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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period
From .................... To ....................
Commission File Number 0-11071
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IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 84-0685613
(State or other (I.R.S. Employer
jurisdiction 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 August 1, 2000:
16,490,706
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS.
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and March 31, 2000
- --------------------------------------------------------------------------------
ASSETS
(In thousands) June 30, March 31,
2000 2000
------- -------
(unaudited)
Cash and cash equivalents $ 1,703 $ 1,532
Accounts receivable, net of allowances of
$3,653 - June 30, 2000;
$3,664 - March 31, 2000 12,975 13,457
Inventories 18,989 17,881
Royalty and distribution fee advances 9,402 8,868
Prepaid expenses and other assets 2,473 2,576
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$5,669 - June 30, 2000;
$5,190 - March 31, 2000 14,253 14,067
Goodwill, net of accumulated amortization of
$742 - June 30, 2000;
$614 - March 31, 2000 6,887 7,014
------- -------
$66,682 $65,395
======= =======
See accompanying notes to consolidated financial statements
-1-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and March 31, 2000
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) June 30, March 31,
2000 2000
-------- --------
(unaudited)
LIABILITIES:
Accounts payable and accrued liabilities $ 17,865 $ 15,606
Accrued royalties and distribution fees 2,971 3,550
Revolving credit and term loan facility 8,743 10,790
Real estate credit facility 3,133 3,176
Distribution equipment lease facility 1,342 1,432
Equipment line of credit 257 --
Convertible subordinated note payable 5,000 5,000
-------- --------
Total liabilities 39,311 39,554
-------- --------
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;
16,491,000 and 16,462,000 issued and outstanding
at June 30, 2000 and March 31, 2000, respectively 32,034 31,819
Additional paid-in capital 3,064 3,064
Accumulated deficit (7,727) (9,042)
-------- --------
Net shareholders' equity 27,371 25,841
-------- --------
$ 66,682 $ 65,395
======== ========
See accompanying notes to consolidated financial statements
-2-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended June 30, 2000 and 1999
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(In thousands, except per share data) 2000 1999
-------- --------
NET REVENUES $ 23,722 $ 18,020
OPERATING COSTS AND EXPENSES:
Cost of sales 16,141 13,626
Selling expenses 2,396 2,022
General and administrative expenses 2,259 1,873
Amortization of production costs 999 1,008
Amortization of goodwill 127 124
-------- --------
21,922 18,653
-------- --------
OPERATING INCOME (LOSS) 1,800 (633)
OTHER EXPENSES (INCOME):
Interest expense, net 430 320
Other 15 (239)
-------- --------
445 81
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,355 (714)
INCOME TAX EXPENSE 40 --
-------- --------
NET INCOME (LOSS) $ 1,315 $ (714)
======== ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ .08 $ (.04)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 16,462 16,431
======== ========
Diluted 17,844 16,431
======== ========
See accompanying notes to consolidated financial statements
-3-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended June 30, 2000 and 1999
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,315 $ (714)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of production costs 999 1,008
Amortization of goodwill 127 124
Depreciation and other amortization 477 336
Amortization of restricted stock units 57 30
Provision for slow-moving inventories 60 261
Provision for estimated doubtful accounts 205 --
Changes in assets and liabilities associated with
operating activities:
Accounts receivable 277 2,955
Inventories (852) (287)
Royalty and distribution fee advances, net (534) (634)
Production cost expenditures (1,314) (1,231)
Prepaid expenses and other assets 103 (741)
Accounts payable, accrued royalties and liabilities 1,838 (4,110)
------- -------
Net cash provided by (used in) operating activities 2,758 (3,003)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities - Capital expenditures (664) (811)
------- -------
See accompanying notes to consolidated financial statements
-4-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
For the Three Months Ended June 30, 2000 and 1999
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit and term loan facility $ 22,366 $ 24,095
Advances under equipment line of credit 257 --
Repayment of advances under revolving credit and
term loan facility (24,413) (20,643)
Repayment of advances under real estate credit facility (43) (43)
Repayment of note payable -- (135)
Principal payments under equipment lease facility (90) (83)
Net proceeds from exercise of stock options -- 33
Other -- (52)
-------- --------
Net cash (used in) provided by financing activities (1,923) 3,172
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 171 (642)
Cash and cash equivalents at beginning of period 1,532 1,552
-------- --------
Cash and cash equivalents at end of period $ 1,703 $ 910
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 445 $ 300
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On June 30, 2000 and 1999, the Company issued 28,674 and 11,407 shares of common
stock to officers (net of shares withheld for payment of related income taxes),
respectively, pursuant to restricted stock units which vested on June 30, 2000
and 1999. The Company increased common stock at June 30, 2000 and 1999 by
approximately $215,000 and $76,000, respectively, representing the respective
value of the total vested shares as of the grant dates less the value of shares
withheld for payment of related income taxes as of the June 30, 2000 and June
30, 1999 vesting dates.
