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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For The Fiscal Year Ended March 31, 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)
_______________________
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California 84-0685613
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)
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9333 Oso Avenue, Chatsworth, California 91311
(Address of principal executive offices, including zip code)
(818) 407-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ( x ) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( x )
At June 1, 1999, 16,445,158 shares of Common Stock were outstanding, and the
aggregate market value of the shares of Common Stock held by the registrant's
nonaffiliates was approximately $78,837,306 (based upon the closing price of the
Common Stock on the NASDAQ National Market System on such date), excluding
shares of Common Stock held by the registrant's directors, executive officers
and 5% or more shareholders. Their holdings have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders
to be filed within 120 days of fiscal year-end.
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IMAGE ENTERTAINMENT, INC.
Form 10-K Annual Report
For The Fiscal Year Ended March 31, 1999
TABLE OF CONTENTS
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PART I ................................................................................... 1
ITEM 1. Business................................................................... 1
ITEM 2. Properties................................................................. 18
ITEM 3. Legal Proceedings.......................................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders........................ 21
PART II .................................................................................. 23
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 23
ITEM 6. Selected Financial Data.................................................... 24
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk................. 39
ITEM 8. Financial Statements and Supplementary Data................................ 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 66
PART III ................................................................................. 66
ITEM 10. Directors and Executive Officers of the Registrant......................... 66
ITEM 11. Executive Compensation..................................................... 66
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............. 66
ITEM 13. Certain Relationships and Related Transactions............................. 66
PART IV .................................................................................. 67
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 67
SIGNATURES ............................................................................... 69
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PART I
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ITEM 1. Business.
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GENERAL
Image Entertainment, Inc. (the "Company") was incorporated in Colorado in
April 1975 as Key International Film Distributors, Inc. The Company's present
name was adopted in June 1983. The Company reincorporated in California in
November 1989. Its principal executive offices are located at 9333 Oso Avenue,
Chatsworth, California 91311, and its telephone number is (818) 407-9100.
The Company operates in the domestic home video market. The Company has
two business segments, wholesale distribution and (through its wholly-owned
subsidiary Image Newco, Inc.) retail distribution. See "Subsidiary Activities"
below. See also Item 8. "-- Notes to Consolidated Financial Statements -- Note
1. Description of Business and Summary of Significant Accounting Policies --
Segment Information." The Company is primarily a licensee and distributor of
optical disc programming. Since 1983, the Company has distributed a broad range
of titles on laserdisc ("LD"). The digital video disc ("DVD"), a new, smaller
optical disc format that is directly competitive with LD became available to
consumers in March 1997, at which time the Company began distributing DVD
titles. Although the Company's primary business is the distribution of DVD and
LD titles, in 1998 the Company began to distribute certain videocassette ("VHS")
and compact disc ("CD") titles as well. See "Distribution of VHS & DTS-Encoded
CD Software" below.
The Company's DVD sales are rapidly growing. DVD sales represented
approximately 38%, 48%, 70% and 73% of the Company's net sales for the first,
second, third and fourth quarters of fiscal 1999, respectively. DVDs have
become the replacement format of choice among most former LD customers,
resulting in the decline in the Company's LD sales. In fiscal 1999, DVD and LD
represented approximately 60% and 36% of the Company's net sales, respectively,
as compared to fiscal 1998 during which DVD and LD represented approximately 21%
and 79% of the Company's net sales, respectively. See Item 7. "-- General --
Coexistence of LD Despite DVD's Success and Future LD Distribution Strategy."
The Company's VHS and CD business combined represented approximately 4% of net
sales for fiscal 1999.
The titles distributed by the Company are produced by motion picture
studios and other program suppliers. The Company manufactures and replicates
some of these titles under license agreements or other arrangements which
generally grant the Company exclusive distribution rights for the United States
and Canada. The Company also distributes titles that are purchased in finished,
prepackaged form; however, the Company generally does not have exclusive
distribution rights to these titles.
In preparing its exclusive titles for replication, the Company uses its in-
house digital post-production facility to create submasters. DVDs require the
added interim steps of authoring and compression, work which the Company does
not presently handle in-house but intends to do so in the future. The Company's
in-house graphic artists also design the interactive menus which appear on DVDs.
The submasters are then delivered to outside replication facilities. The
Company's creative services department designs program packaging, advertising
and marketing materials. The Company's marketing department implements
marketing programs and issues publicity. The Company's sales department
solicits orders and provides customer service and support. All product
distributed by the Company is shipped from the Company's warehouse and
distribution facility in Las Vegas, Nevada.
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Image Entertainment, Inc. 1
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Currently, there are only approximately 3,000 titles available on DVD, as
compared to over 10,000 titles available on LD. The Company distributes all
3,000 DVD titles (approximately 400 of which are the Company's exclusive
releases). The Company's exclusive DVD titles are generally obtained from
independent program suppliers, not motion picture studios (although the Company
has licensed a limited number of catalogue DVD titles from Orion and Universal),
and are typically comprised of music videos and concerts, classic catalogue
titles, foreign films and special interest programming. The Company releases
approximately 30 new exclusive DVD titles each month. Some of the exclusive DVD
titles currently available from the Company include Dances With Wolves, The
Eagles: Hell Freezes Over (live concert video), The Terminator, Super Speedway
(which was filmed in IMAX), and Janet Jackson: Velvet Rope Tour (live concert
video). Some of the exclusive DVD titles the Company expects to release in
fiscal 2000 include The Golden Age of Rock and Roll (rock music compilation),
The Paris Concert for Amnesty International (featuring performances by Bruce
Springsteen, Shania Twain, Alanis Morrisette and others) and 50 titles from the
prestigious RM Associates Library, which includes operas, ballets, symphonies
and other fine arts programming. The Company purchases DVD programming for
nonexclusive distribution from all of the motion picture studios, including
Columbia/TriStar, Disney, Fox, MGM, New Line, Orion (the Company has an
exclusive license to distribute 12 Orion catalogue titles on DVD), Paramount,
Universal (the Company has an exclusive license to distribute 50 Universal
catalogue titles on DVD) and Warner, and from DVD program suppliers with whom
the Company does not have exclusive DVD licenses. See "Acquisition of DVD & LD
Programming" below.
Although the demand for LDs has continued to drop, not all LD consumers
have switched to the DVD format or completely abandoned the LD format. One
reason is that certain titles, such as the Disney animated classics and many
collectible catalogue titles, have yet to be released on DVD. The Company
releases approximately 25 new exclusive LD titles each month. The Company's
exclusive LD titles are generally obtained from major motion picture studios
such as Disney, Warner and Fox and are typically comprised of blockbuster and
other new theatrical releases. Some of the exclusive LD titles currently
available from the Company include Peacemaker, Elizabeth and Thin Red Line.
Some of the exclusive LD titles the Company expects to release in fiscal 2000
include Saving Private Ryan, Prince of Egypt, Analyze This and The Matrix. The
Company is a nonexclusive wholesale distributor of LD programming from
Columbia/TriStar and other LD program suppliers with whom the Company does not
have exclusive LD licenses. The Company does not distribute LD programming from
Paramount or Universal. See "Acquisition of DVD & LD Programming" below.
Notwithstanding the competitive impact of DVD on the Company's LD business,
the Company believes that the DVD format represents significant growth
opportunities for the Company. Since DVD's March 1997 introduction, the Company
has successfully applied its LD licensing, production, marketing, creative
services and distribution skills to the DVD format. It is the Company's
strategy to continue to secure additional rights in both the DVD and LD formats
and to explore and exploit licensing and distribution opportunities in both
formats.
RECENT DEVELOPMENTS
In May 1998, the Company announced the closure of its wholly-owned
subsidiary, U.S. Laser Video Distributors, Inc., located in New Jersey. The
corporate entity was dissolved in February 1999.
On December 28, 1998, the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation (the "Foothill Agreement"), which
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. Concurrent
with funding of the Foothill
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2 Image Entertainment, Inc.
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Agreement, the Company terminated its $10 million December 1996 Loan Agreement
with Union Bank of California, N.A. and repaid all outstanding borrowings under
that agreement. See Item 7. " -- Liquidity and Capital Resources -- Financing
Activities -- Revolving Credit and Term Loan Facility."
On January 6, 1999, the Company completed its public offering and sale of
2.4 million shares of newly-issued common stock to a group of institutional
investors and other accredited investors at $5 per share. The net proceeds of
the offering (net of placement agent fees and professional services fees) was
$10,557,000. See Item 7. "-- Registered Common Stock Sale."
On January 11, 1999, the Company, through Image Newco, Inc. ("Image
Newco"), a wholly-owned subsidiary of the Company, completed its acquisition of
certain assets and liabilities of the Internet/direct-to-consumer DVD and LD
software business ("Ken Crane's") of Ken Crane's Magnavox City, Inc. ("KCMC")
pursuant to an Asset Purchase Agreement dated as of August 20, 1998 between KCMC
and Image Newco (as amended, the "Purchase Agreement"). Ken Crane's is engaged
in Internet/direct-to-consumer retailing of DVD and LD entertainment software.
See "Subsidiary Activities" below.
In May 1999, the Company closed its Chatsworth, California distribution
facility and began to ship all product from its new Las Vegas, Nevada warehouse
and distribution facility. Once certain software and operational issues related
to the transition to the new facility have been resolved, the new facility is
expected to be able to ship orders within 24 hours of receipt. See Item 7. " --
New Las Vegas Warehouse and Distribution Facility." The Company's corporate
offices remain in Chatsworth.
DVD & LD BASICS
Introduction. DVD and LD are optical disc entertainment software formats
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encoded with audio and visual information. Just as compact discs offer distinct
advantages over records and audiotapes, DVDs and LDs offer distinct advantages
over VHS, such as higher resolution video, full-fidelity discrete channel
digital audio, instant access to any scene, frame-by-frame viewing, greater
durability and superior interactive capability. Since both DVD and LD are
optical disc-based home video formats, the marketing, sale and distribution of
DVDs and LDs are similar. LDs offer a number of features which are similar to
DVDs; however, DVDs enjoy the enviable position of being the state-of-the-art
delivery system for home entertainment optical disc software. This section
discusses DVD and LD basics. For a further discussion of the DVD and LD formats
see Item 7. " -- General."
Software Availability. Most of the major motion picture studios release
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their theatrical new releases in the DVD format, often concurrently with the
title's VHS release. Disney, however, has not announced plans to release its
animated classic titles in the DVD format. Warner, an early proponent of the
DVD format, is the only studio that has been actively releasing catalogue titles
in the DVD format (Warner also controls the rights to MGM, New Line and certain
Turner programming). The other studios are selectively releasing a limited
number of catalogue titles in the DVD format, preferring to wait until the DVD
market matures. In addition to the motion picture studios, several independent
program suppliers (including the Company) also release DVD programming. There
are approximately 3,000 titles currently available on DVD (approximately 400 of
which are the Company's exclusive releases), with approximately 200 new DVD
titles released each month (approximately 30 of which are exclusive releases
from the Company). Although there are over 10,000 titles currently available on
LD, program suppliers (including the Company) have significantly scaled back the
number of new titles released in the LD format. Today, the only titles
generally released on LD are theatrical new releases and collectible catalogue
titles.
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Image Entertainment, Inc. 3
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Hardware Availability. Consumer electronic manufacturers have shifted away
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from LD hardware to DVD hardware. Pioneer's LD/DVD combination player, which
generally retails for approximately $999, is the only hardware player currently
manufactured that supports LDs. Virtually all consumer electronic manufacturers
(such as Toshiba, Panasonic, Sony, Thomson and Yamaha) manufacture one or more
models of DVD players. DVD players generally retail from $299 to $1,299 for the
more popular consumer models, and for as much as $5,500 for highly specialized
models. Both DVD players and LD/DVD combination players also play CDs.
Video Quality. Both DVD and LD are optical disc formats which are read by
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a laser beam. DVD's picture is digital while LD's picture is analog. DVD's
video image is compressed to fit on a 5" disc while LD's video image is
transferred uncompressed to a 12" disc. Both DVD and LD provide picture quality
superior to VHS. DVD, LD and VHS offer 500 (if properly compressed), 425 and
240 lines of resolution, respectively.
Audio Quality. The audio format offered on all DVDs is Dolby Digital (also
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known as "AC-3"), providing up to 5.1 channels of discrete audio. Digital audio
is offered on all LDs and many LD titles also offer Dolby Digital. Certain
DVDs, primarily music programs, also offer PCM stereo soundtracks similar to
those found on LDs and CDs. PCM stereo offers better sound quality, on two-
channel stereo programming, than can be realized with two-channel Dolby Digital.
DTS Digital Surround ("DTS") (a discrete multichannel format similar to Dolby
Digital) and Dolby Stereo Surround are also being offered on certain DVDs and
LDs. Consumers must have hardware compatible with Dolby Digital and DTS
technology to take advantage of these audio formats.
Content Capacity. A DVD has the ability to hold up to 139 minutes of
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compressed programming per side for a total of 266 minutes (almost 4 1/2 hours).
Dual-layer DVD technology also exists, allowing for the same storage capacity
without requiring the DVD to be turned over. Most DVD releases with run-times
in excess of 139 minutes are now encoded on a dual layer disc. A LD can hold 60
minutes of programming per side for a total of 120 minutes (2 hours). Many LD
players will automatically play the second side of a LD after a several second
delay, while low-end LD players require the LD to be turned over by hand. A LD
program with a run-time in excess of two hours requires two discs.
Software Features. DVDs and LDs are playback-only formats -- unlike VHS,
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neither format can record. Although there is speculation regarding the
availability of a consumer-oriented recordable DVD player, the Company believes
that such hardware will not be available for several years. Both DVD and LD
offer chapter stops and random/direct program access akin to CD's random track
access. DVDs and LDs typically offer programming with entertaining and
informative ancillary material such as audio commentaries by film talent,
deleted scenes, scripts, photos, alternative endings and multiple versions such
as a "director's cut." DVDs additionally offer on-screen interactive menus
which allow access to key scenes or chapters, ancillary material and, often
times, foreign language subtitles. LDs, on the other hand, typically list such
choices on the back of the LD packaging. LDs provide subtitles for foreign
films and sometimes offer foreign language alternatives on separate audio
tracks. LD titles are generally released in the widescreen version preferred by
videophiles. Many DVD releases offer both widescreen and pan-and-scan (full-
format) versions on the same disc. DVD technology also allows for PC-compatible
features, such as Internet web-links. Whether or not all or any of these
features will be included on a particular DVD or LD is determined by the studio
or program supplier or, in certain instances, licensees such as the Company.
Retail Sale and Pricing. DVDs and LDs are currently priced for the sell-
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through market as opposed to the rental market (although there is an emerging
DVD rental market). Most LD titles sell for between $29.99 and $39.99 and are
generally discounted up to 20% by the speciality LD retailers, music chain
stores
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4 Image Entertainment, Inc.
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and mail order/Internet sources that sell LDs. Currently, most DVD titles sell
for between $24.99 and $29.99 and are generally discounted up to 20% at retail,
although discounts of 30% or more are not uncommon through Internet retailers.
Market Penetration. LD hardware and software is not supported by mass-
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market retailers and, as a result, the LD market is an extremely small niche
market relative to VHS. Since DVD's introduction, most LD retailers and vendors
have added DVD programming to their offerings. Major video/music software
discounters and retailers such as Best Buy, Musicland and Tower are the DVD
market leaders, with large selections of DVD titles. Mass merchants such as
Wal-Mart, Target Stores and Kmart have increased the number of outlets that
carry DVD. With increasing DVD hardware penetration and growing consumer
interest in DVD, an increasing number of video speciality stores are stocking
DVD software for rental and sale. Today, the DVD market is only slightly larger
than the LD market was at its 1997 peak; however, the DVD market is growing
steadily. If the market for DVD does not grow large enough to justify continued
mass-market support, the Company believes DVD will most likely be a niche market
relative to the VHS market.
ACQUISITION OF DVD & LD PROGRAMMING
General. Because the Company does not produce its own DVD and LD
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programming, its success depends, in part, upon entering into new and renewing
existing licenses for programming and, in part, upon its ability to continue
purchasing programming on a wholesale distribution basis. There can be no
assurance that suppliers of programming will continue to enter into or renew
licenses on terms acceptable to the Company. The Company, however, believes
that its production, creative services, marketing and distribution expertise
will continue to make it an attractive partner for such suppliers. There can
also be no assurance that suppliers of programming which the Company distributes
on a wholesale distribution basis will continue to sell product to the Company.
The Company, however, believes that its reputation, knowledge and expertise in
selling optical disc product, strong credit history and volume purchases will
continue to make it an attractive distributor for such suppliers. See
"Competition" below.
Licensed titles accounted for approximately 52% of fiscal 1999 net sales
(of which 33% was derived from DVD and 19% was derived from LD), 46% of fiscal
1998 net sales (of which 9% was derived from DVD and 37% was derived from LD)
and 56% of fiscal 1997 net sales (the Company did not distribute licensed DVD
titles until fiscal 1998).
Wholesale distribution accounted for approximately 48% of fiscal 1999 net
sales (of which 30% was derived from DVD and 18% was derived from LD), 54% of
fiscal 1998 net sales (of which 12% was derived from DVD and 42% was derived
from LD) and 44% of fiscal 1997 net sales (of which less than 1% was derived
from DVD).
License Agreements. The Company enters into licenses whereby it acquires
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from suppliers of programming the right to manufacture and distribute their
titles on DVD, LD or both (and in some cases VHS). Licenses can be exclusive or
nonexclusive, but are typically exclusive. Licenses either cover specific
titles or a licensor's existing library and future releases for a designated
term. This latter type of license agreement is commonly referred to as an
"output" agreement. Most of the Company's DVD license agreements, although
exclusive, are not output agreements, rather they typically cover seven or fewer
titles. Most of the Company's recent DVD license agreements also include LD
(and sometimes VHS) format rights.
When the Company licenses rights, it provides a variety of value-added
services relative to the licensed programs, such as creation of the jacket and
packaging art work, quality-control, replication and
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Image Entertainment, Inc. 5
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manufacture of the product, marketing, sales, warehousing and distribution and,
in certain instances, the addition of enhancements such as separate audio
tracks, commentaries, foreign language tracks, menus and other similar ancillary
materials.
In return for the grant of rights, the Company pays royalties to its
licensors. Royalties are expressed as a percentage of the Company's net
revenues from sales. In many cases, the Company pays licensors advances or
minimum guarantees which are recoupable against royalties earned on a title-by-
title basis or, if cross-collateralized, against all or certain groups of the
titles licensed. Advances under most output licenses are paid according to
predetermined schedules, regardless of the number and marketability of the
titles subsequently available. In entering into licenses and evaluating the
required advances, guarantees and other obligations, the Company depends, to a
large extent, on its ability to anticipate the public's changing taste in
programming and (for output licenses) licensors' future releases.
Generally, the Company's license agreements have terms of two to five years
and are limited to the United States and Canada. Two of the Company's exclusive
DVD license agreements (Orion and Playboy) are terminable by the licensor if DVD
hardware penetration reaches certain specified levels. Under most of the
Company's output license agreements, the Company has two to five years to select
titles and two to five years to distribute a title after its release. While
efforts are made to renegotiate and renew licenses prior to expiration, there
can be no assurances that license agreements will be renegotiated or renewed.
In fiscal 1999, exclusive titles from only two of the Company's licensors
accounted for more than 5% of the Company's total net sales: Disney (agreement
covers LD titles only) (8% of total net sales and 21.5% of LD-only revenues) and
Orion (5.5% of total net sales, 8.7% of DVD-only revenues and 1% of LD-only
revenues). Exclusive titles from the following licensors accounted for the
largest percentages of fiscal 1998 net sales (the only percentage equal to or in
excess of 10% is indicated): Disney (agreement covers LD titles only) (17% of
total net sales and 21.5% of LD-only revenues), New Line (agreement covers LD
titles only), Warner (agreement covers certain classic MGM/UA and MGM/Turner
library LD titles only), Polygram (agreement covers LD titles only) and Playboy
(agreements cover DVD and LD titles). Exclusive titles from the following
licensors accounted for the largest percentages of fiscal 1997 net sales (only
percentages equal to or in excess of 10% are indicated) (the Company did not
release any exclusively licensed DVD titles in fiscal 1997): Disney (26.9% of
total net sales and 27.1% of LD-only revenues), MGM (10.2%), New Line, Warner
(agreement covers certain classic MGM/UA and MGM/Turner library LD titles only)
and Hallmark. The decline in total sales of Disney LD titles from 26.9% in
fiscal 1997 to 8% in fiscal 1999 is attributable primarily to two factors: (1)
DVD sales increased as a percentage of total (DVD and LD) sales from 1% in 1997
to 60% in 1999, resulting in a lower percentage of Disney LD sales to total
sales; and (2) the general decline in annual LD sales and the corresponding
change in retailer purchasing patterns for LD resulting from DVD's presence in
the market.
Historically, the Company has not attempted to obtain foreign distribution
rights, however, the Company is beginning to pursue foreign license rights for
DVD programming, particularly for European distribution.
Wholesale Distribution. In addition to its licensing activities, the
----------------------
Company is a wholesale distributor of certain DVD and LD programming that it
acquires from certain major motion picture studios and other suppliers. In
general, the Company acquires DVD and LD programming for wholesale distribution
in finished, prepackaged form, and thus does not provide any creative services
with respect to such programming. The Company has three exclusive LD
distribution agreements (with Fox, Voyager and Warner) pursuant to which the
Company, for a fee, typically provides all of the same value-added services it
provides under exclusive license agreements. More typical is the nonexclusive
wholesale distribution
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6 Image Entertainment, Inc.
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arrangement where the program supplier notifies the Company of its upcoming
releases and the Company then solicits its customers and places orders for the
releases. In acquiring DVDs and LDs for nonexclusive wholesale distribution, the
Company is generally required to pay program suppliers within 60 days of
delivery.
In fiscal 1999, the Company's wholesale distribution of DVD titles from
only two companies accounted for more than 5% of net sales: Voyager (5.3%) and
Warner (5.2%). Similarly, in fiscal 1999, the Company's wholesale distribution
of LD titles from only two companies accounted for more than 5% of net sales:
Warner (6%) and Fox (5.5%). Exclusive wholesale distribution under the
following agreements accounted for the largest percentage of fiscal 1998 net
sales (the only percentage in excess of 10% is indicated): Fox (15%) (agreement
covers LD titles only), Voyager (agreement covers LD and certain DVD titles) and
Warner (agreement, which commenced in August 1997, covers LD titles only).
Exclusive wholesale distribution under the following agreements accounted for
the largest percentage of fiscal 1997 net sales (the only percentage in excess
of 10% is indicated): Fox (19%) (agreement covers LD titles only) and Voyager
(agreement covers LD and certain DVD titles).
Pursuit of DVD and LD Rights. The Company intends to continue to actively
----------------------------
pursue DVD and LD license and distribution rights. The Company generally
recognizes higher margins and revenues from its exclusive license agreements
than its nonexclusive license and wholesale distribution arrangements. The
Company will attempt to secure exclusive rights under license agreements, which
will most likely require advances and royalty payments. Where the Company is
unable to secure either exclusive or nonexclusive license rights, it will
attempt to purchase and distribute programming on a wholesale distribution
basis.
SALES, CUSTOMERS AND CREDIT POLICIES
The Company sells both licensed and wholesale DVD and LD product (and on a
limited basis VHS and CD product) directly to retailers or through
subdistributors subject to the terms of the Company's dealer sales policies.
Sales to the Company's four largest customers accounted for approximately 28% of
the Company's net sales for fiscal 1999 (no customer accounted for greater than
10% of the Company's fiscal 1999 net sales): Norwalk Record Distributors, Ken
(in that order) the Company's top three customers of DVD product for fiscal
1999. Norwalk and Ken Crane's were (in that order) the Company's top two
customers of LD product for fiscal 1999. Sales to the following customers
accounted for the largest percentages of the Company's fiscal 1998 net sales (no
customer purchased DVDs in excess of 10% of fiscal 1998 net sales): Norwalk
Record Distributors (10.9%), Ken Crane's (10.6%) and Musicland (10%). LD sales
to the following customers accounted for the largest percentage of the Company's
fiscal 1997 net sales (only percentages equal to or greater than 10% are
indicated) (on a per customer basis, DVD sales, relative to LD sales, were
minimal): Musicland (11.2%), Alliance Entertainment (which includes its
consolidated subsidiaries Bassin Distributors, one of the Company's top five
customers in fiscal 1996, and Abbey Road Distributors, another of the Company's
customers) (10.4%), Ken Crane's (10.2%), Norwalk Record Distributors and Trans
World Entertainment Corp. The Company does not have any short- or long-term
contracts or exclusive dealing arrangements with its major customers.
The Company's prospective customers generally submit a credit application
followed by a minimum opening order. If the application is accepted, credit
terms are assigned. Open account terms generally require payment within 45 to
60 days of delivery. The Company may also require a customer to provide a
purchase money security interest, a personal guarantee, a letter of credit
and/or other collateral. The provision for doubtful accounts receivable was
0.2% of net sales during fiscal 1999. The assignment of
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Image Entertainment, Inc. 7
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certain doubtful receivables to third parties at return rates more favorable
than anticipated resulted in the Company realizing net recoveries of doubtful
accounts receivable of 0.4% of net sales during fiscal 1998. (In fiscal 1999, no
receivables were assigned to third parties.) The provision for doubtful accounts
receivable was 2.3% of net sales during fiscal 1997 (the significant increase in
fiscal 1997 was attributable to the financial difficulties experienced by
several of the Company's largest customers). The amount of doubtful accounts
receivable actually written off by the Company in fiscal 1999, 1998 and 1997 was
approximately $23,000, $894,000 and $650,000, respectively. The allowance for
doubtful accounts at March 31, 1999 and 1998 was approximately $525,000 and
$404,000, respectively.
Although sales are generally considered final, the Company allows customers
to return a portion of their stock on a quarterly basis. This allowance
generally is non-cumulative, based on the customer's prior quarter purchases and
limited on an individual-title basis. On occasion, however, greater return
allowances are afforded to certain large customers. The Company has provided
for estimated returns as sales are recorded. Stock returns, other than for
defective product, amounted to approximately 4.9% of all net sales during fiscal
1999 (including DVD, LD, VHS and CD product), approximately 5.0% of all net
sales during fiscal 1998 (including both DVD and LD), and approximately 9.5% of
all LDs sold in fiscal 1997 (DVD sales were minimal in fiscal 1997). Returns of
defective product have been minimal and are generally covered by manufacturers'
warranties.
As of June 1, 1999, the Company had approximately $4.5 million of backlog
orders (80% from DVD product and 20% from LD product). The Company expects to
fill 100% of the backlog orders within the current fiscal year. As of June 15,
1998, the Company had approximately $6.0 million of backlog orders (including
pre-orders of $3.3 million for LD new releases and $2.1 million for DVD new
releases), 66% from LD product and 34% from DVD product (which was launched in
March 1997).
DVD & LD MARKETING
The Company's marketing strategy is to promote its product, in particular,
and the DVD and LD formats, in general. The Company's marketing efforts, which
are directed toward consumers and video software and hardware dealers, involve
point-of-sale advertising, advertising in trade and consumer publications,
national radio advertising campaigns, dealer incentive programs, trade show
exhibits and bulletins featuring new releases and in-stock catalogue titles. The
Company spent approximately $730,000 for advertising in trade and consumer
publications in fiscal 1999 and approximately $500,000 in fiscal 1998.
Promotion of each new title generally begins eight to sixteen weeks before
the scheduled in-store release with the mailing of the solicitation materials
produced in-house. An active telemarketing campaign follows.
The Company also maintains a web site on the Internet at www.image-
entertainment.com. The web site includes information regarding the Company's
exclusive releases, as well as weekly new product announcements and information
of general interest to the home video consumer. News releases pertaining to the
Company are also posted to the web site.
DVD & LD PRODUCTION AND REPLICATION
Under a typical license agreement, the licensor delivers a program master
and art work to the Company for quality evaluation. If the Company deems the
program master acceptable, the Company's in-house post-production facility
creates a submaster with specifications for the DVD or LD format. The Company's
in-house graphic artists then design the interactive menus which appear on the
DVDs.
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8 Image Entertainment, Inc.
<PAGE>
Prior to replication, DVDs require the additional interim steps of
authoring and compression, work which the Company does not presently handle in-
house but intends to do so in the future. The Company currently uses any one of
several authoring and compression facilities for this work. Pioneer, Warner
Advanced Media Operations ("WAMO") and California Video Center performed most of
the Company's authoring and compression work in fiscal 1999. After authoring
and compression work is completed, the DVD submaster is delivered to an outside
manufacturing facility for replication. The Company currently replicates all of
its DVDs at WAMO; however, the Company believes it could easily shift its
product to any number of DVD replication facilities, such as Panasonic, Pioneer,
Technicolor, Nimbus, Sony and Cinram.
LD submasters are delivered to the LD manufacturer for replication. The
Company currently uses two LD replication facilities: Kuraray in Japan and
Pioneer in the United States. The Company believes that these LD manufacturing
facilities currently have sufficient aggregate capacity to fulfill the Company's
orders. If, however, either manufacturer were unable to supply the Company with
LDs, the Company believes it would be able to shift its product to other
manufacturers.
DVD replication is faster and less expensive than LD replication. It takes
approximately two to three weeks from the time the Company places a replication
order for DVDs for the DVDs to arrive at the Company, whereas the turnaround
time for LDs is approximately three to four weeks. The average per unit
replication cost for DVDs is approximately $2.00, whereas the average
replication cost for LDs is approximately $8.00; however, the average cost of
authoring, compression and production of a DVD title is approximately $6,000 as
compared to the $2,000 average cost of mastering a two-sided LD.
The Company attempts to solicit orders from its customers prior to
submitting replication orders. The Company generally must pay for finished
discs within 45 to 90 days of invoicing. The Company's goal is to order for
manufacture that number of units of each title which will enable the Company to
ship the bulk of the order within 30 days of delivery. Attainment of this goal
depends largely upon the Company's ability to predict the popularity of a title.
