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UNITED STATES
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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period From ....................To
....................
Commission File Number 0-11071
_______________________
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
_______________________
California 84-0685613
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation)
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. [_]
At June 1, 2000, 16,462,032 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 $39,209,193 (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 2000 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, 2000
TABLE OF CONTENTS
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<TABLE>
<S> <C>
PART I................................................................................... 1
ITEM 1. Business................................................................ 1
ITEM 2. Properties.............................................................. 11
ITEM 3. Legal Proceedings....................................................... 11
ITEM 4. Submission of Matters to a Vote of Security
Holders................................................................. 12
PART II.................................................................................. 14
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 14
ITEM 6. Selected Financial Data................................................. 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 26
ITEM 8. Financial Statements and Supplementary Data............................. 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 50
PART III................................................................................. 50
ITEM 10. Directors and Executive Officers of the Registrant...................... 50
ITEM 11. Executive Compensation.................................................. 50
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.......... 50
ITEM 13. Certain Relationships and Related Transactions.......................... 50
PART IV.................................................................................. 51
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 51
SIGNATURES............................................................................... 53
</TABLE>
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PART I
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ITEM 1. BUSINESS.
--------
GENERAL
Image Entertainment, Inc. was incorporated in Colorado in April 1975 as Key
International Film Distributors, Inc. The Company's present name was adopted in
June 1983. In November 1989, the Company reincorporated in California. The
Company's principal executive offices are located at 9333 Oso Avenue,
Chatsworth, California 91311. The Company's telephone number is (818) 407-9100.
The Company is primarily engaged in the business of licensing and
distributing DVD format entertainment programming in the home video market. The
Company distributes programming for which it has exclusive distribution rights,
and programming for which it does not have exclusive distribution rights. In
addition to DVD, the Company distributes some of its exclusive titles in other
home video formats such as laserdisc and VHS. The Company has begun to secure
and exploit broadcast rights for certain of its exclusive titles. Broadcast
rights may include television, cable, satellite, radio, and Internet streaming
and digital downloading rights.
The Company's business strategy is to actively pursue, secure and exploit
exclusive rights to entertainment programming in as many home video formats and
broadcast mediums as possible, and in as many territories as possible, for the
longest term possible. To this end, the Company has begun to expand its business
and operations to become a content producer, with an emphasis on music
programming.
Some of the exclusive titles currently available or soon to be released by
the Company include, by genre, the following:
Concerts & Music Videos
-----------------------
Santana: Supernatural Live
Barry Manilow: Live
Steely Dan: Two Against Nature, Live
Phish: Bittersweet Motel Semi-documentary
The Cranberries: Beneath the Skin: Live in Paris
Peter Frampton: Live in Detroit
James Brown: James Brown Live from the House of Blues
Eagles: Hell Freezes Over*
Bee Gees: One Night Only
Sheryl Crow: Rockin' the Globe Live
VHI Divas: Live/99
Roy Orbison: Black and White Night
<TABLE>
<CAPTION>
Operas & Classical Music Cult Feature Films Mature Audience Programming
------------------------ ------------------ ---------------------------
<S> <C> <C>
La Boheme directed by Baz Luhrmann Black Sunday Playboy 2000 Calendar
Andre Previn's A Streetcar Named Desire Dreamscape Penthouse Pet of the Year 2000
Bizet's Carmen The Old Dark House Caligula
The Demoniacs
Special Interest/Classic Films Direct-to-Video Feature Films Foreign Films
------------------------------ ----------------------------- -------------
IMAX: The Living Seas Killing Obsession The Bicycle Thief
IMAX: Super Speedway Ms. 45 Juliet of the Spirits
AFI's 100 Greatest Movies The Decalogue
Visions of Light
Charlie Chaplin classics
* to date, the industry's best selling DVD music title
</TABLE>
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Image Entertainment, Inc. 1
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BUSINESS SEGMENTS
The Company has three business segments:
. Program Licensing & Production/Domestic Wholesale Distribution.
. International Wholesale Distribution/Broadcast Rights Exploitation.
. Direct-to-Consumer Retail Distribution.
Operation of the Program Licensing & Production/Domestic Wholesale
Distribution segment is conducted by the Company. Operation of the International
Wholesale Distribution/Broadcast Rights Exploitation segment is conducted by the
Company's sales agent Aviva International LLC. Operation of the Direct-to-
Consumer Retail Distribution segment is conducted by the Company's wholly-owned
subsidiary DVDPlanet.com. Each of these segments is discussed in greater detail
below.
The following table presents consolidated net sales by reportable business
segment for the periods presented:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
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2000 1999 % Change
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<S> <C> <C> <C>
Net Sales: (in thousands)
Domestic Wholesale Distribution $ 80,406 $ 75,572 6.4%
International Wholesale Distribution (Aviva) 250 -- *
Direct-to-Consumer Retail Distribution (Planet) 14,742 3,781 *
Inter-segment eliminations (11,729) (2,627) *
-------- -------- --------
Consolidated $ 83,669 $ 76,726 9.0%
======== ======== ========
</TABLE>
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* not meaningful
Program Licensing & Production/Domestic Wholesale Distribution Segment.
The Company distributes entertainment programming on both an exclusive and
nonexclusive basis. The exclusive product distributed by the Company (DVD and
other formats) is typically produced, marketed and sold by the Company pursuant
to an exclusive grant of rights -- typically a licensing arrangement but
sometimes pursuant to an exclusive distribution agreement. The nonexclusive
product distributed by the Company (mainly DVD format product) is purchased
directly from suppliers in final, finished and packaged form.
Under the Company's exclusive deals, the Company often secures the right to
distribute entertainment programming in a broad range of home video formats
which could include all or any combination the following: DVD, VHS, CD,
laserdisc or other home video format. The distribution territory for exclusive
product has traditionally been the United States and Canada, however, the
Company has been actively pursuing and often secures exclusive international
distribution rights as well. Increasingly, for the same exclusive programs, the
Company also receives exclusive broadcast rights which could include all or any
combination of the following: television, cable, satellite, pay-per-view, radio
or other broadcast medium. Broadcast rights may also encompass Internet
streaming and digital downloading. For a discussion regarding exploitation of
the Company's international broadcast rights, see "International Wholesale
Distribution/Broadcast Rights Exploitation Segment" below. Although the Company
is beginning to realize its strategy of securing and exploiting a broader grant
of rights than exclusive domestic distribution of DVD format programming,
domestic DVD distribution nonetheless continues to be the Company's core
business.
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2 Image Entertainment, Inc.
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According to industry estimates, there are currently nearly 6,000 DVD
titles available in the market. Virtually all 6,000 DVD titles can be purchased
from the Company making it a leading "one-stop" for DVD product. The Company
releases an average of 50 new exclusive DVD titles each month, adding to the
Company's catalogue of approximately 1,200 exclusive releases. The Company's
exclusive DVD titles are typically licensed from independent program suppliers
(although the Company has licensed a limited number of catalogue DVD titles from
Orion and Universal). The balance of the Company's DVD offerings are purchased
by the Company directly from major motion picture studios and other program
suppliers for distribution on a nonexclusive basis.
The following table sets forth the percentage of consolidated net sales
derived from the distribution of exclusive and nonexclusive programming by
format for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
--------------------------
2000 1999 1998
--------------------------
<S> <C> <C> <C>
Exclusive Programming:
DVD 52% 31% 8%
laserdisc 6 19 38
VHS 4 2 0
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62 52 46
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Nonexclusive Programming:
DVD 34 29 13
laserdisc 3 17 40
CD 1 2 1
--------------------------
38 48 54
--------------------------
TOTAL 100% 100% 100%
==========================
</TABLE>
When the Company licenses rights these rights are generally exclusive. In
return, the Company pays royalties to the licensor. Royalties are expressed as a
percentage of the Company's net revenues from program sales. Typically, the
Company must pay royalty advances which are recouped against royalties earned on
a title-by-title basis or, if cross-collateralized, against all or certain
groups of licensed titles. Generally, the Company's license agreements provide
for a term of five to seven years. Traditionally, the Company has sought and
obtained domestic rights, however, the Company is now actively pursuing and
securing international rights.
In furtherance of the Company's strategy to secure the broadest range of
rights possible and to ensure a continued supply of quality programming for
exclusive distribution, the Company has begun to produce/co-produce (i.e.,
finance, in whole or in part, by means of an advance payment, the production of)
entertainment programming. Thus far, the programs produced by the Company are
generally one-time, special event live music concerts performed by famous
headline acts, produced and filmed for the express purpose of exclusive
exploitation by the Company in home video and/or broadcast markets. The
exclusive rights granted to the Company under these licensing arrangements
generally cover all home video formats (not just domestic DVD distribution
rights), as well as a wide array of broadcast rights. Certain of these deals
also give the Company exclusive Internet streaming and digital downloading
rights. The Company's exclusive rights typically span a term of five to seven
years, and the territory is usually worldwide.
When the Company licenses rights, it provides a variety of value-added
services relative to the licensed programs, such as creation of the packaging,
DVD authoring, compression and menu design, video master quality control,
marketing, sales, warehousing and distribution, and, in certain instances, the
addition of enhancements such as separate audio tracks, commentaries, foreign
language tracks, and other similar ancillary materials. All of these activities
are typically performed by the Company, in-house, with the exception of the
manufacturing, replication and packaging of the finished product which is
performed by third party vendors.
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Image Entertainment, Inc. 3
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Manufacturing & Replication. Under a typical license agreement, a program
---------------------------
master and art work are delivered to the Company. The Company's in-house, post-
production facility creates a submaster with specifications for the necessary
format. The Company's in-house authoring and compression facility typically
performs the work necessary to prepare a DVD master for manufacturing and
replication, as well as the creation of on-screen menus for each title.
Occasionally, the Company may use an outside facility to perform such services.
The Company currently manufactures all of its DVD programming at Warner Advanced
Media Operations (WAMO), however, the Company believes it could shift its
product to any number of other DVD manufacturing facilities should the need
arise. The Company's in-house graphic artists create the necessary packaging.
Marketing. The Company's marketing efforts, which are directed toward
---------
consumers and video software and hardware retailers, involve point-of-sale
advertising, advertising in trade and consumer publications, national television
and radio advertising campaigns, dealer incentive programs, trade show exhibits
and bulletins featuring new releases and in-stock catalogue titles. The Company
has also instituted account specific marketing programs where the Company works
directly with retailers to optimize and customize print advertising and other
advertising programs aimed at promoting the Company's exclusive product. The
creation of specialized in-store displays and sponsorship of celebrity
appearances are other examples of account specific programs. The Company is also
beginning to increase its Internet promotional activities which include product
tie-ins, sweepstakes and give-aways associated with on-line retail customers,
and the creation of genre-specific "boutiques" within direct-to-consumer web
sites.
The Company spent approximately $741,000 for advertising in trade and
consumer publications in fiscal 2000 (less than $100,000 of which represents
expenditures by Planet and Aviva) and approximately $730,000 for advertising in
trade and consumer publications in fiscal 1999. Additionally, the market
development expenditure for account specific and other marketing programs was
approximately $300,000 for each of fiscal 2000 and fiscal 1999.
The Company maintains a web site on the Internet at www.image-
entertainment.com. The web site includes information regarding the Company's
exclusive titles, information of general interest to the home video consumer,
and Company press releases. For a discussion of the Company's on-line retail web
site, www.DVDPlanet.com, see "Direct-To-Consumer Retail Distribution Segment"
below.
Sales & Customers. The Company sells its product to retailers (including
-----------------
Internet retailers) and distributors. The Company's Planet subsidiary sells
product directly to the consumer. See "Direct-to-Consumer Retail Distribution
Segment." In fiscal 2000, sales to Planet accounted for approximately 14.6% of
the consolidated net sales of the program licensing & production/domestic
wholesale distribution segment and Planet's direct-to-consumer sales accounted
for 17.6% of consolidated net sales of the Company. Some of the Company's other
customers include Musicland Group, Express.com, Best Buy, Ingram Entertainment
and Amazon.com. None of these customers accounted for net sales in excess of 5-
6% of the Company's total net sales for fiscal 2000. Domestic delivery of the
product is effected through the Company's distribution and fulfillment facility
in Las Vegas, Nevada. See "International Wholesale Distribution/Broadcast Rights
Exploitation Segment" for information regarding the Company's international
distribution. The Company sells its VHS titles through traditional retail and
distribution channels and via "special market sales" (i.e., direct-to-consumer
print catalogues such as Wireless, Signals, Reader's Digest and The Metropolitan
Opera Catalog).
Although sales are generally considered final, the Company allows customers
to return a portion of their stock on a quarterly basis. Generally, this
allowance is non-cumulative based on the customer's prior quarter purchases and
limited on an individual-title basis. Sometimes greater return allowances are
afforded to large customers. The Company provides for estimated returns as
sales are recorded. Stock returns, other than for defective product, amounted to
approximately 7.3% of net sales in fiscal 2000, approximately 4.9% of net sales
in fiscal 1999, and approximately 5.0% of net sales in fiscal 1998. Returns of
defective product have been minimal and are generally covered by manufacturers'
warranties.
As of June 1, 2000, the Company had approximately $3.7 million of backlog
orders (93% from DVD product). The Company expects to fill 100% of the backlog
orders within the current fiscal year. As of June 1, 1999, the Company had
approximately $4.5 million of backlog orders (80% from DVD product and 20% from
laserdisc product).
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4 Image Entertainment, Inc.
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International Wholesale Distribution/Broadcast Rights Exploitation Segment.
The Company's international wholesale distribution business, and its
domestic and international broadcast rights exploitation activities, are
conducted by the Company's exclusive sales agent, Aviva International LLC, a
50%-owned joint venture between the Company and home video veteran, Michael
Lopez, formed in June 1999. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. Formation of Joint Venture --
Aviva International, LLC."