See accompanying notes to consolidated financial statements
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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NOTE 1. BASIS OF PRESENTATION.
The accompanying condensed consolidated financial statements include the
accounts of Image Entertainment, Inc., its wholly-owned subsidiary
DVDPlanet.com, Inc. (formerly known as "Image Newco, Inc." and doing business as
"Ken Crane's DVD and Laserdisc Superstore," acquired January 1999) and the
50%-owned joint venture, Aviva International, LLC (formed in June 1999)
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
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, 2000. 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 months ended
June 30, 2000, are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2001. The accompanying
consolidated financial information for the three months ended June 30, 2000 and
1999 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, 2000.
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 related to allowances for slow-moving inventories,
doubtful accounts receivables, unrecouped royalty and distribution fee advances
and sales returns. These estimates are based on management's knowledge of
current events and actions management may undertake in the future, therefore,
actual results may ultimately differ from management's estimates.
NOTE 2. INVENTORIES.
Inventories at June 30, 2000 and March 31, 2000 are summarized as follows:
June 30, March 31,
(In thousands) 2000 2000
-------- --------
DVD $ 13,735 $ 12,989
laserdisc 4,439 5,710
other 632 629
-------- --------
18,806 19,328
Reserve for slow-moving inventories:
DVD (826) (767)
laserdisc and other (4,205) (5,578)
-------- --------
(5,031) (6,345)
-------- --------
13,775 12,983
Production costs, net 5,214 4,898
-------- --------
$ 18,989 $ 17,881
======== ========
Inventories consist primarily of finished product for sale and are stated at the
lower of average cost or market.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
Production costs are net of accumulated amortization of $6,739,000 and
$6,701,000 at June 30, 2000 and March 31, 2000, respectively.
NOTE 3. DEBT.
Revolving Credit and Term Loan Facility. At June 30, 2000, the Company had
- ---------------------------------------
$8,270,000 outstanding under its $15,000,000 revolving credit facility and
$473,000 outstanding under its $500,000 term loan facility with Foothill Capital
Corporation ("Foothill") and had borrowing availability of $5,661,000 under its
revolving credit facility, net of amounts utilized for outstanding standby
letters of credit. The Company has fully utilized its term loan facility.
Borrowings under the revolving credit and term loan facility bear interest at
prime plus 0.75% (10.25% at June 30, 2000). The term of the revolving credit and
term loan facility ends December 28, 2001 but is renewable automatically
thereafter for successive one-year periods.
At June 30, 2000, the Company had $700,000 of outstanding standby letters of
credit issued by Foothill of which $150,000 expire on September 30, 2000,
$250,000 expire on November 18, 2000 and $300,000 expire on June 30, 2001. These
standby letters of credit secure trade payables due to program suppliers.
Real Estate Credit Facility. At June 30, 2000, $3,133,000 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% (8.52% at June 30, 2000). The Company may repay and reborrow
principal amounts provided the outstanding borrowings do not exceed the maximum
commitment of $3,133,000 at June 30, 2000, reduced quarterly by $43,000. The
credit facility expires on January 31, 2008.
Distribution Equipment Lease Facility. At June 30, 2000, $1,342,000 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.
Equipment Line of Credit. On June 28, 2000, the Company entered into a Business
- ------------------------
Loan Agreement with Bank of America, N.A., in Nevada for an equipment line of
credit of up to $1,000,000. The line is available for borrowing through August
30, 2001. Outstanding borrowings are to be repaid in 42 successive equal monthly
installments beginning September 30, 2001 through the line's expiration on
February 28, 2005. The Company has the option to borrow at prime plus 1.25% or
LIBOR plus 2.50%, subject to a mininum borrowing requirement. Interest is
payable monthly. Outstanding borrowings are secured by the related equipment
purchased by the Company. The loan agreement contains the same covenants as the
Company's other loan agreements with Bank of America. The Company had $257,000
outstanding under this line at June 30, 2000, bearing interest at prime plus
1.25% (10.75% at June 30, 2000).
Convertible Subordinated Note Payable. At June 30, 2000, the Company had
- -------------------------------------
$5,000,000 outstanding under the convertible subordinated note payable, bearing
interest at 8.0% and due September 29, 2002.
At June 30, 2000, the Company was in compliance with all financial and operating
covenants under its debt agreements.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
NOTE 4. NET INCOME (LOSS) PER SHARE.