DVD and LD packaging is designed by the Company's creative services staff
and sent to a printer for replication. With respect to LDs, the manufacturer
will either package and shrink-wrap the LDs and ship the completed product to
the Company or ship the LDs in bulk to the Company and the Company will package
and shrink-wrap the LDs at its own facility. The Company estimates that 30% of
the manufactured LD units are received in finished form and 70% of the
manufactured LD units are received in bulk shipments requiring packaging and
shrink-wrapping in-house. WAMO currently replicates and packages all of the
Company's DVD product, returning the finished DVD product to the Company for
distribution.
The Company's in-house digital post-production facility and creative
services facility (which utilizes computer graphics equipment for the output of
high resolution, four-color separations used for DVD and LD package printing)
allow the Company to format over 80% of the masters (from all licensors) it
would otherwise contract out to post-production facilities and to deliver to
printers final, color separated film it would otherwise contract out to outside
facilities.
DISTRIBUTION OF VHS & DTS-ENCODED CD SOFTWARE
In addition to the Company's DVD and LD licensing and distribution
activities, the Company distributes DTS-encoded CD music programming, as well as
certain programming on VHS. The Company views its distribution of VHS and DTS-
encoded CD programming as a compliment to its core LD/DVD business.
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Image Entertainment, Inc. 9
<PAGE>
In fiscal 1998, the Company began licensing certain niche entertainment
programming on VHS for exclusive distribution. When and where feasible, the
Company plans to continue to acquire exclusive VHS distribution rights. Such
rights are often offered as part of a bundle of rights which include DVD and LD
rights. VHS represented approximately 2.2% of the Company's net sales for
fiscal 1999. Some of the Company's best selling VHS releases for fiscal 1999
included: Rolling Stones: Bridges to Babylon, Bee Gees: One Night Only, Janet
Jackson: Velvet Rope Tour and the Broadway musical Into the Woods.
DTS is a multichannel audio format that delivers up to six discrete
channels of audio which surrounds the home theater consumer with 360 degrees of
sound that better approximates a live concert experience. Special decoder
hardware is required to receive the enhanced sound capabilities offered by DTS.
In 1997, the Company entered into two exclusive agreements, with Digital Theater
Systems, Inc. and Miller Nevada, Ltd., both of which grant to the Company
exclusive distribution rights to DTS-encoded CDs. Such CDs represented
approximately 1.8% of the Company's net sales for fiscal 1999. Some of the
Company's exclusive DTS-encoded CD releases included Eagles: Hell Freezes Over,
the motion picture soundtrack Titanic and Steely Dan: Gaucho. The Company also
releases certain DTS-encoded LDs.
SUBSIDIARY ACTIVITIES
Image Newco Acquisition of Ken Crane's. The Company's wholly-owned
--------------------------------------
subsidiary, Image Newco, Inc., acquired Ken Crane's on January 11, 1999. Ken
Crane's currently operates in one business segment, retail distribution, under
the name "Ken Crane's DVD and Laserdisc Superstore." Ken Crane's, which
specializes in Internet/direct-to-consumer entertainment software retailing,
operates a retail store in Westminster, California and also sells its product
via mail order and over the Internet on the www.kencranes.com web site. Prior
to its acquisition by Image Newco, Ken Crane's was one of the Company's largest
customers. During the Company's 1999 (through the January 11, 1999 acquisition
date) and 1998 fiscal years, sales by the Company to Ken Crane's were $5,983,000
and $8,069,000, respectively.
The assets acquired by Image Newco included the www.kencranes.com web site,
a mail-order business, an approximately 8,000 square foot retail store (located
in leased premises in Westminster, California), DVD and LD inventory, and fixed
assets and certain other assets used in the operation of Ken Crane's Internet,
mail-order and retail store businesses. In addition, Image Newco assumed
certain of Ken Crane's trade accounts payable. The acquisition purchase price
included $3 million in cash and 258,370 shares of Image common stock, valued at
$2 million (based on an agreed upon value of $7.74 per share). The purchase
price may be subject to adjustment following the results of the post-closing
audit of Ken Crane's. The Company funded the purchase price and its related
payments with a portion of the net proceeds raised in the Company's January 6,
1999 public offering of common stock. In connection with the acquisition, Image
Newco entered into (1) a five-year employment agreement with Charles K. Crane,
II ("Ken Crane, Jr.") (and paid Ken Crane, Jr. a signing bonus of $1.5 million
pursuant to that agreement) and (2) one-year consulting agreements with Pamela
Crane and Casey Crane (and made a one-time payment of $250,000 to each in
connection with those agreements). Ken Crane, Jr. oversees day-to-day
operations of Ken Crane's and serves as Vice-President - General Manager of
Image Newco.
The Company believes that Ken Crane's will generate future operating
benefits by providing a wider distribution channel for the Company's products in
the form of increased access to Internet, mail order and traditional "bricks and
mortar" retail sales. The Company believes that Ken Crane's will be able to
take advantage of the growing level of commerce conducted over the Internet. In
addition, the Company expects that by late September 1999, the www.kencranes.com
web site will be integrated with the Company's new warehouse and distribution
facility in Las Vegas, Nevada. The Company believes that integration of the
www.kencranes.com web site will increase Ken Crane's ability to fulfill and ship
orders quickly and, as a
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10 Image Entertainment, Inc.
<PAGE>
result, will ensure customer satisfaction and customer loyalty and, ultimately,
will increase traffic volume and orders on the web site.
The www.kencranes.com web site differs from the Company's current web site
at www.image-entertainment.com in that visitors to the www.kencranes.com web
site can purchase DVDs and LDs directly from the web site. The
www.kencranes.com web site lists retail prices, has "shopping cart" and "check
out" features, allows for consumer interaction via e-mail, lists over 10,000
items that can be purchased directly from the site and provides synopses of each
such item. Since the Company, unlike Ken Crane's, is a distributor rather than
a direct-to-consumer retailer, the Company's www.image-entertainment.com web
site does not sell product, but rather simply provides information regarding the
Company, its new releases (and suggested retail prices) and other general
Company and industry news.
In the coming months, the Company intends to rename Image Newco and make a
corresponding change to the Ken Crane's retail store name and web site domain
name. The Company also intends to upgrade the look, content, feel and
organization of the web site, which will include the addition of software
enhancements that allow for "one click" ordering and "personalization" based on
a consumer's purchasing habits and other information provided by the consumer.
The retail store will also be redesigned and remodeled to enhance the efficiency
of its customer service/call center area and to provide for more effective
product placement.
Closure of U.S. Laser. In May 1998, the Company announced the closure of
---------------------
its wholly-owned subsidiary U.S. Laser Video Distributors, Inc. The corporate
entity was dissolved in February 1999. See Item 7. "-- Closure of U.S. Laser."
TRADEMARKS
The Company has received Federal registration of the trademark "IMAGE" in
the United States Patent and Trademark Office. The Company also uses the
trademarks "Vocal Images," "The Music Disc," "The Finest in Laserdiscs" and "The
Finest in Home Entertainment" and the service marks "Image Post" and "Image
Creative Group."
COMPETITION
The Company faces competition in the sale of DVDs and LDs to retailers.
The Company believes it has a competitive advantage with respect to sales of its
exclusive LD and DVD titles because it is the only source of such titles. With
respect to LD and DVD titles for which the Company does not have exclusive
rights, the Company believes that it has a competitive sales advantage because
of the amount and selection of its inventory as well as its pricing. Although
the Company's prices may not be as low as those of the studios that sell their
own product, this has a limited effect on the Company because the studios only
sell to a limited number of purchasers, and most retailers must purchase through
a distributor such as the Company. The Company believes it also benefits from
the convenience of "one-stop shopping" for retailers who purchase exclusive
titles from the Company and can easily purchase additional nonexclusive titles
at the same time.
The Company also faces competition in securing DVD and LD license and
distribution rights. The Company believes that it is able to successfully
compete to obtain DVD and LD license and distribution rights because of its
reputation and relationships, the quality of its product and its ability to make
advance payments against revenues to its suppliers. Finally, the Company faces
competition from other forms of in-home entertainment. See "Risk Factors"
below. See also Item 7. "-- Risks and Contingencies."
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Image Entertainment, Inc. 11
<PAGE>
EMPLOYEES
At June 1, 1999, the Company had 109 full-time employees and 1 part-time
employee, and Ken Crane's had 26 full-time employees and 38 part-time employees.
RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
which the Company believes are within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. When used in this document, the words "anticipate,"
"believe," "may," "estimate," "expect" and similar expressions, variations of
such terms or the negative of such terms as they relate to the Company or its
management are intended to identify such forward-looking statements. Such
statements are based on management's current expectations and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. Important factors that could cause or contribute to such difference
include those discussed under "Risk Factors" in this Annual Report. You are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
The Company has made forward-looking statements in this Item 1. and
subsequent Items (including but not limited to Item 7.) of this Annual Report
concerning, among other things, (1) the significance of the growth opportunities
for the Company represented by the DVD format, (2) the Company's ability to
continue to be an attractive licensee and distributor for suppliers, (3) the
ability of the Company to correct the new warehouse and distribution facility's
shipping delays, (4) the expected dates by which the new warehouse and
distribution facility will (a) operate at the efficiency level of the closed
Chatsworth facility, (b) operate at its planned efficiency level and (c)
integrate the Ken Crane's web site and handle fulfillment shipping for Ken
Crane's, (5) whether the Company has a competitive advantage and the factors
that contribute to such competitive advantage, (6) the current number of
domestic DVD households, (7) the ability of LD and DVD to coexist, (8) the
viability of the LD programming market, (9) whether the Company's LD-related
assets will continue to have material decreases in net realizable value, (10)
the most reasonably likely worst case scenario if the Company does not complete
its Year 2000 compliance program in a timely manner, (11) the ability of Ken
Crane's to generate future operating benefits by providing a wider distribution
channel for the Company's products, (12) the ability of Ken Crane's to take
advantage of the growing level of commerce conducted over the Internet, and (13)
the Company's ability to fulfill and ship orders quickly as a key feature in
ensuring customer satisfaction and customer loyalty that will result in
increased traffic volume on the www.kencranes.com web site and an increased
volume of orders. The inclusion of such forward-looking information should not
be regarded as a representation by the Company, its management or any other
person that the future events, plans or expectations contemplated by the Company
will be achieved. The Company undertakes no obligation to release publicly any
updates or revisions to any such forward-looking statements that may reflect
events or circumstances occurring after the date of this Annual Report. Factors
that could cause or contribute to such material differences include, but are not
limited to, those discussed below.
If We Cannot Maintain Relationships with Our Program Suppliers and Vendors,
Our Business May Be Adversely Affected. We receive a significant amount of our
revenues from the distribution of those
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12 Image Entertainment, Inc.
<PAGE>
DVDs and LDs for which we have exclusive agreements with program suppliers. We
cannot assure you that we will be able to renew these exclusive rights as the
existing agreements with each program supplier expire. We also cannot assure you
that our current program suppliers will continue to support the DVD and LD
formats (particularly LD) in accordance with our exclusive agreements. In
addition, we cannot assure you that our current program suppliers will continue
to license titles to us on the current terms or that we will be able to
establish new program supplier relationships to ensure acquisition of titles in
a timely and efficient manner or on an exclusive basis. If we cannot maintain
relationships with our program suppliers, on an exclusive basis or otherwise, or
our program suppliers do not continue to support the DVD and LD formats we could
suffer a material adverse effect on our business, prospects, financial condition
and results of operations.
If We Cannot Continue to Secure DVD License and Distribution Rights, Our
Business May Be Materially Adversely Affected. We cannot assure you that we
will be able to continue to secure DVD license and distribution rights on terms
acceptable to us. Given the relative newness of the DVD format and its
uncertain position in the home video software market, none of the major motion
picture studios has granted exclusive licenses for its new releases and most
popular catalogue titles. Instead, the major motion picture studios sell this
programming directly to retailers, other distributors and us. Given that DVD is
positioned to become a replacement for VHS (although it remains to be seen
whether this will occur), we also compete with independent licensing and
distribution entities from the VHS sector of the home video market. This is
different from the LD market (which is an established specialized market) in
which we face licensing and distribution competition from significantly fewer
sources. We expect to be able to purchase DVD titles on a wholesale basis from
all participating program suppliers for sale to our customers but we cannot
assure you that we will be able to continue to do so if DVD program suppliers
elect to sell direct, increase the number of entities distributing their
programming or limit our access to their programming.
If We Cannot Continue to Secure LD License and Distribution Rights, Our
Future Revenues May Be Negatively Impacted. We cannot assure you that we will
be able to continue to secure LD license and distribution rights on terms
acceptable to us. We compete directly with Pioneer and other independent
licensees for LD distribution rights. Pioneer licenses and distributes LDs and
has exclusive LD output license agreements with Paramount and Universal. We
also compete with LD subdistributors and Columbia/TriStar, which sells its own
programming directly to retailers and to other distributors in addition to its
sales to us. We expect to continue to be able to purchase LD titles on a
wholesale basis from Columbia/TriStar but we cannot assure you that we will
continue to be able to do so if Columbia/TriStar elects to sell direct, increase
the number of entities distributing its programming or limit our access to
programming.
If DVD and LD Cannot Compete Successfully with Other Forms of In-Home
Entertainment, Our Future Revenues May Be Negatively Impacted. Both the DVD and
LD formats compete with other forms of in-home entertainment, such as VHS,
network, syndicated, cable and pay-per-view television and home satellite
systems. The DVD and LD formats also compete with new and emerging technologies
in the entertainment industry, such as entertainment programming on the
Internet, video-on-demand, high-definition television, digital videotape and
optical discs with greater storage capacity. These alternate forms of leisure-
time entertainment and novel means of video delivery could negatively impact the
overall market for DVD and LD sales and us. In addition, emerging technology
may allow consumers to download audio or video programming directly to the
consumer's home computer from the Internet and store such products on a
recordable disc. The development and advancement of such technology into a
viable alternative to purchasing DVDs or LDs could have a material adverse
effect on our business, prospects, results of operation and financial condition.
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Image Entertainment, Inc. 13
<PAGE>
Any Reduction in the Amount of Product That Our Largest Customers Purchase
from Us May Adversely Affect Our Business. Our aggregate sales to our four
largest customers (Norwalk Record Distributors, Ken Crane's -- acquired by a
wholly-owned subsidiary of the Company in January 1999, Musicland and DVD
Express) accounted for approximately 28% of our net sales for the fiscal year
ended March 31, 1999. Any significant delay or reduction in orders from these
customers or any nonpayment or late payment of amounts due by these customers
could have a material adverse effect on our business, prospects, results of
operations and financial condition. We cannot assure you that these customers
will continue their current buying patterns or that we will be able to maintain
our current relationships with each of them.
The Rapid Decline of the LD Industry Has Adversely Affected Our Business.
Due to the growth of the market for DVDs, LD programming sales have continued to
decrease significantly during the fiscal year ended March 31, 1999. We cannot
assure you that the LD market will stabilize at any time in the future or that
we will be able to distribute LDs profitably at any time in the future.
Inability to Correct Problems That Arise With Our New Warehouse and
Distribution Facility Could Have a Material Adverse Effect on Our Business. Any
inability to correct the problems we are experiencing or any new problems that
may arise relating to our new warehouse and distribution facility in Las Vegas,
Nevada could have a material adverse effect on our business, prospects, results
of operations and financial condition. Although we have opened our new facility,
the facility is not currently operating at its planned level of efficiency.
Programmers from the software vendor have been working to finalize the software
package and fully train the warehouse personnel. We currently expect that our
new facility will reach planned operating efficiency during August 1999. We
cannot assure you, however, that our new facility will actually be operating at
its planned efficiency level by that date or that the automated systems will
operate as planned without further delay.
If the DVD Market Does Not Continue to Grow, Our DVD Business May Not Be
Profitable. Our business is increasingly dependent on the growth of the market
for DVDs, which have not yet received mass market acceptance. We believe that
the lack of mass market acceptance of DVD is principally due to the following
factors:
. the lack of a consumer-priced recordable DVD player; and
. the lack of an established rental market.
These factors could impede the growth and acceptance of DVD. We cannot
assure you that a rental market will develop or that a consumer-priced
recordable DVD player (which could lead to greater mass-market appeal) will be
available in the future. In addition, we cannot assure you that studios and
program suppliers will release a wide variety of new release and catalogue DVD
titles to increase availability to the level VHS titles and therefore increase
the appeal of the DVD format.
If Our DVD or LD Production and Replication Vendors Do Not Continue to
Provide Services to Us, Our Production Costs May Increase Significantly. We
expect to be able to continue using various outside vendors to author, compress
and replicate marketable DVD titles for release under our exclusive DVD license
agreements. Despite LD's rapid decline, we also believe that we will be able to
find facilities to replicate our LD products. We cannot assure you, however,
that our vendors will continue to provide such services at the same or higher
level of quality and quantity, or that we will be able to access or afford
alternative vendors for such services.
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14 Image Entertainment, Inc.
<PAGE>
Our Results of Operations Fluctuate Based on Seasonality and Variability.
We have generally experienced higher sales of DVDs and LDs in the quarters ended
December 31 and March 31 due to increased consumer spending associated with the
year-end holidays and because most sales of a title occur in the first few
months after its release. Accordingly, our revenues and results of operations
may vary significantly from period to period, and the results of any one period
may not be indicative of the results of any future periods. This seasonality
also causes our revenues to be concentrated in the last two quarters of the
fiscal year. In addition to seasonality issues, other factors have contributed
to variability in our DVD and LD net sales on a quarterly basis. These factors
include:
. the popularity of titles in release during the quarter;
. our marketing and promotional activities;
. our rights and distribution activities;
. DVD's negative impact on LD sales;
. the extension, termination or non-renewal of existing license and
distribution rights; and
. general economic changes affecting the buying habits of our customers,
particularly those changes affecting consumer demand for DVD and LD
hardware and software.
If Our Key Personnel Leave Us, Our Business May Be Adversely Affected. Our
success greatly depends on the efforts of our executive management, including
the President and Chief Executive Officer, Chief Financial Officer, Chief
Administrative Officer and General Counsel, and Senior Vice President of Sales,
Marketing and Operations. In addition, our ability to operate Ken Crane's
successfully depends significantly on the services and contributions of Ken
Crane, Jr. Our business and operations may be adversely affected if one or more
key executives were to leave the Company or if Ken Crane, Jr. were to leave Ken
Crane's.
If We Are Unable to Repair, Upgrade or Replace Our Technology Systems Prior
to December 1, 1999 or We Experience Technology System Interruptions Due to Year
2000 Non-Compliance, Our Business May Be Adversely Affected. We are aware of
the issues associated with the programming code in existing computer systems as
the year 2000 approaches. In addition, in December 1998 we entered into the
Foothill Agreement, which requires us to be "Year 2000 Compliant" by December 1,
1999. We intend to repair, upgrade or replace all non-compliant hardware,
software and equipment affecting our information (including computer hardware
and software) and non-information (including facilities, telecommunication
systems, distribution center machinery, security systems and video and sound
processing equipment) technology systems prior to December 1, 1999. If we are
unable to repair, upgrade or replace our technology systems prior to December 1,
1999 or, if at any time after December 1, 1999, we experience year 2000 related
problems, and, as a result, we are not "Year 2000 Compliant" under the Foothill
Agreement our lender may declare us in default of our agreement with them. We
cannot assure you that we will be able to repair, upgrade or replace all our
technology systems before the time necessary to avoid year 2000 related problems
or to ensure compliance with the requirements of the Foothill Agreement. In
addition, we cannot assure you that the repaired, upgraded and replaced systems
will actually perform adequately when the year 2000 arrives.
If our technology systems do not perform adequately, we plan to address the
problem by manually processing and/or outsourcing portions of our customer
service, order processing and distribution functions. We cannot assure you that
we will be able to manually process or outsource these functions or that we will
be able to do so in a cost-efficient manner. If we cannot manually process or
outsource these functions, we will temporarily be unable to process orders and
to respond to customer inquiries in a timely manner, which could lead to a loss
of revenue and customer dissatisfaction.
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Image Entertainment, Inc. 15
<PAGE>
Any year 2000 compliance problems we experience on or after December 1,
1999 could materially adversely affect our business, results of operations,
financial condition and prospects.
Any Year 2000 Disruptions Suffered by Our Significant Suppliers and
Customers Could Adversely Affect Our Business. We are taking steps to receive
assurances from our significant suppliers and customers that they are prepared
for any year 2000 related problems that they might experience (see Item 7.
"-- Impact of Year 2000 -- Risks and Contingencies -- Significant Suppliers and
Customers"). We cannot assure you, however, that our significant suppliers and
customers will not suffer business disruptions due to year 2000 related
problems. Any business disruptions our significant suppliers or customers
experience as a result of year 2000 compliance problems could materially
adversely affect our business, results of operations, financial condition and
prospects.
If We Cannot Compete Successfully in the Internet Commerce Industry, Our
Retail Sales May Be Adversely Affected. We cannot assure you that the
www.kencranes.com web site will be able to compete successfully against current
or future competitors. The market for commerce over the Internet is new,
rapidly evolving and intensely competitive. We expect this competition to
intensify in the future due in part to the minimal barriers to entry and the
relatively low cost to launch a new web site. We compete with a variety of
other companies for sales of DVDs and LDs over the Internet. Some of these
competitors can devote substantial resources to Internet commerce in the near
future. The www.kencranes.com web site also competes with traditional retailers
of DVDs and LDs, including mail-order houses and video clubs.
We believe that the principal competitive factors we face in selling DVDs
and LDs through the www.kencranes.com web site are price, selection,
availability, brand recognition, customer service, effectiveness of
advertising, technical expertise, convenience, accessibility, quality of search
tools, quality of editorial and other site content and reliability and speed of
fulfillment. Many of the current and potential competitors of Ken Crane's have
large customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than we have. In addition, some
competitors may be able to obtain merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote more
resources to web site and systems development than we can. The
www.kencranes.com web site could suffer reduced operating margins and market
share and brand recognition based on increased competition.
If We Cannot Keep Pace with Rapid Technological Change, Our Retail Sales
May Be Adversely Affected. We cannot assure you that we will successfully use
new technologies effectively or adapt the www.kencranes.com web site or the
systems of our subsidiary to customer requirements or emerging industry
standards. The technology used in the Internet commerce industry changes
rapidly. This rapid change results in the availability of many new products and
services, new industry standards and frequent changes in user and customer
requirements and preferences. The success of the www.kencranes.com web site
depends, in part, on our ability to do the following:
. license leading technologies useful in the Internet sales business;
. enhance the www.kencranes.com web site's existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our customers; and,
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
If Internet Commerce Does Not Continue to Grow, Our Internet Sales Business
May Be Adversely Affected. We cannot assure you that acceptance and use of the
Internet and World Wide Web will continue
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16 Image Entertainment, Inc.
<PAGE>
to develop or that a sufficiently broad base of consumers will adopt and use the
Internet and World Wide Web as a medium of commerce. Potential future revenues
and profits from sales over the Internet substantially depend on the widespread
acceptance and use of the Internet as an effective medium of commerce by
consumers. Rapid growth in the use of and interest in the World Wide Web, the
Internet and other on-line services is a recent phenomenon. For the
www.kencranes.com web site to be successful, consumers who have historically
used traditional means of commerce to purchase merchandise must accept and
utilize novel ways of conducting business and exchanging information.
If the Internet and other on-line services continue to experience
significant growth in the number of users, the frequency of use or bandwidth
requirements, the infrastructure for the Internet could be affected by capacity
constraints. In addition, the Internet could lose its viability due to delays
in the development or adoption of new standards and protocols required to handle
increased levels of service activity. Changes in or insufficient availability
of telecommunications services to support the Internet also could result in
slower response times and could adversely affect usage of the Internet. Our
business, prospects, financial condition and results of operations could be
materially adversely affected if use of the Internet does not continue to grow
or grows more slowly than expected, if the infrastructure for the Internet does
not effectively support growth that may occur or if the Internet does not become
a viable commercial marketplace.
We Face Security Risks in Selling Product over the Internet. Secure
transmission of confidential information over public networks is a significant
barrier to Internet commerce. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could compromise
the security measures we employ to protect customer transaction data. In
addition, concerns over the security of transactions conducted on the Internet
and the privacy of users in general may inhibit the growth of Internet commerce.
To the extent that our activities or the activities of third-party contractors
involve the storage and transmission of proprietary information, such as credit
card numbers, security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. We may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate security-related problems and we cannot assure you that
our security measures will prevent security breaches. Any compromise of our
security systems could have a material adverse effect on our reputation,
business, prospects, financial condition and results of operations.
We May Experience Capacity Constraints and Other System Development
Problems Relating to the Operation of the www.kencranes.com Web Site. A key
element of our business strategy is to generate a high level of use of the
www.kencranes.com web site. We believe that the satisfactory performance,
reliability and availability of the www.kencranes.com web site and the related
transaction-processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers and to maintain
adequate customer service levels. We plan to upgrade or replace all of the
systems that currently operate the www.kencranes.com web site and to integrate
such systems with our new warehouse and distribution facility. Any inability on
our part to work out any technical problems in the upgrade or replacement of the
www.kencranes.com web site's transaction-processing systems or warehouse and
distribution center integration in a timely manner could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Even if we are able to develop adequate transaction-processing systems and
to integrate the www.kencranes.com web site with our warehouse and distribution
center in a timely manner, periodic system interruptions may occur on the
www.kencranes.com web site. While we believe that we will be able to upgrade or
install new hardware and software that will be sufficient to accommodate the
anticipated traffic on the www.kencranes.com web site, we cannot assure you that
periodic system interruptions will
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 17
<PAGE>
not occur even after the upgrade or installation. Any substantial increase in
the volume of traffic on the www.kencranes.com web site or the number of orders
placed by customers will require us to further expand and upgrade our
technology, transaction-processing systems and network infrastructure. In
addition, we are dependent upon web browser companies and Internet service
providers for access to our products and services. Viewers have experienced and
may in the future experience difficulties due to system or software failures or
incompatibilities not within our control. Any system interruptions that result
in the unavailability of the www.kencranes.com web site or reduced order
fulfillment performance would reduce the volume of goods sold and the
attractiveness of our product and service offerings and could have a material
adverse effect on us.
Laws Restricting Internet Commerce Could Adversely Affect Our Business. We
could be materially adversely affected by any new legislation or regulation or
by the application or interpretation of existing laws to the Internet. Federal,
state and foreign governmental organizations are currently considering many
legislative and regulatory proposals. If a government authority were to adopt
laws or regulations that cover Internet-related issues such as user privacy,
pricing and characteristics and quality of products and services provided, the
growth of the Internet could be adversely affected. This could lead to a
decrease in demand for products offered over the Internet, including those that
the www.kencranes.com web site offers, and could increase the cost of doing
business on the Internet. In addition, we do not know how existing laws
governing issues such as property ownership, copyright, trade secret, libel and
personal privacy will be applied to the rapidly-changing Internet.
If the www.kencranes.com Web Site Experiences System Interruptions Due to
Year 2000 Non-Compliance, Our Internet Sales May Be Adversely Affected. We
intend to install year 2000 compliant systems for the www.kencranes.com web site
when we perform the hardware and software repairs, upgrades or replacements
described above. We cannot assure you, however, that we will be able to
successfully install the new systems before the time necessary to avoid year
2000 related problems. In addition, we cannot assure you that the new systems
will actually perform adequately when the year 2000 arrives. Because the
www.kencranes.com web site's systems will depend on other systems that we do not
control, any year 2000 compliance problems in such other systems could
materially adversely affect the www.kencranes.com web site. Any system
interruption in the www.kencranes.com web site resulting from year 2000
compliance problems could materially adversely affect our business, results of
operations, financial condition and prospects.
ITEM 2. Properties.
----------
The lease for the Company's office space (30,080 square feet) in
Chatsworth, California provides for monthly rent of approximately $14,500
(increasing to $17,450 on April 1, 2000) (subject to annual adjustment based on
increases in the consumer price index) and will expire on April 30, 2004. The
lease (which would have expired on March 31, 2000) was renegotiated in
conjunction with the Company's March 1, 1999 lease of 15,440 square feet of
additional office space in an adjacent building. The lease for additional space
provides for monthly rent of approximately $10,000 (subject to scheduled annual
increases for the first three years of the term and an adjustment based on
increases in the consumer price index for the fourth year of the term) and will
expire on April 30, 2004.
The Company owns approximately 17.2 acres of real property in Las Vegas,
Nevada. The Company's new 76,000 square foot automated warehouse and
distribution facility is located on the back 8.4 acres. The architectural
building plans provide for room to expand the facility an additional 74,000
square feet (also on the back 8.4 acres) should the need arise. Further, the
Company is holding the front 8.8 acres of the property as an investment and, if
needed, for future expansion. Each of the two parcels (the
- --------------------------------------------------------------------------------
18 Image Entertainment, Inc.
<PAGE>
8.4 acres and the 8.8 acres) secures bank obligations. See Item 7. "-- Liquidity
and Capital Resources -- Financial Activities -- Note Payable to Bank" and
"-- Construction Credit Facility" and Item 8. "-- Notes to Consolidated
Financial Statements -- Note 8. Debt."
Ken Crane's leases approximately 8,102 square feet of combined office,
retail and warehouse space in Westminster, California. The lease provides for
monthly rent of approximately $14,000 (subject to annual adjustment based on
increases in the consumer price index) and will expire on December 22, 2002.
ITEM 3. Legal Proceedings.
-----------------
On June 18, 1997, the Company filed a complaint in the Superior Court of
the State of California, County of Los Angeles (Case No. BC173084), against LEI
Partners, L.P. ("LEI") and a number of related entities and individuals, which
relates to a dispute concerning, among other things, LEI's payment obligations
under two promissory notes 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.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 19
<PAGE>
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 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.
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.
- --------------------------------------------------------------------------------
20 Image Entertainment, Inc.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 21
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers serve at the pleasure of the Company's board of
directors (the "Board"). There is no family relationship between any executive
officer or director. The following information sets forth the position and age
of the Company's executive officers at June 1, 1999 and their business
experience for at least the prior five years:
<TABLE>
<S> <C> <C>
Executive Officer Age Position & Background
- ------------------------------------------------------------------------------
Martin W. Greenwald 57 Chairman of the Board, Chief Executive Officer and
President since April 1981, and Treasurer since January
1988. Since July 1990, Mr. Greenwald has been a Board
Member of the Permanent Charities Committee of the
Entertainment Industries, an umbrella organization which
coordinates charitable contributions.
