-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A7W3UZt772dbZiRu1OMOOnR5w9javjfKvF782A8awi+vQhFw2+Bwe1FIQrgYPI68 jWg9E1l2ab7MDmyz8wI36g== 0000898430-01-503416.txt : 20020410 0000898430-01-503416.hdr.sgml : 20020410 ACCESSION NUMBER: 0000898430-01-503416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMAGE ENTERTAINMENT INC CENTRAL INDEX KEY: 0000216324 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 840685613 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11071 FILM NUMBER: 1783369 BUSINESS ADDRESS: STREET 1: 9333 OSO AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8184079100 MAIL ADDRESS: STREET 1: 9333 OSO AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 FORMER COMPANY: FORMER CONFORMED NAME: KEY INTERNATIONAL FILM DISTRIBUTORS INC DATE OF NAME CHANGE: 19830719 10-Q 1 d10q.txt FORM 10-Q, FOR PERIOD ENDED 9/30/2001 ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2001 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 (I.R.S. Employer of incorporation) Identification Number) 9333 Oso Avenue, Chatsworth, California 91311 (Address of principal executive offices, including zip code) (818) 407-9100 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( x ) NO ( ) Number of shares outstanding of the registrant's common stock on November 5, 2001: 15,828,253 ================================================================================ ================================================================================ PART I - FINANCIAL INFORMATION ================================================================================ ITEM 1. Financial Statements. -------------------- IMAGE ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEETS (unaudited) September 30, 2001 and March 31, 2001 ________________________________________________________________________________ ASSETS
(In thousands) September 30, 2001 March 31, 2001 ------------------ -------------- Cash and cash equivalents $ 1,365 $ 606 Accounts receivable, net of allowances of $4,617 - September 30, 2001; $4,470 - March 31, 2001 11,768 14,393 Inventories 18,731 18,622 Royalty and distribution fee advances 17,488 12,879 Prepaid expenses and other assets 2,219 2,442 Deferred tax assets 5,013 4,254 Property, equipment and improvements, net of accumulated depreciation and amortization of $8,669 - September 30, 2001; $7,318 - March 31, 2001 14,554 14,559 Goodwill, net of accumulated amortization of $1,377 - September 30, 2001; $1,123 - March 31, 2001 6,251 6,506 ------------------ -------------- $ 77,389 $ 74,261 ================== ==============
See accompanying notes to consolidated financial statements -1- IMAGE ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEETS (unaudited) September 30, 2001 and March 31, 2001 ________________________________________________________________________________ LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) September 30, 2001 March 31, 2001 ------------------ -------------- LIABILITIES: Accounts payable and accrued liabilities $ 16,403 $ 18,511 Accrued royalties and distribution fees 4,268 4,460 Revolving credit and term loan facilities 8,486 2,603 Revolving loan facility -- disc manufacturer 6,500 6,500 Real estate credit facility 2,918 3,004 Capital lease obligations 1,738 1,061 Equipment line of credit 891 647 Convertible subordinated note payable 5,000 5,000 ------------------ -------------- Total liabilities 46,204 41,786 ------------------ -------------- SHAREHOLDERS' EQUITY: Preferred stock, $1 par value, 3,366,000 shares authorized; none issued and outstanding -- -- Common stock, no par value, 30,000,000 shares authorized; 15,822,000 and 15,849,000 issued and outstanding at September 30, 2001 and March 31, 2001, respectively 29,824 29,765 Additional paid-in capital 3,320 3,320 Accumulated deficit (1,959) (610) ------------------ -------------- Net shareholders' equity 31,185 32,475 ------------------ -------------- $ 77,389 $ 74,261 ================== ==============
See accompanying notes to consolidated financial statements -2- IMAGE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Three Months Ended September 30, 2001 and 2000 ________________________________________________________________________________ (In thousands, except per share data) 2001 2000 -------- -------- NET REVENUES $ 21,070 $ 25,580 OPERATING COSTS AND EXPENSES: Cost of sales 15,127 17,882 Selling expenses 2,237 2,297 General and administrative expenses 3,077 2,323 Amortization of production costs 1,279 1,203 Amortization of goodwill 127 127 -------- -------- 21,847 23,832 -------- -------- EARNINGS (LOSS) FROM OPERATIONS (777) 1,748 OTHER EXPENSES (INCOME): Interest expense, net 499 419 Other 63 (479) -------- -------- 562 (60) -------- -------- EARNINGS (LOSS) BEFORE INCOME TAXES (1,339) 1,808 INCOME TAX (BENEFIT) EXPENSE (483) 55 -------- -------- NET EARNINGS (LOSS) $ (856) $ 1,753 ======== ======== NET EARNINGS (LOSS) PER SHARE: Basic $ (.05) $ .11 Diluted $ (.05) $ .10 ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 15,821 16,479 ======== ======== Diluted 15,821 17,876 ======== ======== See accompanying notes to consolidated financial statements -3- IMAGE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Six Months Ended September 30, 2001 and 2000 ________________________________________________________________________________ (In thousands, except per share data) 2001 2000 ---------- ---------- NET REVENUES $ 41,550 $ 49,547 OPERATING COSTS AND EXPENSES: Cost of sales 29,761 34,727 Selling expenses 4,285 4,234 General and administrative expenses 5,803 4,582 Amortization of production costs 2,586 2,202 Amortization of goodwill 254 254 ---------- ---------- 42,689 45,999 ---------- ---------- EARNINGS (LOSS) FROM OPERATIONS (1,139) 3,548 OTHER EXPENSES (INCOME): Interest expense, net 925 849 Other 44 (464) ---------- ---------- 969 385 ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES (2,108) 3,163 INCOME TAX (BENEFIT) EXPENSE (759) 95 ---------- ---------- NET EARNINGS (LOSS) $ (1,349) $ 3,068 ========== ========== NET EARNINGS (LOSS) PER SHARE: Basic $ (.09) $ .19 Diluted $ (.09) $ .18 ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 15,819 16,469 ========== ========== Diluted 15,819 17,860 ========== ========== See accompanying notes to consolidated financial statements -4- IMAGE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Six Months Ended September 30, 2001 and 2000 ________________________________________________________________________________
(In thousands) 2001 2000 ---------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (1,349) $ 3,068 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Amortization of production costs 2,586 2,202 Amortization of goodwill 254 254 Depreciation and other amortization 1,361 981 Deferred income taxes (759) -- Amortization of restricted stock units 98 130 Provision for lower of cost or market inventory writedowns 244 120 Provision for estimated doubtful accounts receivable 150 442 Gain on sale of land -- (499) Changes in assets and liabilities associated with operating activities: Accounts receivable 2,475 (4,777) Inventories (353) (428) Royalty and distribution fee advances, net (4,609) (2,245) Production cost expenditures (2,586) (3,079) Prepaid expenses and other assets 223 (156) Accounts payable, accrued royalties and liabilities (2,250) 5,562 ---------------- -------------- Net cash (used in) provided by operating activities (4,515) 1,575 ---------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,356) (1,775) Net proceeds from sale of land -- 1,399 ---------------- -------------- Net cash used in investing activities (1,356) (376) ---------------- --------------
See accompanying notes to consolidated financial statements -5- IMAGE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (unaudited) For the Six Months Ended September 30, 2001 and 2000 ________________________________________________________________________________
(In thousands) 2001 2000 ------------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances under revolving credit and term loan facility $ 47,761 $ 43,517 Advances under equipment line of credit 244 411 Advances under capital lease obligation 915 -- Repayment of advances under revolving credit and term loan facility (41,878) (44,767) Repayment of advances under real estate credit facility (86) (86) Principal payments under capital lease obligations (213) (182) Repurchase of common stock (113) (421) ------------------- ---------------- Net cash provided by (used in) financing activities 6,630 (1,528) ------------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 759 (329) Cash and cash equivalents at beginning of period 606 1,532 ------------------- ---------------- Cash and cash equivalents at end of period $ 1,365 $ 1,203 =================== ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 681 $ 860 =================== ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: On July 9, 2001 and June 30, 2000, the Company issued 19,884 and 28,674 shares of common stock, respectively, to officers (net of shares withheld for payment of related income taxes) in connection with the vesting of restricted stock units. The Company increased common stock at July 9, 2001 and June 30, 2000 by approximately $172,000 and $215,000, respectively, such amounts representing the value of the total vested shares as of the respective grant dates less the value of shares withheld for payment of related income taxes on the vesting dates. See accompanying notes to consolidated financial statements -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- Note 1. Basis of Presentation. The accompanying consolidated financial statements include the accounts of Image Entertainment, Inc. ("Image"), its wholly-owned subsidiary DVDPlanet.com, Inc. (formerly known as Image Newco, Inc., doing business as Ken Crane's DVD/Laserdisc and DVDPlanet.com, Inc. ("DVDPlanet")), and Image's controlled, 50%-owned joint venture, Aviva International, LLC ("Aviva") (collectively, the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation. DVDPlanet was acquired in January 1999 and Aviva was formed in June 1999. The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of the Company for the year ended March 31, 2001. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2001, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2002. The accompanying consolidated financial information for the three and six months ended September 30, 2001 and 2000 should be read in conjunction with the Financial Statements, the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended March 31, 2001. The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The significant areas requiring the use of management's estimates are related to allowances for lower of cost or market inventory writedowns, 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 management's estimates. Certain fiscal 2001 balances have been reclassified to conform with the fiscal 2002 presentation. Note 2. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142. SFAS No. 142 must be adopted in fiscal years beginning after December 15, 2001, as of the beginning of the fiscal year. The Company is currently evaluating the effects that the adoption of SFAS No. 141 and Statement No. 142 will have on its financial position and results from operations. The Company does have goodwill recorded and anticipates adopting Statement No. 142 on April 1, 2002. -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- Note 3. Inventories. Inventories at September 30, 2001 and March 31, 2001 are summarized as follows:
September 30, March 31, (In thousands) 2001 2001 ------------------ ----------------- DVD $ 13,106 $ 13,104 Other 925 1,197 ------------------ ----------------- 14,031 14,301 Reserve for lower of cost or market inventory writedowns: DVD (920) (915) Other (336) (720) ------------------ ----------------- (1,256) (1,635) ------------------ ----------------- 12,775 12,666 Production costs, net 5,956 5,956 ------------------ ----------------- $ 18,731 $ 18,622 ================== =================
Inventories consist primarily of finished product for sale and are stated at the lower of average cost or market. Production costs are reflected net of accumulated amortization of $12,768,000 and $10,607,000 at September 30, 2001 and March 31, 2001, respectively. Note 4. Debt. Revolving Credit and Term Loan Facilities. Effective September 30, 2001, the - ----------------------------------------- Company and Foothill Capital Corporation ("Foothill") amended the Company's Loan and Security Agreement dated December 28, 1998 (the "Agreement"). The significant terms amended are as follows: (1) the term of the Agreement was extended three years to December 29, 2004 (the Agreement still contains an automatic renewal provision for successive one-year periods thereafter unless terminated by either the Company or Foothill); (2) certain borrowing base availability limitations were redefined providing the Company with additional borrowing availability under the revolving credit facility of approximately $1,350,000 at September 30, 2001; (3) the minimum interest rate for the facilities was lowered from 7% to 5.75%; (4) the maximum borrowing limit under the capital expenditure term loan facility component of the Agreement was raised from $500,000 to $1,000,000; (5) the tangible net worth financial covenant was redefined, increasing minimum required levels which the Company must maintain quarterly; and, (6) a financial covenant was added requiring the Company to maintain certain minimum levels of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization). At September 30, 2001, the Company had $8,147,000 outstanding under its $15,000,000 revolving credit facility and $339,000 outstanding under its $1,000,000 capital expenditure term loan facility with Foothill. On such date, the Company had borrowing availability of $3,702,000 under its revolving credit facility, net of amounts utilized for an outstanding standby letter of credit, and $661,000 under its capital expenditure term loan facility. Borrowings under the revolving credit and term loan facilities bear interest at prime plus 0.75% (6.75% at September 30, 2001). At September 30, 2001, the Company had one outstanding standby letter of credit in the amount of $150,000 issued by Foothill which has been renewed through November 18, 2002. This standby letter of credit secures trade payables to a program supplier. Real Estate Credit Facility. At September 30, 2001, $2,918,000 in borrowings - --------------------------- were outstanding under the revolving real estate credit facility with Bank of America National Trust and Savings Association in Nevada. Borrowings bear interest at LIBOR plus 2.25% (6.06% at September 30, 2001). The Company may repay and reborrow principal -8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- amounts provided the outstanding borrowings do not exceed the maximum commitment of $2,918,000 at September 30, 2001, reduced quarterly by $43,000. The credit facility expires on January 31, 2008. Capital Lease Obligations. At September 30, 2001, $865,000 in borrowings were - ------------------------- outstanding under the distribution equipment lease facility with BankAmerica Leasing and Capital Corporation. Borrowings bear interest at a fixed rate of 7.719% and are repaid quarterly through October 1, 2003. In July 2001, the Company entered into a capital lease agreement with General Electric Capital Corporation for the lease of DVD production equipment. The term of the lease is 48 months through September 2005. Borrowings under the lease bear interest at 7.58% per annum. Monthly payments, which began September 1, 2001, are approximately $22,000. At September 30, 2001, $873,000 in borrowings were outstanding under the lease. Equipment Line of Credit. The Company's June 28, 2000 equipment line of credit - ------------------------ with Bank of America, N.A. in Nevada was converted into a note payable in the amount of $891,000 on September 30, 2001. Outstanding borrowings under the note are to be repaid in 42 equal principal installments plus interest through maturity on February 28, 2005. The note bears interest at LIBOR plus 2.50% (6.08% at September 30, 2001). Convertible Subordinated Note Payable. At September 30, 2001, the Company had - ------------------------------------- $5,000,000 outstanding under the convertible subordinated note payable to Image Investors Co., bearing interest at 8.0% and due September 29, 2002. At September 30, 2001, the Company was in compliance with all financial and operating covenants under its debt agreements. Note 5. Revolving Loan Facility -- Disc Manufacturer. In March 2001, Image entered into an Optical Disc Replication and Loan Agreement (the "Agreement") with MRT Technology LLC, doing business as Ritek Global Media ("Ritek"). The five-year term of the Agreement commenced August 1, 2001. Under the terms of the Agreement, Ritek has provided Image with a commitment to provide title development funding in the form of a series of advances under an unsecured, non-interest bearing loan. The purpose of Ritek's loan commitment to Image is to assist Image in funding the acquisition of entertainment programming for exclusive United States and/or worldwide distribution, whether through a license or exclusive distribution agreement. Outstanding balances under the loan are subordinate to all of Image's obligations to BankAmerica Leasing and Capital Corporation, Bank of America National Trust and Savings Association of Nevada, Foothill Capital Corporation and Image Investors Co. and all replacements and refinancings of such debt. Repayment of the initial loan of $6,500,000 commenced in October 2001 on a per unit basis of $1.00 for each DVD and $.50 for each CD ordered by the Company from Ritek. Additional advances will be made by Ritek to Image on September 1 of each year from 2002 through 2005 based on prior year orders ($1.00 per DVD and $0.50 per CD) with advances not exceeding $10,000,000 and the final advance in 2005 not exceeding $5,000,000. The agreement contains an option for Ritek to renegotiate the terms if Image fails to meet certain minimum order levels. At September 30, 2001, $6,500,000 was outstanding under the loan from Ritek. As outstanding amounts are non-interest bearing, the Company imputed interest expense of approximately $102,000 and $232,000 for the three and six months ended September 30, 2001, respectively, at Image's incremental borrowing rate. -9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- Note 6. Net Earnings (Loss) per Share. The following presents a reconciliation of the numerators and denominators used in computing basic and diluted net earnings (loss) per share for the three and six months ended September 30, 2001 and 2000:
Three months Three months Six months Six months ended ended ended ended September 30, September 30, September 30, September 30, (In thousands, except per share data) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net earnings (loss) (basic numerator) $ (856) $ 1,753 $ (1,349) $ 3,068 ========== ========== ========== ========== Interest, net of taxes, on assumed conversion of dilutive security -- 97 -- 195 ---------- ---------- ---------- ---------- Net earnings (loss) (diluted numerator) $ (856) $ 1,850 $ (1,349) $ 3,263 ========== ========== ========== ========== Weighted average common shares outstanding(basic denominator) 15,821 16,479 15,819 16,469 ========== ========== ========== ========== Effect of dilutive securities -- 1,397 -- 1,391 ---------- ---------- ---------- ---------- Weighted average common shares outstanding(diluted denominator) 15,821 17,876 15,819 17,860 ========== ========== ========== ========== Net earnings (loss) per share Basic $ (.05) $ .11 $ (.09) $ .19 Diluted $ (.05) $ .10 $ (.09) $ .18 ========== ========== ========== ==========
Diluted net loss per share for the three and six months ended September 30, 2001 is based only on the weighted average number of common shares outstanding for the periods as inclusion of common stock equivalents (outstanding common stock options and common stock underlying the convertible subordinated note payable totaling 1,340,000 and 1,379,000, respectively) would be antidilutive. Outstanding common stock options not included in the computation of diluted net income per share totaled 1,140,000 for the three and six months ended September 30, 2000 and were excluded because their exercise prices were greater than the average market price of the common stock for the periods and the assumed exercise would be antidilutive. Note 7. Sale of Land in Fiscal 2001. In August 2000, the Company closed escrow for the sale (to a real estate developer) of the remaining approximate 4.7 acres of vacant land adjacent to the Company's 8.4 acre warehouse and distribution facility site in Las Vegas, Nevada for net proceeds of approximately $1,399,000. The resulting pretax gain on sale of $499,000 was recorded as other income in the accompanying consolidated statements of operations for the three and six months ended September 30, 2000. Note 8. Segment Information. Selected financial information regarding the Company's reportable business segments, program licensing and production/domestic wholesale distribution ("Domestic Wholesale Distribution"), direct-to-consumer retail distribution (through DVDPlanet) ("Retail Distribution"), and international wholesale distribution/broadcast rights exploitation (through Aviva) ("International Wholesale Distribution"), are presented below. The largest business segment is Domestic Wholesale Distribution of entertainment programming (primarily DVD). Management currently evaluates segment performance based primarily on net revenues, operating costs and expenses and earnings (loss) before income -10- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- taxes. Interest income and expense are evaluated on a consolidated basis and not allocated to the Company's business segments.
