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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 September 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 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 6,
2000: 16,292,706
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
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IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and March 31, 2000
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ASSETS
(In thousands) September 30, 2000 March 31, 2000
------------------- --------------
(unaudited)
Cash and cash equivalents $ 1,203 $ 1,532
Accounts receivable, net of allowances of
$4,366 - September 30, 2000;
$3,664 - March 31, 2000 17,792 13,457
Inventories 19,066 17,881
Royalty and distribution fee advances 11,113 8,868
Prepaid expenses and other assets 2,732 2,576
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$6,171 - September 30, 2000;
$5,190 - March 31, 2000 13,961 14,067
Goodwill, net of accumulated amortization of
$869 - September 30, 2000;
$614 - March 31, 2000 6,760 7,014
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$72,627 $65,395
======= =======
See accompanying notes to consolidated financial statements
-1-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and March 31, 2000
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LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) September 30, 2000 March 31, 2000
------------------- ---------------
(unaudited)
LIABILITIES:
Accounts payable and accrued liabilities $20,376 $15,606
Accrued royalties and distribution fees 4,257 3,550
Revolving credit and term loan facility 9,540 10,790
Real estate credit facility 3,090 3,176
Distribution equipment lease facility 1,250 1,432
Equipment line of credit 411 --
Convertible subordinated note payable 5,000 5,000
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Total liabilities 43,924 39,554
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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;
16,384,000 and 16,462,000 issued and outstanding
at September 30, 2000 and March 31, 2000, respectively 31,613 31,819
Additional paid-in capital 3,064 3,064
Accumulated deficit (5,974) (9,042)
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Net shareholders' equity 28,703 25,841
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$72,627 $65,395
======= =======
See accompanying notes to consolidated financial statements
-2-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended September 30, 2000 and 1999
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(In thousands, except per share data) 2000 1999
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NET REVENUES $25,368 $17,817
OPERATING COSTS AND EXPENSES:
Cost of sales 17,118 13,267
Selling expenses 2,848 2,190
General and administrative expenses 2,323 1,906
Amortization of production costs 1,203 856
Amortization of goodwill 127 125
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23,619 18,344
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OPERATING INCOME (LOSS) 1,749 (527)
OTHER EXPENSES (INCOME):
Interest expense, net 419 402
Other (478) (87)
------- -------
(59) 315
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INCOME (LOSS) BEFORE INCOME TAXES 1,808 (842)
INCOME TAX EXPENSE 55 --
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NET INCOME (LOSS) $ 1,753 $ (842)
======= =======
NET INCOME (LOSS) PER SHARE:
Basic $ .11 $ (.05)
Diluted $ .10 $ (.05)
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 16,479 16,457
======= =======
Diluted 17,876 16,457
======= =======
See accompanying notes to consolidated financial statements
-3-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Six Months Ended September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(In thousands, except per share data) 2000 1999
------- -------
NET REVENUES $49,090 $35,837
OPERATING COSTS AND EXPENSES:
Cost of sales 33,259 26,893
Selling expenses 5,245 4,212
General and administrative expenses 4,582 3,779
Amortization of production costs 2,202 1,864
Amortization of goodwill 254 249
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45,542 36,997
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OPERATING INCOME (LOSS) 3,548 (1,160)
OTHER EXPENSES (INCOME):
Interest expense, net 849 722
Other (464) (326)
------- -------
385 396
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 3,163 (1,556)
INCOME TAX EXPENSE 95 --
------- -------
NET INCOME (LOSS) $ 3,068 $(1,556)
======= =======
NET INCOME (LOSS) PER SHARE:
Basic $ .19 $ (.09)
Diluted $ .18 $ (.09)
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 16,469 16,444
======= =======
Diluted 17,860 16,444
======= =======
See accompanying notes to consolidated financial statements
-4-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ended September 30, 2000 and 1999
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(In thousands) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,068 $(1,556)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of production costs 2,202 1,864
Amortization of goodwill 254 249
Depreciation and other amortization 981 790
Amortization of restricted stock units 130 85
Provision for slow-moving inventories 120 464
Provision for estimated doubtful accounts 442 --
Gain on sale of land (499) --
Changes in assets and liabilities associated