Cheryl L. Lee 40 Chief Administrative Officer since April 1993 and
General Counsel since April 1992; Vice President of Business
Affairs from February 1989 to March 1992; prior thereto,
Counsel, Theatrical Distribution & Acquisition, Twentieth
Century Fox Film Corporation. Ms. Lee received her A.B.
degree from Stanford University in 1980 and her J.D. degree
from New York University Law School in 1984. Ms. Lee is a
member of the California Bar.
Jeff M. Framer 38 Chief Financial Officer since April 1993; Controller
from September 1990 to March 1993; Senior Manager, KPMG Peat
Marwick LLP, from July 1989 to September 1990; and, Manager,
KPMG Peat Marwick LLP, from July 1988 to June 1989. Mr.
Framer received his B.S. degree in Business Administration
and Accounting Theory and Practice from California State
University at Northridge in 1984. Mr. Framer is a certified
public accountant.
David A. Borshell 34 Senior Vice President, Sales, Marketing and Operations
since December 1994; Senior Vice President, Operations, from
April 1993 to December 1994; Vice President, Operations,
from January 1991 to March 1993; Director of Operations from
July 1990 to December 1990; Director of Sales from November
1988 to June 1990; and, Account Executive from February 1986
to November 1988.
</TABLE>
- --------------------------------------------------------------------------------
22 Image Entertainment Inc.
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "DISK." The Company's common stock has been included on the Nasdaq
National Market since February 19, 1991. The table below presents the quarterly
high and low closing prices on the NASDAQ/NMS during the past two fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1999 High Low
-------------------------------- --------- ---------
<S> <C> <C>
Quarter ended June 30, 1998 $ 7.50 $ 3.313
Quarter ended September 30, 1998 $ 10.00 $ 3.250
Quarter ended December 31, 1998 $ 10.50 $ 3.125
Quarter ended March 31, 1999 $ 12.00 $ 5.875
<CAPTION>
Fiscal Year Ended March 31, 1998 High Low
-------------------------------- --------- ---------
<S> <C> <C>
Quarter ended June 30, 1997 $ 4.313 $ 3.50
Quarter ended September 30, 1997 $ 3.938 $ 3.063
Quarter ended December 31, 1997 $ 4.688 $ 3.313
Quarter ended March 31, 1998 $ 4.250 $ 3.063
</TABLE>
As of June 1, 1999 there were 1,629 holders of record of the Company's
common stock. The closing price on that date was $8.188.
The Company has never paid a cash dividend on its common stock and
presently intends to retain any future earnings for business development. In
addition, the Company is party to loan agreements which impose restrictions on
its payment of dividends.
- --------------------------------------------------------------------------------
Image Entertainment Inc. 23
<PAGE>
ITEM 6. Selected Financial Data.
-----------------------
The selected financial data presented below was derived from the
consolidated financial statements of the Company and should be read in
conjunction with such financial statements, the notes thereto and the other
financial information included therein.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
-------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ---------------------
Net sales.................................. $ 76,726 $ 75,516 $ 85,650 $ 95,086 $ 85,591
Operating costs and expenses............... 74,048 84,605/(1)/ 83,399/(2)/ 86,926 77,851
Operating income (loss).................... 2,678 (9,089) 2,251 8,160 7,740
Interest expense........................... (966) (662) (415) (155) (1,184)
Interest income............................ 84 118 231 337 518
Other expense.............................. -- -- (662)/(3)/ -- --
Amortization of deferred financing costs... -- -- -- -- (111)
Net gain on insurance settlement........... -- -- -- -- 742
Income (loss) before income taxes and
and extraordinary item..................... 1,796 (9,633) 1,405 8,342 7,705
Income tax (expense) benefit............... (90) 52 (433) (743) (175)
Income (loss) before extraordinary item.... 1,706 (9,581) 972 7,599 7,530
Extraordinary item, net of taxes........... -- -- (127)/(4)/ -- (1,219)/(4)/
Net income (loss).......................... $ 1,706 $ (9,581) $ 845 $ 7,599 $ 6,311
Income (loss) per share:
Income (loss) before extraordinary item
Basic................................. $ .12 $ (.71) $ .07 $ .56 $ .57
Diluted............................... $ .12 $ (.71) $ .07 $ .51 $ .48
Net income (loss)
Basic................................. $ .12 $ (.71) $ .06 $ .56 $ .48
Diluted............................... $ .12 $ (.71) $ .06 $ .51 $ .40
Weighted average shares outstanding
Basic................................. 14,185 13,471 13,504 13,569 13,255
Diluted............................... 14,309 13,471 13,836 14,802 15,641
<CAPTION>
March 31,
---------------------------------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
-------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- ------------------
Total assets............................... $ 56,445 $ 33,781 $ 46,448 $ 39,406 $ 33,491
Total liabilities.......................... 32,113 25,116 28,397 18,880 16,818
Net shareholders' equity................... 24,332 8,665 18,051 20,526 16,673
- ---------------------
</TABLE>
(1) Includes noncash charges of $8,133,000 and $4,246,000 to reduce the carrying
value of the Company's LD inventory to its net realizable value and provide
for estimated losses on LD license and exclusive distribution agreements,
respectively. Also includes a nonrecurring charge of $825,000 related to
the closure of U.S. Laser, of which $202,000 is composed primarily of fees
and expenses associated with facility lease termination and employee
severance payments, and $623,000 (a noncash charge) is composed of the
write-off of unamortized facility leasehold improvements and goodwill.
(2) Includes noncash charges of $1,964,000 and $1,946,000 to reduce the carrying
value of the Company's LD inventory to its estimated net realizable value
and provide for estimated doubtful accounts receivable, respectively.
(3) Other expense represents a nonrecurring charge composed primarily of legal
and accounting fees associated with the termination of acquisition
negotiations.
(4) Extraordinary item is composed of costs associated with early retirement of
debt, net of related taxes of $56,000 and $34,000 for fiscal 1997 and 1995,
respectively.
- --------------------------------------------------------------------------------
24 Image Entertainment Inc.
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
The Company believes its forward-looking statements made throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Such statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "may," "expect" and
similar expressions, variations of such terms or the negative of such terms as
they relate to the Company or its management are intended to identify such
forward-looking statements. Such statements are based on management's current
expectations and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements. For a more detailed
description of risks and uncertainties that may affect forward-looking
statements see Item 1. "-- Risk Factors."
GENERAL
The Company licenses and distributes a broad range of entertainment
programming on DVD and LD. Prior to fiscal 1998, the Company's net sales were
derived almost entirely from the distribution of titles 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, respectively; however, in the last two quarters of fiscal
1999, DVD and LD represented approximately 72% and 23% of the Company's net
sales, respectively. The Company also distributes music programming on CDs
encoded in the DTS multichannel audio format as well as certain programming on
VHS.
The DVD Format. 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 May 28, 1999, approximately
2,389,000 DVD players were sold to consumer electronics retailers. Management
estimates that there are approximately 1,792,000 domestic DVD households
(approximately 75% of the EIA's estimate to allow for DVD player inventory
currently unsold and held at retail for sale and for consumer households with
multiple DVD players). Although the estimated installed base of domestic DVD
households (between 1% and 2% of estimated television households) is low
relative to domestic VHS households (between 80% and 90% of estimated television
households), DVD player sales are growing. The EIA reported that in their first
calendar year of release (March through December 1997), approximately 350,000
DVD players were sold to electronics retailers. For calendar 1998,
approximately 1,080,000 DVD players were sold to electronics retailers. For the
first 21 weeks of calendar 1999 (ended May 28, 1999), approximately 960,000 DVD
players were sold to electronics retailers, a 386% increase over the comparable
calendar 1998 period.
According to the DVD Video Group (an industry trade group), there are now
more than 40 DVD player models marketed under 30 different consumer brands and
over 3,000 movie and music titles
- --------------------------------------------------------------------------------
Image Entertainment Inc. 25
<PAGE>
available on DVD (including hit movies, re-released classics and children's and
music programming). According to Video Business, a video industry trade
publication, DVD player retail prices are declining and many models are now
priced at $299.
DVD programming is now widely available for sale and/or rental at video
specialty stores (such as Blockbuster Entertainment, Hollywood Entertainment and
Suncoast Motion Picture Co.), mass merchants (such as Wal-Mart, Kmart, Best Buy
and Circuit City), audio-video combination chains (such as Musicland, Trans
World Entertainment, Hastings Books & Records, Tower Records/Video and
Wherehouse), discount club stores (such as Costco and Sam's Club) and Internet
retailers (such as Kencranes.com (owned by the Company's subsidiary), DVD
Express, Amazon.com, and NetFlix.com). According to Video Store Magazine, a
video industry trade publication, almost half of the top 100 highest calendar
1998 rental/sell-through revenue generating video specialty stores now carry DVD
for rental (with most of the rental revenue coming from the top 10 chains).
The Company's DVD Distribution. The Company's net sales of DVD programming
------------------------------
(including both exclusive and nonexclusive distribution) has steadily increased
since the format's introduction. For fiscal 1999, DVD sales were $45,911,000,
representing approximately 60% of the Company's net sales. The Company's net
sales of DVD programming for the quarters ended March 31, 1999 and December 31,
September 30 and June 30, 1998 were $16,872,000, $15,943,000, $6,600,000 and
$6,496,000, respectively. As a percentage of net sales, DVD net sales were 73%,
70%, 48% and 38%, respectively. The Company released 260 exclusive DVD titles
in fiscal 1999, compared to 91 such releases in fiscal 1998.
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 June 13, 1999 was 3.21%. The Company
currently ranks tenth in market share (of 43 companies specifically named)
behind Warner Home Video (18.95%), Disney (11.58%), Columbia TriStar (10.06%),
Universal Home Entertainment (9.06%), New Line (8.39%), Paramount Home Video
(7.68%), MGM (7.24%), Twentieth Century Fox Home Entertainment (5.08%) and
Artisan Entertainment (3.25%). 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 purchase additional nonexclusive titles at
the same time.
DVD's Continued Negative Impact on LD sales. The DVD format competes
-------------------------------------------
directly with the LD format. Most of the same consumers who were attracted to
LD's quality and features are attracted to DVD's offerings. Due to this
competition, the LD market is shrinking, as evidenced by the Company's declining
LD sales during fiscal 1999 and 1998. LD sales for fiscal 1999 declined 53% to
$27,681,000 from $59,289,000 for fiscal 1998 and LD sales for fiscal 1998
declined 30% from $84,908,000 for fiscal 1997. During fiscal 1999 and 1998 the
major audio/video software chains, such as Musicland, Tower and Trans
- --------------------------------------------------------------------------------
26 Image Entertainment Inc.
<PAGE>
World were selling off their LD inventory and employing deeply discounted sale
pricing. All of the chains except Tower have exited the LD market and Tower is
expected to exit the market soon. Additionally, sales of LD player sales are no
longer tracked by the EIA (last reported in calendar 1997). Management believes
that DVD's negative impact on the LD business is permanent. See "Fiscal Year
Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997" below for a
detailed discussion of events leading up to significant write-downs of LD
related assets in fiscal 1998.
Coexistence of LD Despite DVD's Success and Future LD Distribution
------------------------------------------------------------------
Strategy. Although the LD market is shrinking, management believes that LD and
DVD will coexist for several years. LD is well-established as a videophile
format. With an estimated 1997 peak installed base of over 2 million
households, the LD marketplace is not expected to disappear but rather shrink in
size (management estimates the current number of installed LD households to be
less than 1 million). Also, a disparity in the number of available titles on LD
(over 10,000 through Internet and video speciality outlets) versus DVD (over
3,000) remains. Management estimates that it will take DVD several years to
reach LD's breadth of title availability. There are many titles (whether
popular, less popular, rare or esoteric) currently available only in the LD
format and not in the DVD format. In addition, management believes that the
DVD/LD combination player currently manufactured by Pioneer Electronics will
continue to attract consumers to both formats.
Management believes there remains a viable (although shrinking) market for
the still-growing library of LD programming. Despite declining sales and the
Company's diversification into DVD programming, the Company continues to support
the LD format. Due to the declining market for LD, the Company is focusing on
"A" title releases and "classic" catalogue re-releases. The Company analyzes
the cost-benefit relationship on all potential LD new releases given the
declining market and releases only those for which minimum customer pre-orders
are met. In addition to distributing through traditional independent speciality
video retail distribution channels (now excluding audio/video chains stores such
as Tower, Musicland, Trans World and Virgin), the Company is distributing LD
inventory through alternative distribution channels, including direct-to-
consumer via mail order and over the Internet through its recently-acquired web
site.
REGISTERED COMMON STOCK SALE
On January 6, 1999, the Company completed the sale of 2.4 million shares of
newly-issued common stock to a group of institutional investors and other
accredited investors at $5 per share. Image Investors, Co., the largest
shareholder of the Company and beneficially owned by John W. Kluge and Stuart
Subotnick, purchased 600,000 shares of the 2.4 million shares issued.
The net proceeds of the offering (net of placement agent fees and
professional services fees) were $10,557,000. Approximately $5 million of the
net proceeds were used to complete the acquisition of Ken Crane's. See
"Acquisition" below. The remainder of the net proceeds was used to pay-down
borrowings outstanding under the Company's revolving credit facility with
Foothill Capital Corporation.
ACQUISITION
On January 11, 1999, the Company, through Image Newco, completed its
acquisition of Ken Crane's. See Item 1. "-- Subsidiary Activities -- Image
Newco Acquisition of Ken Crane's." For financial statement purposes, the one-
time signing bonus and consulting payments paid in connection with the
acquisition were included in the purchase price of Ken Crane's. The purchase
price and other acquisition related payments were funded by a portion of the
$10,557,000 net proceeds raised in the sale of 2.4 million shares of the
Company's common stock. The acquisition was accounted for using the purchase
method of
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Image Entertainment Inc. 27
<PAGE>
accounting. Accordingly, the acquired assets and assumed liabilities were
recorded at their fair market value on the acquisition date. The operating
results of Ken Crane's are included in the accompanying consolidated statements
of operations for the year ended March 31, 1999 from the date of acquisition.
The excess of purchase price over the fair market value of the net assets
acquired is classified as goodwill and is being amortized on a straight-line
basis over 15 years.
CLOSURE OF U.S. LASER
In May 1998, the Company announced the closing of its wholly-owned
subsidiary U.S. Laser Video Distributors, Inc. ("U.S. Laser"), located in New
Jersey. The Company acquired U.S. Laser in June 1995 for $3.1 million in cash.
The closure of the subsidiary and its retail store "Digitainment" was finalized
on July 15, 1998. The corporate entity was dissolved on February 26, 1999. The
closure followed the Company's consolidation of a majority of U.S. Laser's
optical disc distribution activities. U.S. Laser's only remaining activities
consisted of direct-to-consumer optical disc sales through the "Digitainment"
retail store, mail order to a decreasing number of accounts and the Internet.
With the decline of industry-wide LD software and hardware sales, offset in part
by growing DVD software and hardware sales, the retail store was performing
below expectations.
The closure of U.S. Laser resulted in nonrecurring pretax charges of
$202,000, representing fees and expenses associated with the early termination
of a lease and employee severance payments, and $623,000 (a noncash charge)
covering the write-off of unamortized leasehold improvements and goodwill. The
pretax charges total $825,000 and are included in costs of facility closure
expense for the year ended March 31, 1998.
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 have caused and continue to cause 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 have prevented
the Company from shipping product in a timely manner. Certain of the software
glitches have 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. For
these reasons, the new facility is currently functioning below its projected
operational efficiency level (shipping within 24 hours) and below the efficiency
level of the closed Chatsworth facility (which generally shipped within 48 hours
after receipt of an order). The Company has addressed these software and
operational issues on a priority basis and will continue to do so until these
issued are resolved.
Despite the fact that product demand remains robust, the transitional
problems experienced at the new facility resulted in a shortfall in order
fulfillment for the month of May 1999 and may result in a shortfall for the
month of June 1999. Additionally, the Company anticipates a related significant
rise in shipping expenses (because of higher personnel and freight costs) during
its June 1999 quarter. While the Company's backlog of delayed shipments has
decreased significantly since its peak in May 1999 (due in part to
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28 Image Entertainment Inc.
<PAGE>
temporary labor-intensive shipment efforts), the May shortfall and potential
June shortfall may prove significant enough to result in a net loss for the
Company's June 1999 fiscal quarter.
The Company is taking steps to correct the new facility's shipping delays.
Management is confident that this situation is temporary. The new facility is
operating 24 hours a day, six days a week until these problems are resolved and
orders are shipped in a timely manner. The third-party consultants who
programmed the Company's warehouse management system software are working and
will continue to work on-site to facilitate the software's implementation and
improve operational efficiencies. The Company presently anticipates that the
software implementation problems will be corrected and that the facility will
reach the efficiency level of the Chatsworth facility during July 1999 and its
projected operating efficiency level during August 1999.
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.
RESULTS OF OPERATIONS
The following table presents, as a percentage of net sales, selected
consolidated financial data for each of the three preceding fiscal years ended
March 31:
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
DVD.................................... 59.8% 20.8% 0.9%
LD..................................... 36.1 78.5 99.1
Other.................................. 4.1 0.7 --
-------- ---------- ---------
Total net sales..................... 100.0% 100.0% 100.0%
Cost of sales.............................. 76.1 93.0/(1)/ 79.9/(3)/
-------- --------- ---------
Gross margin............................... 23.9 7.0 20.1
Operating costs and expenses:
Selling expenses........................ 7.1 6.5 5.5
General and administrative expenses..... 7.8 6.4 8.3
Amortization of production costs........ 5.3 5.0 3.6
Other operating costs and expenses...... 0.1 1.1/(2)/ --
-------- --------- ---------
Total operating costs and expenses... 96.5 112.0 97.4
Operating income (loss).................... 3.5 (12.0) 2.6
Other expenses, net........................ 1.2 0.7 1.0
-------- --------- ---------
Income (loss) before income taxes and
extraordinary item....................... 2.3% (12.8)% 1.6%
======== ========= =========
- -----------------------------------
</TABLE>
(1) Includes noncash charges of $8,133,000 and $4,246,000 to reduce the carrying
value of the Company's LD inventory to its net realizable value and provides
for estimated losses on LD license and exclusive distribution agreements,
respectively.
(2) Primarily a nonrecurring charge of $825,000 related to the closure of U.S.
Laser.
(3) Includes noncash charges of $1,964,000 and $1,946,000 to reduce the carrying
value of the Company's LD inventory to its estimated net realizable value
and provide for estimated doubtful accounts receivable, respectively.
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Image Entertainment Inc. 29
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Net sales for fiscal 1999 increased 1.6% to $76,726,000 from $75,516,000
for fiscal 1998. Net sales of DVD programming for fiscal 1999 increased 192% to
$45,911,000, or 59.8% of net sales, from $15,700,000, or 20.8% of net sales,
for fiscal 1998. Approximately 52% of total DVD net sales for fiscal 1999 were
derived from exclusively distributed or licensed programming versus
approximately 39% for fiscal 1998. Net sales for fiscal 1999 include 79 days of
net sales (since the January 11, 1999 acquisition date) of Ken Crane's. Ken
Crane's contributed $701,000 in net sales, after elimination of inter-company
sales. Broadening consumer acceptance and increased availability of programming
in fiscal 1999 contributed to growth in the Company's DVD sales. During fiscal
1999, the Company distributed a greater number of new release titles on DVD
(among which there were a greater number of stronger performing titles) and a
greater number of catalogue titles on DVD than in the prior fiscal year. Net
sales of LD programming for fiscal 1999 declined 53% to $27,681,000, or 36.1% of
net sales, from $59,289,000, or 78.5% of net sales, for fiscal 1998. The DVD
format directly competes with the LD format and has adversely affected the LD
marketplace. Historically, the largest buyers 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. Other net sales (VHS and CD) for fiscal
1999 increased 495% to $3,134,000, or 4.1% of net sales, from $527,000, or 0.7%
of net sales, for fiscal 1998 primarily due to the exclusive distribution of a
greater number of stronger performing VHS titles in fiscal 1999 as compared to
fiscal 1998.
Cost of sales (LD, DVD, CD and VHS) for fiscal 1999 was $58,425,000, or
76.1% of net sales, from $70,256,000, or 93.0% of net sales, for fiscal 1998.
The decrease in cost of sales, as a percentage of net sales, for fiscal 1999 was
primarily due to the significantly reduced provisions for slow-moving LD
inventory of $1,831,000 for fiscal 1999 versus $8,133,000 for fiscal 1998 and
estimated losses recorded on LD license and exclusive distribution agreements of
$4,246,000 reflected in fiscal 1998. Exclusive of the increased provisions for
fiscal 1998 over fiscal 1999, cost of sales for fiscal 1998, as a percentage of
net sales, was 79.1%. The improved gross margins for fiscal 1999 reflect the
shift in sales mix from LD to DVD programming. Gross margins on exclusive DVD
sales are currently higher than on exclusive LD sales, although DVD production
costs are much higher than those for LD. 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 becomes 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 fiscal 1999 increased 10.0% to $5,439,000, or 7.1% of
net sales, from $4,943,000, or 6.5% of net sales, for fiscal 1998. Exclusive of
the selling expenses and net sales
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30 Image Entertainment Inc.
<PAGE>
contribution of Ken Crane's and U.S. Laser in fiscal 1999 and 1998, selling
expenses for fiscal 1999 increased 14.3% to $5,001,000, or 6.5 % of net sales,
from $4,374,000, or 5.8% of net sales, for fiscal 1998. The increase in fiscal
1999 selling expenses, as a percentage of net sales, was primarily due to
additional personnel and higher personnel costs in the Company's sales
department and increased promotional efforts to grow consumer and retailer
awareness of the Company's DVD, VHS and CD programming. For comparative
purposes, U.S. Laser incurred selling expenses of $99,000 and $604,000 in fiscal
1999 and 1998, respectively. Ken Crane's incurred selling expenses of $339,000
for the 79 day period in fiscal 1999 only.
General and administrative expenses for fiscal 1999 increased 24.5% to
$6,016,000, or 7.8% of net sales, from $4,832,000, or 6.4% of net sales, for
fiscal 1998. Exclusive of the general and administrative expenses and net sales
contributions of Ken Crane's and U.S. Laser in fiscal 1999 and 1998 and
exclusive of fiscal 1998 recoveries of previously provided for doubtful accounts
receivable from certain customers, general and administrative expenses for
fiscal 1999 increased 26.2% to $5,662,000, or 7.4% of net sales, from
$4,477,000, or 6.1% of net sales, for fiscal 1998. General and administrative
costs for fiscal 1999 increased primarily due to higher personnel costs and
higher professional fees for legal and investor relations, which were partially
offset by a lower provision for doubtful accounts receivable. For comparative
purposes, U.S. Laser incurred general and administrative expenses of $128,000
and $823,000 in fiscal 1999 and 1998, respectively. Ken Crane's incurred
general and administrative expenses of $226,000 for the 79 day period in fiscal
1999 only.
Amortization of production costs for fiscal 1999 increased 8.5% to
$4,057,000, or 5.3% of net sales, from $3,740,000, or 5.0% of net sales, for
fiscal 1998. The increase in fiscal 1999 amortization costs was due to costs
associated with the increased production of exclusive DVD titles and
corresponding increased overhead in the Company's creative services and
production departments. DVD's production process requires the added interim
step of authoring and compression, which is more costly than the mastering of LD
titles. In December 1998, as part of its periodic review of the recoverability
of capitalized production costs, management changed its estimate of the
projected revenue stream from distribution of exclusive DVD titles. This change
in estimate was recorded in the December 1998 quarter and prospectively. Had
this change in estimate not been made, amortization of production costs for
fiscal 1999 would have been higher by approximately $217,000. Additionally,
amortization of production costs will vary based upon the mix, timing and number
of exclusive DVD and LD titles placed into production. The Company is producing
fewer exclusive LD titles as it increases its exclusive DVD production. The
Company is planning to purchase authoring and compression equipment to bring
this aspect of DVD production in-house and lower per-title DVD production costs.
Amortization of goodwill for fiscal 1999 was $111,000, or 0.1% of net
sales, and represents goodwill amortization from the acquisition of Ken Crane's.
Fiscal 1998 amortization of U.S. Laser goodwill was minimal.
Interest expense for fiscal 1999 increased 45.9% to $966,000, or 1.3% of
net sales, from $662,000, or 0.9% of net sales, for fiscal 1998. The increase
is attributable primarily to higher weighted average debt levels during fiscal
1999 than during fiscal 1998.
Interest income for fiscal 1999 decreased 28.8% to 84,000, or 0.1% of net
sales, from $118,000, or 0.2% of net sales, for fiscal 1998. The Company had
less interest bearing investments during fiscal 1999 than during to fiscal 1998.
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Image Entertainment Inc. 31
<PAGE>
Income tax expense for fiscal 1999 was $90,000, reflecting an effective
combined Federal and state income tax rate of 5%. The effective income tax rate
was lower than the statutory rate due to a reduction in the valuation allowance
recorded against deferred tax assets. The Company recorded a net income tax
benefit of $52,000 in fiscal 1998, representing a carry back to fiscal 1997 of a
portion of the net operating loss generated in fiscal 1998.
For fiscal 1999, the Company recorded net income of $1,706,000, or $.12 per
basic and diluted share, compared to a net loss of $9,581,000, or $.71 per basic
and diluted share, for fiscal 1998.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Net sales for the year ended March 31, 1998 declined 11.8% to $75,516,000
from $85,650,000 for the year ended March 31, 1997. Net sales of LD programming
for fiscal 1998 declined 30.2% to $59,289,000 from $84,908,000 for fiscal 1997.
Net sales of DVD programming, however, increased to $15,700,000 for fiscal 1998
from $742,000 for fiscal 1997. Approximately $6,156,000, or 39%, of total
fiscal 1998 DVD sales were derived from exclusively distributed or licensed
product. The decline in fiscal 1998 net sales was due to the decline in LD
sales, offset in part by net sales from the Company's distribution of exclusive
and nonexclusive DVD programming.
Cost of sales (DVDs and LDs) for the year ended March 31, 1998 increased to
$70,256,000, or 93.0% of net sales, from $68,427,000, or 79.9% of net sales, for
fiscal 1997. The increase in cost of sales, as a percentage of net sales, for
the March 1998 fiscal year over that of the March 1997 fiscal year was primarily
due to the significantly increased provisions for slow-moving LD inventory of
$8,133,000 for fiscal 1998 as compared to $1,964,000 for fiscal 1997 and
estimated losses on LD license and exclusive distribution agreements of
$4,246,000 during fiscal 1998 as compared to none in fiscal 1997.
Since DVD's March 1997 launch, management has been making an on-going
quarterly assessment of the impact of DVD's growth on the LD market and the
recoverability of the Company's LD-related assets. The marketing efforts
accompanying DVD's introduction caused considerable confusion at the retail and
consumer level as there was much speculation regarding consumer acceptance of
and studio support for the new format, the potential breadth of available DVD
titles and the audio and video quality afforded by DVD. Although this confusion
and speculation had a "chilling effect" on the LD market and lead to an
approximate 70% decline in calendar 1997 LD player sales from calendar 1996, not
all of the major studios immediately embraced the new format, preferring to wait
and see how the DVD market developed. Similarly, wide-spread consumer
acceptance of the new format did not materialize and, although the chain stores
were more cautious in their LD purchasing, they continued to support the LD
format. The Company experienced a 23% decline in LD sales for its June 1997
quarter, as compared to the comparable prior-year period, and a 25% decline for
its September 1997 quarter, as compared to the comparable prior-year period;
however, the decline for its December 1997 quarter, as compared to the
comparable prior-year period, was only 15%. Nonetheless, in response to
weakening LD sales the Company recorded write-downs of its LD inventory for each
of its June, September and December 1997 quarters totaling $1,870,000 to reduce
its carrying value to management's estimate of its net realizable value.
In the March 1998 quarter, however, several significant events occurred
which indicated to management that DVD's adverse impact on the Company's LD
business had dramatically accelerated, leading the Company to record
substantially larger write-downs of its LD-related assets than in prior
quarters. First, the Company experienced a 56% decline in LD sales in that
quarter, as compared to the comparable prior-year period. Additionally, certain
chain stores instituted across-the-board price reductions of their LD inventory
(with the exception of new releases) and held well-promoted clearance sales.
Further, the chain
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32 Image Entertainment Inc.
<PAGE>
stores informed the Company that they intended to significantly reduce future LD
purchases in favor of DVD and permanently replace LD floor space with DVD.
Finally, by the end of the fourth quarter, Twentieth Century Fox announced that
it would be releasing programming in the DIVX pay-per-play DVD format and it was
rumored that participation by Paramount, the last studio "holdout," was imminent
(Paramount announced its participation in May 1998). (The DIVX format was
discontinued in June 1999 due to lack of studio and retail support). Meanwhile,
the studios already participating in the DVD format were actively increasing
their output of new releases and catalogue titles. Given the studios' unanimous
support of the DVD format, management believed that the number of available DVD
titles (both new releases and catalogue titles) would grow more quickly than
previously expected and the number of LD only versions of titles would shrink,
further negatively impacting LD sales. Additionally, mass-merchants and
discounters (Wal-Mart, Target Stores, Sears and Borders Books and Music)
announced plans to increase their DVD inventories, which would further grow the
DVD market. In management's estimation, the occurrence of these events had
significantly accelerated DVD's negative impact on LD and the Company's
recoverability of LD inventory and unrecouped royalty and distribution fee
advances.
Accordingly, the Company recorded pre-tax noncash charges during the fourth
quarter ended March 31, 1998 of $6,263,000 to reduce the carrying value of its
LD inventory to its estimated net realizable value and $4,246,000 to provide for
estimated losses on long-term LD license and exclusive distribution agreements.
During the fiscal year ended March 31, 1998, the Company recorded provisions for
slow-moving LD inventory and for estimated losses on long-term LD license and
exclusive distribution agreements totaling approximately $8,133,000 and
$4,246,000, respectively. Management believes that its LD related assets
(inventory and royalty and distribution fee advances) at March 31, 1998 were
stated at their estimated net realizable values.