The following presents a reconciliation of the numerators and denominators used
in computing basic and diluted net income (loss) per share for the three months
ended June 30, 2000 and 1999:
(In thousands, except per share data) 2000 1999
-------- --------
Net income (loss) (basic numerator) $ 1,315 $ (714)
======== ========
Interest, net of taxes, on assumed conversion of dilutive security 97 --
-------- --------
Net income (loss) (diluted numerator) $ 1,412 $ (714)
======== ========
Weighted average common shares outstanding
(basic denominator) 16,462 16,431
======== ========
Effect of dilutive securities 1,382 --
-------- --------
Weighted average common shares outstanding
(diluted denominator) 17,844 16,431
======== ========
Basic and diluted net income (loss) per share $ .08 $ (.04)
======== ========
Diluted net loss per share for the three months ended June 30, 1999 is based
only on the weighted average number of common shares outstanding for the period
as inclusion of common stock equivalents (outstanding common stock options and
common stock underlying the convertible subordinated note payable totaling
2,553,000) would be antidilutive. Outstanding common stock options not included
in the computation of diluted net income per share totaled 1,152,000 for the
three months ended June 30, 2000 and were excluded because their exercise prices
were greater than the average market price of the common stock for the period
and the assumed exercise would be antidilutive.
NOTE 5. SEGMENT INFORMATION.
In accordance with the requirements of SFAS No. 131, Disclosures about Segments
of and Enterprises and Related Information, selected financial information
regarding the Company's reportable business segments, domestic wholesale
distribution, direct-to-consumer retail distribution (through DVDPlanet), and
international wholesale distribution (through Aviva), 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 income (loss)
before income taxes. Interest income and expense is evaluated on a consolidated
basis and not allocated to the Company's business segments.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended June 30, 2000:
2000
----------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
NET REVENUES $ 21,992 $ 3,377 $ 1,408 $ (3,055) $ 23,722
OPERATING COSTS AND EXPENSES 19,519 4,133 1,312 (3,042) 21,922
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS) 2,473 (756) 96 (13) 1,800
OTHER EXPENSES 430 -- -- 15 445
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES $ 2,043 $ (756) $ 96 $ (28) $ 1,355
======== ======== ======== ======== ========
For the Three Months Ended June 30, 1999:
1999
----------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
NET REVENUES $ 17,017 $ 3,777 $ -- $ (2,774) $ 18,020
OPERATING COSTS AND EXPENSES 17,217 4,161 80 (2,805) 18,653
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (200) (384) (80) 31 (633)
OTHER EXPENSES (INCOME) 121 -- -- (40) 81
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES $ (321) $ (384) $ (80) $ 71 $ (714)
======== ======== ======== ======== ========
As of
------------------------
(In thousands) June 30, March 31,
2000 2000
-------- --------
Total Assets:
Domestic wholesale distribution $ 61,775 $ 59,376
Retail distribution 5,602 6,000
International wholesale distribution 553 1,264
Inter-segment eliminations (1,248) (1,245)
-------- --------
Consolidated total assets $ 66,682 $ 65,395
======== ========
-9-
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 for which it has exclusive distribution rights,
and programming for which it does not have exclusive distribution rights. In
addition to DVD, the Company distributes some of its exclusive titles in other
home video formats such as laserdisc and VHS. The Company has begun to secure
and exploit broadcast rights for certain of its exclusive titles. Broadcast
rights may include television, cable, satellite, radio and Internet streaming.
The Company's business strategy is to actively pursue, secure and
exploit exclusive rights to entertainment programming in as many home video
formats and broadcast mediums as possible, and in as many territories as
possible, for the longest term possible. To this end, the Company has begun to
expand its business and operations to become a content producer, with an
emphasis on music programming. 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.
----------------------------------------------------------------------
The Company distributes entertainment programming on both an exclusive and
nonexclusive basis. The exclusive product distributed by the Company (DVD and
other formats) is typically produced, marketed and sold by the Company pursuant
to an exclusive grant of rights -- typically a licensing arrangement but
sometimes pursuant to an exclusive distribution agreement. The nonexclusive
product distributed by the Company (mainly DVD format product) is purchased
directly from suppliers in final, finished and packaged form.
Direct-to-Consumer Retail Distribution Segment. The Company's
----------------------------------------------
direct-to-consumer retail distribution operations are conducted exclusively by
the Company's wholly-owned subsidiary, DVDPlanet.com, Inc. DVDPlanet has been in
operation since January 1999. DVDPlanet specializes in DVD software retailing
through its www.DVDPlanet.com web site, and via mail order. DVDPlanet also owns
and operates a DVD retail store in Westminster, California.
