<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For The Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period From ..........To...........
Commission File Number 0-11071
_______________________
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
_______________________
California 84-0685613
(State or other jurisdiction of (I.R.S.Employer Identification
incorporation) Number)
9333 Oso Avenue, Chatsworth, California 91311
(Address of principal executive offices, including zip code)
(818) 407-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ( x ) NO ( )
Number of shares outstanding of the registrant's common stock on August 6, 1999:
16,457,032
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<PAGE>
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
--------------------
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and March 31, 1999
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
-------------- --------------
(In thousands) (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 910 $ 1,552
Accounts receivable, net of allowances of
$3,175 - June 30, 1999;
$3,475 - March 31, 1999 8,999 11,954
Inventories (Note 3) 17,117 16,691
Royalties and distribution fee advances 3,807 3,173
Prepaid expenses and other assets 1,548 807
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$5,311 - June 30, 1999;
$5,295 - March 31, 1999 14,969 14,494
Goodwill 7,473 7,774
------- -------
$54,823 $56,445
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
-1-
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and March 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
-------------- ---------------
(In thousands, except share data) (unaudited)
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $ 11,858 $ 16,101
Accrued royalties and distribution fees 2,752 2,665
Revolving credit facility (Note 5) 5,326 1,874
Construction credit facility (Note 5) 3,305 3,348
Distribution equipment lease facility (Note 6) 1,692 1,775
Convertible subordinated note payable (Note 5) 5,000 5,000
Note payable (Note 5) 1,215 1,350
-------- --------
Total liabilities 31,148 32,113
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,366,000 shares
authorized; none issued and outstanding -- --
Common stock, no par value, 25,000,000 shares authorized;
16,457,000 and 16,417,000 issued and outstanding
at June 30, 1999 and March 31, 1999, respectively 31,782 31,725
Additional paid-in capital 3,064 3,064
Accumulated deficit (11,171) (10,457)
-------- --------
Net shareholders' equity 23,675 24,332
-------- --------
$ 54,823 $ 56,445
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
-2-
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998
-------- -------
<S> <C> <C>
NET SALES $18,020 $17,140
OPERATING COSTS AND EXPENSES:
Cost of sales 13,626 13,197
Selling expenses 2,022 1,229
General and administrative expenses 1,873 1,221
Amortization of production costs 1,008 1,126
Amortization of goodwill 124 --
------- -------
18,653 16,773
------- -------
OPERATING INCOME (LOSS) (633) 367
OTHER EXPENSES (INCOME):
Interest expense, net 320 151
Other income (239) --
------- -------
81 151
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (714) 216
INCOME TAXES -- 11
------- -------
NET INCOME (LOSS) $ (714) $ 205
======= =======
NET INCOME (LOSS) PER SHARE (Note 4):
Basic $(.04) $.02
Diluted $(.04) $.02
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 4):
Basic 16,431 13,506
======= =======
Diluted 16,431 13,614
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (714) $ 205
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of production costs 1,008 1,126
Amortization of goodwill 124 --
Depreciation and other amortization 336 156
Amortization of restricted stock units 30 --
Provision for slow-moving inventories 261 68
Provision for estimated doubtful accounts -- 14
Changes in assets and liabilities associated
with operating activities:
Accounts receivable 2,955 (677)
Inventories (287) 258
Royalty and distribution fee advances, net (634) 713
Production cost expenditures (1,231) (1,100)
Prepaid expenses and other assets (741) (303)
Accounts payable, accrued royalties and liabilities (4,110) 783
------- -------
Net cash (used in) provided by operating activities (3,003) 1,243
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities -- capital expenditures (811) (730)
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE>
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
For the Three Months Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 24,095 $ 15,249
Repayment of advances under revolving credit facility (20,643) (16,105)
Repayment of advances under construction credit facility (43) --
Repayment of note payable (135) --
Principal payment under lease obligation (83) --
Net proceeds from exercise of stock options 33 73
Additional offering costs from issuance of common stock (52) --
-------- --------
Net cash provided (used in) by financing activities 3,172 (783)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (642) (270)
Cash and cash equivalents at beginning of period 1,552 1,015
-------- --------
Cash and cash equivalents at end of period $ 910 $ 745
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 300 $ 185
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the June 1998 quarter, the Company borrowed $1,555,000 to fund costs
relating to the construction of the Las Vegas, Nevada warehouse and distribution
facility.
On June 30, 1999, the Company issued a net 11,407 shares of common stock to
officers in satisfaction of restricted stock units which vested on June 30,
1999. The Company increased common stock at June 30, 1999 by approximately
$76,000, the value of the net shares issued.
See accompanying notes to consolidated financial statements
-5-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
Note 1. Basis of Presentation.
The accompanying consolidated financial statements include the accounts of Image
Entertainment, Inc., its wholly-owned subsidiaries Image Newco, Inc. ("Ken
Crane's," acquired on January 11, 1999) and U.S. Laser Video Distributors, Inc.
("U.S. Laser," closed on July 15, 1998) and the 50%-owned joint venture , Aviva
International LLC (began operations during the June 1999 quarter, see Note 8)
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated balance sheet at June 30, 1999 and the related
consolidated statements of operations and cash flows for the three months ended
June 30, 1999 and 1998 of the Company included herein are unaudited; however,
such information reflects all adjustments of a normal recurring nature which
management believes are necessary for a fair presentation of results for the
interim periods. The accompanying consolidated financial information for the
three months ended June 30, 1999 and 1998 should be read in conjunction with the
Financial Statements, the Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's March 31, 1999
Form 10-K.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. The significant areas requiring the use of
management estimates related to allowances for slow-moving inventories, doubtful
accounts receivables, unrecouped royalty/distribution fee advances and sales
returns. Although these estimates are based on management's knowledge of
current events and actions management may undertake in the future, actual
results may ultimately differ from those estimates.
Note 2. Recently Issued Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for transactions
entered into after June 1, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. The Company believes that
adoption of SFAS No. 133 will not have a material effect on the Company's
consolidated results of operations or financial position.
In March 1998, the AICPA's Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use." SOP 98-1 provides guidance on the
capitalization of software for internal use. SOP 98-1 is effective for
financial statements for periods beginning after December 15, 1998. The Company
adopted the provisions of SOP 98-1 on April 1, 1999. Costs incurred related to
the warehouse management system software for the Las Vegas, Nevada warehouse and
distribution facility have been recorded consistent with the provisions of SOP
98-1.
AcSEC issued SOP 98-5, "Reporting on the Cost of Start-Up Activities" in April
1998. SOP 98-5 requires that all costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for periods beginning after December 15, 1998. The Company
adopted the
-6-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
provisions of SOP 98-5 on April 1, 1999. Management believes adoption of SOP 98-
5 will not have a material impact on the Company's financial position or results
of operations.
Note 3. Inventories.
Inventories at June 30, 1999 and March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
June 30, March 31,
(In thousands) 1999 1999
--------- ----------
<S> <C> <C>
LD $10,265 $12,125
DVD 11,071 9,724
Other 423 500
------- -------
21,759 22,349
Reserve for slow-moving inventories (8,498) (9,291)
------- -------
13,261 13,058
Production costs, net 3,856 3,633
------- -------
$17,117 $16,691
======= =======
</TABLE>
Inventories consist primarily of finished products for sale and are stated at
the lower of average cost or market.
Production costs are net of accumulated amortization of $6,883,000 and
$6,955,000 at June 30, 1999 and March 31, 1999, respectively.
Note 4. Net Income per Share.
The following presents a reconciliation of the numerators and denominators used
in computing basic and diluted net income (loss) per share for the three months
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998
-------- -------
<S> <C> <C>
Net income (loss) $ (714) $ 205
======= =======
Weighted average common shares outstanding
(basic denominator) 16,431 13,506
======= =======
Effect of dilutive stock options -- 108
------- -------
Weighted average common shares outstanding
(diluted denominator) 16,431 13,614
======= =======
Basic and diluted net income (loss) per share $ (.04) $ .02
======= =======
</TABLE>
Diluted net loss per share for the three months ended June 30, 1999 is based
only on the weighted average number of common shares outstanding during the
period, as inclusion of common stock equivalents would
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
be antidilutive. The 1,379,000 shares underlying the convertible subordinated
note payable were not included in the three months ended June 30, 1999 and 1998
diluted net income (loss) per share calculations as its impact was antidilutive.
Stock options to purchase 1,174,000 and 867,000 shares of common stock at June
30, 1999 and 1998, respectively, were outstanding but not included in the
computations of diluted net income (loss) per share for the three months ended
June 30, 1999 and 1998 as their impact was antidilutive. In the case of the 1998
period, the exercise prices of the stock options were greater than the average
market price of the common stock for the respective period.
Note 5. Debt.
Revolving Credit and Term Loan Facility. On December 28, 1998, the Company
- ---------------------------------------
entered into a Loan and Security Agreement (the "Foothill Agreement") with
Foothill Capital Corporation ("Foothill"). The Foothill Agreement provides for
revolving advances and the issuance of and guaranty of standby letters of credit
under a $12 million revolving credit facility and a series of term loans under a
$500,000 capital expenditure term loan facility. The term of the Foothill
Agreement is three years, renewable automatically thereafter for successive one-
year periods.
Borrowings under the Foothill Agreement are secured by substantially all of the
Company's assets and bear interest at prime plus 1% (9% at June 30, 1999),
payable monthly. The borrowing rate was reduced to prime plus .75% effective
July 1, 1999 as the Company met certain fiscal 1999 operating performance
targets specified in the Foothill Agreement. Funds available for borrowing
under the credit facility may not exceed the borrowing base specified in the
Foothill Agreement. The borrowing base is calculated as a percentage of
eligible trade accounts receivable and eligible DVD inventory and excludes all
LD inventory. At June 30, 1999, the Company had a total of $5,326,000
outstanding under the revolving credit and term loan facilities and had
borrowing availability of $5,001,000 and $500,000, respectively, net of amounts
utilized for outstanding letters of credit.
The Foothill Agreement imposes restrictions on such items as encumbrances and
liens, payment of dividends, other indebtedness, stock repurchases and capital
expenditures. The Foothill Agreement requires the Company to comply with
certain financial and operating covenants including a covenant to be Year 2000
compliant by December 1, 1999. At June 30, 1999, the Company was in compliance
with all financial and operating covenants.
At June 30, 1999, the Company had $1.5 million of outstanding standby letters of
credit issued or guaranteed by Foothill which expire on various dates from
November 15, 1999 to June 30, 2000. These letters of credit secure balances due
to program suppliers.
Construction Credit Facility. On September 30, 1998, the Company converted an
- ----------------------------
existing construction loan with Bank of America National Trust and Savings
Association in Nevada to a revolving line of credit (the "Revolving Line").
Under the Revolving Line, the Company may repay and reborrow principal amounts
provided the outstanding borrowings do not exceed the maximum available
commitment of $3,305,000 at June 30, 1999. The maximum available commitment is
reduced quarterly by $43,000. The Revolving Line expires January 31, 2008. The
Company has the option under the Revolving Line to borrow at the bank's prime
rate plus 1.25% or for fixed periods at LIBOR plus either 2.25% or 2.65%
depending on the level of the Company's debt service coverage ratio, as defined.
At June 30, 1999, $3,305,000 in borrowings were outstanding under the Revolving
Line, of which $5,000 were borrowed at prime rate plus 1.25% (9.25% at June 30,
1999) and $3,300,000 were borrowed at LIBOR plus 2.25% (7.62% at June 30, 1999).
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
Borrowings under the Revolving Line are secured by a deed of trust on the
approximate 8.4 acres of land in Las Vegas, Nevada on which the Company has
constructed its new warehouse and distribution facility, as well as any of the
Company's personal property located in Nevada, but excluding inventory held for
sale. The Revolving Line contains cross-default provisions to other borrowing
agreements and imposes certain restrictions on such items as payment of
dividends and stock repurchases. The Revolving Line requires the Company to
comply with certain quarterly financial and operating covenants. At June 30,
1999, the Company was in compliance with all financial and operating covenants.
Convertible Subordinated Note Payable. The Company entered into a Credit
- -------------------------------------
Agreement with Image Investors Co. ("IIC"), a principal stockholder of the
Company owned and controlled by John W. Kluge and Stuart Subotnick, dated as of
September 29, 1997, pursuant to which the Company borrowed $5,000,000 from IIC,
with interest payable quarterly at 8% per annum, and principal due in five
years. The loan is unsecured and subordinated to any obligations to Foothill
and is convertible into the Company's common stock at any time during the term
at a conversion price of $3.625 per share, the closing price of the Company's
common stock on September 29, 1997.
Note Payable to Bank. In July 1997, the Company entered into a Business Loan
- --------------------
Agreement (the "Business Loan Agreement") with Pioneer Citizens Bank in Nevada.
Borrowings under the Business Loan Agreement, as amended, bear interest at prime
plus 1.75% (9.75% at June 30, 1999), mature on August 1, 2000 and are secured by
a deed of trust on the approximately 8.8 acres of land adjacent to the Company's
8.4 acre warehouse and distribution facility site in Las Vegas, Nevada. There
were $1,215,000 in borrowings outstanding under the Business Loan Agreement at
June 30, 1999. The Company is required to make a principal reduction of
approximately $122,000 on February 1, 2000.
Note 6. Distribution Equipment Lease Facility.
The Company's Lease Intended as Security Agreement (the "Lease") with
BankAmerica Leasing and Capital Corporation provided for advances to purchase
distribution machinery and equipment utilized in the Company's Las Vegas, Nevada
warehouse and distribution facility through the delivery, installation and
acceptance date of the equipment (the "Advance Rent Period"). The Advance Rent
Period ended March 31, 1999.
The "Base Rent Period" began on the machinery and equipment acceptance date
(April 1, 1999). During the Base Rent Period, the outstanding borrowings will
be amortized, over 18 consecutive quarterly installments, to a $1 purchase
option, with the first such installment paid on June 30, 1999. The variable
implicit interest for each leased unit is the three-month LIBOR plus 2.719%
(8.09% at June 30, 1999). Under the Lease, the Company may convert to a fixed
implicit interest rate. The fixed implicit interest rate will be the bond-
equivalent yield per annum for U.S. Treasury obligations with a maturity most
closely matching to the nearest month of the remaining average life of the
leased equipment plus a spread of 3.137%. There were $1,692,000 in borrowings
outstanding under the Lease at June 30, 1999.
Borrowings under the Lease are secured by the underlying equipment leased. The
Lease contains cross-default provisions with other borrowing agreements and
early termination charges. The Lease requires the Company to meet the same
quarterly financial and operating covenants contained in the Revolving Line with
Bank of America National Trust and Savings Association above. At June 30, 1999,
the Company was in compliance with all financial and operating covenants.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
Note 7. Segment Information.
In accordance with the requirements of SFAS No. 131, "Disclosures about Segments
of and Enterprise and Related Information," selected financial information
regarding the Company's reportable business segments, wholesale and retail
distribution (Ken Crane's) of primarily DVDs and LDs, are presented below.
Management evaluates segment performance based primarily on net sales and income
(loss) before income taxes. Interest income and expense is evaluated on a
consolidated basis and not allocated to the Company's business segments.
Comparable data for the three months ended June 30, 1998 is not presented as the
acquisition of Ken Crane's occurred during January 1999, therefore the retail
distribution segment was immaterial during this period.
For the three months ended June 30, 1999:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net sales:
Wholesale distribution $ 17,017
Retail distribution 3,777
-------------
20,794
Inter-segment eliminations (2,774)/(1)/
-------------
Consolidated net sales $ 18,020
=============
Segment loss before income taxes:
Wholesale distribution $ (486)
Retail distribution (259)
-------------
(745)
Inter-segment eliminations 31/(2)/
-------------
Consolidated loss before income taxes $ (714)
=============
Total assets:
Wholesale distribution $ 55,229
Retail distribution 1,154
-------------
56,383
Inter-segment eliminations (1,560)/(3)/
-------------
$ 54,823
=============
</TABLE>
_________________________________________________________________
(1) Elimination of inter-segment net sales.
(2) Elimination of inter-segment profit in ending inventory.
(3) Elimination of primarily inter-segment receivables.
Note 8. Formation of Joint Venture Limited Liability Company.
In June 1999, the Company completed the joint venture formation of Aviva
International, LLC, a California limited liability company ("Aviva") with
Michael Lopez ("Lopez"), President of International Consulting & Business
Management. Aviva is 50% owned by each of the Company and Lopez. Aviva was
formed to develop, acquire, produce, finance and distribute entertainment
programming for worldwide broadcast, international home video, and the Internet
with an emphasis on music related projects such as live concerts
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- -----------------------------------------------------------------------------
and event programming. Additionally, Aviva will act as international sales agent
for the Company's licensed programming. In accordance with the joint venture
operating agreement, the initial term of the joint venture will be one year with
an option to renew for additional successive periods upon mutual agreement of
the Company and Lopez. Lopez will serve as Manager of Aviva. Both the Company
and Lopez will contribute funds to Aviva (as initial working capital) in the
form of interest-bearing loans. Although the Company owns 50% of the joint
venture, it can exercise control over the operations of Aviva. As a result,
Aviva will be consolidated with the operations of the Company. Accordingly, the
loss of Aviva since the date of formation is included in the Company's statement
of operations for the three months ended June 30, 1999.
For the quarter ended June 30, 1999, Aviva did not recognize any sales revenue
and had operating expenses totaling $80,000. The Company has recognized 50% of
Aviva's net loss for the three months ended June 30, 1999, approximately
$40,000, in its consolidated statement of operations for the three months ended
June 30, 1999.
Note 9. Subsequent Event.
On July 12, 1999, the Company was named as a defendant in an Adversary
Proceeding (the "Adversary Proceeding") filed by One Stop Recovery LLC, as
Trustee for AEC One Stop, Inc. ("Plaintiff") in connection with the July 1997
Chapter 11 Bankruptcy of Alliance Entertainment Corp. ("Alliance"). The
Adversary Proceeding is pending in the United States Bankruptcy Court for the
Southern District of New York. In the Adversary Proceeding, the Plaintiff is
seeking to recover approximately $1,740,000 in alleged preferential transfers
(including payments made and goods returned) made by Alliance within the 90-day
period immediately preceding the commencement of its bankruptcy case. The
Company intends to vigorously defend itself in the Adversary Proceeding. While
it is not feasible to predict or determine the outcome of the Adversary
Proceeding, management does not believe that it would have a material adverse
effect on the Company's financial position, results of operations or liquidity.
-11-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
- -------------
GENERAL
The Company licenses and distributes a broad range of entertainment
programming on digital video disc ("DVD") and laserdisc ("LD"). Prior to fiscal
1998, the Company's net sales were derived almost entirely from the distribution
of programming in the LD format. In March 1997, DVD was introduced and the
Company began distributing DVD programming on a nonexclusive wholesale basis.
The Company began releasing exclusively licensed DVD programming in June 1997.
In fiscal 1998, DVD and LD represented approximately 21% and 79% of the
Company's net sales, respectively. In fiscal 1999, DVD and LD represented
approximately 60% and 36% of the Company's net sales. For its first quarter
ended June 30, 1999, DVD and LD represented approximately 79% and 16% of the
Company's net sales, respectively. The Company also distributes music
programming on compact disc ("CD") encoded in the DTS Digital Surround
multichannel audio format as well as certain programming on videocassette
("VHS"). The accompanying consolidated financial information for the three
months ended June 30, 1999 and 1998 should be read in conjunction with the
Financial Statements, the Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's March 31, 1999
Form 10-K.
The Company believes that DVD has established itself as an accepted video
format. Unanimous movie studio and independent program supplier support,
broadening consumer acceptance, increased availability of DVD programming and
players, rental programming availability in national video chains and decreasing
DVD player prices have contributed to the format's growth.
The Electronics Industries Association ("EIA") reported that from March 1997
(the DVD format's introduction date) to July 16, 1999, approximately 2,789,000
DVD players were sold to consumer electronics retailers. For the first 28 weeks
of calendar 1999 (ended July 16, 1999), approximately 1,360,000 DVD players were
sold to electronics retailers, a 366% increase over the 292,000 for comparable
calendar 1998 period.