The term of the joint venture currently runs through December 31, 2000,
with an option to renew for additional successive two year periods upon mutual
agreement of the Company and Lopez. Management believes that the parties will
renew the joint venture when the initial term expires on December 31, 2000.
Lopez serves as Manager of Aviva.
The Company's first international home video release (in DVD and VHS) was
Sheryl Crow: Rockin' the Globe Live, in March 2000, which was followed by the
release of the Eagles: Hell Freezes Over and the classic television series The
Twilight Zone. Some of the other titles released or to be released by the
Company internationally include VH1 Divas Live/99 (in DVD) and IMAX: Super
Speedway (in DVD and VHS). In June 2000, the Company's international
distribution of Carlos Santana's Supernatural Live concert in the VHS format
will commence, followed by the DVD release in September 2000. When the Company
licenses rights for international distribution such rights can, and often time,
include all home video rights and all broadcast rights (including Internet and
digital download rights) throughout the world, or any subset or variation
thereof. Release dates in the various home video formats, like broadcast air
dates, vary by territory.
The Company does not have personnel outside of the United States.
International distribution of its home video product (mostly DVD and VHS format
product) is achieved either through local distributors or by the licensing of
international rights to local licensees. Aviva determines whether a distributor
will be used or if the product will be licensed. Aviva then identifies the
appropriate third party distributors and licensees, and negotiates and secures,
on the Company's behalf, the terms of the respective relationships. Aviva
receives a percentage of the net distribution revenues generated by Aviva's
exploitation of the Company's rights. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations. Formation of Joint
Venture -- Aviva International, LLC."
Local distributors represent the Company's product in most major foreign
territories. These distributors provide marketing, sales, collection and
physical distribution services. The Company maintains direct control over the
manufacturing of the home video units as well as the pricing, inventory levels,
release schedule and overall marketing expenditures associated with such units.
The Company's in-house production facility creates the international masters
used to replicate the programs and the Company's in-house creative services
department provides the appropriate marketing and packaging art work. In Europe,
which is the largest international market for the Company's programming, DVD
manufacturing is contracted through WAMO and the units are packaged and shipped
by a WAMO affiliate in Germany which holds the completed inventory for shipment
to the distributors. The Company's European VHS duplication is contracted
through a Netherlands entity which inventories and ships product to the
international distributors.
In smaller foreign markets, rather than engage the services of a local
distributor, the Company typically enters into license agreements with local
licensees, which agreements are negotiated, facilitated and managed by Aviva,
and contain terms and conditions similar to the terms which typically govern the
Company's underlying rights agreements. The licensee is then responsible for the
manufacture, marketing, distribution and sale of the licensed program in the
territory.
Aviva also exploits, on the Company's behalf, the Company's broadcast
rights both domestically and abroad. All broadcast arrangements are negotiated,
facilitated and managed directly by Aviva. The buyer is typically a cable or
satellite broadcaster, but can also be a television or even an Internet
broadcaster. The typical broadcast license involves the payment of a fixed, one-
time fee and generally spans a two year term with a specified number of airings
per year -- although a license can be as short as one month. Usually, the only
undertaking required of the Company is to provide a broadcast master of the
program. The Company's first domestic broadcast exploitation of programming
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Image Entertainment, Inc. 5
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is the June 2000 airing on DirectTV of Barry Manilow's Live concert filmed in
Nashville, followed by the July 2000 airing, also on DirectTV, of Peter
Frampton's Live in Detroit concert. Aviva has also secured a Latin American
broadcasting deal for Victor/Victoria (the Broadway show), and Santana's
Supernatural Live concert title will air in a number of markets in Europe, Japan
and Latin America.
Direct-to-Consumer Retail Distribution Segment.
The Company's direct-to-consumer retail distribution operations are
conducted exclusively by the Company's wholly-owned subsidiary, DVDPlanet.com,
Inc. Planet has been in operation since January 1999. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations. Fiscal
1999 -- Acquisition."
Planet specializes in DVD software retailing through its www.DVDPlanet.com
web site, and via mail order. Planet also owns and operates a DVD retail store
in Westminster, California. Planet is the Company's largest customer and makes
all of its purchases from the Company. Planet sells every DVD title sold by the
Company (approximately 6,000 titles). During fiscal 2000, sales by the Company
to Planet were approximately $11.7 million.
In March 2000, Planet launched a completely redesigned e-commerce web site
under the name "DVDPlanet.com." Visitors to the Planet web site can purchase
product directly from the web site. The site provides proprietary information
about DVD releases, including title synopses, editorial reviews and ratings, and
entertainment related editorial features. The site also provides title
information such as cast members, MPAA ratings, production details and technical
specifications. Further, the site features a powerful search engine that assists
consumers in finding product, streaming video of motion picture trailers and
clips, and genre-specific "boutiques" within the web site (such as The Disney
and film noir boutiques). Planet is currently adding a feature that will
automatically recommend titles to Planet customers based upon their prior
purchase history.
Planet sells its product at a standard discount from the suggested retail
price. Planet's pricing and return policy is consistent with most on-line DVD
retailers. Planet charges a flat rate for standard domestic shipping regardless
of the number of units. Purchases can only be effected through use of a major
credit card. The site includes secure payment systems which protect the
customer's name, address and credit card number.
Planet has established an Internet affiliate program whereby other web
sites can refer customers to the Planet site and receive a referral fee based on
sales generated. Commissions are paid to the affiliate sites based on purchases
from new customers who arrive at the Planet site through the links. Finally,
Planet holds studio sponsored on-site contests and promotions, provides
customers with weekly email updates on product releases and sponsors promotions
on other entertainment content web sites.
Planet conducts its own warehouse and shipping operations out of Planet's
Westminster, California location. The Company intends to commence shipping and
fulfillment for Planet out of the Company's Las Vegas, Nevada warehouse and
distribution facility by late summer or early fall 2000.
TRADEMARKS
The Company has received Federal registration of the trademark "IMAGE" in
the United States Patent and Trademark Office. The Company has commenced
trademark and service mark registration of the mark "DVDPlanet.com." The Company
also uses the service marks "Image Post" and "Image Creative Group."
COMPETITION
With respect to the sale of its nonexclusive (mostly DVD format) product,
the Company faces competition from other distributors who carry the same
product. The Company believes that to some extent it has a competitive advantage
over certain of its competition because it also affords buyers the opportunity
to purchase the Company's exclusive titles. The Company believes it benefits
from the convenience of "one-stop shopping" for retailers who desire to purchase
both exclusive and nonexclusive titles from a single source. At the retail
level, the Company's exclusive programming vies
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6 Image Entertainment, Inc.
<PAGE>
for shelf -space and "open to buy" dollars with other home video titles
(including blockbuster feature films and other popular appeal programming from
major program suppliers). The Company's Planet subsidiary faces significant
competition from traditional and on-line retailers. Finally, the Company faces
competition from other forms of in-home entertainment.
The Company also faces competition in securing exclusive license rights.
The Company believes that it is able to successfully compete to obtain such
rights because of the quality of its reputation and relationships, the quality
of its product, and its ability to make advance payments against revenues to its
suppliers. The Company's status as an independent program supplier that can
exploit programming in all home video and broadcast formats, world-wide, is also
attractive to certain content owners (potential licensors).
EMPLOYEES
At June 1, 2000, the Company had 135 full-time employees and 2 part-time
employees, and its Planet subsidiary had 45 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 this "Risk Factors" heading. 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 Company's ability to shift its product
manufacturing, replication and packaging work from WAMO to another facility
should the need arise, (2) the Company's ability to renew the Aviva joint
venture upon expiration of the current term, (3) the Company's ability to fulfil
Planet's orders out of the Company's Las Vegas, Nevada warehouse and
distribution facility by the date indicated, (4) whether the Company will be
repaid for all start-up loans made to Aviva within the next 18 months, (5)
whether sales of the Company's exclusive DVD programming will grow as DVD player
sales continue to grow, (6) whether the Company will increase its fiscal 2001
selling and marketing expenditures for Planet over that of fiscal 2000, (7) that
the Company does not expect that Year 2000 internal system failures will result
in a material adverse effect on the Company's operations or financial condition,
and (8) that the escrow for the sale of 4.7 acres of land in Las Vegas, Nevada
will close in August 2000. 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. Unless otherwise required by law, 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 DVDs 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
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Image Entertainment, Inc. 7
<PAGE>
current program suppliers will continue to support the DVD format 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 format 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 (and other) license and distribution rights on
terms acceptable to us. No major motion picture studio has granted exclusive DVD
licenses for its new releases and most popular catalogue titles. Instead, the
major motion picture studios sell this programming directly to retailers and
other distributors including us. Given that DVD is positioned to become a
replacement for VHS, we also compete with independent licensing and distribution
entities from the VHS sector of the home video market. We expect to be able to
purchase DVD titles on a nonexclusive 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
to retailers, increase the number of entities distributing their programming or
limit our access to their programming.
If DVD Cannot Compete Successfully with Other Forms of In-Home
Entertainment, Our Future Revenues May Be Negatively Impacted. The DVD format
competes with other forms of in-home entertainment, such as VHS, network,
syndicated, cable and pay-per-view television and home satellite systems. The
DVD format also competes 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 sales
and us. In addition, emerging technology may allow consumers to download audio
or video programming directly to the consumer's home computer, or television
set-top recording device, from the Internet (or other broadband delivery system)
and store such products on a recordable disc or hard-drive. The development and
advancement of such technology into a viable alternative to purchasing DVDs
could have a material adverse effect on our business, prospects, results of
operation and financial condition.
Our 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 problems we may experience that relate to our warehouse and
distribution facility in Las Vegas, Nevada could have a material adverse effect
on our business, prospects, results of operations and financial condition.
If the DVD Market Does Not Continue to Grow, Our DVD Business May Be
Materially Adversely Affected. Our business is increasingly dependent on the
growth of the market for DVDs, which has not yet received mass market
acceptance. We cannot assure you that the DVD market will achieve mass market
acceptance. In addition, we cannot assure you that studios and other program
suppliers will continue to release programs in the DVD format, or release a wide
variety of new release and catalogue DVD titles, to increase availability to the
level of VHS titles and therefore increase the appeal of the DVD format.
If Our DVD 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 replicate marketable DVD
titles for release under our exclusive DVD license agreements. 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.
Our Results of Operations Fluctuate Based on Seasonality and Variability.
We have generally experienced higher sales of DVDs in the quarters ended
December 31 and March 31 due to increased consumer spending associated with the
year-end holidays and because most sales of a title occur in the first few
months after its release. Accordingly, our revenues and results of operations
may vary significantly from period to period, and the results of any one period
may not be indicative of the results of any future periods. This seasonality
also causes our
--------------------------------------------------------------------------------
8 Image Entertainment, Inc.
<PAGE>
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 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;
. 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 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 our wholly-owned
DVDPlanet.com subsidiary 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 Planet.
If Our Joint Venture with Aviva International LLC is Not Renewed, Our
Ability to Exploit Broadcast Rights and International Home Video Rights May Be
Adversely Affected. We cannot assure you that the Aviva joint venture agreement
will be renewed when the term expires. Further, our ability to successfully
operate our International Wholesale Distribution/Broadcast Rights Exploitation
operations depends significantly on the services and contributions of Michael
Lopez. The business and operations of this segment may be adversely affected if
the joint venture is not continued or if Michael Lopez were to leave Aviva.
If We Cannot Compete Successfully in the Internet Commerce Industry, Our
Retail Sales May Be Adversely Affected. We cannot assure you that the Planet 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 over the
Internet. Some of these competitors can devote substantial resources to Internet
commerce in the near future. The Planet web site also competes with traditional
retailers of DVDs, including mail-order houses and video clubs.
We believe that the principal competitive factors we face in selling DVDs
through the Planet 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 Planet 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 Planet 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 Planet 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 Planet web site depends, in part, on our ability
to do the following:
. license leading technologies useful in the Internet sales business;
. enhance the Planet web site's existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our customers; and,
--------------------------------------------------------------------------------
Image Entertainment, Inc. 9
<PAGE>
. 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 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 Planet 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 Planet Web Site. A key element of our
business strategy is to generate a high level of use of the Planet web site. We
believe that the satisfactory performance, reliability and availability of the
Planet 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. Currently,
Planet handles its own distribution out of its Southern California based
facility. In late summer/early fall 2000, we expect that the Company's Las
Vegas, Nevada warehouse distribution facility will take over and perform these
functions. To achieve this transition, Planet will upgrade the transaction-
processing system required to allow orders received by Planet to be fulfilled by
the Las Vegas facility. Any inability on our part to work out any technical
problems in the upgrade of the transaction-processing system 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 successfully create
and implement the transaction-processing system and to integrate fulfillment for
the Planet web site with our warehouse and distribution center in a timely
manner, periodic system interruptions may occur on the Planet 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 Planet web
site, we cannot assure you that periodic system interruptions will not occur
even after the upgrade or installation. Any substantial increase in the volume
of traffic on the Planet 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
--------------------------------------------------------------------------------
10 Image Entertainment, Inc.
<PAGE>
incompatibilities not within our control. Any system interruptions that result
in the unavailability of the Planet 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 Planet 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.
ITEM 2. PROPERTIES.
----------
The Company's headquarters are located in two adjacent buildings in
Chatsworth, California (30,080 and 15,440 square feet, respectively), leased
from the same landlord. The leases co-terminate on April 30, 2004. The monthly
rent for the larger building is approximately $17,450 (subject to annual
adjustment based on increases in the consumer price index). The monthly rent for
the smaller building is approximately $10,000 (with scheduled yearly increases).