Selling expenses for fiscal 1998 increased 4.0% to $4,943,000, or 6.5% of
net sales, from $4,752,000, or 5.5% of net sales, for fiscal 1997. Fiscal
1998's increase, as a percentage of net sales, was primarily due to higher
personnel and distribution costs associated with DVD and DTS distribution and
higher freight costs due to increased freight rates over the prior year.
General and administrative expenses for fiscal 1998 decreased 31.9% to
$4,832,000, or 6.4% of net sales, from $7,097,000, or 8.3% of net sales, for
fiscal 1997. Fiscal 1997 figures include a $1,946,000 provision for estimated
doubtful accounts receivable related to the then-distressed condition of the
retail entertainment software market. Exclusive of the fiscal 1997 charge,
general and administrative expenses for fiscal 1998 decreased 6.2% to
$4,832,000, or 6.4% of net sales, from $5,151,000, or 6.0% of net sales, for
fiscal 1997. The fiscal 1998 decrease in absolute dollars was primarily due to
net recoveries of previously provided for doubtful accounts receivable from
certain customers totaling $331,000 and lower overhead for U.S. Laser resulting
from the consolidation of certain administrative support, offset in part by
severance payments to former principals of U.S. Laser totaling $150,000 and
higher professional fees for fiscal 1998 versus fiscal 1997. The employment of
U.S. Laser's former principals ended in December 1997 as part of the Company's
consolidation of a majority of U.S. Laser's distribution activities.
Amortization of production costs for fiscal 1998 increased 20.2% to
$3,740,000, or 5.0% of net sales, from $3,112,000, or 3.6% of net sales, for
fiscal 1997. The increase was primarily attributable to costs associated with
the increased production of exclusive DVD titles and corresponding increased
overhead in the Company's creative services and production departments. Certain
costs of DVD production are higher than that of LD due to the complexity and
intricacy of the required processes for DVD. Amortization of production costs
varies based upon the mix, timing and number of exclusive DVD and LD titles
placed into production.
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Image Entertainment Inc. 33
<PAGE>
Interest expense for fiscal 1998 increased 59.5% to $662,000, or 0.9% of
net sales, from $415,000, or 0.5% of net sales, for fiscal 1997. The increase
was attributable to higher average debt levels during fiscal 1998.
Interest income for fiscal 1998 decreased 48.9% to $118,000, or 0.2% of net
sales, from $231,000, or 0.3% of net sales, for fiscal 1997. The Company had
less cash invested during fiscal 1998 than 1997. Further, interest income for
fiscal 1997 included interest income on notes receivable from LEI Partners L.P.,
which defaulted on the notes in November 1996.
Other expense for fiscal 1997 consisted of a nonrecurring charge of
$662,000, composed primarily of professional fees, relating to the terminated
acquisition of Essex Entertainment, Inc., a privately-held independent music
company headquartered in New Jersey.
The extraordinary charge of $127,000, net of taxes of $56,000, for fiscal
1997 was associated with an early retirement of debt. In December 1996, the
Company refinanced its $15 million revolving credit facility with Foothill
Capital Corporation with a facility from Union Bank of California, N.A. The
charge related to a prepayment penalty paid and amortization of deferred
financing costs accelerated as a result of the early retirement ($40,000
represents noncash charges).
The Company recorded a net income tax benefit of $52,000 in fiscal 1998,
representing a carry back to fiscal 1997 of a portion of the net operating loss
generated in fiscal 1998. The effective income tax rate of 30.8% for fiscal
1997 was lower than the statutory rate due to utilization of net operating loss
carryforwards for Federal income tax purposes.
For fiscal 1998, the Company recorded a net loss of $9,581,000, or $.71 per
basic and diluted share, as compared to net income of $845,000, or $.06 per
basic and diluted share for fiscal 1997.
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
will adopt SOP 98-1 in the annual financial statements of the fiscal year ending
March 31, 2000. Management believes adoption of SOP 98-1 will not have a
material impact on the Company's financial position or results of operations.
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
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34 Image Entertainment Inc.
<PAGE>
is effective for financial statements for periods beginning after December 15,
1998. The Company will adopt SOP 98-5 in the annual financial statements for the
fiscal year ended March 31, 2000. Management believes adoption of SOP 98-5 will
not have a material impact on the Company's financial position or results of
operations.
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 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 is currently in
the resolution phase with respect to such systems, for which all affected
hardware, software and equipment is being repaired, upgraded or replaced. The
Company expects to complete the resolution phase for all systems (information
technology and non-information technology) by July 31, 1999. The Company
expects to have completed the testing and implementation phases by September 30,
1999. Through March 31, 1999, the Company estimates that its resolution and
testing phases are approximately 70% 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 March 31, 1999, approximately 50% 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 March 31, 1999, the Company has spent approximately $25,000
-----
on the discovery, planning and resolution phases for both information technology
and non-information technology systems. The Company expects the remainder of
the Year 2000 remediation process to cost approximately $75,000. 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
- --------------------------------------------------------------------------------
Image Entertainment Inc. 35
<PAGE>
outsource portions of its customer service, order processing and/or distribution
functions. The Company's contingency plans in this area 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. See Item 1. "-- Risk Factors -- If We Are Unable
to Repair, Upgrade or Replace Our Technology Systems Prior to December 1, 1999
or We Experience Technology System Interruptions Due to Year 2000 Non-
Compliance, Our Business May Be Adversely Affected."
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 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. See Item 1. "-- Risk Factors -- Any Year 2000 Disruptions Suffered
by Our Significant Suppliers and Customers Could Adversely Affect Our Business."
Impact of Year 2000 C Ken Crane's. Ken Crane's, acquired by the
Company in January 1999, utilizes its own custom computer software to perform
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. Because the software uses 2-digit date fields, it is not
Year 2000 compliant. The Company intends to upgrade the existing computer
software beginning July 1, 1999 so the software will correctly process dates in
the Year 2000. The Company estimates that this upgrade will take two to four
weeks of programming time (by the third-party programmer who designed the
software) at a total cost of approximately $20,000. See Item 1. "-- Risk
Factors -- If the www.kencranes.com Web Site Experiences System Interruptions
Due to Year 2000 Non-Compliance, Our Internet Sales May Be Adversely Affected."
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 fiscal year ended March 31,
1999, operating activities used cash and cash equivalents of $2,651,000,
investing activities used cash and cash equivalents of $8,246,000 and
- --------------------------------------------------------------------------------
36 Image Entertainment Inc.
<PAGE>
financing activities provided cash and cash equivalents of $11,434,000,
resulting in a net increase in cash and cash equivalents of $537,000.
Sources and Uses of Working Capital, Fiscal 1999 and 1998. For fiscal
---------------------------------------------------------
1999, the Company's net cash used in operating activities was $2,651,000, as
compared to net cash provided by operating activities of $516,000 for fiscal
1998. The significant increase in net cash used in operating activities for
fiscal 1999 as compared to fiscal 1998 resulted primarily from substantial
increases in accounts receivables, DVD inventory purchases and DVD production
cost expenditures, which were offset, in part, by an increase in accounts
payable (primarily for DVD product purchases). The Company attempts to maintain
what it estimates to be adequate levels of DVD inventory on a title specific
basis from all product suppliers so that it can service the needs of its broad
base of retail consumers as a "one-stop" source for all DVD product. The
Company's accounts receivables at March 31, 1999 increased considerably from
those at March 31, 1998, resulting from fiscal 1999's increased fourth quarter
net sales compared to fiscal 1998's fourth quarter net sales.
For fiscal 1999, the Company's net cash used in investing activities
increased to $8,246,000 from $384,000 for fiscal 1998. The significant increase
in net cash used in investing activities for fiscal 1999 as compared to fiscal
1998 was due to the January 11, 1999 acquisition of Ken Crane's. See Item 1.
"-- Subsidiary Activities -- Image Newco Acquisition of Ken Crane's."
Additionally, fiscal 1999 capital expenditures were significantly higher than
fiscal 1998, primarily related to the Las Vegas, Nevada warehouse and
distribution facility costs not financed through the Company's construction
credit and distribution equipment lease facilities. See "Financing Activities"
below.
For fiscal 1999, the Company's net cash provided by financing activities
was $11,434,000 compared to net cash used in financing activities of $207,000 in
fiscal 1998. The significant increase in net cash provided by financing
activities for fiscal 1999 as compared to fiscal 1998 resulted primarily from
the Company's fiscal 1999 sale of 2.4 million shares of newly-issued common
stock to certain investors. See "Registered Common Stock Sale" above.
Additionally, the Company received substantially higher proceeds from the
exercise of stock options during fiscal 1999 as compared to fiscal 1998.
Proceeds from the stock sale were used to fund the aforementioned acquisition of
Ken Crane's as well as pay-down outstanding borrowings under the Company's
revolving line of credit with Foothill Capital Corporation.
The aforementioned changes for fiscal 1999 cash flow versus fiscal 1998
resulted in net cash and cash equivalents increasing 53% to $1,552,000 at March
31, 1999 from $1,015,000 at March 31, 1998.
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.
In the June 30, 1998 and September 30, 1998 quarters of fiscal 1999, the
Company experienced losses which caused noncompliance with certain financial
covenants under certain of its debt agreements such as minimum tangible net
worth, maximum total debt to tangible net worth ratio and minimum average
quarterly profitability covenants. As a result, the Company had requested and
received waivers for its noncompliance from its lenders. On December 28, 1998,
the Company refinanced its Union Bank of California revolving credit facility
with a revolving credit facility from Foothill Capital Corporation. The
revolving credit facility with Foothill Capital Corporation has less restrictive
financial covenants than the Union Bank of California facility. Should the
Company not be in compliance with future covenants, there is no assurance that
the Company's lenders will provide waivers for noncompliance. Without a waiver
of
- --------------------------------------------------------------------------------
Image Entertainment Inc. 37
<PAGE>
noncompliance, the debt would be in default and would potentially cross-default
other debt causing such debt to be immediately due and payable. The Company
would attempt to refinance its current debt with its existing lender or a new
lender at terms which may be less favorable than its current terms, however,
there can be no assurance that the Company would be successful in doing so. The
Company is currently in compliance with all financial and operating covenants
that are measured on an ongoing basis and expects that, at each measurement date
in the foreseeable future, it will be in compliance with all financial and
operating covenants to be measured at such date.
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 March 31, 1999, the Company had a total of $1,874,000
outstanding under the revolving credit and term loan facilities and had
borrowing availability of $8,643,000 and $500,000, respectively, net of amounts
utilized for outstanding letters of credit. At March 31, 1999, the Company also
had $1.5 million of outstanding standby letters of credit issued or guaranteed
by Foothill which were subsequently amended to expire on various dates from
November 15, 1999 to June 15, 2000. These letters of credit secure balances due
to program suppliers.
Concurrent with funding of the Foothill Agreement, the Company terminated
its $10 million loan agreement with Union Bank of California, N.A. and repaid
all outstanding borrowings under that agreement. Borrowings under that
agreement at March 31, 1998 were $2,315,000.
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 $3,434,000, which is reduced quarterly beginning December 31, 1998
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 March 31, 1999,
$3,348,000 in borrowings were outstanding under the Revolving Line, of which
$48,000 were borrowed at prime rate plus 1.25% option (9% at March 31, 1999) and
$3,300,000 were borrowed at LIBOR plus 2.65% (7.65% at March 31, 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 million from
IIC, with interest payable quarterly at 8% per annum, and principal due in five
years. The loan is unsecured and subordinated to any obligations to 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 borrowed $1,350,000
under a Business Loan Agreement (the "Business Loan Agreement") with Pioneer
Citizens Bank in Nevada. The Business Loan Agreement, as amended, bears
interest at prime plus 1.75% (9.5% at March 31, 1999), matures on August 1, 1999
and is secured by a deed of trust on the approximately 8.8 acres of land
adjacent to the
- --------------------------------------------------------------------------------
38 Image Entertainment Inc.
<PAGE>
Company's 8.4 acre warehouse and distribution facility site in Las Vegas,
Nevada. In May 1999, the Company repaid $135,000 (10%) of the outstanding
principal balance.
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. Interest
during the Advance Rent Period was at the three-month LIBOR plus 2.5% (7.5% at
March 31, 1999). There were $1,775,000 in borrowings outstanding under the
Lease at 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 due July
1, 1999. The variable implicit interest for each leased unit is the three-month
LIBOR plus 2.719% (7.719% at March 31, 1999).
Summary. Management believes the Company's long-term operating cash flow
-------
and liquidity will depend upon the success and extent of the Company's licensing
and distribution of DVD software and, to a lesser extent, the viability of the
LD marketplace and the Company's ability to reach the installed LD household
base through alternative distribution channels. Future operating cash flow may
also be positively affected by the success and extent of the Company's exclusive
distribution of complimentary entertainment programming in other video/audio
formats.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company does not use derivative financial instruments in its operations
or investments and does not have operations subject to fluctuations in foreign
currency exchange rates. At March 31, 1999, approximately 63% of the Company's
obligations to its lenders were subject to future potential fluctuations in
interest rates (both in the prime rate as well as in the LIBOR). To date, risks
associated with interest rate movements have not been significant and are not
expected to be so in the near future. Changes in interest rates which
dramatically increase the interest rate on the Company's debt facilities would
make it more costly to borrow proceeds under those facilities and may impede the
Company's growth strategies if management determines that the costs associated
with borrowing funds are too high to implement these strategies.
- --------------------------------------------------------------------------------
Image Entertainment Inc. 39
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
-------------------------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
<S> <C>
Independent Auditors' Report.............................................................. 41
Consolidated Balance Sheets at March 31, 1999 and 1998.................................... 42
Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997... 44
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999,
1998 and 1997........................................................................ 45
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997... 46
Notes to Consolidated Financial Statements................................................ 49
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 1999,
1998 and 1997........................................................................ 68
</TABLE>
- --------------------------------------------------------------------------------
40 Image Entertainment, Inc.
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We have audited the accompanying consolidated financial statements of Image
Entertainment, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Image Entertainment,
Inc. and subsidiaries as of March 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Los Angeles, California
May 21, 1999
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 41
<PAGE>
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
================================================================================
ASSETS
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 1,552 $ 1,015
Accounts receivable, net of allowances of
$3,475 - 1999; $4,604 - 1998 11,954 6,978
Inventories (Note 6) 16,691 11,205
Royalty and distribution fee advances 3,173 4,566
Prepaid expenses and other assets 807 1,094
Property, equipment and improvements, net (Notes 7 and 9) 14,494 8,923
Goodwill (Note 3) 7,774 --
------- -------
$56,445 $33,781
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
42 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data) 1999 1998
--------- --------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $ 16,101 $ 12,303
Accrued royalties and distribution fees 2,665 2,003
Revolving credit facility (Note 8) 1,874 2,315
Construction credit facility (Note 8) 3,348 1,619
Distribution equipment lease facility (Note 9) 1,775 526
Convertible subordinated note payable (Note 8) 5,000 5,000
Note payable (Note 8) 1,350 1,350
-------- --------
Total liabilities 32,113 25,116
-------- --------
Commitments and Contingencies (Notes 3, 8 and 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,366,000 shares authorized;
none issued and outstanding -- --
Common stock, no par value, 25 million shares authorized;
16,417,000 and 13,493,000 issued and outstanding
in 1999 and 1998, respectively (Notes 2, 3 and 10) 31,725 17,764
Additional paid-in capital 3,064 3,064
Accumulated deficit (10,457) (12,163)
-------- --------
Net shareholders' equity 24,332 8,665
-------- --------
$ 56,445 $ 33,781
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 43
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1999, 1998 and 1997
================================================================================
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES $76,726 $75,516 $85,650
OPERATING COSTS AND EXPENSES:
Cost of sales (Note 12) 58,425 70,256 68,427
Selling expenses 5,439 4,943 4,752
General and administrative expenses 6,016 4,832 7,097
Costs of facility closure -- 825 --
Amortization of production costs 4,057 3,740 3,112
Amortization of goodwill 111 9 11
------- ------- -------
74,048 84,605 83,399
------- ------- -------
OPERATING INCOME (LOSS) 2,678 (9,089) 2,251
OTHER EXPENSES (INCOME):
Interest expense 966 662 415
Interest income (84) (118) (231)
Other -- -- 662
------- ------- -------
882 544 846
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,796 (9,633) 1,405
INCOME TAX EXPENSE (BENEFIT) (Note 11) 90 (52) 433
------- ------- -------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 1,706 (9,581) 972
EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES -- -- 127
------- ------- -------
NET INCOME (LOSS) $ 1,706 $ (9,581) $ 845
======= ======== =======
NET INCOME (LOSS) PER SHARE (Note 5):
Income (loss) before extraordinary item --
Basic and diluted $ .12 $ (.71) $ .07
Extraordinary item -- -- (.01)
Net income (loss)-- Basic and diluted $ .12 $ (.71) $ .06
======= ======== =======
Weighted average shares outstanding
Basic 14,185 $ 13,471 13,504
Diluted 14,309 $ 13,471 13,836
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
44 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Notes 2, 3 and 10)
For the Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
=========================================================================================================
Common Stock Additional
----------------- Stock Paid-In Accumulated
Shares Amount Warrants Capital Deficit
(In thousands) ------ ------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996 13,556 $21,122 $ (233) $3,064 $ (3,427)
Exercise of options 544 49 -- -- --
Stock repurchased (757) (3,529) -- -- --
Amortization of stock warrants -- -- 160 -- --
Net income -- -- -- -- 845
------- ------- -------- ------- -----------
BALANCES, March 31, 1997 13,343 17,642 (73) 3,064 (2,582)
Exercise of options 150 122 -- -- --
Amortization of stock warrants -- -- 73 -- --
Net loss -- -- -- -- (9,581)
------ ------- -------- ------- -----------
BALANCES, March 31, 1998 13,493 17,764 -- 3,064 (12,163)
Exercise of options 266 1,404 -- -- --
Issuance of common stock 2,658 12,557 -- -- --
Net income -- -- -- -- 1,706
------ ------- -------- ------- -----------
BALANCES, March 31, 1999 16,417 $31,725 $ -- $ 3,064 $ (10,457)
====== ======= ======== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 45
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1999, 1998 and 1997
================================================================================
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,706 $(9,581) $ 845
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of production costs 4,057 3,740 3,112
Amortization of goodwill 111 9 11
Depreciation and other amortization 725 990 846
Amortization of stock warrants -- 73 160
Amortization of restricted stock units 89 -- --
Provision for estimated doubtful accounts
receivable, net of recoveries 144 (331) 1,946
Provision for slow-moving inventories 1,831 8,133 1,964
Provision for estimated losses on LD license
and exclusive distribution agreements -- 4,246 --
Loss on disposition of assets -- 460 34
Changes in assets and liabilities
associated with operating activities, net of
acquired business:
Accounts receivable (5,121) 4,112 628
Inventories (4,867) (1,314) (4,207)
Royalty and distribution fee advances, net 1,393 (359) (5,284)
Production cost expenditures (5,734) (4,121) (3,369)
Prepaid expenses and other assets 306 (444) 220
Accounts payable, accrued royalties
and liabilities 2,709 (5,097) 523
------- ------- -------
Net cash provided by (used in)
operating activities (2,651) 516 (2,571)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,928) (384) (6,234)
Payments for business acquired (5,318) -- --
------- ------- -------
Net cash used in investing activities (8,246) (384) (6,234)
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
46 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended March 31, 1999, 1998 and 1997
================================================================================
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit facility $ 33,572 $ 35,330 $ 56,127
Proceeds from issuance of convertible
subordinated note payable -- 5,000 --
Proceeds from issuance of note payable -- 1,350 --
Repayment of advances under revolving
credit facility (34,013) (41,724) (47,418)
Repayment of advances under construction
credit facility (86) -- --
Repayment of note payable -- (285) --
Repurchase of warrant and common stock -- -- (3,529)
Net proceeds from issuance of common stock 10,557 -- --
Net proceeds from exercise of stock options 1,404 122 49
-------- -------- --------
Net cash provided by (used in)
financing activities 11,434 (207) 5,229
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 537 (75) (3,576)
Cash and cash equivalents at beginning of year 1,015 1,090 4,666
-------- -------- --------
Cash and cash equivalents at end of year $ 1,552 $ 1,015 $ 1,090
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,049 $ 656 $ 417
Income taxes $ -- $ 90 $ 668
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 47
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended March 31, 1999, 1998 and 1997
===============================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
In January 1999, the Company, through Image Newco, Inc., its wholly-owned
subsidiary, acquired certain assets and assumed certain liabilities of the
Internet/direct-to-consumer DVD and LD software business of Ken Crane's Magnavox
City, Inc. for $5,000,000 in cash (of which $500,000 is contingent and held in
escrow) and 258,370 shares of the Company's common stock valued at $2,000,000
($7.74 per share). See "Note 3. Acquisition."
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value of assets acquired $ 1,096
Excess of purchase price over fair value of net assets acquired recorded as goodwill 7,885
Cash paid for net assets acquired (including escrowed amount) (5,000)
Stock issued for net assets acquired (2,000)
Expenses incurred in connection with the acquisition (318)
-----
Liabilities assumed $ 1,663
=====
</TABLE>
During fiscal 1999 and 1998, the Company borrowed $3,064,000 and $2,145,000,
respectively, to fund costs relating to the construction of the Las Vegas,
Nevada warehouse and distribution facility.
During fiscal 1997, the Company purchased real property in Las Vegas, Nevada for
approximately $4,365,000, which included notes payable for approximately
$1,235,000.
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
48 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Description of Business and Summary of Significant Accounting Policies.
Description of Business and Organization. Image Entertainment, Inc. (the
- ----------------------------------------
"Company") was reincorporated in California in November 1989. The Company's
primary business is the distribution of programming on optical disc (laserdisc
("LD") and digital video disc ("DVD")) under exclusive and nonexclusive license
and wholesale distribution agreements.
Principles of Consolidation. The consolidated financial statements include
- ---------------------------
those of the Company and its wholly-owned subsidiaries, Image Newco, Inc.
("Image Newco" or "Ken Crane's") and U.S. Laser Video Distributors, Inc. ("U.S.
Laser") (collectively, the "Company"). All significant inter-company balances
and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the Company's consolidated financial
- ----------------
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. The significant areas requiring the use of management
estimates related to allowances for slow-moving inventory, doubtful accounts
receivables, unrecouped royalty and 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.
Fair Value of Financial Instruments. The carrying amounts reflected in the
- -----------------------------------
Company's consolidated balance sheets for all financial instruments approximate
their respective fair values.
Cash and Cash Equivalents. The Company considers all highly liquid investments
- -------------------------
purchased with maturities of three months or less to be cash equivalents.
Inventories. Inventories consist primarily of finished products for sale which
- -----------
are stated at the lower of cost or market, cost being determined on an average
cost basis and unamortized capitalized production costs.
Royalty and Distribution Fee Advances. Royalty and distribution fee advances
- -------------------------------------
represent fixed minimum payments made to program suppliers for exclusive
programming distribution rights. A program supplier's share of exclusive
program distribution revenues is retained by the Company until the share equals
the advance(s) paid to the program supplier. Thereafter, any excess is paid to
the program supplier. In the event of an excess, the Company records, as a cost
of sales, an amount equal to the program supplier's share of the net
distribution revenues. Royalty and distribution fee advances are charged to
operations as revenues are earned, and are stated at the lower of unamortized
cost or estimated net realizable value on an individual-title or exclusive
distribution-agreement basis. If estimated future revenues on an individual-
title or agreement basis are not sufficient to recover the amortized balance of
royalty and distribution fee advances, such estimated loss is recorded as cost
of sales in the period when the loss is estimated.
Property, Equipment and Improvements. Property, equipment and improvements are
- ------------------------------------
stated at cost less accumulated depreciation and amortization. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation and amortization are computed
by applying the straight-line method over the estimated useful lives of the
building (25 years) and machinery, equipment and warehouse management system
software (3 - 7 years). Leasehold improvements are amortized over the shorter
of the useful life of the improvement or the life of the related lease.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Interest costs on the construction of the Las Vegas, Nevada warehouse and
facility were capitalized as part of the cost of the facility.
Goodwill. The excess of purchase price over the value of the net assets
- --------
acquired is amortized on a straight-line basis over a 15-year period. The
Company reviews the recoverability of goodwill by determining the ability to
recover the unamortized balance of goodwill from expected future operating cash
flows on an undiscounted basis. In management's opinion, no impairment exists
as of March 31, 1999.
Revenue Recognition. Revenue is recognized upon shipment of product. The
- -------------------
Company's return policy allows customers to return a percentage of programming
purchased on a quarterly basis. The Company provides for estimated sales
returns when product is shipped to customers.
Major Customers. Customers which individually accounted for more than 10% of
- ---------------
fiscal year net sales were none for fiscal 1999, approximately 31.5% of fiscal
1998 net sales (Norwalk Records 10.9%, Ken Crane's 10.6%, and Musicland 10.0%)
and approximately 31.8% of fiscal 1997 net sales (Musicland 11.2%, Alliance
Entertainment 10.4% and Ken Crane's 10.2%).
Amortization of Production Costs. The Company amortizes capitalized production
- --------------------------------
costs in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 53. Pursuant to the income forecast method, a percentage
of the production costs is charged to expense each month based upon (i) a
projected revenue stream resulting from distribution of new and previously
released exclusive optical disc programming related to the production costs and
(ii) management's estimate of the ultimate net realizable value of the
production costs. Estimates of future revenues are reviewed periodically and
amortization of production costs is adjusted accordingly. If estimated future
revenues are not sufficient to recover the unamortized balance of production
costs, such costs are reduced to their estimated net realizable value.
Long-Lived Assets. The Company reviews for the impairment of long-lived assets
- -----------------
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount.
Income Taxes. The Company accounts for income taxes under the asset and
- ------------
liability whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and the future tax benefits derived from operating loss and
tax credit carryforwards.
Earnings Per Share. Basic earnings (loss) per share is computed using the
- ------------------
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the combination of dilutive common share
equivalents and the weighted average shares outstanding during the period.
Comprehensive Income. The Company adopted the provisions of SFAS No. 130,
- --------------------
"Reporting Comprehensive Income" on April 1, 1998. Comprehensive income is the
change in equity of a business enterprise during a period resulting from
transactions and all other events and circumstances from non-owner sources.
Other comprehensive income includes foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. The Company did not have components of
comprehensive income during the year ended March 31, 1999.
- --------------------------------------------------------------------------------
50 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Stock Options. Prior to April 1, 1996, the Company accounted for its stock
- -------------
options in accordance with provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On April 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize, as expense
over the vesting period, the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income disclosures
for employee stock option grants made in 1996 and future years as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company has
provided the pro forma disclosure provisions of SFAS No. 123.
Segment Information. In 1999, the Company adopted SFAS No. 131 "Disclosures
- -------------------
about Segments of an Enterprise and Related Information." SFAS No. 131
supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." The adoption of SFAS No. 131 did not affect results of operations
or financial position but, in future periods, will affect the disclosure of
segment information. With the January 11, 1999 acquisition of Ken Crane's (more
fully described in "Note 3. Acquisition"), the Company now operates in two
business segments. The largest segment is wholesale distribution of primarily
DVD and LD programming. The Company's other business segment - retail sales
including direct-to-consumer Internet/mail order distribution - currently has
operating results which are not material to the Company's consolidated operating
results for the year ended March 31, 1999. Management expects the retail sales
segment to grow and be reported separately in the Company's segment information
disclosure. For the year ended March 31, 1999, segment information is not
presented.
Recently Issued Accounting Standards. In June 1998, the Financial Accounting
- ------------------------------------
Standards Board issued 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
will adopt SOP 98-1 in the annual financial statements of the fiscal year ending
March 31, 2000. Management believes adoption of SOP 98-1 will not have a
material impact on the Company's financial position or results of operations.
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 will adopt
SOP 98-5 in the annual financial statements of the fiscal year ending March 31,
2000. Management believes adoption of SOP 98-5 will not have a material impact
on the Company's financial position or results of operations.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Reclassifications. Certain fiscal 1998 and 1997 balances have been reclassified
- -----------------
to conform with the fiscal 1999 presentation.
Note 2. Registered Common Stock Sale.
On January 6, 1999, the Company completed the sale of 2.4 million shares of
newly-issued common stock to a group of institutional investors and other
accredited investors at $5 per share. Image Investors, Co., the largest
shareholder of the Company and beneficially owned by John W. Kluge and Stuart
Subotnick, purchased 600,000 shares of the 2.4 million shares issued.
The net proceeds of the offering (net of placement agent fees and professional
services fees) were $10,557,000. Approximately $5 million of the net proceeds
were used to complete the acquisition of Ken Crane's (as defined in "Note 3.
Acquisition" below). The remainder of the net proceeds was used to pay-down
borrowings outstanding under the Company's revolving credit facility with
Foothill Capital Corporation.
Note 3. Acquisition.
On January 11, 1999, the Company, through Image Newco, completed its acquisition
of certain assets and liabilities of the Internet/direct-to-consumer DVD and LD
software business ("Ken Crane's") of Ken Crane's Magnavox City, Inc. ("KCMC")
pursuant to an Asset Purchase Agreement dated as of August 20, 1998 between KCMC
and Image Newco (as amended, the "Purchase Agreement"). Ken Crane's is engaged
in Internet/direct-to-consumer retailing of DVD and LD entertainment software
and is doing business as "Ken Crane's DVD and Laserdisc Superstore." The assets
acquired included the www.kencranes.com web site, a mail-order business, an
approximately 8,000 square foot retail store (located in leased premises in
Westminster, California), DVD and LD inventory, and fixed assets and certain
other assets used in the operation of Ken Crane's Internet, mail-order and
retail store businesses. In addition, Image Newco assumed certain trade
accounts payable of Ken Crane's.
The acquisition purchase price paid to KCMC included $3 million in cash and
258,370 shares of the Company's common stock, valued at $2 million (at $7.74 per
share). The value of the 258,370 shares issued to KCMC's was based upon the
average price of the Company's common stock for the 20 days preceding the August
20, 1998 signing of the Purchase Agreement. The purchase price may be subject
to adjustment following the results of the post-closing audit of Ken Crane's.