The Company continues to aggressively seek DVD programming for exclusive
distribution. The Company has agreements with numerous program suppliers for
the exclusive release of titles on DVD. According to VideoScan, which tracks
point-of-sale data from an estimated 70 percent of the retail market (includes
mass merchants and retailers but not most discount outlets or Internet
retailers), the Company's market share of total DVD software unit sales for the
period from January 1, 1999 through July 27, 1999 was 3.26%. The Company
currently ranks tenth in market share (of 43 companies specifically named)
behind Warner Home Video (20.00%), Disney (12.66%), Columbia TriStar (10.19%),
Universal Home Entertainment (9.23%), New Line (7.87%), Paramount Home Video
(7.55%), Twentieth Century Fox Home Entertainment (5.29%), MGM (5.28%) and
Artisan Entertainment (3.28%). Additionally, VideoScan reported the Company's
market share of total DVD software unit sales for all of calendar 1998 was
2.96%. The Company ranked ninth in market share behind Warner Home Video
(24.13%), Columbia TriStar (14.45%), Universal Home Entertainment (10.79%), MGM
(10.33%), Disney (9.01%), New Line (8.34%), Artisan Entertainment (4.52%) and
Paramount Home Video (3.97%). It is likely that actual market share data would
differ from the above reported sales data had VideoScan captured sales data from
all retailers including Internet retailers.
The Company distributes DVD programming on a nonexclusive basis from all
program suppliers with whom it does not have an exclusive agreement, making it a
"one-stop" source for all DVD programming, meaning that customers who purchase
exclusive titles from the Company can also purchase additional nonexclusive
titles at the same time.
-12-
<PAGE>
Seasonality and Variability. The Company has generally experienced higher
---------------------------
sales in the quarters ended December 31 and March 31 due to increased consumer
spending associated with the year-end holidays and the home video release of
many high profile, high budget summer theatrical releases. In addition to
seasonality issues, other factors have contributed to variability in the
Company's DVD and LD net sales on a quarterly basis. These factors include: (i)
DVD's negative impact on LD sales; (ii) the popularity of titles then in
release; (iii) the Company's marketing and promotional activities; (iv) the
Company's licensing and distribution activities relating to new video
programming; (v) the extension, termination or non-renewal of existing license
and distribution rights; and (vi) general and economic changes affecting the
buying habits of the Company's customers, particularly those changes affecting
consumer demand for DVD and LD hardware and software. Accordingly, the
Company's revenues and results of operations may vary significantly from period
to period, and the results of any one period may not be indicative of the
results of any future periods.
NEW LAS VEGAS WAREHOUSE AND DISTRIBUTION FACILITY
In May 1999, the Company closed its 48,300 square foot Chatsworth, California
distribution facility and transferred all of its warehousing and distribution
activities to its new 76,000 square foot Las Vegas, Nevada warehouse and
distribution facility located adjacent to McCarran International Airport. Since
that time, the new facility's warehouse management system software
implementation has proceeded slower than anticipated and the Company has
experienced certain related operational inefficiencies. The large quantities of
product transferred from the Chatsworth facility to the new facility, the high
volume of backlogged orders for that product and new incoming orders had caused
unexpected problems in the new facility's systems operations, particularly
software programming problems that were not revealed when the system was tested
in a simulated environment. These software glitches and certain related
operational inefficiencies had prevented the Company from shipping product in a
timely manner. Certain of the software glitches had not been corrected in a
timely manner because of demand placed upon the software programmers to assist
in addressing the day-to-day shipping requirements, thereby further contributing
to continued shipping delays.
The transitional problems experienced at the new facility resulted in a
shortfall in order fulfillment for the three months ended June 30, 1999 and
negatively affected June 1999 quarter net sales. Expenses associated with 24-
hour operation of the facility and overnight shipping, measures instituted to
mitigate shipping delays caused by the software implementation problems,
contributed to the June 1999 quarter's net loss. The operating performance of
Ken Crane's was also negatively affected by the Las Vegas distribution
facility's difficulties and also contributed to the overall consolidated net
loss. Although the facility is not yet operating at planned efficiency
(shipping within 24 hours after receipt of an order), the Company has reached
the operating efficiency of its Chatsworth warehouse (shipping within 48 hours
after receipt of an order).
Once 24-hour shipping has been achieved, the Company will focus on its
strategy of integrating the fulfillment of Ken Crane's distribution activities
out of the new Las Vegas facility. And once the fulfillment shipping for Ken
Crane's is achieved, the Company will focus its efforts on seeking third-party
retail and Internet fulfillment opportunities.
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<PAGE>
RESULTS OF OPERATIONS
The following table presents, as a percentage of net sales, selected
consolidated financial data for the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months ended June 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net sales:
DVD..................................... 79.2% 37.9%
LD...................................... 16.1 60.9
Other................................... 4.7 1.2
----- -----
Total net sales...................... 100.0% 100.0%
Cost of sales............................. 75.6 77.0
----- -----
Gross margin.............................. 24.4 23.0
Operating costs and expenses:
Selling expenses........................ 11.2 7.2
General and administrative expenses..... 10.4 7.1
Amortization of production costs........ 5.6 6.6
Other operating costs and expenses...... 0.7 --
----- -----
Total operating costs and expenses... 27.9 20.9
Operating income (loss)................... (3.5) 2.1
Other expenses, net....................... 0.5 0.9
----- -----
Income (loss) before income taxes......... (4.0)% 1.2%
===== =====
</TABLE>
THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1998
Net sales for the June 1999 quarter increased 5.1% to $18,020,000 from
$17,140,000 for the June 1998 quarter. Net sales of DVD programming for the
June 1999 quarter increased 119.7% to $14,269,000, or 79.2% of net sales, from
$6,496,000, or 37.9% of net sales, for the June 1998 quarter. Approximately 53%
of total DVD net sales for the June 1999 quarter were derived from exclusively
distributed or licensed programming versus approximately 50% for the June 1998
quarter. Net sales for the June 1999 quarter included a full quarter of Ken
Crane's net sales, the first full quarter following its January 11, 1999
acquisition. The Company's retail distribution business segment, Ken Crane's,
contributed $1,003,000 in net sales, after elimination of inter-company sales.
The Company's wholesale distribution business segment contributed net sales of
$17,017,000 for the June 1999 quarter, as compared to $17,140,000 for the June
1998 quarter. The June 1998 quarter, includes net sales of $390,000 from U.S.
Laser which was winding down its operations through its closure in July 1998.
The Company's revenue performance was negatively affected by difficulties
encountered implementing the software required to run the Company's Las Vegas
warehouse and distribution facility. These difficulties were exacerbated by
related operational inefficiencies. Continued broadening consumer acceptance and
increased availability of programming following the introduction the DVD format
in March 1997 contributed to the growth in the Company's new-release and
catalogue DVD sales. In addition to positive market factors, the Company has
continued to acquire exclusive license and distribution rights which resulted in
the Company distributing a greater number of exclusive new-release titles on DVD
during the June 1999 quarter than in the June 1998 quarter.
Net sales of LD programming for the June 1999 quarter decreased 72.2% to
$2,905,000, or 16.1% of net sales, from $10,446,000, or 60.9% of net sales, for
the June 1998 quarter. The DVD format directly competes with the LD format and
has adversely affected the LD marketplace. Historically, the largest buyers
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<PAGE>
of LD programming were the major music/video software retail chain stores. The
major chain stores have replaced dedicated LD floor space with DVD product. The
majority of the Company's LD sales are now to the independent video stores that
still promote LD and direct-to-consumer via Internet/mail-order. Due to
declining demand for LD programming, the Company continues to reduce the number
of new titles it releases in the LD format. Other net sales (VHS and CD) for the
June 1999 quarter increased 327.3% to $846,000, or 4.7% of net sales, from
$198,000, or 1.2% of net sales, for the June 1998 quarter primarily due to the
exclusive distribution of a greater number of stronger performing VHS titles
(new release and catalogue) in the June 1999 quarter as compared to the June
1998 quarter.
Cost of sales (DVD, LD, CD and VHS collectively) for the June 1999 quarter was
$13,626,000, or 75.6% of net sales, compared to $13,197,000, or 77.0% of net
sales, for the June 1998 quarter. The improved gross profit margins for the
June 1999 quarter primarily reflect the shift in sales mix from LD to DVD
programming and incremental gross profit contributed by Ken Crane's operations
offset, in part, by increased labor costs associated with expedited order
processing caused by the difficulties the Company encountered implementing the
software required to run the Company's Las Vegas warehouse and distribution
facility. Gross margins on exclusive DVD sales are currently higher than on
exclusive LD sales. Gross margins on nonexclusive DVD sales are comparable to
nonexclusive LD sales. DVD replication costs, on a per-title basis, are less
than half of LD costs. The Company expects DVD replication costs to decline in
the future as the format continues to become more widely accepted by consumers
and the volume of DVD replication increases. Currently, management does not
foresee a continuation of material decreases in the net realizable values of the
Company's LD related assets. The Company, however, will continue to evaluate
the recoverability of LD-related assets based upon the facts and circumstances
at the time of the evaluation and management's reasonable estimate of future
events and the Company may at that time be required to record additional
charges.
The Company's cost of sales, as a percentage of net sales, can vary period to
period depending upon the sales mix of higher-margin exclusive programming and
lower-margin nonexclusive programming. The sales mix of exclusive and
nonexclusive programming and the cost of sales within each category will vary
with the availability of and the demand for new and catalogue exclusive and
nonexclusive programming. The Company's cost of sales for exclusive programming
will vary depending upon specific royalty rates or distribution fees paid to
program suppliers and will vary for nonexclusive programming depending upon the
cost of the programming from the program suppliers.
Selling expenses for the June 1999 quarter increased 64.5% to $2,022,000, or
11.2% of net sales, from $1,229,000, or 7.2% of net sales, for the June 1998
quarter. Exclusive of the selling expenses and net sales contributions of Ken
Crane's in the June 1999 quarter as well as the selling expenses and net sales
contributions of U.S. Laser in the June 1998 quarter, selling expenses for the
June 1999 quarter increased 23.1% to $1,407,000, or 8.3% of net sales, from
$1,143,000, or 6.8% of net sales, for the June 1998 quarter. The increase in the
June 1999 quarter selling expenses, as a percentage of net sales, was primarily
due to higher freight expenses due to expedited order shipments caused by the
Las Vegas, Nevada warehouse and distribution facility difficulties and
additional personnel and higher personnel costs in the Company's sales
department to support the Company's multiple formats (DVD, LD, VHS and CD
programming) as well as multiple distribution channels (wholesale, retail,
direct-to-consumer mail order, and Internet). The aforementioned increases in
selling expenses were offset, in part, by reduced trade advertisements as well
as reduced costs associated with the Company's new version of its monthly
Preview Magazine which was previously offered free of charge to retail customers
but is now offered only to distributors. For comparative purposes, Ken Crane's
incurred selling expenses of $615,000 in the June 1999 quarter, whereas U.S.
Laser incurred selling expenses of $86,000 in the June 1998 quarter.
-15-
<PAGE>
General and administrative expenses for the June 1999 quarter increased 53.4%
to $1,873,000, or 10.4% of net sales, from $1,221,000, or 7.1% of net sales, for
the June 1998 quarter. Exclusive of the general and administrative expenses and
net sales contributions of Ken Crane's in the June 1999 quarter as well as the
general and administrative expenses and net sales contributions of U.S. Laser in
the June 1998 quarter, general and administrative expenses for the June 1999
quarter increased 40.2% to $1,558,000, or 9.2% of net sales, from $1,111,000, or
6.6% of net sales, for the June 1998 quarter. General and administrative costs
for the June 1999 quarter increased primarily due to higher personnel costs,
increased depreciation and amortization of fixed assets which is attributable to
the commencement of depreciating the Las Vegas warehouse and distribution
facility building, equipment and software during the June 1999 quarter and
higher professional fees for legal and investor relations. For comparative
purposes, Ken Crane's incurred general and administrative expenses of $315,000
in the June 1999 quarter, whereas U.S. Laser incurred general and administrative
expenses of $110,000 in the June 1998 quarter.
Amortization of production costs for the June 1999 quarter decreased 10.5% to
$1,008,000, or 5.6% of net sales, from $1,126,000, or 6.6% of net sales, for the
June 1998 quarter. The Company produced fewer exclusive LD titles and has
increased its exclusive DVD production in the June 1999 quarter compared to the
June 1998 quarter. DVD's production process requires the added interim step of
authoring and compression, which is more costly than the mastering of LD titles.
The decrease in the June 1999 quarter amortization costs is attributable to
operational efficiencies attained by the creative services and production
departments since the Company's first exclusive DVD release in June 1997, as
well as lower comparative authoring and compression costs. Amortization of
production costs will vary based upon the mix, timing and number of exclusive
DVD and LD titles placed into production. The Company has purchased its own
authoring and compression equipment during the June 1999 quarter in order to
bring this aspect of DVD production in-house and lower per-title DVD production
costs.
Amortization of goodwill for the June 1999 quarter was $124,000, or 0.7% of
net sales, and represents goodwill amortization from the acquisition of Ken
Crane's. There was no goodwill in the June 1998 quarter.
Interest expense, net of interest income, for the June 1999 quarter increased
111.9% to $320,000, or 1.8% of net sales, from $151,000, or 0.9% of net sales,
for the June 1998 quarter. The increase is attributable primarily to higher
weighted average debt levels during the June 1999 quarter.
Other income of $239,000, or 1.3% of net sales, consists primarily of $190,000
received as a result of a confidential settlement agreement with one of the
nondebtor defendants to the Company's continuing litigation against LEI
Partners, L.P. and approximately $40,000 representing the minority interest in
the Aviva joint venture.
The Company did not record an income tax expense in the June 1999 quarter as a
result of its net loss. Comparatively, $11,000 was recorded for the June 1998
quarter.
For the three months ended June 30, 1999, the Company recorded a net loss of
$714,000, or $.04 per basic and diluted share, compared to net income of
$205,000, or $.02 per basic and diluted share, for the three months ended June
30, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for transactions
entered into after June 1, 2000. SFAS No. 133 requires that all derivative
-16-
<PAGE>
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. The Company believes that
adoption of SFAS No. 133 will not have a material effect on the Company's
consolidated results of operations or financial position.
In March 1998, the AICPA's Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use." SOP 98-1 provides guidance on the
capitalization of software for internal use. SOP 98-1 is effective for
financial statements for periods beginning after December 15, 1998. The Company
adopted the provisions of SOP 98-1 on April 1, 1999. Costs incurred related to
the warehouse management system software for the Nevada facility have been
recorded consistent with the provisions of SOP 98-1.
AcSEC issued SOP 98-5, "Reporting on the Cost of Start-Up Activities" in April
1998. SOP 98-5 requires that all costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for periods beginning after December 15, 1998. The Company
adopted the provisions of SOP 98-5 on April 1, 1999. Management believes
adoption of SOP 98-5 will not have a material impact on the Company's financial
position or results of operations.
INFLATION
Management believes that inflation is not a material factor in the operation
of the Company's business at this time.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements vary primarily with the level of
its licensing, production and distribution activities. The principal recurring
uses of working capital in operations are for program licensing costs (i.e.,
royalty payments, including advances, to program suppliers), distribution fee
advances, manufacturing and production costs, costs of acquiring finished
product for wholesale distribution and selling, general and administrative
expenses. Working capital has historically been provided by cash flows from
operations, private and public sales of common stock, notes representing short-
and long-term debt and bank borrowings. For the three months ended June 30,
1999, operating activities used cash and cash equivalents of $3,003,000,
investing activities used cash and cash equivalents of $811,000 and financing
activities provided cash and cash equivalents of $3,172,000, resulting in a net
decrease in cash and cash equivalents of $642,000.
Sources and Uses of Working Capital, Three Months Ended June 30, 1999 and
-------------------------------------------------------------------------
1998. For the June 1999 quarter, the Company's net cash used in operating
- ----
activities was $3,003,000, as compared to net cash provided by operating
activities of $1,243,000 for the June 1998 quarter. The significant increase in
net cash used in operating activities for the June 1999 quarter resulted from
substantial pay down of accounts payable (in the normal course of business) and
increases in royalty and distribution fee advances and prepaid assets offset, in
part, by collections of accounts receivable. Comparatively, net cash provided
by operations for the June 1998 quarter resulted from an increase in accounts
payable and recoupment of royalty and distribution fees offset, in part, by
increase in accounts receivable. Net cash used in investing activities,
consisting entirely of capital expenditures, increased 11% to $811,000 for the
June 1999 quarter from $730,000 for the June 1998 quarter. Net cash provided by
financing activities was $3,172,000 for the June 1999 quarter compared to net
cash used in financing activities of $783,000 for the June 1998 quarter. Net
cash provided by financing activities during the June 1999 quarter resulted from
advances under the
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<PAGE>
Company's revolving credit facility to fund DVD royalty and distribution fee
advances and to pay down accounts payable. The aforementioned changes for the
June 1999 quarter resulted in net cash and cash equivalents decreasing 41% to
$910,000 at June 30, 1999 from $1,552,000 at March 31, 1999.
Management believes that its internal and external sources of funding are
adequate to meet anticipated needs for the next 12 months. Should the Company
be presented with exclusive DVD distribution opportunities which require
significant advance royalty or distribution fee payments, the Company may seek
additional debt and/or equity financing.
Financing Activities.
--------------------
Revolving Credit and Term Loan Facility. On December 28, 1998, the Company
entered into a Loan and Security Agreement with Foothill Capital Corporation
("Foothill"). The Foothill Agreement provides for revolving advances and the
issuance of and guaranty of standby letters of credit under a $12 million
revolving credit facility and a series of term loans under a $500,000 capital
expenditure term loan facility. The term of the Foothill Agreement is three
years, renewable automatically thereafter for successive one-year periods. At
June 30, 1999, the Company had a total of $5,326,000 outstanding under the
revolving credit and term loan facilities and had borrowing availability of
$5,001,000 and $500,000, respectively, net of amounts utilized for outstanding
letters of credit. At June 30, 1999, the Company also had $1.5 million of
outstanding standby letters of credit issued or guaranteed by Foothill which
expire on various dates from November 15, 1999 to June 15, 2000. These letters
of credit secure balances due to program suppliers.
Construction Credit Facility. On September 30, 1998, the Company converted
an existing construction loan with Bank of America National Trust and Savings
Association in Nevada to a revolving line of credit (the "Revolving Line").
Under the Revolving Line, the Company may repay and reborrow principal amounts
provided the outstanding borrowings do not exceed the maximum available
commitment of $3,305,000 at June 30, 1999. The maximum available commitment is
reduced quarterly by $43,000. The Revolving Line expires January 31, 2008. The
Company has the option under the Revolving Line to borrow at the bank's prime
rate plus 1.25% or for fixed periods at LIBOR plus either 2.25% or 2.65%
depending on the level of the Company's debt service coverage ratio, as defined.
At June 30, 1999, $3,305,000 in borrowings were outstanding under the Revolving
Line, of which $5,000 were borrowed at prime rate plus 1.25% option (9.25% at
June 30, 1999) and $3,300,000 were borrowed at LIBOR plus 2.25% (7.62% at June
30, 1999).
Convertible Subordinated Note Payable. The Company entered into a Credit
Agreement with Image Investors Co. ("IIC"), a principal stockholder of the
Company owned and controlled by John W. Kluge and Stuart Subotnick, dated as of
September 29, 1997, pursuant to which the Company borrowed $5,000,000 from IIC,
with interest payable quarterly at 8% per annum, and principal due in five
years. The loan is unsecured and subordinated to any obligations to Foothill
and is convertible into the Company's common stock at any time during the term
at a conversion price of $3.625 per share, the closing price of the Company's
common stock on September 29, 1997.