International Wholesale Distribution/Broadcast Rights Exploitation
------------------------------------------------------------------
Segment. The Company's international wholesale distribution business, and its
- -------
domestic and international broadcast rights exploitation activities, are
conducted by the Company's exclusive sales agent, Aviva International LLC, a
50%-owned joint venture between the Company and home video veteran, Michael
Lopez, formed in June 1999. The term of the joint venture currently runs through
December 31, 2000, with an option to renew for additional successive two year
periods upon mutual agreement of the Company and Lopez. Management believes that
the parties will renew the joint venture when the initial term expires on
December 31, 2000. Lopez serves as Manager of Aviva.
SEASONALITY AND VARIABILITY.
The Company has generally experienced higher sales in the quarters
ended December 31 and March 31 due to increased consumer spending associated
with the year-end holidays and the home video release of many high profile, high
budget summer theatrical releases. In addition to seasonality issues, other
factors have contributed to variability in the Company's DVD net revenues on a
quarterly basis. These factors include: (i) the popularity of titles then in
release; (ii) the Company's licensing and distribution activities relating to
new video 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.
-10-
The accompanying consolidated financial information for the three
months ended June 30, 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, 2000.
RESULTS OF OPERATIONS
The Three Months Ended June 30, 2000 Compared to the Three Months Ended
June 30, 1999
The following table presents consolidated net revenues by reportable
business segment for the three months ended June 30, 2000 and 1999:
Three Months Ended
June 30,
-------------------------------
2000 1999 % Change
------------- -------------- ------------
(in thousands)
Net revenues:
Domestic wholesale distribution $ 21,992 $ 17,017 29.2%
Retail distribution 3,377 3,777 (10.6)
International wholesale distribution 1,408 -- *
Inter-segment eliminations (3,055) (2,774) *
------------- -------------- ------------
Consolidated $ 23,722 $ 18,020 31.6%
============= ============== ============
----------
* not meaningful
Consolidated net revenues for all segments for the June 2000 quarter
increased 31.6% to $23,722,000 from $18,020,000 for the June 1999 quarter. This
increase is a result of growing sales of DVD programming partially offset by
declining laserdisc revenues. The Company experienced continued growth in its
sales of DVD programming domestically and internationally driven by the
Company's continued licensing of exclusive programming and the continued growth
in DVD player-household penetration. Consolidated net revenues of DVD
programming for the June 2000 quarter increased 54.3% to $22,017,000, or 92.8%
of consolidated net revenues, from $14,269,000, or 79.2% of net revenues, for
the June 1999 quarter. Approximately 64.3% of consolidated net revenues of DVD
programming for the June 2000 quarter were derived from exclusively licensed or
distributed programming as compared to 53.2% for the June 1999 quarter. Net
revenues of VHS and CD programming for the June 2000 quarter were $1,317,000, or
5.6% of consolidated net revenues, as compared to $846,000, or 4.7% of
consolidated net revenues for the June 1999 quarter. Net revenues of laserdisc
programming for the June 2000 quarter were $388,000, or 1.6% of consolidated net
revenues, as compared to $2,905,000, or 16.1% of consolidated net revenues for
the June 1999 quarter.
Net revenues for the Company's domestic wholesale distribution segment
for the June 2000 quarter increased 29.2% to $21,992,000 from net revenues of
$17,017,000 for the June 1999 quarter. In addition to positive market factors,
the Company has continued to aggressively license DVD programming which has
contributed to the Company's release of a greater number of new DVD programming.
During the June 2000 quarter, the Company released 151 exclusive DVD titles, an
86.4% increase from 81 exclusive DVD titles released during the June 1999
quarter. Additionally as the household penetration of DVD players grows, sales
of the Company's previously released exclusive DVD programming are expected to
grow.
Net revenues for the Company's retail distribution segment were
$3,377,000 for the June 2000 quarter, down approximately 10.6% from $3,777,000
for the June 1999 quarter. Although comparative net revenues for DVDPlanet for
the June 2000 quarter were down due to declining laserdisc sales, DVD sales were
significantly higher. DVDPlanet's net revenues of DVD programming were up 51.0%
to $3,076,000, or 91.1% of segment net revenues, for the June 2000 quarter from
$2,037,000, or 53.9% of segment net revenues, for the June 1999 quarter. Net
revenues of DVD
-11-
programming via Internet/mail order increased 41.8% to $2,128,000 for the June
2000 quarter from $1,501,000 for the June 1999 quarter. Increased DVD Internet
customer transactions contributed to the increase in DVD sales.