Approximately $500,000 of the cash portion of the purchase price is in an escrow
account, as provided for in the Purchase Agreement, pending resolution of
certain deficiencies claimed by the Company in the amount of assets delivered
to the Company on the January 11, 1999 closing date. In connection with the
acquisition, Image Newco entered into (1) a five-year employment agreement with
Charles K. Crane, II ("Ken Crane, Jr.") (and paid a signing bonus of $1.5
million pursuant to that agreement) and (2) one-year consulting agreements with
Pamela Crane and Casey Crane (and made a one-time payment of $250,000 to each in
connection with those agreements). Ken Crane, Jr. serves as Vice President -
General Manager of Image Newco. For financial statement purposes, the one-time
payments are included in the purchase price of Ken Crane's.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the acquired assets and assumed liabilities were recorded at their
fair market value on the acquisition date. The consolidated financial
statements reflect a preliminary allocation of the purchase price, including the
cash
- --------------------------------------------------------------------------------
52 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
portion of purchase price held in escrow, as the purchase price allocation
has not been finalized. The excess of purchase price over the fair market value
of the net assets acquired is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Total purchase price:
Cash paid, including escrowed amount $ 3,000
Common stock issued 2,000
Payments to Ken Crane Jr. 1,500
Payments to Pamela Crane and Casey Crane 500
Costs of acquisition 318
-------
Total purchase price 7,318
-------
Fair market value of net assets acquired:
Inventories 771
Other assets 21
Property and equipment 304
Accounts payable and accrued liabilities assumed (1,663)
-------
Net assets acquired (567)
-------
Excess purchase price over net assets acquired $ 7,885
=======
</TABLE>
The operating results of Ken Crane's are included in the accompanying
consolidated statements of operations for the year ended March 31, 1999 from the
date of acquisition. The excess of purchase price over the fair market value of
the net assets acquired, including $500,000 in contingent purchase price held in
escrow, is classified as goodwill and is being amortized on a straight-line
basis over 15 years. At March 31, 1999, goodwill, net of accumulated
amortization, was $7,774,000. Amortization charged to operations for year ended
March 31, 1999 was $111,000.
Prior to the acquisition, Ken Crane's was historically one of the Company's
largest customers. During the years ended March 31, 1999 (through the January
11, 1999 acquisition date) and 1998, sales by the Company to Ken Crane's were
$5,983,000 and $8,069,000, respectively.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of Ken Crane's had occurred at the beginning of
fiscal 1998.
<TABLE>
<CAPTION>
For the Years Ended March 31,
--------------------------------
(In thousands, except per share data) 1999 1998
---------- ----------
<S> <C> <C>
NET SALES $ 83,650 $ 84,155
NET INCOME (LOSS) $ 1,489 $ (10,025)
NET INCOME (LOSS) PER SHARE -- BASIC AND DILUTED $ .10 $ (.73)
========== ==========
</TABLE>
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future. The primary pro forma adjustments primarily reflect
elimination of inter-company transactions and amortization of goodwill on a
straight-line basis over 15 years. The pro forma information does not give
effect to any synergies anticipated by management as a result of the
acquisition, in particular improvements in shipping efficiencies and the
elimination of redundant shipping, general and administrative expenses and other
operating expenses.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 4. Closure of U.S. Laser.
In May 1998, the Company announced the closing of U.S. Laser, located in New
Jersey and acquired by the Company in June 1995 for $3.1 million in cash. The
closure of the subsidiary and its retail store "Digitainment" was finalized on
July 15, 1998. The corporate entity was dissolved on February 26, 1999. The
closure followed the Company's consolidation of a majority of U.S. Laser's
optical disc distribution activities. U.S. Laser's only remaining activities
consisted of direct-to-consumer optical disc sales through the "Digitainment"
retail store, mail order to a decreasing number of accounts and the Internet.
With the decline of industry-wide LD software and hardware sales, offset in part
by growing DVD software and hardware sales, the retail store was performing
below expectations.
The closure of U.S. Laser resulted in nonrecurring pretax charges of $202,000,
representing fees and expenses associated with the early termination of a lease
and employee severance payments, and $623,000 (a noncash charge) covering the
write-off of unamortized leasehold improvements and goodwill. The pretax
charges total $825,000 and are included in costs of facility closure expense for
the year ended March 31, 1998.
Note 5. Net Income (Loss) per Share Data.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income (loss) per share for the three years
ended March 31, 1999:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Income (loss) before extraordinary item $ 1,706 $ (9,581) $ 972
========= ======== ========
Net income (loss) $ 1,706 $ (9,581) $ 845
========= ======== ========
Weighted average common shares outstanding --
basic 14,185 13,471 13,504
========= ======== ========
Effect of dilutive securities 124 -- 332
--------- -------- --------
Weighted average common shares outstanding --
diluted 14,309 13,471 13,836
========= ======== ========
Net income (loss) per share:
Income (loss) before extraordinary item --
basic and diluted $ .12 $ (.71) $ .07
========= ======== ========
Extraordinary item -- -- (.01)
Net income (loss) --
basic and diluted $ .12 $ (.71) $ .06
========= ======== ========
</TABLE>
Diluted net loss per share for 1998 is based only on the weighted average number
of common shares outstanding during the period, as inclusion of common stock
equivalents would be antidilutive. The 1,379,000 shares underlying the
convertible subordinated note payable were not included in the 1999, 1998 and
1997 diluted net income per share calculations since the impact was
antidilutive. Stock options and warrants to purchase 800,000 and 2,007,000
shares of common stock in 1999 and 1997, respectively, were outstanding but not
included in the computation of diluted net income per share because the
option/warrant exercise price was greater than the average market price of the
Company's common stock during those respective periods.
- --------------------------------------------------------------------------------
54 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Inventories.
Inventories at March 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
---------- ----------
<S> <C> <C>
LD $ 12,125 $ 15,641
DVD 9,724 2,128
Other 500 577
---------- ----------
22,349 18,346
Reserve for slow-moving inventory (9,291) (9,098)
---------- ----------
13,058 9,248
Production costs, net 3,633 1,957
---------- ----------
$ 16,691 $ 11,205
========== ==========
</TABLE>
The costs to produce licensed optical disc programming include the cost of
converting film prints or tapes into the optical disc format, which includes
mastering and ancillary material production for LD and authoring and
compression, replica sample, set up charges and ancillary material production
for DVD, and packaging artwork costs and the overhead of the Company's creative
services and production departments. In December 1998, as part of its periodic
review of the recoverability of capitalized production costs, management changed
its estimate of the projected revenue stream from distribution of exclusive DVD
titles. This change in estimate was recorded in the December 1998 quarter and
prospectively. Had this change in estimate not been made, amortization of
production costs for fiscal 1999 would have been higher by approximately
$217,000. Production costs are net of accumulated amortization of $8,559,000
and $6,013,000 at March 31, 1999 and 1998, respectively. The Company expects to
amortize substantially all of the March 31, 1999 production costs by March 31,
2002.
Note 7. Property, Equipment and Improvements.
Property, equipment and improvements at March 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----------- ----------
<S> <C> <C>
Land $ 4,868 $ 4,855
Building 4,337 --
Construction in progress -- 2,644
Machinery, equipment and software 9,279 4,920
Leasehold improvements 824 794
Other 481 280
----------- ----------
19,789 13,493
Less accumulated depreciation and amortization 5,295 4,570
----------- ----------
$ 14,494 $ 8,923
=========== ==========
</TABLE>
In December 1997, the Company commenced construction of a 76,000 square foot
warehouse and distribution facility located on 8.4 acres of land in Las Vegas,
Nevada. The building construction was completed September 30, 1998. Subsequent
to September 30, 1998, the Company began receiving and installing custom
distribution machinery and equipment. The Company began shipping product on a
test-basis from the new facility in March 1999 and began shipping 100% of its
product from the new facility on May 3, 1999. For depreciation purposes, the
building and distribution facility related machinery, equipment
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
and software were placed into service on May 1, 1999. The Company also owns
approximately 8.8 acres of unimproved property located adjacent to the Company's
8.4 acres on which its warehouse and distribution facility is located. The
Company is holding this property as an investment, and, if needed, for future
expansion. The land is recorded at the lower of cost or fair market value.
Depreciation and amortization of property, equipment and improvements was
$725,000, $826,000 and $846,000 for fiscal 1999, 1998 and 1997, respectively.
Interest capitalized for fiscal 1999 and 1998 was $156,000 and $18,000,
respectively. The Company did not capitalize interest during fiscal 1997.
Note 8. 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% (8.75% at March 31, 1999),
payable monthly. The borrowing rate may be reduced in the future should the
Company meet certain 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 March 31, 1999, the
Company had a total of $1,874,000 outstanding under the revolving credit and
term loan facilities and had borrowing availability of $8,643,000 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 March 31, 1999, the Company was in compliance
with all financial and operating covenants.
At March 31, 1999, the Company had $1.5 million of outstanding standby letters
of credit issued or guaranteed by Foothill which were subsequently amended to
expire on various dates from November 15, 1999 to June 30, 2000. These letters
of credit secure balances due to program suppliers.
Concurrent with funding of the Foothill revolving credit facility, the Company
terminated its $10 million loan agreement with Union Bank of California, N.A.
and repaid all outstanding borrowings under that agreement. Borrowings under
that agreement at March 31, 1998 were $2,315,000.
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 $3,434,000, which is reduced quarterly beginning December 31, 1998
by $43,000. The Revolving Line expires January
- --------------------------------------------------------------------------------
56 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 March 31, 1999, $3,348,000 in borrowings were outstanding under the
Revolving Line, of which $48,000 were borrowed at prime rate plus 1.25% (9% at
March 31, 1999) and $3,300,000 were borrowed at LIBOR plus 2.65% (7.65% at March
31, 1999).
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 March 31,
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 million from IIC,
with interest payable quarterly at 8% per annum, and principal due in five
years. The loan is unsecured and subordinated to any obligations to 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 borrowed $1,350,000 under a
- --------------------
Business Loan Agreement (the "Business Loan Agreement") with Pioneer Citizens
Bank in Nevada. The Business Loan Agreement, as amended, bears interest at
prime plus 1.75% (9.5% at March 31, 1999), matures on August 1, 1999 and is
secured by a deed of trust on the approximately 8.8 acres of land adjacent to
the Company's 8.4 acre warehouse and distribution facility site in Las Vegas,
Nevada. In May 1999, the Company repaid $135,000 (10%) of the outstanding
principal balance.
The following is a schedule by year of required minimum debt principal payments
and maturities under the Company's debt agreements (revolving credit and term
loan and construction credit facilities and its notes payable):
<TABLE>
<CAPTION>
(In thousands)
Fiscal Amount
------------ ----------
<S> <C>
2000 $ 1,522
2001 172
2002 2,046
2003 5,172
2004 172
Thereafter 2,488
------------ ----------
$ 11,572
==========
</TABLE>
Note 9. 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
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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. Interest during the
Advance Rent Period was at the three-month LIBOR plus 2.5% (7.5% at March 31,
1999). There were $1,775,000 in borrowings outstanding under the Lease at 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 due July 1, 1999. The variable implicit
interest for each leased unit is the three-month LIBOR plus 2.719% (7.719% at
March 31, 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%.
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 March 31,
1999, the Company was in compliance with all financial and operating covenants.
Machinery and equipment under capital leases consists of the following:
<TABLE>
<CAPTION>
For the Fiscal Year Ended March 31,
------------------------------------
(In thousands) 1999 1998
--------------- ---------------
<S> <C> <C>
Machinery and equipment $ 1,775 $ 526
Less accumulated amortization -- --
--------------- ---------------
$ 1,775 $ 526
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Future minimum lease payments at March 31, 1999 for property under capital leases are as follows:
(In thousands)
Year Ending Amount
-------------- --------------
<S> <C>
2000 $ 471
2001 471
2002 471
2003 471
2004 234
--------------
Total minimum lease payments 2,118
Less amount representing interest at 7.719% 343
--------------
Present value of minimum lease payments $ 1,775
==============
</TABLE>
- --------------------------------------------------------------------------------
58 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Stock Awards, Options and Warrants.
The Company has three employee stock option plans. Incentive stock options may
be granted under one plan, and incentive stock options and nonstatutory options
under the other two. Under the plans, the exercise price of an incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The exercise price of a nonstatutory option generally may not be
less than 85% of the fair market value on the date of grant. The term of an
option may be no more than 10 years from the date of grant. The Company also
has a directors' stock option plan providing for an initial and annual award of
participate under the plan. Only nonstatutory options may be granted under the
directors' plan. The directors' plan also provides for an exercise price of
$0.25 over the fair market value of the common stock on the date of grant for
initial grants to directors. Thereafter, the directors' plan provides for an
exercise price at fair market value of the common stock of the date of grant,
fixed vesting and a ten-year term. In addition to options under the three
employee plans and the directors plan, the Company has granted options
(including the antidilution rights described below and warrants in connection
with program acquisition agreements) to officers, shareholders, creditors and
others for various business purposes.
In September 1998, the Company's shareholders approved a new incentive plan
pursuant to which approximately 1,160,000 shares were available for awards,
including options, thereunder. No new options will be granted under the
Company's other plans. The new plan provides for awards to employees and
directors of the Company. Options (incentive as well as nonqualified),
restricted stock units ("RSUs"), stock appreciation rights, performance share
awards, stock bonuses, cash bonuses and stock units can be awarded under the new
plan. The new plan includes a minimum option price of 85% of the fair market
value of a share of common stock relative to the closing price on the date of
grant for any non-qualified stock option. The maximum term allowed for an
option is 10 years and a RSU shall either vest or be forfeited not more than 10
years from the date of grant. The new plan contemplates annual automatic grants
of RSUs payable in shares of the Company's common stock to certain directors of
the Company ("Formula Director Awards") in lieu of the 15,000 share option
grants under the directors' stock option plan. The new plan also provides that
under certain limited circumstances directors who are not also executive
officers of the Company may receive discretionary option grants in addition to
the Formula Director Awards. The new plan terminates on June 30, 2008.
No more than 300,000 shares may be subject to options and stock appreciation
rights granted to any one individual in any one calendar year; no more than
500,000 shares may be subject to RSU awards and stock unit awards (including
Formula Director Awards), issued initially for nominal or no consideration other
than future services, with vesting based on passage of time and continued
service; no more than 5,000 shares may be subject to Formula Director Awards
granted to any one individual in any one calendar year; and no more than 400,000
shares may be subject to all awards granted to any one individual in any one
calendar year.
In July 1998 an aggregate 88,358 RSUs were granted to officers of the Company
under the new plan. These grants will vest annually in increments of 20% over
the five-year period commencing June 30, 1999. Accelerated vesting may occur if
certain fiscal earnings before interest, taxes, depreciation and amortization
targets are achieved (they were not achieved in fiscal 1999). The number of
RSUs awarded to officers was determined by multiplying a specified percentage of
base salary by the officer's base salary as of the beginning of the period and
dividing the results by the average trading price of the stock determined as of
the date of grant ($6.70 per share) to determine the number of RSUs. These RSUs
are payable solely in
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
shares. The Company amortizes the total value of the RSUs on the date of grant
($592,000) ratably over the 5-year vesting period as compensation expense.
Compensation expense for fiscal 1999 was approximately $89,000.
Stock option transactions for the three years ended March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted
Per Share Average Price
(In thousands, except per share data) Shares Price Range Per Share
---------- ----------- -------------
<S> <C> <C> <C>
Outstanding, March 31, 1996 6,007 $ .59-10.25 $5.697
Granted 180 5.813-6.75 6.594
Exercised (544) .743-6.00 3.740
Surrendered (1,427) .817-6.00 5.799
Canceled (1,832) .743-7.25 5.622
------ ------
Outstanding, March 31, 1997 2,384 .743-10.25 6.208
Granted 30 3.25 3.250
Exercised (150) .743-1.857 1.295
Surrendered (10) 7.00 7.000
Canceled (837) 4.16-7.00 6.073
------ ------
Outstanding, March 31, 1998 1,417 .743-10.25 6.364
Granted 60 7.94 7.940
Exercised (266) .743-7.25 5.274
Surrendered (99) 4.16 4.160
Canceled (30) .743-7.94 6.182
------ ------
Outstanding, March 31, 1999 1,082 $.817-10.25 $6.824
====== ======
</TABLE>
Of the options reflected as outstanding on March 31, 1999, 1998 and 1997,
options to purchase approximately 999,000, 1,296,000 and 2,243,000 shares of
common stock were exercisable, respectively. At March 31, 1999, there were
approximately 1,070,000 shares of common stock reserved for issuance under all
of the Company's stock option plans.
The following table summarizes significant ranges of outstanding and exercisable
options at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Range of Shares Remaining Exercise Shares Exercise
Exercise Prices (In thousands) Life (Years) Price (In thousands) Price
- ------------------ -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
under $4.00 46 2.9 $ 1.621 46 $ 1.621
$4.01 to $6.00 216 3.7 5.535 216 5.535
$6.01 to $8.00 722 6.1 7.261 639 7.285
$8.01 to $10.00 85 5.0 8.647 85 8.647
over $10.00 13 2.8 10.250 13 10.250
----- -----
1,082 999
===== =====
</TABLE>
- --------------------------------------------------------------------------------
60 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A December 29, 1987 stock purchase agreement (the "Agreement") provides for the
grant of antidilution rights ("Rights") to various persons (the "Investors").
Each Investor is entitled to Rights in connection with certain issuances of
common stock. The Agreement was amended in July 1992 and will expire in July
2002.
Upon the exercise of certain options outstanding as of December 29, 1987 (the
"Management Options"), each Investor was granted Rights to purchase shares of
common stock pursuant to a formula based in part on the percentage of the
outstanding shares of common stock owned by the Investor on December 29, 1987.
As of March 31, 1999, all Rights to purchase 507,016 shares had been granted
(the maximum allowable upon exercise of all the Management Options), Rights to
purchase 476,609 shares had been exercised (as to 4,521 shares in fiscal 1999,
19,697 shares in fiscal 1998 and 22,039 shares in fiscal 1997, at per-share
exercise prices ranging from $.74 to $1.07) and Rights to purchase 30,407 shares
were outstanding. Rights granted in connection with the exercise of a
Management Option are exercisable for two years from the date of grant and have
a per-share exercise price equal to the greater of (a) $.74 or (b) the exercise
price of the Management Option.
Upon certain issuances of shares of common stock other than pursuant to the
exercise of Management Options, the Investors will be granted additional Rights
("Other Rights") so that the equity interest represented by the Agreement shares
held by the Investor (excluding the shares purchased upon the exercise of Rights
issued in connection with the exercise of Management Options) will not be
diluted. As of March 31, 1999, Other Rights to purchase approximately 851,616
shares of common stock had been exercised (none exercised in fiscal 1999 and
1998 and 433 shares in fiscal 1997).
The Company applies APB Opinion No. 25 in accounting for its stock option plans,
and accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's consolidated net income (loss) and net
income (loss) per share would have been decreased (or increased in the case of
the net loss) to the pro forma amounts indicated below for the three years ended
March 31, 1999:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 1997
------ --------- -----
<S> <C> <C> <C>
Consolidated Net Income (Loss):
As reported $1,706 $ (9,581) $ 845
Pro forma $1,382 $(10,076) $ 372
====== ======== =====
Consolidated Net Income (Loss) per Share:
As reported
Basic and diluted $ .12 $ (.71) $ .06
====== ======== =====
Pro forma
Basic and diluted $ .10 $ (.75) $ .03
====== ======== =====
</TABLE>
The weighted-average fair value of options granted during fiscal 1999, 1998 and
1997 was $4.49, $3.25 and $7.19, respectively, using the Black-Scholes option-
pricing model with the following weighted-average assumptions: Fiscal 1999,
1998 and 1997 -- expected volatility of 60%, risk-free interest rates of 5.5% -
6.7%, no expected dividends and an expected life of three to five years.
Pro forma consolidated net income (loss) and net income (loss) per share
reflects only options granted in fiscal 1999, 1998 and 1997. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma consolidated net income (loss) and net
income (loss)
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
per share amounts presented above because compensation cost is reflected over
the option vesting periods of up to four years and compensation cost for options
granted prior to April 1, 1995 are not considered.
Note 11. Income Taxes.
Income tax expense (benefit) for the three years ended March 31, 1999, all
current, are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
----- ------ ----
<S> <C> <C> <C>
Federal $ 88 $ (55) $ 32
State 2 3 345
----- ----- -----
$ 90 $ (52) $ 377
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets at March 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 3,946 $ 3,639
Net operating loss carryforwards 728 755
Other 557 818
Installment sales 396 396
Sales returns reserve 313 388
Store closure expenses 44 92
Royalty reserves 174 848
Bad debt reserve 210 162
Tax credits 329 329
------- -------
Deferred tax assets 6,697 7,427
Less valuation allowance (6,697) (7,372)
------- -------
Net deferred tax assets $ -- $ 55
======= =======
</TABLE>
Expected income tax expense based on Federal statutory rates for the three years
ended March 31, 1999 differed from actual tax expense as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Expected income tax expense (benefit) $ 626 $(3,275) $ 415
State income taxes, net of Federal benefit 73 3 73
Change in valuation allowance (675) 3,206 (28)
Other 66 14 (83)
----- ------- -----
$ 90 $ (52) $ 377
===== ======= =====
</TABLE>
Note 12. Other Items - Statements of Operations.
Fourth Quarter Adjustments in Fiscal 1998 and 1997. During the fourth quarter
- --------------------------------------------------
of fiscal 1998, the Company recorded pretax noncash charges of $6,263,000 and
$4,246,000 to reduce the carrying value of its LD inventory to its net
realizable value and to provide for estimated losses on LD license and exclusive
distribution agreements, respectively. The provisions were in response to a
greater than expected decline
- --------------------------------------------------------------------------------
62 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
in the Company's quarterly LD sales and the continued adverse effect DVD has had
on the LD market. The Company's decision to record these charges in the fourth
quarter was based on industry-wide statistics and other relevant published data
on DVD and LD trends and the incrementally adverse impact these trends had on
the Company's operations during the fourth quarter of fiscal 1998 and would
appear to continue having on the Company's operations in the foreseeable future.
The charges are reflected as a component of cost of sales in the accompanying
consolidated statements of operations for fiscal 1998.
Also during the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring pretax charge of $825,000 associated with the closure of its
subsidiary, U.S. Laser. The charge is reflected as costs of facility closure in
the accompanying consolidated statement of operations for fiscal 1998.
During the fourth quarter of fiscal 1997, the Company recorded pretax provisions
for slow-moving LD inventory and estimated doubtful accounts receivable of
$1,214,000 and $792,000, respectively. The charges are reflected as a component
of cost of sales and general and administrative expenses, respectively, in the
accompanying consolidated statement of operations for fiscal 1997.
Acquisition Expenses. During the third quarter of fiscal 1997, the Company
- --------------------
recorded a nonrecurring pretax charge of $662,000 consisting primarily of
professional fees incurred in connection with negotiations to acquire Essex
Entertainment, Inc., a privately held New Jersey-based corporation. Acquisition
negotiations were terminated in December 1996. The charge is reflected as other
expense in the accompanying consolidated statement of operations for fiscal
1997.
Note 13. Commitments and Contingencies.
Operating Leases. In March 1999, the Company amended its existing lease for its
- ----------------
corporate office space (30,080 square feet) in Chatsworth, California, extending
the lease term four years through April 30, 2004. The existing lease provided
for monthly rent of approximately $14,500 (subject to annual adjustment based
upon increases in the Consumer Price Index("CPI")) and an expiration date of
March 31, 2000. Commencing April 1, 2000, monthly rent will be increased to
$17,450, with annual upward adjustments based upon the CPI.
Concurrent with the March 1999 amendment of its existing lease, the Company
leased additional office space (15,440 square feet) adjacent to its corporate
office space. The lease term is five years commencing May 1, 1999 and co-
terminates with the corporate office space lease on April 30, 2004. Monthly
rent for the first annual lease period is $10,000 with annual scheduled rent
increases up to a monthly rent of $11,000 in the fourth year of the lease. The
scheduled increase during the last year of the lease is based upon the CPI.
The lease for the Company's warehouse space (48,300 square feet) in Chatsworth,
California provided for monthly rent of $23,500 (subject to annual adjustment
based upon increases in the CPI). On February 2, 1998, the Company entered into
a Surrender of Lease and Termination Agreement (the "Termination Agreement").
The Termination Agreement provided for the Company to surrender the lease for
the warehouse space on August 31, 1998 ("Termination Date"). The Company
extended the Termination Date on a month-to-month basis through May 16, 1999.
In consideration for the early termination of the lease which would have
otherwise terminated on March 31, 2000, the Company paid $50,000 on the
Termination Date. Effective May 16, 1999, the Company relocated its warehousing
and distribution operations to Nevada.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The lease for the Ken Crane's retail facility (8,102 square feet) located in
Westminster, California provides for monthly rent of $14,000 (subject to annual
adjustment based upon increases in the CPI). The lease terminates on November
22, 2002.
Future minimum annual rental payments under operating leases at March 31, 1999
are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Amount
---------- ----------
(In thousands)
<S> <C>
2000 $ 492
2001 505
2002 508
2003 439
2004 341
Thereafter 29
------
$2,314
======
</TABLE>
Rent expense was $487,000, $570,000 and $538,000 for fiscal 1999, 1998 and 1997,
respectively.
Other. At March 31, 1999, the Company's future obligations for royalty
- -----
advances, minimum royalty guarantees and exclusive distribution fee guarantees
under the terms of existing licenses and exclusive distribution agreements,
respectively, are as follows:
<TABLE>
<CAPTION>
Fiscal Amount
---------- ---------
(In thousands)
<S> <C>
2000 $ 4,890
2001 445
-------
$ 5,335
=======
</TABLE>
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations relating to employment and tax matters. While it is not possible to
predict the outcome of these matters, it is the opinion of management, based on
consultations with legal counsel, that the ultimate disposition of known
proceedings will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
- --------------------------------------------------------------------------------
64 Image Entertainment, Inc.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Quarterly Financial Data. (Unaudited)
Summarized quarterly financial data for fiscal 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
(In thousands, except per share data) June 30, September 30, December 31, March 31,
------------------ ------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997 1999 1998
------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $17,140 $16,902 $13,834 $16,412 $22,715 $26,297 $23,037 $ 15,905
Operating income (loss) 367 (34) (532) (68) 1,474 1,467 1,369 (10,454)/(1)/
Income (loss) before extraordinary item 205 (191) (687) (184) 1,129 1,087 1,059 (10,293)/(1)/
Net income (loss) 205 (191) (687) (184) 1,129 1,087 1,059 (10,293)/(1)/
Net income (loss) per share/ (2)/ -
Basic $ .02 $ (.01) $ (.05) $ (.01) $ .08 $ .08 $ .07 $ (.76)
Diluted $ .02 $ (.01) $ (.05) $ (.01) $ .08 $ .08 $ .06 $ (.76)
- ---------------------------
</TABLE>
(1) Includes noncash charges of $6,263,000 and $4,246,000 to reduce the carrying
value of the Company's LD inventory to its net realizable value and provide
for estimated losses on LD license and exclusive distribution agreements,
respectively. Also includes nonrecurring charges totaling $825,000 relating
to the closure of U.S. Laser.
(2) Net income (loss) per share are computed independently for each of the
quarters represented in accordance with SFAS No. 128. Therefore, the sum of
the quarterly net income (loss) per share may not equal the total computed
for the fiscal year or any cumulative interim period.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 65
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Election of Directors" in
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the Company's 1999
Annual Meeting of Shareholders. See also, Part I "Executive Officers of the
Registrant."
ITEM 11. Executive Compensation.
----------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Executive Compensation" in
the Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1999 Annual Meeting of Shareholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive proxy
statement to be filed with the Commission in connection with the Company's 1999
Annual Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information required by this item is incorporated by reference from
the information contained under the caption entitled "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement to be filed
with the Commission in connection with the Company's 1999 Annual Meeting of
Shareholders.
- --------------------------------------------------------------------------------
66 Image Entertainment, Inc.
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT. Page
----
<S> <C>
1. Financial Statements:
Independent Auditors' Report............................................................................. 41
Consolidated Balance Sheets at March 31, 1999 and 1998................................................... 42
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997..................................................................... 44
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997..................................................................... 45
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997..................................................................... 46
Notes to Consolidated Financial Statements............................................................... 49
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts.......................................................... 68
3. Exhibits:
See the Exhibit Index on pages i - vi.
</TABLE>
(b) REPORTS ON FORM 8-K.
On January 22, 1999, the Company filed a Current Report on Form 8-K (the
"1-22-99 Report") that reported, pursuant to Item 2 of Form 8-K, that the
Company (through Image Newco, Inc.), had completed its acquisition of Ken
Crane's, pursuant to the Purchase Agreement.
On March 23, 1999, the Company filed a Current Report on Form 8-K/A that
amended the 1-22-99 Report to include, pursuant to Item 7 of Form 8-K, (1)
audited financial statements of Ken Crane's for the fiscal year ended July 31,
1998 and (2) pro forma consolidated financial statements for the Company and Ken
Crane's.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 67
<PAGE>
SCHEDULE II
-- Valuation and Qualifying Accounts --
For the Years Ended March 31, 1999, 1998 and 1997
================================================================================
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
--------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999: $ 404 $ 144 $ (23) $ 525
========= ======== ========= ========
For the Year Ended March 31, 1998: $ 1,629 $ (331) $ (894) $ 404
======== ======== ========== ========
For the Year Ended March 31, 1997: $ 333 $ 1,946 $ (650) $ 1,629
======== ======== ========== ========
<CAPTION>
Allowance for Sales Returns
--------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999: $ 4,200 $ 3,146 $ (4,396) $ 2,950
========= ========== =========== ========
For the Year Ended March 31, 1998: $ 3,180 $ 5,457 $ (4,437) $ 4,200
======== ========== ========== ========
For the Year Ended March 31, 1997: $ 2,850 $ 9,385 $ (9,055) $ 3,180
======== ========== ========== ========
<CAPTION>
Reserve for Slow-Moving Inventory
--------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
(In thousands) of Year Expenses Written-Off of Year
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1999: $ 9,098 $ 1,831 $ (1,638) $ 9,291
======== ========== ========== ========
For the Year Ended March 31, 1998: $ 3,070 $ 8,133 $ (2,105) $ 9,098
======== ========== ========== ========
For the Year Ended March 31, 1997: $ 1,219 $ 1,964 $ (113) $ 3,070
======== ========== ========== ========
</TABLE>
- --------------------------------------------------------------------------------
68 Image Entertainment, Inc.
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.,
a California corporation
Dated: June 25, 1999 By:/s/ MARTIN W. GREENWALD
-----------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: June 25, 1999 /s/ MARTIN W. GREENWALD
-----------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer
Dated: June 25, 1999 /s/ JEFF M. FRAMER
-----------------------------------------------
JEFF M. FRAMER,
Chief Financial Officer (Principal Financial and
Accounting Officer)
Dated: June 25, 1999 /s/ STUART SEGALL
-----------------------------------------------
STUART SEGALL,
Vice President & Director
Dated: June 25, 1999 /s/ IRA EPSTEIN
-----------------------------------------------
IRA EPSTEIN,
Director
Dated: June 25, 1999 /s/ M. TREVENEN HUXLEY
-----------------------------------------------
M. TREVENEN HUXLEY,
Director
- --------------------------------------------------------------------------------
Image Entertainment, Inc. 69
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit No. Description
- ----------- -----------
2.1 Asset Purchase Agreement dated as of August 20, 1998 by and
between Image Newco, Inc. and Ken Crane's Magnavox City, Inc.