For the Three Months Ended September 30, 2001: 2001 -------------------------------------------------------------------------- Domestic International Wholesale Retail Wholesale Inter-segment (In thousands) Distribution Distribution Distribution Eliminations Consolidated ------------- ------------- -------------- ------------ ------------- NET REVENUES $ 16,720 $ 3,923 $ 2,465 $ (2,038) $ 21,070 OPERATING COSTS AND EXPENSES 17,009 4,311 2,619 (2,092) 21,847 ------------- ------------- -------------- ------------ ------------- LOSS FROM OPERATIONS (289) (388) (154) 54 (777) OTHER EXPENSES 499 -- -- 63 562 ------------- ------------- -------------- ------------ ------------- LOSS BEFORE INCOME TAXES $ (788) $ (388) $ (154) $ (9) $ (1,339) ============= ============= ============== ============ ============= For the Three Months Ended September 30, 2000: 2000 -------------------------------------------------------------------------- Domestic International Wholesale Retail Wholesale Inter-segment (In thousands) Distribution Distribution Distribution Eliminations Consolidated ------------- ------------- -------------- ------------ ------------- NET REVENUES $ 23,587 $ 3,840 $ 1,336 $ (3,183) $ 25,580 OPERATING COSTS AND EXPENSES 21,054 4,566 1,393 (3,181) 23,832 ------------- ------------- -------------- ------------ ------------- EARNINGS (LOSS) FROM OPERATIONS 2,533 (726) (57) (2) 1,748 OTHER INCOME (80) -- -- 20 (60) ------------- ------------- -------------- ------------ ------------- EARNINGS (LOSS) BEFORE INCOME TAXES $ 2,613 $ (726) $ (57) $ (22) $ 1,808 ============= ============= ============== ============ ============= For the Six Months Ended September 30, 2001: 2001 -------------------------------------------------------------------------- Domestic International Wholesale Retail Wholesale Inter-segment (In thousands) Distribution Distribution Distribution Eliminations Consolidated ------------- ------------- -------------- ------------ ------------- NET REVENUES $ 34,548 $ 7,695 $ 4,356 $ (5,049) $ 41,550 OPERATING COSTS AND EXPENSES 34,399 8,486 4,895 (5,091) 42,689 ------------- ------------- -------------- ------------ ------------- EARNINGS (LOSS) FROM OPERATIONS 149 (791) (539) 42 (1,139) OTHER EXPENSES 925 -- -- 44 969 ------------- ------------- -------------- ------------ ------------- LOSS BEFORE INCOME TAXES $ (776) $ (791) $ (539) $ (2) $ (2,108) ============= ============= ============== ============ ============= For the Six Months Ended September 30, 2000: 2000 -------------------------------------------------------------------------- Domestic International Wholesale Retail Wholesale Inter-segment (In thousands) Distribution Distribution Distribution Eliminations Consolidated ------------- ------------- -------------- ------------ ------------- NET REVENUES $ 45,625 $ 7,416 $ 2,744 $ (6,238) $ 49,547 OPERATING COSTS AND EXPENSES 40,619 8,898 2,705 (6,223) 45,999 ------------- ------------- -------------- ------------ ------------- EARNINGS (LOSS) FROM OPERATIONS 5,006 (1,482) 39 (15) 3,548 OTHER EXPENSES 350 -- -- 35 385 ------------- ------------- -------------- ------------ ------------- EARNINGS (LOSS) BEFORE INCOME TAXES $ 4,656 $ (1,482) $ 39 $ (50) $ 3,163 ============= ============= ============== ============ =============
-11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- As of ------------------------------- (In thousands) September 30, March 31, 2001 2001 -------------- ------------ Total Assets: Domestic Wholesale Distribution $ 71,242 $ 67,376 Retail Distribution 8,969 9,785 International Wholesale Distribution 5,559 4,369 Inter-segment eliminations (8,381) (7,269) -------------- ------------ Consolidated total assets $ 77,389 $ 74,261 ============== ============ -12- ITEM 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. --------------------- General 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 exclusively and nonexclusively. In addition to the DVD format, the Company distributes some of its exclusive titles in the VHS home video format and the audio portion of certain exclusive programming in the CD format. The Company also secures and exploits broadcast rights for certain of its exclusive titles. Broadcast rights may include exploitation via television, pay-per-view, cable, satellite and radio media. The Company has also begun to secure Internet streaming and digital downloading rights for certain of its exclusive titles. The Company's business strategy is to actively pursue, secure and exploit exclusive rights to entertainment programming in as many home entertainment formats and broadcast media as possible, and in as many territories as possible, for the longest term possible. To this end, the Company has expanded its business and operations to produce its own entertainment programming, with an emphasis on music programming. The Company's three reportable business segments are program licensing and production/domestic wholesale distribution, direct-to-consumer retail distribution and international wholesale distribution/broadcast rights exploitation. Program Licensing & Production/Domestic Wholesale Distribution Segment ---------------------------------------------------------------------- ("Domestic Wholesale Distribution"). Operation of the Domestic Wholesale - ----------------------------------- Distribution segment is conducted by Image. Image distributes entertainment programming on both an exclusive and nonexclusive basis. The exclusive product distributed by Image (DVD and other formats) is typically produced, marketed and sold by Image pursuant to an exclusive grant of rights -- typically a licensing arrangement but sometimes pursuant to an exclusive distribution agreement. The nonexclusive product distributed by Image (mainly DVD format product) is purchased directly from suppliers in final, finished and packaged form. Direct-to-Consumer Retail Distribution Segment ("Retail ------------------------------------------------------- Distribution"). The Company's direct-to-consumer retail distribution operations - -------------- are conducted by DVDPlanet, in conjunction with Image. DVDPlanet specializes in DVD software retailing through its www.DVDPlanet.com and Kencranes.com web sites, and via mail order. DVDPlanet also owns and operates a DVD retail store in Westminster, California. See "Liquidity and Capital Resources --Management's --- Plan to Improve Fiscal 2002 DVDPlanet Operating Results." International Wholesale Distribution/Broadcast Rights Exploitation ------------------------------------------------------------------ Segment ("International Wholesale Distribution"). The Company's international - ------------------------------------------------ wholesale distribution business, and its domestic and international broadcast rights exploitation activities, are conducted by Aviva, in conjunction with Image. Seasonality and Variability. The Company has generally experienced higher sales in the quarters ended December 31 and March 31 due to increased consumer spending associated with the year-end holidays. In addition to seasonality issues, other factors have contributed to variability in the Company's DVD net revenues on a quarterly basis. These factors include: (i) wholesale customer and retail consumer demand for the Company's exclusively distributed programming then in release; (ii) the Company's licensing and distribution activities relating to new exclusive programming; (iii) the extension, termination or non-renewal of existing license and distribution rights; (iv) the Company's marketing and promotional activities; and (v) general and economic changes affecting the buying habits of the Company's customers, particularly those changes affecting consumer demand for DVD hardware and software. Accordingly, the Company's revenues and results of operations may vary significantly from period to period, and the results of any one period may not be indicative of the results of any future periods. -13- The accompanying consolidated financial information for the three and six months ended September 30, 2001 should be read in conjunction with the Financial Statements, the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended March 31, 2001. Results of Operations The Three Months Ended September 30, 2001 Compared to The Three Months Ended September 30, 2000 The following tables present consolidated net revenues by format and net revenues by format as a percentage of total consolidated net revenues for the three months ended September 30, 2001 and 2000. The information in the table below does not represent segment data, but rather is presented for purposes of explaining certain trends within net revenues:
Three Months Ended September 30, ------------------------------- 2001 2000 % Change ------------- -------------- ------------- (in thousands) Net revenues: DVD: Exclusive $ 10,864 $ 16,503 (34.2)% Nonexclusive 7,315 6,821 7.2 ------------- -------------- ------------- Total 18,179 23,324 (22.1) VHS/CD 1,254 849 47.7 Broadcast/Sublicense 1,048 466 124.9 Other 589 941 (37.4) ------------- -------------- ------------- $ 21,070 $ 25,580 (17.6)% ============= ============== ============= As a percentage of consolidated net revenues: DVD: Exclusive 51.6% 64.5% (12.9)% Nonexclusive 34.7 26.7 8.0 ------------- -------------- ------------- Total 86.3 91.2 (4.9) VHS/CD 5.9 3.3 2.6 Broadcast/Sublicense 5.0 1.8 3.2 Other 2.8 3.7 (0.9) ------------- -------------- ------------- 100.0% 100.0% --% ============= ============== =============
The following table presents consolidated net revenues by reportable business segment for the three months ended September 30, 2001 and 2000:
Three Months Ended September 30, ------------------------------- 2001 2000 % Change ------------- -------------- ------------- (in thousands) Net revenues: Domestic Wholesale Distribution $ 14,682 $ 20,404 (28.0)% Retail Distribution 3,923 3,840 2.2 International Wholesale Distribution 2,465 1,336 84.5 ------------- -------------- ------------ Consolidated $ 21,070 $ 25,580 (17.6)% ============= ============== ============
Consolidated net revenues for all segments for the three months ended September 30, 2001 decreased 17.6% to $21,070,000 from $25,580,000 for the three months ended September 30, 2000. Factors that contributed to the decrease in consolidated net revenues for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000 are detailed below. Net revenues for the Company's Domestic Wholesale Distribution segment for the three months ended September 30, 2001 decreased 28.0% to $14,682,000 from net revenues of $20,404,000 for the three months ended September 30, 2000. Net revenues for the Domestic Wholesale Distribution segment for the three months ended -14- September 30, 2001 and 2000 are reflected after elimination of $2,038,000 and $3,183,000, respectively, in inter-segment sales from the Domestic Wholesale Distribution segment to the Retail Distribution segment. Management believes this segment's revenue performance was negatively impacted by economic weakness in the retail sector, as well as the loss of exclusive revenues from the Orion Home Entertainment Corp. ("Orion") and Universal Studios Home Video, Inc. ("Universal") license agreements which expired at the end of the last fiscal year. Revenue generated from these two agreements totaled over $5,500,000 for the September 2000 quarter. Approximately $4,000,000 of this $5,500,000 resulted from a successful sales re-promotion program of previously released exclusive Universal DVD titles. Management believes that future revenue growth will be primarily dependent upon Image's ability to continue to license new exclusive programming as well as renew existing license agreements upon their expiration. Management further believes that revenue generated from new and existing licensing should begin to replace these lost revenue sources for fiscal 2002, but there can be no assurance. See "Liquidity and Capital Resources -- The --- Company's Liquidity Position at September 30, 2001 and Management's Assessment of the Company's Liquidity Position for the Next 12 Months." Net revenues for DVDPlanet, the Company's Retail Distribution segment, for the three months ended September 30, 2001 increased 2.2% to $3,923,000 from net revenues of $3,840,000 for the three months ended September 30, 2000. Net revenues of DVD programming sold by the Retail Distribution segment were up 3.3% to $3,487,000 for the three months ended September 30, 2001 from $3,377,000 for the three months ended September 30, 2000. Net revenues of DVD programming via Internet/mail order increased 13.3% to $2,720,000 for the three months ended September 30, 2001 from $2,401,000 for the three months ended September 30, 2000. While management believes DVDPlanet is benefitting from consolidation in the DVD Internet retailing sector as well as the growing popularity of the DVD format, revenue growth was less than management expected. Management believes economic weakness in the retail sector has also affected DVDPlanet's revenues. In March 2001, DVDPlanet increased its selling prices to customers as well as shipping fees charged customers as part of management's plan to improve fiscal 2002 operating results. See "Liquidity and Capital Resources -- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results." Net revenues for the Company's International Wholesale Distribution segment for the three months ended September 30, 2001 were up 84.5% to $2,465,000 from net revenues of $1,336,000 for the three months ended September 30, 2000. For the three months ended September 30, 2001 and 2000, revenues of approximately $2,002,000 and $1,169,000, respectively, were derived from international wholesale distribution of Image's licensed DVD and VHS programming, either through international subdistribution or international sublicensees. For the three months ended September 30, 2001 and 2000, revenues of approximately $463,000 and $167,000, respectively, were derived from international and domestic broadcast exploitation of the Image's licensed programming. Management expects that projected international growth of DVD player-households should increase the Company's international DVD revenues. Additionally, in September 2001, Aviva added a dedicated broadcast sales executive to further take advantage of broadcast revenue opportunities for the Company's exclusive programming. -15- The following tables present consolidated cost of sales by reportable business segment and as a percentage of related segment net revenues for the the three months ended September 30, 2001 and 2000:
Three Months Ended September 30, --------------------------- 2001 2000 ---------- --------- in thousands) Cost of sales: Domestic Wholesale Distribution $ 10,133 $ 13,631 Retail Distribution 3,195 3,402 International Wholesale Distribution 1,799 849 ---------- -------- Consolidated $ 15,127 $ 17,882 ========== ======== As a percentage of segment net revenues: % Change ------------ Domestic Wholesale Distribution 69.0% 66.8% 2.2% Retail Distribution 81.4 88.6 (7.2) International Wholesale Distribution 73.0 63.5 9.5 ---------- -------- ------------ Consolidated 71.8% 69.9% 1.9% ========== ======== ===========
Consolidated cost of sales for the three months ended September 30, 2001 was $15,127,000, or 71.8% of net revenues, compared to $17,882,000, or 69.9% of net revenues, for the three months ended September 30, 2000. Accordingly, consolidated gross profit margin declined to 28.2% for the three months ended September 30, 2001 from 30.1% for the three months ended September 30, 2000. In general, the Company's cost of sales, as a percentage of net revenues, can vary period to period depending upon the sales mix of higher-margin exclusive programming and lower-margin nonexclusive programming. The sales mix of exclusive and nonexclusive programming and the cost of sales within each category will vary with the availability of and the demand for new and catalogue exclusive and nonexclusive programming. The Company's cost of sales for exclusive programming will vary depending upon specific royalty rates or distribution fees paid to program suppliers and will vary for nonexclusive programming depending upon the cost of the programming from the program suppliers. Gross margins for the Domestic Wholesale Distribution segment, as a percentage of segment net revenues, declined 2.2% to 31.0% for the three months ended September 30, 2001 from 33.2% for the three months ended September 30, 2000. The 2.2% decrease was primarily due to the decrease in higher-margin exclusive revenues as a percentage of total segment revenues for the September 2001 quarter as compared to the September 2000 quarter. Beginning in the quarter ending December 31, 2001, and assuming a similar mix of exclusive and nonexclusive programming sold, management anticipates that its segment gross margins will improve as a result of expected manufacturing cost savings to be realized under the Ritek Global Media manufacturing agreement. See "Liquidity --- and Capital Resources -- New Disc Manufacturing Agreement and Revolving Loan Commitment." Manufacturing under the agreement began August 1, 2001. Gross margins for the Retail Distribution segment, as a percentage of segment net revenues, improved 7.2% to 18.6% for the three months ended September 30, 2001 from 11.4% for the three months ended September 30, 2000. The 7.2% increase was primarily due to the increase in selling prices to customers as well as an increase in shipping fees charged to customers as part of management's plan to improve fiscal 2002 operating results. See "Liquidity and --- Capital Resources -- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results." Gross margins for the International Wholesale Distribution segment, as a percentage of segment net revenues, declined 9.5% to 27.0% for the three months ended September 30, 2001 from 36.5% for the three months ended September 30, 2000. The decline in the gross margins was primarily due to a higher percentage of lower-margin sublicense and broadcast revenues recognized during the September 2001 quarter, as a percentage of overall segment revenues, compared to the September 2000 quarter. Beginning in the quarter ending December 31, 2001, and assuming a similar mix of subdistribution, sublicense and broadcast revenues recognized, management anticipates that its segment -16- gross margins will benefit from expected lower international disc manufacturing costs to be realized under the Ritek Global Media manufacturing agreement. The following tables present consolidated selling expenses by reportable business segment and as a percentage of related segment net revenues for the three months ended September 30, 2001 and 2000:
Three Months Ended September 30, ------------------------------- 2001 2000 % Change ------------- -------------- ------------- (in thousands) Selling expenses: Domestic Wholesale Distribution $ 1,379 $ 1,291 6.8% Retail Distribution 472 661 (28.6) International Wholesale Distribution 386 345 11.9 ------------- -------------- ------------ Consolidated $ 2,237 $ 2,297 (2.6)% ============= ============== ============ As a percentage of segment net revenues: Domestic Wholesale Distribution 9.4% 6.3% 3.1% Retail Distribution 12.0 17.2 (5.2) International Wholesale Distribution 15.7 25.8 (10.1) ------------- -------------- ------------ Consolidated 10.6% 9.0% 1.6% ============= ============== ============
Consolidated selling expenses for the three months ended September 30, 2001 decreased 2.6% to $2,237,000 from $2,297,000 for the three months ended September 30, 2000. As a percentage of consolidated net revenues, consolidated selling expenses for the three months ended September 30, 2001 increased to 10.6% from 9.0% for the three months ended September 30, 2000. Factors that led to the increase in consolidated selling expenses as a percentage of consolidated net revenues for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000 are detailed below. Selling expenses for the Domestic Wholesale Distribution segment were up 6.8% to $1,379,000 for the three months ended September 30, 2001 from $1,291,000 for the three months ended September 30, 2000. As a percentage of segment net revenues, selling expenses for the three months ended September 30, 2001 were 9.4%, up from 6.3% for the three months ended September 30, 2000 due, in part, to spreading of fixed costs over lower comparative quarterly revenue. During the September 2001 quarter, Image incurred comparatively higher advertising and promotional expenditures (higher by $154,000) for specific title and line of programming promotions in an effort to drive exclusive sales. The increased advertising and promotional expenditures were offset, in part, by reduced travel and convention expenditures (lower by $63,000). Selling expenses for the Retail Distribution segment decreased 28.6% to $472,000 for the three months ended September 30, 2001 from $661,000 for the three months ended September 30, 2000. As a percentage of segment net revenues, selling expenses were down 5.2% to 12.0% for the three months ended September 30, 2001, from 17.2% for the three months ended September 30, 2000. Selling expenses for this segment decreased as a percentage of segment net revenues for the September 2001 quarter based upon the staffing reduction, staffing redeployment and other operational changes instituted in the fourth quarter of the fiscal year ended March 31, 2001. See "Liquidity and Capital Resources -- --- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results." Selling expenses for the International Wholesale Distribution segment increased 11.9% to $386,000 for the three months ended September 30, 2001 from $345,000 for the three months ended September 30, 2000. However, as a percentage of segment revenues, selling expenses were down 10.1% to 15.7% for the three months ended September 30, 2001, from 25.8% for the three months ended September 30, 2000. Management has been working with its international subdistributors to reduce segment advertising and promotion expenses as a percentage of segment net revenues. -17- The following tables present consolidated general and administrative expenses by reportable business segment and as a percentage of related segment net revenues for the three months ended September 30, 2001 and 2000: Three Months Ended September 30, ------------------ 2001 2000 % Change -------- -------- -------- (in thousands) General and administrative expenses: Domestic Wholesale Distribution $ 2,360 $ 1,883 25.3% Retail Distribution 517 376 37.5 International Wholesale Distribution 200 64 212.5 -------- -------- ------- Consolidated $ 3,077 $ 2,323 32.5% ======== ======== ======= As a percentage of segment net revenues: Domestic Wholesale Distribution 16.1% 9.2% 6.9% Retail Distribution 13.2 9.8 3.4 International Wholesale Distribution 8.1 4.8 3.3 -------- -------- ------- Consolidated 14.6% 9.1% 5.5% ======== ======== ======= Consolidated general and administrative expenses for the three months ended September 30, 2001 increased 32.5% to $3,077,000 from $2,323,000 for the three months ended September 30, 2000. As a percentage of consolidated net revenues, consolidated general and administrative expenses for the three months ended September 30, 2001 were 14.6%, up from 9.1% for the three months ended September 30, 2000. Factors that led to the increase in consolidated general and administrative expenses for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000 are detailed below. General and administrative expenses for the Domestic Wholesale Distribution segment for the three months ended September 30, 2001 were up 25.3% to $2,360,000 from $1,883,000 for the three months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses for the three months ended September 30, 2001 were 16.1%, up from 9.2% for the three months ended September 30, 2000. The increase in absolute dollar general and administrative expenses for the September 2001 quarter results, in part, from a litigation settlement fee expense accrual (including associated legal fees) totaling $310,000, higher depreciation and amortization expense (higher by $158,000) relating to increased capital expenditures in prior periods, higher personnel costs (higher by $82,000), and higher other legal costs (higher by $52,000). These increases were partially offset by a comparatively lower provision for uncollectible accounts receivable (lower by $127,000) during the September 2001 quarter than for the September 2000 quarter. Additionally, spreading fixed costs over lower comparative net revenues for the September 2001 quarter contributed to the increase in segment general and administrative expenses as a percentage of segment net revenues. General and administrative expenses for the Retail Distribution segment increased 