with operating activities:
Accounts receivable (4,777) 1,607
Inventories (428) 1,345
Royalty and distribution fee advances, net (2,245) (2,507)
Production cost expenditures (3,079) (2,649)
Prepaid expenses and other assets (156) (836)
Accounts payable, accrued royalties and liabilities 5,562 (4,235)
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Net cash provided by (used in) operating activities 1,575 (5,379)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,775) (1,231)
Net proceeds from sale of land 1,399 --
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(376) (1,231)
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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, 2000 and 1999
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(In thousands) 2000 1999
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CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit and term loan facility $ 43,517 $ 42,317
Advances under equipment line of credit 411 --
Repayment of advances under revolving credit and
term loan facility (44,767) (36,125)
Repayment of advances under real estate credit facility (86) (86)
Repayment of note payable -- (135)
Principal payments under equipment lease facility (182) (168)
Repurchase of common stock (421) --
Net proceeds from exercise of stock options -- 33
Other -- (52)
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Net cash (used in) provided by financing activities (1,528) 5,784
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NET DECREASE IN CASH AND CASH EQUIVALENTS: (329) (826)
Cash and cash equivalents at beginning of period 1,532 1,552
-------- --------
Cash and cash equivalents at end of period $ 1,203 $ 726
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 860 $ 634
======== ========
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, 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 June 30, 2000 and 1999 by approximately
$215,000 and $76,000, respectively, 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)
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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. 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 and six months
ended September 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 and six months ended September
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 are 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 September 30, 2000 and March 31, 2000 are summarized as follows:
September 30, March 31,
(In thousands) 2000 2000
------------- ---------
DVD $13,401 $12,989
laserdisc 3,754 5,710
other 718 629
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17,873 19,328
Reserve for slow-moving inventories:
DVD (826) (767)
laserdisc and other (3,756) (5,578)
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(4,582) (6,345)
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13,291 12,983
Production costs, net 5,775 4,898
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$19,066 $17,881
======= =======
Inventories consist primarily of finished product for sale and are stated at the
lower of average cost or market.
Production costs are net of accumulated amortization of $7,942,000 and
$6,701,000 at September 30, 2000 and March 31, 2000, respectively.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
________________________________________________________________________________
Note 3. Debt.
Revolving Credit and Term Loan Facility. At September 30, 2000, the Company had
- ---------------------------------------
$9,093,000 outstanding under its $15,000,000 revolving credit facility and
$447,000 outstanding under its $500,000 term loan facility with Foothill Capital
Corporation ("Foothill") and had borrowing availability of $5,207,000 under its
revolving credit facility, net of amounts utilized for outstanding standby
letters of credit. The Company has fully utilized its borrowing availability
under its term loan facility. Borrowings under the revolving credit and term
loan facility bear interest at prime plus 0.75% (10.25% at September 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 September 30, 2000, the Company had $700,000 of outstanding standby letters
of credit issued by Foothill of which $250,000 expire on November 18, 2000,
$300,000 expire on June 30, 2001 and $150,000 expire on September 30, 2001.
These standby letters of credit secure trade payables due to program suppliers.
Real Estate Credit Facility. At September 30, 2000, $3,090,000 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% (8.99% at September 30, 2000). The Company may
repay and reborrow principal amounts provided the outstanding borrowings do not
exceed the maximum commitment of $3,090,000 at September 30, 2000, reduced
quarterly by $43,000. The credit facility expires on January 31, 2008.
Distribution Equipment Lease Facility. At September 30, 2000, $1,250,000 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 $411,000
outstanding under this line at September 30, 2000, $257,000 bearing interest at
LIBOR plus 2.50% (9.50% at September 30, 2000) and $154,000 bearing interest at
prime plus 1.25% (10.75% at September 30, 2000).
Convertible Subordinated Note Payable. At September 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 September 30, 2000, the Company was in compliance with all financial and
operating covenants under its debt agreements.