Filed as Exhibit 2.1 to the Company's Registration Statement on
Form S-2 (No.333-65611), effective December 21, 1998, and
incorporated by reference herein.
2.1.a First Amendment to Asset Purchase Agreement dated as of October 3,
1998 by and between Image Newco, Inc. and Ken Crane's Magnavox
City, Inc. Filed as Exhibit 2.2 to the Company's Registration
Statement on Form S-2 (No.333-65611), effective December 21, 1998,
and incorporated by reference herein.
3.1 Restated Articles of Incorporation. Filed as Exhibit 3.1 of the
Company's Form 10-K for the year ended March 31, 1995, and
incorporated by reference herein.
3.2 Bylaws. Filed as Exhibit 3.2 of the Company's Form 10-K for the
year ended March 31, 1995, and incorporated by reference herein.
4.1 Specimen Common Stock certificate. Filed as Exhibit 4 to the
Company's Registration Statement on Form S-2 (No.333-65611),
effective December 21, 1998, and incorporated by reference herein.
4.2* Convertible Subordinated Promissory Note dated October 29, 1997
issued to Image Investors Co. pursuant to that certain Credit
Agreement dated as of September 29, 1997 by and between the
Company and Image Investors Co.
10.1+ The Company's Restated 1989 Incentive Stock Option Plan, as
amended. Filed as Exhibit 10.1 of the Company's Form 10-K for the
year ended March 31, 1992, and incorporated by reference herein.
10.2+ The Company's 1990 Stock Option Plan. Filed as Exhibit A of the
Company's Proxy Statement dated December 27, 1990, and
incorporated by reference herein.
10.3+ The Company's Restated 1992 Stock Option Plan. Filed as Exhibit A
of the Company's Proxy Statement dated September 9, 1994, and
incorporated by reference herein.
10.4+ The Company's 1994 Eligible Directors Stock Option Plan and Form
of Eligible Director Non-Qualified Stock Option Agreement. Filed
as Exhibit 10.4 of the Company's Form 10-K for the year ended
March 31, 1995, and incorporated by reference herein.
10.5+ The Company's 1998 Incentive Plan. Filed as Exhibit A to the
Company's Notice of Annual Meeting and Proxy Statement dated July
29, 1998, and incorporated herein by this reference.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. i
<PAGE>
10.5.a* Form of Employee (Nonqualified) Stock Option Grant Agreement under
the Company's 1998 Incentive Plan.
10.6+ Eligible Director Non-Qualified Stock Option Agreement dated as of
July 22, 1998 between the Company and Stuart Segall. Filed as
Exhibit 10.9 to the Company's Registration Statement on Form S-2
(No.333-65611), effective December 21, 1998, and incorporated by
reference herein.
10.7+ Eligible Director Non-Qualified Stock Option Agreement dated as of
September 17, 1998 between the Company and Mark Trevenen Huxley.
Filed as Exhibit 10.10 to the Company's Registration Statement on
Form S-2 (No.333-65611), effective December 21, 1998, and
incorporated by reference herein.
10.8+ Form of Option Agreement dated October 15, 1991 between the
Company and Martin W. Greenwald. Filed as Exhibit 10.3 of the
Company's 10-Q for the quarter ended September 30, 1991, and
incorporated by reference herein.
10.9+ Option granted August 13, 1992 by the Company to Cheryl Lee. Filed
as Exhibit 10.12 of the Company's Form 10-K for the year ended
March 31, 1994, and incorporated by reference herein.
10.10+ Form of Option granted May 19, 1994 to Jeff Framer, Cheryl Lee and
David Borshell. Filed as Exhibit 10.24 to the Company's Form 10-K
for the year ended March 31, 1994, and incorporated by reference
herein.
10.11+ Form of Termination Agreement between the Company and each of
Martin W. Greenwald, Cheryl Lee, Jeff Framer and David Borshell
(relating to the termination of their former employment
agreements). Filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-2 (No.333-65611), effective December 21, 1998,
and incorporated by reference herein.
10.12+ Employment Agreement dated as of July 1, 1998 between the Company
and Martin W. Greenwald. Filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-2 (No.333-65611), effective
December 21, 1998, and incorporated by reference herein.
10.13+ Employment Agreement dated as of July 1, 1998 between the Company
and Cheryl Lee. Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-2 (No.333-65611), effective
December 21, 1998, and incorporated by reference herein.
10.14+ Employment Agreement dated as of July 1, 1998 between the Company
and Jeff Framer. Filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-2 (No.333-65611), effective
December 21, 1998, and incorporated by reference herein.
10.15+ Employment Agreement dated as of July 1, 1998 between the Company
and David Borshell. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-2 (No.333-65611), effective
December 21, 1998, and incorporated by reference herein.
- --------------------------------------------------------------------------------
ii Image Entertainment, Inc.
<PAGE>
10.16+ Form of 1998 Performance Restricted Stock Unit Award Agreement
(and related General Provisions) between the Company and each of
Martin W. Greenwald, Cheryl Lee, Jeff Framer and David Borshell
(appended as Exhibit A to Exhibits 10.12 through 10.15). Filed as
Exhibit 10.16 to the Company's Registration Statement on Form S-2
(No.333-65611), effective December 21, 1998, and incorporated by
reference herein.
10.17+ Form of Indemnity Agreement between the Company and its directors
and officers. Filed as Exhibit F of the Company's Proxy Statement
dated September 5, 1989, and incorporated by reference herein.
10.18 Stock Purchase Agreement among the Company, Directors of the
Company and various Buyers dated December 29, 1987. Filed as
Exhibit 4.3 of the Company's Form 8-K dated December 29, 1987, and
incorporated by reference herein.
10.18.a Form of First Amendment, dated July 7, 1992, to the Stock Purchase
Agreement among the Company, Directors of the Company and various
Buyers dated December 29, 1987. Filed as Exhibit 10.5 of the
Company's Form 10-Q for the quarter ended September 30, 1992, and
incorporated by reference herein.
10.19 Stock Purchase Agreement among the Company, Directors of the
Company and Image Investors Co. dated June 27, 1990. Filed as
Exhibit 10.53 of the Company's Form 10-K for the year ended March
31, 1990. The Company and Image Investors Co. are parties to Stock
Purchase Agreements dated July 14, 1988, November 30, 1988,
January 11, 1989, February 14, 1989, May 10, 1989 and June 20,
1990, which are virtually identical to this Exhibit except for the
number of shares of Common Stock purchased, and incorporated by
reference herein.
10.20 Stock Purchase Agreement between the Company and Image Investors
Co. dated December 30, 1992, including Warrant. Filed as Exhibit
10.6 of the Company's Form 10-Q for the quarter ended December 31,
1992, and incorporated by reference herein.
10.21 Stock Purchase Agreement between the Company and Stuart Segall
dated as of July 12, 1995. Filed as Exhibit 10.1 of the Company's
Form 10-Q for the quarter ended September 30, 1996, and
incorporated by reference herein.
10.22 Stock Purchase Agreement between the Company and Martin W.
Greenwald dated as of June 27, 1996. Filed as Exhibit 10.2 of the
Company's Form 10-Q for the quarter ended September 30, 1996, and
incorporated by reference herein.
10.23 Purchase and Sale Agreement between the Company and LEI Partners,
L.P. dated December 31, 1990. Filed as Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended December 31, 1990, and
incorporated by reference herein.
10.24 Standard Industrial Lease for 9333 Oso Avenue, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.1 of the Company's Form 10-Q for the quarter ended December 31,
1993.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. iii
<PAGE>
10.24.a* First Amendment dated August 20, 1996 to Standard Industrial Lease
for 9333 Oso Avenue, Chatsworth, California, dated December 1,
1993 and effective April 1, 1994, by and between the Company and
P&R Investment Company.
10.24.b* Second Amendment dated March 1, 1999 to Standard Industrial Lease
for 9333 Oso Avenue, Chatsworth, California, dated December 1,
1993 and effective April 1, 1994, by and between the Company and
P&R Investment Company.
10.25* Standard Industrial Lease for 9349 Oso Avenue, Chatsworth,
California, dated March 1, 1999 and effective May 1, 1990, between
the Company and P&R Investment Company.
10.26 Agreement for Purchase and Sale dated June 5, 1996 between Airport
Center Partnership and the Company. Filed as Exhibit 10.19 of the
Company's Form 10-K for the year ended March 31, 1996, and
incorporated by reference herein.
10.27 Construction Agreement between the Company and Carson Construction
Management, Inc. dated as of November 25, 1996. Filed as Exhibit
10.23 of the Company's Form 10-K for the year ended March 31,
1997, and incorporated by reference herein.
10.28 Business Loan Agreement between the Company and Bank of America
National Trust and Savings Association dated March 10, 1997. Filed
as Exhibit 10.23 to the Company's Form 10-K for the fiscal year
ended March 31, 1998, and incorporated by reference herein.
10.28.a Amendment No. 1 dated as of February 4, 1998 to Business Loan
Agreement between the Company and Bank of America National Trust
and Savings Association dated March 10, 1997. Filed as Exhibit
10.23.a to the Company's Form 10-K for the fiscal year ended March
31, 1998, and incorporated by reference herein.
10.28.b Amendment No. 2 dated as of June 29, 1998 to Business Loan
Agreement between the Company and Bank of America National Trust
and Savings Association dated March 10, 1997. Filed as Exhibit
10.3 to the Company's Form 10-Q for the quarter ended June 30,
1998, and incorporated by reference herein.
10.29 Lease Intended as Security between the Company and BA Leasing &
Capital Corporation dated March 19, 1997. Filed as Exhibit 10.24
to the Company's Form 10-K for the fiscal year ended March 31,
1998, and incorporated by reference herein.
10.29.a (First) Amendment dated March 19, 1997 to Lease Intended as
Security between the Company and BA Leasing & Capital Corporation
dated March 19, 1997. Filed as Exhibit 10.24.a to the Company's
Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
10.29.b Second Amendment dated February 8, 1998 to Lease Intended as
Security between the Company and BA Leasing & Capital Corporation
dated March 19, 1997. Filed as Exhibit 10.24.b to the Company's
Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
- --------------------------------------------------------------------------------
iv Image Entertainment, Inc.
<PAGE>
10.29.c Third Amendment dated September 25, 1998 to Lease Intended as
Security between the Company and BA Leasing & Capital Corporation
dated March 19, 1997. Filed as Exhibit 10.1 to the Company's Form
10-Q for the quarter ended September 30, 1998.
10.30 Loan Agreement between the Company and Union Bank of California,
N.A. dated as of December 17, 1996. Filed as Exhibit 10.20 of the
Company's Form 10-K for the year ended March 31, 1997, and
incorporated by reference herein.
10.30.a Amendment No. 1 dated as of February 5, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.20.A of the Company's
Form 10-K for the year ended March 31, 1997, and incorporated by
reference herein.
10.30.b Amendment No. 2 dated as of February 25, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.20.B of the Company's
Form 10-K for the year ended March 31, 1997, and incorporated by
reference herein.
10.30.c Amendment No. 3 dated as of September 27, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.26.c to the Company's
Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
10.30.d Amendment No. 4 dated as of October 31, 1997 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.26.d to the Company's
Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
10.30.e Amendment No. 5 dated as of January 28, 1998 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.26.e to the Company's
Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
10.30.f Amendment No. 6 dated as of June 18, 1998 to Loan Agreement dated
as of December 17, 1996 by and between the Company and Union Bank
of California, N.A. Filed as Exhibit 10.26.f to the Company's Form
10-K for the fiscal year ended March 31, 1998, and incorporated by
reference herein.
10.30.g Amendment No. 7 dated as of July 13, 1998 to Loan Agreement dated
as of December 17, 1996 by and between the Company and Union Bank
of California, N.A. Filed as Exhibit 10.2 to the Company's Form
10-Q for the quarter ended June 30, 1998.
10.30.h Amendment No. 8 dated as of October 23, 1998 to Loan Agreement
dated as of December 17, 1996 by and between the Company and Union
Bank of California, N.A. Filed as Exhibit 10.2 to the Company's
Form 10-Q for the quarter ended September 30, 1998.
- --------------------------------------------------------------------------------
Image Entertainment, Inc. v
<PAGE>
10.31 Credit Agreement dated as of September 29, 1997 by and between the
Company and Image Investors Co. Filed as Exhibit 10.27 to the
Company's Form 10-K for the fiscal year ended March 31, 1998, and
incorporated by reference herein.
10.32 Loan and Security Agreement dated as of December 28, 1998 by and
between the Company and Foothill Capital Corporation, including
Capital Expenditure Loan Note and Trademark Security Agreement.
Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended December 31, 1998.
21* Subsidiaries of the Registrant.
23* Consent Letter of KPMG, Independent Certified Public Accountants.
27* Financial Data Schedule Fiscal Year Ended March 31, 1999.
- --------------------------------------------------------------------------------
* Exhibit(s) not previously filed with the Securities and
Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
- --------------------------------------------------------------------------------
vi Image Entertainment, Inc.
<PAGE>
EXHIBIT 4.2
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$5,000,000 New York, New York
October 29, 1997
FOR VALUE RECEIVED, the undersigned, Image Entertainment, Inc., a
California corporation (Borrower), hereby unconditionally promises to pay to
--------
the order of Image Investors Co., a Delaware corporation (the "Lender"), in
------
lawful money of the United States of America and in immediately available funds,
on the Termination Date, or such earlier date as payment shall be due, whether
by acceleration or otherwise in accordance with the Credit Agreement (as defined
below), at such office as the Lender may designate in writing, from time to
time, the principal amount of FIVE MILLION DOLLARS ($5,000,000). The Borrower
further agrees to pay interest in like money on the unpaid principal amount
outstanding at the rates and on the dates specified in subsection 1.4 of the
Credit Agreement.
This Note (a) is the Note referred to in the Credit Agreement dated as of
September 29, 1997 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"), between the Borrower and the Lender, (b) is
----------------
entitled to the benefits of and is subject to the provisions of the Credit
Agreement, except to the extent such provisions conflict with the provisions of
this Note, and (c) is subject to optional and mandatory prepayment in whole or
in part as provided in the Credit Agreement.
This Note may be converted into shares of common stock of the Borrower in
accordance with Subsection 1.7 of the Credit Agreement.
As set forth in Subsection 1.11 of the Credit Agreement, the indebtedness
represented by this Note is subordinated in accordance with the following
provisions (the "Subordination Provisions"):
------------------------
1. Borrower covenants and agrees, and Lender by its acceptance hereof likewise
covenants and agrees, that, to the extent and in the manner hereinafter set
forth in Sections 1 through 5 of these Subordination Provisions, the
indebtedness represented by this Note and the payment of principal of this
Note and interest thereon and any other obligations or claims in respect
hereof (including but not limited to any fees or expenses of collection,
post-petition interest or claims for indemnity) is hereby
<PAGE>
expressly made subordinate and subject in right of payment and in
reorganization, liquidation or bankruptcy to the prior payment in full of
all Senior Indebtedness (defined below).
a. "Senior Indebtedness" means all Indebtedness (defined below),
whenever created or incurred, under that certain Loan Agreement,
dated as of December 17, 1996, between Borrower and Union Bank of
California, N.A., as amended and as may be further amended,
modified, restated, renewed and extended, other than Indebtedness
under the Credit Agreement or this Note or Indebtedness expressly
excluded as Senior Indebtedness hereinbelow.
i. Union Bank of California may expressly rely on these
Subordination Provisions.
ii. Notwithstanding anything to the contrary set forth above,
"Senior Indebtedness" shall not include any Indebtedness
which by the express terms of the agreement or instrument
creating, evidencing or governing the same is pari passu
with or subordinate in right of payment to the obligations
under this Note.
b. "Indebtedness" means (A) all indebtedness, obligations and other
liabilities (contingent or otherwise) for or in respect of
borrowed money or evidenced by bonds, debentures, notes or
similar instruments (whether or not the recourse of the lender is
to the whole of the assets of Borrower or to only a portion
thereof); (B) all reimbursement obligations and other liabilities
(contingent or otherwise) of Borrower with respect to letters of
credit or bankers' acceptances issued for the account of such
person or with respect to interest rate protection agreements or
currency exchange agreements; (iii) all obligations and other
liabilities (contingent and otherwise) of Borrower with respect
to any conditional sale, installment sale or other title
retention agreement, purchase money mortgage or security
interest, or otherwise to pay the deferred purchase price of
property or services (except trade accounts payable and accrued
expenses arising in the ordinary course of business) or in
respect of any sale and leaseback arrangement; (iv) all
obligations and liabilities (contingent or otherwise) in respect
of leases by Borrower as lessee which, in conformity with
generally accepted accounting principles, are required to be
accounted for as
2
<PAGE>
capitalized lease obligations on the balance sheet of Borrower;
and (v) all direct or indirect guaranties or similar agreements
in respect of, and obligations or liabilities (contingent or
otherwise) to purchase or otherwise acquire or otherwise to
assure a creditor against loss in respect of, indebtedness,
obligations or liabilities of others.
2. In the event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to Borrower or to its
creditors, as such, or to its assets, or (b) any liquidation, dissolution,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or (c) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of Borrower, then and in any such
event the holder of the Senior Indebtedness shall be entitled to received
payment in full of all amounts due or to become due on or in respect of all
Senior Indebtedness, before the Lender is entitled to receive any payment
on account of principal of or interest or any other amount on or in respect
of this Note, and to that end the holder of the Senior Indebtedness shall
be entitled to received, for application to the payment thereof, any
payment or distribution of any kind or character, whether in cash, property
or securities, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other indebtedness
of Borrower being subordinated to the payment of this Note, which may be
payable or deliverable in respect to this Note in any such case,
proceeding, dissolution, liquidation or other winding up or event.
3. If notwithstanding the foregoing provisions of Sections 1 and 2, the Lender
shall have received any payment or distribution of assets of Borrower of
any kind or character, whether in cash, property or securities, including
any such payment or distribution which may be payable or deliverable by
reason of the payment of any other indebtedness of Borrower being
subordinated to the payment of this Note, before all Senior Indebtedness is
paid in full or payment thereof provided for, and if such fact shall, at or
prior to the time of such payment or distribution, have been made known to
the Lender, any such payment or distribution of assets so received shall be
held in trust for the holder of Senior Indebtedness and (x) shall be paid
to such holder (pro rata) to the extent necessary to make payment in full
in cash or cash equivalent of all Senior Indebtedness (and, in the case of
Senior Indebtedness in respect of letters of credit not yet drawn upon,
necessary to be fully secured by cash collateral) after giving effect to
any concurrent payment or distribution to or for the benefit of such holder
or (y) shall be paid over or delivered forthwith to the trustee in
bankruptcy,
3
<PAGE>
receiver, liquidating trustee, custodian, assignee, agent or other person
making payment or distribution of assets of Borrower for application to the
payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full, after giving effect to
any concurrent payment or distribution to or for the holder of the Senior
Indebtedness.
4. Upon the maturity of any Senior Indebtedness by lapse of time, acceleration
or otherwise, then unless such acceleration shall have been rescinded or
shall have otherwise ceased to exist, or the time for payment extended, all
principal thereof and premium, if any, and interest thereon and all other
claims with respect thereto shall first be paid in full, before any payment
is made on account of principal of or interest on or any other claim with
respect to this Note. Upon any event of default (or upon the receipt by
Borrower of written notice of any other event of default) with respect to
any Senior Indebtedness, then, unless and until such payment has been made
or the event of default shall have been cured or waived in writing or shall
have ceased to exist or the holder of the Senior Indebtedness shall have
otherwise agreed in writing, no direct or indirect payment shall be made by
Borrower with respect to the principal of or interest on or any other
amount or claim with respect to this Note.
5. Nothing contained in this Note shall prevent Borrower, at any time except
during the pendency of an event of default under any Senior Indebtedness or
any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshaling of assets and
liabilities of Borrower referred to in Section 2 above, from making
payments of principal of or interest on this Note when otherwise due.
6. Subject to the payment in full of all Senior Indebtedness, the Lender shall
be subrogated to the extent of the payments or distributions made to the
holder of such Senior Indebtedness pursuant to the provisions of these
Subordination Provisions to the rights of the holder of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness until the principal of,
and interest, if any, on this Note shall be paid in full. For purposes of
such subrogation, no payments or distributions to the holder of the Senior
Indebtedness of any cash, property or securities to which the Lender would
be entitled except for the provisions of these Subordination Provisions,
and no payments made pursuant to the provisions of these Subordination
Provisions to the holder of Senior Indebtedness by Lender, shall, as among
Borrower, its creditors other than holder of Senior
4
<PAGE>
Indebtedness and Lender, be deemed to be a payment or distribution by
Borrower to or on account of the Senior Indebtedness.
7. The provisions of these Subordination Provisions are and are intended
solely for the purpose of defining the relative rights of the Lender of
this Note, on the one hand, and the holder of Senior Indebtedness, on the
other hand. Such provisions are for the benefit of the holder of Senior
Indebtedness (and their successors and assigns) and shall be enforceable by
them directly against the Lender (and its successors and assigns) of this
Note. These Subordination Provisions shall constitute a continuing offer to
all persons who become holder of, or continue to hold, Senior Indebtedness
(whether such Senior Indebtedness was created or acquired before or after
the issuance of this Note). These Subordination Provisions may not be
amended without the consent of each Lender of Senior Indebtedness that may
be adversely affected thereby. Nothing contained in these Subordination
Provisions or elsewhere in this Note is intended to or shall: (i) impair,
as among Borrower, its creditors other than Lenders of Senior Indebtedness
and the Lender, the obligation of Borrower, which is absolute and
unconditional, to pay to the Lender the principal of and interest on this
Note as and when the same shall become due and payable in accordance with
its terms; or (ii) affect the relative rights against Borrower of the
Lender and creditors of Borrower other than the holder of Senior
Indebtedness; or (iii) prevent the Lender from exercising all remedies
otherwise permitted by applicable law upon default under this Note, subject
to the rights, if any, under or by reason of these Subordination
Provisions, of the holder of Senior Indebtedness to receive cash, property
and securities otherwise payable or deliverable to or received by Lender.
8. No right of any present or future holder of any Senior Indebtedness to
enforce subordination as provided herein shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of Borrower
or by any act or failure to act, in good faith, by any such holder, or by
any noncompliance by Borrower with the terms of this Note. The holder of
Senior Indebtedness may extend, renew, modify or amend the terms of the
Senior Indebtedness or any security therefor and release, sell or exchange
such security and otherwise deal freely with Borrower, all without
affecting the liabilities and obligations of the Lender of this Note. The
Lender of this Note by its acceptance authorizes and expressly directs
Borrower on the Lender's behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in these Subordination
Provisions and appoints the Company as attorney-in-fact for such purpose.
5
<PAGE>
Upon the occurrence of any one or more of the Events of Default, all
amounts then remaining unpaid on this Note shall become, or may be declared to
be, immediately due and payable, all as provided in the Credit Agreement.
No delay or omission on the part of the Lender or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Lender in exercising its rights under the Credit Agreement or under any other
Loan Document, or course of conduct relating thereto, shall operate as a waiver
of such rights or any other right of the Lender or any holder hereof, nor shall
any waiver by the Lender of any such right or rights on any one occasion be
deemed a bar to, or waiver of, the same right or rights on any future occasion.
Upon an Event of Default, the Borrower agrees to pay or reimburse the
Lender for all of its out-of-pocket costs and expenses incurred in connection
with the collection of the principal amount of this Note, including reasonable
outside attorneys' fees, if this Note is collected by or through an attorney-at-
law or under advice therefrom.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit Agreement
and used herein shall have the meanings given to them in the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE SATE OF NEW YORK.
Image Entertainment, Inc.
By: /s/ Martin W. Greenwald
---------------------------------
Martin W. Greenwald,
President
6
<PAGE>
EXHIBIT 10.5.a
IMAGE ENTERTAINMENT, INC.
(the "Company")
EMPLOYEE (NONQUALIFIED) STOCK OPTION GRANT AGREEMENT
----------------------------------------------------
THIS EMPLOYEE (NONQUALIFIED) STOCK OPTION AGREEMENT (the "Option Agreement") is
between the Company and the Optionee named below and evidences the Company's
grant to the Optionee of a Nonqualified Stock Option to purchase authorized but
unissued shares of the Company's Common Stock. The Option is granted pursuant
to and subject to the Company's 1998 Incentive Plan (the "Plan") and the Terms
and Conditions for Nonqualified Stock Options Under the 1998 Incentive Plan (the
"Terms"), incorporated herein by this reference.
Optionee:------------------------ Vesting Schedule/1/,/2/:
------------------------------
Exercise Price Per Share: $-----/1/ ------------------------------
------------------------------
Number of Shares:----------------/1/ ------------------------------
------------------------------
Grant Date:---------------------- ------------------------------
------------------------------
Expiration Date:-----------------/2/ ------------------------------
-----------------------------
_____________________________
/1/Subject to adjustment under Section 6.2 of the Plan.
/2/Subject to early termination if the Optionee's employment terminates
or in certain other circumstances. See Sections 4 through 6 of the Terms
and Sections 1.6 and 6.2 of the Plan for exceptions and additional details
regarding possible early termination of the Option.
Optionee accepts the Option and agrees to and acknowledges receipt of a copy of
the Plan and the Terms.
IMAGE ENTERTAINMENT, INC. AGREED AND ACKNOWLEDGED:
(a California corporation)
_________________________________
By: ____________________________ (Optionee's Signature)
Cheryl Lee,
CAO & General Counsel _________________________________
(Address)
_________________________________
(City, State, Zip Code)
<PAGE>
TERMS AND CONDITIONS FOR
(NONQUALIFIED) OPTIONS GRANTED UNDER THE
1998 INCENTIVE PLAN
1. Exercisability of Option. The Option shall vest and become exercisable in
------------------------
percentage installments of the aggregate number of shares of Common Stock
of the Company as set forth in the Option Agreement. The Option may be
exercised only to the extent the Option is exercisable and vested.
(a) Cumulative Exercisability. To the extent the Optionee does not
-------------------------
purchase all the shares that the Optionee may exercise, the Optionee
has the right cumulatively thereafter to purchase any shares not so
purchased until the Option terminates or expires.
(b) No Fractional Shares. Fractional share interests shall be
--------------------
disregarded, but may be cumulated.
(c) Minimum Exercise. No fewer than 100 shares may be purchased at any
----------------
one time, unless the number purchased is the total number at the time
exercisable under the Option.
2. Method of Exercise of Option. To the extent exercisable, the Option may be
----------------------------
exercised by the delivery to the Company of an Exercise Agreement (a form
of which is attached as Exhibit A) from the Optionee stating the number of
shares to be purchased pursuant to the Option and accompanied by payment in
one or a combination of the following methods:
(a) by electronic funds transfer, or by certified or cashier's check
payable to the order of the Company, in the full amount of the
purchase price of the shares and amounts required to satisfy
applicable withholding taxes;
(b) by a promissory note of the Optionee consistent with the requirements
of Sections 1.8 and 6.4 of the Plan if expressly authorized in writing
by the Committee;
(c) by notice and third party payment in such manner as may be authorized
by the Committee; or
(d) by the delivery of shares that have been held by the Optionee for at
least six months, in accordance with Section 2.2.2(e) of the Plan,
unless otherwise provided by the Committee.
Other payment methods may be permitted only if expressly authorized by the
Committee with respect to this Option or all options under the Plan. The
Option is non-transferable and may be exercised only by the Optionee,
except as the Committee may otherwise expressly permit.
3. Minimum Required Withholding on Exercise. The Plan provides that the
----------------------------------------
Company may, in its sole discretion, reduce the amount of shares
deliverable or other amount payable to the Optionee upon exercise of an
Option to satisfy minimum required statutory tax withholding rates. If the
Company does elect to permit the Optionee to withhold shares in
satisfaction of the tax withholding requirements, the Optionee shall not
withhold in excess of the minimum required withholding rate.
4. Continuance of Employment Required. 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
this Option Agreement. Partial service, even if substantial, during any
vesting period will not entitle the Optionee 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.
1
<PAGE>
5. Effect of Termination of Employment or Death. If the Optionee's employment
--------------------------------------------
by either the Company or any subsidiary terminates, the Option and all
other rights and benefits under this Option Agreement terminate except that
the Optionee may, at any time within the following applicable period after
the Severance Date, exercise the Option to the extent the Option was
exercisable on the Severance Date and has not otherwise expired:
(a) Termination by the Company or a subsidiary, other than (1) a
Termination for Cause (as defined below), (2) upon a voluntary
resignation or retirement or (3) because of a Total Disability or
death of the Optionee --- for a period of 3 months
(b) Voluntary resignation (other than in anticipation of or in connection
with a Termination for Cause) --- for a period of 3 months
(c) Retirement --- for a period of 24 months
(d) Total Disability or death of the Optionee --- for a period of 24
months
In case of a Termination for Cause or a voluntary resignation in
anticipation of or in connection with a Termination for Cause, the Option
shall terminate immediately, in its entirety.
