax assets and liabilities are recognized for
the temporary differences between the financial statement
carrying amounts and the tax bases of the Company's assets and
liabilities at income tax rates expected to be in effect when
such amounts are realized or settled, The effect of deferred
tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the
enactment date.
(e) Customer Deposits
Customer deposits represent payments received from customers
for titles which are not immediately available. In such
cases, the Company has ordered the product and is waiting for
its arrival. The customer deposits are recognized as revenue
when the product is shipped to the customer.
(f) Advertising Costs
Advertising costs are expensed as incurred.
(continued)
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KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Notes to Financial Statements
July 31, 1998
(g) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(h) Long-Lived Assets
The Company reviews the carrying value of long-lived assets if
facts and circumstances suggest that they may be impaired.
For purposes of this review, assets are grouped at the
operating company level which is the lowest level for which
there are identifiable cash flows. If this review indicates
that an asset's carrying value will not be recoverable, as
determined based on future expected, undiscounted operating
cash flows, the carrying value is reduced to fair market
value. No impairment was recorded during the year ended
July 31, 1998.
(i) Divisional Allocations
The Company receives allocations of certain expenses incurred
by the Parent on behalf of the Company. These allocations
relate to rent, payroll and other administrative items and are
determined based on estimates of the related time spent by
certain personnel, allocable square footage or other methods
which approximate the cost of obtaining such services as if
the Company was operated on a stand-alone basis. These
allocations are subject to ongoing review and evaluation by
management.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31, 1998
(in thousands):
Furniture and fixtures $ 74
Equipment 109
Computers 113
Software 157
Leasehold improvements 31
-------
484
Less accumulated depreciation
and amortization 231
-------
Property and equipment, net $ 253
=======
(continued)
<PAGE>
<PAGE>
KEN CRANE'S LASERDISC, A DIVISION OF
KEN CRANE'S MAGNAVOX CITY, INC.
Notes to Financial Statements
July 31, 1998
(4)INCOME TAXES
The provision for income taxes, all current, consists of the
following (in thousands):
Federal $ 78
State 14
-------
$ 92
=======
Income tax expense differs from the statutory tax rate as
applied to income before income taxes as follows (in thousands):
Expected Federal income taxes $ 80
State income taxes, net of
Federal benefit 12
-------
$ 92
=======
The provision for income taxes represents an allocation of income
taxes from the Parent. Deferred tax assets and liabilities
related to this division are immaterial and are therefore not
provided.
(5)COMMITMENTS
The Company is obligated under a noncancelable operating lease for
its retail store, as follows (in thousands):
Year ending July 31:
1999 $ 159
2000 163
2001 168
2002 173
2003 58
--------
$ 721
========
Total rent expense for the year ended July 31, 1998 was
approximately $200,700, which includes an allocation from the
Parent for the corporate facilities rent expense.
IMAGE ENTERTAINMENT, INC.
Pro forma Consolidated Financial Information
On January 11, 1999, Image Entertainment, Inc. (the "Company")
completed an acquisition (the "Acquisition") of the Internet/
direct-to-consumer DVD and laserdisc ("LD") software division
("Ken Crane's Laserdisc") of Ken Crane's Magnavox City, Inc.
The assets acquired included the "Kencranes.com" website, a
mail-order business, an approximate 8,000 square foot retail store,
DVD and LD inventory, property and equipment and certain other
assets used in the operation of Ken Crane's Laserdisc. In
addition, the Company assumed certain trade accounts payable of
Ken Crane's Laserdisc.
The Acquisition price included $3,000,000 in cash and 258,370
shares of the Company's common stock, valued at $2,000,000.
In addition, the purchase price also included one-time payments
to Ken Crane, Jr. of $1,500,000, representing a signing bonus
pursuant to his new five-year employment agreement. Also, the
purchase price included $250,000 payments to each of Pamela and
Casey Crane related to one-year consulting agreements in connection
with the Acquisition. The Acquisition will be accounted for under
the purchase method of accounting and will be recorded in the
Company's fourth fiscal quarter ending March 31, 1999. The
following pro forma information is based upon preliminary valuations
of the net assets that have not yet been finalized and is also based
on a preliminary purchase price as summarized above. Adjustments to
the purchase price and the valuations of the net assets acquired may
occur as a result of the Company's final analysis of this transaction.