-8-
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 and six
months ended September 30, 2000 and 1999:
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) 2000 1999 2000 1999
-------------- -------------- ------------- --------------
Net income (loss) (basic numerator) $ 1,753 $ (842) $ 3,068 $(1,556)
======= ======= ======= =======
Interest, net of taxes, on assumed
conversion of dilutive security 97 -- 195 --
------- ------- ------- -------
Net income (loss) (diluted numerator) $ 1,850 $ (842) $ 3,263 $(1,556)
======= ======= ======= =======
Weighted average common shares
outstanding(basic denominator) 16,479 16,457 16,469 16,444
======= ======= ======= =======
Effect of dilutive securities 1,397 -- 1,391 --
------- ------- ------- -------
Weighted average common shares
outstanding(diluted denominator) 17,876 16,457 17,860 16,444
======= ======= ======= =======
Net income (loss) per share
Basic $ .11 $ (.05) $ .19 $ (.09)
Diluted $ .10 $ (.05) $ .18 $ (.09)
======= ======= ======= =======
Diluted net loss per share for the three and six months ended September 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 1,140,000
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 period and the assumed exercise would be antidilutive.
Note 5. Sale of Land.
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 6. Segment Information.
In accordance with the requirements of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, selected financial information
regarding the Company's reportable business segments, program licensing and
production/domestic wholesale distribution, direct-to-consumer retail
distribution (through DVDPlanet), and international wholesale
distribution/broadcast rights exploitation (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
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
________________________________________________________________________________
(loss) before income taxes. Interest income and expense is evaluated on a
consolidated basis and not allocated to the Company's business segments.
For the Three Months Ended September 30, 2000:
2000
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Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- ------------- ------------
NET REVENUES $23,567 $3,648 $1,336 $(3,183) $25,368
OPERATING COSTS AND EXPENSES 21,033 4,374 1,393 (3,181) 23,619
------- ------ ------ ------- -------
OPERATING INCOME (LOSS) 2,534 (726) (57) (2) 1,749
OTHER EXPENSES (INCOME) (80) -- -- 21 (59)
------- ------ ------ ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 2,614 $ (726) $ (57) $ (23) $ 1,808
======= ====== ====== ======= =======
For the Three Months Ended September 30, 1999:
1999
------------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- ------------- ------------
NET REVENUES $17,242 $3,449 $ -- $(2,874) $17,817
OPERATING COSTS AND EXPENSES 16,672 4,299 174 (2,801) 18,344
------- ------ ------ ------- -------
OPERATING INCOME (LOSS) 570 (850) (174) (73) (527)
OTHER EXPENSES (INCOME) 402 -- -- (87) 315
------- ------ ------ ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 168 $ (850) $ (174) $ 14 $ (842)
======= ====== ====== ======= =======
For the Six Months Ended September 30, 2000:
2000
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Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------------- -------------- ------------- ------------- ------------
NET REVENUES $45,559 $ 7,025 $ 2,744 $(6,238) $49,090
OPERATING COSTS AND EXPENSES 40,553 8,507 2,705 (6,223) 45,542
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 5,006 (1,482) 39 (15) 3,548
OTHER EXPENSES 350 -- -- 35 385
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 4,656 $(1,482) $ 39 $ (50) $ 3,163
======= ======= ======= ======= =======
For the Six Months Ended September 30, 1999:
1999
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Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
--------------- -------------- ------------- ------------- ------------
NET REVENUES $34,259 $ 7,226 $ -- $(5,648) $35,837
OPERATING COSTS AND EXPENSES 33,890 8,459 254 (5,606) 36,997
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 369 (1,233) (254) (42) (1,160)
OTHER EXPENSES (INCOME) 523 -- -- (127) 396
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ (154) $(1,233) $ (254) $ 85 $(1,556)
======= ======= ======= ======= =======
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
________________________________________________________________________________
As of
-------------------------------------
(In thousands) September 30, 2000 March 31, 2000
------------------- --------------
Total Assets:
Domestic wholesale distribution $66,120 $59,376
Retail distribution 4,754 6,000
International wholesale distribution 3,145 1,264
Inter-segment eliminations (1,392) (1,245)
------------- -------
Consolidated total assets $72,627 $65,395
============= =======
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 other programming for which it does not have exclusive distribution rights.