The Company owns approximately 13 acres of real property in Las Vegas,
Nevada. The Company's 76,000 square foot automated warehouse and distribution
facility is located on the back 8.4 acre parcel. The architectural building
plans provide for room to expand the facility an additional 74,000 square feet
(within the 8.4 acre parcel) should the need arise. The Company has been trying
to sell the excess acreage and, in December 1999, sold a 3.8 acre parcel. The
Company is currently in escrow to sell the balance of the excess acreage.
The Company's Planet subsidiary leases approximately 8,102 square feet of
combined office, retail and warehouse space in Westminster, California. The
lease provides for monthly rent of approximately $14,400 (subject to annual
adjustment based on increases in the consumer price index) and will expire on
November 22, 2002.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
The LEI Action. As previously reported, 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. and a number of related
entities and individuals, relating 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 Company 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 contended 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. The
Company also contended that this fraudulent scheme included, but was 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 Company maintained that all of the defendants were the alter egos of
LEI and each other. The complaint sought 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.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 11
<PAGE>
In a related action, on November 13, 1998, the Company filed a complaint in
the Superior Court of the State of California, County of Los Angeles (Case No.
SC 054918), against a former outside attorney for breach of fiduciary duty and
legal malpractice. The claims alleged arose out of defendant's representation of
LEI and its principals, without the Company's informed and written consent, in
matters directly related to the subject of defendant's prior representation of
the Company. The complaint sought compensatory damages of not less than $5
million plus interest.
On April 30, 1999, the Company entered into a confidential settlement
agreement with one of the nondebtor defendants in the LEI action, who was then
dismissed from the action. On January 31, 2000, the Company entered into a
confidential settlement agreement with the defendant in the related legal
malpractice action, and the case has since been dismissed. On March 15, 2000,
the Company entered into a confidential settlement agreement with all of the
remaining defendants in the LEI action, and the case was dismissed, with
prejudice. Each of the three settlement agreements required that a cash payment
be made by the defendant or defendants in each of the respective actions in
consideration for the Company's agreement to file a request for dismissal. The
three settlement agreements resulted in payments to the Company totaling
$899,000.
The Alliance Action. On July 12, 1999, the Company was named as a defendant
in an adversary proceeding filed in the United States Bankruptcy Court for the
Southern District of New York, by One Stop Recovery LLC, as Trustee for AEC One
Stop, Inc. in connection with the Chapter 11 bankruptcy of Alliance
Entertainment Corp. In the proceeding, the plaintiff One Stop sought to recover
approximately $1,740,000 in alleged preferential transfers (including payments
made and the value of goods returned) made by Alliance within the 90-day period
immediately preceding the commencement of its bankruptcy case. On June 23, 2000,
the Company entered into a Stipulation of Settlement pursuant to which the
Company agreed to pay the Plaintiff $250,000 to settle the proceeding. The
Stipulation is subject to court approval at a hearing scheduled for the end of
June 2000.
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 (including the rejected counterclaim in the above-described
arbitration proceeding and the adversary proceeding) will not have a material
adverse impact on the Company's financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
--------------------------------------------------------------------------------
12 Image Entertainment, Inc.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers serve at the pleasure of the Company's board of directors.
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, 2000 and their business experience for at least the prior
five years:
Executive Officer Age Position & Background
--------------------------------------------------------------------------------
Martin W. Greenwald 58 Chairman of the Board, Chief Executive
Officer and President since April 1981, and
Treasurer since January 1988.
Jeff M. Framer 39 Chief Financial Officer since April 1993;
Controller from September 1990 to March 1993;
Senior Manager, KPMG LLP, from July 1989 to
September 1990; and, Manager, KPMG 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.
Cheryl L. Lee 41 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.
David A. Borshell 35 Senior Vice President, Sales, Marketing and
Operations since December 1994. Prior to
1994, Mr. Borshell has held various positions
in the Company since starting as an Account
Executive in February 1986. Mr. Borshell is a
member of the DVD Entertainment Group, an
industry trade association devoted to
fostering consumer awareness of the DVD
format.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 13
<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 National Market during the past two fiscal
years.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 2000 High Low
-------------------------------- ------- ------
<S> <C> <C>
Quarter ended June 30, 1999 $11.469 $6.50
Quarter ended September 30, 1999 $ 7.938 $4.563
Quarter ended December 31, 1999 $ 3.563 $7.00
Quarter ended March 31, 2000 $ 4.438 $6.688
Fiscal Year Ended March 31, 1999 High Low
-------------------------------- ------- ------
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
</TABLE>
As of June 1, 2000 there were 1,544 holders of record of the Company's
common stock.
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.
--------------------------------------------------------------------------------
14 Image Entertainment, Inc.
<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 the financial statements, the notes thereto and the other
financial information included therein.
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------------------------------
(In thousands, except per share data) 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
---------------------
Net sales..................................... $ 83,669 $ 76,726 $ 75,516 $ 86,650 $ 95,086
Operating costs and expenses.................. 82,007 74,048 84,605/(2)/ 83,399/(3)/ 86,926
Operating income (loss)....................... 1,662 2,678 (9,089) 2,251 8,160
Interest expense.............................. (1,562) (966) (662) (415) (155)
Interest income............................... -- 84 118 231 337
Other (expense) income........................ 1,315/(1)/ -- -- (662)/(4)/ --
Income (loss) before income taxes and
extraordinary item........................ 1,415 1,796 (9,633) 1,405 8,342
Income tax (expense) benefit.................. -- (90) 52 (433) (743)
Income (loss) before extraordinary item....... 1,415 1,706 (9,581) 972 7,599
Extraordinary item, net of taxes.............. -- -- -- (127)/(5)/ --
Net income (loss)............................. $ 1,415 $ 1,706 $ (9,581) $ 845 $ 7,599
Income (loss) per share:
Income (loss) before extraordinary item
Basic................................. $ .09 $ .12 $ (.71) $ .07 $ .56
Diluted............................... $ .09 $ .12 $ (.71) $ .07 $ .51
Net income (loss)
Basic................................. $ .09 $ .12 $ (.71) $ .06 $ .56
Diluted............................... $ .09 $ .12 $ (.71) $ .06 $ .51
Weighted average shares outstanding
Basic................................. 16,452 14,185 13,471 13,504 13,569
Diluted............................... 16,490 14,309 13,471 13,836 14,802
Years Ended March 31,
-----------------------------------------------------------------------------
(In thousands, except per share data) 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
------------------
Total assets.................................. $ 65,395 $ 56,445 $ 33,781 $ 46,448 $ 39,406
Total liabilities............................. 39,554 32,113 25,116 28,397 18,880
Net shareholders' equity...................... 25,841 24,332 8,665 18,051 20,526
</TABLE>
---------------------
(1) Includes $899,000 in proceeds from settlements of litigation.
(2) Includes noncash charges of $8,133,000 and $4,246,000 to reduce the carrying
value of the Company's laserdisc inventory to its net realizable value and
provide for estimated losses on laserdisc license and exclusive distribution
agreements, respectively. Also includes a non-recurring 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.
(3) Includes noncash charges of $1,964,000 and $1,946,000 to reduce the carrying
value of the Company's laserdisc inventory to its estimated net realizable
value and provide for estimated doubtful accounts receivable, respectively.
(4) Other expense represents a non-recurring charge composed primarily of legal
and accounting fees associated with the termination of acquisition
negotiations.
(5) Extraordinary item is composed of costs associated with early retirement of
debt, net of related taxes of $56,000.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
General
The Company licenses and distributes a broad range of entertainment
programming on DVD, and a rapidly declining range of entertainment programming
on laserdisc. Prior to fiscal 1998, the Company's net sales were derived almost
entirely from the distribution of titles in the laserdisc 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 represented 21% and laserdisc
79% of the Company's net sales. In fiscal 1999, DVD represented 60% and
laserdisc 36% of the Company's net sales. In fiscal 2000, DVD represented 86%
and laserdisc 9% of the Company's net sales. The Company also distributes music
programming on CDs encoded in the DTS multichannel audio format as well as
certain programming on VHS. In January 1999, the Company acquired an
Internet/direct-to-consumer retail distribution business. See "Fiscal 1999 --
Acquisition" below. In June 1999, the Company formed a joint venture, primarily
for international distribution of its licensed entertainment programming. See
"Formation of Joint Venture -- Aviva International, LLC" below.
Fiscal 1999 -- Acquisition
On January 11, 1999, the Company completed its acquisition of the
direct-to-consumer retailer Ken Crane's. The purchase price and other
acquisition related payments were funded by a portion of the $10,505,000 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 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
were 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 was classified as
goodwill and is being amortized on a straight-line basis over 15 years. As of
March 1, 2000, the name of the Company's subsidiary officially became
"DVDPlanet.com, Inc."
During the last half of fiscal 2000, the Company redesigned the layout,
navigation and content of www.kencranes.com. The redesigned web site was
officially launched under the new name of "DVDPlanet.com" on March 30, 2000.
Since the Company's acquisition, Planet has fulfilled consumer orders out of its
Westminster, California warehouse. It is the Company's intention to ultimately
fulfill Planet's direct-to-consumer orders out of its Las Vegas, Nevada
distribution facility. Due to software programming issues involving Planet's
back-end order processing system's inability to support electronic data
interchange, the Company has delayed fulfillment of Planet's orders out of the
Nevada facility until its second quarter ending September 30, 2000. Software
programmers are continuing to upgrade the Planet order processing system so the
system will properly communicate with the Company's Nevada facility systems and
thus accommodate direct-to-consumer fulfillment by the Company out of the Nevada
facility.
Formation of Joint Venture -- Aviva International, LLC
In June 1999, the Company formed Aviva International, LLC, a California
limited liability company, with Michael Lopez, President of International
Consulting & Business Management. Aviva is 50% owned by each of the Company and
Lopez. Aviva acts as international sales agent for the Company's licensed
programming for which it holds distribution rights for worldwide broadcast and
international home video. Lopez serves as Manager of Aviva. Both the Company and
Lopez have contributed funds to Aviva (as initial working capital) in the form
of interest-bearing loans. The Company will continue to loan Aviva funds for
working capital, if needed, during Aviva's start-up phase. Start-up loans to
Aviva from the Company totaled approximately $605,000 at March 31, 2000.
Management believes the Company will be repaid for all start-up loans made to
Aviva within the next eighteen months. Loans by the Company will be repaid by
Aviva prior to any profit distributions to the Company or Lopez. Although the
Company owns 50% of the joint venture, it has the ability to exercise control
over the operations of Aviva. Accordingly, Aviva's operating loss, since its
formation, is consolidated with the Company's statement of operations for fiscal
2000 and a
--------------------------------------------------------------------------------
16 Image Entertainment, Inc.
<PAGE>
minority interest representing Lopez's share of cumulative losses is reflected
in prepaid expenses and other assets at March 31, 2000 and other income for the
year ended March 31, 2000.
In April 2000, the Company and Lopez amended the joint venture operating
agreement retroactively (to inception date) primarily amending sales agency fees
to be retained by Aviva and the allocation of joint venture profits and losses.
Joint venture profits and losses, which were to be allocated 50% to each of
Lopez and the Company, were amended changing the allocation to 60% Lopez and 40%
the Company up to $750,000 in cumulative profits. The next $750,000 in
cumulative profits are allocated 55% Lopez and 45% the Company and cumulative
profits over $1,500,000 are allocated 50% to each. Accordingly, other income in
the accompanying consolidated statement of operations for fiscal 2000 reflects
minority interest of $383,000, representing 60% of Aviva's operating loss of
$639,000 since its June 1999 formation. In accordance with the amendment to the
joint venture operating agreement, the initial term of the joint venture was
extended to December 31, 2000. It is the Company's and Lopez's current intention
to renew the agreement for an additional two years through December 31, 2002.
Royalties and distribution fees payable by the Company to program suppliers
in connection with international distribution revenues generated by Aviva's
sales agency efforts will generally be used to recoup advance royalties and
distribution fees paid by the Company to program suppliers for exclusive
international distribution rights.
Results of Operations
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999
The following table presents consolidated net sales by reportable business
segment for the fiscal years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
--------------------
2000 1999 % Change
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net sales:
Wholesale distribution $ 80,406 $75,572 6.4%
Retail distribution 14,742 3,781 *
International distribution 250 -- *
Inter-segment eliminations (11,729) (2,627) *
-------- ------- --------
Consolidated $ 83,669 $76,726 9.0%
======== ======= ========
</TABLE>
______________________
* not meaningful
Consolidated net sales for all segments for the fiscal year ended March 31,
2000 increased 9% to $83,669,000, from $76,726,000, for the fiscal year ended
March 31, 1999. The increase is a result of growing sales of DVD programming
partially offset by declining laserdisc net sales. The growth in the Company's
DVD sales in fiscal 2000 is attributable to an increase in the number of
exclusive DVD titles released by the Company, continued sales from a growing
catalog of previously released DVD programming and the continued growth in DVD
player sales to consumers.
Consolidated net sales of DVD programming for fiscal 2000 increased 57.3%
to $72,219,000, or 86.3% of consolidated net sales, from $45,911,000, or 59.8%
of consolidated net sales, for fiscal 1999. Approximately 60.2% of consolidated
net sales of DVD programming for fiscal 2000 were derived from exclusively
licensed or distributed programming as compared to 52.0% for fiscal 1999.
Consolidated net sales of laserdisc programming for fiscal 2000 declined 72.9%
to $7,495,000, or 9.0% of consolidated net sales, from $27,681,000, or 36.1% of
consolidated net sales, for fiscal 1999. Consolidated net sales of VHS and CD
programming for fiscal 2000 increased 26.2% to $3,955,000, or 4.7% of
consolidated net sales, from $3,134,000, or 4.1% of consolidated net sales, for
fiscal 1999.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 17
<PAGE>
The Company continues to aggressively license DVD programming which has
contributed to the Company's release of a greater number of exclusive DVD
titles. During fiscal 2000, the Company released 504 exclusive DVD titles, an
85.3% increase from 272 exclusive DVD titles released during fiscal 1999. In
addition, as DVD player sales grow, sales of the Company's previously released
exclusive DVD programming are expected to grow.