The accompanying pro forma balance sheet reflects the consolidated
financial position as of December 31, 1998 of the entities
consolidated as if the Acquisition had occurred on December 31, 1998.
The accompanying pro forma consolidated statements of operations for
the year ended March 31, 1998 and for the nine months ended
December 31, 1998 reflect the operations of the consolidated
companies as if the Acquisition had occurred on April 1, 1997 and
1998, respectively. For purposes of the pro forma consolidated
statement of operations for the year ended March 31, 1998, the year
ended June 30, 1998 was used for Ken Crane's Laserdisc for compliance
purposes with applicable SEC Rules and Regulations. The fiscal
year-end of Ken Crane's Laserdisc is July 31, 1998. Ken Crane's
Laserdisc's financial statements for the year ended June 30, 1998 are
comparable to the fiscal year ended July 31, 1998.
<PAGE>
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IMAGE ENTERTAINMENT, INC.
Pro forma Consolidated Balance Sheet
December 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
The Ken Crane's Pro forma Pro forma
ASSETS Company Laserdisc adjustments consolidated
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,099 1 (1,100)<F1> --
Accounts receivable, net 13,042 -- (1,493)<F2> 11,549
Inventories 15,049 1,241 (134)<F3> 16,156
Royalty advances, distribution fee
and license fee advances 3,234 -- 3,234
Intangible assets -- -- 7,580<F1> 7,580
Prepaid expenses and other assets 1,642 39 1,681
Property, equipment and improvements,
net 13,601 304 13,905
--------- ------ --------- --------
Total assets $ 47,667 1,585 4,853 54,105
========= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued
liabilities $ 17,149 2,054 (1,493)<F2> 17,710
Accrued royalties, distribution
fees and license fees 2,411 -- 2,411
Revolving credit facility 7,207 -- 7,207
Due to sellers -- -- 4,200 <F1> 4,200
Construction credit facility 3,391 -- 3,391
Distribution equipment lease facility 1,626 -- 1,626
Convertible subordinated note payable 5,000 -- 5,000
Note payable 1,350 -- 1,350
--------- ------- --------- -------
Total liabilities 38,134 2,054 2,707 42,895
--------- ------- --------- -------
Shareholders' equity:
Common stock 17,926 -- 2,000 <F1> 19,926
Additional paid-in capital 3,123 -- 280 <F1> 3,403
Accumulated deficit (11,516) (469) (134)<F3> (12,119)
--------- ------- --------- -------
Net shareholders' equity 9,533 (469) 2,146 11,210
--------- ------- --------- -------
Total liabilities and
shareholders' equity $ 47,667 1,585 4,853 54,105
========= ======= ========= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
statements.
<PAGE>
<PAGE>
IMAGE ENTERTAINMENT, INC.
Pro forma Consolidated Statement of Operations
Year ended March 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
The Ken Crane's Pro forma Pro forma
Company Laserdisc adjustments consolidated
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 75,516 16,708 (8,069)<F5> 84,155
--------- --------- ----------- ---------
Operating costs and expenses:
Cost of sales 70,256 14,025 (8,069)<F5>
194 <F3> 76,406
Selling expenses 4,943 1,599 6,542
General and administrative
expenses 4,841 807 505 <F4> 6,153
Cost of facility closure 825 -- 825
Amortization of production
costs 3,740 -- 3,740
--------- --------- ----------- ---------
84,605 16,431 (7,370) 93,666
--------- --------- ----------- ---------
Operating income
(loss) (9,089) 277 (699) (9,511)
Interest expense 662 -- 662
Interest income (118) -- (118)
--------- --------- ----------- ---------
Income (loss) before
income taxes (9,633) 277 (699) (10,055)
Income tax expense (benefit) (52) 118 (116)<F6> (50)
--------- --------- ----------- ---------
Net income (loss) $ (9,581) 159 (583) (10,005)
========= ========= =========== =========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
<PAGE>
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IMAGE ENTERTAINMENT, INC.