Note Payable to Bank. In July 1997, the Company entered into a Business
Loan Agreement (the "Business Loan Agreement") with Pioneer Citizens Bank in
Nevada. Borrowings under the Business Loan Agreement, as amended, bear interest
at prime plus 1.75% (9.75% at June 30, 1999), mature on August 1, 2000 and are
secured by a deed of trust on the approximately 8.8 acres of land adjacent to
the Company's 8.4 acre warehouse and distribution facility site in Las Vegas,
Nevada. There were $1,215,000 in borrowings outstanding under the Business Loan
Agreement at June 30, 1999. The Company is required to make principal reduction
of approximately $122,000 on February 1, 2000.
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<PAGE>
Distribution Equipment Lease Facility. The Company's March 1997 Lease
Intended as Security Agreement (the "Lease") with BankAmerica Leasing and
Capital Corporation provided for advances to purchase distribution machinery and
equipment utilized in the Company's Nevada warehouse and distribution facility
through the delivery, installation and acceptance date of the equipment (the
"Advance Rent Period"). The Advance Rent Period ended March 31, 1999. The
"Base Rent Period" began on the machinery and equipment acceptance date (April
1, 1999). During the Base Rent Period, the outstanding borrowings will be
amortized, over 18 consecutive quarterly installments, to a $1 purchase option,
with the first such installment paid on June 30, 1999. The variable implicit
interest for each leased unit is the three-month LIBOR plus 2.719% (8.09% at
June 30, 1999). There were $1,692,000 in borrowings outstanding under the Lease
at June 30, 1999.
Formation of Joint Venture Limited Liability Company.
----------------------------------------------------
In June 1999, the Company completed the joint venture formation of Aviva
International, LLC, a California limited liability company ("Aviva") with
Michael Lopez ("Lopez"), President of International Consulting & Business
Management. Aviva is 50% owned by each of the Company and Lopez. Aviva was
formed to develop, acquire, produce, finance and distribute entertainment
programming for worldwide broadcast, international home video, and the Internet
with an emphasis on music related projects such as live concerts and event
programming. Additionally, Aviva will act as international sales agent for the
Company's licensed programming. In accordance with the joint venture operating
agreement, the initial term of the joint venture will be one year, with an
option to renew for additional successive periods upon mutual agreement of the
Company and Lopez. Lopez will serve as Manager of Aviva. Both the Company and
Lopez will contribute funds to Aviva (as initial working capital) in the form of
interest-bearing loans. Although the Company owns 50% of the joint venture, it
can exercise control over the operations of Aviva. As a result, Aviva will be
consolidated with the operations of the Company. Accordingly, the loss of Aviva
since the date of formation is included in the Company's statement of operations
for the three months ended June 30, 1999. Pro forma information has not been
provided as its impact on the consolidated statement of operations for the
period presented is not material.
For the quarter ended June 30, 1999, Aviva did not recognize any sales revenue
and had operating expenses totaling $80,000. The Company has recognized 50% of
Aviva's net loss for the three months ended June 30, 1999, approximately
$40,000, in its consolidated statement of operations for the three months ended
June 30, 1999.
Other Obligations.
-----------------
At June 30, 1999, the Company had future license obligations for royalty
advances, minimum guarantees and other fees of $3,993,000 due during fiscal
2000, $295,000 due during fiscal 2001 and $66,000 due during fiscal 2002. These
advances and guarantees are recoupable against royalties and distribution fees
earned by the licensors and program suppliers, respectively. Depending upon the
competition for license and exclusive distribution rights, the Company may have
to pay increased advances, guarantees and/or royalty rates in order to acquire
or retain such rights in the future.
Impact of Year 2000.
-------------------
The Company is aware of the complexity and the significance of the Year 2000
issue. The Company utilizes information systems throughout its business to
effectively carry out its day-to-day operations. The Company has established a
Year 2000 compliance methodology which comprises five phases: discovery,
planning, resolution, testing and implementation. The scope of the Company's
compliance program
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<PAGE>
includes information technology systems (computer hardware and software), non-
information technology systems (facilities, telecommunication systems,
distribution center machinery, security systems and video and sound processing
equipment which may include embedded technology) and the Year 2000 readiness of
significant third-party suppliers (product manufacturers and suppliers and major
service providers such as financial institutions, freight carriers, securities
agents and other service providers) and customers.
State of Readiness. The Company has completed the discovery and planning
phases for both its information technology systems and non-information
technology systems. Approximately 25% of the systems addressed were found to
require some level of remediation or replacement. The Company has substantially
completed the resolution phase with respect to such systems, for which all
affected hardware, software and equipment has been repaired, upgraded or
replaced. The Company expects to have completed the testing and implementation
phases by September 30, 1999. Through June 30, 1999, the Company estimates that
its testing phase is approximately 90% complete.
Additionally, the Company is conducting a comprehensive Year 2000
supplier/customer readiness assessment with all of its significant third-party
suppliers and customers. This assessment consists of distributing a
questionnaire to significant third-party suppliers (including those which
manufacture/supply approximately 75% of the exclusive optical discs and
packaging and finished nonexclusive optical disc programming purchased by the
Company) and significant third-party customers (including the Company's largest
retail customers). Through June 30, 1999, approximately 75% of the Company's
customers and suppliers have responded to the questionnaires, and these
responses are being analyzed to determine their progress in addressing the Year
2000 problem; however, the Company's suppliers and customers are under no
contractual obligation to provide such information about their Year 2000
compliance. The Company expects to complete its investigation of the state of
Year 2000 readiness of significant third party suppliers and customers by
September 30, 1999.
Costs. Through June 30, 1999, the Company has spent approximately $30,000 on
the discovery, planning, resolution and testing phases for both information
technology and non-information technology systems. The Company expects the
remainder of the Year 2000 remediation process to cost approximately $50,000.
The Company believes it has sufficient cash, cash flow and borrowing
availability to fund this project. All costs are being expensed as incurred.
Risks and Contingencies.
Information and Non-Information Technology Systems. In the event the
--------------------------------------------------
Company does not complete all phases of its Year 2000 compliance program by
December 1, 1999, the Company's most reasonably likely worst case scenario would
be that it would temporarily have to manually process and/or outsource portions
of its customer service, order processing and/or distribution functions.
Additionally, the Company would potentially default on its loan covenant to be
"Year 2000 Complaint" with Foothill Capital Corporation. This would potentially
cross-default other debt causing such debt to be immediately due and payable.
The Company's contingency plans in these areas will be finalized after the
testing phase of the systems is completed (currently scheduled by September 30,
1999) and will include the manual processes and potential outsourcing of certain
functions required to perform critical business functions that could be affected
by Year 2000 issues.
Significant Suppliers and Customers. The Company has no means of ensuring
-----------------------------------
that its significant suppliers and customers will be Year 2000 compliant.
Should the Company not receive assurance from their significant suppliers of
their expected Year 2000 compliance by September 30, 1999, the Company will
begin its contingency planning to identify and utilize alternative sources for
its programming and other
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<PAGE>
supplier provided services, where practical. The Company believes there are
alternative sources for the manufacturing of its exclusive optical discs and for
purchasing its finished nonexclusive catalogue optical disc programming;
however, in the case of finished new release nonexclusive optical disc
programming, purchases are from sole source suppliers and it may not be possible
to alternatively source such product. With respect to its significant customers,
the Company believes that retailer demand for optical disc programming is
ultimately driven by the end-consumer. Should the Company not receive assurance
from their significant customers of their expected Year 2000 compliance by
September 30, 1999, the Company will begin its contingency planning to identify
those retailers that expect to be Year 2000 compliant and focus Year 2000 sales
efforts toward such retailers.
Impact of Year 2000 -- Ken Crane's.
----------------------------------
Ken Crane's, acquired by the Company in January 1999, utilizes its own custom
computer software to support its point of sale operating system, including order
entry, invoicing and cash and inventory management functions. Ken Crane's also
utilizes custom computer software to support its Internet web site at
www.kencranes.com. The Company completed its Year 2000 compliance upgrade of
the existing computer software and hardware in August 1999. The upgraded
software and hardware is currently being tested for Year 2000 compliance. The
Company believes that Ken Crane's information technology systems and significant
non-information technology systems will Year 2000 compliant by September 30,
1999.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, are contained
throughout this Form 10-Q. Such statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "may," "plan," "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 and should not be regarded as a representation by the
Company, its management or any other person that the future events, plans or
expectations contemplated by the Company will be achieved. Such statements are
based on management's current expectations and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
the Company's actual results, performance or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. The Company has made forward-looking statements in this Form 10-Q
concerning, among other things: (1) that DVD has established itself as an
accepted video format; (2) that DVD replication costs will decline in the
future; (3) whether the Company's LD-related assets will continue to have
material decreases in net realizable value; and (4) the most likely worst case
scenario if the Company does not complete its Year 2000 compliance program in a
timely manner. These statements are only predictions. Actual events or results
may differ materially as a result of risks facing the Company. These risks
include, but are not limited to: (1) changing consumer tastes and preferences;
(2) supply and demand factors influencing DVD replication vendor pricing; (3)
willingness of LD licensors and nonexclusive LD product suppliers to continue to
release LD programming; (4) cost/benefit relationship of continuing to release
LD programming; (5) the significance of any Year 2000 problem or the Company's
reliance on the public Year 2000 compliance statements of vendors and
significant customers when in fact they are actually not Year 2000 compliant.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to announce publicly the result of any
revisions to any of the forward-looking statements contained in this and other
Securities and Exchange Commission filings of the Company to reflect future
events or developments.
-21-
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company's obligations to its lenders are subject to fluctuations in interest
rates (both in the prime rate as well as in the LIBOR), however, the Company has
not experienced a material change in interest rates from its fiscal year ended
March 31, 1999.
-22-
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The condensed consolidated financial statements as of June 30, 1999 and for
the three-month periods ended June 30, 1999 and 1998 in this Form 10-Q have been
reviewed by KPMG LLP, independent certified public accountants, in accordance
with established professional standards and procedures for such a review.
The report of KPMG LLP commenting upon their review follows.
-23-
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We have reviewed the condensed consolidated balance sheet of Image
Entertainment, Inc. and subsidiary as of June 30, 1999, and the related
condensed consolidated statements of operations and cash flows for the three-
month periods ended June 30, 1999 and 1998. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Image Entertainment, Inc. and
subsidiary as of March 31, 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended; and in
our report dated May 21, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of March 31, 1999, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Los Angeles, California
August 4, 1999
-24-
<PAGE>
================================================================================
PART II - OTHER INFORMATION
================================================================================
ITEM 1. Legal Proceedings.
-----------------
On June 18, 1997, the Company filed a complaint in the Superior Court of
the State of California, County of Los Angeles (Case No. BC173084), against LEI
Partners, L.P. ("LEI") and a number of related entities and individuals, which
relates to a dispute concerning, among other things, LEI's payment obligations
under two promissory notes issued in connection with a December 31, 1990
purchase agreement documenting the Company's sale of a business segment to LEI
(the "Superior Court Action"). The Company has alleged, inter alia, breach of
----- ----
contract, intentional misrepresentation, negligent misrepresentation, conspiracy
to defraud, interference with economic relationship, conspiracy to interfere
with economic relationship, and conversion. The Company contends that through
an intricate conspiracy among sham corporations and partnerships LEI and others
defrauded the Company and systematically dissipated and diverted the assets of
LEI so that LEI was intentionally rendered incapable of satisfying its
obligations under the purchase agreement and the two promissory notes. This
fraudulent scheme includes, but is not limited to, the misrepresentation of the
gross revenues and pre-tax profits derived from the operation of the acquired
business, and the fraudulent concealment and conspiratorial diversion of assets
of that business (including the revenues generated by that business) from LEI to
persons and entities affiliated with LEI. The complaint seeks compensatory
damages of not less than $5 million plus accrued interest, attorney's fees and
punitive damages in an amount to be proven at trial. On September 16, 1997, the
Company filed a first amended complaint against the same defendants and making
the same claims, but providing additional factual details.
In response to the complaint, defendant LEI filed a petition to compel
arbitration and stay the litigation pending completion of the arbitration, based
upon an arbitration provision in one of the two promissory notes in dispute. On
September 18, 1997, the court ordered the Company and LEI to arbitrate before
the American Arbitration Association ("AAA") in Los Angeles, California, and
stayed the remainder of the litigation pending completion of the arbitration.
On November 17, 1997, the Company commenced the court ordered arbitration
proceedings against LEI, seeking damages in excess of $3.7 million, plus
attorney's fees and costs, for breach of the promissory notes. On January 21,
1998, LEI filed an answering statement denying liability. LEI also submitted a
counterclaim against the Company and three of its present or former officers or
directors, but refused to pay the AAA filing fee, and the AAA rejected the
counterclaim. Although LEI's counterclaim was rejected and is not pending, it
alleged claims for, inter alia, fraud in the inducement, recission and breach of
----- ----
written contract. The counterclaim maintained that certain of the Company's
representations and warranties regarding the value of the acquired business and
its projected income were false, and that LEI was therefore fraudulently induced
to execute the purchase agreement and the two promissory notes. LEI also
maintained that the Company breached a seller non-competition agreement, thereby
entitling LEI to an offset against any amount found to be owed under the second
promissory note. The counterclaim sought compensatory damages of $1 million
plus accrued interest, attorney's fees and costs, and also sought punitive
damages in the amount of $2 million. Should the rejected counterclaim of LEI
ever be filed or prosecuted, the Company intends to contest vigorously its
allegations and purported claims.
On May 4, 1998, LEI and certain other defendants in the Superior Court
Action filed voluntary petitions under Chapter 7 of the Bankruptcy Code in the
United States Bankruptcy Court for the Central District of California. These
bankruptcy filings automatically stayed the prosecution of the court ordered
arbitration proceedings against LEI, and the prosecution of the Superior Court
Action against LEI and three
-25-
<PAGE>
other defendants. In connection with the bankruptcy proceedings, the Company has
availed itself of provisions in the Bankruptcy Code to conduct discovery
relating to the acts, conduct, property, liabilities and financial condition of
LEI and the other debtors. In July 1998, the Company filed motions to compel LEI
and the other debtors and the debtors' accountants to produce documents and
appear for examination under Bankruptcy Rule 2004. The Bankruptcy Court granted
all of the Company's motions, issuing orders compelling the four debtor entities
and their principals (Mark Kreloff and Paul Haigney), as well as the debtors'
former accountants (Kress & Rosenbaum Accountancy Corporation and Calvin Leong)
to produce documents and appear for Rule 2004 examinations. In connection with
the Rule 2004 motions, the Company has obtained and reviewed thousands of pages
of documents from the debtors' former accountants and the debtors, relating to
the assets, liabilities, and financial condition of the debtors and other
matters which may affect the administration of the debtor's estate or their
right to a discharge. The Company has also taken Rule 2004 examinations of three
of the debtors' former accountants, and has begun, but not completed, Rule 2004
examinations of the debtors and their principals.
Effective as of April 30, 1999, the Company entered into a confidential
settlement agreement with one of the nondebtor defendants, who has since been
dismissed from the Superior Court Action. On May 4, 1999, the Superior Court
granted the Company's motion to lift the stay of the Superior Court Action,
thereby permitting the Company to prosecute the Superior Court Action against
all remaining nondebtor defendants. Once the stay was lifted, the Company added
as defendants in the Superior Court Action two additional companies alleged to
be affiliated with LEI and its principals. On June 3, 1999, all nondebtor
defendants, including the two new defendants, filed an answer to the First
Amended Complaint denying liability. Although the defendants alleged
affirmative defenses based on the rejected counterclaim that LEI attempted to
assert in the arbitration proceeding, they filed no cross-complaint and
therefore currently have no claim for affirmative relief against the Company.
On May 7, 1999, the debtors filed motions in the Bankruptcy Court
objecting to the claims of the Company, attempting to resolve in the Bankruptcy
Court the claims pending in the Superior Court Action. On June 10, 1999, the
Bankruptcy Court denied the debtors' motions in their entirety and overruled
their objections to the Company's claims, proofs of which had not been filed.
Before the hearing of the debtors' objections, on May 28, 1999, the trustee in
each of the bankruptcy cases filed "no asset reports" for each of the debtors,
notifying all creditors not to file proofs of claim, as there appeared to be no
assets of any debtor. This also means the trustee places no value on the
purported counterclaim of LEI identified in the bankruptcy schedules, and any
such counterclaim will most likely never be pursued.
Now that the stay has been lifted, the Company intends to complete the
Rule 2004 examinations of the debtors and their principals and to continue
prosecuting its Superior Court Action by conducting further discovery and
preparing the case for trial.
On November 13, 1998, the Company filed a complaint in the Superior Court
of the State of California, County of Los Angeles (Case No. SC 054918), against
its former attorneys, Stephen P. Reid, A Professional Law Corporation, Stephen
P. Reid, and Reid & Co., for breach of fiduciary duty and legal malpractice.
The claims alleged arise out of defendants' representation of LEI and its
principals, without the Company's informed and written consent, in matters
directly related to the subject of defendants' prior representation of the
Company. The complaint seeks compensatory damages of not less than $5 million
plus interest. The parties are in the process of completing the discovery phase
of the litigation. Trial is set for February 22, 2000.
On July 12, 1999, the Company was named as a defendant in an Adversary
Proceeding (the "Adversary Proceeding") filed by One Stop Recovery LLC, as
Trustee for AEC One Stop, Inc. ("Plaintiff") in
-26-
<PAGE>
connection with the July 1997 Chapter 11 Bankruptcy of Alliance Entertainment
Corp. ("Alliance"). The Adversary Proceeding is pending in the United States
Bankruptcy Court for the Southern District of New York. In the Adversary
Proceeding, the Plaintiff is seeking to recover approximately $1,740,000 in
alleged preferential transfers (including payments made and goods returned) made
by Alliance within the 90-day period immediately preceding the commencement of
its bankruptcy case. The Company intends to vigorously defend itself in the
Adversary Proceeding. While it is not feasible to predict or determine the
outcome of the Adversary Proceeding, management does not believe that it would
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
In the normal course of business, the Company and its subsidiary (Ken
Crane's) are subject to proceedings, lawsuits and other claims, including
proceedings under government laws and regulations relating to employment and tax
matters. While it is not possible to predict the outcome of these matters, it
is the opinion of management, based on consultations with legal counsel, that
the ultimate disposition of known proceedings (including the rejected
counterclaim in the above-described arbitration proceeding) will not have a
material adverse impact on the Company's financial position, results of
operations or liquidity.
ITEM 2. Changes in Securities.
---------------------
Not Applicable
ITEM 3. Defaults upon Senior Securities.
-------------------------------
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not Applicable
ITEM 5. Other Information.
-----------------
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
See Exhibit Index on page i
(b) Reports on Form 8-K
None
-27-
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.
Date: August 12, 1999 By: /S/ MARTIN W. GREENWALD
-----------------------
Martin W. Greenwald
Chairman of the Board, Chief Executive Officer,
President and Treasurer
Date: August 12, 1999 By: /S/ JEFF M. FRAMER
------------------
Jeff M. Framer
Chief Financial Officer
-28-
<PAGE>
================================================================================
EXHIBIT INDEX
================================================================================
Exhibit No. Description
- --------------------------------------------------------------------------------
10.1 + 1999 Performance Restricted Stock Unit Award Agreement, dated as
of July 1, 1999 (and related 1999 General Provisions) between the
Company and each of Martin W. Greenwald, Cheryl Lee, Jeff Framer
and David Borshell.
10.2 Limited Liability Company Operating Agreement of Aviva
International, LLC dated as of June 21, 1999 by and between the
Company and Michael Lopez.
15 * Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
27 * Financial Data Schedule Three Months Ended June 30, 1999.
- --------------------
* Exhibit(s) not previously filed with the Securities
and Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
-i-
<PAGE>
EXHIBIT 10.1
IMAGE ENTERTAINMENT, INC.
1999 PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT dated as of the 1st day of July, 1999, between IMAGE
ENTERTAINMENT, INC., a California corporation (the "Corporation") and Martin W.
Greenwald (the "Employee").