Net revenues for the Company's international wholesale distribution
segment for the June 2000 quarter were $1,408,000. There were no segment
revenues recognized during the June 1999 quarter. This segment was formed in
June 1999. Approximately $830,000, or 59%, of segment revenues was derived from
international wholesale distribution of the Company's licensed DVD and VHS
programming, either through local distribution or local licensees. Approximately
$523,000, or 37%, of segment revenues was derived from international broadcast
exploitation of the Company's licensed programming. Approximately $55,000, or
4%, of segment revenues was derived from domestic broadcast exploitation of the
Company's licensed programming.
The following tables present consolidated cost of sales by reportable
business segment and as a percentage of related segment net revenues for the
three months ended June 30, 2000 and 1999:
Three Months Ended
June 30,
---------------------------
2000 1999
---------- --------
(in thousands)
Cost of sales:
Domestic wholesale distribution $ 15,263 $ 13,325
Retail distribution 2,945 3,106
International wholesale distribution 975 --
Inter-segment eliminations (3,042) (2,805)
---------- --------
Consolidated $ 16,141 $ 13,626
========== ========
As a percentage of segment net revenues: % Change
--------
Domestic wholesale distribution 69.4% 78.3% (8.9)%
Retail distribution 87.2 82.2 5.0
International wholesale distribution 69.2 -- *
---------- -------- -------
Consolidated 68.0% 75.6% (7.6)%
========== ======== =======
----------
* not meaningful
Consolidated cost of sales for the June 2000 quarter was $16,141,000,
or 68.0% of net revenues, compared to $13,626,000, or 75.6% of net revenues, for
the June 1999 quarter. Accordingly, consolidated gross profit margin improved to
32.0% for the June 2000 quarter from 24.4% for the June 1999 quarter. The
increase in gross profit margin primarily reflects the growth in the Company's
exclusive DVD revenues, the continued shift in sales mix from exclusive
laserdisc to higher profit margin exclusive DVD programming and lower DVD
replication costs. The Company expects DVD replication costs to further decline
in the near future.
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 the cost of DVD replication.
Additionally, the gross margins realized on exclusive international programming
are generally lower than those realized domestically on like exclusive
programming.
-12-
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 June 30, 2000 and 1999:
Three Months Ended
June 30,
-------------------------------
2000 1999 % Change
------------- -------------- -------------
(in thousands)
Selling expenses:
Domestic wholesale distribution $ 1,423 $ 1,348 5.6%
Retail distribution 706 615 14.8
International wholesale distribution 267 59 352.5
------------- -------------- -------------
Consolidated $ 2,396 $ 2,022 18.5%
============= ============== =============
As a percentage of segment net revenues:
Domestic wholesale distribution 6.5% 7.9% (1.4)%
Retail distribution 20.9 16.3 4.6
International wholesale distribution 19.0 * *
------------- -------------- -------------
Consolidated 10.1% 11.2% (1.1)%
============= ============== =============
---------
* not meaningful
Consolidated selling expenses for the June 2000 quarter increased 18.5%
to $2,396,000 from $2,022,000 for the June 1999 quarter. As a percentage of
consolidated net revenues, consolidated selling expenses for the June 2000
quarter decreased to 10.1% from 11.2% for the June 1999 quarter. The decrease in
consolidated selling expenses as a percentage of consolidated net revenues is
primarily due to the significant increase in comparative quarterly revenues for
the periods. The increase in selling expenses in absolute dollars for the June
2000 quarter was primarily due to the selling activities of the international
wholesale distribution segment. The segment was formed in the year-ago quarter.
Selling expenses for the domestic wholesale distribution segment were
up 5.6% to $1,423,000 for the June 2000 quarter from $1,348,000 for the June
1999 quarter. However, as a percentage of segment net revenues, selling expenses
for the June 2000 quarter were down 1.4% to 6.5% from 7.9% for the June 1999
quarter. The 5.6% increase in absolute dollar selling expenses results primarily
from higher personnel costs.
Selling expenses for the retail distribution segment increased 14.8% to
$706,000 for the June 2000 quarter from $615,000 for the June 1999. As a
percentage of segment net revenues, selling expenses for the June 2000 quarter
were up 4.6% to 20.9% from 16.3% for the June 1999 quarter. The 14.8% increase
in absolute dollar selling expenses were primarily due to higher personnel costs
(higher by $202,000) offset, in part, by lower net freight expenses (lower by
$78,000).
Selling expenses for the international wholesale distribution segment
increased to $267,000, or 19.0% of segment net sales, for the June 2000 quarter
from $59,000 for the June 1999 quarter primarily due to increased international
advertising and promotional expenditures during the June 2000 quarter compared
to the June 1999 quarter. The Company will continue to incur advertising and
promotional expenditures for its internationally exploited titles at a higher
percentage of net revenues as compared to its domestic wholesale distribution
segment to increase international brand awareness.