Net sales for the Company's wholesale distribution segment for fiscal 2000
increased 6.4% to $80,406,000 from net sales of $75,572,000 for fiscal 1999. Net
sales of the wholesale distribution segment for fiscal 2000 and fiscal 1999 are
reflected prior to elimination of $11,729,000 and $2,627,000, respectively, in
inter-segment sales from the wholesale distribution segment to the retail
distribution segment. The increase in net sales is due to the growth in the
aforementioned DVD programming offset by the declining laserdisc market.
Net sales for the Company's retail distribution segment, consisting solely
of the Company's Planet subsidiary, were $14,742,000, down approximately 8.1%
from $16,033,000 for fiscal 1999 which includes the period prior to acquisition
for comparative purposes on an unaudited pro forma basis. Although comparative
net sales for Planet were down due to declining laserdisc sales, DVD sales were
significantly higher. Net sales of DVD programming for fiscal 2000 were up 59.9%
to $10,461,000, or 71.0% of segment net sales, from $6,541,000, or 40.8% of
segment net sales, for fiscal 1999. Net sales of DVD programming via
Internet/mail-order increased 54.9% to $7,469,000 for fiscal 2000 from
$4,823,000 for fiscal 1999.
The following tables present consolidated cost of sales by reportable
business segment and as a percentage of related segment net sales for the fiscal
years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
---------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C> <C>
Cost of sales:
Wholesale distribution $ 59,164 $ 57,790
Retail distribution 12,530 3,215
International distribution 152 --
Inter-segment eliminations (11,690) (2,580)
-------- --------
Consolidated $ 60,156 $ 58,425
======== ========
As a percentage of segment net sales: % Change
--------
Wholesale distribution 73.6% 76.5% (2.9)%
Retail distribution 85.0 85.0 --
International distribution 60.8 -- *
-------- -------- --------
Consolidated 71.9% 76.1% (4.2)%
======== ======== ========
</TABLE>
_____________________
* not meaningful
Consolidated cost of sales for fiscal 2000 was $60,156,000, or 71.9% of
consolidated net sales, compared to $58,425,000, or 76.1% of consolidated net
sales for fiscal 1999. Accordingly, consolidated gross profit margin improved to
28.1% for fiscal 2000 from 23.9% for fiscal 1999. The increase in gross profit
margin primarily reflects the shift in sales mix from exclusive laserdisc
programming to exclusive higher-profit margin DVD programming, the incremental
gross profit margin contributed by the retail distribution segment, lower DVD
replication costs and a lower provision for slow-moving inventory in fiscal 2000
as compared to fiscal 1999. The increase in gross profit margin was partially
offset by comparatively higher labor costs associated with operating the Nevada
warehouse and distribution facility during the first half of fiscal 2000. These
higher costs included expenses associated with expedited order processing,
necessitated by difficulties encountered implementing the software required to
operate the facility.
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
--------------------------------------------------------------------------------
18 Image Entertainment, Inc.
<PAGE>
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.
The following tables present consolidated selling expenses by reportable
business segment and as a percentage of related segment net sales for the fiscal
years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
---------------------
2000 1999 % Change
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Selling Expenses:
Wholesale distribution $ 5,637 $ 5,001 12.7%
Retail distribution 2,517 438 *
International distribution 567 -- *
-------- -------- --------
Consolidated $ 8,721 $ 5,439 60.3%
======== ======== ========
As a percentage of segment net sales:
Wholesale distribution 7.0% 6.6% 0.4%
Retail distribution 17.1 11.6 5.5
International distribution 226.8 -- *
-------- -------- --------
Consolidated 10.4% 7.1% 3.3%
======== ======== ========
</TABLE>
____________________
*not meaningful
Consolidated selling expenses for fiscal 2000 increased 60.3% to $8,721,000
from $5,439,000 for fiscal 1999. As a percentage of consolidated net sales,
consolidated selling expenses for fiscal 2000 increased to 10.4% from 7.1% for
fiscal 1999. The increase in consolidated selling expenses in absolute dollars
and as a percentage of consolidated net sales is primarily due to higher selling
expenses of the retail distribution and international distribution segments
incurred during their start-up phases. Planet was acquired during the fourth
quarter of fiscal 1999 and Aviva was formed subsequent to fiscal 1999. Selling
expenses for the retail distribution and international distribution segments
will continue to be higher as a percentage of segment net sales than for the
wholesale distribution segment.
Selling expenses for the wholesale distribution segment were up 12.7% to
$5,637,000 for fiscal 2000 from $5,001,000 for fiscal 1999. As a percentage of
segment net sales, selling expenses for fiscal 2000 were up 0.4% to 7.0% from
6.6% for fiscal 1999. The 12.7% increase in absolute dollar selling expenses
results primarily from higher net freight expenses (higher by $523,000) and
higher compensation expenses (higher by $322,000), offset, in part, by lower
trade advertising costs (lower by $195,000).
The Planet retail distribution segment incurred selling expenses of
$2,517,000, or 17.1% of segment net sales, for fiscal 2000, consisting primarily
of compensation, promotional and freight expenses, net of freight income.
Included during fiscal 2000 is a net $366,000 one-time charge related to free
goods distributed and other promotional expenses incurred in connection with a
joint national DVD hardware promotion with Thomson Consumer Electronics. Planet
has been adding marketing personnel to build Planet awareness and increase
traffic to the web site with on-line and off-line promotions, enhancement of the
Planet web site and creation of affiliate marketing relationships. The Company
plans to increase its fiscal 2001 selling and marketing expenditures for Planet
over that for fiscal 2000. Fiscal 1999 includes primarily Planet selling
expenses of $339,000 for the 79-day period post-acquisition and $99,000 in
selling expenses from the Company's subsidiary, U.S. Laser, which was winding
down its operations through its closure in July 1998. The international
distribution segment, in its start-up phase during fiscal 2000, incurred selling
expenses of $567,000, composed primarily of compensation, international
convention and travel expenses.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 19
<PAGE>
The following tables present consolidated general and administrative
expenses by reportable business segment and as a percentage of related segment
net sales for the fiscal years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
---------------------
2000 1999 % Change
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
General and administrative expenses:
Wholesale distribution $ 7,229 $ 5,662 27.7%
Retail distribution 1,242 354 *
International distribution 164 -- *
-------- -------- --------
Consolidated $ 8,635 $ 6,016 43.5%
======== ======== ========
As a percentage of segment net sales:
Wholesale distribution 9.0% 7.5% 1.5%
Retail distribution 8.4 9.4 (1.0)
International distribution 65.6 -- *
-------- -------- --------
Consolidated 10.3% 7.8% 2.5%
======== ======== ========
</TABLE>
____________________
*not meaningful
Consolidated general and administrative expenses for fiscal 2000 increased
43.5% to $8,635,000 from $6,016,000 for fiscal 1999. As a percentage of
consolidated net sales, consolidated general and administrative expenses for
fiscal 2000 increased to 10.3% from 7.8% for fiscal 1999. The increase in
consolidated general and administrative expenses in absolute dollars and as a
percentage of consolidated net sales is primarily due to higher general and
administrative expenses for the wholesale distribution segment as discussed
below and the general and administrative expenses of the retail distribution and
international distribution segments. Planet was acquired during the fourth
quarter of fiscal 1999 and Aviva was formed subsequent to fiscal 1999.
General and administrative expenses for the wholesale distribution segment
for fiscal 2000 were up 27.7% to $7,229,000 from $5,662,000 for fiscal 1999. As
a percentage of segment net sales, general and administrative expenses for
fiscal 2000 were up 1.5% to 9.0% from 7.5% for fiscal 1999. The 27.7% increase
in absolute dollar general and administrative expenses for fiscal 2000 results
primarily from higher depreciation and amortization expense associated with the
Nevada distribution facility and in-house authoring and compression equipment
(higher by $822,000), higher compensation expense (including higher performance-
based executive bonuses) and amortization of restricted stock units granted
(higher by $380,000) and a one-time $300,000 charge for settlement including
estimated legal fees, subject to court approval, of the Company's adversary
proceeding in connection with the Chapter 11 bankruptcy of Alliance
Entertainment Corp.
General and administrative expenses for the retail distribution segment of
$1,242,000, or 8.4% of segment net sales, consisted primarily of compensation
expense, bank credit card servicing fees, depreciation expense and management
information systems expenses. Fiscal 1999 includes Planet general and
administrative expenses of $226,000 and $128,000 in general and administrative
expenses from the Company's subsidiary U.S. Laser, which was winding down its
operations through its closure in July 1998.
Amortization of production costs for fiscal 2000 decreased 1.6% to
$3,992,000, or 4.8% of consolidated net sales, from $4,057,000, or 5.3% of
consolidated net sales, for fiscal 1999. The decrease in amortization costs for
fiscal 2000 is attributable to lower comparative per-title DVD authoring and
compression costs (much of this DVD process is now performed in-house) as well
as other operational efficiencies attained by the creative services and
production departments offset, in part, by the increased number of exclusively
licensed programs placed into production during fiscal 2000 compared to fiscal
1999.
--------------------------------------------------------------------------------
20 Image Entertainment, Inc.
<PAGE>
For fiscal 2000, amortization of goodwill from the acquisition of Planet
was $503,000, or 0.6% of net sales, compared to $111,000, or 0.1% of net sales,
for fiscal 1999.
Interest expense, net of interest income, for fiscal 2000 increased 77.1%
to $1,562,000, or 1.9% of net sales, from $882,000, or 1.1% of net sales, for
fiscal 1999. The increase is attributable primarily to higher weighted average
debt levels during fiscal 2000 as compared to fiscal 1999.
For fiscal 2000, other income of $1,315,000 consisted primarily of proceeds
from settlements in connection with the Company's litigation against LEI
Partners, L.P. totaling $899,000 and the minority interest in the Aviva joint
venture of $383,000.
The Company did not incur income tax expense for fiscal 2000 and incurred
income tax expense of $90,000 for fiscal 1999. The Company's effective income
tax rate was significantly lower than the statutory rate for both fiscal years
due to a reduction in the valuation allowance recorded against deferred tax
assets.
Consolidated net income for fiscal 2000 was $1,415,000, or $.09 per basic
and diluted share, as compared to consolidated net income of $1,706,000, or $.12
per basic and diluted share, for fiscal 1999. The principal reason for this
decline was due to post-acquisition/formation losses of $2,300,000 (net of
inter-segment eliminations and minority interest but including goodwill
amortization of $503,000) in the retail and international distribution segments.
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
As previously discussed, the retail distribution segment was acquired in
January 1999 and the international distribution segment was formed in June 1999.
Accordingly, the following discussion focuses primarily on the Company's
wholesale distribution segment.
Net sales for fiscal 1999 increased 1.6% to $76,726,000 from $75,516,000
for fiscal 1998. Net sales of the Company's retail distribution segment for
fiscal 1999 includes Planet net sales of $3,162,000. Net sales of DVD
programming for fiscal 1999 increased 192.4% 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.
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 laserdisc programming for fiscal 1999 declined 53.3% 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 had directly competed with the laserdisc format and had adversely
affected the laserdisc marketplace. Historically, the largest buyers of
laserdisc programming were the major music/video software retail chain stores.
The major chain stores replaced dedicated laserdisc floor space with DVD
product. During the latter half of fiscal 1999, the majority of the Company's
laserdisc sales were through the independent video stores that promoted
laserdisc and direct-to-consumer via Internet/mail-order. Other net sales (VHS
and CD) for fiscal 1999 increased 494.7% 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 for fiscal 1999 decreased $11,831,000 to $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 for fiscal 1999 was primarily due to the
significantly reduced provisions for slow-moving laserdisc inventory of
$1,831,000 for fiscal 1999 versus $8,133,000 for fiscal 1998 and estimated
losses recorded on laserdisc 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 laserdisc to DVD programming.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 21
<PAGE>
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. Selling
expenses for fiscal 1999 for the wholesale distribution segment increased 14.3%
to $5,001,000, or 6.6 % of segment net sales, from $4,374,000, or 5.8% of
segment 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.
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 fiscal 1998 recoveries of previously provided for
doubtful accounts receivable from certain customers, general and administrative
expenses for fiscal 1999 for the wholesale distribution segment increased 26.5%
to $5,662,000, or 7.5% of segment net sales, from $4,477,000, or 6.1% of segment
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.
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
laserdisc 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 laserdisc titles placed into production.
Amortization of goodwill for fiscal 1999 was $111,000, or 0.1% of net
sales, and represents goodwill amortization from the acquisition of Planet.
Interest expense, net of interest income, for fiscal 1999 increased 62.1%
to $882,000, or 1.1% of net sales, from $544,000, or 0.7% of net sales, for
fiscal 1998. The increase is attributable primarily to higher weighted average
debt levels during fiscal 1999 than during fiscal 1998.
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 carryback 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.
Inflation
Management believes that inflation is not a material factor in the
operation of the Company's business at this time.
Recently Issued Accounting Pronouncements
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the
--------------------------------------------------------------------------------
22 Image Entertainment, Inc.
<PAGE>
provisions related to repricings and the definition of an employee which apply
to awards issued after December 15, 1998. The provisions related to
modifications to fixed stock option awards to add a reload feature are effective
for awards modified after January 12, 2000. The new interpretation is not
expected to have a material impact upon the Company's consolidated financial
statements.