Pro forma Consolidated Statement of Operations
Nine months ended December 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
The Ken Crane's Pro forma Pro forma
Company Laserdisc adjustments consolidated
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 53,689 12,547 (5,623)<F5> 60,613
--------- --------- ----------- --------
Operating costs and expenses:
Cost of sales 41,105 10,218 (5,623)<F5>
134 <F3> 45,834
Selling expenses 3,982 1,509 5,491
General and administrative
expenses 4,194 674 379 <F4> 5,247
Amortization of production
costs 3,099 -- 3,099
--------- --------- ----------- --------
52,380 12,401 (5,110) 59,671
--------- --------- ----------- --------
Operating income (loss) 1,309 146 (513) 942
Interest expense 676 -- 676
Interest income (69) -- (69)
--------- --------- ----------- --------
Income (loss) before
income taxes 702 146 (513) 335
Income tax expense (benefit) 55 58 (89)<F6> 24
--------- --------- ----------- --------
Net income (loss) $ 647 88 (424) 311
========= ========= =========== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
<PAGE>
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IMAGE ENTERTAINMENT, INC.
Notes to Unaudited Pro forma Consolidated Financial Statements
[FN]
PRO fORMA FINANCIAL INFORMATION
The Company has prepared pro forma financial statements using the
following assumptions:
<F1> The Acquisition will be accounted for as a purchase. Under
purchase accounting, the total purchase cost and liabilities
assumed will be allocated to the tangible assets acquired
based upon their respective fair values as of the closing date
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 forma amounts included herein.
Purchase cost - purchase price (in thousands):
Cash $ 3,000
Common stock 2,000
Payments to Ken Crane, Jr. 1,500
Payments to Pamela and Casey Crane 500
Estimated fees and expenses 300
--------
Total purchase cost 7,300
--------
Fair market value of net assets acquired:
Inventories 1,100
Prepaid expense and other assets 20
Property and equipment 300
Accounts payable and accrued
liabilities assumed (1,700)
--------
Total preliminary allocation of
purchase cost (280)
--------
Unallocated excess $ 7,580
========
In connection with the Acquisition, Ken Crane, Jr. executed a
five-year employment agreement and received a signing bonus of
$1,500,000. In addition, Pam Crane and Casey Crane, sister
and brother of Ken Crane, Jr., each received $250,000 in
connection with one-year consulting agreements. No adjustment
to the pro forma statements of operations was made for the
difference in Ken Crane, Jr.'s compensation expense paid
historically and amounts to be paid under his new employment
agreement as the base salaries are comparable and the bonus
amounts are subject to formula-based calculations which cannot
be determined at this time.
The unallocated excess will be allocated to goodwill. The
goodwill will be amortized over a 15-year period. The Company
has financed this transaction with the proceeds of an offering
of its common stock, which was closed on January 11, 1999,
aggregating $10,900,000. For purposes of the pro forma
financial information, the Company has recorded a "Due to
seller" liability for the cash portion of the purchase price
in excess of the pro forma cash balance at December 31, 1998.
For purposes of this calculation, the cash portion of the
purchase price was approximately $5,300,000 and the pro forma
cash balance was $1,100,000.
<F2> Reflects the elimination of accounts receivable and accounts
payable between the Company and Ken Crane's Laserdisc.
<F3> Reflects the elimination of profit in ending inventory of Ken
Crane's Laserdisc purchased from the Company.
<F4> The preliminary application of purchase accounting will result
in goodwill being recorded of $7,580,000, subject to final
adjustment. The goodwill will be amortized over 15 years.
The pro forma impact of the goodwill amortization was $505,000
for the year ended March 31, 1998 and $379,000 for the nine
months ended December 31, 1998. The adjustment for estimated
pro forma amortization is based on the estimated fair values.
<F5> Reflects the elimination of sales made by the Company to Ken
Crane's Laserdisc and the related cost of sales incurred by
Ken Crane's Laserdisc.
<F6> 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>