-13-
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 June 30, 2000 and 1999:
Three Months Ended
June 30,
-------------------------------
2000 1999 % Change
------------- -------------- -------------
(in thousands)
General and administrative expenses:
Domestic wholesale distribution $ 1,834 $ 1,536 19.4%
Retail distribution 355 315 12.7
International wholesale distribution 70 22 218.2
------------- -------------- -------------
Consolidated $ 2,259 $ 1,873 20.6%
============= ============== =============
As a percentage of segment net revenues:
Domestic wholesale distribution 8.3% 9.0% (0.7)%
Retail distribution 10.5 8.3 2.2
International wholesale distribution 5.0 * *
------------- -------------- -------------
Consolidated 9.5% 10.4% (0.9)%
============= ============== =============
----------
* not meaningful
Consolidated general and administrative expenses for the June 2000
quarter increased 20.6% to $2,259,000 from $1,873,000 for the June 1999 quarter.
The increase in consolidated general and administrative expenses in absolute
dollars for the June 2000 quarter was primarily due to an increase in the
domestic wholesale distribution segment's general and administrative expenses.
As a percentage of consolidated net revenues, consolidated general and
administrative expenses for the June 2000 quarter decreased to 9.5% from 10.4%
for the June 1999 quarter. The decrease in consolidated general and
administrative expenses as a percentage of consolidated net revenues is
primarily due to the significant increase in comparative quarterly revenues for
the periods.
General and administrative expenses for the domestic wholesale
distribution segment for the June 2000 quarter were up 19.4% to $1,834,000 from
$1,536,000 for the June 1999 quarter. However, as a percentage of segment net
revenues, general and administrative expenses for the June 2000 quarter were
down 0.7% to 8.3% from 9.0% for the June 1999 quarter. The 19.4% increase in
absolute dollar general and administrative expenses for the June 2000 quarter
results primarily from higher personnel costs, including performance-based
bonuses and amortization of restricted stock units, (higher by $190,000) and a
higher provision for uncollectible accounts receivable (higher by $180,000).
General and administrative expenses for the retail distribution segment
increased 12.7% to $355,000 for the June 2000 quarter from $315,000 for the June
1999 quarter. As a percentage of segment net revenues, general and
administrative expenses for the June 2000 quarter were up 2.2% to 10.5% from
8.3% for the June 1999 quarter. The increase in absolute dollar general and
administrative expenses was primarily due to higher depreciation expense for the
June 2000 quarter.
General and administrative expenses for the international wholesale
distribution segment increased to $70,000, or 5.0% of segment net revenues, for
the June 2000 quarter from $22,000 for the June 1999 quarter representing
primarily international travel related expenses.
Amortization of production costs for the June 2000 quarter decreased
0.9% to $999,000, or 4.2% of consolidated net revenues, from $1,008,000, or 5.6%
of consolidated net revenues, for the June 1999 quarter.
Goodwill amortization for the June 2000 quarter was $127,000, or 0.5%
of consolidated net revenues compared with $124,000, or 0.7% of consolidated net
revenues for the June 1999 quarter.
-14-
Interest expense, net of interest income, for the June 2000 quarter
increased 34.4% to $430,000 from $320,000 for the June 1999 quarter. The
increase is attributable primarily to higher weighted average debt and interest
rate levels during the June 2000 quarter as compared to the June 1999 quarter.
Other expense for the June 2000 quarter was $15,000 consisting of the
minority interest in the Aviva joint venture. Other income for the June 1999
quarter of $239,000 consists primarily of a $190,000 litigation settlement and
approximately $40,000 of minority interest in the Aviva joint venture.
Income tax expense of $40,000 for the June 2000 quarter reflects an
estimated consolidated effective tax rate of approximately 3%. The effective tax
rate is lower than the statutory rate due to utilization of net operating loss
carryforwards for Federal and state income tax purposes. The effective tax rate
is subject to on going review by management on a regular basis. The Company did
not record an income tax expense for the June 1999 quarter due to the
consolidated net loss.
Consolidated net income for the June 2000 quarter was $1,315,000, or
$.08 per basic and diluted share, as compared to a consolidated net loss of
$714,000, or $.04 per basic and diluted share, for the June 1999 quarter.
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.
Sources and Uses of Working Capital, Three Months Ended June 30, 2000 and 1999.