--------
The Corporation has granted to the Employee as of the date first above
written (the "Award Date") a performance restricted stock unit award (the
----------
"Performance Restricted Stock Unit Award" or "Award") under Section 5.1 of the
- ---------------------------------------- -----
1998 Incentive Plan (the "Plan"), upon the terms and conditions set forth
----
herein.
In consideration of services rendered and to be rendered by the Employee,
the mutual promises made herein, and the mutual benefits to be derived, the
parties agree as follows:
1. Grant. Subject to the terms of this Award Agreement, the Corporation
-----
grants to the Employee a Performance Restricted Stock Unit Award with respect to
an aggregate of 43,354 shares of Common Stock (the "Restricted Stock Units").
----------------------
2. General Terms. The Award is subject to, and the Corporation and the
-------------
Employee agree to be bound by, the terms and conditions of the Plan and the
General Provisions Applicable to 1999 Performance Restricted Stock Unit Awards
Granted Under the Plan (the "1999 General Provisions") that have been adopted
-----------------------
pursuant to the Plan. The Plan and the 1999 General Provisions are incorporated
herein by this reference. The Employee acknowledges receiving a copy of,
reading and understanding the Plan and the 1999 General Provisions. Capitalized
terms not otherwise defined herein shall have the meanings assigned to those
terms in the Plan or the 1999 General Provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYEE IMAGE ENTERTAINMENT, INC.
(a California corporation)
/s/ Martin W. Greenwald By: /s/ Martin W. Greenwald
- --------------------------------- ----------------------------------
Martin W. Greenwald Martin W. Greenwald, President
<PAGE>
IMAGE ENTERTAINMENT, INC.
1999 PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT dated as of the 1st day of July, 1999, between IMAGE
ENTERTAINMENT, INC., a California corporation (the "Corporation") and Cheryl Lee
(the "Employee").
--------
The Corporation has granted to the Employee as of the date first above
written (the "Award Date") a performance restricted stock unit award (the
----------
"Performance Restricted Stock Unit Award" or "Award") under Section 5.1 of the
- ---------------------------------------- -----
1998 Incentive Plan (the "Plan"), upon the terms and conditions set forth
----
herein.
In consideration of services rendered and to be rendered by the Employee,
the mutual promises made herein, and the mutual benefits to be derived, the
parties agree as follows:
1. Grant. Subject to the terms of this Award Agreement, the Corporation
-----
grants to the Employee a Performance Restricted Stock Unit Award with respect to
an aggregate of 13,238 shares of Common Stock (the "Restricted Stock Units").
----------------------
2. General Terms. The Award is subject to, and the Corporation and the
-------------
Employee agree to be bound by, the terms and conditions of the Plan and the
General Provisions Applicable to 1999 Performance Restricted Stock Unit Awards
Granted Under the Plan (the "1999 General Provisions") that have been adopted
-----------------------
pursuant to the Plan. The Plan and the 1999 General Provisions are incorporated
herein by this reference. The Employee acknowledges receiving a copy of,
reading and understanding the Plan and the 1999 General Provisions. Capitalized
terms not otherwise defined herein shall have the meanings assigned to those
terms in the Plan or the 1999 General Provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYEE IMAGE ENTERTAINMENT, INC.
(a California corporation)
/s/ Cheryl Lee By: /s/ Martin W. Greenwald
- -------------------------------- ----------------------------------
Cheryl Lee Martin W. Greenwald, President
<PAGE>
IMAGE ENTERTAINMENT, INC.
1999 PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT dated as of the 1st day of July, 1999, between IMAGE
ENTERTAINMENT, INC., a California corporation (the "Corporation") and Jeff M.
Framer (the "Employee").
--------
The Corporation has granted to the Employee as of the date first above
written (the "Award Date") a performance restricted stock unit award (the
----------
"Performance Restricted Stock Unit Award" or "Award") under Section 5.1 of the
- ---------------------------------------- -----
1998 Incentive Plan (the "Plan"), upon the terms and conditions set forth
----
herein.
In consideration of services rendered and to be rendered by the Employee,
the mutual promises made herein, and the mutual benefits to be derived, the
parties agree as follows:
1. Grant. Subject to the terms of this Award Agreement, the Corporation
-----
grants to the Employee a Performance Restricted Stock Unit Award with respect to
an aggregate of 13,238 shares of Common Stock (the "Restricted Stock Units").
----------------------
2. General Terms. The Award is subject to, and the Corporation and the
-------------
Employee agree to be bound by, the terms and conditions of the Plan and the
General Provisions Applicable to 1999 Performance Restricted Stock Unit Awards
Granted Under the Plan (the "1999 General Provisions") that have been adopted
-----------------------
pursuant to the Plan. The Plan and the 1999 General Provisions are incorporated
herein by this reference. The Employee acknowledges receiving a copy of,
reading and understanding the Plan and the 1999 General Provisions. Capitalized
terms not otherwise defined herein shall have the meanings assigned to those
terms in the Plan or the 1999 General Provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYEE IMAGE ENTERTAINMENT, INC.
(a California corporation)
/s/ Jeff M. Framer By: /s/ Martin W. Greenwald
________________________________ __________________________________
Jeff M. Framer Martin W. Greenwald, President
<PAGE>
IMAGE ENTERTAINMENT, INC.
1999 PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS AGREEMENT dated as of the 1st day of July, 1999, between IMAGE
ENTERTAINMENT, INC., a California corporation (the "Corporation") and David A.
Borshell (the "Employee").
--------
The Corporation has granted to the Employee as of the date first above
written (the "Award Date") a performance restricted stock unit award (the
----------
"Performance Restricted Stock Unit Award" or "Award") under Section 5.1 of the
- ---------------------------------------- -----
1998 Incentive Plan (the "Plan"), upon the terms and conditions set forth
----
herein.
In consideration of services rendered and to be rendered by the Employee,
the mutual promises made herein, and the mutual benefits to be derived, the
parties agree as follows:
1. Grant. Subject to the terms of this Award Agreement, the Corporation
-----
grants to the Employee a Performance Restricted Stock Unit Award with respect to
an aggregate of 12,542 shares of Common Stock (the "Restricted Stock Units").
----------------------
2. General Terms. The Award is subject to, and the Corporation and the
-------------
Employee agree to be bound by, the terms and conditions of the Plan and the
General Provisions Applicable to 1999 Performance Restricted Stock Unit Awards
Granted Under the Plan (the "1999 General Provisions") that have been adopted
-----------------------
pursuant to the Plan. The Plan and the 1999 General Provisions are incorporated
herein by this reference. The Employee acknowledges receiving a copy of,
reading and understanding the Plan and the 1999 General Provisions. Capitalized
terms not otherwise defined herein shall have the meanings assigned to those
terms in the Plan or the 1999 General Provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYEE IMAGE ENTERTAINMENT, INC.
(a California corporation)
/s/ David A. Borshell By: /s/ Martin W. Greenwald
- -------------------------------- ----------------------------------
David A. Borshell Martin W. Greenwald, President
<PAGE>
1999 GENERAL PROVISIONS APPLICABLE TO
1999 PERFORMANCE RESTRICTED STOCK UNIT AWARDS
GRANTED UNDER IMAGE ENTERTAINMENT, INC.'S
1998 INCENTIVE PLAN
The specific purposes of Performance Restricted Stock Unit Awards
authorized under the Image Entertainment, Inc. 1998 Incentive Plan (the "Plan")
are to encourage and reward continued service and high levels of performance to
the Corporation and to provide greater incentives for service and performance by
offering compensation competitive with similar companies. Capitalized terms not
otherwise defined herein shall have the meaning assigned to such terms in the
Plan or the Award Agreement, as the case may be.
These General Provisions supplement the provisions of Award Agreements
contemplated by Section 5.1 of the Plan and shall apply to any Performance
Restricted Stock Unit Award granted in fiscal year 2000 under the Plan when
incorporated by reference in the Award Agreement, except as the Committee may
otherwise provide in the case of any grants to new employees or otherwise.
1. Vesting; Lapse of Restrictions. Except as otherwise provided herein,
------------------------------
Restricted Stock Units credited to an Employee's Stock Unit Account (other than
Restricted Stock Units representing Dividend Equivalents) shall vest, and
restrictions (other than those set forth in Section 12 (Compliance; Application
of Securities Laws)) shall lapse, with respect to 20% of the total original
number of Stock Units (subject to adjustment under Section 6.2 of the Plan)
comprising the Award on each of the first, second, third, fourth and fifth
anniversaries of June 30, 1999, so that the restricted period covered hereby
shall have expired with respect to the total number of Stock Units no later than
June 30, 2004, unless (i) the Award has earlier vested or has been accelerated,
as provided in Section 5(c) (Termination of Service without Cause Prior to or
Following Change in Control Event), Section 6 (Total Disability or Death),
Section 7 (Retirement), Section 8 (Acceleration for Performance), Section 9
(Adjustments) or Section 10 (Acceleration Immediately Prior to Change in Control
Event) or has been otherwise accelerated pursuant to the Plan; (ii) the
Committee has taken other action with respect to the Award permitted by the
Plan; or (iii) the Award Agreement or these 1999 General Provisions otherwise
provide. If the provisions of Section 8 apply and are paid for a prior fiscal
year before June 30 of the current fiscal year, no additional installment shall
vest on such June 30.
The vesting schedule requires continued service through each applicable
vesting date as a condition to the vesting of the applicable installment and
rights and benefits under the Award Agreement. Partial service, even if
substantial, during any vesting period will not entitle the Employee to any
proportionate vesting or avoid or mitigate a termination of rights and benefits
upon or following a termination of employment or service as provided in Section
5 below or under the Plan.
2. Form of Distribution of Stock Unit Accounts. Once vested, Restricted
-------------------------------------------
Stock Units credited to an Employee's Stock Unit Account shall be distributed in
an equivalent whole number of shares of the Company's Common Stock, together
with any Dividend Equivalents with respect to that number of shares. Any
fractional share interests shall be accumulated; the Committee, however, may
determine that cash, other securities, or other property will be paid or
transferred in lieu of any fractional share interests.
-1-
<PAGE>
3. Limitations on Rights Associated with Stock Units. An Employee's
-------------------------------------------------
Stock Unit Account shall be a memorandum account on the books of the Company.
The Restricted Stock Units credited to an Employee's Stock Unit Account shall be
used solely as a device for the determination of the number of shares of Common
Stock to be eventually distributed to the Employee in accordance with the Plan.
The Stock Units shall not be treated as property or as secured or funded in any
way. The Award Agreement creates only a contractual obligation on the part of
the Company as to benefits payable and shall not be construed as creating a
trust. Employee shall have only rights no greater than the right to receive the
Common Stock as a general unsecured creditor of the Corporation with respect to
amounts credited and benefits payable, if any, in respect of the Employee's
Stock Unit Account, in accordance with the terms of the Award Agreement and
these General Provisions.
No Employee shall be entitled to any voting or other shareholder rights
with respect to Restricted Stock Units granted or credited under the Plan. The
number of Restricted Stock Units credited (and the number of shares to which the
Employee is entitled under the Plan) shall be subject to adjustment in
accordance with Section 9 hereof and the terms of the Plan.
4. Dividend Equivalent Credits to Stock Unit Account. As of the
-------------------------------------------------
applicable dividend payment date, an Employee's Stock Unit Account shall be
credited with additional Restricted Stock Units in an amount equal to any
dividends paid on that number of shares equal to the aggregate number of
Restricted Stock Units in the Employee's Stock Unit Account as of that date
divided by the Fair Market Value of a share of Common Stock as of that date.
Restricted Stock Units in respect of these Dividend Equivalent credits will be
distributed in shares to the Employee or forfeited in the same manner as shares
issuable in respect of the Stock Units to which the Dividend Equivalents relate.
5. Effect of Termination of Employment.
-----------------------------------
(a) Forfeiture after Certain Events. Except as provided in Section 5(c)
-------------------------------
(Termination without Cause Prior to or Following Change in Control Event),
Section 6 (Total Disability or Death) or Section 7 (Retirement) hereof, the
Employee's Restricted Stock Units shall be forfeited to the extent such Stock
Units have not become vested or to the extent they remain subject to
restrictions upon the date an Employee is no longer employed by the Corporation
for any reason, whether with or without cause, voluntarily or involuntarily,
unless the Committee otherwise provides consistent with the terms of the Plan.
If an entity ceases to be a Subsidiary, such action shall be deemed to be a
termination of employment of all employees of that entity, but the Committee may
make provision in such circumstances for accelerated vesting of some or all of
the remaining Restricted Stock Units under any Awards then held by some or all
such Employees, effective immediately prior to such event.
(b) Termination of Restricted Stock Units. Upon the occurrence of any
-------------------------------------
forfeiture of Restricted Stock Units hereunder, such unvested, forfeited Stock
Units, without payment of any consideration by the Corporation, shall
automatically terminate and the Restricted Stock Units Account cancelled,
without any other action by the Employee, or the Employee's Beneficiary or
Personal Representative, as the case may be.
(c) Termination of Service Without Cause In Anticipation of or Following
--------------------------------------------------------------------
Change in Control Event. If an Employee's employment by the Corporation is
- -----------------------
terminated by the Corporation for any reason other than because of death or
Total Disability (as defined in the Plan) or for Cause (as defined in the Plan
or the Employment Agreement), either (i) in express anticipation of an announced
-2-
<PAGE>
transaction that would constitute a Change in Control Event (as defined in
Section 7 of the Plan) and less than three months before its occurrence, or (b)
within one year following a Change in Control Event, as determined by the
Committee in its sole and absolute discretion, then any portion of his or her
Award that has not previously expired and that has not previously vested shall
thereupon vest, subject to the provisions of Section 9 (Adjustments) hereof and
Section 6.2 of the Plan; provided, however, that in no event shall restrictions
on the Stock Units lapse or the Stock Units vest earlier than six months after
the date hereof.
6. Effect of Total Disability or Death. If the Employee incurs a Total
-----------------------------------
Disability or dies while employed by the Corporation, the Employee's Stock Unit
Account shall be fully vested and the shares issuable in payment thereof shall
be distributed immediately.
7. Effect of Retirement. Upon Retirement, the Employee's Stock Unit
--------------------
Account will be credited with a pro rata portion of the next installment of the
Award that would otherwise vest based on the number of quarters or partial
quarters served during the Applicable Performance Period.
8. Acceleration for Performance.
----------------------------
(a) The Committee shall determine the performance of the Corporation as
measured, over the Applicable Performance Period, in relation to specified
Business Criteria or models determined by the Committee in accordance with the
provisions of subsection (b). The Performance Factor shall then be evaluated
against a specified Performance Target in accordance with the provisions of
subsection (c). If and to the extent the Corporation's performance as certified
by the Committee meets or exceeds the Minimum Specified Percentage of the
Performance Target for a particular fiscal year, the Employee's original Award
shall be subject to accelerated vesting as provided in Section 8(c) on the June
30th next following the date of the Committee's determination, which shall be
made as soon as practicable following the year-end audit but no later than June
29 (the "Determination Date"). To the extent that an Award is not subject to
accelerated vesting for the preceding Applicable Performance Period by reason of
performance, the Award shall remain eligible for accelerated vesting as of each
subsequent Applicable Performance Period, the Determination Date for which is
the prior to the forfeiture or other vesting of the Award, based upon the
Corporation's performance during the subsequent Applicable Performance Period
relative to the then applicable Business Criteria and Performance Targets.
(b) Terms used in this Section 8 have the following meanings, subject to
the Committee's authority hereunder and the Plan:
"Applicable Performance Period" shall mean the fiscal year period
-----------------------------
commencing April 1, 1999 and ending March 31, 2000, or the applicable fiscal
year ending on any March 31 thereafter within the term of the Award.
"Business Criteria" shall have the meaning set forth in Section 5.2.7 of
-----------------
the Plan. For fiscal year 2000, the Committee has determined that earnings
before interest, taxes, depreciation and amortization ("EBITDA") shall
------
constitute the relevant business criterion for the purpose of determining the
Performance Factor and Performance Target for fiscal 2000.
-3-
<PAGE>
"Determination Date" shall mean the date no later than June 29 of each year
------------------
as of which the Committee makes its determination of the Corporation's
Performance Factor for the Applicable Performance Period and other decisions
essential to the calculation of the extent (if any) to which Performance
Restricted Stock Unit Awards governed by these General Provisions shall be
subject to accelerated performance vesting.
"Minimum Specified Percentage" shall mean the minimum percentage of the
----------------------------
Performance Target that the Performance Factor must meet or surpass in order to
accelerate vesting, as specified annually by the Committee on or before June 29
of the Applicable Performance Period. In order for the vesting of the Awards to
accelerate in fiscal year 2000, the Performance Factor must reach a minimum of
80% of the EBITDA Performance Target.
"Performance Factor" shall mean the percentage determined by dividing the
------------------
Corporation's actual performance as measured by the Business Criteria or model
specified by the Performance Target. The relevant Business Criteria underlying
the determination of the Performance Factor shall be set by the Committee on or
before June 29 of the Applicable Performance Period. For fiscal 1999, the
Performance Factor of the Corporation shall be determined by dividing the
Corporation's actual EBITDA (Business Criterion) by the target EBITDA specified
by the Committee as the Performance Target for fiscal 2000. For 2001, 2002 and
future fiscal years, the Committee shall establish on or before June 29 of the
applicable year, the applicable Business Criteria, Performance Target and
Minimum Specified Percentage for accelerated vesting with respect to that year.
"Performance Target" shall mean the target level of performance set by the
------------------
Committee and based on the relevant Business Criteria for the Applicable
Performance Period. The specific EBITDA performance targets for 2000 and future
years are confidential and available to the Employee from the Chief Executive
Officer or Chief Financial Officer upon request.
(c) Accelerated Vesting. If the Performance Factor for any Applicable
-------------------
Performance Period meets or exceeds the applicable Minimum Specified Percentage
for any Applicable Performance Period, the Restricted Stock Units will vest as
of the next June 30th at a rate of 33 1/3% (rather than 20%) of the total number
of Stock Units (subject to adjustment under Section 6.2 of the Plan and other
general conditions to vesting) for that Applicable Performance Period; provided,
--------
however, that performance vesting will not occur until the Committee or its
- -------
delegate(s) confirm(s) based on audited results that the Corporation satisfied
the applicable performance objective.
9. Adjustments in Case of Changes in Common Stock. If there shall occur
----------------------------------------------
any change in the outstanding shares of the Company's Common Stock by reason of
any stock dividend, stock split, recapitalization, merger, consolidation,
combination or other reorganization, exchange of shares, sale of all or
substantially all of the assets of the Company, split-up, split-off, spin-off,
extraordinary redemption, liquidation or similar corporate change or change in
capitalization or any distribution to holders of the Company's Common Stock
(other than cash dividends and cash distributions), the Committee shall make
such proportionate and equitable adjustments (if any) consistent with the effect
of such even on stockholders generally (but without duplication of benefits if
Dividend Equivalents are credited), as the Committee determines to be necessary
or appropriate, in the number, kind and/or character of shares of Common Stock
or other securities, property and/or rights contemplated hereunder and of rights
in respect of Restricted Stock Units and Stock Unit Accounts credited under the
Plan so as to preserve the benefits intended, but only to the extent that such
adjustment or
-4-
<PAGE>
determination in respect of the Awards would be consistent with the requirements
of Section 162(m) to qualify as performance-based compensation.
10. Acceleration Immediately Prior to Change in Control Event.
---------------------------------------------------------
Immediately prior to the occurrence of a Change in Control Event, all Restricted
Stock Units credited to an Employee's Stock Unit Account (including Dividend
Equivalents), shall vest and shall be distributed immediately.
11. Continuance of Employment. Notwithstanding any commitment of the
-------------------------
Employee to remain in the employ of the Corporation, the grant of an Award shall
not confer upon the Employee any right with respect to the continuation of his
- ---
or her employment or other service by the Corporation or any Subsidiary or
constitute any contract or agreement of employment or other service. These
General Provisions shall not alter or in any way affect the rights of the
Corporation or the Employee under any other written employment agreement between
them, except as expressly provided herein.