Impact of Year 2000
The Company has been aware of the complexity and significance of the Year
2000 issue. During the past year, the Company acted to minimize the risk of
disruption from a Year 2000 related problem. The Company established a Year 2000
compliance program which was comprised of five phases: discovery, planning,
resolution, testing and implementation. The scope of the Company's compliance
program included information technology systems (computer hardware and software)
and non-information technology systems (facilities, telecommunication systems,
distribution center machinery, security systems and video and sound processing
equipment which may include embedded technology). Also included in the scope of
the Company's compliance program was 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.
The Company has not experienced any significant Year 2000 related system
failures or service disruptions. Additionally, the Company has not experienced
any service disruptions from its significant third-party suppliers and
customers, nor is it aware of any significant Year 2000 related system failures
which may have been experienced by them. The Company intends to monitor its
systems for ongoing Year 2000 compliance. Management does not currently
anticipate that internal system failures will result in a material adverse
effect on the Company's operations or financial condition. Management cannot
guarantee the computer systems of the Company's significant third-party
suppliers and customers will not be adversely affected by problems associated
with the Year 2000 issue.
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 (for exclusive distribution), manufacturing and production costs, costs
of acquiring finished product for wholesale distribution and selling, general
and administrative expenses. Non-recurring uses during the fiscal years ended
March 31, 2000 and 1999 were attributable to the development of the Company's
Las Vegas, Nevada warehouse and distribution facility. 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.
Sources and Uses of Working Capital, Fiscal 2000 and 1999.
Net cash used in operating activities for fiscal 2000 increased 120.4% to
$5,843,000 from $2,651,000 for fiscal 1999. The increase is primarily due to a
dramatic increase in royalty and distribution fee advances paid during fiscal
2000 to secure future exclusive rights for both domestic and international
distribution and when available, worldwide broadcast, VHS distribution and
digital downloading and streaming rights. Additionally, the increases in
accounts receivable and inventory at March 31, 2000 compared to March 31, 1999
were substantially lower than the increases in the same accounts at March 31,
1999 compared to March 31, 1998. During fiscal 1999, the Company was growing its
DVD inventory during the transition away from laserdisc distribution.
Accordingly, inventory and accounts receivable balances at March 31, 1999 were
much greater than those at March 31, 1998, when the DVD business was less
established. The Company has made a push during the last six months of fiscal
2000 to return excess nonexclusive DVD inventory under its normal return
allowances provided by nonexclusive program suppliers. Additionally, the Company
continues to slowly sell its laserdisc inventory at deep discounts to the few
retail customers remaining. Lastly, the increase in cash used by operating
activities was also due to an increase in prepaid expenses and other assets at
March 31, 2000, primarily due to a receivable for litigation proceeds received
in May 2000, minority interest in the Company's joint venture and deferred
advertising payments made for certain of the Company's exclusive programming.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 23
<PAGE>
Net cash used in investing activities for fiscal 2000 decreased 84.9% to
$1,246,000 from $8,246,000 for fiscal 1999. The significant increase in cash
used in fiscal 1999 as compared to fiscal 2000 resulted from the Company's
January 1999 acquisition of Planet. In December 1999, the Company sold
approximately 3.8 acres of the Company's 8.8 acres of land (adjacent to the
Company's 8.4 acre warehouse and distribution facility site) in Las Vegas,
Nevada for net proceeds of $1,823,000.
Net cash provided from financing activities for fiscal 2000 decreased 38.2%
to $7,069,000 from $11,434,000 for fiscal 1999. During fiscal 1999, the Company
sold 2.4 million shares of newly-issued common stock to certain investors for a
net $10,505,000. See "Financing Activities" below. Additionally, the Company
received $1,404,000 in net proceeds from exercise of employee stock options. In
fiscal 2000 borrowings from its revolving credit and term loan facility
increased to fund royalty advances for exclusive distribution rights, offset in
part, by the repayment of its note payable to bank securing the land sold as
well as term repayments of its real estate and distribution equipment lease
facilities.
The aforementioned changes for fiscal 2000 cash flows as compared to fiscal
1999 cash flows resulted in net cash and cash equivalents decreasing 1.3% to
$1,532,000 at March 31, 2000 from $1,552,000 at March 31, 1999.
Financing Activities.
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 $10,505,000. Approximately $5,000,000 of the
net proceeds were used to complete the Planet acquisition. The remainder of the
net proceeds was used to pay-down borrowings outstanding under the Company's
revolving credit facility with Foothill Capital Corporation.
Revolving Credit and Term Loan Facility. In November 1999, the Company and
---------------------------------------
Foothill Capital Corporation amended the December 28, 1998 Loan and Security
Agreement increasing the maximum revolving advance limit from $12,000,000 to
$15,000,000. The term of the agreement is three years, renewable automatically
thereafter for successive one-year periods. At March 31, 2000, the Company had
$10,290,000 in borrowings outstanding under its revolving credit facility and
$500,000 outstanding under its term loan facility with Foothill. At March 31,
2000, the Company had borrowing availability under its revolving credit facility
of $4,639,000, net of amounts utilized for outstanding standby letters of
credit. As of March 31, 2000, the Company had fully utilized its term loan
facility. Outstanding borrowings under the revolving credit and term loan
facility bear interest at prime plus .75% (9.75% at March 31, 2000).
Real Estate Credit Facility. At March 31, 2000, the Company had $3,176,000
---------------------------
in borrowings outstanding under its revolving real estate credit facility with
Bank of America National Trust and Savings Association in Nevada. Outstanding
borrowings bear interest at LIBOR plus 2.25% (8.28% at March 31, 2000). The
Company may repay and reborrow principal amounts provided the outstanding
borrowings do not exceed the maximum commitment of $3,176,000 at March 31, 2000,
reduced quarterly by $43,000. The credit facility expires January 31, 2008.
Distribution Equipment Lease Facility. At March 31, 2000, the Company had
-------------------------------------
$1,432,000 in borrowings outstanding under the distribution equipment lease
facility with BankAmerica Leasing and Capital Corporation. Outstanding
borrowings bear interest at a fixed rate of 7.719% and are repaid quarterly
through October 1, 2003.
Convertible Subordinated Note Payable. At March 31, 2000, the Company had
-------------------------------------
$5,000,000 outstanding under the convertible subordinated note payable, bearing
interest at 8.0% and due September 29, 2002.
Note Payable to Bank. In December 1999, the Company repaid the remaining
--------------------
$1,215,000 in outstanding borrowings from Pioneer Citizen's Bank of Nevada
($135,000 was repaid in May 1999), which bore interest at prime
--------------------------------------------------------------------------------
24 Image Entertainment, Inc.
<PAGE>
plus 1.75% (10.25% at December 31, 1999) from proceeds from the sale of land in
Las Vegas, Nevada. See "Sources and Uses of Working Capital, Fiscal 2000 and
1999" above.
Other Obligations.
At March 31, 2000, the Company had future license obligations for royalty
advances, minimum guarantees and other fees of $8,276,000 due during fiscal 2001
and $213,000 due during fiscal 2002. These advances and guarantees are
recoupable against royalties and distribution fees earned (in connection with
Company revenues) by the licensors and program suppliers, respectively.
Depending upon the competition for license and exclusive distribution rights,
the Company may have to pay increased advances, guarantees and/or royalty rates
in order to acquire or retain such rights in the future.
At March 31, 2000, the Company had $550,000 of outstanding standby letters
of credit issued by Foothill of which $250,000 expire on November 18, 2000 and
$300,000 expire on June 30, 2001. These letters of credit secure trade payables
due program suppliers.
Other Items.
In March 2000, the Company reached a final settlement relating to its
ongoing litigation with LEI Partners, L.P. and a number of related entities and
individuals relating to disputes in connection with the Company's December 1990
sale of a business segment to LEI. The Company recognized a gain of $899,000
relating to these settlements, classified as a component of other income in the
accompanying consolidated financial statements for fiscal 2000. Prepaid expenses
and other assets in the accompanying consolidated balance sheet at March 31,
2000 includes a receivable of $540,000 relating to this settlement. The
receivable was collected in May 2000.
In May 2000, the Company entered into escrow to sell approximately 4.7
acres of land in Las Vegas, Nevada (the remaining unsold acreage adjacent to the
Company's 8.4 acre warehouse and distribution facility site) to a real estate
developer for expected net proceeds of $1,400,000. The buyer has a 45-day due
diligence period and the right to extend escrow 30 days for a non-refundable
deposit. The escrow is expected to close in August 2000. There can be no
assurance that the escrow will close and that the ultimate sale will occur.
In June 2000, the Company reached a settlement, subject to court approval,
in an adversary proceeding filed by One Stop Recovery LLC, as Trustee for AEC
One Stop, Inc. in connection with the Chapter 11 bankruptcy of Alliance relating
to certain alleged preferential transfers. The Company has recorded a $300,000
settlement charge including estimated legal fees as a component of general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal 2000. The Company expects to pay the settlement in July 2000.
Summary.
Management believes that its projected cash flows from operations,
borrowing availability under its revolving lines of credit, cash on hand and
trade credit will provide the necessary capital to meet its projected cash
requirements for at least the next 12 months. However, any projections of future
cash needs and cash flows are subject to substantial uncertainty. If cash flows
to be generated from operations, future borrowing availability under its lender
revolving lines of credit and future cash on hand are insufficient to satisfy
the Company's continuing licensing and acquisition of exclusive DVD programming
which require significant advance royalty or distribution fee payments, the
Company will need to seek additional debt and/or equity financing. Failure to
obtain this additional financing could significantly restrict the Company's
growth plans. There can be no assurance that additional financing will be
available in amounts or on terms acceptable to the Company, if at all.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates and foreign currency exchange rates.
Changes in interest rates and, in the future, changes in foreign currency
exchange rates have and will have an impact on the Company's results of
operations.
Interest Rate Fluctuations. Approximately $14,000,000 of the Company's
outstanding borrowings are subject to changes in interest rates; however, the
Company does not use derivatives to manage this risk. This exposure is linked to
the prime rate and LIBOR. The Company believes that moderate changes in the
prime rate or LIBOR would not materially affect the operating results or
financial condition of the Company. For example, a 1% change in interest rates
would result in an approximate $140,000 annual impact on pretax income (loss)
based upon those outstanding borrowings at March 31, 2000 subject to interest
rate fluctuations.