37.5% to $517,000 for the three months ended September 30, 2001 from $376,000 for the three months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses for the three months ended September 30, 2001 were 13.2%, up from 9.8% for the three months ended September 30, 2000. The increase in general and administrative expenses was primarily due to higher depreciation and amortization expenses relating to increased capital expenditures (higher by $53,000), higher management information systems' related costs (personnel and third-party computer programmer services - higher by $45,000), and higher rent (higher by $26,000) for the September 2001 quarter. General and administrative expenses for the International Wholesale Distribution segment increased to $200,000 for the three months ended September 30, 2001 from $64,000 for the three months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses were 8.1% for the three months ended September 30, 2001, up from 4.8% for the three months ended September 30, 2000. The increase in absolute dollar general and administrative expenses was primarily due to increased personnel costs (higher by $75,000) and higher foreign currency exchange loss (higher by $30,000). -18- Amortization of production costs for the three months ended September 30, 2001 increased 6.3% to $1,279,000, or 6.1% of consolidated net revenues, from $1,203,000, or 4.7% of consolidated net revenues, for the three months ended September 30, 2000. This increase resulted primarily from an increase in exclusive international titles released and amortized during the three months ended September 30, 2001 compared to the three months ended September 30, 2000. Amortization of production costs for the three months ended September 30, 2001 and 2000 included $234,000 and $135,000, respectively, attributable to the International Wholesale Distribution segment. The Company anticipates that amortization of production costs will decrease as a percentage of net revenues, beginning in the quarter ending December 31, 2001, as a result of expected production cost savings to be realized under the Ritek Global Media manufacturing agreement. See "Liquidity and Capital Resources -- New Disc Manufacturing Agreement and Revolving Loan Commitment." Production services under the manufacturing agreement began August 1, 2001. Interest expense, net of interest income, for the three months ended September 30, 2001 increased 19.1% to $499,000, or 2.4% of consolidated net revenues, from $419,000, or 1.6% of consolidated net revenues, for the three months ended September 30, 2000. The increase is attributable to higher weighted average outstanding debt levels offset, in part, by lower weighted average interest rate levels during the three months ended September 30, 2001 as compared to the three months ended September 30, 2000. Other expense for the three months ended September 30, 2001 was $63,000 consisting of the minority interest in the net earnings of Aviva. Other income for the three months ended September 30, 2000 was $479,000 consisting of a gain on sale of land of $499,000, net of minority interest in the net earnings of Aviva of $20,000. The Company recorded an income tax benefit for the September 2001 quarter of $483,000, based on an estimated consolidated effective income tax rate of approximately 36%. Income tax expense of $55,000 for the September 2000 quarter reflected an estimated consolidated effective tax rate of approximately 3%. The effective tax rate is subject to on-going review and evaluation by management. Consolidated net loss for the September 2001 quarter was $856,000, or $.05 per basic and diluted share, as compared to consolidated net earnings for the September 2000 quarter of $1,753,000, or $.11 per basic share and $.10 per diluted share. The Six Months Ended September 30, 2001 Compared to The Six Months Ended September 30, 2000 The following tables present consolidated net revenues by format and net revenues by format as a percentage of total consolidated net revenues for the six months ended September 30, 2001 and 2000. The information in the table below does not represent segment data, but rather is presented for purposes of explaining certain trends within net revenues: Six Months Ended September 30, ---------------- 2001 2000 % Change ------- ------- --------- (in thousands) Net revenues: DVD: Exclusive $21,356 $29,556 (27.7)% Nonexclusive 15,263 14,614 4.4 ------- ------- -------- Total 36,619 44,170 (17.1) VHS/CD 2,335 2,120 10.1 Broadcast/Sublicense 1,690 1,410 19.9 Other 906 1,847 (50.9) ------- ------- -------- $41,550 $49,547 (16.1)% ======= ======= ======== -19- As a percentage of consolidated net revenues: DVD: Exclusive 51.4% 59.7% (8.3)% Nonexclusive 36.7 29.5 7.2 ------- ------- ------- Total 88.1 89.2 (1.1) VHS/CD 5.6 4.3 1.3 Broadcast/Sublicense 4.1 2.8 1.3 Other 2.2 3.7 (1.5) ------- ------- ------- 100.0% 100.0% -- % ======= ======= ======= The following table presents consolidated net revenues by reportable business segment for the six months ended September 30, 2001 and 2000: Six Months Ended September 30, ------------------ 2001 2000 % Change ------- ------- -------- (in thousands) Net revenues: Domestic Wholesale Distribution $29,499 $39,387 (25.1)% Retail Distribution 7,695 7,416 3.8 International Wholesale Distribution 4,356 2,744 58.7 ------- ------- ------- Consolidated $41,550 $49,547 (16.1)% ======= ======= ======= Consolidated net revenues for all segments for the six months ended September 30, 2001 decreased 16.1% to $41,550,000 from $49,547,000 for the six months ended September 30, 2000. Factors that contributed to the decrease in consolidated net revenues for the six months ended September 30, 2001 as compared to the six months ended September 30, 2000 are detailed below. Net revenues for the Company's Domestic Wholesale Distribution segment for the six months ended September 30, 2001 decreased 25.1% to $29,499,000 from net revenues of $39,387,000 for the six months ended September 30, 2000. Net revenues for the Domestic Wholesale Distribution segment for the six months ended September 30, 2001 and 2000 are reflected after elimination of $5,049,000 and $6,238,000, respectively, in inter-segment sales from the Domestic Wholesale Distribution segment to the Retail Distribution segment. Management believes this segment's revenue performance was negatively impacted by economic weakness in the retail sector, as well as the loss of exclusive revenues from the Orion and Universal license agreements which expired at the end of the last fiscal year. Revenue generated from these two agreements totaled over $7,500,000 for the September 2000 period. Approximately $4,000,000 of this $7,500,000 resulted from a successful sales re-promotion program of previously released exclusive Universal DVD titles. Management believes that future revenue growth will be primarily dependent upon Image's ability to continue to license new exclusive programming as well as renew existing license agreements upon their expiration. Management further believes that revenue generated from new and existing licensing should begin to replace these lost revenue sources for fiscal 2002, but there can be no assurance. See "Liquidity and Capital Resources -- The --- Company's Liquidity Position at September 30, 2001 and Management's Assessment of the Company's Liquidity Position for the Next 12 Months." Net revenues for DVDPlanet, the Company's Retail Distribution segment, for the six months ended September 30, 2001 increased 3.8% to $7,695,000 from net revenues of $7,416,000 for the six months ended September 30, 2000. Net revenues of DVD programming sold by the Retail Distribution segment were up 7.7% to $6,953,000 for the September 2001 period from $6,453,000 for the September 2000 period. Net revenues of DVD programming via Internet/mail order increased 18.0% to $5,345,000 for the September 2001 period from $4,529,000 for the September 2000 period. While management believes DVDPlanet is benefitting from consolidation in the DVD Internet retailing sector as well as the growing popularity of the DVD format, revenue growth was less than management expected. Management believes the slowing economy has also affected DVDPlanet's revenues. DVDPlanet has increased its selling prices to customers as well as shipping fees charged customers as part of management's plan to improve fiscal 2002 operating results. See "Liquidity and Capital Resources -- Management's Plan to Improve --- Fiscal 2002 DVDPlanet Operating Results." Net revenues for the Company's International Wholesale Distribution segment for the six months ended September 30, 2001 were up 58.7% to $4,356,000 from net revenues of $2,744,000 for the six months ended September -20- 30, 2000. For the six months ended September 30, 2001 and 2000, revenues of approximately $3,629,000 and $1,999,000, respectively, were derived from international wholesale distribution of Image's licensed DVD and VHS programming, either through international subdistribution or international sublicensees. For the six months ended September 30, 2001 and 2000, revenues of approximately $727,000 and $745,000, respectively, were derived from international and domestic broadcast exploitation of the Image's licensed programming. Management expects that projected international growth of DVD player-households should increase the Company's international DVD revenues. The following tables present consolidated cost of sales by reportable business segment and as a percentage of related segment net revenues for the the six months ended September 30, 2001 and 2000: Six Months Ended September 30, ------------------ 2001 2000 -------- -------- (in thousands) Cost of sales: Domestic Wholesale Distribution $ 20,289 $ 26,324 Retail Distribution 6,299 6,579 International Wholesale Distribution 3,173 1,824 -------- -------- Consolidated $ 29,761 $ 34,727 ======== ======== As a percentage of segment net revenues: % Change -------- Domestic Wholesale Distribution 68.8% 66.8% 2.0% Retail Distribution 81.9 88.7 (6.8) International Wholesale Distribution 72.8 66.5 6.3 -------- -------- -------- Consolidated 71.6% 70.1% 1.5% ======== ======== ======== Consolidated cost of sales for the six months ended September 30, 2001 was $29,761,000, or 71.6% of net revenues, compared to $34,727,000, or 70.1% of net revenues, for the six months ended September 30, 2000. Accordingly, consolidated gross profit margin declined to 28.4% for the September 2001 period from 29.9% for the September 2000 period. Gross margins for the Domestic Wholesale Distribution segment, as a percentage of segment net revenues, declined 2.0% to 31.2% for the six months ended September 30, 2001 from 33.2% for the six months ended September 30, 2000. The 2.0% decrease was primarily due to the decrease in higher-margin exclusive revenues as a percentage of total segment revenues for the September 2001 period as compared to the September 2000 period. Beginning in the quarter ending December 31, 2001, and assuming a similar mix of exclusive and nonexclusive programming sold, management anticipates that its segment gross margins will improve as a result of expected manufacturing cost savings to be realized under the Ritek Global Media manufacturing agreement. See "Liquidity and Capital --- Resources -- New Disc Manufacturing Agreement and Revolving Loan Commitment." Manufacturing under the agreement began August 1, 2001. Gross margins for the Retail Distribution segment, as a percentage of segment net revenues, improved 6.8% to 18.1% for the six months ended September 30, 2001 from 11.3% for the six months ended September 30, 2000. The 6.8% increase was primarily due to the increase in selling prices to customers as well as an increase in shipping fees charged to customers for the September 2001 period as part of management's plan to improve fiscal 2002 operating results. See "Liquidity and Capital Resources -- Management's Plan to Improve Fiscal 2002 - --- DVDPlanet Operating Results." Gross margins for the International Wholesale Distribution segment, as a percentage of segment net revenues, declined 6.3% to 27.2% for the six months ended September 30, 2001 from 33.5% for the six months ended September 30, 2000. The decline in the gross margins was primarily due to a higher percentage of lower-margin sublicense revenues recognized during the September 2001 period, as a percentage of overall segment net revenues, compared to the September 2000 period. Beginning in the quarter ending December 31, 2001, and assuming a similar mix of subdistribution, sublicense and broadcast revenue recognized, management anticipates that its segment gross margins -21- will benefit from expected lower international disc manufacturing costs to be realized under the Ritek Global Media manufacturing agreement. The following tables present consolidated selling expenses by reportable business segment and as a percentage of related segment net revenues for the six months ended September 30, 2001 and 2000:
Six Months Ended September 30, ------------------------------- 2001 2000 % Change ------------- -------------- ------------- (in thousands) Selling expenses: Domestic Wholesale Distribution $ 2,508 $ 2,288 9.6% Retail Distribution 909 1,334 (31.9) International Wholesale Distribution 868 612 41.8 ------------- -------------- ------------- Consolidated $ 4,285 $ 4,234 1.2% ============= ============== ============= As a percentage of segment net revenues: Domestic Wholesale Distribution 8.5% 5.8% 2.7% Retail Distribution 11.8 18.0 (6.2) International Wholesale Distribution 19.9 22.3 (2.4) ------------- -------------- ------------- Consolidated 10.3% 8.5% 1.8% ============= ============== =============
Consolidated selling expenses for the six months ended September 30, 2001 increased 1.2% to $4,285,000 from $4,234,000 for the six months ended September 30, 2000. As a percentage of consolidated net revenues, consolidated selling expenses for the September 2001 period increased to 10.3% from 8.5% for the September 2000 period. Factors that led to the increase in consolidated selling expenses for the six months ended September 30, 2001 as compared to the six months ended September 30, 2000 are detailed below. Selling expenses for the Domestic Wholesale Distribution segment were up 9.6% to $2,508,000 for the six months ended September 30, 2001 from $2,288,000 for the six months ended September 30, 2000. As a percentage of segment net revenues, selling expenses for the September 2001 period were 8.5%, up from 5.8% for the September 2000 period due, in part, to spreading of fixed costs over lower comparative six-month revenues. During the September 2001 period, Image incurred comparatively higher promotional expenditures (higher by $200,000) and increased personnel costs (higher by $78,000). In an effort to drive exclusive sales, Image incurred comparatively higher expenditures during the September 2001 period for specific title and line of programming promotions. Selling expenses for the Retail Distribution segment decreased 31.9% to $909,000 for the six months ended September 30, 2001 from $1,334,000 for the six months ended September 30, 2000. As a percentage of segment net revenues, selling expenses were down 6.2% to 11.8% for the September 2001 period, from 18.0% for the September 2000 period. Selling expenses for this segment decreased as a percentage of segment net revenues for the September 2001 period based upon the staffing reduction, staffing redeployment and operational changes initiated in the fourth quarter of the fiscal year ended March 31, 2001. See "Liquidity --- and Capital Resources -- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results." Selling expenses for the International Wholesale Distribution segment increased 41.8% to $868,000 for the six months ended September 30, 2001 from $612,000 for the six months ended September 30, 2000. However, as a percentage of segment revenues, segment selling expenses were down 2.4% to 19.9% for the September 2001 period from 22.3% for the September 2000 period. The September 2001 period had comparatively higher expenditures for advertising and promotion (higher by $145,000) and personnel (higher by $79,000). Although not fully realized during the September 2001 period as a percentage of segment net revenues, management has been working with its international subdistributors to reduce segment advertising and promotion expenses as a percentage of segment net revenues. -22- The following tables present consolidated general and administrative expenses by reportable business segment and as a percentage of related segment net revenues for the six months ended September 30, 2001 and 2000:
Six Months Ended September 30, ------------------------------- 2001 2000 % Change ------------- -------------- ------------- (in thousands) General and administrative expenses: Domestic Wholesale Distribution $ 4,388 $ 3,717 18.1% Retail Distribution 1,024 731 40.1 International Wholesale Distribution 391 134 191.8 ------------- -------------- ------------- Consolidated $ 5,803 $ 4,582 26.6% ============= ============== ============= As a percentage of segment net revenues: Domestic Wholesale Distribution 14.9% 9.4% 5.5% Retail Distribution 13.3 9.9 3.4 International Wholesale Distribution 9.0 4.9 4.1 ------------- -------------- ------------- Consolidated 14.0% 9.2% 4.8% ============= ============== =============
Consolidated general and administrative expenses for the six months ended September 30, 2001 increased 26.6% to $5,803,000 from $4,582,000 for the six months ended September 30, 2000. As a percentage of consolidated net revenues, consolidated general and administrative expenses for the September 2001 period were 14.0%, up from 9.2% for the September 2000 period. Factors that led to the increase in consolidated general and administrative expenses for the September 2001 period as compared to the September 2000 period are detailed below. General and administrative expenses for the Domestic Wholesale Distribution segment for the six months ended September 30, 2001 were up 18.1% to $4,388,000 from $3,717,000 for the six months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses for the September 2001 period were 14.9%, up from 9.4% for the September 2000 period, with the majority of the increase due to the spreading of fixed costs over lower revenues. The increase in absolute dollar general and administrative expenses for the September 2001 period results, in part, from a litigation settlement fee expense accrual (including associated legal fees) totaling $310,000, higher depreciation and amortization expense (higher by $296,000) relating to increased capital expenditures in prior periods, higher other legal costs (higher by $133,000), and higher personnel costs (higher by $122,000). These increases were partially offset by a lower provision for uncollectible accounts receivable (lower by $275,000) for the September 2001 period than that for the September 2000 period. General and administrative expenses for the Retail Distribution segment increased 40.1% to $1,024,000 for the six months ended September 30, 2001 from $731,000 for the six months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses for the September 2001 period were 13.3%, up from 9.9% for the September 2000 period. The increase in general and administrative expenses was primarily due to higher management information systems' related costs (personnel and third-party computer programmer services - higher by $137,000), higher depreciation and amortization expenses relating to increased capital expenditures (higher by $79,000), and higher rent (higher by $62,000) for the September 2001 period. General and administrative expenses for the International Wholesale Distribution segment increased to $391,000 for the six months ended September 30, 2001 from $134,000 for the six months ended September 30, 2000. As a percentage of segment net revenues, general and administrative expenses were 9.0% for the September 2001 period, up from 4.9% for the September 2000 period. The increase in absolute dollar general and administrative expenses for the September 2001 period was primarily due to increased personnel costs (higher by $141,000) and higher foreign currency exchange loss (higher by $61,000). Amortization of production costs for the six months ended September 30, 2001 increased 17.4% to $2,586,000, or 6.2% of consolidated net revenues, from $2,202,000, or 4.4% of consolidated net revenues, for the six months ended September 30, 2000. This increase resulted primarily from an increase in exclusive international titles released and -23- amortized during the six months ended September 30, 2001 compared to the six months ended September 30, 2000. Amortization of production costs for the September 2001 period included $463,000 attributable to the International Wholesale Distribution segment. The Company anticipates that amortization of production costs will decrease as a percentage of net revenues, beginning in the quarter ending December 31, 2001, as a result of expected production cost savings to be realized under the Ritek Global Media manufacturing agreement. See --- "Liquidity and Capital Resources -- New Disc Manufacturing Agreement and Revolving Loan Commitment." Production services under the manufacturing agreement began August 1, 2001. Interest expense, net of interest income, for the six months ended September 30, 2001 increased 9.0% to $925,000, or 2.2% of consolidated net revenues, from $849,000, or 1.7% of consolidated net revenues, for the six months ended September 30, 2000. The increase is attributable to higher weighted average outstanding debt levels offset, in part, by lower weighted average interest rate levels during the September 2001 period as compared to the September 2000 period. Other expense for the six months ended September 30, 2001 was $44,000 consisting of the minority interest in the net earnings of Aviva. Other income for the six months ended September 30, 2000 was $464,000 consisting of a gain on sale of land of $499,000, net of minority interest in the net earnings of Aviva of $35,000. The Company recorded an income tax benefit for the six months ended September 30, 2001 of $759,000, based on an estimated consolidated effective income tax rate of approximately 36%. Income tax expense of $95,000 for the September 2000 period reflected an estimated consolidated effective tax rate of approximately 3%. The effective tax rate is subject to on-going review and evaluation by management. Consolidated net loss for the six months ended September 30, 2001 period was $1,349,000, or $.09 per basic and diluted share, as compared to consolidated net earnings for the six months ended September 30, 2000 of $3,068,000, or $.19 per basic share and $.18 per diluted share. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142. SFAS No. 142 must be adopted in fiscal years beginning after December 15, 2001, as of the beginning of the year. The Company is currently evaluating the effects that the adoption of SFAS No. 141 and Statement No. 142 will have on its financial position and results from operations. The Company does have goodwill recorded and anticipates adopting Statement No. 142 on April 1, 2002. Inflation Management believes that inflation is not a material factor in the operation of the Company's business at this time. Liquidity and Capital Resources The Company's working capital requirements vary primarily with the level of its licensing, production and distribution activities. The principal recurring uses of working capital in operations are for program licensing costs (i.e., royalty payments, including advances, to program suppliers), distribution fee advances, manufacturing and production costs, costs of acquiring finished product for wholesale distribution and selling, general and administrative expenses. Working capital has historically been provided by cash flows from operations, private and public sales of common stock, notes representing short- and long-term debt and bank borrowings. -24- Sources and Uses of Working Capital, Six Months Ended September 30, 2001 and 2000. Net cash used in operating activities for the six months ended September 30, 2001 was $4,515,000 compared to net cash provided by operating activities of $1,575,000 for the comparable September 2000 period. The major factors contributing to the reduction of net cash provided by operating activities for the six months ended September 30, 2001 as compared to the prior year are as follows: the Company incurred a net loss of $1,349,000 for the six months ended September 30, 2001 compared to net earnings of $3,068,000 for the September 2000 period and the September 2001 period had significantly higher royalty and distribution fee advances paid. Additionally, the Company paid down its accounts payable, accrued liabilities and accrued royalties and distribution fees balances during the September 2001 period by $2,250,000 compared to increasing those same account balances by $5,562,000 during the September 2000 period. Investing activities consisted primarily of capital expenditures. Such amounts aggregated $1,356,000 and $1,775,000 during the September 2001 and 2000 six-month periods, respectively. The September 2000 period included net proceeds of $1,399,000 received from the sale of vacant land adjacent to the Company's distribution facility. Net cash provided by financing activities for the six months ended September 30, 2001 was $6,630,000 compared to net cash used in financing activities for the six months ended September 30, 2000 of $1,528,000. The increase was primarily due to increased borrowing activity to finance royalty and distribution fee advances and capital expenditure requirements. The Company's Liquidity Position at September 30, 2001 and Management's Assessment of the Company's Liquidity Position for the Next 12 Months. At March 31, 2001, the Company had cash and cash equivalents of $606,000, borrowings outstanding of $2,603,000 and borrowing availability of $12,512,000 under its $15 million revolving credit and $500,000 capital expenditures term loan facilities with Foothill. At September 30, 2001, the Company had cash and cash equivalents of $1,365,000, borrowings outstanding of $8,486,000 and borrowing availability of $4,363,000 under its $15 million revolving credit and $1 million capital expenditures term loan facilities, as amended, with Foothill. During the six months ended September 30, 2001, the Company's outstanding borrowings increased with Foothill because operational cash flow was insufficient to fund the Company's working capital needs. The Company's working capital needs increased significantly, primarily by reason of the Company's aggressive acquisition of exclusive rights to entertainment programming for worldwide distribution. In addition, the Company's borrowing availability with Foothill decreased due to increased borrowing and a reduction in the Company's accounts receivable. Management believes the slowing economy and its effect on our wholesale customers' buying habits as well as retail customers' discretionary spending habits negatively impacted revenue performance over the six months ended September 30, 2001. The loss of revenues from the Orion and Universal expired license agreements further reduced revenues over the six-month 2001 period compared to the prior-year period. In March 2001, the Company received a $6,500,000 unsecured, non-interest bearing loan from Ritek Global Media to assist the Company in funding the acquisition of entertainment programming for exclusive worldwide distribution, whether through a license or exclusive distribution agreement. Upon funding, the Company paid down the then-outstanding borrowings from Foothill. Pursuant to the terms of the loan agreement with Ritek Global Media, repayment of this loan began October 2001. See "New Disc Manufacturing Agreement and Revolving Loan --- Commitment." At September 30, 2001, the Company had one outstanding standby letter of credit in the amount of $150,000 issued by Foothill which was renewed through November 18, 2002. This letter of credit secures trade payables due to a program supplier. -25- At September 30, 2001, the Company had future license obligations for royalty advances, minimum guarantees and other fees of $5,974,000 due during the remainder of fiscal 2002 and $4,220,000 due during fiscal 2003. 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. Over the past year, the Company has been on an aggressive licensing campaign to provide a foundation for future exclusive worldwide revenue growth, as well as to replace the exclusive revenues lost by reason of the expiration of the Orion and Universal agreements in March 2001. The Company believes it has developed a specialty niche in exclusive distribution of music related entertainment programming. Because of this aggressive licensing campaign, the Company believes it is the DVD marketplace's leading source of music related programming, with an estimated 26% share of the market (as reported in the June 10 - 16, 2001 edition of Video Store Magazine, a video industry trade magazine). These license agreements normally require substantial up-front royalty advances prior to the release of the programming. Management disclosed in its Form 10-Q for the quarterly period ended June 30, 2001, that based upon then-operating results, borrowing availability and the state of the economy, it believed it may have over-committed its then-available working capital to fund then-existing exclusive license agreements. Management disclosed its concern that the Company's then-sources of working capital might be insufficient to fund working capital requirements for the next 12 months unless certain discretionary licensing and capital investment programs were rescheduled, restructured or curtailed and/or additional sources of working capital were secured either through the sale of equity or debt securities, the incurrence of new debt financing or the restructuring of existing obligations. During the three months ended September 30, 2001, management has taken the following courses of action to manage its expected cash outflows against cash inflows and accordingly, fund working capital requirements for the next 12 months: Suspended Stock Repurchase Plan. In June 2001, management suspended the repurchase of its common stock under its existing stock repurchase plan until such time as the Company's projected short-term and long-term operating cash flow improves and then-current market conditions and other factors may allow. Amended Revolving Credit and Term Loan Facilities. Effective September 30, 2001, management amended its revolving credit and term loan facilities with Foothill which extended the term of the facilities and increased borrowing availability as of September 30, 2001. See "Amendment of Revolving Credit and --- Term Loan Facilities." New Lease Agreement with General Electric Capital Corporation. In July 2001, the Company entered into a capital lease agreement with General Electric Capital Corporation ("GE Capital") for the lease of DVD production equipment totaling $915,000. The Company had previously paid cash for these assets. Proceeds received from GE Capital were used to pay down a portion of the outstanding borrowings from Foothill. Obligations under the lease agreement are being repaid over 48 months through September 2005 at approximately $22,000 per month. Rescheduled Commitments Under Existing License Agreements. Management has been successful in working with certain licensors to reschedule payment of certain royalty advance commitments to later in fiscal 2002 and into fiscal 2003 in an attempt to better match such advances paid with the release of the related licensed content. New Exclusive License Agreements. When possible and when in the best interests of the Company, management has continued to attempt to acquire future rights pursuant to license agreements which provide for reduced or no up-front payments of advance royalties as well as a larger percentage of advances and/or guarantees tied to the release of the licensed content. -26- Expedited Release of Licensed Programming. Management is endeavoring to move up the release dates of higher profile licensed programming for both domestic and international releases in an effort to speed up the cycle of recoupment of previously funded royalty advances. Management believes that through continued successful implementation of the above courses of action and expected improved revenue performance during the Company's historically strong holiday selling season, 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 future cash flows to be generated from operations, future borrowing availability under its revolving lines of credit, its disc manufacturer revolving credit commitment 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 would be available in amounts or on terms acceptable to the Company, if at all. Amendment of Revolving Credit and Term Loan Facilities. Effective September 30, 2001, the Company and Foothill amended its Loan and Security Agreement dated December 28, 1998 (the "Agreement"). The significant terms amended are as follows: (1) the term of the Agreement was extended three years to December 29, 2004 (the Agreement contains an automatic renewal provision for successive one-year periods thereafter unless terminated by either the Company or Foothill); (2) certain borrowing base availability limitations were redefined providing the Company with additional borrowing availability under the revolving credit facility of approximately $1,350,000 at September 30, 2001; (3) the minimum interest rate for the facilities was lowered from 7% to 5.75%; (4) the maximum borrowing limit under the capital expenditure term loan facility component of the Agreement was raised from $500,000 to $1,000,000; (5) the tangible net worth financial covenant was redefined, increasing minimum required levels for the Company to maintain quarterly; and, (6) a financial covenant requiring the Company to maintain certain minimum levels of quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) was added. New Disc Manufacturing Agreement and Revolving Loan Commitment. In March 2001, Image entered into an Optical Disc Replication and Loan Agreement (the "Agreement") with MRT Technology LLC, doing business as Ritek Global Media ("Ritek"). The five-year term of the Agreement commenced August 1, 2001. Under the Agreement, Ritek has become the exclusive provider of manufacturing services associated with the Image's DVD, DVD-audio and compact disc programming as well as Image's programming on all future home entertainment storage mediums then-serviced by Ritek. The provisions of the Agreement are expected to reduce Image's current optical disc manufacturing costs and related production service costs on a per-disc basis for Image's exclusive domestic and international releases. The Company expects to see the benefits of these reduced costs in the form of increased gross profit margins and lower production cost expenditures beginning in the Company's third quarter ending December 31, 2001. In addition to the lower pricing, under the terms of the Agreement, Ritek has provided Image with a commitment to provide title development funding in the form of a series of advances under an unsecured, non-interest bearing loan. The purpose of Ritek's loan commitment to Image is to assist Image in funding the acquisition of entertainment programming for exclusive United States and/or worldwide distribution, whether through a license or exclusive distribution agreement. Outstanding balances under the loan are subordinate to all of Image's obligations to BankAmerica Leasing and Capital Corporation, Bank of America National Trust and Savings Association of Nevada, Foothill Capital Corporation and Image Investors Co. and all replacements and refinancings of such debt. -27- Repayment of the initial loan of $6,500,000 commenced in October 2001 on a per unit basis of $1.00 for each DVD and $.50 for each CD ordered by the Company from Ritek. Additional advances will be made by Ritek to Image on September 1 of each year from 2002 through 2005 based on prior year orders ($1.00 per DVD and $0.50 per CD) with advances not exceeding $10,000,000 and the final advance in 2005 not exceeding $5,000,000. The agreement contains an option for Ritek to renegotiate the terms if Image fails to meet certain minimum order levels. At September 30, 2001, $6,500,000 was outstanding under the loan from Ritek. As outstanding amounts are non-interest bearing, the Company imputed interest expense of approximately $102,000 and $232,000 for the three and six months ended September 30, 2001, respectively, at Image's incremental borrowing rate. Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results. In July 1999, the Company began expanding the DVDPlanet employee base in anticipation of growth in DVD revenues through direct-to-consumer distribution via the Internet. The majority of the new employees hired were based in Image's Chatsworth, California corporate headquarters and not at DVDPlanet's retail store and shipping facility in Westminster, California. From mid-calendar 1999 and throughout calendar 2000, competing Internet retailers offered DVD programming to consumers at deep discounts, often at or below their actual cost, in an effort to capture new customers. Management believes that profitability for these Internet retailers was ultimately sacrificed to obtain rapid revenue growth during this period. Although DVDPlanet did lower its pricing to consumers with an additional discount from the suggested retail price, it did not eliminate its entire gross profit margin to match its competitors' pricing. Management believes, in large part because of its competitors' pricing policies, DVDPlanet's revenue growth has been below management's expectations. During the Company's third quarter ended December 31, 2000, the financial difficulties and related attrition experienced by certain Internet DVD retailers led to generally increased pricing to consumers by the remaining Internet DVD retailers. Management believes this overall pricing increase by DVDPlanet's competitors has positively impacted DVDPlanet Internet-based revenues since that time, because the disparity in pricing between DVDPlanet and its competitors narrowed. With lower than expected revenue growth and a significant increase in operating expenses, DVDPlanet had sustained upwardly trending quarterly losses. In response to the negative trend in the operating results of DVDPlanet, management developed an action plan (the "Action Plan") to improve the operating results of DVDPlanet with the goal of achieving positive cash flows and profitability. The Action Plan principally involved (i) initiatives which were implemented by March 2001 (including (a) fulfilling DVDPlanet's orders out of the Company's Las Vegas, Nevada warehouse and distribution facility; (b) increased pricing and shipping charges to customers; (c) reduction in ineffective customer solicitations; and, (d) reduction in selling and shipping department payroll expenses and redeployment of certain personnel to the Domestic Wholesale Distribution segment) and (ii) initiatives which were implemented during the quarter ended June 30, 2001 (including (a) realignment of customer service, retail sales and shipping functions and (b) changes in class of shipping). Management believes that implementation of the aforementioned Action Plan has yielded positive operating results for the six months ended September 30, 2001 as compared to the prior year. EBITDA (earnings before interest, taxes, depreciation and amortization), a measure of cashflow, improved 71.5% to a negative EBITDA of $308,000 for the six months ended September 30, 2001 from a negative EBITDA of $1,080,000 for the six months ended September 30, 2000. Management believes that these Action Plan initiatives, as well as a continuing review of cost savings opportunities, will continue to improve DVDPlanet's cash flows and operating results for the remainder of fiscal year ending March 31, 2002 as compared to the results for the fiscal year ended March 31, 2001. However, there can be no assurance that DVDPlanet's operating results will continue to improve as a result of these initiatives or that the goal of achieving positive cash flows and profitability will be reached. -28- Other Items. In October 2001, the Company settled its litigation with Universal Studios Home Video, Inc. The Company accrued $310,000 in related settlement fee expense and associated legal expenses as a component of general and administrative expenses in the accompanying consolidated statements of operations for the three and six months ended September 30, 2001. Under Image's reinstated stock repurchase program announced in August 2000, Image repurchased approximately 696,000 common shares through September 30, 2001 for an aggregate purchase price of approximately $2,413,000 (average price of approximately $3.47 per share), including brokerage commissions. At September 30, 2001, there were approximately 138,000 common shares remaining for repurchase under the January 1995 Board of Directors' authorized program to repurchase up to 2.5 million common shares. Under the program, Image may purchase shares from time to time in the open market and/or through privately negotiated transactions based upon current market conditions and other factors. The Company's stock repurchase program has been suspended. See "The Company's --- Liquidity Position at September 30, 2001 and Management's Assessment of the Company's Liquidity Position for the Next 12 Months" above. Forward-looking Statements Forward-looking statements, within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, are contained throughout this Form 10-Q. Such statements are based on the belief of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "may," "plan," "expect" and similar expressions, variations of such terms or the negative of such terms as they relate to the Company or its management are intended to identify such forward-looking statements and should not be regarded as a representation by the Company, its management or any other person that the future events, plans or expectations contemplated by the Company will be achieved. Such statements are based on management's current expectations and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. The Company has made forward-looking statements in this Form 10-Q concerning, among other things: (1) that the Company will be able to successfully implement the remaining courses of action described above in "The Company's Liquidity Position at September 30, 2001 and Management's Assessment of the Company's Liquidity Position for the Next 12 Months" with respect to its liquidity position, (2) that the Company's revenue performance will improve during the Company's historically strong holiday selling season, (3) that the Company's international revenues should grow if DVD player-households grow internationally, (4) that DVDPlanet revenues will continue to benefit from the closing of certain Internet retailers, (5) that Image should begin to replace revenue lost from the expiration of license agreements with Orion and Universal during fiscal 2002 with revenue from new and existing licensing agreements, (6) that cost savings under the Ritek manufacturing agreement which began August 1, 2001 should result in a lower cost structure (lower manufacturing and production costs) and accordingly, both increase gross margins and decrease production cost amortization as a percentage of net revenues beginning in the quarter ending December 31, 2001, (7) that implementation of management's Action Plan to improve fiscal 2002 DVDPlanet operating results, along with a continuing review of cost savings opportunities, should continue to improve DVDPlanet's cash flows and operating results for the fiscal year ending March 31, 2002 as compared to fiscal 2001, and (8) that the Company can continue to work with its international subdistributors to further reduce future segment advertising and promotional expenses as a percentage of segment revenues. These statements are only predictions. Actual events or results may differ materially as a result of risks facing the Company. These risks include, but are not limited to: (1) that any projections of future cash needs and cash flows are subject to substantial uncertainty, (2) that there can be no assurance that the Company will be successfully able to sell equity or debt securities, incur new debt financing or reschedule existing obligations, if necessary, to provide additional liquidity, (3) the failure to continue to successfully implement the courses of action described in "The Company's Liquidity Position at September 30, 2001 and Management's Assessment of the Company's -29- Liquidity Position for the Next 12 Months" could significantly restrict the Company's future licensing of exclusive distribution rights and its growth plans, (4) customer and consumer tastes and preferences for the Company's domestic and international entertainment programming, (5) the DVDPlanet Action Plan might ultimately reduce sales volume which, in turn, might reduce the benefit of certain economies of scale expected to be achieved upon implementation of the DVDPlanet Action Plan, and (6) certain new Internet DVD retailers may begin operations offering pricing substantially below DVDPlanet pricing. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company disclaims any obligation to update any such factors or to announce publicly the result of any revisions to any of the forward-looking statements contained in this and other Securities and Exchange Commission filings of the Company to reflect future events or developments. In addition to the foregoing risk factors, the risks facing the Company include those contained in the Company's Annual Report on Form 10-K for the year ended March 31, 2001. The risk factors described in that report are applicable to all forward-looking statements wherever they appear in this report. ITEM 3. 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. At September 30, 2001, approximately $13.2 million 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 $132,000 annual impact on pretax income (loss) based upon those outstanding borrowings at September 30, 2001. Foreign Exchange Rate Fluctuations. At September 30, 2001, approximately $1,792,000 of the Company's accounts receivables related to international distribution and denominated in foreign currencies are subject to foreign exchange rate risk in the future. The Company distributes certain of its licensed DVD and VHS programming (for which the Company has international distribution rights) internationally through international subdistributors. Additionally, the Company exploits international broadcast rights to its licensed entertainment programming. The Company believes that moderate changes in foreign exchange rates will not materially affect the operating results or financial condition of the Company. For example, a 10% change in exchange rates would result in an approximate $179,000 impact on pretax income (loss) based upon those outstanding receivables at September 30, 2001. To date, the Company has not entered into foreign currency exchange contracts. -30- REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- The condensed consolidated financial statements as of September 30, 2001 and for the three- and six-month periods ended September 30, 2001 and 2000 in this Form 10-Q have been reviewed by KPMG LLP, independent certified public accountants, in accordance with established professional standards and procedures for such a review. The report of KPMG LLP commenting upon their review follows. -31- INDEPENDENT AUDITORS' REVIEW REPORT ----------------------------------- The Board of Directors and Shareholders Image Entertainment, Inc.: We have reviewed the condensed consolidated balance sheet of Image Entertainment, Inc. and subsidiary as of September 30, 2001, and the related condensed consolidated statements of operations and cash flows for the three- and six-month periods ended September 30, 2001 and 2000. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Image Entertainment, Inc. and subsidiary as of March 31, 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended; and in our report dated June 1, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP Los Angeles, California November 2, 2001 -32- ================================================================================ PART II - OTHER INFORMATION ================================================================================ ITEM 1. Legal Proceedings. ----------------- On November 16, 2000, Universal Studios Home Video, Inc. ("USHV") filed a Complaint (the "USHV Complaint") against Image in Los Angeles Superior Court (Case No. BC240429), alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing. USHV's claims arose out of a 3 year license agreement (the "USHV License Agreement") between the parties pursuant to which USHV licensed to Image the exclusive right to distribute within the United States and Canada 52 delineated motion picture (the "Pictures") in the DVD format for the term September 15, 1997 to September 14, 2000. In the USHV Complaint, USHV alleged, inter alia, that, by reducing the wholesale price and suggested retail price of the Pictures, Image breached the USHV License Agreement. In the USHV Complaint, USHV prayed for "compensatory damages according to proof but reasonably believed to be in excess of $5,000,000," reasonable attorney's fees and costs of suit. On January 10, 2001, Image filed its Answer to the USHV Complaint, denying all of USHV's material allegations and asserting numerous affirmative defenses. On or about, and as of October 3, 2001, Image and USHV entered into an "Agreement of Compromise, Settlement and Release" (the "Settlement Agreement") pursuant to which, without any admission of wrongdoing, the parties released each other from all claims asserted in the lawsuit and all claims pertaining to the USHV License Agreement, and Image agreed to pay $300,000 to USHV in three installments of $100,000, payable upon execution of the Settlement Agreement, on April 3, 2002 and on October 3, 2002. On October 29, 2001, pursuant to the Settlement Agreement, the court dismissed the USHV Complaint with prejudice. In the normal course of business, the Company is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to employment and tax matters. While it is not possible to predict the outcome of these matters, it is the opinion of management, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on the Company's financial position, results of operations or liquidity. ITEM 2. Changes in Securities and Use of Proceeds. ----------------------------------------- Not Applicable. ITEM 3. Defaults upon Senior Securities. -------------------------------- Not Applicable. ITEM 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- On September 7, 2001, the Company held its annual meeting of shareholders. Represented at the meeting in person or by proxy were 14,705,215 shares of common stock (approximately 92.94% of the shares entitled to vote), constituting a quorum. At the meeting, Martin W. Greenwald, Ira S. Epstein, M. Trevenen Huxley and Stuart Segall were elected as directors of the Company to serve until their respective successors have been elected and qualified. With respect to Mr. Greenwald's election, there were 14,476,774 votes for and 228,267 votes withheld. With respect to Mr. Epstein's election there were 14,475,573 votes for and 228,901 votes withheld. With respect to Mr. Huxley's election, there were 14,476,428 votes for and 228,046 votes withheld. With respect to Mr. Segall's election, there were 14,462,964 votes for and 242,077 votes withheld. -33- At the meeting, the Company's shareholders voted upon and ratified the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending March 31, 2002. With respect to this matter, there were 14,632,249 votes for, 44,100 votes against and 29,607 abstentions. ITEM 5. Other Information. ----------------- Not Applicable. ITEM 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits See Exhibit Index on page i (b) Reports on Form 8-K None -34- ================================================================================ SIGNATURES ================================================================================ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IMAGE ENTERTAINMENT, INC. Date: November 13, 2001 By: /s/ MARTIN W. GREENWALD -------------------------------------- Martin W. Greenwald Chairman of the Board, Chief Executive Officer, President and Treasurer Date: November 13, 2001 By: /s/ JEFF M. FRAMER -------------------------------------- Jeff M. Framer Chief Financial Officer -35- ================================================================================ EXHIBIT INDEX ================================================================================ Exhibit No. Description - -------------------------------------------------------------------------------- 10.1*+ Form of Director Stock Unit Award Agreement, dated as of October 1, 2001, between Image and each of Ira Epstein, M. Trevenen Huxley and Stuart Segall. 10.2* Amendment No. 3, dated as of August 28, 2001, to Loan and Security Agreement, dated as of December 28, 1998, by and between Image and Foothill Capital Corporation. 10.3* Amendment No. 4, dated as of September 30, 2001, to Loan and Security Agreement, dated as of December 28, 1998, by and between Image and Foothill Capital Corporation. 10.4* Master Lease Agreement, dated as of July 25, 2001, by and between Image and General Electric Capital Corporation. 15* Consent Letter of KPMG LLP, Independent Certified Public Accountants. _________________________________ * Exhibit(s) not previously filed with the Securities and Exchange Commission. + Management Contracts, Compensatory Plans or Arrangements. -36- EX-10.1 3 dex101.txt FORM OF DIRECTOR STOCK UNIT AWARD AGREEMENT EXHIBIT 10.1 IMAGE ENTERTAINMENT, INC. DIRECTOR STOCK UNIT AWARD AGREEMENT THIS AGREEMENT dated as of October 1, 2001, is between Image Entertainment, Inc., a California corporation ("Image Entertainment"), and IRA EPSTEIN (the "Director"). Image Entertainment and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. BACKGROUND A. Image Entertainment has adopted and the shareholders of Image Entertainment have approved the Image Entertainment, Inc. 1998 Incentive Plan (the "Plan"). B. Pursuant to the Plan, Image Entertainment has granted a stock unit award (the "Stock Unit Award") to the Director upon the terms and conditions evidenced hereby, as required by the Plan. 1. Stock Unit Grant. Subject to the terms of this Agreement, Image ---------------- Entertainment grants to the Director, as of October 1, 2001 (the "Award Date"), a Stock Unit Award of an aggregate 2,240 Stock Units (the "Award Units"), under Section 8 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or pursuant to the Plan. 2. Vesting. The Award Units are subject to the vesting schedule set forth ------- in Section 8.3 of the Plan and are subject to forfeiture in accordance with Section 8.4 of the Plan. 3. Dividend Equivalent Rights. The Award Units carry dividend equivalent -------------------------- rights as set forth in Section 8.5 of the Plan. 4. Payment. Award Units which vest will be paid at the time and in the ------- manner specified in Section 8.7 of the Plan. 5. Adjustments; Acceleration. The Award Units are subject to adjustment and ------------------------- acceleration as set forth in Section 8.8 of the Plan. 6. Limited Transferability; No Shareholder Rights. The Award Units are ------------------------ generally nontransferable except as provided in Section 1.9 of the Plan. Other limitations on the Director's rights with respect to the Award Units are set forth in Section 8 of the Plan. 7. General Terms. The Stock Unit Award and this Agreement are subject to, ------------- and Image Entertainment and the Director agree to be bound by, the provisions of the Plan that apply to the Stock Unit Award. Such provisions are incorporated herein by this reference. The Director acknowledges receipt of a copy of the Plan. Capitalized terms not otherwise defined herein have the meaning set forth in the Plan. The parties have signed this Agreement as of the date on page 1. IMAGE ENTERTAINMENT, INC. (a California corporation) By:______________________________________ Title:___________________________________ Director __________________________________ (Signature) __________________________________ (Print Name) __________________________________ (Address) __________________________________ (City, State, Zip Code) __________________________________ (Social Security Number) IMAGE ENTERTAINMENT, INC. DIRECTOR STOCK UNIT AWARD AGREEMENT THIS AGREEMENT dated as of October 1, 2001, is between Image Entertainment, Inc., a California corporation ("Image Entertainment"), and M. TREVENEN HUXLEY (the "Director"). Image Entertainment and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. BACKGROUND A. Image Entertainment has adopted and the shareholders of Image Entertainment have approved the Image Entertainment, Inc. 1998 Incentive Plan (the "Plan"). B. Pursuant to the Plan, Image Entertainment has granted a stock unit award (the "Stock Unit Award") to the Director upon the terms and conditions evidenced hereby, as required by the Plan. 1. Stock Unit Grant. Subject to the terms of this Agreement, Image ---------------- Entertainment grants to the Director, as of October 1, 2001 (the "Award Date"), a Stock Unit Award of an aggregate 2,240 Stock Units (the "Award Units"), under Section 8 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or pursuant to the Plan. 2. Vesting. The Award Units are subject to the vesting schedule set forth ------- in Section 8.3 of the Plan and are subject to forfeiture in accordance with Section 8.4 of the Plan. 3. Dividend Equivalent Rights. The Award Units carry dividend equivalent -------------------------- rights as set forth in Section 8.5 of the Plan. 4. Payment. Award Units which vest will be paid at the time and in the ------- manner specified in Section 8.7 of the Plan. 5. Adjustments; Acceleration. The Award Units are subject to adjustment and ------------------------- acceleration as set forth in Section 8.8 of the Plan. 6. Limited Transferability; No Shareholder Rights. The Award Units are ---------------------------------------------- generally nontransferable except as provided in Section 1.9 of the Plan. Other limitations on the Director's rights with respect to the Award Units are set forth in Section 8 of the Plan. 7. General Terms. The Stock Unit Award and this Agreement are subject to, ------------- and Image Entertainment and the Director agree to be bound by, the provisions of the Plan that apply to the Stock Unit Award. Such provisions are incorporated herein by this reference. The Director acknowledges receipt of a copy of the Plan. Capitalized terms not otherwise defined herein have the meaning set forth in the Plan. The parties have signed this Agreement as of the date on page 1. IMAGE ENTERTAINMENT, INC. (a California corporation) By:______________________________________ Title:___________________________________ Director ______________________________ (Signature) ______________________________ (Print Name) ______________________________ (Address) ______________________________ (City, State, Zip Code) ______________________________ (Social Security Number) IMAGE ENTERTAINMENT, INC. DIRECTOR STOCK UNIT AWARD AGREEMENT THIS AGREEMENT dated as of October 1, 2001, is between Image Entertainment, Inc., a California corporation ("Image Entertainment"), and STUART SEGALL (the "Director"). Image Entertainment and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. BACKGROUND A. Image Entertainment has adopted and the shareholders of Image Entertainment have approved the Image Entertainment, Inc. 1998 Incentive Plan (the "Plan"). B. Pursuant to the Plan, Image Entertainment has granted a stock unit award (the "Stock Unit Award") to the Director upon the terms and conditions evidenced hereby, as required by the Plan. 1. Stock Unit Grant. Subject to the terms of this Agreement, Image ---------------- Entertainment grants to the Director, as of October 1, 2001 (the "Award Date"), a Stock Unit Award of an aggregate 2,240 Stock Units (the "Award Units"), under Section 8 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or pursuant to the Plan. 2. Vesting. The Award Units are subject to the vesting schedule set forth ------- in Section 8.3 of the Plan and are subject to forfeiture in accordance with Section 8.4 of the Plan. 3. Dividend Equivalent Rights. The Award Units carry dividend equivalent -------------------------- rights as set forth in Section 8.5 of the Plan. 4. Payment. Award Units which vest will be paid at the time and in the ------- manner specified in Section 8.7 of the Plan. 5. Adjustments; Acceleration. The Award Units are subject to adjustment and ------------------------- acceleration as set forth in Section 8.8 of the Plan. 6. Limited Transferability; No Shareholder Rights. The Award Units are ----------------------------------------------- generally nontransferable except as provided in Section 1.9 of the Plan. Other limitations on the Director's rights with respect to the Award Units are set forth in Section 8 of the Plan. 7. General Terms. The Stock Unit Award and this Agreement are subject to, ------------- and Image Entertainment and the Director agree to be bound by, the provisions of the Plan that apply to the Stock Unit Award. Such provisions are incorporated herein by this reference. The Director acknowledges receipt of a copy of the Plan. Capitalized terms not otherwise defined herein have the meaning set forth in the Plan. The parties have signed this Agreement as of the date on page 1. IMAGE ENTERTAINMENT, INC. (a California corporation) By:______________________________________ Title:___________________________________ Director __________________________________ (Signature) __________________________________ (Print Name) __________________________________ (Address) __________________________________ (City, State, Zip Code) __________________________________ (Social Security Number) EX-10.2 4 dex102.txt AMENDMENT NO. 3, DATED AUGUST 28,2001 TO LOAN... EXHIBIT 10.2 AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT (this "Amendment"), is entered into as of August 28, 2001, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 2450 Colorado Avenue, Suite 3000 West, Santa Monica, California 90404, and IMAGE ENTERTAINMENT, INC., a California corporation ("Borrower"), with its chief executive office located at 9333 Oso Avenue, Chatsworth, California 91311, with reference to the following facts: WHEREAS, Borrower has requested that Foothill amend that certain Loan and Security Agreement dated as of December 28, 1998, between Foothill and Borrower (the "Agreement") as set forth herein; and WHEREAS, Foothill is willing to so amend the Agreement in accordance with the terms and conditions hereof. NOW, THEREFORE, in consideration of the above recitals and the mutual promises contained herein, Foothill and Borrower hereby agree as follows: SECTION 1. DEFINED TERMS. Capitalized terms used herein and otherwise defined herein shall have the meanings ascribed in them in the Agreement. SECTION 2. AMENDMENTS TO THE AGREEMENT. (a) Section 3.3 of the Agreement is hereby amended and restated in its ----------- entirety as follows: 3.3 Term; Automatic Renewal. This Agreement shall become effective on the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on the date (the "Renewal Date") that is 3 years from the Closing Date and automatically shall be renewed for successive 1 year periods thereafter, unless sooner terminated pursuant to the terms hereof. Either party may terminate this Agreement effective on the Renewal Date or on any 1 year anniversary of the Renewal Date by giving the other party at least 60 days prior written notice by registered or certified mail, return receipt requested. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. SECTION 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Foothill that (a) the execution, delivery and performance of this Amendment and of the Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) this Amendment and the Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. SECTION 4. CONDITIONS PRECEDENT TO AMENDMENT. The satisfaction of each of the following, on or before August 28, 2001, unless waived or deferred by Foothill in its sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment: (a) The representations and warranties in this Amendment, the Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) Other than Borrower's failure to maintain minimum availability under the Agreement in excess of $3,000,000, no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from from the consummation of the transactions contemplated herein; (c) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower or Foothill; and, (d) All other documents, agreements, instruments, and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. (e) The due execution and delivery of this Amendment by the each party hereto. SECTION 5. FURTHER ASSURANCES. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time fully to consummate the transactions contemplated under this Amendment and the Agreement, as amended by this Amendment. SECTION 6. MISCELLANEOUS. (a) Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement," "hereunder," "herein," "hereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement," "thereunder," "therein," "thereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. (c) This Amendment shall be governed by and construed in accordance with the laws of the State of California. (d) This Amendment can only be amended by a writing signed by both Foothill and Borrower. (e) This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an originally executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (f) This Amendment reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be duly executed as of the date first written above. IMAGE ENTERTAINMENT, INC., a California corporation By: /S/ JEFF M. FRAMER Title: Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation By: TRENT SMART Title: Vice President IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be duly executed as of the date first written above. IMAGE ENTERTAINMENT, INC., a California corporation By: /s/ JEFF M. FRAMER Title: Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation By: /S/ TRENT SMART Title: Vice President EX-10.3 5 dex103.txt AMENDMENT NO. 4, DATED AS OF SEPTEMBER 30, 2001... EXHIBIT 10.3 AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT (this "Amendment"), is effective as of September 30, 2001, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 2450 Colorado Avenue, Suite 3000 West, Santa Monica, California 90404, and IMAGE ENTERTAINMENT, INC., a California corporation ("Borrower"), with its chief executive office located at 9333 Oso Avenue, Chatsworth, California 91311, with reference to the following facts: WHEREAS, Borrower has requested that Foothill amend that certain Loan and Security Agreement dated as of December 28, 1998, between Foothill and Borrower (as amended, restated or otherwise modified from time to time, the "Agreement") as set forth herein; and WHEREAS, Foothill is willing to so amend the Agreement in accordance with the terms and conditions hereof. NOW, THEREFORE, in consideration of the above recitals and the mutual promises contained herein, Foothill and Borrower hereby agree as follows: SECTION 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. SECTION 2. AMENDMENTS TO THE AGREEMENT. (a) Section 1 of the Agreement is hereby amended by adding --------- the following definitions in alphabetical order: "EBITDA" means, with respect to any fiscal period, ------ Borrower's consolidated earnings before all interest, taxes, depreciation and amortization expenses for such period, determined in accordance with GAAP. "First Amendment" means that certain Amendment Number One to --------------- Loan and Security Agreement, dated as of October 26, 1999, between Foothill and Borrower. "Fourth Amendment" means that certain Amendment Number Four ---------------- to Loan and Security Agreement, effective as of September 30, 2001, between Foothill and Borrower; provided that such effectiveness shall only occur after the date on which all of the conditions precedent set forth in Section 4 hereof have been satisfied. "Fourth Amendment Closing Date" means the date on which all ---------------- of the conditions precedent set forth in Section 4 hereof shall have been satisfied. "Second Amendment" means that certain Amendment Number Two ---------------- to Loan and Security Agreement, dated as of February 8, 2000, between Foothill and Borrower. "Third Amendment" means that certain Amendment Number Three --------------- to Loan and Security Agreement, dated as of August 28, 2001, between Foothill and Borrower. (b) Section 1 of the Agreement is hereby amended by --------- deleting the following definitions therein in their entirety and the following is hereby substituted in lieu thereof: "Dilution Reserve" means, as of the date of any ---------------- determination, an amount equal to (a) the amount of Eligible Accounts, times (b) the amount (expressed as a percentage and calculated based upon the prior twelve month period) of Borrower's Accounts which were the subject of credit memoranda and other dilution in excess of twelve percent (12%). "Maximum Amount" means the Maximum Revolving Credit Amount -------------- plus One Million Dollars ($1,000,000). "Vendor Reserve" means, as of the date of any determination -------------- where Excess Availability (provided, however, that solely for the purposes of -------- ------- determining whether Excess Availability is less than $2,500,000 in this definition, the amount of the Vendor Reserve shall not be included in the "availability reserves" referenced in subsection (a) of the definition of Excess Availability) is less than $2,500,000, an amount equal to the sum of: (i) (a) the amount of accounts payable or Indebtedness owed by Borrower to a creditor pursuant to the terms of a License Agreement or other product purchase or acquisition arrangement, where such creditor holds a lien or other security interest in the Eligible Accounts Receivable of Borrower (a "Lien Creditor"), ---- -------- minus (b) the undrawn amount available to be drawn under one or more letters of - ----- credit obtained by Borrower, if any, for the benefit of such Lien Creditor with respect to the repayment of sums due and owing under such License Agreement or other product purchase or acquisition arrangement included in clause (a) minus ----- fifty percent (50%) of the value of Borrower's DVD inventory composed of a Lien Creditor's products that would otherwise be Eligible Inventory if it were not Exclusive DVD Inventory or encumbered by a lien or other security interest in favor of such Lien Creditor (a) above; plus (ii) the amount of royalties and ---- accounts payable owed by Borrower to creditors under License Agreements or other product purchase or acquisition arrangements that are not Lien Creditors but then only to the extent that such accounts payable are outstanding more than sixty (60) days from their due date. If Excess Availability (provided, however, -------- ------- that solely for the purposes of determining whether Excess Availability is equal to or greater than $2,500,000 in this definition, the amount of the Vendor Reserve shall not be included in the "availability reserves" referenced in subsection (a) of the definition of Excess Availability) is equal to or greater than $2,500,000, Vendor Reserve shall mean, as of any date of determination, an amount equal to the sum of: (i) (a) the amount of accounts payable or Indebtedness owed by Borrower to a creditor pursuant to the terms of a License Agreement or other product purchase or acquisition arrangement, where such creditor holds a lien or other security interest in the Eligible Accounts Receivable of Borrower (a "Lien Creditor"), minus (b) the undrawn amount ---- -------- ----- available to be drawn under one or more letters of credit obtained by Borrower, if any, for the benefit of such Lien Creditor with respect to the repayment of sums due and owing under such License Agreement or other product purchase or acquisition arrangement included in clause (a) minus fifty percent (50%) of the ----- value of Borrower's DVD inventory composed of a Lien Creditor's products that would otherwise be Eligible Inventory if it were not Exclusive DVD Inventory or encumbered by a lien or other security interest in favor of such Lien Creditor (a) above; plus (ii) the amount of royalties and accounts payable owed by ---- Borrower to creditors under License Agreements or other product purchase or acquisition arrangements that are not Lien Creditors but then only to the extent that (A) such accounts payable are outstanding more than sixty (60) days from their due date and (B) the aggregate amount of such accounts is greater than $500,000. (c) Subsections (a) and (g) of the definition of Eligible Accounts contained in Section 1 of the Agreement are amended and restated in --------- their entirety as follows: "(a) Accounts that the Account Debtor has failed to pay within sixty (60) to eighty-nine (89) days of the due date set forth in the invoice to the extent of that amount by which the total of Accounts in such category of past-due Accounts would exceed twenty-five percent (25%) of the total of Eligible Accounts as of the date of the determination thereof, or Accounts that the Account Debtor has failed to pay within ninety (90) days of the due date set forth in the invoice, or Accounts with selling terms of more than seventy-five (75) days, and all Accounts owed by an Account Debtor that has failed to pay fifty percent (50%) or more of its Accounts owed to Borrower within ninety (90) days of the due date set forth in the invoice;" "(g) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed fifteen percent (15%) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, (i) in the case of Accounts with -------- ------- respect to which Musicland Group, Inc. ("Musicland") is the Account Debtor, Eligible Accounts shall not include Accounts thereof owing to Borrower to the extent that the total obligations of Musicland owing to Borrower exceed twenty-five percent (25%) of all Eligible Accounts; (ii) in the case of Accounts with respect to which Best Buy, Inc. ("Best Buy") is the Account Debtor, Eligible Accounts shall not include Accounts thereof owing to Borrower to the extent that the total obligations of Best Buy owing to Borrower exceed twenty-five percent (25%) of all Eligible Accounts; and provided, however, that in no event shall Eligible -------- ------- Accounts include Accounts of Musicland or Best Buy to the extent that the aggregate amount of total obligations of Musicland and Best Buy owing to Borrower exceed forty percent (40%) of all Eligible Accounts." (d) Section 2.3 of the Agreement is hereby amended and ----------- restated in its entirety as follows: "2.3 Capital Expenditure Loan. Subject to the terms and conditions of this Agreement, Foothill agrees to make a series of term loans to Borrower in an aggregate amount at any one time outstanding of up to One Million Dollars ($1,000,000) (the "Capital Expenditure Loan Commitment"), to be evidenced by and repayable in ----------------------------------- accordance with the terms and conditions of a single promissory note (the "Capital Expenditure Loan Note"), dated as of even date herewith, executed by ----------------------------- Borrower in favor of Foothill. Each such term loan shall be made by Foothill at such times and in such amounts as Borrower may request in writing, shall be advanced directly to the applicable vendor or Borrower, as the case may be, and once borrowed may be repaid or prepaid without penalty and then, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. The foregoing notwithstanding: (i) each borrowing of a Capital Expenditure Loan shall be in a minimum principal amount of One Hundred Thousand Dollars ($100,000), or such lesser amount as is the then unfunded balance of the Capital Expenditure Loan Commitment; (ii) each borrowing of a term loan shall be in an amount, as determined by Foothill, up to eighty percent (80%) of Borrower's invoice cost (net of installation and other so-called `soft costs') of new Equipment to be purchased by Borrower, that is acceptable to Foothill in all respects and that is not to be affixed to real property or become installed in or affixed to other goods; and (iii) the aggregate amount of Capital Expenditure Loans shall not exceed the lesser of cost or fair market value, at the time of acquisition or construction, of the Equipment so acquired or constructed. All amounts evidenced by the Capital Expenditure Loan Note shall constitute Obligations." (e) Section 2.5(c) of the Agreement is hereby amended and restated in its entirety as follows: "(c) Minimum Interest. In no event shall the rate of interest chargeable hereunder be less than five and three quarters percent (5.75%) per annum." (f) Section 3.3 of the Agreement is hereby amended and ----------- restated in its entirety as follows: "3.3 Term; Automatic Renewal. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending December 29, 2004 (the "Renewal Date") and automatically shall be renewed for successive one (1) year periods thereafter, unless sooner terminated pursuant to the terms hereof. Either party may terminate this Agreement effective on the Renewal Date or on any one (1) year anniversary of the Renewal Date by giving the other party at least one hundred twenty (120) days prior written notice by registered or certified mail, return receipt requested. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default." (g) Section 3.5 of the Agreement is hereby amended and ----------- restated in its entirety as follows: "3.5 Early Termination by Borrower. The provisions of Section 3.3 that allow termination of this Agreement by Borrower only on the Renewal Date and certain anniversaries thereof notwithstanding, Borrower has the option, at any time upon [one hundred twenty (120)] days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations (including an amount equal to 105% of the undrawn amount of the L/Cs or L/C Guarantees), together with a premium (the "Early Termination Premium") equal to: (a) during the period of time from ------------------------- and after the Fourth Amendment Closing Date up to the first anniversary of the Fourth Amendment Closing Date, the sum of three-quarters of one percent (0.75%) times the Maximum Revolving Credit Amount plus three-quarters of one percent ---- (0.75%) times the principal amount of any Capital Expenditure Loans outstanding as of the effective date of the termination of this Agreement; (b) during the period of time from and after the first anniversary of the Fourth Amendment Closing Date up to the second anniversary of the Fourth Amendment Closing Date, the sum of one-half of one percent (0.5%) times the Maximum Revolving Credit Amount plus one-half of one percent (0.5%) times the principal amount of any ---- Capital Expenditure Loans outstanding as of the effective date of the termination of this Agreement; and (iii) thereafter, zero (0)." (h) Section 6.12 of the Agreement is hereby amended and ------------ restated in its entirety as follows: "6.12 Financial Covenants. (a) Tangible Net Worth. Borrower shall maintain Tangible ------------------ Net Worth, measured on a fiscal quarter-end basis, of (i) not less than the amount indicated below with respect to the fiscal quarter-end dates indicated below plus (ii) seventy percent (70%), on an aggregate cumulative basis, of the ---- net offering proceeds received by Borrower from the primary issuance of its equity securities or from the issuance of rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Borrower's equity securities: --------------------------------------------------- 12/31/01 $16,462,000 --------------------------------------------------- 03/31/02 $17,506,000 --------------------------------------------------- 06/30/02 $18,718,000 --------------------------------------------------- 09/30/02 $19,663,000 --------------------------------------------------- 12/31/02 $23,427,000 --------------------------------------------------- 03/31/03 $24,878,000 --------------------------------------------------- 06/30/03 $25,997,000 --------------------------------------------------- 09/30/03 $26,865,000 --------------------------------------------------- 12/31/03 $28,350,000 --------------------------------------------------- 03/31/04 $30,162,000 --------------------------------------------------- 06/30/04 $31,594,000 --------------------------------------------------- 09/30/04 $32,801,000 --------------------------------------------------- for the quarter ending $34,697,000 12/31/04 and each quarter thereafter --------------------------------------------------- (b) EBITDA. Borrower shall maintain EBITDA, measured on a ------ fiscal quarter-end basis, of not less than the amount indicated below with respect to the fiscal quarter-end dates indicated below: --------------------------------------------------- for the immediately $1,158,000 preceding three-month period ending 12/31/01 --------------------------------------------------- for the immediately $2,775,000 preceding six-month period ending 03/31/02 --------------------------------------------------- -------------------------------------------------- for the immediately $4,531,000 preceding nine-month period ending 06/30/02 -------------------------------------------------- for the immediately $6,033,000 preceding twelve-month period ending 09/30/02 -------------------------------------------------- for the immediately $7,053,000 preceding twelve-month period ending 12/31/02 -------------------------------------------------- for the immediately $8,011,000 preceding twelve-month period ending 03/31/03 -------------------------------------------------- for the immediately $8,374,000 preceding twelve-month period ending 06/30/03 -------------------------------------------------- for the immediately $8,681,000 preceding twelve-month period ending 09/30/03 -------------------------------------------------- for the immediately $9,099,000 preceding twelve-month period ending 12/31/03 -------------------------------------------------- for the immediately $9,562,000 preceding twelve-month period ending 03/31/04 -------------------------------------------------- for the immediately $9,981,000 preceding twelve-month period ending 06/30/04 -------------------------------------------------- for the immediately $10,396,000 preceding twelve-month period ending 09/30/04 -------------------------------------------------- for the immediately $10,912,000 preceding twelve-month period ending 12/31/04 and each trailing twelve-month period thereafter -------------------------------------------------- (i) Section 7.7(c) of the Agreement is hereby amended and -------------- restated in its entirety as follows: "(c) Make any payments on any Indebtedness owing to any third person that has been subordinated to the Obligations; provided, however, -------- that Borrower may make payments on such Indebtedness if (i) Foothill has agreed thereto pursuant to the terms and conditions of the agreement evidencing such subordination, and (ii) Borrower has Excess Availability of no less than $2,500,000." (j) Section 7.9 of the Agreement is hereby amended and ----------- restated in its entirety as follows: "7.9 Capital Expenditures. Make any capital expenditure, or any commitment therefor, (a) with respect to individual transactions, in excess of Eight Hundred Thousand Dollars ($800,000); or (b) with respect to aggregate capital expenditures, in an aggregate amount in excess of Two Million Five Hundred Thousand Dollars ($2,500,000); provided, however, that if the amount available -------- ------- under this covenant is not expended in any particular year, one hundred percent (100%) thereof shall be available to be expended in the following fiscal year, but only in such subsequent fiscal year, with the amount so carried over being deemed to have been expended last in such subsequent year." SECTION 3. Representations and Warranties. Borrower hereby represents and warrants to Foothill that (a) the execution, delivery, and performance of this Amendment and of the Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) this Amendment and the Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. SECTION 4. Conditions Precedent to Amendment. The satisfaction of each of the following, on or before October __, 2001, unless waived or deferred by Foothill in its sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment: (a) The representations and warranties in this Amendment, the Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; (c) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower or Foothill; and (d) All other documents, agreements, instruments, and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. (e) The due execution and delivery of the following by each party hereto: (i) this Amendment; and (ii) the Capital Expenditure Loan Note. (f) Foothill shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution and delivery of this Amendment and the Capital Expenditure Loan Note and authorizing specific officers of Borrower to execute the same. (g) Foothill shall have received a certificate from the Secretary of Borrower attesting that Borrower's By-laws and Articles or Certificate of Incorporation have not been amended or modified since the Closing Date or in the event that such By-laws or Articles or Certificate of Incorporation have been so amended or modified, Foothill shall have received a copy of such amendment or modification certified by the Secretary of Borrower. (h) Foothill shall have received a certificate of corporate status with respect to Borrower, dated within thirty (30) days of this Amendment, by the Secretary of State of the state of incorporation of Borrower, which certificate shall indicate that Borrower is in good standing in such state. (i) Foothill shall have received an amendment fee of $25,000, which fee shall be charged directly to Borrower's Loan Account. SECTION 5. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time fully to consummate the transactions contemplated under this Amendment and the Agreement, as amended by this Amendment. SECTION 6. Miscellaneous. (a) Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. (c) This Amendment shall be governed by and construed in accordance with the laws of the State of California. (d) This Amendment can only be amended by a writing signed by both Foothill and Borrower. (e) This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (f) This Amendment reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. [Signature page follows.] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. IMAGE ENTERTAINMENT, INC., a California corporation By: /s/ JEFF M. FRAMER Title: Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation By: /s/ TRENT SMART Title: Vice President EX-10.4 6 dex104.txt MASTER LEASE AGREEMENT, DATED AS OF JULY 25, 2001 EXHIBIT 10.4 MASTER LEASE AGREEMENT (Quasi) dated as of July 25, 2001 ("Agreement") THIS AGREEMENT is between General Electric Capital Corporation (together with its successors and assigns, if any, "Lessor") and Image Entertainment, Inc. ("Lessee"). Lessor has an office at 2400 E. Katella Avenue, Suite 800, Anaheim, CA 92806. Lessee is a corporation organized and existing under the laws of the state of California. Lessee's mailing address and chief place of business is 9333 Oso Avenue, Chatsworth, CA 91311. This Agreement contains the general terms that apply to the leasing of Equipment from Lessor to Lessee. Additional terms that apply to the Equipment (term, rent, options, etc.) shall be contained on a schedule ("Schedule"). 1. LEASING: (a) Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment ("Equipment") described in any Schedule scheduled by both parties. (b) Lessor shall purchase Equipment from the manufacturer or supplier ("Supplier") and lease it to Lessee if on or before the Last Delivery Date (specified in the Schedule) Lessor receives (i) a Schedule for the Equipment, (ii) evidence of insurance which complies with the requirements of Section 8, and (iii) such other documents as Lessor may reasonably request. Each of the documents required above must be in form and substance satisfactory to Lessor. Lessor hereby appoints Lessee its agent for inspection and acceptance of the Equipment from the Supplier. Once the Schedule is signed, the Lessee may not cancel the Schedule. 2. TERM, RENT AND PAYMENT: (a) The rent payable for the Equipment and Lessee's right to use the Equipment shall begin on the earlier of (i) the date when the Lessee signs the Schedule and accepts the Equipment or (ii) when Lessee has accepted the Equipment under a Certificate of Acceptance ("Lease Commencement Date"). The term of this Agreement shall be the period specified in the applicable Schedule. The word "term" shall include all basic and any renewal terms. (b) Lessee shall pay rent to Lessor at its address stated above, except as otherwise directed by Lessor. Rent payments shall be in the amount set forth in, and due as stated in the applicable Schedule. If any Advance Rent (as stated in the Schedule) is payable, it shall be due when the Lessee signs the Schedule. Advance Rent shall be applied to the first rent payment and the balance, if any, to the final rent payment(s) under such Schedule. In no event shall any Advance Rent or any rent payments be refunded to Lessee. If rent is not paid within ten (10) days of its due date, Lessee agrees to pay a late charge of five cents ($.05) per dollar, on and in addition to, the amount of such rent but not exceeding the lawful maximum, if any. (c) Lessor shall not disturb Lessee's quiet enjoyment of the Equipment during the term of this Agreement unless a default has occurred and is continuing under this Agreement. 3. TAXES: (a) If permitted by law, Lessee shall report and pay promptly all taxes, fees and assessments due, imposed, assessed or levied against any Equipment (or purchase, ownership, delivery, leasing, possession, use or operation thereof), this Agreement (or any rents or receipts hereunder), any Schedule, Lessor or Lessee by any governmental entity or taxing authority during or related to the term of this Agreement, including, without limitation, all license and registration fees, and all sales, use, personal property, excise, gross receipts, franchise, stamp or other taxes, imposts, duties and charges, together with any penalties, fines or interest thereon (collectively "Taxes"). Lessee shall have no liability for Taxes imposed by the United States of America or any State or political subdivision thereof which are on or measured by the net income of Lessor. Lessee shall promptly reimburse Lessor (on or after tax basis) for any Taxes charged to or assessed against Lessor. Lessee shall send Lessor a copy of each report or return and evidence of Lessees payment of Taxes upon request. (b) Lessee's obligations, and Lessor's rights and privileges, contained in this Section 3 shall survive the expiration or other termination of this Agreement. 4. REPORTS: (a) If any tax or other lien shall attach to any Equipment, Lessee will notify Lessor in writing, within ten (10) days after Lessee becomes aware of the tax or lien. The notice shall include the full particulars of the tax or lien and the location of such Equipment on the date of the notice. (b) Lessee will deliver to Lessor Lessees complete financial statements, certified by a recognized firm of certified public accountants, within ninety (90) days of the close of each fiscal year of Lessee. If Lessor requests, Lessee will deliver to Lessor copies of Lessee's quarterly financial report certified by the chief financial officer of Lessee, within ninety (90) days of the close of each fiscal quarter of Lessee. Lessee will deliver to Lessor all Forms 10-K and 10-Q, if any, filed with the Securities and Exchange Commission within thirty (30) days after the date on which they are filed. (c) Lessor may inspect any Equipment during normal business hours after giving Lessee reasonable prior notice. (d) Lessee will keep the Equipment at the Equipment Location (specified in the applicable Schedule) and will give Lessor prior written notice of any relocation of Equipment. If Lessor requests, Lessee will promptly notify Lessor in writing of the location of any Equipment. (e) If any Equipment is lost or damaged (where the estimated repair costs would exceed the greater of ten percent (10%) of the original Equipment cost or ten thousand and 00/100 ($10,000)), or is otherwise involved in an accident causing personal injury or property damage, Lessee will promptly and fully report the event to Lessor in writing. (f) Lessee will furnish a certificate of an authorized officer of Lessee stating that he has reviewed the activities of Lessee and that, to the best of his knowledge, there exists no default or event which with notice or lapse of time (or both) would become such a default within thirty (30) days after any request by Lessor. 5. DELIVERY, USE AND OPERATION: (a) All equipment shall be shipped directly from the Supplier to Lessee. (b) Lessee agrees that the Equipment will be used by Lessee solely in the conduct of its business and in a manner complying with all applicable laws, regulations and insurance policies, and Lessee shall not discontinue use of the Equipment. (c) Lessee will not move any equipment from the location specified on the Schedule, without the prior written consent of Lessor. (d) Lessee will keep the Equipment free and clear of all liens and encumbrances other than those which result from acts of Lessor. (e) Lessor shall not disturb Lessees quiet enjoyment of the Equipment during the term of the Agreement unless a default has occurred and is continuing under this Agreement. 6. MAINTENANCE: (a) Lessee will, at its sole expense, maintain each unit of Equipment in good operating order and repair, normal wear and tear excepted. The Lessee shall also maintain the Equipment in accordance with manufacturers recommendations. Lessee shall make all alterations or modifications required to comply with any applicable law, rule or regulation during the term of this Agreement. If Lessor requests, Lessee shall affix plates, tags or other identifying labels showing ownership thereof by Lessee and Lessor's security interest therein. The tags or labels shall be placed in a prominent position on each unit of Equipment. (b) Lessee will not attach or install anything on the Equipment that will impair the originally intended function or use of such Equipment without the prior written consent of Lessor. All additions, parts, supplies, accessories, and equipment ("Additions") furnished or attached to any Equipment that are not readily removable shall become subject to the lien of Lessor. All Additions shall be made only in compliance with applicable law. Lessee will not attach or install any Equipment to or in any other personal or real property without the prior written consent of Lessor. 7. STIPULATED LOSS VALUE: If for any reason any unit of Equipment becomes worn out, lost, stolen, destroyed, irreparably damaged or unusable ("Casualty Occurrences") Lessee shall promptly and fully notify Lessor in writing. Lessee shall pay Lessor the sum of (i) the Stipulated Loss Value (see Schedule) of the affected unit determined as of the rent payment date prior to the Casualty Occurrence; and (ii) all rent and other amounts which are then due under this Agreement on the Payment Date (defined below) for the affected unit. The Payment Date shall be the next rent payment date after the Casualty Occurrence. Upon payment of all sums due hereunder, the term of this lease as to such unit shall terminate. 8. INSURANCE: (a) Lessee shall bear the entire risk of any loss, theft, damage to, or destruction of, any unit of Equipment from any cause whatsoever from the time the Equipment is shipped to Lessee. (b) Lessee agrees, at its own expense, to keep all Equipment insured for such amounts and against such hazards as Lessor may reasonably require. All such policies shall be with companies, and on terms, reasonably satisfactory to Lessor. The insurance shall include coverage for damage to or loss of the Equipment, liability for personal injuries, death or property damage. Lessor shall be named as additional insured with a loss payable clause in favor of lessor, as its interest may appear, irrespective of any breach of warranty or other act or omission of Lessee. The insurance shall provide for liability coverage in an amount equal to at least ONE MILLION U.S. DOLLARS ($1,000,000.00) total liability per occurrence, unless otherwise stated in any Schedule. The casualty/property damage coverage shall be in an amount equal to the higher of the Stipulated Loss value or the full replacement cost of the Equipment. No insurance shall be subject to any co-insurance clause. The insurance policies shall provide that the insurance may not be altered or canceled by the insurer until after thirty (30) days written notice to Lessor. Lessee agrees to deliver to Lessor evidence of insurance reasonably satisfactory to Lessor. (c) Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make proof of loss and claim for insurance, and to make adjustments with insurers and to receive payment of and execute or endorse all documents, checks or drafts in connection with insurance payments. Lessor shall not act as Lessees attorney-in-fact unless Lessee is in default. Lessee shall pay any reasonable expenses of Lessor in adjusting or collecting insurance. Lessee will not make adjustments with insurers except with respect to claims for damage to any unit of Equipment where the repair costs are less than the lesser of ten percent (10%) of the original Equipment cost or ten thousand and 00/100 dollars ($10,000). Lessor may, at its option, apply proceeds of insurance, in whole or in part, to (i) repair or replace Equipment or any portion thereof, or (ii) satisfy any obligation of Lessee to Lessor under this Agreement. 