12. Compliance; Application of Securities Laws.
------------------------------------------
No shares of Common Stock shall be delivered and (subsequent to vesting and
delivery) no shares shall be offered for sale by the holder unless and until any
then applicable requirements of the Securities and Exchange Commission (the
"Commission") or any other regulatory agency having jurisdiction and any
----------
exchanges upon which the Common Stock may be listed shall have been fully
satisfied. Upon the Corporation's request, the Employee, or any other person
entitled to such shares of Common Stock pursuant to the Award, shall provide a
written assurance of compliance (or representations reasonably requested by the
Corporation to assure such compliance) satisfactory to the Corporation.
The Committee may impose such additional conditions on the Award or on its
acceleration or vesting or on the payment of any related tax or withholding
obligation as in its sole discretion may be required or advisable to satisfy any
applicable legal or regulatory requirements, including, without limitation,
provisions necessary to avoid liability under Section 16 of the Exchange Act or
to secure benefits of Rule 16b-3 (or any successor rule) promulgated by the
Commission pursuant to the Exchange Act.
13. Tax Withholding. The Corporation shall satisfy any state or federal
---------------
income tax withholding obligation arising upon distributions of shares of Common
Stock in respect of an Employee's Stock Unit Account by reducing the number of
shares of Common Stock otherwise deliverable to the Employee. The appropriate
number of shares required to satisfy such tax withholding obligation in the case
of Restricted Stock Units will be based on the Fair Market Value of a share of
Common Stock on the day prior to the date of distribution. If the Corporation,
for any reason, cannot (or chooses not to) satisfy the withholding obligation in
accordance with the preceding sentence, the Employee shall pay or provide for
payment in cash of the amount of any taxes which the Company may be required to
withhold with respect to the benefits hereunder.
14. Employment by Subsidiaries. Employment by any Subsidiary shall be
--------------------------
considered as the equivalent of employment by the Corporation for all purposes
hereunder.
15. Notices. Any notice to be given under the terms of the Plan, these
-------
General Provisions or an Award Agreement shall be in writing and addressed to
the Corporation at its principal executive
-5-
<PAGE>
office, to the attention of the Corporate Secretary and to the Employee at the
address given beneath the Employee's signature to the Award Agreement, or at
such other address as either party may thereafter designate in writing to the
other.
16. Administration of Awards.
------------------------
(a) Powers of Committee. Subject to the limitations of the Plan, the
-------------------
Committee shall have the responsibility for carrying out the intents and
purposes of these General Provisions and related Performance Restricted Stock
Unit Awards and shall have all powers necessary to accomplish those purposes,
including, but not by way of limitation, the following:
(i) to construe, interpret and administer the General Provisions
and Award Agreements;
(ii) to make all determinations required by these General
Provisions;
(iii) to collect and interpret such reported results of and other
information regarding the Corporation as the Committee may deem advisable
or appropriate, or to utilize such other readily available information as
it may deem advisable or appropriate, with respect to determinations made
hereunder;
(iv) to determine, compute and certify the extent of vesting and
the amount of any other benefits payable to Employees hereunder; and
(v) to, in determining the performance of each relative entity,
make such adjustments as it deems appropriate and equitable in its
discretion to reflect changes in capitalization and similar corporate
changes affecting the Corporation.
In making any discretionary adjustments hereunder or under the Plan, the
Committee shall make the same adjustments and confer the same benefits on all
holders of Restricted Stock Units subject to these General Provisions, unless
the Award Agreement otherwise expressly provides. Notwithstanding anything
contained herein to the contrary, the Committee shall have no discretion to
increase the number of shares to be delivered upon attainment of the performance
goals set forth herein except pursuant to Section 6.2 of the Plan.
(b) No Liability of Committee. The determination of the Committee made in
-------------------------
good faith as to any disputed question or controversy shall be binding and
conclusive for all purposes of the Award Agreement and the Plan. In performing
its duties, the Committee shall be entitled to rely on information, opinions,
reports or statements prepared or presented by: (i) officers or employees of
the Corporation whom the Committee believes to be reliable and competent as to
such matters, and (ii) counsel (who may be employees of the Corporation),
accountants and other persons as to matters which the Committee believes to be
within such persons' professional or expert competence. The Committee shall be
fully protected with respect to any action taken or omitted by it in good faith
pursuant to the advice of such persons.
(c) Amendments. The Committee further may amend Awards and these General
----------
Provisions, subject to the limitations of Section 6.6.4 of the Plan; provided,
however, that except as
-6-
<PAGE>
contemplated by Section 9 (Adjustments), no amendment or termination shall
cancel or otherwise adversely affect in any material respect, without his or her
written consent, the Employee's rights with respect to the Employee's Stock Unit
Account or dividend equivalent credits thereon so long as the Account is
outstanding). Any amendments authorized hereby shall be stated in an instrument
in writing, and all Employees shall be bound by permitted amendments upon
receipt of notice thereof.
-7-
<PAGE>
EXHIBIT 10.2
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
AVIVA INTERNATIONAL, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
Dated as of June 21, 1999
<PAGE>
OPERATING AGREEMENT
FOR
AVIVA INTERNATIONAL, LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
THIS OPERATING AGREEMENT (this "Agreement") is made and entered into as of
June 21, 1999 by and between IMAGE ENTERTAINMENT, INC., a California corporation
("Image"), and MICHAEL LOPEZ, an individual ("Lopez"), with reference to the
following facts:
A. On June 21, 1999, Articles of Organization for Aviva International,
LLC (the "Company"), a limited liability company under the laws of the State of
California, were filed with the Secretary of State of the State of California.
B. The parties desire to adopt and approve an operating agreement for the
Company.
NOW, THEREFORE, the parties by this Agreement set forth the operating
agreement for the Company upon the terms and conditions contained herein.
ARTICLE 1
---------
DEFINITIONS
-----------
When used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Act". "Act" means the Beverly-Killea Limited Liability Company Act
as set forth in Title 2.5 (commencing with Section 17000) of the California
Corporations Code (or any corresponding provision or provisions of any
succeeding law).
1.2 "Adjusted Capital Account Deficit". "Adjusted Capital Account
Deficit" means, with respect to any Member, the deficit balance, if any, in such
Member's Capital Account as of the end of the relevant Fiscal Year, after giving
effect to the following adjustments:
1.2.1 Increase such Capital Account by any amounts which such Member
is obligated to contribute to the Company (pursuant to the terms of this
Agreement or otherwise) or is deemed to be obligated to contribute to the
Company pursuant to Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
1.2.2 Reduce such Capital Account by the amount of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
1.3 "Adjusted Capital Contributions". "Adjusted Capital Contributions"
means, as of any day, a Member's Capital Contribution reduced by distributions
to such Member.
1
<PAGE>
1.4 "Affiliate". "Affiliate" means, when used with reference to a
specified Person, (i) the Principal of the Person, (ii) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(iii) any Person who or which has the right to exercise, directly or indirectly,
more than fifty percent (50%) of the outstanding voting interests of such
Person, and (iv) any spouse, child, parent, grandchild, grandparent, sibling,
aunt, uncle or first cousin of such Person.
1.5 "Agreement". "Agreement" means this Limited Liability Company
Operating Agreement, as originally executed and as amended from time to time, as
the context requires.
1.6 "Articles of Organization". "Articles of Organization" means the
articles of organization filed with the Secretary of State for the purpose of
forming the Company, as amended from time to time.
1.7 "Available Cash Flow". "Available Cash Flow" means, with respect to
any Fiscal Year or other period, the sum of all cash receipts of the Company
from any and all sources, less all cash disbursements (including, without
limitation, all repayments of principal and interest under the Loans) and a
reasonable allowance for Reserves, contingencies and anticipated obligations as
determined by the Members.
1.8 "Capital Account". "Capital Account" of a Member shall have the
meaning set forth in Section 3.3.3 hereof.
1.9 "Capital Contribution". "Capital Contribution" shall have the meaning
set forth in Article 3 hereof.
1.10 "Code". "Code" means the Internal Revenue Code of 1986, as amended
from time to time (or any corresponding provision or provisions of any
succeeding law).
1.11 "Company". "Company" shall have the meaning set forth in Recital A of
the Agreement.
1.12 "Company Minimum Gain". "Company Minimum Gain" has the meaning set
forth in Regulations Section 1.704-2(b)(2) and (d).
1.13 "Dissolution". "Dissolution" means, when used with reference to any
entity (including the Company), the earliest of (i) the date upon which such
entity is terminated under the Act, any similar provision enacted in lieu
thereof or any similar provision of corporate, partnership, limited liability
company or trust law, (ii) the date upon which such entity ceases to be a going
concern, or (iii) the date of any bankruptcy, insolvency, assignment for the
benefit of creditors or similar act or occurrence involving such entity.
1.14 "Distribution Match Notice". "Distribution Match Notice" shall have
the meaning set forth in Section 5.3.2 hereof.
2
<PAGE>
1.15 "Distribution Match Response Notice". "Distribution Match Response
Notice" shall have the meaning set forth in Section 5.3.2 hereof.
1.16 "Distribution Match Right". "Distribution Match Right" shall have the
meaning set forth in Section 5.3.2 hereof.
1.17 "Distribution Notice". "Distribution Notice" shall have the meaning
set forth in Section 5.3.1 hereof.
1.18 "Distribution Response Notice". "Distribution Response Notice" shall
have the meaning set forth in Section 5.3.1 hereof.
1.19 "Distribution Rights". "Distribution Rights" shall have the meaning
set forth in Section 5.3.1 hereof.
1.20 "Economic Interest". "Economic Interest" means a Person's allowable
share of the Profits, Loss or similar items, and such Person's right to receive
distributions from the Company, but does not include any other rights of a
Member including, without limitation, the right to vote or to participate in the
management of the Company, or any right to information concerning the business
and affairs of the Company.
1.21 "Fiscal Year". "Fiscal Year" means the Company's fiscal year, which
shall be the period commencing on April 1 of each year through and including
March 31 of the immediately succeeding year.
1.22 "First Funding Extension". "First Funding Extension" shall have the
meaning set forth in Section 4.3 hereof.
1.23 "Further Funding Extension". "Further Funding Extension" shall have
the meaning set forth in Section 4.4 hereof.
1.24 "Image". "Image shall have the meaning set forth in the introductory
paragraph of this Agreement.
1.25 "Image Distribution Notice". "Image Distribution Notice" shall have
the meaning set forth in Section 5.4.1 hereof.
1.26 "Image Distribution Response Notice". "Image Distribution Response
Notice" shall have the meaning set forth in Section 5.4.1 hereof.
1.27 "Image Distribution Rights". "Image Distribution Rights" shall have
the meaning set forth in Section 5.4.1 hereof.
1.28 "Indemnitee". "Indemnitee" shall have the meaning set forth in
Section 8.7.3 hereof.
3
<PAGE>
1.29 "Interest". "Interest" means an ownership interest in the Company,
which includes the Economic Interest, the right to vote or participate in the
management of the Company, and the right to information concerning the business
and affairs of the Company, as provided in this Agreement and under the Act.
1.30 "Lien". "Lien" means any lien, security interest, pledge,
hypothecation, encumbrance or other claim in or with respect to any property
(real, personal or mixed).
1.31 "Liquidator". "Liquidator" shall have the meaning set forth in
Section 12.2.2 hereof.
1.32 "Loan" and "Loans". "Loan" means any loan made to the Company by
Lopez (pursuant to Section 4.1 hereof) or by Image (pursuant to Section 4.2
hereof). "Loans" means all loans made to the Company by Lopez (pursuant to
Section 4.1 hereof) or by Image (pursuant to Section 4.2 hereof), collectively.
1.33 "Lopez". "Lopez" shall have the meaning set forth in the introductory
paragraph of this Agreement.
1.34 "Lopez Management Agreement". "Lopez Management Agreement" means the
Management Agreement of even date herewith by and between the Company and Lopez
in the form of Exhibit C attached hereto.
1.35 "Manager" "Manager" means the Person appointed as manager of the
Company pursuant to Section 8.1 hereof, and all successors.
1.36 "Manager Indemnitee" shall have the meaning set forth in Section 8.7.2
hereof.
1.37 "Member". "Member" means a Person who:
1.37.1 Has been admitted to the Company as a member in accordance
with this Agreement, or an assignee of an Interest (other than an Economic
Interest) who has become a Member pursuant to Article 10; and
1.37.2 Has not resigned, withdrawn or been expelled as a Member or,
if other than an individual, been Dissolved.
1.38 "Member Indemnitee" shall have the meaning set forth in Section 8.7.1
hereof.
1.39 "Member Non-Recourse Debt". "Member Nonrecourse Debt" has the meaning
set forth in Regulations Section 1.704-2(b)(4).
1.40 "Member Non-Recourse Debt Minimum Gain". "Member Non-Recourse Debt
Minimum Gain" means an amount, with respect to each Member Non-Recourse Debt,
equal to the Company Minimum Gain that would result if such Member Non-Recourse
Debt were
4
<PAGE>
treated as a non-recourse liability of the Company, determined in
accordance with Regulations Sections 1.704-2(i)(2) and (3).
1.41 "Member Non-Recourse Deductions". "Member Non-Recourse Deductions"
has the meaning set forth in Regulations Sections 1.704-2(i)(1) and (2).
1.42 "Non-Recourse Deductions". "Non-Recourse Deductions" means any
deductions attributable to any liability or obligation for which no Members has
or will incur any personal or recourse liability.
1.43 "Offered Interests". "Offered Interests" shall have the meaning set
forth in Section 10.3 hereof.
1.44 "Percentage Interest". "Percentage Interest" shall mean the
percentage interest of a Member set forth opposite the name of such Member under
the column "Percentage Interest" in Exhibit A attached hereto, as such
percentage may be adjusted from time to time pursuant to the terms of this
Agreement.
1.45 "Person". "Person" means an individual, general partnership, limited
partnership, corporation, trust, estate, association, limited liability company,
limited liability partnership, real estate investment trust, association or
other entity, whether domestic or foreign.
1.46 "Principal". "Principal" means the natural Persons who are in
ultimate control of a Member which is not a natural person.
1.47 "Profits and Loss". "Profits" and "Loss" mean, for each Fiscal Year
or other period, an amount equal to the Company's income or loss for such year
or period, determined in accordance with Code Section 703(a) (for this purpose,
all items of income, gain, loss or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with all adjustments required to maintain Capital Accounts in accordance with
Regulations Section 1.704-1(b)(2)(iv)(b). Items of income, gain, loss or
deduction specially allocated pursuant to this Agreement shall not be taken into
account in determining Profits or Loss.
1.48 "Project". "Project" shall have the meaning set forth in Section 2.4
hereof.
1.49 "Property". "Property" means all assets of the Company, both tangible
and intangible, or any portion thereof.
1.50 "Purchase Notice". "Purchase Notice" shall have the meaning set forth
in Section 10.3 hereof.
1.51 "Regulations". "Regulations" means the federal income tax regulations
promulgated under the Code, as such regulations may be amended from time to
time. All
5
<PAGE>
references herein to a specific section of the Regulations shall be
deemed also to refer to any corresponding provisions of succeeding Regulations.
1.52 "Regulatory Allocations". "Regulatory Allocations" shall have the
meaning set forth in Section 6.3 hereof.
1.53 "Reserves". "Reserves" means funds set aside from Capital
Contributions or revenues as reserves. Such Reserves shall be maintained in
amounts reasonably deemed sufficient by the Members for working capital and the
payment of taxes, insurance, debt service (including, without limitation, the
repayment of Loans), repairs, replacements, renewals, or other costs or expenses
incident to the business and operations of the Company, or in the alternative,
the Dissolution of the Company.
1.54 "Sale". "Sale" shall have the meaning set forth in Section 10.3
hereof.
1.55 "Sale Notice". "Sale Notice" shall have the meaning set forth in
Section 10.3 hereof.
1.56 "Secretary of State". "Secretary of State" shall mean the Secretary
of State of the State of California.
1.57 "Securities Act". "Securities Act" shall mean the Securities Act of
1933, as amended from time to time, or any succeeding law.
1.58 "Selling Member". "Selling Member" shall have the meaning set forth
in Section 10.3 hereof.
ARTICLE 2
---------
ORGANIZATIONAL MATTERS
----------------------
2.1 Formation of the Company. The parties have formed the Company
------------------------
pursuant to the provisions of the Act by filing the Articles of Organization
with the Secretary of State and entering into this Agreement.
2.2 Name. The name of the Company shall be Aviva International, LLC. The
----
Company shall be operated under such name or, upon compliance with applicable
laws, any other name that both of the Members deem appropriate or advisable.
The Company shall file any fictitious name certificates and similar filings, and
any amendments thereto, that both of the Members deem appropriate or advisable.
2.3 Term. The term of the existence of the Company commenced on the date
----
of the filing of the Articles of Organization with the California Secretary of
State and shall end on December 31, 2029, unless the Company is terminated or
dissolved sooner in accordance with the provisions of this Agreement.
6
<PAGE>
2.4 Business and Purpose of the Company. The business and purpose of the
-----------------------------------
Company is to engage in any lawful activity for which a limited liability
company may be organized under the Act. Notwithstanding the foregoing, without
the written consent of both Members, the Company shall not engage in any
business other than the acquisition, development, production, financing,
distribution and exploitation of one or more music and concert videos, motion
pictures, television programs, mini-series, made for television motion pictures
and other audiovisual productions (each, a "Project"), and all ancillary,
publishing, spin-off, collateral, allied, subsidiary, merchandising and other
activities related or incidental to the foregoing.
2.5 Principal Place of Business. The Company's principal place of
---------------------------
business shall be located at 37 Gresham Lane, Atherton, California 94027, or at
such other place within the State of California jointly determined by the
Members.
2.6 Resident Agent. The name and address of the Company's resident agent
--------------
in the State of California are as follows:
Michael Lopez
37 Gresham Lane
Atherton, California 94027
2.7 Members. The name, current mailing address, taxpayer identification
-------
number and Percentage Interest of each Member are set forth on Exhibit A.
ARTICLE 3
---------
CAPITAL CONTRIBUTIONS
---------------------
3.1 Initial Capital Contributions. Each Member shall contribute such
-----------------------------
amounts as is set forth on Exhibit A as such Member's initial Capital
Contribution, which Exhibit shall be revised to reflect any additional
contribution made pursuant to Section 3.2 hereof and upon the issuance of
additional Interests in accordance with the terms hereof.
3.2 Additional Contributions. Neither Lopez nor Image shall be obligated
------------------------
to make any additional Capital Contributions to the Company.
3.3 Rights with Respect to Capital.
------------------------------
3.3.1 No Member shall have the right to withdraw, or receive any
return of, its Capital Contribution, and no Capital Contribution may be returned
in the form of property other than cash except as specifically provided herein.
3.3.2 Except as provided in the Lopez Management Agreement, no
Member shall receive any interest, salary or draw with respect to its Capital
Account, for services rendered on behalf of the Company, or otherwise in its
capacity as a Member.
7
<PAGE>
3.3.3 A separate capital account ("Capital Account") shall be
maintained for each Member. The Company shall determine and maintain each
Capital Account in accordance with Regulation Section 1.704-1(b)(2)(iv). If a
Member transfers all or any part of its Interest in accordance with the terms of
this Agreement, such Member's Capital Account attributable to the transferred
Interest shall carry over to the new owner of such Interest pursuant to
Regulations Section 1.704-1(b)(2)(iv)(1).
3.3.4 The Capital Account of each Member shall be increased by:
3.3.4.1 Such Member's cash contributions;
3.3.4.2 The agreed fair market value of property contributed
by such Member (net of liabilities secured by such contributed property that the
Company is considered to assume or take subject to under Code Section 752); and
3.3.4.3 All items of Company income and gain (including
income and gain exempt from tax) allocated to such Member pursuant to Article 6
or other provisions of this Agreement.