"Termination for Cause" means a termination of service, based upon a
finding by the Company, acting in good faith and based on its reasonable
belief at the time, that the Optionee:
(w) is or has been dishonest, incompetent, or negligent in the
discharge of his or her duties to the Company; or has refused to
perform stated or assigned duties; or
(x) has committed a theft or embezzlement, or a breach of
confidentiality or unauthorized disclosure or use of inside
information, customer lists, trade secrets or other confidential
information, or a breach of fiduciary duty involving personal
profit, or a willful or negligent violation of any law, rule or
regulation or of Company rules or policy, in any material
respect; or has been convicted of a felony or misdemeanor (other
than minor traffic violations or similar offenses); or
(y) has materially breached any of the provisions of any agreement
with the Company or an affiliate; or
(z) has engaged in unfair competition with, or otherwise acted
intentionally in a manner injurious to the reputation, business
or assets of the Company; or has induced a customer to break or
terminate any contract with the Company or an affiliate; or has
induced any principal for whom the Company or an affiliate acts
as agent to terminate such agency relationship.
6. Change in Subsidiary's Status; Leaves of Absence.
------------------------------------------------
(a) If the Optionee is employed by an entity that ceases to be a
subsidiary of the Company, this event is deemed for purposes of this
Option Agreement to be a termination of the Optionee's employment by
the Company other than a Termination for Cause, voluntary resignation,
retirement, Total Disability or death of Optionee.
(b) Absence from work caused by military service, authorized sick leave or
other leave approved in writing by the Company or the Committee shall
not be considered a termination of employment by the Company for
purposes of Section 5; provided that, unless
2
<PAGE>
reemployment upon the expiration of such leave is guaranteed by
contract or law, such leave is for a period of not more than 90 days.
7. Notices. Any notice to be given shall be in writing and addressed to the
-------
Company at its principal office, to the attention of the Secretary, and to
the Optionee at his or her last address of record, or at such other address
as either party may hereafter designate in writing to the other for
purposes of notices in respect of the Option.
8. Optionee Not a Stockholder. Neither the Optionee nor any other person
--------------------------
entitled to exercise the Option shall have any of the rights or privileges
of a stockholder of the Company as to any shares of Common Stock until the
issuance and delivery to him or her of a certificate evidencing the shares
registered in his or her name. No adjustment will be made for dividends or
other rights as to a stockholder for which a record date is prior to such
date of delivery.
9. No Employment Commitment by Company. Nothing contained in this Option
-----------------------------------
Agreement or the Plan constitutes an employment commitment by the Company,
affects the Optionee's status as an employee at will who is subject to
termination without cause, confers upon the Optionee any right to remain
employed by the Company or any subsidiary, interferes in any way with the
right of the Company or any subsidiary at any time to terminate such
employment, or affects the right of the Company or any subsidiary to
increase or decrease the Optionee's other compensation.
10. Effect of Option Agreement. The Option Agreement shall be binding upon and
--------------------------
inure to the benefit of any successor or successors of the Company, except
to the extent the Committee determines otherwise.
11. Choice of Law. The construction, interpretation, performance and
-------------
enforcement of the Option Agreement and the Option shall be governed by the
laws of the State of California.
12. Defined Terms. Capitalized terms used herein and not otherwise defined
-------------
herein shall have the meaning assigned by the Plan. The Option is not an
Incentive Stock Option under the Plan or the Code.
13. Plan. The Option and all rights of Optionee thereunder are subject to, and
----
the Optionee agrees to be bound by, all of the terms and conditions of the
provisions of the Plan. Unless otherwise expressly provided in these Terms
and Conditions, provisions of the Plan that confer discretionary authority
on the Committee do not (and shall not be deemed to) create any additional
rights in the Optionee not expressly set forth in the Optionee's Option
Agreement or in a written amendment thereto. If there is any conflict or
inconsistency between the terms and conditions of the Option Agreement or
these Terms and of the Plan, the terms and conditions of the Plan shall
govern.
3
<PAGE>
EXHIBIT 10.24
STANDARD INDUSTRIAL LEASE -- NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
1. Parties. This Lease, dated, for reference purposes only, December 1, 1993,
-----------------
is made by and between P & R Investment Company, a California General
----------------------------------------------
Partnership (herein called "Lessor") and Image Entertainment, Inc., a Colorado
- ----------- -------------------------------------
Corporation (herein called "Lessee").
- -----------
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Los Angeles State of
-----------
California, commonly known as 9333 Oso Avenue, Chatsworth, CA 91311 and
- ---------- -------------------------------------
described as an approximately 30,080 square foot industrial building on lots 8 &
-------------------------------------------------------------------
9, Tract 31225, recorded in Book 843, pages 62-65 in the office of the Los
- --------------------------------------------------------------------------
Angeles County Recorder's Office and part of lot 7, Tract 31225 as shown on
- ---------------------------------------------------------------------------
Exhibit "A" attached hereto and made a part hereof by this reference. Said real
- --------------------------------------------------------------------
property including the land and all improvements therein, is herein called "the
Premises".
3. Term.
3.1 Term. The term of this Lease shall be for Six (6) Years commencing
-------------
on April 1, 1994 and ending on March 31, 2000 unless sooner terminated pursuant
------------- --------------
to any provision hereof.
See Addendum Paragraph 1
3.2 Delay in Possession. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case, Lessee shall not be obligated to
pay rent until possession of the Premises is tendered to Lessee; provided,
however, that if Lessor shall not have delivered possession of the Premises
within sixty (60) days from said commencement date, Lessee may, at Lessee's
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee is
not received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease hereunder shall terminate and be of no further force or effect.
3.3 Early Possession. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rate set forth below.
See Addendum Paragraph 2
4. Rent. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $13,536.00, in advance, on the first day of each month of the term
---------- -----
hereof. Lessee shall pay Lessor upon the execution hereof $ as rent for
---------
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment. Rent shall be payable in
lawful money of the United States to Lessor at the address stated herein or to
such other persons or at such other places as Lessor may designate in writing.
5. Security Deposit. Lessee has deposited, as a carry over from the Lease
dated 4/10/89, with Lessor $13,536.00 as security for Lessee's faithful
----------
performance of Lessee's obligations hereunder. If Lessee fails to pay rent or
other charges due hereunder, or otherwise defaults with respect to any provision
of this Lease, Lessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Lessor may become obligated by reason of
Lessee's default, or to compensate Lessor for any loss or damage which Lessor
may suffer thereby. If Lessor so uses or applies all or any portion of said
deposit, Lessee shall within ten (10) days after written demand therefor deposit
cash with Lessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Lessee's failure to do so shall be a material
breach of this Lease. If the monthly rent shall, from time to time, increase
during the term of this Lease, Lessee shall thereupon deposit with Lessor
additional security deposit so that the amount of security deposit held by
Lessor shall at all times bear the same proportion to current rent as the
original security deposit bears to the original monthly rent set forth in
paragraph 4 hereof. Lessor shall not be required to keep said deposit separate
from its general accounts. If Lessee performs all of Lessee's obligations
hereunder, said deposit, or so much thereof as has not theretofore been applied
by Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of
Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein between
Lessor and Lessee with respect to said Security Deposit.
See Addendum Paragraph 3
6. Use.
6.1 Use. The Premises shall be used and occupied only for Warehousing
-----------
distribution and sales of laser video discs and related products or any other
- ----------------------------------------------------------------
use which is reasonably comparable and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph
6.2(a) shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, in such event, Lessee
shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, if there shall
be more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air conditioning,
heating, and loading doors in the Premises shall be in good operating condition
on the Lease commencement date. In the event that it is determined that this
warranty has been violated, then it shall be the obligation of Lessor, after
receipt of written notice from Lessee setting forth with specificity the nature
of the violation, to promptly, at Lessor's sole cost, rectify such violation.
Lessee's failure to give such written notice to Lessor within thirty (30) days
after the Lease commencement date shall cause the conclusive presumption that
Lessor has complied with all of Lessor's obligations hereunder. The warranty
contained in this paragraph 6.3(a) shall be of no force or effect if prior to
the date of this Lease, Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession of the Premises, whichever is earlier,
subject to all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and any
covenants or restrictions of record, and accepts this Lease subject thereto and
to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
See Addendum Paragraph 4
7. Maintenance, Repairs and Alterations.
7.1 Lessee's Obligations. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and non structural,
(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises) including, without
limiting the generality of the foregoing, all plumbing, heating, air
conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior and
exterior), foundations, ceilings, roofs (interior and exterior), floors,
windows, doors, plate glass and skylights located within the Premises, and all
landscaping, driveways, parking lots, fences and signs located on the Premises
and sidewalks and parkways adjacent to the Premises.
7.2 Surrender. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occasioned
Initials: -----
(C) American Industrial Real Estate Association 1980 NET -----
<PAGE>
by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease. Lessee shall leave the air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing and fencing on the premises in good operating condition.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor may
at its option (but shall not be required to) enter upon the Premises after ten
(10) days prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf and put the same in good order, condition and repair, and the cost
thereof together with interest thereon at the maximum rate then alllowable by
law shall become due and payable as additional rental to Lessor together with
Lessee's next rental installment.
7.4 Lessor's Obligations. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty). Paragraph 9
(relating to destruction of the premises) and under Paragraph 14 (relating to
condemnation of the Premises). It is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof Lessee expressly waives the benefit of
any statute now or hereinafter in effect which would otherwise afford Lessee the
right to make repairs at Lessor's expense or to terminate this Lease because of
Lessor's failure to keep the premises in good order, condition and repair.
See Addendum Paragraph 4(c)
7.5 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility Installations in, on or about
the Premises, except for nonstructural alterations not exceeding $xxx in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $xxx cumulative cost, Lessee shall make no change or alteration to
the exterior of the Premises nor the exterior of the building(s) on the Premises
without Lessor's prior written consent. As used in this Paragraph 7.5 the term
"Utility Installation" shall mean carpeting, window coverings, air lines, power
panels, electrical distribution systems, lighting fixtures, space heaters, air
conditioning, plumbing, and fencing. Lessor may require that Lessee remove any
or all of said alterations, improvements, additions or Utility installations at
the expiration of the term, and restore the Premises to their prior condition.
Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense,
a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such improvements, to insure Lessor against any liability for
mechanic's and materialmen's liens and to insure completion of the work. Should
Lessee make any alterations, improvements, additions or Utility Installations
without the prior approval of Lessor, Lessor may require that Lessee remove any
or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises, or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of non-
responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorneys fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Not withstanding the provisions of this Paragraph 7.5(d). Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2.
8. Insurance Indemnity.
8.1 Insuring Party. As used in this Paragraph 8, the term "insuring
party" shall mean the party who has the obligation to obtain the Property
Insurance required hereunder. The insuring party shall be designated in
Paragraph 46 hereof. In the event Lessor is the insuring party , Lessor shall
also maintain the liability insurance described in paragraph 8.2 hereof, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2, but Lessor shall not be required to name Lessee
as an additional insured on such policy. Whether the insuring party is the
Lessor or the Lessee, Lessee shall, as additional rent for the Premises, pay the
cost of all insurance required hereunder, except for that portion of the cost
attributable to Lessor's liability insurance coverage in excess of $1,000,000
per occurrence. If Lessor is the insuring party Lessee shall, within the ten
(10) days following demand by Lessor, reimburse Lessor for the cost of the
insurance so obtained.
8.2 Liability Insurance. Lessee shall, at Lessee's expense obtain and keep
in force during the term of this Lease a policy of Combined Single Limit, Bodily
Injury and Property Damage insurance insuring Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $2,000,000.00 per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
Paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.3 Property Insurance.
(a) The insuring party shall obtain and keep in force during the term
of this Lease a policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof, as the same may
exist from time to time, which replacement value is now $ 1,500,000. but in
---------
no event less than the total amount required by lenders having liens on the
Premises, against all perils including within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended
perils ("all risk" as such term is used in the insurance industry). Said
insurance shall provide for payment of loss thereunder to Lessor or to the
holders of mortgages or deeds of trust on the Premises. The insuring party
shall, in addition, obtain and keep in force during the term of this Lease a
policy of rental value insurance covering a period of one year, with loss
payable to Lessor, which insurance shall also cover all real estate taxes and
insurance costs for said period. A stipulated value or agreed amount endorsement
deleting the coinsurance provision of the policy shall be procured with said
insurance. If the insuring party shall fail to procure and maintain said
insurance the other party may, but shall not be required to, procure and
maintain the same, but at the expense of Lessee. If such insurance coverage has
a deductible clause, the deductible amount shall not exceed 1,000 per
occurrence, and Lessee shall be liable for such deductible amount.
(b) If the Premises are part of a larger building, or if the Premises
are part of a group of buildings owned by Lessor which are adjacent to the
Premises, then Lessee shall pay for any increase in the property insurance of
such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof. But
if Lessee is the insuring party the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 Insurance Policies. Insurance required hereunder shall be in companies
holding a "General Policyholders Rating" of at least (A)VI or such other rating
as may be required by a lender having a lien on the Premises, as set forth in
the most current issue of "Best's Insurance Guide". The insuring party shall
deliver to the other party copies of policies of such insurance or certificates
evidencing the existence and amounts of such insurance with loss payable clauses
as required by this paragraph 8. No such policy shall be cancellable or subject
to reduction of coverage or other modification except after thirty (30) days'
prior written notice to Lessor. If Lessee is the insuring party Lessee shall, at
least thirty (30) days prior to the expiration of such policies, furnish Lessor
with renewals or "binders" thereof, or Lessor may order such insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee upon
demand. Lessee shall not do or permit to be done anything which shall invalidate
the insurance policies referred to in Paragraph 8.3. If Lessee does or permits
to be done anything which shall increase the cost of the insurance policies
referred to in Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand
reimburse Lessor for any additional premiums attributable to any act or omission
or operation of Lessee causing such increase in the cost of insurance. If Lessor
is the insuring party, and if the insuring policies maintained hereunder cover
other improvements in addition to the Premises, Lessor shall deliver to Lessee a
written statement setting forth the amount of any such insurance cost increase
and showing in reasonable detail the manner in which it has been computed.
8.5 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and /or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises arising from any
cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.7 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee. Lessee's employees, invitees, customers, or any other person in or
about the Premises, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, agents or contractors, whether such damage to injury
is caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said damage or injury results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places and regardless of whether the cause
of such damage or injury or the means of repairing the same is inaccessible to
Lessee. Lessor shall not be liable for any act or neglect of any other tenant,
if any, of the building in which the Premises are located.
Initials
--------------
--------------
<PAGE>
9. Damage of Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
then replacement cost of the Premises. "Premises Building Partial Damage shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more of
the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 Partial Damage - Insured Loss. Subject to the provisions of paragraphs
9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage
which is an Insured Loss and which falls into the classification of Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment, or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the Lessee is
the insuring party, and if the insurance proceeds received by Lessor are not
sufficient to effect such repair, Lessor shall give notice to Lessee of the
amount required in addition to the insurance proceeds to effect such repair.
Lessee shall contribute the required amount to Lessor within ten days after
Lessee has received notice from Lessor of the shortage in the insurance. When
Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possible and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 Partial Damage - Uninsured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense). Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of
occurrence of such damage.
9.4 Total Destruction. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss, (including destruction required by
any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 Damage Near End of Term.
(a) If at any time during the last six months of the term of this Lease
there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than 20 days after the occurrence of an Insured
Loss falling within the classification of Premises Partial Damage during the
last six months of the term of this Lease. If Lessee duly exercises such option
during said 20 day period, Lessor shall, at Lessor's expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said 20 day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 20 day period by giving written notice to Lessee of Lessor's
election to do so within 10 days after the expiration of said 20 day period,
notwithstanding any term of provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, and equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the real property tax, as defined
in paragraph 10.2, applicable to the Premises during the term of this Lease. All
such payments shall be made at least ten (10) days prior to the delinquency date
of such payment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes paid by Lessee shall cover any
period of time prior to or after the expiration of the term hereof. Lessee's
share of such taxes shall be equitably prorated to cover only the period of time
within the tax fiscal year during which this Lease shall be in effect, and
Lessor shall reimburse Lessee to the extent required. If Lessee shall fail to
pay any such taxes, Lessor shall have the right to pay the same, in which case
Lessee shall repay such amount to Lessor with Lessee's next rent installment
together with interest at the maximum rate then allowable by law.
10.2 Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge thereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.3 Joint Assessment. If the Premises are not separately assessed.
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
See Addendum Paragraph 5
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in
anyway, affect or limit the liability of Lessee under the terms of this Lease
even if after such assignment or subletting the terms of this Lease are
materially changed or altered without the consent of Lessee, the consent of whom
shall not be necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no subletting or
assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof. Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee, Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees.
<PAGE>
of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 Attorney's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure shall
continue for a period of 30 days after written notice thereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 30 days are reasonably required for its cure, then Lessee shall not be
deemed to be in default if Lessee commenced such cure within said 30-day period
and thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C.(S)101 or any successor statute thereto (unless, in the case of a petition
filed against Lessee, the same is dismissed within 60 days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within 30 days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
See Addendum Paragraph 6
13.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by Lessor
by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter diligently
prosecutes the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to as certain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee, Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any
other provision of this Lease to the contrary.
13.5 Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay
to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the terms
of this Lease. Such fund shall be established to insure payment when due,
before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of this
paragraph are insufficient to discharge the obligations of Lessee to pay such
real property taxes and insurance premiums as the same become due. Lessee shall
pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
default in the obligations of Lessee to perform under this Lease, then any
balance remaining from funds paid to Lessor under the provisions of this
paragraph may, at the option of Lessor, be applied to the payment of any
monetary default of Lessee in lieu of being applied to the payment of real
property tax and insurance premiums.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), his Lease shall terminate as to
the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the building taken bears to the total floor
area of the building situated on the Premises. No reduction of rent shall occur
if the only area taken is that which does not have a building located thereon.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
16 Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement within
such time shall be a material breach of this Lease or shall be
-4-
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or any
part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises. In the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified mail, and if
given personally or by mail, shall be deemed sufficiently given if addressed to
Lessee or to Lessor at the address noted below the signature of the respective
parties, as the case may be. Either party may by notice to the other specify a
different address for notice purposes except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address for
notice purposes. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties at
such addresses as Lessor may from time to time hereafter designate by notice to
Lessee.
24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder
by Lessor shall not be a waiver of any preceding breach by Lessee of any
provision hereof, other than the failure of Lessee to pay the particular rent so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of
this Lease pertaining to the obligations of Lessee, but all options and rights
of first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law: Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. Attorney's Fees. If either party brings an action to enforce the terms
hereof or declare rights hereunder, the prevailing party in any such action, on
trail or appeal, shall be entitled to his reasonable attorney's fees to be paid
by the losing party as fixed by the court.
32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
See Addendum Paragraph 7
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent shall
not be unreasonably withheld.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other property of Lessor or the right of first offer to lease
other property of Lessor; (3) the right or option to purchase the Premises, or
the right of first refusal to purchase the Premises, or the right of first offer
to purchase the Premises or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
Initials: _____
NET -5- _____
<PAGE>
39.2 Options Personal. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 Multiple Options. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(b) or 13.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) continuing until the obligation is
paid, or (iii) at any time after an event of default described in paragraphs
13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of
such default to Lessee), or (iv) in the event that Lessor has given to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
has become payable under paragraph 13.4 for each of such defaults, or paragraph
13.1(c), whether or not the defaults are cured, during the 12 month period prior
to the time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1(a), 13.1(d), or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or not the defaults are cured.
40. Multiple Tenant Building. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violations of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from act of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material breach of this Lease.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. Authority. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provision shall be controlled by the typewritten or
handwritten provisions.
46. Insuring Party. The insuring party under this lease shall be the Lessor.
47. Addendum. Attached hereto is an addendum or addenda containing paragraphs 1
through 7 which constitutes a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER
OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
Executed at Encino, CA P & R INVESTMENT COMPANY
--------------------------- -------------------------------------
on December , 1993 By /s/ Sanford P. Paris
------------------------------------ ------------------------------------
Sanford P. Paris, General Partner
Address 16501 Ventura Blvd., #402 By /s/ Max Ramberg
- --------------------------------------- ------------------------------------
Max Ramberg, General Partner
Encino, CA 91436 (Tel. 818/905-0703)
- --------------------------------------- "LESSOR" (Corporate seal)
Executed at Chatsworth, CA IMAGE ENTERTAINMENT, INC.
--------------------------- --------------------------------------
on December , 1993 By /s/ Martin Greenwald
------------------------------------ ------------------------------------
Martin Greenwald, President
Address 9333 Oso Ave. By
------------------------------- -----------------------------------
Chatsworth, CA 91311 (Tel. 818/407-9100)
- ---------------------------------------- "LESSEE" (Corporate seal)
<PAGE>
ADDENDUM to that Lease dated December 1, 1993, by and between P & R INVESTMENT
COMPANY, as Lessor and IMAGE ENTERTAINMENT, INC., as Lessee for that property
commonly known as 9333 Oso Avenue, Chatsworth, California.
This Addendum to the attached Lease, dated December 1, 1993 is hereby
incorporated into the Lease and is made a part thereof by this reference. In the
event of any conflict or inconsistency between the Lease and this Addendum, the
terms of this Addendum shall govern and control the intent of the parties.
1. Possession. Subparagraphs 3.2 Delay in Possession and 3.3 Early
----------
Possession are hereby deleted and the following substituted therefore;
The parties acknowledge that Lessee is in possession of the premises under
a Lease dated April 10, 1989 by and between these parties. All of the terms and
conditions of the April 10, 1989 Lease shall remain in full force and effect
until March 31, 1994, at which time it shall TERMINATE and the terms and
conditions of this Lease dated December 1, 1993 shall commence so that there
shall be no break in occupancy by Lessee.
2. Rent. Paragraph 4 of the Lease is modified by adding the following:
----
Commencing April 1, 1995 and on each and every April 1 thereafter, the
monthly rent of $13,536.00 shall be subject to adjustment, upward only, in
proportion to that increase, if any in the U.S. Department of Labor, Bureau of
Labor Statistics, Consumer Price Index, All Urban Consumers, (Los
Angeles/Anaheim/Riverside, All Items, 1982-84=100) hereinafter referred to as
"C.P.I." for the previous year (twelve months) period terminating the third
month (i.e. January) prior to the date of adjustment (i.e. April). This is
used so that the parties will know the latest full year CPI changes by the time
the April 1st rent is due. This annually adjusted rent shall commence on April
1 of each year automatically without notice. If notice to Lessee by Lessor is
not made by March 1, then the previous rent shall be paid and the additional
adjustment paid within ten (10) days of notice to Lessee by Lessor of the actual
increase. In the event said Index shall have been discontinued, the most nearly
comparable index shall be substituted therefore.
3. Use. Paragraph 6 of the Lease shall be modified by adding the
---
following:
Page 1 of 4
<PAGE>
a. Except in strict compliance with all Environmental Requirements, Lessee
shall not cause, permit or suffer any "Hazardous Material" to be brought upon,
treated, kept, stored, disposed of, discharged, released, produced,
manufactured, generated, refined or used upon, about or beneath the Property or
any portion thereof by Lessee, its agents, employees, contractors, tenants or
invitees, or any other person.
b. Hazardous Material means any substance the presence of which requires
reporting, regulation, investigation or remediation under any federal, state or
local statute, regulation ordinance, order, action, policy or common law or
which is or becomes defined as a "hazardous waste", "hazardous substance",
pollutant or contaminant under any federal, state or local statute, regulation,
rule or ordinance or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42
U.S.C. section 6901 et seq.).
4. Maintenance, Repairs and Alterations. Paragraph 7 of the Lease is
------------------------------------
modified to provide the following:
a. Lessee shall remove those office improvements constructed by Lessee if
required to do so by the Lessor at Lessee's sole cost and expense at the end of
the Lease or any extension thereof.
b. In consideration of Lessee's use of part of lot 7 for parking, ingress
and egress from the premises at no additional rent or payment of real estate
taxes on lot 7, Lessee at its sole cost and expense shall maintain the two
planters in front of lot 7 on Oso Avenue for the mutual benefit of the parties.
c. The number "$10,000" shall be substituted for the number $2500 in the
first and second sentences of Paragraph 7.5.
5. Assignment and Subletting. Paragraph 12 of the Lease shall be modified
-------------------------
by adding the following:
a. The following additional provisions shall apply to any assignment of
the Lease and/or subletting of the Premises:
1) The assignment or sublease to the particular assignee or sublessee
must have been approved in writing by Lessor in advance.
2) Lessee shall have made to Lessor a full and complete disclosure of
all of the terms, provisions and conditions of the
Page 2 of 4
<PAGE>
assignment or subletting and shall have furnished to Lessor true and complete
copies of all documents used and to be used in connection with the transaction.
3) In the event there is "Overriding Consideration" paid and/or to be paid
by the assignee or sublessee to Lessee, one-half of all such Overriding
Consideration shall be paid by Lessee (or by the assignee or sublessee at the
direction of Lessor) to Lessor after Lessee deducts normal reasonable costs of
the assignment or subletting; such as broker commissions, free rent periods, or
tenant improvements, providing Lessee substantiates such costs to Lessor in
writing.
4) As used herein "Overriding Consideration" shall mean any consideration
of whatsoever kind or character whether in money or any other item or items of
value and whether in a lump sum or in installments or in any combination thereof
paid and/or payable by the assignee or the sublessee in connection with the
Premises over and above the monetary sums payable by Lessee to Lessor under the
Lease and the performance of Lessee's other obligations under the Lease. In the
event that one or more subleases cover less than all of the Premises, Overriding
Consideration shall be determined by first making an equitable allocation
between the entire Premises and the portion or portions thereof covered by the
sublease or subleases. Lessor's allocation made in good faith shall be binding
and conclusive upon all parties involved.
5) Lessor shall have the right to communicate with the assignee or
sublessee or any other person having relevant information on the subject; and
shall have the right from time to time to examine all books, records and
documents of Lessee. Lessee shall also use Lessee's best efforts to arrange for
Lessor to examine the books, records and documents of any assignee and
sublessee.
b. In the event of any proposed assignment or subletting under the Lease, if
the proposed assignee's or sublessees' activities in or about the Premises
involve the use, handling, storage or disposal of any Hazardous Materials (as
defined in Paragraph 3b above) (i) it shall be reasonable for Lessor to withhold
its consent to such assignment or sublease in light of the risk of contamination
posed by such activities unless Lessee satisfies the condition described in the
following clause and/or (ii) Lessor may impose an additional condition to such
assignment or sublease which requires Lessee to establish beyond a reasonable
doubt that such assignee's or sublessee's activities pose no greater risk on
contamination to the Premises than do Lessee's permitted activities in view of
(a) the quantities, toxicity and other properties of the Hazardous Materials to
be used by such assignee or sublessee, (b) the
Page 3 of 4
<PAGE>
precautions against a release of Hazardous Materials such assignee or sublessee
agrees to implement, (c) such assignee's or sublessee's financial condition as
it relates to its ability to fund a major clean-up, and (d) such assignee's or
sublessee's policy and historical record respecting its willingness to respond
to and clean up a release of Hazardous Materials.
6. Lessor's Remedies. In addition to any other remedies of Lessor
-----------------
contained in this Lease under the provisions of Paragraph 13.2 hereof, notice is
given by the Lessor that additional remedies are available under California law
(Civil Code Section 1951.2) and its future amendments or revisions. These Code
Sections require Lessor to declare to Lessee in the Lease that Lessor will
avail itself of the remedies so prescribed. Lessor hereby gives said notice.
7. Signs. Paragraph 34 of the Lease is modified by adding the following:
-----
Lessee shall have the right to place exterior signs on the Premises
subject to any applicable laws, code or ordinances and subject to any reasonable
rules and regulations adopted for the Building.
Lessee shall be solely responsible for maintaining in good conditions
its signs and shall remove them and repair any damage caused by such removal on
or before the termination of the Lease or any extension thereof.
This Addendum to Lease consisting of paragraphs 1 through 7 shall be binding
upon the parties hereto and their heirs, administrators, successors and assigns.
LESSOR: LESSEE:
P & R INVESTMENT COMPANY IMAGE ENTERTAINMENT, INC.
by: /s/ Sanford P. Paris by: /s/ Martin W. Greenwald
-------------------------------- ------------------------------
Sanford P. Paris, General Partner Martin W. Greenwald, President
by: /s/ Max Ramberg
--------------------------------
Max Ramberg, General Partner
Date: 12/ /93 Date: 12/16/93
-------------------------------- ---------------------------
at: Encino, California at: Chatsworth, California
LOCATION: LOCATION:
--------------------------- ---------------------
Page 4 of 4
<PAGE>
[FLOOR PLAN OF IMAGE PARKING APPEARS HERE]
= IMAGE PARKING - 90 CARS PROVIDED
= NON EXCLUSIVE EASEMENT
<PAGE>
EXHIBIT 10.24.A
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE is made and entered into as of this 20/th/
day of August, 1996 by and between P & R INVESTMENT COMPANY, a California
General Partnership, (hereinafter referred to as "LESSOR"), and IMAGE
ENTERTAINMENT, INC., a California Corporation, (hereinafter referred to as
"LESSEE").
WITNESSETH
----------
A. WHEREAS, LESSOR and LESSEE did heretofore on December 1, 1993, enter into a
LEASE ("LEASE"), in which LESSOR rented to LESSEE an industrial building
commonly known as 9333 Oso Avenue, Chatsworth, CA 91311 whose legal description
is:
Lots 8 and 9, Tract 31225, recorded in Book 843, pages 62-65 in the office
of the Los Angeles County Recorder.
for a term of six (6) years commencing on April 1, 1994 and ending on March 31,
2000; and,
B. WHEREAS, the parties wish to mutually modify the Lease.
NOW, THEREFORE, it is agreed to by and between the parties as follows:
1. The definition of Premises in the LEASE shall be modified to exclude any
reference to Lot 7, Tract 31225. It is the intent of the LESSOR to utilize Lot
7 for a new building.
2. Paragraph 4.(b.) of the Addendum to LEASE dated December 1, 1993 is hereby
deleted. Parking for the Premises shall be limited to those parking spaces
located on Lots 8 and 9, Tract 31225 only as shown on Exhibit A attached hereto
and made a part hereof by this reference.
3. In consideration of Lessee's agreeing to this First Amendment to Lease,
Lessor shall at its sole cost and expense, remove the chain link enclosures and
concrete curbs at the South-West corner of the building and otherwise at
Lessee's request. Lessor shall also restrip the parking area of Premises per
Exhibit A.