9. RETURN OF EQUIPMENT: (a) At the expiration or termination of this Agreement or any Schedule, Lessee shall perform any testing and repairs required to place the units of Equipment in the same condition and appearance as when received by Lessee (reasonable wear and tear excepted) and in good working order for the original intended purpose of the Equipment. If required the units of Equipment shall be deinstalled, disassembled and crated by an authorized manufacturer's representative or such other service person as is reasonably satisfactory to Lessor. Lessee shall remove installed markings that are not necessary for the operation, maintenance or repair of the Equipment. All Equipment will be cleaned, cosmetically acceptable, and in such condition as to be immediately installed into use in a similar environment for which the Equipment was originally intended to be used. All waste material and fluid must be removed from the Equipment and disposed of in accordance with then current waste disposal laws. Lessee shall return the units of Equipment to a location with the continental United States as Lessor shall direct. Lessee shall obtain and pay for a policy of transit insurance for the redelivery period in an amount equal to the replacement value of the Equipment. The transit insurance must name Lessor as the loss payee. The Lessee shall pay for all costs to comply with this section (a). (b) Until Lessee has fully complied with the requirements of Section 9(a) above, Lessee's rent payment obligation and all other obligations under this Agreement shall continue from month to month notwithstanding any expiration or termination of the lease term. Lessor may terminate the Lessee's right to use the Equipment upon ten (10) days notice to Lessee. (c) Lessee shall provide to Lessor a detailed inventory of all components of the Equipment including model and serial numbers. Lessee shall also provide any up-to-date copy of all other documents pertaining to the Equipment. All service manuals, blue prints, process flow diagrams, operating manuals, inventory and maintenance records shall be given to Lessor at least ninety (90) days and not more than one hundred twenty (120) days prior to lease termination. (d) Lessee shall make the Equipment available for on-site operational inspections by potential purchasers at least one hundred twenty (120) days prior to and continuing up to lease termination. Lessor shall provide Lessee with reasonable notice prior to any inspection. Lessee shall provide personnel, power and other requirements necessary to demonstrate the electrical, hydraulic and mechanical systems for each item of Equipment. 10. DEFAULT AND REMEDIES: (a) Lessor may in writing declare this Agreement in default if: (i) Lessee breaches its obligation to pay rent or any other sum when due and fails to cure the breach within ten (10) days; (ii) Lessee breaches any of its insurance obligations under Section 8; (iii) Lessee breaches any of its other obligations and fails to cure that breach within thirty (30) days after written notice from Lessor; (iv) any representation or warranty made by Lessee in connection with this Agreement shall be false or misleading in any material respect; (v) Lessee or any guarantor or other obligor for the Lessee's obligations hereunder ("Guarantor") becomes insolvent or ceases to do business as a going concern; (vi) any Equipment is illegally used; (vii) if Lessor or any Guarantor is a natural person, any death or incompetency of Lessor or such Guarantor; or (viii) a petition is filed by or against Lessee or any Guarantor under any bankruptcy or insolvency laws and in the event of an involuntary petition, the petition is not dismissed within forty-five (45) days of the filing date. The default declaration shall apply to all Schedules unless specifically excepted by Lessor. (b) After a default, at the request of Lessor, Lessee shall comply with the provisions of Section 9(a). Lessee hereby authorizes Lessor to peacefully enter any premises where any Equipment may be and take possession of the Equipment. Lessee shall immediately pay to Lessor without further demand as liquidated damages for loss of a bargain and not as a penalty, the Stipulated Loss Value of the Equipment (calculated as of the rent payment date prior to the declaration of default), and all rents and other sums then due under this Agreement and all Schedules. Lessor may terminate this Agreement as to any or all of the Equipment. A termination shall occur only upon written notice by Lessor to Lessee and only as to the units of Equipment specified in any such notice. Lessor may, but shall not be required to, sell Equipment at private or public sale, in bulk or in parcels, with or without notice, and without having the Equipment present at the place of sale. Lessor may also, but shall not be required to, lease, otherwise dispose of or keep idle all or part of the Equipment. Lessor may use Lessee's premises for a reasonable period of time for any or all of the purposes stated above without liability for rent, costs, damages or otherwise. The proceeds of sale, lease or other disposition, if any, shall be applied in the following order or priorities: (i) to pay all of Lessor's costs, charges and expenses incurred in taking, removing, holding, repairing and selling, leasing or otherwise disposing of Equipment; then, (ii) to the extent not previously paid by Lessee, to pay Lessor all sums due from Lessee under this Agreement; then (iii) to reimburse Lessee any sums previously paid by Lessee as liquidated damages; and then (iv) to Lessee, if there exists any surplus. Lessee shall immediately pay any deficiency in (i) and (ii) above. (c) The foregoing remedies are cumulative, and any or all thereof may be exercised instead of or in addition to each other or any remedies at law, in equity, or under statue. Lessee waives notice of sale or other disposition (and the time and place thereof), and the manner and place of any advertising. Lessee shall pay Lessor's actual attorney's fees incurred in connection with the enforcement, assertion, defense or preservation of Lessor's rights and remedies under this Agreement, or if prohibited by law, such lesser sum as may be permitted. Waiver of any default shall not be a waiver of any other or subsequent default. (d) Any default under the terms of this or any other agreement between Lessor and Lessee may be declared by Lessor under by Lessor a default under this and any such other agreement. 11. ASSIGNMENT: LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, ENCUMBER OR SUBLET ANY EQUIPMENT OR THE INTEREST OF LESSEE IN THE EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. Lessor may, without the consent of Lessee, assign this Agreement, any Schedule or the right to enter into a Schedule. Lessee agrees that if Lessee receives written notice of an assignment from Lessor, Lessee will pay all rent and all other amounts payable under any assigned Schedule to such assignee or as instructed by Lessor. Lessee also agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by assignee. Lessee hereby waives and agrees not to assert against any such assignee any defense, set-off, recoupment claim or counterclaim which Lessee has or may at any time have against Lessor for any reason whatsoever. 12. NET LEASE: Lessee is unconditionally obligated to pay all rent and other amounts due for the entire lease term no matter what happens, even if the Equipment is damaged or destroyed, if it is defective or if Lessee no longer can use it. Lessee is not entitled to reduce or set-off against rent or other amounts due to Lessor or to anyone to whom Lessor assigns this Agreement or any Schedule whether Lessees claim arises out of this Agreement, any Schedule, any statement by Lessor, Lessors liability or any manufacturers liability, strict liability, negligence or otherwise. 13. INDEMNIFICATION: (a) Lessee hereby agrees to indemnify Lessor, its agents, employees, successors and assigns (on an after tax basis) from and against any and all losses, damages, penalties, injuries, claims, actions and suits, including legal expenses, of whatsoever kind and nature arising out of or relating to the Equipment or this Agreement, except to the extent the losses, damages, penalties, injuries, claims, actions, suits or expenses result from Lessors gross negligence or willful misconduct ("Claims"). This indemnity shall include, but is not limited to, Lessor's strict liability in tort and Claims, arising out of (i) the selection, manufacture, purchase, acceptance or rejection of Equipment, the ownership of Equipment during the term of this Agreement, and the delivery, lease, possession, maintenance, uses, condition, return or operation of Equipment (including, without limitation, latent and other defects, whether or not discoverable by Lessor or Lessee and any claim for patent, trademark or copyright infringement or environmental damage) or (ii) the condition of Equipment sold or disposed of after use by Lessee, any sublessee or employees of Lessee. Lessee shall, upon request, defend any actions based on, or arising out of, any of the foregoing. (b) All of Lessor's rights, privileges and indemnities contained in this Section 13 shall survive the expiration or other termination of this Agreement. The rights, privileges and indemnities contained herein are expressly made for the benefit of, and shall be enforceable by Lessor, its successors and assigns. 14. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE EQUIPMENT LEASED UNDER THIS AGREEMENT OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks, as between Lessor and Lessee, are to be borne by Lessee. Without limiting the foregoing, Lessor shall have no responsibility or liability to Lessee or any other person with respect to any of the following: (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by any Equipment, any inadequacy thereof, any deficiency or defect (latent or otherwise) of the Equipment, or any other circumstance in connection with the Equipment; (ii) the use, operation or performance of any Equipment or any risks relating to it; (iii) any interruption of service, loss of business or anticipated profits or consequential damages; or (iv) the delivery, operation, servicing, maintenance, repair, improvement or replacement of any Equipment. If, and so long as, no default exists under this Agreement, Lessee shall be, and hereby is, authorized during the term of this Agreement to assert and enforce, whatever claims and rights Lessor may have against any Supplier of the Equipment at Lessee's sole cost and expense, in the name of and for the account of Lessor and/or Lessee, as their interests may appear. 15. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee makes each of the following representations and warranties to Lessor on the date hereof and on the date of execution of each Schedule: (a) Lessee has adequate power and capacity to enter into, and perform under, this Agreement and all related documents (together, the "Documents"). Lessee is duly qualified to do business wherever necessary to carry on its present business and operations, including the jurisdiction(s) where the Equipment is or is to be located. (b) The Documents have been duly authorized, executed and delivered by Lessee and constitute valid, legal and binding agreements, enforceable in accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws. (c) No approval, consent or withholding of objections is required from any governmental authority or entity with respect to any entry into or performance by Lessee of the Documents except such as have already been obtained. (d) The entry into and performance by Lessee of the Documents will not: (i) violate any judgment, order, law or regulation applicable to Lessee or any provision of Lessee's Certification of Incorporation or bylaws; of (ii) result in any breach of, constitute a default under or result in the creation of any lien, charge, security interest or other incumbrance upon any Equipment pursuant to any indenture, mortgage, deed of trust, bank loan or credit agreement or other instrument (other than this Agreement) to which Lessee is a party. (e) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Lessee, which if decided against Lessee will have a material adverse effect on the ability of Lessee to fulfill its obligations under this Agreement. (f) The Equipment accepted under any Certificate of Acceptance is and will remain tangible personal property. (g) Each financial statement delivered to Lessor has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of the most recent financial statement, there has been no material adverse change. (h) Lessee is and will be at all times validly existing and in good standing under the laws of the State of its incorporation (specified in the first sentence of this Agreement). (i) The Equipment will at all times be used for commercial or business purposes. 16. OWNERSHIP FOR TAX PURPOSES, GRANT OF SECURITY INTEREST; USURY SAVINGS: (a) For income tax purposes, the parties hereto agree that it is their mutual intention that Lessee shall be considered the owner of the Equipment. Accordingly, Lessor agrees (i) to treat Lessee as the owner of the Equipment on its federal income tax return, (ii) not to take actions or positions inconsistent with such treatment on or with respect to its federal income tax return, and (iii) not to claim any tax benefits available to an owner of the Equipment on or with respect to its federal income tax return. The foregoing undertakings by Lessor shall not be violated by Lessor's taking a tax position inconsistent with the foregoing sentence to the extent such a position is required by law or is taken through inadvertence so long as such inadvertent tax position is reversed by Lessor promptly upon its discovery. Lessor shall in no event be liable to Lessee if Lessee fails to secure any of the tax benefits available to the owner of the Equipment. (b) Lessee hereby grants to Lessor a first security interest in the Equipment, together with any additions, attachments, accessions, accessories and accessions thereto whether or not furnished by the Supplier of the Equipment and any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or proceeds of the property in and against which a security interest is granted hereunder. Notwithstanding anything to the contrary contained elsewhere in this Agreement, to the extent that Lessor asserts a purchase money security interest in any items of Equipment ("PMSI Equipment"): (i) the PMSI Equipment shall secure only those sums which have been advanced by Lessor for the purchase of the PMSI Equipment, or in the acquisition of rights therein, or the use thereof (the "PMSI Indebtedness"), and (ii) no other Equipment shall secure the PMSI Indebtedness. (c) It is the intention of the parties hereto to comply with any applicable usury laws to the extent that any Schedule is determined to be subject to such laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in any Schedule or this Agreement, in no event shall any Schedule require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under any Schedule or this Agreement, or in the event that all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under any Schedule or this Agreement shall exceed the maximum amount of interest permitted by applicable law, then in such event (i) the provisions of this paragraph shall govern and control, (ii) neither Lessee nor any other person or entity now or hereafter liable for payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (iii) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Lessee, at the option of the Lessor, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under any Schedule or this Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Lessee or otherwise by Lessor in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for Lessor to receive a greater interest per annum rat than is presently allowed, the Lessee agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest rate per annum rate allowed by the amended state law or the laws of the United States of America. 17. EARLY TERMINATION: (a) On or after the First Termination Date (specified in the applicable Schedule), Lessee may, so long as no default exists hereunder, terminate this Agreement as to all (but not less than all) of the Equipment on such Schedule as of a rent payment date ("Termination Date"). Lessee must give Lessor at least ninety (90) days prior written notice of the termination. (b) Lessee shall, and Lessor may, solicit cash bids for the Equipment on an AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall (i) certify to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the Termination Value (calculated as of the rent due on the Termination Date) for the Equipment, and (B) all rent and other sums due and unpaid as of the Termination Date. (c) If all amounts due hereunder have been paid on the Termination Date, Lessor shall (i) sell the Equipment on an AS IS BASIS for cash to the highest bidder and (ii) refund the proceeds of such sale (net of any related expenses) to Lessee up to the amount of the Termination Value. If such sale is not consummated, no termination shall occur and Lessor shall refund the Termination Value (less any expenses incurred by Lessor) to Lessee. (d) Notwithstanding the foregoing, Lessor may elect by written notice, at any time prior to the Termination Date, not to sell the Equipment. In that event, on the Termination Date Lessee shall (i) return the Equipment (in accordance with Section 9) and (ii) pay to Lessor all amounts required under Section 17(b) less the amount of the highest bid certified by Lessee to Lessor. 18. EARLY PURCHASE OPTION: (a) Lessee may purchase on an AS IS BASIS all (but not less than all) of the Equipment on any Schedule on any Rent Payment Date after the First Termination Date specified in the applicable Schedule but not prior to the last Rent Payment Date of such Schedule (the "Early Purchase Date"), for a price equal to (i) the Termination Value (calculated as of the Early Purchase Date) for the Equipment, and (ii) all rent and other sums due and unpaid as of the Early Purchase Date (the "Early Option Price"), plus all applicable sales taxes. Lessee must notify Lessor of its intent to purchase the Equipment in writing at least thirty (30) days, but not more than two hundred seventy (270) days, prior to the Early Purchase Date. If Lessee is in default or if the Schedule or this Agreement has already been terminated, Lessee may not purchase the Equipment. (The purchase option granted by this subsection shall be referred to herein as the "Early Purchase Option"). (b) If Lessee exercises its Early Purchase Option, then on the Early Purchase Date, Lessee shall pay to Lessor any rent and other sums due and unpaid on the Early Purchase Date and Lessee shall pay the Early Option Price, plus all applicable sale taxes, to Lessor in cash. 19. END OF LEASE PURCHASE OPTION: Lessee may, at lease expiration, purchase all (but not less than all) of the Equipment on any Schedule on an AS IS BASIS for cash equal to the amount indicated on each Schedule (the "Option Payment"), plus all applicable sales taxes. The Option Payment, plus all applicable sales taxes, shall be due and payable in immediately available funds on the expiration date of such Schedule. Lessee must notify Lessor of its intent to purchase the Equipment in writing at least one hundred eighty (180) days prior to the expiration date of the Schedule. If Lessee is in default, or if the Schedule or this Agreement has already been terminated, Lessee may not purchase the Equipment. 20. MISCELLANEOUS: (a) LESSEE AND LESSOR UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (b) Any cancellation or termination by Lessor of this Agreement, any Schedule, supplement or amendment hereto, or the lease of any Equipment hereunder shall not release Lessee for any then outstanding obligations to Lessor hereunder. All Equipment shall at all times remain personal property even thought it may be attached to real property. The Equipment shall not become part of any other property by reason of any installation in, or attachment to, other real or personal property. (c) Time is of the essence of this Agreement. Lessor's failure at any time to require strict performance by Lessee of any of the provisions hereof shall not waive or diminish Lessor's right at any time to demand strict compliance with this Agreement. Lessee agrees, upon Lessor's request, to execute any other instrument necessary or expedient for filing, recording or perfecting the interest of Lessor. All notices required to be given hereunder shall be deemed adequately given if sent by registered or certified mail to the addressee at its address stated herein, or at such other place as such addressee may have specified in writing. This Agreement and any Schedule and Annexes thereto constitute the entire agreement of the parties with respect to the subject matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO. (d) If Lessee does not comply with any provision of this Agreement, Lessee shall have the right, but shall not be obligated, to effect such compliance, in whole or in part. All reasonable amounts spent and obligations incurred or assumed by Lessor in effecting such compliance shall constitute additional rent due to Lessor. Lessee shall pay the additional rent within five days after the date Lessor sends notice to Lessee requesting payment. Lessor's effecting such compliance shall not be a waiver of Lessee's default. (e) Any rent or other amount not paid to Lessor when due shall bear interest, from the due date until paid, at the lesser of eighteen percent (18%) per annum or the maximum rate allowed by law. Any provisions in this Agreement and any Schedule that are in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. (f) Lessee hereby irrevocably authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no more than ten percent (10%) within each Schedule to account for equipment change orders, equipment returns, invoicing errors, and similar matters. Lessee acknowledges and agrees that the rent shall be adjusted as a result of the change in the Capitalized Lessor's Cost. Lessor shall send Lessee a written notice stating the final Capitalized Lessor's Cost, if it has changed. (g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPALS OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT. (h) Any cancellation or termination by Lessor, pursuant to the provisions of this Agreement, any Schedule, supplement or amendment hereto, of the lease of any Equipment hereunder, shall not release Lessee from any then outstanding obligations to Lessor hereunder. (i) To the extent any Schedule would constitute chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest therein may be created through the transfer or possession of this Agreement in and of itself without the transfer or possession of the original of a Schedule executed pursuant to this Agreement and incorporating this Agreement by reference; and no security interest in this Agreement and a Schedule may be created by transfer or possession of any counterpart of the Schedule other than the original thereof, which shall be identified as the document marked Original and all other counterparts shall be marked Duplicate. IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation Image Entertainment, Inc. By: /s/ STEPHEN B. PETERSON By: /s/ JEFF M. FRAMER ---------------------------------- ------------------------------ Name: Stephen B. Peterson Name: Jeff M. Framer -------------------------------- ------------------------- Title: Sr. Risk Analyst Title: Chief Financial Officer ---------------------------- ------------------------- EQUIPMENT SCHEDULE (Quasi Lease - Fixed Rate) SCHEDULE NO. 1 DATED THIS July 25, 2001 TO MASTER LEASE AGREEMENT DATED AS OF July 25, 2001 Lessor & Mailing Address: Lessee & Mailing Address: - ------------------------- ------------------------- General Electric Capital Corporation Image Entertainment, Inc. 2400 E. Katella Avenue Suite 800 9333 Oso Avenue Anaheim, CA 92806 Chatsworth, CA 91311 This Schedule is executed pursuant to, and incorporates by reference the terms and conditions of, and capitalized terms not defined herein shall have the meanings assigned to them in, the Master Lease Agreement identified above ("Agreement", said Agreement and this Schedule being collectively referred to as "Lease"). This Schedule, incorporating by reference the Agreement, constitutes a separate instrument of lease. A. Equipment: Subject to the terms and conditions of the Lease, Lessor agrees to lease to Lessee the Equipment described below (the "Equipment"). Number Capitalized Serial Numbers of Units Lessor's Cost Manufacturer Year/Model and Type of Equipment - -------------------------------------------------------------------------------- Various DVD Editing Production Equipment as more fully described on Exhibit A attached hereto and made a part hereof. B. Financial Terms 1. Advance Rent (if any): N/A 6. Lessee Federal Tax ID No.: 840685613. 2. Capitalized Lessor's Cost: $914,528.97 7. Last Delivery Date: July 31, 2001 3. Basic Term (No. of Months): 48 Months plus 1 day 8. Daily Lease Rate Factor: .0210556% 4. Basic Term Lease Rate Factor: 2.421625% 9. Interest Rate: 7.58% per annum. 5. Basic Term Commencement Date: August 1, 2001 10. Option Payment: $1.