3.3.5 The Capital Account of each Member shall be decreased by:
3.3.5.1 The amount of cash distributed to such Member;
3.3.5.2 The agreed fair market value of all actual and deemed
distributions of property made to such Member pursuant to this Agreement (net of
liabilities secured by such distributed property that the Member is considered
to assume or take subject to under Code Section 752); and
3.3.5.3 All items of Company deduction and loss allocated to
such Member pursuant to Article 6 or other provisions of this Agreement.
3.4 Special Rules with Respect to Capital Accounts.
----------------------------------------------
3.4.1 Time of Adjustment for Capital Contributions. For purposes of
--------------------------------------------
computing the balance in a Member's Capital Account, no credit shall be given
for any Capital Contribution which such Member is to make until such
contribution is actually made. "Capital Contribution" refers to the total amount
of cash and the agreed fair market value (net of liabilities) contributed to the
Company by that Member and any subsequent contributions of cash and the agreed
fair market value (net of liabilities) of any other property subsequently
contributed to the Company by that Member.
3.4.2 Intent to Comply with Treasury Regulations. The foregoing
------------------------------------------
provisions of this Article 3 and the other provisions of this Agreement relating
to the maintenance of Capital Accounts are intended to comply with Regulations
Section 1.704-1(b), and shall be interpreted and applied in a manner consistent
with such Section of the Regulations. To the
8
<PAGE>
extent such provisions are inconsistent with such Section of the Regulations or
are incomplete with respect thereto, Capital Accounts shall be maintained in
accordance with such Section of the Regulations.
ARTICLE 4
---------
LOANS BY THE MEMBERS; OPERATIONS AFTER THE FIRST FISCAL YEAR
------------------------------------------------------------
4.1 If and when Lopez receives any payments under any the of the
agreements described on Exhibit D attached hereto, Lopez shall (within five (5)
days after receipt of such payment) make a loan to the Company in an amount
equal to 100% of the amount of such payment.
4.2 From time to time during the period commencing on the date hereof
through the end of the Fiscal Year of the Company ending March 31, 2000, Image
shall make one or more loans to the Company on an "as needed" basis for the
purpose of funding the Company's overhead and working capital needs in
accordance with the budget attached hereto as Exhibit B.
4.3 In the event Image and Lopez desire to continue the active operations
of the Company for the two (2) year period commencing April 1, 2000 through and
including March 31, 2002 (the "First Funding Extension"), the parties shall so
agree in writing not later than December 31, 1999. In the event the parties
elect the First Funding Extension, Lopez shall within twenty (20) days
thereafter prepare and deliver to Image a proposed budget for said two (2) year
period. Said budget shall be in substantially the form (including, without
limitation, containing all categories and line items) as the budget attached
hereto as Exhibit B and shall also include the projected revenue of the Company
and the aggregate amount of Loans which Lopez proposes that Image commit to
making during said two (2) year period. Image shall approve or disapprove the
proposed budget within twenty (20) days thereafter, provided that Image's
approval of the proposed budget shall not be unreasonably withheld if it is
generally consistent with the budget and results of operations of the Company
for the then current Fiscal Year. Failure of Image to approve or disapprove the
proposed budget within said twenty (20) day period shall be deemed Image's
disapproval of the same. If Image disapproves (or is deemed to have
disapproved) the proposed budget, Lopez and Image shall for a period of thirty
(30) days thereafter attempt in good faith to agree upon a budget for said two
(2) year period. In the event that Lopez and Image fail to agree on a budget
for said two (2) year period prior to the end of said thirty (30) day period,
the parties' election of the First Funding Extension shall be deemed nullified
for all purposes, the active operations of the Company shall cease on March 31,
2000 and Image shall have no further obligation to make Loans to fund the
Company's overhead and working capital needs. If the budget is approved, from
time to time during the First Funding Extension, Image shall make one or more
Loans on an "as needed" basis for the purpose of funding the Company's overhead
and working capital needs in accordance with such approved budget.
9
<PAGE>
4.4 If Lopez and Image elect the First Funding Extension, they thereafter
may (but shall not be obligated to) jointly elect to extend the active
operations of the Company for one or more subsequent consecutive two (2) year
periods (each, a "Further Funding Extension"). Lopez and Image shall confirm
their agreement to any Further Funding Extension in writing no later than ninety
(90) days prior to the expiration of the First Funding Extension or the then
current Further Funding Extension, as applicable. The first Further Funding
Extension shall commence on April 1, 2002 and each subsequent Further Funding
Extension shall commence on the day after the end of the immediately prior
Further Funding Extension. In the event the parties elect any Further Funding
Extension, Lopez shall within twenty (20) days thereafter prepare and deliver to
Image a proposed budget for said two (2) year period. Said budget shall be in
substantially the form (including, without limitation, containing all categories
and line items) as the budget attached hereto as Exhibit B and shall also
include the projected revenue of the Company and the aggregate amount of Loans
which Lopez proposes that Image commit to making during said two (2) year
period. Image shall approve or disapprove the proposed budget within twenty (20)
days thereafter, provided that Image's approval of the proposed budget shall not
be unreasonably withheld if it is generally consistent with the budget and
results of operations of the Company for the then current Fiscal Year. Failure
of Image to approve or disapprove the proposed budget within said twenty (20)
day period shall be deemed Image's disapproval of the same. If Image disapproves
(or is deemed to have disapproved) the proposed budget, Lopez and Image shall
for a period of thirty (30) days thereafter attempt in good faith to agree upon
a budget for said two (2) year period. In the event that Lopez and Image fail to
agree on a budget for said two (2) year period prior to the end of said thirty
(30) day period, the parties' election of such Further Funding Extension shall
be deemed nullified for all purposes, the active operations of the Company shall
cease on the last day of the First Funding Extension or then current Further
Funding Extension, as applicable, and Image shall have no further obligation to
make Loans to fund the Company's overhead and working capital needs. If the
budget is approved, from time to time during such Further Funding Extension,
Image shall make one or more Loans on an "as needed" basis for the purpose of
funding the Company's overhead and working capital needs in accordance with such
approved budget.
4.5 Notwithstanding anything to the contrary contained in this Article 4,
neither Lopez nor Image shall be required to make any Loan to the extent that
such party reasonably determines that the Company then has the ability to
satisfy the Company's reasonably anticipated working capital and overhead
obligations for at least the four (4) month period immediately following the
date any proceeds of the agreements described on Exhibit D are received by Lopez
(in the case of Loans to be made by Lopez) or the date of any request for a Loan
made by Lopez as Manager on behalf of the Company (in the case of Loans to be
made by Image). Lopez or Image, as applicable, shall make such determination in
good faith based on (i) the then current Reserves of the Company, (ii) the
reasonably anticipated receipts of the Company during such four (4) month
period, and (iii) the reasonably anticipated expenses of the Company during such
four (4) month period.
4.6 Interest shall accrue on the principal balance of each Loan from the
date such Loan is made through the date on which such Loan is repaid in full at
a rate per annum equal
10
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to the Applicable Federal Rate for long term loans in effect for the month in
which such Loan is made. The principal balance and all accrued but unpaid
interest on all Loans shall be due and payable in full on the date which is ten
(10) years after the date such Loan is made, provided, however, that the Company
shall repay the Loans to Lopez and Image on a pro rata basis to the extent of
any Available Cash Flow of the Company as of the last day of each calendar
quarter after deduction of an amount equal to the reasonably anticipated
obligations of the Company for the four (4) month period immediately following
such date. All Loans made by Lopez shall be pari passu in right of
---- -----
repayment with all Loans made by Image.
4.7 If so requested by Lopez or Image, the Company shall execute and
deliver to Image or Lopez, as applicable, one or more promissory notes
evidencing the Loans. Such promissory notes shall be in such form as Lopez or
Image, as applicable, may reasonably request.
ARTICLE 5
---------
PROJECTS
--------
5.1 Projects. If either Member desires to cause the Company to acquire,
--------
develop, produce, finance or distribute any Project, such Member shall notify
the other Member and the Members shall thereafter in good faith jointly
determine whether and the terms upon which such Project may be acquired,
developed, produced, financed or distributed by the Company. All material terms
of the acquisition, development, production, financing or distribution of any
Project shall require the approval of both Members and shall be confirmed in
writing by the parties.
5.2 Production Financing. Without limiting the generality of Section 5.1
--------------------
above, the Members contemplate that the Company will from time to time develop,
produce or finance one or more Projects. The Members further contemplate that
Image may provide financing for such Project; provided, that the decision to
provide financing and all of the terms of such financing shall be jointly made
with respect to each Project and that Image shall have no obligation to provide
financing for any Project or provide financing on any particular terms.
5.3 Image's First Offer/Last Match Right.
------------------------------------
5.3.1 If the Company acquires or otherwise possesses any North
American home video distribution rights with respect to any Project (the
"Distribution Rights") and whether or not Image has provided production
financing for such Project pursuant to Section 5.2 above, the Company shall
provide Image with a right of first offer to acquire the Distribution Rights in
accordance with the following procedure: Lopez shall deliver written notice (the
"Distribution Notice") to Image, which Distribution Notice shall contain a
reasonably detailed description of the proposed terms under which Lopez proposes
that the Company grant all of the Distribution Rights to Image, including,
without limitation, all material economic terms thereof. Following the delivery
of the Distribution Notice to Image, Image shall notify Lopez in writing (the
"Distribution Response Notice") within fifteen (15) days after receipt of the
Distribution Notice stating whether or not Image agrees to acquire all
11
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of the Distribution Rights on the terms set forth in the Distribution Notice and
on other reasonable and customary terms consistent with industry standards. If
Image elects to acquire all of the Distribution Rights, the Company and Image
shall enter into a definitive distribution agreement on terms consistent with
those contained in the Distribution Notice. Subject to the terms of Section 5.2,
failure of Image to deliver the Distribution Response Notice within said fifteen
(15) day period shall be deemed an election not to acquire the Distribution
Rights.
5.3.2 If Image elects, or is deemed to have elected, not to acquire
the Distribution Rights pursuant to Section 5.3.1 above, Lopez (as Manager on
behalf of the Company) shall have the right to negotiate with one or more third
parties regarding the grant to such third party by the Company of all or any
part of the Distribution Rights. If Lopez so elects to negotiate with one or
more third parties, before the Company enters into a binding agreement with a
third party regarding the grant to such third party of all or any part of the
Distribution Rights, Lopez shall first deliver written notice to Image
identifying the third party and disclosing to Image all material terms of such
transaction (the "Distribution Match Notice"). Image shall then have the right
to acquire the Distribution Rights on the same terms and conditions as, and in
lieu of, such third party (the "Distribution Match Right") by delivering written
notice (the "Distribution Match Response Notice") to Lopez within fifteen (15)
days after receipt by Image of the Distribution Match Notice. Image's failure to
deliver the Distribution Match Response Notice within said fifteen (15) day
period shall be deemed an election not to exercise the Distribution Match Right.
5.3.3 If Image elects, or is deemed to have elected, not to exercise
the Distribution Match Right, Lopez (acting as Manager on behalf of the Company)
may, but shall not be obligated to, grant the Distribution Rights to the third
party identified in the Distribution Match Notice on terms which are identical
in all material respects to those contained in the Distribution Match Notice,
provided that the Company shall enter into a definitive agreement with such
third party regarding the Distribution Rights within ninety (90) days after the
date Image elects, or is deemed to have elected, not to exercise the
Distribution Match Right. If the Company has not entered into said definitive
agreement within such ninety-(90)-day period, the Company shall not grant the
Distribution Rights to any third party without allowing Image to acquire such
rights pursuant to the procedure set forth in this Section 5.3.
5.4 The Company's First Offer Right.
-------------------------------
5.4.1 If Image acquires or otherwise possesses the distribution
rights for any music or concert video, motion picture, television program, mini-
series, made for television motion picture or other audiovisual production which
is not otherwise a Project (collectively, the "Image Distribution Rights"),
Image shall provide the Company with a right of first offer to acquire the Image
Distribution Rights (excluding any North American home video distribution rights
otherwise included within the Image Distribution Rights) in accordance with the
following procedure: Image shall deliver written notice (the "Image Distribution
Notice") to Lopez (acting as Manager on behalf of the Company), which Image
Distribution Notice shall contain a reasonably detailed description of the
proposed terms under which Image proposes that Image grant all of the Image
Distribution Rights (excluding any North American
12
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home video distribution rights otherwise included within the Image Distribution
Rights) to the Company, including, without limitation, all material economic
terms thereof. Following the delivery of the Image Distribution Notice to Lopez,
Lopez (acting as Manager on behalf of the Company) shall notify Image in writing
(the "Image Distribution Response Notice") within fifteen (15) days after
receipt of the Image Distribution Notice stating whether or not the Company
agrees to acquire all of the Image Distribution Rights (excluding any North
American home video distribution rights otherwise included within the Image
Distribution Rights) on the terms set forth in the Image Distribution Notice and
on other reasonable and customary terms consistent with industry standards.
Notwithstanding the foregoing, the parties agree that in no event shall Image be
obligated to pay the Company a distribution fee in excess of 20%. If Lopez
(acting as Manager on behalf of the Company) elects to acquire all of the Image
Distribution Rights (excluding any North American home video distribution rights
otherwise included within the Image Distribution Rights), the Company and Image
shall enter into a definitive distribution agreement on terms consistent with
those contained in the Image Distribution Notice. Failure of Lopez to deliver
the Image Distribution Response Notice within said fifteen (15) day period shall
be deemed an election not to acquire the Image Distribution Rights (excluding
any North American home video distribution rights otherwise included within the
Image Distribution Rights).
5.4.1 If Lopez (acting as Manager on behalf of the Company) elects,
or is deemed to have elected, not to acquire the Image Distribution Rights
pursuant to Section 5.4.1 above, Image may, but shall not be obligated to, grant
the Image Distribution Rights to any third party of Image's choosing on terms
which are identical in all material respects to those contained in the Image
Distribution Notice, provided that Image shall enter into a definitive agreement
with such third party regarding the Image Distribution Rights within ninety (90)
days after the date Lopez elects, or is deemed to have elected, not to acquire
the Image Distribution Rights pursuant to Section 5.4.1 above. If Image has not
entered into said definitive agreement within such ninety-(90)-day period, Image
shall not grant the Image Distribution Rights to any third party without
allowing the Company to acquire such rights pursuant to the procedure set forth
in this Section 5.4.
ARTICLE 6
---------
ALLOCATIONS OF PROFITS AND LOSSES
---------------------------------
6.1 Allocation of Profits and Losses. Except as otherwise provided in
--------------------------------
this Article 6, Profits and Losses of the Company in each Fiscal Year shall be
allocated among the Members as follows:
6.1.1 Profits. Profits shall be allocated among the Members as
-------
follows:
6.1.1.1 first, to each of the Members until the cumulative
profits allocated to such Member pursuant to this Section 6.1.1.1 is
equal to the cumulative loss allocated to such Member pursuant to the
last two sentences of Section 6.1.2 for all prior periods in the ratio
of such cumulative loss.
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6.1.1.2 second, to each of the Members until the cumulative
Profits allocated to such Member pursuant to this Section 6.1.1.2 is
equal to the cumulative Loss allocated to the Member pursuant to
Section 6.1.2.2 for all prior periods in the ratio of such cumulative
loss;
6.1.1.3 third, to each of the Members until the cumulative
Profits allocated to such Member pursuant to this Section 6.1.1.3 is
equal to the cumulative Loss allocated to the Member pursuant to
Section 6.1.2.1 for all prior periods in the ratio of such cumulative
loss; and
6.1.1.4 thereafter, to the Members in accordance with their
Percentage Interests.
6.1.2 Allocation of Losses. Except as otherwise provided in this
--------------------
Article 6, Losses shall be allocated among the Members as follows:
6.1.2.1 first, in proportion to the positive balances, if
any, in the Members' respective Capital Accounts, until such balances
are reduced to zero; and
6.1.2.2 second, to the Members, in proportion to their
Percentage Interests.
Notwithstanding anything to the contrary contained herein, Losses allocated
pursuant to this Section 6.1.2 shall not exceed the maximum amount of Losses
that may be so allocated without causing any Member to have an Adjusted Capital
Account Deficit at the end of any Fiscal Year. In the event some, but not all,
of the Members would have Adjusted Capital Account Deficits as a consequence of
an allocation of Losses pursuant to this Section 6.1.2, the limitation set forth
herein shall be applied on a Member by Member basis so as to allocate the
maximum permissible Loss to each Member under Section 1.704-1(b)(2)(ii)(d) of
the Regulations.
6.2 Special Allocations.
-------------------
6.2.1 Qualified Income Offset. In the event any Member unexpectedly
-----------------------
receives any adjustments, allocations, or distributions described in paragraphs
(4), (5) and (6) of Regulations Section 1.704-1(b)(2)(ii)(d), items of Company
income and gain shall be specially allocated to such Member in an amount and
manner sufficient to eliminate, to the extent required by such Regulations, the
Adjusted Capital Account Deficit of such Member as quickly as possible; provided
that an allocation pursuant to this Section 6.2.1 shall be made only to the
extent that such Member would have an Adjusted Capital Account Deficit after all
other allocations pursuant to this Article 6 have been made on a tentative basis
as if this Section 6.2.1 were not in this Agreement.
14
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6.2.2 Interest on Member Obligations. To the extent the Company has
------------------------------
taxable interest income with respect to any obligation of a Member to the
Company pursuant to Sec tion 483, Sections 1271 through 1288 or Section 7872 of
the Code:
6.2.2.1 Such interest income shall be specially allocated to
the Member to whom such obligation relates; and
6.2.2.2 The amount of such interest income shall be excluded
from the Capital Contributions credited to such Member's Capital Account in
connection with payments of principal with respect to such obligation.
6.2.3 Minimum Gain Chargeback. Except as otherwise provided in
-----------------------
Regulations Section 1.704-2(f), notwithstanding any other provision of this
Article 6, if there is a net decrease in Company Minimum Gain during any Fiscal
Year, each Member who would otherwise have an Adjusted Capital Account Deficit
at the end of such year shall be specially allocated items of Company income and
gain for such year (and, if necessary, subsequent years) in an amount and manner
sufficient to eliminate such Adjusted Capital Account Deficit as quickly as
possible. The items to be so allocated shall be determined in accordance with
Regulations Section 1.704-2(f)(6) and (j)(2). This Section 6.2.3 is intended to
comply with the minimum gain chargeback requirement in Regulations Section
1.704-2(f) and shall be interpreted consistently therewith.
6.2.4 Member Minimum Gain Chargeback. Except as otherwise provided
------------------------------
in Regulations Section 1.704-2(i)(4), notwithstanding any other provision of
this Article 6, if there is a net decrease in Member Non-Recourse Debt Minimum
Gain attributable to a Member Non-Recourse Debt during any Fiscal Year, each
Member who has a share of the Member Non-Recourse Debt Minimum Gain attributable
to such Member Non-Recourse Debt, determined in accordance with Regulations
Section 1.704-2(i)(5) shall be specifically allocated items of Company income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Member's share of the net decrease in Member Non-Recourse Debt Minimum
Gain attributable to such Member Non-Recourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Regulations Section 1.704-2(i)(4) and (j)(2). This
Section 6.2.4 is intended to comply with the minimum gain chargeback requirement
in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
6.2.5 Basis Adjustments to Property. To the extent an adjustment to
-----------------------------
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Regulations Section 1.704-
1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis) and such gain or loss shall be allocated to the
15
<PAGE>
Members in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such Section of the Regulations.
6.2.6 Tax Allocations: Code Section 704(c).
-------------------------------------
6.2.6.1 Contributed Property. In accordance with Code Section
--------------------
704(c) and the Regulations thereunder, income, gain, loss, and deduction with
respect to any property contributed to the capital of the Company shall, solely
for tax purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for federal
income tax purposes and its agreed fair market value.
6.2.6.2 Elections. Any elections or other decisions relating
---------
to allocations under Section 6.2.6.1 shall be made by the Manager in any manner
that reasonably reflects the purpose and intention of this Agreement.