- -------------------------------------------------------------------------------
Net cash provided by operating activities for the three months ended
June 30, 2000 was $2,758,000 compared to net cash used in operating activities
of $3,003,000 for the comparable June 1999 period. The two major factors
contributing to the significant increase in net cash provided by operating
activities for the June 2000 quarter are as follows: the June 2000 quarter
provided net income of $1,315,000 compared to a net loss of $714,000 for the
June 1999 quarter and the June 2000 quarter had a higher comparative quarter-end
level of accounts payable, accrued royalties and liabilities than the June 1999
quarter as a result of comparatively increased DVD inventory purchases.
Investing activities consisted primarily of capital expenditures. Such
amounts aggregated $664,000 and $811,000 during the 2000 and 1999 three-month
periods, respectively. For both the 2000 and 1999 periods, the Company incurred
capital expenditures primarily for its Nevada warehouse and distribution
facility.
Net cash used in financing activities for the three months ended June
30, 2000 was $1,923,000 compared to net cash provided by financing activities
for the three months ended June 30, 1999 of $3,172,000. The decrease is
primarily due to net repayment of interest-bearing debt during the June 2000
quarter compared to net borrowings during the June 1999 quarter.
-15-
Financing Activities.
- ---------------------
Revolving Credit and Term Loan Facility. At June 30, 2000, the Company
---------------------------------------
had $8,270,000 outstanding under its $15,000,000 revolving credit facility and
$473,000 outstanding under its $500,000 term loan facility with Foothill Capital
Corporation ("Foothill") and had borrowing availability of $5,661,000 under its
revolving credit facility, net of amounts utilized for outstanding standby
letters of credit. The Company has fully utilized its term loan facility.
Borrowings under the revolving credit and term loan facility bear interest at
prime plus 0.75% (10.25% at June 30, 2000). The term of the revolving credit and
term loan facility ends December 28, 2001 but is renewable automatically
thereafter for successive one-year periods.
Real Estate Credit Facility. At June 30, 2000, $3,133,000 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% (8.52% at June 30, 2000). The Company may repay and
reborrow principal amounts provided the outstanding borrowings do not exceed the
maximum commitment of $3,133,000 at June 30, 2000, reduced quarterly by $43,000.
The credit facility expires January 31, 2008.
Distribution Equipment Lease Facility. At June 30, 2000, $1,342,000 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.
Equipment Line of Credit. On June 28, 2000, the Company entered into a
------------------------
Business Loan Agreement with Bank of America, N.A., in Nevada for an equipment
line of credit of up to $1,000,000. The line is available for borrowing through
August 30, 2001. Outstanding borrowings are to be repaid in 42 successive equal
monthly installments beginning September 30, 2001 through the line's expiration
on February 28, 2005. The Company has the option to borrow at prime plus 1.25%
or LIBOR plus 2.50%, subject to a minimum borrowing requirement. Interest is
payable monthly. Outstanding borrowings are secured by the related equipment
purchased by the Company. The loan agreement contains the same covenants as the
Company's other loan agreements with Bank of America. The Company had $257,000
outstanding under this line at June 30, 2000, bearing interest at prime plus
1.25% (10.75% at June 30, 2000). As of July 5, 2000, the outstanding balance
under the line bears interest at the LIBOR plus 2.5% option (9.5% at July 5,
2000).
Convertible Subordinated Note Payable. At June 30, 2000, the Company
-------------------------------------
had $5,000,000 outstanding under the convertible subordinated note payable,
bearing interest at 8.0% and due September 29, 2002.
Other Obligations.
- ------------------
At June 30, 2000, the Company had future license obligations for
royalty advances, minimum guarantees and other fees of $7,106,000 due during the
remainder of fiscal 2001 and $255,000 due during fiscal 2002. These advances and
guarantees are recoupable against royalties and distribution fees earned (in
connection with Company revenues) by the licensors and program suppliers,
respectively. Depending upon the competition for license and exclusive
distribution rights, the Company may have to pay increased advances, guarantees
and/or royalty rates in order to acquire or retain such rights in the future.
At June 30, 2000, the Company had $700,000 of outstanding standby
letters of credit issued by Foothill of which $150,000 expire on September 30,
2000, $250,000 expire on November 18, 2000 and $300,000 expire on June 30, 2001.
These letters of credit secure trade payables due program suppliers.
Other Items.
- ------------
In May 2000, the Company entered into escrow to sell approximately 4.7
acres of land in Las Vegas, Nevada (the remaining unsold acreage adjacent to the
Company's 8.4 acre warehouse and distribution facility site) to a real estate
developer for expected net proceeds of $1,400,000. The buyer exercised its right
to extend escrow from 45 days
-16-
to 75 days for a non-refundable deposit. The escrow is expected to close in
August 2000. There can be no assurance that the escrow will close and that the
ultimate sale will occur.