11. First Termination Date: Thirty-six (36) months after the Basic Term Commencement Date. 12. Interim Rent: For the period from and including the Lease Commencement Date to the Basic Term Commencement Date ("Interim Period"), Lessee shall pay as rent ("Interim Rent") for each unit of Equipment, the product of the Daily Lease Rate Factor times the Capitalized Lessor's Cost of such unit times the number of days in the Interim Period. Interim Rent shall be due on N/A. 13. Basic Term Rent. Commencing on September 1, 2001 and on the same day of each month thereafter (each, a "Rent Payment Date") during the Basic Term, Lessee shall pay as rent ("Basic Term Rent") the product of the Basic Term Lease Rate Factor times the Capitalized Lessor's Cost of all Equipment on this Schedule. 14. Lessee agrees and acknowledges that the Capitalized Lessor's Cost of the Equipment as stated on the Schedule is equal to the fair market value of the Equipment on the date hereof. C. Interest Rate: Interest shall accrue from the Lease Commencement Date through and including the date of termination of the Lease. D. Property Tax APPLICABLE TO EQUIPMENT LOCATED IN CALIFORNIA: Lessee agrees that it will (a) list all such Equipment, (b) report all property taxes assessed against such Equipment and (c) pay all such taxes when due directly to the appropriate taxing authority until Lessor shall otherwise direct in writing. Upon request of Lessor, Lessee shall promptly provide proof of filing and proof of payment to Lessor. Lessor may notify Lessee (and Lessee agrees to follow such notification) regarding any changes in property tax reporting and payment responsibilities. E. Article 2A Notice IN ACCORDANCE WITH THE REQUIREMENTS OF ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE AS ADOPTED IN THE APPLICABLE STATE, LESSOR HEREBY MAKES THE FOLLOWING DISCLOSURES TO LESSEE PRIOR TO EXECUTION OF THE LEASE, (A) THE PERSON(S) SUPPLYING THE EQUIPMENT IS Reflections in Video, California Soundworks, Broadcast Store, Westlake Audio, Sunfire Corporation, (THE "SUPPLIER(S)"), (B) LESSEE IS ENTITLED TO THE PROMISES AND WARRANTIES, INCLUDING THOSE OF ANY THIRD PARTY, PROVIDED TO THE LESSOR BY SUPPLIER(S), WHICH IS SUPPLYING THE EQUIPMENT IN CONNECTION WITH OR AS PART OF THE CONTRACT BY WHICH LESSOR ACQUIRED THE EQUIPMENT AND (C) WITH RESPECT TO SUCH EQUIPMENT, LESSEE MAY COMMUNICATE WITH SUPPLIER(S) AND RECEIVE AN ACCURATE AND COMPLETE STATEMENT OF SUCH PROMISES AND WARRANTIES, INCLUDING ANY DISCLAIMERS AND LIMITATIONS OF THEM OR OF REMEDIES. TO THE EXTENT PERMITTED BY APPLICABLE LAW, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A LESSEE IN ARTICLE 2A AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY LIMIT OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES UNDER THE DEFAULT AND REMEDIES SECTION OF THE AGREEMENT. F. Stipulated Loss and Termination Value Table* stipulated # of termination loss base value value payments % of cost % of cost 1 101.210 105.094 2 99.409 103.231 3 97.596 101.357 4 95.772 99.472 5 93.936 97.575 6 92.089 95.667 7 90.230 93.747 8 88.360 91.815 9 86.477 89.871 10 84.583 87.916 11 82.677 85.948 12 80.758 83.969 13 78.828 81.977 14 76.885 79.973 15 74.930 77.957 16 72.963 75.928 17 70.983 73.887 18 68.991 71.834 19 66.986 69.768 20 64.969 67.689 21 62.939 65.598 22 60.896 63.494 23 58.840 61.377 24 56.771 59.246 25 54.689 57.103 26 52.594 54.947 27 50.485 52.777 28 48.364 50.594 29 46.229 48.398 30 44.080 46.188 31 41.918 43.965 32 39.742 41.728 33 37.553 39.477 34 35.349 37.213 35 33.132 34.934 36 30.901 32.642 37 28.655 30.335 38 26.396 28.014 39 24.122 25.679 40 21.834 23.330 41 19.531 20.966 42 17.214 18.587 43 14.882 16.194 44 12.535 13.786 45 10.174 11.364 46 7.798 8.926 47 5.406 6.474 48 3.000 4.006 *The Stipulated Loss Value or Termination Value for any unit of Equipment shall be the Capitalized Lessor's Cost of such unit multiplied by the appropriate percentage derived from the above table. In the event that the Lease is for any reason extended, then the last percentage figure shown above shall control throughout any such extended term. G. Modifications and Additions for This Schedule Only For purposes of this Schedule only, the Agreement is amended as follows: LEASE TERM OPTIONS Lessee hereby irrevocably agrees to purchase the Equipment upon the expiration of the Basic Term. Lessee shall pay the Lessor the purchase price of One Dollar ($1.00) in cash for the Equipment, on or before September 1, 2005. The Equipment shall be sold to Lessee and possession made available to Lessee "As-is" and "Where-is"; Lessor will not make any representation or warranty, express or implied, including, but not limited to any warranty as to fitness fro any particular or other purpose, merchantability, or patent infringement, except that Lessor shall have the right to sell the Equipment and shall transfer to Lessee good title free and clear of any superior lien or encumbrances created by Lessor. Lessee is liable for any taxes payable as a result of this sale. H. Payment Authorization Lessor is hereby irrevocably authorized and directed to deliver and apply the proceeds due under this Schedule as follows:
Company Name Address Amount ----------------------------------------------------------------------=--------------------- Image Entertainment, Inc. 9333 Oso Avenue, Chatsworth, CA 91311 $860,046.58 Reflections In Video 6910 Havenhurst Ave., #100, Van Nuys, CA 91406 $50,847.99 Broadcast Store 1840 Flower Street, Glendale, CA 91201 $3,634.40
This authorization and direction is given pursuant to the same authority authorizing the above-mentioned financing. Pursuant to the provisions of the lease, as it relates to this Schedule, Lessee hereby certifies and warrants that (i) all Equipment listed above is in good condition and appearance, has been delivered and installed (if applicable) as of the date stated above and in working order; (ii) Lessee has inspected the Equipment, and all such testing as it deems necessary has been performed by Lessee, Supplier or the manufacturer; and (iii) Lessee accepts the Equipment for all purposes of the Lease and all attendant documents. Lessee does further certify that as of the date hereof (i) Lessee is not in default under the Lease; and (ii) the representations and warranties made by Lessee pursuant to or under the Lease are true and correct on the date hereof. Lessee hereby authorizes Lessor to file a financing statement and amendments thereto describing the Equipment described in this Schedule and adding any other collateral described herein and containing any other information required by the applicable Uniform Commercial Code. Further, Lessee irrevocably grants to Lessor the power to sign Lessee's name and generally to act on behalf of Lessee to execute and file financing statements and other documents pertaining to any or all of the Equipment. Except as expressly modified hereby, all terms and provisions of the Agreement shall remain in full force and effect. This Schedule is not binding or effective with respect to the Agreement or Equipment until executed on behalf of Lessor and Lessee by authorized representatives of Lessor and Lessee, respectively. IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: General Electric Capital Corporation Image Entertainment, Inc. By: /s/ STEPHEN B. PETERSON By: /s/ JEFF M. FRAMER ------------------------------------ --------------------------------- Name: Stephen B. Peterson Name: Jeff M. Framer ---------------------------------- ------------------------------- Title: Senior Risk Analyst Title: Chief Financial Officer --------------------------------- ------------------------------ EXHIBIT B TO SCHEDULE NO. 1 DATED THIS JULY 25, 2001 TO MASTER LEASE AGREEMENT DATED AS OF JULY 25, 2001 BILL OF SALE KNOW ALL MEN BY THESE PRESENTS: Integrated Circuit Solutions, Inc. ("Seller"), for and in consideration of the sum of One Dollar ($1) and other good and valuable consideration, provided to General Electric Capital Corporation, ("Buyer"), with offices at 2400 East Katella Ave., Suite 800, Anaheim, California 92806, the receipt of which is hereby acknowledged, does hereby sell, assign, transfer, set over and convey to Buyer the equipment (the "Equipment") leased under Annex "A" to Schedule No. 1 dated as of July 25, 2001, between Seller and Buyer, executed pursuant to the Master Lease Agreement dated July 25, 2001, between Seller and Buyer, a copy of which is attached hereto and made a part hereof. Buyer and Seller agree and acknowledge that the sale and conveyance contemplated hereby is solely for the purpose of granting to Buyer a security interest in the Equipment and Seller shall retain legal title to such Equipment. All Equipment in which an interest is conveyed hereby shall remain in the possession of Seller pursuant to the Lease. Buyer is purchasing the Equipment described above in reliance upon its personal inspection and knowledge of the Equipment and in an "AS-IS, WHERE-IS", condition. SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, OF ANY KIND OR NATURE EXCEPT THAT (1) BUYER WILL ACQUIRE ITS INTEREST IN THE EQUIPMENT FREE FROM ALL LIENS, CLAIMS AND ENCUMBRANCES, AND (2) SELLER HAS THE RIGHT TO SELL AND CONVEY THE EQUIPMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SELLER MAKES NO WARRANTIES WITH RESPECT TO THE QUALITY, CONTENT, CONDITION, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE EQUIPMENT AND NO WARRANTIES AGAINST PATENT INFRINGEMENT OR THE LIKE. IN WITNESS WHEREOF, Buyer and Seller have executed this Bill of Sale this 25th day of July, 2001 BUYER: SELLER: General Electric Capital Corporation Image Entertainment, Inc. By: /s/ STEPHEN B. PETERSON By: /s/ JEFF M. FRAMER --------------------------------- --------------------------------- Name: Stephen B. Peterson Name: Jeff M. Framer ------------------------------- ------------------------------ Title: Senior Risk Analyst Title: Chief Financial Officer ------------------------------ ----------------------------- AMORTIZATION SCHEDULE TO SCHEDULE NO. 1 TO MASTER FILM AGREEMENT DATED JULY 25, 2001
Outstanding Rent Payment Rent Principal Number Balance Payment Interest Principal Balance 1 914,528.97 22,146.47 5,776.78 16,369.69 898159.28 2 898,159.28 22,146.47 5,673.37 16,473.09 881686.19 3 881,686.19 22,146.47 5,569.32 16,577.15 865109.04 4 865,109.04 22,146.47 5,464.61 16,681.86 848427.18 5 848,427.18 22,146.47 5,359.23 16,787.23 831639.95 6 831,639.95 22,146.47 5,253.19 16,893.27 814746.67 7 814,746.67 22,146.47 5,146.48 16,999.98 797746.69 8 797,746.69 22,146.47 5,039.10 17,107.37 780639.33 9 780,639.33 22,146.47 4,931.04 17,215.43 763423.90 10 763,423.90 22,146.47 4,822.30 17,324.17 746099.73 11 746,099.73 22,146.47 4,712.86 17,433.60 728666.13 12 728,666.13 22,146.47 4,602.74 17,543.72 711,122.40 13 711,122.40 22,146.47 4,491.92 17,654.54 693,467.86 14 693,467.86 22,146.47 4,380.41 17,766.06 675,701.80 15 675,701.80 22,146.47 4,268.18 17,878.28 657,823.52 16 657,823.52 22,146.47 4,155.25 17,991.21 639,832.31 17 639,832.31 22,146.47 4,041.61 18,104.86 621,727.45 18 621,727.45 22,146.47 3,927.25 18,219.22 603,508.23 19 603,508.23 22,146.47 3,812.16 18,334.31 585,173.92 20 585,173.92 22,146.47 3,696.35 18,450.12 566,723.81 21 566,723.81 22,146.47 3,579.81 18,566.66 548,157.15 22 548,157.15 22,146.47 3,462.53 18,683.94 529,473.21 23 529,473.21 22,146.47 3,344.51 18,801.96 510,671.25 24 510,671.25 22,146.47 3,225.74 18,920.73 491,750.52 25 491,750.52 22,146.47 3,106.22 19,040.24 472,710.28 26 472,710.28 22,146.47 2,985.95 19,160.51 453,549.77 27 453,549.77 22,146.47 2,864.92 19,281.54 434,268.23 28 434,268.23 22,146.47 2,743.13 19,403.34 414,864.89 29 414,864.89 22,146.47 2,620.56 19,525.90 395,338.99 30 395,338.99 22,146.47 2,497.23 19,649.24 375,689.74 31 375,689.74 22,146.47 2,373.11 19,773.36 355,916.39 32 355,916.39 22,146.47 2,248.21 19,898.26 336,018.12 33 336,018.12 22,146.47 2,122.52 20,023.95 315,994.17 34 315,994.17 22,146.47 1,996.03 20,150.44 295,843.74 35 295,843.74 22,146.47 1,868.75 20,277.72 275,566.02 36 275,566.02 22,146.47 1,740.66 20,405.81 255,160.21 37 255,160.21 22,146.47 1,611.76 20,534.70 234,625.51 38 234,625.51 22,146.47 1,482.05 20,664.41 213,961.09 39 213,961.09 22,146.47 1,351.52 20,794.95 193,166.15 40 193,166.15 22,146.47 1,220.17 20,926.30 172,239.85 41 172,239.85 22,146.47 1,087.98 21,058.48 151,181.36 42 151,181.36 22,146.47 954.96 21,191.50 129,989.86 43 129,989.86 22,146.47 821.10 21,325.36 108,664.50 44 108,664.50 22,146.47 686.40 21,460.07 87,204.43 45 87,204.43 22,146.47 550.84 21,595.62 65,608.80 46 65,608.80 22,146.47 414.43 21,732.04 43,876.76 47 43,876.76 22,146.47 277.15 21,869.31 22,007.45 48 22,007.45 22,146.47 139.01 22,007.45 0.00
Initials: SBP JMF --------- --- Lessor Lessee EX-15 7 dex15.txt CONSENT LETTER OF KPMG LLP INDEPENDENT ACCOUNTANTS' CONSENT -------------------------------- Image Entertainment, Inc. Chatsworth, California Gentlemen: Re: Registration Statement Nos. 33-43241, 33-55393 and 33-57336 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated November 2, 2001 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ KPMG LLP Los Angeles, California November 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----