Foreign Exchange Rate Fluctuations. The Company is exposed to foreign exchange
rate risk associated with its accounts receivable and accounts payable
denominated in foreign currencies. The Company has begun to distribute certain
of its licensed DVD and VHS programming (for which the Company has international
distribution rights) internationally through international sub-distributors. The
Company's first international video release occurred in March 2000. The
Company's exposure to foreign currency exchange risk through March 31, 2000 has
not been material. To date, the Company has not entered into foreign currency
exchange contracts. The Company is exploring ways to mitigate the risk of
foreign currency exchange rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
<S> <C>
Independent Auditors' Report................................................................................ 27
Consolidated Balance Sheets at March 31, 2000 and 1999...................................................... 28
Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998..................... 30
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2000, 1999 and 1998........... 31
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998..................... 32
Notes to Consolidated Financial Statements.................................................................. 35
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2000, 1999 and 1998........... 52
</TABLE>
--------------------------------------------------------------------------------
26 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2000, 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 26, 2000
--------------------------------------------------------------------------------
Image Entertainment, Inc. 27
<PAGE>
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS
(In thousands) 2000 1999
------- -------
<S> <C> <C>
Cash and cash equivalents $ 1,532 $ 1,552
Accounts receivable, net of allowances of
$3,664 - 2000; $3,475 - 1999 13,457 11,954
Inventories (Note 6) 17,881 16,691
Royalty and distribution fee advances 8,868 3,173
Prepaid expenses and other assets 2,576 807
Property, equipment and improvements, net (Notes 7, 8 and 9) 14,067 14,494
Goodwill, net of accumulated amortization of
$614 - 2000; $111 - 1999 (Note 4) 7,014 7,774
------- -------
$65,395 $56,445
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
28 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) 2000 1999
------- --------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued liabilities $15,606 $ 16,101
Accrued royalties and distribution fees 3,550 2,665
Revolving credit and term loan facility (Note 8) 10,790 1,874
Real estate credit facility (Note 8) 3,176 3,348
Distribution equipment lease facility (Note 9) 1,432 1,775
Convertible subordinated note payable (Note 8) 5,000 5,000
Note payable (Note 8) -- 1,350
------- --------
Total liabilities 39,554 32,113
------- --------
Commitments and Contingencies (Notes 8, 9, 10 and 14)
SHAREHOLDERS' EQUITY (Notes 3, 4 and 11):
Preferred stock, $1 par value, 3,366,000 shares authorized;
none issued and outstanding -- --
Common stock, no par value, 30,000,000 shares authorized;
16,462,000 and 16,417,000 issued and outstanding
in 2000 and 1999, respectively (Notes 3, 4 and 11) 31,819 31,725
Additional paid-in capital 3,064 3,064
Accumulated deficit (9,042) (10,457)
------- --------
Net shareholders' equity 25,841 24,332
------- --------
$65,395 $ 56,445
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 29
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
(In thousands, except per share data) 2000 1999 1998
------- ------- -------
NET SALES $83,669 $76,726 $75,516
OPERATING COSTS AND EXPENSES:
Cost of sales 60,156 58,425 70,256
Selling expenses 8,721 5,439 4,943
General and administrative expenses 8,635 6,016 4,832
Amortization of production costs 3,992 4,057 3,740
Amortization of goodwill 503 111 9
Costs of facility closure -- -- 825
------- ------- -------
82,007 74,048 84,605
------- ------- -------
OPERATING INCOME (LOSS) 1,662 2,678 (9,089)
OTHER EXPENSES (INCOME):
Interest expense, net 1,562 882 544
Other (1,315) -- --
------- ------- -------
247 882 544
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,415 1,796 (9,633)
INCOME TAX EXPENSE (BENEFIT) (Note 13) -- 90 (52)
------- ------- -------
NET INCOME (LOSS) $ 1,415 $ 1,706 $(9,581)
======= ======= =======
NET INCOME (LOSS) PER SHARE (Note 12):
Basic and diluted $ .09 $ .12 $ (.71)
======= ======= =======
Weighted average common shares outstanding:
Basic 16,452 14,185 13,471
Diluted 16,490 14,309 13,471
======= ======= =======
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
30 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Notes 3, 4 and 11)
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
Additional
Common Stock Paid-In Accumulated
------------
(In thousands) Shares Amount Capital Deficit
--------- -------- ------- ---------
BALANCES, March 31, 1997 13,343 $17,642 $3,064 $ (2,582)
Exercise of options 150 122 -- --
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)
Exercise of options 34 60 -- --
Issuance of restricted stock units 11 76 -- --
Other -- (42) -- --
Net income -- -- -- 1,415
--------- -------- ------- --------
BALANCES, March 31, 2000 16,462 $31,819 $3,064 $ (9,042)
========= ======== ======= ========
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,415 $ 1,706 $ (9,581)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of production costs 3,992 4,057 3,740
Amortization of goodwill 503 111 9
Depreciation and other amortization 1,696 725 1,063
Amortization of restricted stock units 215 89 --
Provision for (recoveries of) estimated doubtful
accounts receivable 384 144 (331)
Provision for slow-moving inventories 1,010 1,831 8,133
Gain on sale of land (23) -- --
Provision for estimated losses on laserdisc license
and exclusive distribution agreements -- -- 4,246
Loss on disposition of assets -- -- 460
Changes in assets and liabilities
associated with operating activities, net of
acquired business:
Accounts receivable (1,887) (5,121) 4,112
Inventories (678) (4,867) (1,314)
Royalty and distribution fee advances, net (5,695) 1,393 (359)
Production cost expenditures (5,257) (5,734) (4,121)
Prepaid expenses and other assets (1,769) 306 (444)
Accounts payable, accrued royalties
and liabilities 251 2,709 (5,097)
---------- ---------- -----------
Net cash provided by (used in)
operating activities (5,843) (2,651) 516
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,069) (2,928) (384)
Net proceeds from sale of land 1,823 -- --
Payments for business acquired -- (5,318) --
---------- ---------- -----------
Net cash used in investing activities (1,246) (8,246) (384)
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
32 Image Entertainment, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit and term loan facility $ 90,363 $ 33,572 $ 35,330
Repayment of advances under revolving
credit and term loan facility (81,447) (34,013) (41,724)
Proceeds from issuance of note payable and
convertible subordinated note payable -- -- 6,350
Repayment of advances under real estate
credit facility (172) (86) --
Repayment of note payable (1,350) -- (285)
Principal payments under lease facility (343) -- --
Net proceeds from issuance of common stock -- 10,557 --
Net proceeds from exercise of stock options 60 1,404 122
Other (42) -- --
----------- ----------- ------------
Net cash provided by (used in)
financing activities 7,069 11,434 (207)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (20) 537 (75)
Cash and cash equivalents at beginning of year 1,552 1,015 1,090
----------- ----------- ------------
Cash and cash equivalents at end of year $ 1,532 $ 1,552 $ 1,015
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,457 $ 1,049 $ 656
Income taxes $ -- $ -- $ 90
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
On June 30, 1999, the Company issued 11,407 shares of common stock to officers
(net of shares withheld for payment of related income taxes) pursuant to
restricted stock units which vested on June 30, 1999. The Company increased
common stock at June 30, 1999 by approximately $76,000, the value of the net
shares issued.
In January 1999, the Company acquired certain assets and assumed certain
liabilities of the Internet/direct-to-consumer DVD and laserdisc software
business of Ken Crane's Magnavox City, Inc. for $4,919,000 in cash, adjusted
pursuant to the purchase agreement, and 258,370 shares of the Company's common
stock valued at $2,000,000 ($7.74 per share). See "Note 4. Fiscal 1999
Acquisition."
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value of assets acquired $ 1,287
Excess of purchase price over fair value of net assets acquired recorded as goodwill 7,628
Cash paid for net assets acquired, as adjusted (4,919)
Stock issued for net assets acquired (2,000)
Expenses incurred in connection with the acquisition (333)
-------
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.
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
34 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. The Company's primary business is the
----------------------------------------
distribution of a broad range of entertainment programming on DVD and a rapidly
declining range of entertainment programming on laserdisc under exclusive and
nonexclusive license and wholesale distribution agreements.
Principles of Consolidation. The consolidated financial statements include its
---------------------------
wholly-owned subsidiaries, DVDPlanet.com, Inc. (formerly known as "Image Newco,
Inc." and dba "Ken Crane's DVD & Laserdisc Superstore," and acquired in January
1999), the 50%-owned joint venture, Aviva International, LLC (formed in June
1999) and U.S. Laser Video Distributors, Inc. (closed in July 1998). 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 inventories, 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.
Depreciation and Amortization. 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 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. Goodwill, which is the excess
purchase price over the value of the net assets acquired, is amortized on a
straight-line basis over 15 years.
Interest costs on the construction of the Las Vegas, Nevada warehouse and
distribution facility were capitalized as part of the cost of the facility.
Certain costs in developing the Planet web site were capitalized pursuant to the
AICPA's Accounting Standards Executive Committee's Statement of Position 98-1,
Accounting for Costs of Computer Software Developed or Obtained for Internal
Use.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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. On a consolidated basis, there were no customers which
---------------
accounted for greater than 10% of net sales in fiscal 2000 and 1999. Three
customers accounted for 31.5% of fiscal 1998 net sales (Norwalk Records 10.9%,
Ken Crane's 10.6%, and Musicland 10.0%).
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 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 and
-----------------
certain identifiable intangible 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 undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. No impairment charge has been recorded at
March 31, 2000.
Income Taxes. The Company accounts for income taxes pursuant to the provisions
------------
of SFAS No. 109 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. The Company provides a valuation allowance on its
deferred tax assets because of the uncertainty regarding its realizability.
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 two years ended March 31, 2000.
Stock Options. The Company accounts for its stock options in accordance with
-------------
provisions of Accounting Principles Board (APB) Opinion No. 25. 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. The Company
has provided the pro forma disclosure provisions of SFAS No. 123.
Recently Issued Accounting Standards. On March 31, 2000, the Financial
------------------------------------
Accounting Standards Board issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation - an interpretation of APB
Opinion No. 25 (FIN 44). This interpretation provides guidance for issues that
have arisen in applying APB Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 applies prospectively to new awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July
--------------------------------------------------------------------------------
36 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1, 2000, except for the provisions related to repricings and the definition of
an employee which apply to awards issued after December 15, 1998. The provisions
related to modifications to fixed stock option awards to add a reload feature
are effective for awards modified after January 12, 2000. The new interpretation
is not expected to have a material impact upon the Company's consolidated
financial statements.
Reclassifications. Certain fiscal 1999 and 1998 balances have been reclassified
-----------------
to conform with the fiscal 2000 presentation.
Note 2. Formation of Joint Venture - Aviva International, LLC.
In June 1999, the Company formed Aviva International, LLC, a California limited
liability company, with Michael Lopez, President of International Consulting &
Business Management. Aviva is 50% owned by each of the Company and Lopez. Aviva
acts as international sales agent for the Company's licensed programming for
which it holds distribution rights for worldwide broadcast and international
home video. Lopez serves as Manager of Aviva. Both the Company and Lopez have
contributed funds to Aviva (as initial working capital) in the form of interest-
bearing loans. The Company will continue to loan Aviva funds for working
capital, if needed, during Aviva's start-up phase. Start-up loans to Aviva from
the Company totaled approximately $605,000 at March 31, 2000. Loans to the
Company will be repaid by Aviva prior to any profit distributions to the Company
or Lopez. Although the Company owns 50% of the joint venture, it has the ability
to exercise control over the operations of Aviva. Accordingly, Aviva's operating
loss, since its formation, is consolidated with the Company's statement of
operations for the fiscal year ended March 31, 2000 and a minority interest
representing Lopez's share of losses is reflected in prepaid expenses and other
assets at March 31, 2000 and other income for the year ended March 31, 2000.
In April 2000, the Company and Lopez amended the joint venture operating
agreement retroactively (to inception date) primarily amending sales agency fees
to be retained by Aviva and the allocation of the joint venture profits and
losses. Joint venture profits and losses, which were to be allocated 50% to each
of Lopez and the Company were amended changing the allocation to 60% Lopez and
40% the Company up to $750,000 in cumulative profits. The next $750,000 in
cumulative profits are allocated 55% Lopez and 45% the Company and cumulative
profits over $1,500,000 are allocated 50% to each. Accordingly, other income in
the accompanying consolidated statement of operations for the fiscal year ended
March 31, 2000 reflects minority interest of $383,000, representing 60% of
Aviva's operating loss of $639,000 since its June 1999 formation. In accordance
with the amendment to the joint venture operating agreement, the initial term of
the joint venture was extended to December 31, 2000. It is the Company's and
Lopez's current intention to renew the agreement for an additional two years
through December 31, 2002.
Note 3. 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 $10,505,000. Approximately $5,000,000 of the net proceeds
were used to complete the acquisition of Ken Crane's (as described in "Note 4.
Fiscal 1999 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 4. Fiscal 1999 Acquisition.
On January 11, 1999, the Company completed an acquisition of certain assets and
liabilities of the Internet/direct-to-consumer DVD and laserdisc software
business of Ken Crane's Magnavox City, Inc. The wholly-owned subsidiary, renamed
"DVDPlanet.com, Inc." in March 2000, is engaged in Internet/direct-to-consumer
retailing of DVD and
--------------------------------------------------------------------------------
Image Entertainment, Inc. 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
laserdisc entertainment software. The acquired assets included the
www.kencranes.com web site (replaced in March 2000 by the Planet web site), a
mail-order business, a retail store, DVD and laserdisc inventory, and certain
other assets. The Company also assumed certain trade accounts payable.
The acquisition purchase price included $2,919,000 in cash, as adjusted pursuant
to the purchase agreement, and 258,370 shares of the Company's common stock,
valued at $2,000,000 (at $7.74 per share). In connection with the acquisition,
the Company entered into (1) a five-year employment agreement with Charles K.
Crane, II (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). Charles K. Crane, II serves as Vice President - General Manager of
Planet. For financial statement purposes, the one-time payments are included in
the acquisition purchase price.
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 acquired entity was 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 the acquired entity were $5,983,000 and $8,069,000,
respectively.
The following unaudited pro forma consolidated results of operations for the
year ended March 31, 1999 have been prepared as if the acquisition of Planet had
occurred at the beginning of fiscal 1999.
(In thousands, except per share data) 1999
-----------
Net sales $ 83,650
Net income $ 1,489
===========
Net income per share -- basic and diluted $ .10
===========
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 period
presented, nor do they purport to be indicative of the results that will be
obtained in the future. The pro forma adjustments primarily reflect elimination
of inter-company transactions and amortization of goodwill on a straight-line
basis over 15 years.
Note 5. 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
July 15, 1998 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 an entertainment software retail store, mail order to a
decreasing number of accounts and the Internet. With the decline of industry-
wide laserdisc 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 non-recurring 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.
--------------------------------------------------------------------------------
38 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 6. Inventories.
Inventories at March 31, 2000 and 1999 are summarized as follows:
(In thousands) 2000 1999
-------- --------
DVD $ 12,989 $ 9,724
laserdisc 5,710 12,125
other 629 500
-------- --------
19,328 22,349
Reserve for slow-moving inventories:
DVD (767) (231)
laserdisc and other (5,578) (9,060)
-------- --------
(6,345) (9,291)
-------- --------
12,983 13,058
Production costs, net 4,898 3,633
-------- --------
$ 17,881 $ 16,691
======== ========
The costs to produce licensed programming include the cost of converting film
prints or tapes into the optical disc format, which includes authoring and
compression, subtitling, closed-captioning, replica sample, set up charges,
ancillary material production, packaging artwork costs and the overhead of the
Company's creative services and production departments. Production costs are net
of accumulated amortization of $6,701,000 and $6,955,000 at March 31, 2000 and
1999, respectively. The Company expects to amortize substantially all of the
March 31, 2000 production costs by March 31, 2004.
Note 7. Property, Equipment and Improvements.
Property, equipment and improvements at March 31, 2000 and 1999 are summarized
as follows:
(In thousands) 2000 1999
-------- --------
Land $ 2,044 $ 4,868
Land held for sale 900 --
Building 4,493 4,337
Machinery, equipment and software 10,961 9,279
Leasehold improvements 501 824
Other 358 481
-------- --------
19,257 19,789
Less accumulated depreciation and amortization 5,190 5,295
-------- --------
$ 14,067 $ 14,494
======== ========
In December 1999, the Company sold approximately 3.8 acres of the Company's 8.8
acres of unimproved property located (adjacent to the Company's 8.4 acres on
which its warehouse and distribution facility is located) in Las Vegas, Nevada
for net proceeds of $1,823,000. The sale resulted in a gain of $23,000 which is
recorded as other income in the accompanying statement of operations for the
year ended March 31, 2000. In May 2000, the Company entered into escrow to sell
the remaining acreage adjacent to its 8.4 acre facility site. There is no
assurance that the escrow will close and that the ultimate sale will occur. The
land and land held for sale is recorded at the lower of cost or fair market
value.
Depreciation and amortization of property, equipment and improvements was
$1,696,000, $725,000 and $826,000 for fiscal 2000, 1999 and 1998, respectively.