4. Except as herein modified and amended, all of the terms and conditions of
said LEASE dated December 1, 1993 shall be and remain in full force and effect.
4. Since LESSEE is a Corporation, each individual executing this FIRST
AMENDMENT TO LEASE on behalf of said Corporation represents and warrants that
he/she is duly authorized to execute and deliver this FIRST AMENDMENT TO LEASE
on behalf of said Corporation.
5. This FIRST AMENDMENT TO LEASE shall bind the parties hereto, their personal
representatives, successors and assigns. This FIRST AMENDMENT TO LEASE shall be
governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this FIRST AMENDMENT TO LEASE on
the day and year first written above.
at: Los Angeles, California
LESSOR: LESSEE:
P & R INVESTMENT CO., by: IMAGE ENTERTAINMENT, INC., by:
/s/ SANFORD P. PARIS /s/ CHERYL LEE
- ----------------------------- ------------------------------------
Sanford P. Paris, Cheryl Lee,
General Partner its Chief Administrative Officer and
General Counsel
/s/ MAX RAMBERG /s/ DAVID BORSHELL
- ----------------------------- ------------------------------------
Max Ramberg, David Borshell,
General Partner its Sr. Vice President of Sales,
Marketing and Operations
<PAGE>
EXHIBIT 10.24.b
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE is made and entered into as of this 1/ST/ day of
March, 1999 by and between P & R INVESTMENT COMPANY, a California General
Partnership, (hereinafter referred to as "LESSOR"), and IMAGE ENTERTAINMENT,
INC., a California corporation, (hereinafter referred to as "LESSEE").
WITNESSETH
----------
A. WHEREAS, LESSOR and LESSEE did heretofore on December 1, 1993, enter into a
LEASE ("LEASE"), in which LESSOR rented to LESSEE an industrial building
commonly known as 9333 Oso Avenue, Chatsworth, CA 91311 whose legal description
is:
Lots 8 and 9, Tract 31225, recorded in Book 843, pages 62-65 in the office
of the Los Angeles County Recorder.
for a term of six (6) years commencing on April 1, 1994 and ending on March 31,
2000, and;
B. WHEREAS, the parties first amended this lease on August 20, 1996.
C. WHEREAS, the parties wish to mutually extend the Lease.
NOW THEREFORE, it is agreed to by and between the parties as follows:
1. Lease is hereby extended to April 30, 2004.
2. The rent for the extended period of time (April 1, 2000 through April 30,
2004) shall be as follows:
Commencing on April 1, 2000 and on each and every April 1 thereafter, the
monthly rent of $17,450.00 shall be subject to adjustment, upward only, in
proportion to that increase, if any in the U.S. Department of Labor, Bureau of
Labor Statistics, Consumer Price Index, All Urban Consumers, (Los
Angeles/Anaheim/Riverside, All Items, 1982-84=100) hereinafter referred to as
"C.P.I." for the previous year (twelve months) period terminating the third
month (i.e. January) prior to the date of adjustment (i.e. April). This is used
so that the parties will know the latest full year CPI changes by the time the
April 1/st/ rent is due. This annually adjusted rent shall commence on April 1
of each year automatically without notice. If notice to Lessee by Lessor is not
made by March 1, then the previous rent shall be paid and the additional
adjustment paid within ten (10) days of notice to Lessee by Lessor of the actual
increase. In the event said Index shall have been discontinued, the most nearly
comparable index shall be substituted therefore.
3. Except as herein modified and amended, all of the terms and conditions of
said LEASE dated December 1, 1993 shall be and remain in full force and effect.
4. Since LESSEE is a Corporation, each individual executing this SECOND
AMENDMENT TO LEASE on behalf of said Corporation represents and warrants that
he/she is duly authorized to execute and deliver this SECOND AMENDMENT TO LEASE
on behalf of said Corporation.
5. This SECOND AMENDMENT TO LEASE shall bind the parties hereto, their
personal representatives, successors and assigns. This SECOND AMENDMENT TO
LEASE shall be governed by the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this SECOND AMENDMENT TO LEASE on
the day and year first written above.
at: Los Angeles, California
LESSOR: LESSEE:
P & R INVESTMENT CO., by: IMAGE ENTERTAINMENT, INC., by:
/s/ SANFORD P. PARIS /s/ MARTIN W. GREENWALD
- ---------------------------- -----------------------------------
Sanford P. Paris, Martin W. Greenwald,
General Partner its President and CEO
/s/ MAX RAMBERG /s/ DAVID BORSHELL
- ---------------------------- -----------------------------------
Max Ramberg, David Borshell,
General Partner its Sr. Vice President of Sales,
Marketing and Operations
<PAGE>
EXHIBIT 10.25
STANDARD INDUSTRIAL LEASE - NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERCIAN INDUSTRIAL REAL ESTATE ASSOCIATION]
1. Parties. This Lease, dated, for reference purposes only, March 1, 1999
-------------------
is made by and between P & R Investment Company, a California General
----------------------------------------------
Partnership (herein called "Lessor) and Image Entertainment, Inc., a California
- ----------- ---------------------------------------
Corporation (herein called "Lessee").
- -----------
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Los Angeles State of
-----------
California, commonly known as 9349 Oso Avenue, Chatsworth, CA 91311 and
- -------------------------------------------------------------------
described as approximately 15,440 square foot concrete tilt up industrial
------------------------------------------------------------
building.
- --------
Said real property including the land and all improvements therein, is herein
called "the Premises".
3. Term.
3.1 Term. The term of this Lease shall be for Five (5) years commencing on
--------------
May 1, 1999 and ending on April 30, 2004 unless sooner terminated pursuant to
- ----------- --------------
any provision hereof.
See Addendum Paragraph 48.
3.2 Delay in Possession. Notwithstanding said commencement date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date,
Lessor shall not be subject to any liability therefor, nor shall such failure
affect the validity of this Lease or the obligations of Lessee hereunder or
extend the term hereof, but in such case, Lessee shall not be obligated to pay
rent until possession of the Premises is tendered to Lessee; provided, however,
that if Lessor shall not have delivered possession of the Premises within ninety
(90) days from said commencement date, Lessee may, at Lessee's option, by notice
in writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder;
provided further, however, that if such written notice of Lessee is not received
by Lessor within said ten (10) day period, Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect.
3.3 Early Possession. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rates set forth below.
4. Rent. Lessee shall pay to Lessor as rent for the Premises, monthly payments
of $ See Addend, Par. 49, in advance, on the First day of each month of the
----------------------
term hereof. Rent for any period during the term hereof which is for less than
one month shall be a pro rata portion of the monthly installment. Rent shall be
payable in lawful money of the United States to Lessor at the address stated
herein or to such other persons or at such other places as Lessor may designate
in writing.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
$10,000.00 as security for Lessee's faithful performance of Lessee's
- ----------
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount hereinabove
stated and Lessee's failure to do so shall be a material breach of this Lease.
If the monthly rent shall, from time to time, increase during the term of this
Lease, Lessee shall thereupon deposit with Lessor additional security deposit so
that the amount of security deposit held by Lessor shall at all times bear the
same proportion to current rent as the original security deposit bears to the
original monthly rent set forth in paragraph 4 hereof. Lessor shall not be
required to keep said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not theretofore been applied by Lessor, shall be returned, without
payment of interest or other increment for its use, to Lessee (or, at Lessor's
option, to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect to
said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for Warehousing,
-----------
distribution and sales of laser discs, video discs, DVD and related products.
- ----------------------------------------------------------------------------
See paragraph 50 of Addendum or any other use which is reasonably comparable and
- ----------------------------
for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2
(a) shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air conditioning,
heating, and loading doors in the Premises shall be in good operating condition
on the Lease commencement date. In the event that it is determined that this
warranty has been violated, then it shall be the obligation of Lessor, after
receipt of written notice from Lessee setting forth with specificity the nature
of the violation, to promptly, at Lessor's sole cost, rectify such violation.
Lessee's failure to give such written notice to Lessor within thirty (30) days
after the Lease commencement date shall cause the conclusive presumption that
Lessor has complied with all of Lessor's obligations hereunder. The warranty
contained in this paragraph 6.3(a) shall be of no force or effect if prior to
the date of this Lease, Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession of the Premises, whichever is earlier,
subject to all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and regulating the use of the Premises and any
covenants or restrictions of record, and accepts this Lease subject thereto and
to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. Maintenance, Repairs and Alterations.
7.1 Lessee's Obligations. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and non structural
(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises) including, without
limiting the generality of the foregoing, all plumbing, heating, air
conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior and
exterior), foundations, ceilings, roofs (interior and exterior), floors,
windows, doors, plate glass and skylights located within the Premises, and all
landscaping, driveways, parking lots, fences and signs located on the Premises
and sidewalks and parkways adjacent to the Premises.
7.2. Surrender. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occasioned
(c) American Industrial Real Estate Association 1980 Initials:
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by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, space heaters, air conditioning, plumbing and
fencing on the premises in good operating condition.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph to this Lease, Lessor may
at its option (but shall not be required to) enter upon the Premises after ten
(10) days' prior written notice to Lessee (except in the case of an emergency,
in which case no notice shall be required), perform such obligations on Lessee's
behalf and put the same in good order, condition and repair, and the cost
thereof together with interest thereon at the maximum rate then allowable by law
shall become due and payable as additional rental to Lessor together with
Lessee's next rental installment.
7.4 Lessor's Obligations. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit
of any statute now or hereinafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease because
of Lessor's failure to keep the premises in good order, condition and repair.
7.5 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility Installations in, on or about
the Premises, except for nonstructural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not
in excess of $10,000.00 in cumulative cost, Lessee shall make no change or
alteration to the exterior of the Premises nor the exterior of the building(s)
on the Premises without Lessor's prior written consent. As used in this
Paragraph 7.5 the term "Utility Installation" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing and fencing. Lessor may
require that Lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations in,
or about the Premises that Lessee shall desire to make and which requires the
consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of non-
responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorneys fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions of this Paragraph 7.5(d), Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2.
8. Insurance Indemnity.
8.1 Insuring Party. As used in this Paragraph 8, the term "insuring party"
shall mean the party who has the obligation to obtain the Property Insurance
required hereunder. The insuring party shall be designated in Paragraph 46
hereof. In the event Lessor is the insuring party, Lessor shall also maintain
the liability insurance described in paragraph 8.2 hereof, in addition to, and
not in lieu of, the insurance required to be maintained by Lessee under said
paragraph 8.2, but Lessor shall not be required to name Lessee as an additional
insured on such policy. Whether the insuring party is the Lessor or the
Lessee, Lessee shall, as additional rent for the Premises, pay the cost of all
insurance required hereunder, except for that portion of the cost attributable
to Lessor's liability insurance coverage in excess of $1,000,000 per
occurrence. If Lessor is the insuring party Lessee shall, within ten (10) days
following demand by Lessor, reimburse Lessor for the cost of the insurance so
obtained.
8.2 Liability Insurance. Lessee shall, at Lessee's expense obtain and keep
in force during the term of this Lease a policy of Combined Single Limit, Bodily
Injury and Property Damage insurance insuring Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $1,000,000.00 per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
Paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.3 Property Insurance.
(a) The insuring party shall obtain and keep in force during the term
of this Lease a policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof, as the same may
exist from time to time, which replacement value is now $750,000.00, but in no
event less than the total amount required by lenders having liens on the
Premises, against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended
perils ("all risk" as such term is used in the insurance industry). Said
insurance shall provide for payment of loss thereunder to Lessor or to the
holders of mortgages or deeds of trust on the Premises. The insuring party
shall, in addition, obtain and keep in force during the term of this Lease a
policy of rental value insurance covering a period of one year, with loss
payable to Lessor, which insurance shall also cover all real estate taxes and
insurance costs for said period. A stipulated value or agreed amount endorsement
deleting the coinsurance provision of the policy shall be procured with said
insurance as well as an automatic increase in insurance endorsement causing the
increase in annual property insurance coverage by 2% per quarter. If the
insuring party shall fail to procure and maintain said insurance the other party
may, but shall not be required to, procure and maintain the same, but at the
expense of Lessee. If such insurance coverage has a deductible clause, the
deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be
liable for such deductible amount.
(b) If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are adjacent to
the Premises, then Lessee shall pay for any increase in the property insurance
of such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof. But
if Lessee is the insuring party the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 Insurance Policies. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide". The insuring
party shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses as required by this paragraph 8. No such policy shall be
cancellable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee upon demand. Lessee shall not do or permit to be
done anything which shall invalidate the insurance policies referred to in
Paragraph 8.3. If Lessee does or permits to be done anything which shall
increase the cost of the insurance policies referred to in Paragraph 8.3, then
Lessee shall forthwith upon Lessor's demand reimburse Lessor for any additional
premiums attributable to any act or omission or operation of Lessee causing such
increase in the cost of insurance. If Lessor is the insuring party, and if the
insurance policies maintained hereunder cover other improvements in addition to
the Premises, Lessor shall deliver to Lessee a written statement setting forth
the amount of any such insurance cost increase and showing in reasonable detail
the manner in which it has been computed.
8.5 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises arising from any
cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.7 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or
about the Premises, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, agents or contractors, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from any other cause, whether the said damage or injury results from
conditions arising upon the Premises or upon other portions of the building of
which the Premises are a part, or from other sources or places and regardless
of whether the cause of such damage or injury or the means of repairing the
same is inaccessible to Lessee. Lessor shall not be liable for any damages
arising from any act or neglect of any other tenant, if any, of the building in
which the Premises are located.
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9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall herein mean damage or destruction to
the Premises to the extent that the cost of repair is less than 50% of the then
replacement cost of the Premises. "Premises Building Partial Damage" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is 50% or more of the then
replacement cost of the Premises. "Premises Building Total Destruction" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is 50% or more of the then
replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 Partial Damage -- Insured Loss. Subject to the provisions of paragraphs
9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage
which is an Insured Loss and which falls into the classification of Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the Lessee is
the insuring party, and if the insurance proceeds received by Lessor are not
sufficient to effect such repair, Lessor shall give notice to Lessee of the
amount required in addition to the insurance proceeds to effect such repair.
Lessee shall contribute the required amount to Lessor within ten days after
Lessee has received notice from Lessor of the shortage in the insurance. When
Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possible and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 Partial Damage -- Uninsured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if any time during the term of this Lease there is
damage which is not an Insured Loss and which falls within the classification of
Premises Partial Damage or Premises Building Partial Damage, unless caused by a
negligent or willful act of Lessee (in which event Lessee shall make the repairs
at Lessee's expense), Lessor may at Lessor's option either (i) repair such
damage as soon as reasonably possible at Lessor's expense, in which event this
Lease shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after the date of the occurrence of such damage
of Lessor's intention to cancel and terminate this Lease, as of the date of the
occurrence of such damage. In the event Lessor elects to give such notice of
Lessor's intention to cancel and terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 Total Destruction. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss, (including destruction required by
any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 Damage Near End of Term.
(a) If at any time during the last six months of the term of this Lease
there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than 20 days after the occurrence of an Insured
Loss falling within the classification of Premises Partial Damage during the
last six months of the term of this Lease. If Lessee duly exercises such option
during said 20 day period, Lessor shall, at Lessor's expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said 20 day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 20 day period by giving written notice to Lessee of Lessor's
election to do so within 10 days after the expiration of said 20 day period,
notwithstanding any term or provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence such repair or
restoration within 90 days after such obligations shall accure, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 Termination -- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the real property tax, as defined in
paragraph 10.2, applicable to the Premises during the term of this Lease. All
such payments shall be made at least ten (10) days prior to the delinquency date
of such payment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes paid by Lessee shall cover any
period of time prior to or after the expiration of the term hereof, Lessee's
share of such taxes shall be equitably prorated to cover only the period of time
within the tax fiscal year during which this Lease shall be in effect, and
Lessor shall reimburse Lessee to the extent required. If Lessee shall fail to
pay any such taxes, Lessor shall have the right to pay the same, in which case
Lessee shall repay such amount to Lessor with Lessee's next rent installment
together with interest at the maximum rate then allowable by law.
10.2 Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's
liability shall be an equitable proportion of the real property taxes for all of
the land and improvements included within the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be reasonably
available. Lessor's reasonable determination thereof, in good faith, shall be
conclusive.
10.4 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation
of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all
or any part of Lessee's interest in this Lease or in the Premises, without
Lessor's prior written consent, which Lessor shall not unreasonably withhold.
Lessor shall respond to Lessee's request for consent hereunder in a timely
manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no subletting or
assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees
See Addendum Paragraph 51. Initials:
_________
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of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 Attorney's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statues such Notice to
Pay Rent or Quit shall also constitute the notice required by this subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Lessor to Lessee;
provided, however, that if the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Lessee commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. (S) 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within 60 days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within 30 days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
See Addendum Paragraph 52
13.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter diligently
prosecutes the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirements for notice to Lessee, Lessee shall pay to Lessor
a late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any
other provision of this Lease to the contrary.
13.5 Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within ten (10)
days after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent shall be reduced in the proportion that the floor area of
the building taken bears to the total floor area of the building situated on the
Premises. No reduction of rent shall occur if the only area taken is that which
does not have a building located thereon. Any award for the taking of all or any
part of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold or for taking of the fee, or as severance damages; provided, however,
that Lessee shall be entitled to any award for loss of or damage to Lessee's
trade fixtures and removable personal property. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation,
repair any damage to the Premises caused by such condemnation except to the
extent that Lessee has been reimbursed therefor by the condemning authority.
Lessee shall pay any amount in excess of such severance damages required to
complete such repair.
16. Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be material breach of this Lease or shall be
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or any
part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in Paragraph
15, in the event of any transfer of such title or interest, Lessor herein named
(and in case of any subsequent transfers then the grantor) shall be relieved
from and after the date of such transfer of all liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
18. Severability. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail, and if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the respective parties,
as the case may be. Either party may by notice to the other specify a different
address for notice purposes except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for notice purposes. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenant and Conditions. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of Paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to
execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. Attorney's Fees. If either party or the broker named herein brings an action
to enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, on trail or appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the court. The
provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraph 33 hereof, wherever in this Lease the consent
of one party is required to an act of the other party such consent shall not be
unreasonably withheld.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other property of Lessor or the right of first offer to lease
other property of Lessor; (3) the right or option to purchase the Premises, or
the right of first refusal to purchase the Premises, or the right of first offer
to purchase the Premises or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
-5-
<PAGE>
39.2 Options Personal. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 Multiple Options. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the default
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) continuing until
the obligation is paid, or (iii) at any time after an event of default described
in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to
give notice of such default to Lessee), or (iv) in the event that Lessor has
given to Lessee three or more notices of default under paragraph 13.1(b), where
a late charge has become payable under paragraph 13.4 for each of such defaults,
or paragraph 13.1(c), whether or not the defaults are cured, during the 12 month
period prior to the time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1(a), 13.1(d) or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or not the defaults are cured.
40. Multiple Tenant Building. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order
therein as well as for the convenience of other occupants and tenants of the
building. The violations of any such rules and regulations shall be deemed a
material breach of this Lease by Lessee.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so long
as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign
any of the aforementioned documents upon request of Lessor and failure to do so
shall constitute a material breach of this Lease.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. Authority. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. Insuring Party. The insuring party under this lease shall be the LESSOR.
------
47. Addendum. Attached hereto is an addendum or addenda containing paragraphs
48 through 55 which constitutes a part of this Lease.
- ------- --------
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING
THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
Executed at Encino, CA P & R Investment Co.
------------------------- -------------------------------------
on 3/1/99 By /s/ Sanford P. Paris Gen. Partner
---------------------------------- -------------------------------------
Address 16501 Ventura Blvd. #402 /s/ Max Ramberg Gen'l Partner
------------------------------ -------------------------------------
- ------------------------------------- "LESSOR" (Corporate seal)
Executed at Image Entertainment
-------------------------- ---------------------------------------
on 3/1/99 /s/ Martin W. Greenwald
----------------------------------- By ------------------------------------
Address 9333 Oso Ave By /s/ David Borshell
------------------------------ ------------------------------------
Chatsworth CA 91311
- ------------------------------------- "LESSEE" (Corporate seal)
For these forms write or call the American Industrial Real Estate Association,
350 South Figueroa St., Suite 275, Los Angeles, CA 90071 (213) 687-8777
Form 204n 780
<PAGE>
ADDENDUM TO LEASE
This ADDENDUM TO LEASE dated March 1, 1999 is by and between P & R INVESTMENT
COMPANY, as Lessor, and IMAGE ENTERTAINMENT, INC. as Lessee, for the property
commonly known as 9349 Oso Ave, Chatsworth, California. This Addendum is
attached to and made a part of, the above referenced Standard
Industrial/Commercial Single-Tenant Lease-Net (together with this Addendum, "The
Lease"). The provisions of this Addendum shall govern and supersede any, and
all, contrary or inconsistent provisions of the preprinted portion of the Lease.
48. CONDITION PRECEDENT: This lease is subject to Lessor entering into an
--------------------
acceptable lease termination agreement with the current tenant of the
Premises.
49. RENT: Paragraph 4. (Rent) of the Lease is modified by adding the
-----
following:
A. Lessee shall pay as Base Monthly Rental for each and every month of
the period May 1, 1999 (or the Commencement Date of the Lease,
whichever is later) through and including June 30, 1999 the sum of
$10,000.00.
B. Lessee shall pay as Base Monthly Rental for each and every month of
the period July 1, 1999 through and including June 30, 2000, the sum
of $10,400.00.
C. Lessee shall pay as Base Monthly Rental for each and every month of
the period July 1, 2000 through and including June 30, 2001, the sum
of $10,700.00.
D. Lessee shall pay as Base Monthly Rental for each and every month of
the period July 1, 2001 through and including June 30, 2002, the sum
of $11,000.00.
E. Lessee shall pay as Base Monthly Rental for each and every month of
the period July 1, 2002 through and including June 30, 2003, the sum
of $11,000.00 adjusted upwards only, by the percentage increase in the
Consumer Price Index (CPI) (See 49.G. below), from April 2001 to
April, 2002.
F. Lessee shall pay as Base Monthly Rental for each and every month of
the period July 1, 2003 through and including April 30, 2004, the sum
calculated in 49.E. above, adjusted upwards only, by the percentage
increase in the Consumer Price Index (CPI) (See 49.G. below), from
April, 2002 to April, 2003.
G. The Consumer Price Index (CPI) referred to above is the Consumer Price
Index for All Urban Consumers, Los Angeles-Anaheim-Riverside, All
Items, 1982-84=100, as published by the United States Bureau of Labor
Statistics. If at the time the Index is needed to determine the rent
under this ADDENDUM TO LEASE, and it is no longer maintained or
published, then the parties shall select another Index as shall most
closely approximate the "Index" in order to calculate the percentage
increase over the applicable period. In the event that, within ninety
(90) days after the consumer Price
Page 1 of 4
<PAGE>
Index information is needed, the parties are not able to agree upon
such substitute Index to calculate the rental increase, the matter
shall be referred for binding and conclusive arbitration at Los
Angeles, California, in accordance with the rules and regulations of
the American Arbitration Association.
50. USE: Paragraph 6 of the Lease shall be modified by adding the following:
- ----------
A. Except in strict compliance with all Environmental Requirements,
Lessee shall not cause, permit or suffer any "Hazardous Material" to
be brought upon, treated, kept, stored, disposed of, discharged,
released, produced, manufactured, generated, refined or used upon,
about or beneath the Property or any portion thereof by Lessee, its
agents, employees, contractors, tenants or invitees, or any other
person.
B. Hazardous Material means any substance the presence of which requires
reporting, regulation, investigation or remediation under any federal,
state or local statute, regulation ordinance, order, action, policy or
common law or which is or becomes defined as a "hazardous waste",
"hazardous substance", pollutant or contaminant under any federal,
state or local statute, regulation, rule or ordinance or amendments
thereto including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. section 9601 et
seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C.
section 6901 et seq.).
51. ASSIGNMENT AND SUBLETTING: Paragraph 12 of the Lease shall be modified by
- --------------------------------
adding the following:
A. The following additional provisions shall apply to any assignment of
the Lease and/or subletting of the Premises:
1) The assignment or sublease to the particular assignee or
sublessee must have been approved in writing by Lessor in advance.
2) Lessee shall have made to Lessor a full and complete disclosure
of all of the terms, provisions and conditions of the assignment or
subletting and shall have furnished to Lessor true and complete
copies of all documents used and to be used in connection with the
transaction.
3) In the event there is "Overriding Consideration" paid and/or to
be paid by the assignee or sublessee to Lessee, one-half of all such
Overriding Consideration shall be paid by Lessee (or by the assignee
or sublessee at the direction of Lessor) to Lessor after Lessee
deducts normal reasonable costs of the assignment or subletting;
such as broker commissions, free rent periods, or tenant
improvements, providing Lessee substantiates such cost to Lessor in
writing.
4) As used herein "Overriding Consideration" shall mean any
consideration of whatsoever kind or character whether in money or
any other item or items of value and whether in a lump sum or in
installments or in any combination thereof paid and/or payable by
the assignee or the sublessee in connection with the Premises over
and above the monetary sums payable by Lessee to Lessor under the
Lease and the performance of Lessee's others
Page 2 of 4
<PAGE>
obligations under the Lease. In the event that one or more subleases
cover less than all of the Premises, Overriding Consideration shall
be determined by first making an equitable allocation between the
entire Premises and the portion or portions thereof covered by the
sublease or subleases. Lessor's allocation made in good faith shall
be binding and conclusive upon all parties involved.
5) Lessor shall have the right to communicate with the assignee or
sublessee or any other person having relevant information on the
subject; and shall have the right from time to time to examine all
books, records and documents of Lessee. Lessee shall also use
Lessee's best efforts to arrange for Lessor to examine the books,
records and documents of any assignee and sublessee.
B. In the event of any proposed assignment or subletting under the
Lease, if the proposed assignee's or sublessees' activities in or
about the Premises involve the use, handling, storage or disposal
of any Hazardous Materials (as defined in Paragraph 3b above) (i) it
shall be reasonable for Lessor to withhold its consent to such
assignment or sublease in light of the risk of contamination posed
by such activities unless Lessee satisfies the condition described
in the following clause and/or (ii) Lessor may impose an additional
condition to such assignment or sublease which requires Lessee to
establish beyond a reasonable doubt that such assignee's or
sublessee's activities pose no greater risk on contamination to the
Premises than do Lessee's permitted activities in view of (a) the
quantities, toxicity and other properties of the Hazardous Materials
to be used by such assignee or sublessee, (b) the precautions
against a release of Hazardous Materials such assignee or sublessee
agrees to implement, (c) such assignee's or sublessee's financial
condition as it relates to its ability to fund a major clean-up, and
(d) such assignee's or sublessee's policy and historical record
respecting its willingness to respond to and clean up a release of
Hazardous Materials.
52. LESSOR'S REMEDIES: In addition to any other remedies of Lessor contained
- -------------------------
in this Lease under the provisions of Paragraph 13.2 hereof, notice is
given by the Lessor that additional remedies are available under
California law (Civil Code Section 1951.2) and its future amendments or
revisions. These Code Sections require Lessor to declare to Lessee in
the Lease that Lessor will avail itself of the remedies so prescribed.
Lessor hereby gives said notice.
53. SIGNS: Paragraph 34 of the Lease is modified by adding the following:
- -------------
Lessee shall have the right to place exterior signs on the Premises
subject to any applicable laws, code or ordinances and subject to any
reasonable rules and regulations adopted for the Building.
Lessee shall be solely responsible for maintaining in good
conditions its signs and shall remove them and repair any damage caused
by such removal on or before the termination of the Lease or any
extension thereof.
54. Since LESSEE is a Corporation, each individual executing this ADDENDUM TO
- ---
LEASE on behalf of said Corporation represents and warrants that he/she
is duly authorized to execute and deliver this ADDENDUM TO LEASE on
behalf of said Corporation.
Page 3 of 4
<PAGE>
55. This ADDENDUM TO LEASE shall bind the parties hereto, their personal
- ---
representatives, successors and assigns. This ADDENDUM TO LEASE shall be
governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this ADDENDUM TO LEASE on the day
and year first written above.
at: Los Angeles, California
LESSOR: LESSEE:
P & R INVESTMENT CO., by: IMAGE ENTERTAINMENT, INC., by:
/s/ Sanford P. Paris /s/ Martin Greenwald
____________________________ ______________________________
Sanford P. Paris, Martin Greenwald
General Partner President and CEO
/s/ Max Ramberg /s/ David Borshell
____________________________ ______________________________
Max Ramberg, David Borshell,
General Partner its Sr. Vice President of Sales,
Marketing and Operations
Page 4 of 4
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
------------------------------
Image NewCo.,
a California Corporation
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
Image Entertainment, Inc.
Chatsworth, California
We consent to incorporation by reference in the registration statements (Nos.
33-43241, 33-55393 and 33-57336) all on Form S-8 of Image Entertainment, Inc. of
our report dated May 21, 1999, relating to the consolidated balance sheets of
Image Entertainment, Inc. as of March 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1999, and the related
schedule, which report appears in the March 31, 1999 annual report on Form 10-K
of Image Entertainment, Inc.
/s/ KPMG LLP
Los Angeles, California
June 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,552
<SECURITIES> 0
<RECEIVABLES> 15,429
<ALLOWANCES> 3,475
<INVENTORY> 16,691
<CURRENT-ASSETS> 0<F1>
<PP&E> 19,789
<DEPRECIATION> 5,295
<TOTAL-ASSETS> 56,445
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 31,725
<OTHER-SE> (7,393)
<TOTAL-LIABILITY-AND-EQUITY> 56,445
<SALES> 76,726
<TOTAL-REVENUES> 76,726
<CGS> 58,425
<TOTAL-COSTS> 58,425
<OTHER-EXPENSES> 4,057
<LOSS-PROVISION> 144
<INTEREST-EXPENSE> 966
<INCOME-PRETAX> 1,796
<INCOME-TAX> 90
<INCOME-CONTINUING> 1,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706
<EPS-BASIC> .12
<EPS-DILUTED> .12
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET DUE TO THE NATURE OF ITS
INDUSTRY.
</FN>
</TABLE>