6.3 Regulatory Allocations. The allocations set forth in Sections 6.1.1,
----------------------
6.2.1, 6.2.3, 6.2.4 and 6.2.5 hereof (the "Regulatory Allocations") are intended
to comply with certain requirements of Regulations Section 1.704-1(b).
6.3.1 Authority of Members. The Manager may divide other allocations
--------------------
of Profits, Losses and other items among the Members so as to prevent the
Regulatory Allocations from distorting the manner in which Company distributions
will be divided among the Members pursuant to Article 6 hereof. Except with
respect to Regulatory Allocations made pursuant to Sections 6.2.3, 6.2.4 and
6.2.5 hereof, the Members anticipate that this will be ac complished by
specially allocating other Profits, Losses and items of income, gain, loss and
deduction among the Members so that the net amount of the Regulatory Allocations
and such special allocations to each such Member is zero.
6.3.2 Non-Recourse Deductions. Non-Recourse Deductions for any
-----------------------
Fiscal Year or other period shall be specially allocated among the Members in
proportion to their respective Percentage Interests.
6.3.3 Member Non-Recourse Deductions.
------------------------------
6.3.3.1 Any Member Non-Recourse Deductions for any Fiscal
Year or other period shall be specially allocated to the Members who bear the
economic risk of loss with respect to the Member Non-Recourse Debt to which such
Member Non-Recourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i)(1).
6.3.3.2 In the event the sum of the items of income and gain
allocated to a Member pursuant to Section 6.2.4 for the current and all prior
years exceeds the total Member Non-Recourse Deductions allocated with respect to
such Member for the same period, such excess shall be taken into account in
computing subsequent allocations of Profits
16
<PAGE>
and Losses pursuant to this Article 6 so that the net amount of such excess and
the Profits and Losses allocated with respect to each Member pursuant to this
Article 6 shall, to the extent possible, be equal to the net amount that would
have been allocated to each such Member pursuant to this Article 6 if such
excess allocation had not occurred.
6.4 Other Allocation Rules.
----------------------
6.4.1 Partial Year Allocations. In the event additional Members are
------------------------
admitted to the Company on different dates during any fiscal year, the Profits
(or Losses) allocated to the Members for each such fiscal year shall be
allocated among the Members in accordance with the Percentage Interest each
holds from time to time during such fiscal years in accor dance with Code
Section 706, using any convention permitted by law and selected by the Manager.
6.4.2 Methods. For purposes of determining the Profits, Losses, or
-------
any other items allocable to any period, Profits, Losses, and any such other
items shall be determined on a daily, monthly, or other basis, as determined by
the Manager using any permissible method under Code Section 706 and the
Regulations thereunder.
6.4.3 Residual Items. Except as otherwise provided in this
--------------
Agreement, all items of Company income, gain, loss, deduction, and any other
allocations not otherwise specially allocated shall be divided among the Members
in the same proportions as they share Profits or Losses, as the case may be, for
the year.
6.4.4 Members Bound By Allocations. The Members are aware of the
----------------------------
income tax consequences of the allocations made by this Article 6 and hereby
agree to be bound by the provisions of this Article 6 in reporting their shares
of Company income and loss for income tax purposes. It is the intent of the
Members that each Member's distributive share of Profits, Losses, income, gain,
expense, deduction and tax credits shall be determined and allocated in
accordance with this Article 6 to the fullest extent permitted by Code Section
704(b). Therefore, if the Company is advised that the allocations provided
herein are unlikely to be respected for federal income tax purposes, the Manager
may amend the allo cation provisions of this Agreement to the minimum extent
necessary to effect the plan of allocations and distributions provided for in
this Agreement.
ARTICLE 7
---------
DISTRIBUTIONS
-------------
17
<PAGE>
ARTICLE 7
---------
DISTRIBUTIONS
-------------
7.1 In General. Subject to applicable law and any limitations contained
----------
elsewhere in this Agreement, the Members may jointly elect from time to time to
distribute Available Cash Flow to the Members, provided that after giving effect
to such distribution the Company shall have retained sufficient Reserves to
satisfy the Company's reasonably anticipated working capital and overhead
obligations for at least the four (4) month period immediately following the
date of such distribution. All distributions shall be in the following order of
priority:
7.1.1 To the Members in proportion to their Capital Accounts until
the Capital Accounts of each Member has been reduced to zero; and
7.1.2 To the Members in proportion to their Percentage Interests.
All such distributions shall be made only to the Persons who, according to the
books and records of the Company, are the holders of the Economic Interests in
respect of which such distributions are made on the actual date of distribution.
Neither the Company nor any Member shall incur any liability for making
distributions in accordance with this Section 7.1.
7.2 Form of Distribution. A Member, regardless of the nature of the
--------------------
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than money. No Member may be
compelled to accept from the Company a distribution of any asset in kind in lieu
of a proportionate distribution of money being made to other Members.
7.3 Restrictions on Distributions. No distribution shall be made if,
-----------------------------
after giving effect to the distribution:
7.3.1 The Company would not be able to pay its debts as they become
due in the usual course of business; or
7.3.2 The Company's total assets would be less than the sum of its
liabilities plus, unless this Agreement provides otherwise, the amount that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights of other Members, if any, upon
dissolution that are superior to the rights of the Member receiving the
distribution.
7.4 Return of Distributions. Except for distributions made in violation
-----------------------
of the Act or this Agreement, no Member or holder of an Economic Interest shall
be obligated to return any distribution to the Company or pay the amount of any
distribution for the account of the Company or to any creditor of the Company.
The amount of any distribution returned to the Company by a Member or holder of
an Economic Interest or paid by a Member or holder of an Economic Interest for
the account of the Company or to a creditor of the Company shall be added to the
account or accounts from which it was subtracted when it was distributed to the
Member or holder of an Economic Interest.
18
<PAGE>
7.5 No Return of Capital Contributions or Priorities of Members. Except
-----------------------------------------------------------
as set forth in this Agreement, no Member shall have the right to withdraw,
demand return of or reduce its contributions to the capital of the Company, and
no Member shall have priority over any other Members as to return of Capital
Contributions or Distributions from the Company.
7.6 Amounts Withheld. All amounts withheld pursuant to the Code or any
----------------
provision of any state or local tax law with respect to any payment or
distribution to the Company or the Members shall be treated as amounts
distributed to the Members pursuant to this Article 6 for all purposes under
this Agreement. The Manager may allocate any such amounts among the Members in
any manner that is in accordance with applicable law.
ARTICLE 8
---------
MANAGEMENT: RIGHTS, POWERS AND DUTIES
-------------------------------------
OF THE MANAGER AND THE MEMBERS
------------------------------
8.1 Manager. Subject to the terms of this Agreement, the day-to-day
-------
operations of the Company shall be managed by the Manager. The initial Manager
of the Company shall be Lopez. Except as otherwise required by the Act and
subject to the terms of this Agreement (including, without limitation, the terms
of Section 8.2 below), the Manager shall have the sole and exclusive right to
manage the business of the Company and shall have all of the rights and powers
which may be possessed by a managing member under the Act with respect to the
business of the Company.
8.2 Rights of Members. Notwithstanding anything to the contrary contained
-----------------
in this Agreement, the following matters shall require the vote, approval or
consent of all of the Members:
8.2.1 the making of any distributions;
8.2.2 all decisions or elections whether to acquire, develop,
produce, finance, distribute or otherwise exploit any Project, and all material
terms of the acquisition, development, production, financing, distribution or
exploitation of any Project;
8.2.3 the sale or issuance of any additional Interests or Economic
Interests in the Company; the merger or consolidation of the Company with or
into another Person, or the entering into of any binding share exchange or
similar transaction with any Person; the sale, transfer or disposition of any of
the assets or Property of the Company outside the ordinary course of business;
the Dissolution of the Company; the formation or creation of any subsidiary; the
sale, transfer or disposition of, or the lease, pledge or encumbrance of, the
capital stock or ownership interests of any subsidiary of the Company;
8.2.4 the filing of a voluntary petition or otherwise initiating
proceedings to be adjudicated insolvent or the seeking of an order for relief as
a debtor under the United States Bankruptcy Code (11 U.S.C. (S)(S) 101, et seq.)
-- ----
or any successor law, or the filing or consent to filing of any petition seeking
of any petition seeking any composition, reorganization,
19
<PAGE>
readjustment, liquidation, dissolution or similar relief under the present or
any future federal bankruptcy laws or any other present or future applicable
federal, state or other statute or law relative to bankruptcy, insolvency or
other relief for debtors; or the seeking or consenting to the appointment of any
trustee, receiver, conservator, assignee, sequestrator, custodian, liquidator
(or other similar official) of the Company or all or any substantial part of the
properties and assets of the Company, or the making or consenting to any general
assignment for the benefit of creditors, or admitting in writing its inability
to pay its debts generally as they become due, or declaring or effecting a
moratorium on its debt or taking any action in furtherance of any such action;
8.2.5 the borrowing of money and the issuance of evidences of
indebtedness (recourse or non-recourse), and the granting of any Lien of any
kind upon or against any of the Property except for Liens applicable to personal
or real property taxes and assessments not yet due and payable;
8.2.6 the execution of any deed, lease, license, mortgage, deed of
trust, mortgage note, promissory note, bill of sale, contract or other
instrument outside the ordinary course of the Company's business and purporting
to convey or encumber any interest in any or all of the Property of the Company;
8.2.7 the prepayment (in whole or in part), refinancing, recasting,
increasing, modification or extension of any liabilities affecting the Property
of the Company;
8.2.8 the acquisition (in one or a series of related transactions)
by purchase, lease or otherwise of any tangible or intangible personal property
outside the ordinary course of the Company's business or any interest in real
property;
8.2.9 the opening, maintenance and closing of any bank, deposit and
brokerage accounts;
8.2.10 the contracting on behalf of the Company for the employment or
services of employees and/or independent contractors other than in accordance
with the then current approved budget for the Company;
8.2.11 the engagement and termination of professional service
providers, including, without limitation, attorneys and accountants;
8.2.12 the binding of the Company for the provision of goods or
services to or by the Company pursuant to any agreement outside of the ordinary
course of the Company's business;
8.2.13 the compromising or settling of any rights or claims which the
Company may have against or with respect to any Person pursuant to any document,
instrument, agreement or otherwise; the termination, amendment or material
modification of
20
<PAGE>
any document, instrument or agreement to which the Company is a party or by
which the Company is otherwise bound;
8.2.14 the making of any elections for federal, state or local tax
purposes, including, without limitation, any election, if permitted by
applicable law, (i) to extend the statute of limitations for assessment of tax
deficiencies against Members with respect to adjustments to the Company's
federal, state or local tax returns; or (ii) to represent the Company and the
Members before taxing authorities or courts of competent jurisdiction in tax
matters affecting the Company and the Members in their capacity as Members, and
to execute any agreements or other documents relating to or affecting such tax
matters, including agreements or other documents that bind the Members with
respect to such tax matters or otherwise affect the rights of the Company or the
Members;
8.2.15 the investment and reinvestment of any Property of the Company
in any securities, investments or any other properties or assets other than in
bank, brokerage, money market and other accounts previously approved by the
Members;
8.2.16 bringing, defending, settling or compromising actions at law
or in equity or through arbitration;
8.2.17 the lending of money or extension of credit to any Person on
behalf of the Company, or guaranteeing of the obligations of any Person;
8.2.18 the establishment of a new place of business, or changing the
name of the Company (or conducting business other than under the current name of
the Company);
8.2.19 the granting of any power of attorney to any Person;
8.2.20 the establishment and maintenance of Reserves; and
8.2.21 any acts or other matters required by the Act or this
Agreement to be approved or ratified by all of the Members.
8.3 Performance of Duties. Lopez shall perform services for the Company
---------------------
as Manager in accordance with the Lopez Management Agreement.
8.4 Other Activities.
----------------
8.4.1 Lopez' and his Affiliates' respective professional and
business activities outside of the Company shall be limited and restricted as
set forth in the Lopez Management Agreement.
8.4.2 Image and its Affiliates may engage in or possess interests in
other business ventures of every kind and description for their own account, and
in so doing shall
21
<PAGE>
incur no liability to the Company, nor to Lopez as a result of engaging in any
other business or ventures or as a result of deriving income or profits
therefrom. Neither Image nor any of its Affiliates shall be obligated to present
any particular investment or business opportunity to the Company, even if the
opportunity is of a character which, if presented to the Company, could be taken
by the Company; further, any of the foregoing parties shall have the right to
take for their own account or to recommend to others any investment or business
opportunity.
8.5 Personal Service; Remuneration To Members. Except as contemplated by
-----------------------------------------
the Lopez Management Agreement, no Member shall be required to perform services
for the Company solely by virtue of being a Member. Except as contemplated by
the Lopez Management Agreement, no Member (other than a Member who is also a
Manager) is entitled to remuneration for services performed for the Company.
8.6 Management Fee; Reimbursement of Expenses. Lopez, in his capacity as
-----------------------------------------
the Manager, will receive fees and other remuneration in connection with
services rendered to the Company pursuant to the terms of the Lopez Management
Agreement.
8.7 Indemnification.
---------------
8.7.1 Indemnification of Members. The Company, its receiver or its
--------------------------
trustee, shall indemnify and hold harmless the Members, their respective
Affiliates and their respective officers, directors, employees, agents,
shareholders, heirs, successors and assigns (hereinafter collectively referred
to, for purposes of this Section 8.7, as the "Member Indemnitees"), jointly and
severally, from and against any and all losses, claims, demands, costs, damages,
liabilities, joint and several, expenses of any nature (including reasonable
attorneys' fees and disbursements), judgments, fines, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which the Member
Indemnitee was involved or may be involved, or threatened to be involved, as a
party or otherwise, arising out of or incidental to the business or operations
of the Company, excluding liabilities to any Member, regardless of whether the
Member Indemnitee continues to be a Member, an Affiliate, or an officer,
director, employee, agent or Principal of the Member or Manager at the time any
such liability or expense is paid or incurred, to the fullest extent permitted
by the Act and all other applicable laws.
8.7.2 Indemnification of the Manager. The Company, its receiver or
------------------------------
its trustee, shall indemnify and hold harmless the Manager, any Affiliate of the
Manager and their respective officers, directors, employees, agents,
shareholders, heirs, successors and assigns (hereinafter collectively referred
to, for purposes of this Section, as the "Manager Indemnitees"), jointly and
severally, from and against any and all losses, claims, demands, costs, damages,
liabilities, joint and several, expenses of any nature (including reasonable
attorneys' fees and disbursements), judgments, fines, settlements and other
amounts arising from any act or omission by the Manager Indemnitees, provided
that such act or omission (i) was done in good faith for the benefit of the
Company; and (ii) did not constitute fraud, bad faith, gross negligence or
willful misconduct. The Company, its receiver or its trustee shall indemnify
and hold harmless a Manager Indemnitee who retires or is removed from the
22
<PAGE>
Company from all expense, loss, damage or liability resulting from any act or
omission occurring after its retirement or withdrawal. The exoneration and
indemnification of the Manager Indemnitees as provided herein shall extend to
former Managers during the period they were Managers.
8.7.3 Expenses. Expenses incurred by a Member Indemnitee or a
--------
Manager Indemnitee (each, an "Indemnitee") in defending any claim, demand,
action, suit or proceeding subject to this Section shall, from time to time, be
advanced by the Company prior to the final disposition of such claim, demand,
action, suit or proceeding upon receipt by the Company of an undertaking by or
on behalf of the Indemnitee to repay such amount if it shall be determined that
such Person is not entitled to be indemnified as authorized in this Section.
8.7.4 Indemnification Rights Non-Exclusive. The indemnification
------------------------------------
provided by this Section shall be in addition to (and not in lieu of) any other
rights to which those indemnified may be entitled under any agreement, as a
matter of law or equity or otherwise, both as to action in the Indemnitee's
capacity as a Member or a Manager, as an Affiliate or as an officer, director,
employee, agent or Principal of a Member or a Manager and as to any action in
another capacity, and shall continue as to an Indemnitee who has ceased to serve
in such capacity and shall inure to the benefit of the heirs, successors,
assigns and administrators of such Indemnitee.
8.7.5 Recourse. All judgments or liabilities against the Company or
--------
the Manager must first be satisfied from Company assets before the Manager or
other Persons may be required to satisfy such obligations.
8.7.6 Limitation on the Liability of the Manager to the Members.
---------------------------------------------------------
Except in the case of fraud, bad faith, gross negligence or willful misconduct,
the doing of any act or the failure to do any act by Manager, the effect of
which may cause or result in loss or damage to the Company or the Members, shall
not subject Manager or any officer, director, shareholder, employee, agent,
designee or nominee of Manager to any liability to the Members or the Company.
Except as otherwise provided in this Agreement, neither the Manager nor any
officer, director, shareholder, employee, agent, designee or nominee of the
Manager shall be liable to the Member for the repayment of their respective
Capital Contributions to the Comp any.
8.8 Removal of Manager. Except as otherwise provided in the Lopez
------------------
Management Agreement, the Manager may be removed, with or without cause, only
with the written consent of all of the Members (including a Member who is then
the Manager).
ARTICLE 9
---------
MEMBERS
-------
9.1 Limited Liability. Except as required under the Act, no Member shall
-----------------
be personally liable for any debt, obligation or liability of the Company,
whether that liability or obligation arises in contract, tort or otherwise.
23
<PAGE>
ARTICLE 10
----------
TRANSFER AND ASSIGNMENT OF INTERESTS
------------------------------------
10.1 Transfer or Assignment of Member's Interest. No Member shall be
-------------------------------------------
entitled to transfer, assign, convey, sell, encumber or in any way alienate,
voluntarily or involuntarily, all or any part of his or her Interest except with
the prior written consent of the other Member (which consent may be granted or
withheld in the reasonable discretion of such Member). Notwithstanding the
foregoing, either Member shall have the right to transfer, assign, convey, sell
and alienate all or any part of his or its Interest to any Affiliate of such
Member without the consent of the other Member for so long as such Affiliate
shall thereafter remain an Affiliate of such Member. After the consummation of
any transfer of an Interest, the Interest so transferred shall continue to be
subject to the terms and provisions of this Agreement and any further transfer
shall be required to comply with all of the terms and provisions of this
Agreement.
10.2 Restrictions on Transfer. In addition to other restrictions found in
------------------------
this Agreement, no Member shall transfer, assign, convey, sell, encumber or in
any way alienate all or any part of his or its Interest which will result in the
violation by such Member or by the Company of the Securities Act, any provision
of California law, or any other applicable laws. Without limiting the generality
of the foregoing, such Member agrees not to make any disposition of all or any
part of the Interest unless and until:
10.2.1 There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement and any applicable requirements
of state securities laws; or
10.2.2 Such Member has notified the Company of the proposed
disposition and has furnished the Company with (i) a detailed statement of the
circumstances surrounding the proposed disposition, (ii) a written opinion of
counsel, reasonably satisfactory to the other Member, that such disposition will
not require registration of any securities under the Securities Act or the
consent of or a permit from appropriate authorities under any applicable state
securities laws, (iii) in the case of any disposition of all or any part of the
Interest pursuant to Rule 144 promulgated under the Securities Act, a copy of
Form 144 filed with the Securities and Exchange Commission with respect to such
disposition, and (iv) such additional documents and information as the Manager
may reasonably require.
10.3 Right of First Refusal. In the event that for any reason either
----------------------
Member receives a bona-fide offer from any third party (other than an Affiliate)
to sell, pledge, transfer or dispose of (a "Sale") all or any part of such
Member's Interests and which such Member (the "Selling Member") elects to
accept, then the Selling Member shall give written notice to the other Member of
the Selling Member's intention (the "Sale Notice"). The Sale Notice must name
and identify the proposed transferee and specify the number of Interests to be
transferred (the "Offered Interests"), the price per Interest, the payment terms
and all other relevant terms of the proposed Sale with reasonable specificity.