In June 2000, the court approved the Company's settlement agreement of
an adversary proceeding filed by One Stop Recovery LLC, as Trustee for AEC One
Stop, Inc. in connection with the Chapter 11 bankruptcy of Alliance relating to
certain alleged preferential transfers. The Company has recorded a $300,000
settlement charge including estimated legal fees as a component of general and
administrative expenses in the consolidated statement of operations during the
fiscal year ended March 31, 2000. The Company paid the settlement in July 2000.
Summary.
- --------
Management believes that its projected cash flows from operations,
borrowing availability under its lender revolving lines of credit, cash on hand
and trade credit will provide the necessary capital to meet its projected cash
requirements for at least the next 12 months. However, any projections of future
cash needs and cash flows are subject to substantial uncertainty. If cash flows
to be generated from operations, future borrowing availability under its lender
revolving lines of credit and future cash on hand are insufficient to satisfy
the Company's continuing licensing and acquisition of exclusive DVD programming
which require significant advance royalty or distribution fee payments, the
Company will need to seek additional debt and/or equity financing. Failure to
obtain this additional financing could significantly restrict the Company's
growth plans. There can be no assurance that additional financing will be
available in amounts or on terms acceptable to the Company, if at all.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, are
contained throughout this Form 10-Q. Such statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this report, the
words "anticipate," "believe," "estimate," "may," "plan," "expect" and similar
expressions, variations of such terms or the negative of such terms as they
relate to the Company or its management are intended to identify such
forward-looking statements and should not be regarded as a representation by the
Company, its management or any other person that the future events, plans or
expectations contemplated by the Company will be achieved. Such statements are
based on management's current expectations and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
the Company's actual results, performance or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. The Company has made forward-looking statements in this Form 10-Q
concerning, among other things: (1) growth in the Company's previously released
exclusive DVD programming as the household penetration of DVD players grows; (2)
lower DVD replication costs in the near future; (3) increasing international
brand awareness through increased advertising and promotional expenditures; and
(4) the date the escrow will close and that an ultimate sale of Las Vegas land
will occur. 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) customer and consumer tastes and preferences for the
Company's domestic and international entertainment programming; (2)
then-existing capacity at DVD replication vendors; and (3) the ultimate
suitability of the Las Vegas property to the intended buyer. 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.
-17-
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. Approximately $12.1 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 $121,000 annual impact on pretax income (loss)
based upon those outstanding borrowings at June 30, 2000.
FOREIGN EXCHANGE RATE FLUCTUATIONS. Approximately $419,000 of the Company's
accounts receivable related to international distribution and denominated in
foreign currencies is subject to foreign exchange rate risk in the future. The
Company distributes certain of its licensed DVD and videotape programming (for
which the Company has international distribution rights) internationally through
international sub-distributors. 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 $42,000 impact on pretax
income (loss) based upon those outstanding receivables at June 30, 2000.
-18-
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The condensed consolidated financial statements as of June 30, 2000 and
for the three-month periods ended June 30, 2000 and 1999 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.
-19-
INDEPENDENT AUDITORS' REVIEW REPORT
-----------------------------------
The Board of Directors and Shareholders
Image Entertainment, Inc.:
We have reviewed the condensed consolidated balance sheet of Image
Entertainment, Inc. and subsidiary as of June 30, 2000, and the related
condensed consolidated statements of operations and cash flows for the
three-month periods ended June 30, 2000 and 1999. 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, 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended; and in
our report dated May 26, 2000, 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, 2000, 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
July 21, 2000
-20-
================================================================================
PART II - OTHER INFORMATION
================================================================================
ITEM 1. LEGAL PROCEEDINGS.
------------------
Not Applicable.
ITEM 2. CHANGES IN SECURITIES.
----------------------
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION.
------------------
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
See Exhibit Index on page i
(b) Reports on Form 8-K
None
-21-
================================================================================
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGE ENTERTAINMENT, INC.
Date: August 8, 2000 By: /s/ MARTIN W. GREENWALD
-----------------------
Martin W. Greenwald
Chairman of the Board,
Chief Executive Officer,
President and Treasurer
Date: August 8, 2000 By: /s/ JEFF M. FRAMER
-----------------------
Jeff M. Framer
Chief Financial Officer
-22-
================================================================================
EXHIBIT INDEX
================================================================================
Exhibit No. Description
- ----------- -----------
10.1 * Intercreditor Agreement between Bank of America, N.A. and Foothill
Capital Corporation dated June 28, 2000.
10.2 * Business Loan Agreement between the Company and Bank of America,
N.A. dated June 28, 2000.
15 * Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
27 * Financial Data Schedule as of and for the Three Months Ended
June 30, 2000.
- ----------
* Exhibit(s) not previously filed with the Securities and Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.