Interest capitalized for fiscal 1999 and 1998 was $156,000 and $18,000,
respectively. The Company did not capitalize interest during fiscal 2000. Web
site development costs capitalized during fiscal 2000 were $146,000. The Company
did not capitalize web site development costs during fiscal 1999.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 8. Debt.
Revolving Credit and Term Loan Facility. In November 1999, the Company and
---------------------------------------
Foothill Capital Corporation amended the December 28, 1998 Loan and Security
Agreement increasing the maximum revolving advance limit from $12,000,000 to
$15,000,000. The Foothill Agreement provides for revolving advances and the
issuance of and guaranty of standby letters of credit under a $15,000,000
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 limited to the borrowing base, as
defined, are secured by substantially all of the Company's assets and bear
interest at prime plus .75% (9.75% at March 31, 2000), payable monthly. At March
31, 2000, the Company had a total of $10,290,000 and $500,000, respectively,
outstanding under the revolving credit and term loan facilities and had
borrowing availability under its revolving credit facility of $4,639,000, net of
amounts utilized for outstanding letters of credit. As of March 31, 2000, the
Company had fully utilized its term loan facility.
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, 2000, the Company was not in compliance with
the covenant establishing the maximum amount of capital expenditures the Company
could make during fiscal 2000 as set forth in the Foothill Agreement. The
Company exceeded the maximum limit for fiscal 2000 by $42,000. However, at the
Company's request, Foothill waived the Company's compliance with that covenant
for fiscal 2000. At March 31, 2000, the Company was in compliance with all other
financial and operating covenants.
Real Estate Credit Facility. The Company has a revolving line of credit with
---------------------------
Bank of America National Trust and Savings Association of Nevada. Under the
revolving line, the Company may repay and reborrow principal amounts provided
the outstanding borrowings do not exceed the maximum available commitment of
$3,176,000 at March 31, 2000, which is reduced quarterly by $43,000. The
revolving line expires January 31, 2008. The Company has the option under the
revolving line to borrow at the bank's prime rate plus 1.25% or for fixed
periods at LIBOR plus either 2.25% or 2.65% depending on the level of the
Company's debt service coverage ratio, as defined. At March 31, 2000, $3,176,000
in borrowings were outstanding under the revolving line. Borrowings bear
interest at LIBOR plus 2.25% (8.28% at March 31, 2000).
Borrowings under the revolving line are secured by a deed of trust on the
approximate 8.4 acres of land in Las Vegas, Nevada used for operations. The
revolving line requires the Company to comply with certain quarterly financial
and operating covenants. At March 31, 2000, 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., a principal stockholder of the Company owned
and controlled by John W. Kluge and Stuart Subotnick, dated as of September 29,
1997, pursuant to which the Company borrowed $5,000,000 from Image Investors Co,
with interest payable quarterly at 8.0% 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 with Pioneer Citizens Bank in Nevada. Borrowings under
the Pioneer agreement were secured by a deed of trust on the approximately 8.8
acres of land adjacent to the Company's 8.4 acre site in Las Vegas, Nevada used
for operations. In May 1999, the Company repaid $135,000 (10%) of the then
outstanding principal balance. In December 1999,
--------------------------------------------------------------------------------
40 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
concurrent with the sale of 3.8 acres of Nevada land securing this note and
described in "Note 7. Property, Equipment and Improvements," the Company repaid
the note in its entirety.
The following is a schedule by year of required minimum debt principal payments
and maturities under the Company's debt agreements (revolving credit, term loan
and real estate credit facilities and its convertible note payable):
(In thousands)
Fiscal Amount
-------------- ------------
2001 $ 278
2002 10,854
2003 5,172
2004 172
2005 172
Thereafter 2,318
------------
$ 18,966
============
Note 9. Distribution Equipment Lease Facility.
The Company's Lease Intended as Security Agreement with BankAmerica Leasing and
Capital Corporation provided for advances to purchase distribution machinery and
equipment utilized in the Company's Las Vegas, Nevada warehouse and distribution
facility through the delivery, installation and acceptance date of the
equipment. There were $1,432,000 in borrowings outstanding under the lease at
March 31, 2000. Outstanding borrowings are repaid in quarterly installments
through October 1, 2003, down to a $1 purchase option, bearing a fixed implicit
rate, as defined, of 7.719%.
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, 2000,
the Company was in compliance with all financial and operating covenants.
Machinery and equipment under capital leases at March 31, 2000 and 1999 are
summarized as follows:
(In thousands) 2000 1999
-------- --------
Machinery and equipment $ 1,775 $ 1,775
Less accumulated amortization 232 --
-------- --------
$ 1,543 $ 1,775
======== ========
Future minimum lease payments by year at March 31, 2000 for property under
capital leases are as follows:
(In thousands)
Fiscal Amount
------ ------------
2001 $ 471
2002 471
2003 471
2004 235
------------
Total minimum lease payments 1,648
Less amount representing interest at 7.719% 216
------------
Present value of minimum lease payments $ 1,432
============
--------------------------------------------------------------------------------
Image Entertainment, Inc. 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 10. 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 new lease commenced April
1, 2000 and provides for monthly rent of $17,450, with annual upward adjustments
based upon the consumer price index (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 five-year lease term commenced May 1, 1999 and co-terminates
with the corporate office space lease on April 30, 2004. The lease provides for
monthly rent of $10,400 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. In consideration for the early
termination of the lease which would have otherwise terminated on March 31,
2000, the Company paid $50,000. Effective May 16, 1999, the Company relocated
its warehousing and distribution operations to Nevada.
The lease for Planet's Westminister, California (8,102 square feet) retail store
provides for monthly rent of $14,400 (subject to annual adjustment based upon
increases in the CPI). The lease terminates on November 22, 2002.
Future minimum annual rental payments by year under operating leases at March
31, 2000 are approximately as follows:
Fiscal Amount
-------------- ------------
(In thousands)
2001 $ 509
2002 513
2003 442
2004 341
2005 29
------------
$ 1,834
============
Rent expense was $409,000, $487,000 and $570,000 for fiscal 2000, 1999 and 1998,
respectively.
Other. At March 31, 2000, the Company's future obligations by year 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:
Fiscal Amount
-------------- ------------
(In thousands)
2001 $ 8,276
2002 213
------------
$ 8,489
============
At March 31, 2000, the Company had $550,000 of outstanding standby letters of
credit issued by Foothill of which $250,000 expire on November 18, 2000 and
$300,000 expire on June 30, 2001. These letters of credit secure balances due to
program suppliers.
--------------------------------------------------------------------------------
42 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 11. Stock Awards, Options and Warrants.
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, 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 stock unit shall either vest or be forfeited not more than 10 years
from the date of grant. The new plan contemplates annual automatic grants of
stock units payable in shares of the Company's common stock to certain directors
of the Company in lieu of the 15,000 share option grants under the directors'
stock option plan. The new plan terminates on June 30, 2008.
In July 1999 and 1998 an aggregate 91,662 and 88,359, respectively, stock units
were granted to officers of the Company under the new plan. These grants vest
annually in increments of 20% over the five-year period commencing June 30, 2000
and 1999, respectively. Accelerated vesting may occur if certain fiscal earnings
before interest, taxes, depreciation and amortization targets are achieved (they
were not achieved in fiscal 2000 or 1999). The number of stock units 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 ($6.781 per share in fiscal 2000 and $6.70 per share in fiscal 1999) to
determine the number of stock units. These stock units are payable solely in
shares. The Company amortizes the total value of the stock units on the date of
grant ($622,000 for the fiscal 2000 grant and $592,000 for the fiscal 1999
grant) ratably over the 5-year vesting period as compensation expense.
Compensation expense relating to these stock units for fiscal 2000 and 1999 was
approximately $200,000 and $89,000, respectively.
In October 1999, awards to directors aggregating 6,720 stock units were granted.
These grants vest on a pro rata basis over a one-year period commencing October
1, 1999. These stock units are payable solely in shares. The Company amortizes
the total value of the stock units on the date of the grant (approximately
$30,000 at $4.531 per share) ratably over the one year vesting period as
compensation expense. Compensation expense relating to these stock units for
fiscal 2000 was approximately $15,000.
Stock option transactions, including the Company's former plans, for the three
years ended March 31, 2000 are as follows:
Weighted
Per Share Average Price
(In thousands, except per share data) Shares Price Range Per Share
--------- ------------ -------------
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
Granted 152 4.938-6.668 6.523
Exercised (34) .817-5.625 1.787
Canceled (33) .817-7.25 6.134
--------- -------------
Outstanding, March 31, 2000 1,167 $3.25-10.25 $ 6.950
========= =============
--------------------------------------------------------------------------------
Image Entertainment, Inc. 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Of the options reflected as outstanding on March 31, 2000, options to purchase
approximately 1,055,000 shares of common stock were exercisable. At March 31,
2000, there were approximately 798,000 shares of common stock available for new
awards, including stock options, to directors and employees of the Company.
The following table summarizes significant ranges of outstanding and exercisable
options at March 31, 2000:
<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 15 7.3 $ 3.250 15 $ 3.250
$4.01 to $6.00 225 3.2 5.519 213 5.530
$6.01 to $8.00 829 5.6 7.180 729 7.227
$8.01 to $10.00 85 4.0 8.647 85 8.647
over $10.00 13 1.8 10.250 13 10.250
-------------- --------------
1,167 1,055
============== ==============
</TABLE>
A December 29, 1987 stock purchase agreement provides for the grant of
antidilution rights to various investors. Each investor is entitled to
(antidilution) 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
(referred to in the Agreement as 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 503,273 shares had been exercised (as to
26,664 shares in fiscal 2000, 4,521 shares in fiscal 1999 and 19,697 shares in
fiscal 1998, at per-share exercise prices ranging from $.74 to $1.07). The
remaining rights to purchase 3,743 shares expired prior to March 31, 2000. There
were no outstanding rights to purchase shares as of March 31, 2000.
Upon certain issuances of shares of common stock other than pursuant to the
exercise of Management Options, the investors will be granted additional rights
so that the equity interest represented by the Agreement shares held by the
investor (excluding the shares purchased upon the exercise of the antidilution
rights issued in connection with the exercise of Management Options) will not be
diluted. As of March 31, 2000, Other rights granted to purchase approximately
851,616 shares of common stock had been exercised (none of which were exercised
during the three years ended March 31, 2000).
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
--------------------------------------------------------------------------------
44 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2000:
(In thousands, except per share data) 2000 1999 1998
------ ------ --------
Consolidated Net Income (Loss):
As reported $1,415 $1,706 $ (9,581)
Pro forma $1,106 $1,382 $(10,076)
====== ====== ========
Consolidated Net Income (Loss) per Share:
As reported
Basic and diluted $ .09 $ .12 $ (.71)
====== ====== ========
Pro forma
Basic and diluted $ .07 $ .10 $ (.75)
====== ====== ========
The weighted-average fair value of options granted during fiscal 2000, 1999 and
1998 was $6.52, $4.49 and $3.25, respectively, using the Black-Scholes option-
pricing model with the following weighted-average assumptions: Fiscal 2000, 1999
and 1998 -- expected volatility of 60% - 78%, risk-free interest rates of 5.5% -
6.5%, 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 2000, 1999 and 1998. 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) per share amounts presented above because compensation cost is reflected
over the option vesting periods of up to five years and compensation cost for
options granted prior to April 1, 1995 are not considered.
Note 12. 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, 2000:
<TABLE>
<CAPTION>
(In thousands, except per share data) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss) $ 1,415 $ 1,706 $(9,581)
======= ======= =======
Weighted average common shares outstanding -- basic 16,452 14,185 13,471
Effect of dilutive securities 38 124 --
------- ------- -------
Weighted average common shares outstanding -- diluted 16,490 14,309 13,471
======= ======= =======
Basic and diluted net income (loss) per share $ .09 $ .12 $ (.71)
======= ======= =======
</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 (common stock options and common stock underlying the convertible
subordinated note payable) would be antidilutive. Outstanding common stock
options not included in the computation of diluted net income per share totaled
927,000 and 800,000, respectively, for the years ended March 31, 2000 and 1999.
The stock options were excluded because their exercise prices were greater than
the average market price of the common stock for the respective periods and the
assumed exercise would be antidilutive. The 1,379,000 common shares underlying
the convertible subordinated note payable were excluded because the assumed
conversion for the respective periods would be antidilutive.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 13. Income Taxes.
Income tax expense (benefit) for the three years ended March 31, 2000, all
current, are summarized as follows:
(In thousands) 2000 1999 1998
------ ------ ------
Federal $ -- $ 88 $ (55)
State -- 2 3
------ ------ ------
$ -- $ 90 $ (52)
======= ====== ======
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets at March 31, 2000 and 1999 are presented below:
(In thousands) 2000 1999
-------- --------
Deferred tax assets:
Reserve for slow-moving inventories $ 2,538 $ 3,947
Net operating loss carryforwards 2,040 754
Other 618 549
Sales returns reserve 376 313
Tax credits 329 329
Reserve for doubtful accounts receivable 221 210
Royalty reserves 13 175
Installment sales -- 396
Store closure expenses -- 44
-------- --------
Deferred tax assets 6,135 6,717
Less valuation allowance (6,135) (6,717)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The Company provides a valuation allowance on the deferred tax assets because of
uncertainty regarding its realizability.
Expected income tax expense based on Federal statutory rates for the three years
ended March 31, 2000 differed from actual tax expense as follows:
(In thousands) 2000 1999 1998
----- ----- -------
Expected income tax expense (benefit) $ 481 $ 626 $(3,275)
State income taxes, net of Federal benefit 89 73 3
Change in valuation allowance (582) (675) 3,206
Other 12 66 14
----- ----- -------
$ -- $ 90 $ (52)
===== ===== =======
Note 14. Other Items - Statements of Operations.