Upon receipt of the Sale Notice, the other Member shall have the right, but not
the obligation, to purchase the Offered Interests on the
24
<PAGE>
terms and conditions contained in the Sale Notice. If the Member desires to
acquire all, or any part of, the Offered Interests, it deliver to the Selling
Member within thirty (30) days after receipt of the Sale Notice, a written
election (the "Purchase Notice") to purchase such portion or all of the Offered
Interests. Failure of the other Member to deliver such party's Purchase Notice
within said thirty (30) day period shall be deemed an election by such party not
to purchase any Offered Interests. The closing of the Sales of the Offered
Interests to the other Member shall occur within thirty (30) days after the
amount of Offered Interests which such Member is to purchase is determined. If
the other Member elects not to purchase all of the Offered Interests, the
Selling Member, subject to obtaining the other Member's approval pursuant to
Section 10.1, may sell the Offered Interests not so purchased by the other
Member to the third party specified in the Sale Notice; provided, however, that
the Selling Member shall not have the right to effect the proposed Sale with a
party other than the party identified in the Sale Notice or on terms different
than those contained in the Sale Notice without first giving the other Member a
new right of first refusal as described above, and in the event that the Selling
Member does not effect the proposed Sale within ninety (90) days after delivery
of the Sale Notice, the other Member's right of first refusal shall reapply and
the Selling Member shall not thereafter effect the proposed Sale without
complying with the above provisions.
10.4 Substitution of Members. Subject to compliance with this Article 10,
-----------------------
a transferee of an Interest shall have the right to become a substitute Member
only if such person pays any reasonable expenses in connection with his or her
admission as a new Member. The admission of a substitute Member shall not
result in the release of the Member who assigned the Interest from any liability
that such Member may have to the Company. The effective date of any such
transfer shall be the date on which the last to occur of the foregoing
conditions is satisfied.
10.5 Rights of Legal Representatives. If a Member who is an individual
-------------------------------
dies or is adjudged by a court of competent jurisdiction to be incompetent to
manage such Member's person or property, the Member's executor, administrator,
guardian, conservator or other legal representative may exercise all of the
Member's rights hereunder. Upon the occurrence of a Dissolution of a Member
that is not a natural person, the powers of that Member may be exercised by its
legal representative or successor.
10.6 No Effect to Transfers in Violation of this Agreement. Upon any
-----------------------------------------------------
transfer of an Interest in violation of this Article 10, the transferee shall
have no right to vote or participate in the management of the business, property
and affairs of the Company or to exercise any rights of a Member. Such
transferee shall only be entitled to become a holder of an Economic Interest and
thereafter shall only receive the share of the Company's Profits, Losses and
distributions of the Company's assets to which the transferor of such Economic
Interest would otherwise be entitled. Notwithstanding the immediately preceding
sentence, if, in the good faith determination of the other Member, a transfer in
violation of this Article 10 would cause the termination of the Company under
the Act, in the sole discretion of the other Member, the transfer shall be null
and void and the purported transferee shall not become either a Member or a
holder of an Economic Interest.
25
<PAGE>
10.7 Investment Representations.
--------------------------
10.7.1 Each Member hereby represents and warrants to the Company that
the acquisition of its Interest is made as a principal for its own account for
investment purposes only and not with a view to the resale or distribution of
such Interest, except insofar as the Securities Act, and any applicable
securities law or any state or other jurisdiction, permit such acquisition to be
made for the account of others or with a view to the resale or distribution of
such Interest without requiring that such Interest, or the acquisition, resale,
or distribution thereof, be registered under the Securities Act, or any
applicable securities law of the United States, any state, or other
jurisdiction.
10.7.2 Each Member agrees that it will not sell, assign, or otherwise
transfer its Interest, or any portion thereof, to any Person who does not
similarly represent and warrant and similarly agree not to sell, assign, or
transfer such Interest, or portion thereof, to any Person who does not similarly
represent and warrant and agree.
10.7.3 Each Member hereby agrees that a legend to the effect of the
following may be placed upon any documents evidencing ownership issued to such
Member representing the Interest to which such Member has subscribed:
"The Interest represented by this instrument has not been registered
under any securities laws, and the transferability of the Interest
therefore is restricted. The Interest may not be sold, assigned, or
transferred, nor will any assignee, vendee, transferee, or endorsee hereof
be recognized as having an interest in such Interest by the issuer for any
purpose, unless (i) a registration statement under the Securities Act of
1933, as amended, with respect to such Interest shall then be in effect and
such transfer has been qualified under applicable state securities laws, or
unless (ii) the availability of an exemption from registration and
qualification shall be established to the satisfaction of counsel for the
Company.
"The Interest represented by this document is subject to further
restric tion as to its sale, transferability, or assignment as set forth in
the Limited Liability Company Operating Agreement and agreed to by each
Member. Said restriction provides, among other things, that no transferee,
or assignee shall become a Substitute Member unless consented to by the
Manager."
ARTICLE 11
----------
BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS
-----------------------------------------
26
<PAGE>
111. Maintenance of Books and Records. The Manager shall cause complete
--------------------------------
and accurate books and records of the Company to be maintained in accordance
with generally accepted accounting principles and the Act, and shall give
reports to the Members in accordance with prudent business practices and the
Act.
11.2 Bank Accounts. The bank accounts of the Company shall be maintained
-------------
in such banking institutions as the Members shall jointly determine.
11.3 Tax Matters Partner. The "Tax Matters Partner" (as defined in Code
-------------------
section 6231), designated to represent the Company (at the Company's expense) in
connection with all examinations of the Company's affairs by tax authorities,
including resulting judicial and administrative proceedings shall be:
Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, California 91311
In its capacity as "Tax Matters Partner," the designated Person shall oversee
the Company tax affairs in the overall best interests of the Company.
ARTICLE 12
----------
DISSOLUTION AND LIQUIDATION
---------------------------
12.1 Dissolution of the Company. The Company shall be dissolved on the
--------------------------
happening of any of the following events:
12.1.1 The decision of all of the Members to dissolve and wind up the
affairs of the Company;
12.1.2 Upon the death, withdrawal, resignation, expulsion, bankruptcy
or dissolution of a Member, unless the other Member elects to continue the
business of the Company; or
12.1.3 Except as otherwise provided in the Agreement, upon the
occurrence of any other event causing termination of the Company under the laws
of the State of California.
27
<PAGE>
12.2 Winding Up and Dissolution.
--------------------------
12.2.1 Upon the Dissolution of the Company, the winding up of the
Company's business and the distribution of Company property and assets shall be
carried out in as expeditious a manner as is reasonably practicable and
consistent with the provisions of this Section 12.2 and applicable law.
12.2.2 The "Liquidator" (as hereafter defined) shall be responsible
for taking all actions relating to the winding up and distribution of the assets
of the Company. Image shall hereinafter be referred to in this Section 12.2 as
the "Liquidator". In the event Image is not able to act as the Liquidator, a
Liquidator shall be Lopez. The Liquidator shall collect all sums due and owing
to the Company, including sums due in accordance with Section 12.5 hereof, and
shall file all certificates or notices of the dissolution of the Company as
required by law. Upon the complete liquidation and distribution of Property, the
Members shall cease to be Members of the Company, and the Liquidator shall
execute, acknowledge and cause to be filed all certificates and notices required
by law to terminate the Company. A Member who acts as the Liquidator shall not
be entitled to receive any compensation therefor.
12.2.3 The Liquidator shall proceed without any unnecessary delay to
sell and otherwise liquidate Property; provided, however, that if the Liquidator
shall determine that an immediate sale of part or all of the Property would
cause undue loss to the Members, the Liquidator may, in order to avoid such
loss, defer the liquidation of the Property for a reasonable time, except for
such liquidations as may be necessary to satisfy the debts and liabilities of
the Company to Persons and parties other than the Members. The proceeds from
the sale and liquidation of Property shall be distributed as provided in Section
12.3 hereof.
12.2.4 Upon the dissolution of the Company, the Liquidator shall
cause the accountants of the Company to prepare, within thirty (30) days of such
dissolution, and shall furnish to each Member, a statement setting forth the
assets and liabilities of the Company as of the date of its dissolution.
Promptly following the complete liquidation and distribution of Property, the
Company's accountants shall prepare, and the Liquidator shall furnish to each
Member, a statement showing the manner in which Property was liquidated and
distributed.
12.2.5 The Liquidator shall have all of the powers of the Manager
hereunder.
12.3 Distribution of Liquidation Proceeds. The amounts received by the
------------------------------------
Liquidator on the sale or other disposition of the Company's assets or the
distribution of assets in kind shall be distributed and applied in the following
order of priority:
12.3.1 To the costs of sale of Property and the liquidation and
dissolution of the Company, including brokerage commissions, escrow costs,
accounting and legal fees and other expenses;
28
<PAGE>
12.3.2 To the payment of debts and liabilities of the Company,
including loans or other debts and liabilities (other than liabilities for
Distributions) of the Company to Members or former Members, including, without
limitation, all Loans;
12.3.3 To the setting up of any Reserves that the Liquidator shall
deem reasonably necessary for contingent or unforeseen liabilities or
obligations of the Company arising out of or in connection with the business of
the Company;
12.3.4 To the Members in accordance with the positive balances in
their Capital Accounts after adjustments for all allocations of Profits and
Losses, including Profits and Losses resulting from distributions of Liquidation
proceeds; and
12.3.5 To the Members in accordance with their respective Percentage
Interests.
12.4 Limitation on Liability of Members. Except as provided in Section
----------------------------------
12.5 hereof, upon the dissolution of the Company and the distribution of the net
proceeds and assets pursuant to Section 12.3 hereof, each Member shall look
solely to the Property for the return of its Capital Contributions, and if the
Property remaining after the payment or discharge of the debts and liabilities
of the Company are insufficient to return the full amount of the Capital
Contributions of each Member, the Member shall have no recourse or claim against
the Liquidator, the Manager or any Member.
12.5 Timing of Liquidating Distributions and Restoration of Company Capital
----------------------------------------------------------------------
Accounts. In the event of a liquidation of the Company or a Member's Interest
- ---------
in the Company within the meaning of Treasury Regulations Section 1.704-
1(b)(2)(ii)(g):
12.5.1 If any Member has an Adjusted Capital Account Deficit (after
giving effect to all contributions, distributions and allocations for all
taxable years including the year during which such liquidation occurs), then
such Member shall contribute to the capital of the Company the amount necessary
to increase its Adjusted Capital Account Deficit to zero, not later that the end
of the Fiscal Year during which such liquidation occurs or, if later, 90 days
after the date of the liquidation.
12.5.2 Any amount contributed to the Company pursuant to Section
12.5.1 hereof shall be paid or distributed as provided in Treasury Regulations
Section 1.704-1(b)(2)(ii)(b)(2).
12.5.3 Distributions pursuant to this Section 12.5 may be distributed
to a trust established for the benefit of the Members for the purposes of
liquidating Property, collecting amounts owed to the Company, and paying any
contingent or unforeseen liabilities or obligations of the Company or of the
Liquidator, arising out of or in connection with the Company. The assets of any
such trust shall be distributed to the Members from time to time, in the
reasonable discretion of the Liquidator, in the same proportions as the amount
distri-
29
<PAGE>
buted to such trust by the Company would otherwise have been distributed to the
Members pursuant to this Agreement.
12.6 Waiver of Right to Dissolve. Each Member expressly waives its right
---------------------------
to dissolve the Company or to obtain dissolution in any way except as provided
in this Agreement.
ARTICLE 13
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
13.1 Representations and Warranties of Image. Image hereby represents and
---------------------------------------
warrants to Lopez as follows:
13.1.1 Organization and Good Standing. Image is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of California
with all requisite power, right and authority to own and lease the properties
and assets it currently owns and leases and to carry on its business as such
business is currently being conducted.
13.1.2 Authorization of Agreement; No Violation. This Agreement has
----------------------------------------
been duly executed and delivered by Image. Image has the requisite power and
authority to enter into this Agreement, to make the representations, warranties,
covenants and agreements made herein and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by all requisite action on the part of the Board of Directors
of Image. The consummation of the transactions contemplated by this Agreement
will not result in or constitute any of the following: (a) a conflict with or
violation of any provision of the Certificate of Incorporation or Bylaws of
Image; (b) a default or an event that, with notice or lapse of time or both,
would be a default, breach or violation of any lease, license, promissory note,
conditional sales contract, commitment, indenture, mortgage, deed of trust or
other agreement, instrument or arrangement to which Image is a party or by which
Image is bound; or (c) a violation of any law, judgment, order, injunction,
decree, regulation or ruling of any court or governmental authority to which
Image is subject.
13.1.3 No Consents. No consent, action, approval or authorization of,
-----------
or registration, declaration or filing with, any governmental or non-
governmental third party is required to authorize, or is otherwise required in
connection with, the execution and delivery of this Agreement by Image or the
performance by Image of the terms of this Agreement or the validity or
enforceability hereof against Image.
13.1.4 Enforceability. This Agreement constitutes the legal, valid,
--------------
and binding obligation of Image enforceable against Image in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting creditors' rights generally and general
principles of equity.
13.2 Representations and Warranties of Lopez. Lopez hereby represents and
---------------------------------------
warrants to Image as follows:
30
<PAGE>
13.2.1 Authorization of Agreement; No Violation. This Agreement has
----------------------------------------
been duly executed and delivered by Lopez. Lopez has the requisite capacity to
enter into this Agreement, to make the representations, warranties, covenants
and agreements made herein and to consummate the transactions contemplated
hereby. The consummation of the transactions contemplated by this Agreement will
not result in or constitute any of the following: (a) a default or an event
that, with notice or lapse of time or both, would be a default, breach or
violation of any lease, license, promissory note, conditional sales contract,
commitment, indenture, mortgage, deed of trust or other agreement, instrument or
arrangement to which Lopez is a party or by which Lopez is bound; or (b) a
violation of any law, judgment, order, injunction, decree, regulation or ruling
of any court or governmental authority to which Lopez is subject.
13.2.2 No Consents. No consent, action, approval or authorization
-----------
of, or registration, declaration or filing with, any governmental or non-
governmental third party is required to authorize, or is otherwise required in
connection with, the execution and delivery of this Agreement by Lopez or the
performance by Lopez of the terms of this Agreement or the validity or
enforceability hereof against Lopez.
13.2.3 Enforceability. This Agreement constitutes the legal, valid,
--------------
and binding obligation of Lopez enforceable against Lopez in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting creditors' rights generally and general
principles of equity.
ARTICLE 14
----------
MISCELLANEOUS
-------------
14.1 Amendments. Amendments to or modifications of this Agreement shall
----------
require the written consent of all of the Members.
14.2 Successors and Assigns. This Agreement shall be binding upon, and, as
----------------------
to permitted or accepted successors, transferees and assigns, inure to the
benefit of the Members and the Company and their respective successors and
assigns.
14.3 Severability. In the event any provision or any sentence within any
------------
Section, is declared by a court of competent jurisdiction to be void or
unenforceable, such provision or sentence shall be deemed severed from the
remainder of this Agreement and the balance of this Agreement shall remain in
full force and effect.
14.4 Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be deemed to have been given if
personally delivered, transmitted by facsimile (with mechanical confirmation of
transmission), or deposited in the United States mail, registered or certified,
postage prepaid, addressed to the parties' addresses set forth below. Notices
given in the manner provided for in this Section 14.4 shall be deemed effective
on the third day following deposit in the mail or on the day of transmission or
delivery if given by facsimile or by hand. Notices must be addressed to the
parties hereto at
31
<PAGE>
the addresses set forth on Exhibit A, unless the same shall have been changed by
notice in accordance herewith.
14.5 Construction. The language in all parts of this Agreement shall be in
------------
all cases construed simply according to its fair meaning and not strictly for or
against any of the Members or the Manager.
14.6 Section Headings. The captions of the Articles or Sections in this
----------------
Agreement are for convenience only and in no way define, limit, extend or
describe the scope or intent of any of the provisions hereof, shall not be
deemed part of this Agreement and shall not be used in construing or
interpreting this Agreement.
14.7 Governing Law and Venue. This Agreement shall be construed according
-----------------------
to the laws of the State of California, without reference to its principles of
conflict of laws. Any action arising out of or related to this Agreement shall
be brought only in the state or federal courts located in Los Angeles County,
California, and in no other venue.
14.8 Further Assurances. Each Member, upon the request of another Member
------------------
or the Manager, agrees to perform all further acts and execute, acknowledge and
deliver all documents which may be reasonably necessary, appropriate or
desirable to carry out the provisions of this Agreement.
14.9 Pronouns and Plurals. Whenever the context may require, any pronoun
--------------------
used in this Agreement shall include the corresponding masculine, feminine and
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
14.10 Time of the Essence. Except as otherwise provided herein, time is of
-------------------
the essence in connection with each and every provision of this Agreement.
14.11 Third Party Beneficiaries. There are no third party beneficiaries of
-------------------------
this Agreement except Affiliates and Principals of the Members and the Manager.
14.12 Partitions. The Members agree that the Property that the Company may
----------
own or have an interest in is not suitable for partition. Each of the Members
hereby irrevocably waives any and all rights that it may have to maintain any
action for partition of any Property in which the Company may at any time have
an interest.
14.13 Entire Agreement. This Agreement and the Articles of Organization
----------------
constitute the entire agreement of the Members with respect to, and supersedes
all prior written and oral agreements, understandings and negotiations with
respect to, the subject matter hereof.
14.14 Waiver. No failure by any party to insist upon the strict performance
-----
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute a waiver
of any such breach or any other covenant, duty, agreement or condition.
32
<PAGE>
14.15 Attorneys' Fees. In the event of any litigation, arbitration or
---------------
other dispute related to or arising as a result of or by reason of this
Agreement, the prevailing party in any such litigation, arbitration or other
dispute shall be entitled to, in addition to any other damages assessed, its
reasonable attorneys' fees, and all other costs and expenses incurred in
connection with settling or resolving such dispute.
14.16 Counterparts. This Agreement may be executed in several counterparts,
------------
and all counterparts so executed shall constitute one Agreement, binding on all
of the parties hereto, notwithstanding that all of the parties are not signatory
to the original or the same counterpart.
33
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
Agreement as of the date first written above, and agree to be bound by all of
its terms.
IMAGE ENTERTAINMENT, INC.
By: /s/ MARTIN W. GREENWALD
------------------------
Its: President
/s/ MICHAEL LOPEZ
---------------------------
MICHAEL LOPEZ
34
<PAGE>
EXHIBIT A
---------
Initial Percentage
Member Contribution Interest
- ------ ------------ ----------
Image Entertainment, Inc. 50.00%
9333 Oso Avenue
Chatsworth, California 91311
Tax ID: 84-0685613
Michael Lopez 50.00%
____________________
____________________
____________________
Tax ID:_____________
35
<PAGE>
EXHIBIT B
---------
APPROVED BUDGET
(FOR PERIOD ENDING MARCH 31, 2000)
See Attached
36
<PAGE>
EXHIBIT C
---------
Lopez Management Agreement
See Attached
37
<PAGE>
EXHIBIT D
---------
Lopez Agreements
See Attached
38
<PAGE>
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
Image Entertainment, Inc.
Chatsworth, California
Gentlemen:
Re: Registration Statement Nos. 33-43241, 33-55393 and 33-57336
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated August 4, 1999 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Los Angeles, California
August 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 910
<SECURITIES> 0
<RECEIVABLES> 12,174
<ALLOWANCES> 3,175
<INVENTORY> 17,117
<CURRENT-ASSETS> 0<F1>
<PP&E> 20,280
<DEPRECIATION> 5,311
<TOTAL-ASSETS> 54,823
<CURRENT-LIABILITIES> 0
<BONDS> 0
31,782
0
<COMMON> 0
<OTHER-SE> (8,107)
<TOTAL-LIABILITY-AND-EQUITY> 54,823
<SALES> 18,020
<TOTAL-REVENUES> 18,020
<CGS> 13,626
<TOTAL-COSTS> 13,626
<OTHER-EXPENSES> 1,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320
<INCOME-PRETAX> (714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (714)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
<FN>
<F1>The Company has an unclassified balance sheet due to the nature of its
industry.
</FN>
</TABLE>