Fourth Quarter Adjustments in Fiscal 2000 and Fiscal 1998.
---------------------------------------------------------
During the fourth quarter of fiscal 2000, the Company reached a final settlement
relating to its on-going litigation with LEI Partners, L.P. and a number of
related entities and individuals. The Company recorded a pretax gain of
$709,000 during the fourth quarter ended March 31, 2000 relating to certain
settlements and a pretax gain of $899,000 for the year ended March 31, 2000
covering all settlements relating to this litigation. The gain on settlements
is included as a component of other income in the accompanying consolidated
statement of operations for the year ended March 31, 2000. A receivable related
to this settlement of $540,000 is included as a component of prepaid expenses
and other assets in the accompanying consolidated balance sheet at March 31,
2000. The receivable was collected in full by May
--------------------------------------------------------------------------------
46 Image Entertainment, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
31, 2000. Total principal, interest and settlement payments received by the
Company over the years relating to the December 1990 sale of a business segment
totaled $2,240,000, net of related legal fees.
In June 2000, the Company reached a settlement, subject to court approval, in
connection with certain alleged preferential transfers relating to the Chapter
11 bankruptcy of Alliance. During the fourth quarter of fiscal 2000, the Company
accrued $300,000, including estimated legal fees, as a component of general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal 2000.
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
laserdisc inventory to its net realizable value and to provide for estimated
losses on laserdisc license and exclusive distribution agreements, respectively.
The provisions were in response to a greater than expected decline in the
Company's quarterly laserdisc sales and the continued adverse effect DVD has had
on the laserdisc 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 laserdisc trends and the incrementally adverse impact
these trends had on the Company's operations during the fourth quarter of fiscal
1998 and the Company's operations in the then-foreseeable future. The charges
were 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 non-
recurring 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.
Note 15. Employee Benefit Plan.
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the rate of 50% of the first 4% of
salary contributed. The Company's 401(k) savings plan matching expense for
fiscal 2000, 1999 and 1998 were $88,000, $80,000 and $63,000, respectively.
Note 16. Segment Information.
In accordance with the requirements of SFAS No. 131, Disclosures about Segments
of and Enterprises and Related Information, selected financial information
regarding the Company's reportable business segments, wholesale distribution,
retail distribution (through Planet), and international distribution (through
Aviva), are presented below. The largest business segment is wholesale
distribution of entertainment programming (primarily DVD and laserdisc).
Management currently evaluates segment performance based primarily on net sales,
operating costs and expenses and income (loss) before income taxes. Interest
income and expense is evaluated on a consolidated basis and not allocated to the
Company's business segments. Comparable data for fiscal 1998 is not presented as
Planet was acquired in January 1999, the Company did not track retail
distribution sales of U.S. Laser in fiscal 1998 and the Company did not begin
international distribution until fiscal 2000.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For the Year Ended March 31, 2000:
<TABLE>
<CAPTION>
2000
------------------------------------------------------------------------------------
Wholesale Retail International Inter-segment
(In thousands) Distribution Distribution/(1)/ Distribution/(2)/ Eliminations Consolidated
------------ ----------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 80,406 $ 14,742 $ 250 $ (11,729) $ 83,669
OPERATING COSTS AND EXPENSES:
Cost of sales 59,164 12,530 152 (11,690) 60,156
Selling expenses 5,637 2,517 567 -- 8,721
General and administrative expenses 7,229/(3)/ 1,242 164 -- 8,635/(3)/
Amortization of production costs 3,992 -- -- -- 3,992
Amortization of goodwill -- 503 -- -- 503
------------ ----------------- ----------------- ------------ ------------
76,022 16,792 883 (11,690) 82,007
------------ ----------------- ----------------- ------------ ------------
OPERATING INCOME (LOSS) 4,384 (2,050) (633) (39) 1,662
OTHER EXPENSES (INCOME):
Interest expense, net 1,562 -- -- -- 1,562
Other (932)/(4)/ -- -- (383) (1,315)/(4)/
------------ ----------------- ----------------- ------------ ------------
(630) -- -- (383) 247
------------ ----------------- ----------------- ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES $ 3,754 $ (2,050) $ (633) $ 344 $ 1,415
============ ================= ================= ============ ============
</TABLE>
______________________
/(1)/ Planet was acquired in January 1999.
/(2)/ Includes consolidated 50%-owned joint venture formed in June 1999.
/(3)/ Includes $300,000 one-time charge for settlement of adversary proceeding.
/(4)/ Includes $899,000 in proceeds from settlements of litigation.
For the Year Ended March 31, 1999:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------
Wholesale Retail Inter-segment
(In thousands) Distribution Distribution/(1)/ Eliminations Consolidated
------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 75,572 $ 3,781 $ (2,627) $ 76,726
OPERATING COSTS AND EXPENSES:
Cost of sales 57,790 3,215 (2,580) 58,425
Selling expenses 5,001 438 -- 5,439
General and administrative expenses 5,662 354 -- 6,016
Amortization of production costs 4,057 -- -- 4,057
Amortization of goodwill -- 111 -- 111
------------ ----------------- ------------ ------------
72,510 4,118 (2,580) 74,048
------------ ----------------- ------------ ------------
OPERATING INCOME (LOSS) 3,062 (337) (47) 2,678
INTEREST EXPENSE, NET 882 -- -- 882
------------ ----------------- ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES $ 2,180 $ (337) $ (47) $ 1,796
============ ================= ============ ============
</TABLE>
_____________________
(1) Planet was acquired in January 1999.
As of March 31,
------------------------
(In thousands) 2000 1999
----------- ----------
Total Assets:
Wholesale distribution $ 59,376 $ 56,599
Retail distribution 6,000 1,362
International distribution 1,264 --
Inter-segment eliminations (1,245) (1,516)
----------- ----------
Consolidated total assets $ 65,395 $ 56,445
=========== ==========
--------------------------------------------------------------------------------
48 Image Entertainment, Inc.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 17. Quarterly Financial Data. (Unaudited)
Summarized quarterly financial data for fiscal 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
(In thousands, except per share data) --------------------- --------------------- ----------------- ------------------
1999 1998 1999 1998 1999 1998 2000 1999
------- -------- -------- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $18,020 $17,140 $17,817 $13,834 $25,067 $22,715 $22,765 $23,037
Operating income (loss) (633) 367 (527) (532) 1,547 1,474 1,275 1,369
Net income (loss) (714) 205 (842) (687) 1,261 1,129 1,710 1,059
Net income (loss) per share/ (1)/ --
Basic $ (.04) $ .02 $ (.05) $ (.05) $ .08 $ .08 $ .10 $ .07
Diluted $ (.04) $ .02 $ (.05) $ (.05) $ .08 $ .08 $ .10 $ .06
Shares used in computation of net
income (loss) per share --
Basic 16,431 13,506 16,457 13,546 16,459 13,551 16,462 16,196
Diluted 16,431 13,614 16,457 13,546 17,843 14,994 17,847 16,529
</TABLE>
___________________________
(1) 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. 49
<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 in connection with the Company's 2000 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 Securities and
Exchange Commission in connection with the Company's 2000 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 Securities and Exchange Commission in connection with the
Company's 2000 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 Securities and Exchange Commission in connection with the Company's
2000 Annual Meeting of Shareholders.
--------------------------------------------------------------------------------
50 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.......................................................................... 27
Consolidated Balance Sheets at March 31, 2000 and 1999................................................ 28
Consolidated Statements of Operations for the years ended
March 31, 2000, 1999 and 1998............................................................. 30
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 2000, 1999 and 1998............................................................. 31
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998............................................................. 32
Notes to Consolidated Financial Statements............................................................ 35
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts....................................................... 52
</TABLE>
3. Exhibits:
See the Exhibit Index on pages i - v.
(b) REPORTS ON FORM 8-K.
None.
--------------------------------------------------------------------------------
Image Entertainment, Inc. 51
<PAGE>
SCHEDULE II
-- Valuation and Qualifying Accounts --
For the Years Ended March 31, 2000, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
-------------------------------------------------------------------------
Additions
Charged to
Balance at (Recoveries of) 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, 2000: $ 525 $ 384 $ (358) $ 551
============= =============== ============ =============
For the Year Ended March 31, 1999: $ 404 $ 144 $ (23) $ 525
============= =============== ============ =============
For the Year Ended March 31, 1998: $ 1,629 $ (331) $ (894) $ 404
============= =============== ============ =============
<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, 2000: $ 2,950 $ 6,463 $ (6,300) $ 3,113
============= =============== ============ ============
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
============= =============== ============ ============
<CAPTION>
Reserve for Slow-Moving Inventories
------------------------------------------------------------------------
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, 2000: $ 9,291 $ 1,010 $ (3,956) $ 6,345
============= =============== ============ ============
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
============= =============== ============ ============
</TABLE>
--------------------------------------------------------------------------------
52 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 27, 2000 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 27, 2000 /s/ MARTIN W. GREENWALD
------------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer
Dated: June 27, 2000 /s/ JEFF M. FRAMER
------------------------------------------------
JEFF M. FRAMER,
Chief Financial Officer (Principal Financial and
Accounting Officer)
Dated: June 27, 2000 /s/ STUART SEGALL
-----------------------------------------------
STUART SEGALL,
Vice President & Director
Dated: June 27, 2000 /s/ IRA EPSTEIN
-----------------------------------------------
IRA EPSTEIN,
Director
Dated: June 27, 2000 /s/ M. TREVENEN HUXLEY
-----------------------------------------------
M. TREVENEN HUXLEY,
Director
--------------------------------------------------------------------------------
Image Entertainment, Inc. 53
<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. Filed as Exhibit 4.2 to the
Company's Form 10-K for the fiscal year ended March 31, 1999, and
incorporated by reference herein.
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.
10.5(a) Form of Employee (Nonqualified) Stock Option Grant Agreement
under the Company's 1998 Incentive Plan. Filed as Exhibit 10.5(a)
to the Company's Form 10-K for the fiscal year ended March 31,
1999, and incorporated by reference herein.
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.
________________________________________________________________________________
Image Entertainment, Inc. i
<PAGE>
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 + Form of 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 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.
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 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.
10.16 + 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 1999 Performance Restricted Stock Unit Award Agreement,
dated as of July 1, 1999 (and related 1999 General Provisions),
between the Company and each of Martin W. Greenwald, Cheryl Lee,
Jeff Framer and David Borshell. Filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1999, and
incorporated by reference herein.
10.18 +* Form of Director Stock Unit Award Agreement, dated as of October
1, 1999, between the Company and each of Ira Epstein, M. Trevenen
Huxley and Stuart Segall.
10.19 + 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.
________________________________________________________________________________
ii Image Entertainment, Inc.
<PAGE>
10.20 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.
10.20(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.
10.21 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.
10.22 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.
10.23 Standard Industrial Lease for 9333 Oso Avenue, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.1 of the Company's Form 10-Q for the quarter ended December
31, 1993, and incorporated by reference herein.
10.23(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. Filed as Exhibit 10.24(a) to the
Company's Form 10-K for the fiscal year ended March 31, 1999, and
incorporated by reference herein.
10.23(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. Filed as Exhibit 10.24(b) to the
Company's Form 10-K for the fiscal year ended March 31, 1999, and
incorporated by reference herein.
10.24 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. Filed as Exhibit
10.25 to the Company's Form 10-K for the fiscal year ended March
31, 1999, and incorporated by reference herein.
10.25 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.
10.25(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.
10.25(b) Amendment No. 2, dated as of June 29, 1998, to Business Loan
Agreement, dated as of March 10, 1997, by and between the Company
and Bank of America National Trust and Savings Association. Filed
as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended
June 30, 1998, and incorporated by reference herein.
--------------------------------------------------------------------------------
Image Entertainment, Inc. iii
<PAGE>
10.25(c) Amendment No. 3, dated as of November 3, 1999, to Business Loan
Agreement, dated as of March 10, 1997, by and between the Company
and Bank of America, NA, successor by merger to Bank of America
National Trust and Savings Association. Filed as Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended September 30, 1999,
and incorporated by reference herein.
10.26 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.
10.26(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.
10.26(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.
10.26(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, and incorporated
by reference herein.
10.27 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.
10.27(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.
10.27(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.
10.27(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.
10.27(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.
10.27(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.
10.27(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.
10.27(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, and
incorporated by reference herein.
________________________________________________________________________________
iv Image Entertainment, Inc.
<PAGE>
10.27(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, and
incorporated by reference herein.
10.28 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.
10.29 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, and incorporated by
reference herein.
10.29(a) Amendment No. 1, dated as of November 1, 1999, to Loan and
Security Agreement, dated as of December 28, 1998, by and between
the Company and Foothill Capital Corporation. Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended September
30, 1999, and incorporated by reference herein.
10.29(b) Amendment No. 2, dated as of February 8, 2000, to Loan and
Security Agreement, dated as of December 28, 1998, by and between
the Company and Foothill Capital Corporation. Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended December
31, 1999, and incorporated by reference herein.
10.30 Limited Liability Company Operating Agreement of Aviva
International, LLC, dated as of June 21, 1999, by and between the
Company and Michael Lopez. Filed as Exhibit 10.2 to the Company's
Form 10-Q for the quarter ended June 30, 1999, and incorporated
by reference herein.
10.30(a) * First Amendment, dated as of April 28, 2000, to Limited Liability
Company Operating Agreement of Aviva International, LLC, dated as
of June 21, 1999, by and between the Company and Michael Lopez.
21 * Subsidiaries of the Registrant.
23 * Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
27 * Financial Data Schedule Fiscal Year Ended March 31, 2000.
______________________________________
* Exhibit(s) not previously filed with the Securities
and Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
--------------------------------------------------------------------------------
Image Entertainment, Inc. v