The Company also distributes some of its exclusive titles in other home video
formats such as VHS and to a lesser degree laserdisc. 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, in as many territories as possible, and 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 was acquired
in 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 Mr. Lopez. It is the parties intention to
renew the joint venture when the initial term expires on December 31, 2000. Mr.
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. 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 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.
-12-
The accompanying consolidated financial information for the three and six
months ended September 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 September 30, 2000 Compared to The Three Months Ended
September 30, 1999
The following table presents consolidated net revenues by reportable
business segment for the three months ended September 30, 2000 and 1999:
Three months ended
September 30,
------------------------
2000 1999 % Change
------- ------- --------
(in thousands)
Net revenues:
Domestic wholesale distribution $23,567 $17,242 36.7%
Retail distribution 3,648 3,449 5.8
International wholesale distribution 1,336 -- *
Inter-segment eliminations (3,183) (2,874) *
------- ------- ----
Consolidated $25,368 $17,817 42.4%
======= ======= ====
_____________________________
* not meaningful
Consolidated net revenues for all segments for the September 2000 quarter
increased 42.4% to $25,368,000 from $17,817,000 for the September 1999 quarter.
The September 2000 quarter's net revenues included approximately $4,000,000 from
a successful sales re-promotion program targeting certain previously released
theatrical DVD titles. The Company has other sales re-promotion programs
planned for the balance of the fiscal year, although none will be as extensive
in terms of revenues as this quarter's re-promotion program. Rapid growth in
the worldwide DVD player installed household base and the Company's licensing
efforts have contributed to the growth in the Company's domestic and
international DVD revenues.
Consolidated net revenues of DVD programming for the September 2000 quarter
increased 71.1% to $24,038,000, or 94.8% of consolidated net revenues, from
$14,047,000, or 78.9% of net revenues, for the September 1999 quarter.
Approximately 71.8% of consolidated net revenues of DVD programming for the
September 2000 quarter was derived from exclusively licensed or distributed
programming as compared to 63.2% for the September 1999 quarter. Net revenues
of VHS and CD programming for the September 2000 quarter were $842,000, or 3.3%
of consolidated net revenues, as compared to $628,000, or 3.5% of consolidated
net revenues for the September 1999 quarter. Net revenues of laserdisc
programming for the September 2000 quarter were $488,000, or 1.9% of
consolidated net revenues, as compared to $3,142,000, or 17.6% of consolidated
net revenues for the September 1999 quarter.
Net revenues for the Company's domestic wholesale distribution segment for
the September 2000 quarter increased 36.7% to $23,567,000 from net revenues of
$17,242,000 for the September 1999 quarter, due to the aforementioned factors
above. During the September 2000 quarter, the Company released 162 exclusive
DVD titles domestically, a 14.9% increase from 141 exclusive DVD titles released
during the September 1999 quarter. The Company anticipates that worldwide
household penetration of DVD players will continue to grow and positively impact
the Company's DVD revenues.
The Company's retail distribution segment, DVDPlanet, experienced continued
growth in its DVD revenues. DVD revenues increased 54.1% to $3,377,000, or
92.6% of segment net revenues, for the September 2000 quarter from $2,192,000,
or 63.6% of segment net revenues, for the September 1999 quarter. Net revenues
of DVD programming
-13-
via Internet/mail order increased 49.2% to $2,401,000 for the September 2000
quarter from $1,609,000 for the September 1999 quarter. Overall net revenues for
DVDPlanet for the September 2000 quarter increased 5.8% to $3,648,000 from
$3,449,000 for the September 1999 quarter. The September 1999 quarter included
laserdisc revenues of approximately $1.3 million compared to only $271,000 for
the September 2000 quarter. This anticipated decline contributed to a reduction
in overall segment net revenue growth for the September 2000 quarter.
Net revenues for the Company's international wholesale distribution segment
for the September 2000 quarter were $1,336,000, the second full quarter of
revenue generating operations. There were no segment revenues recognized during
the September 1999 quarter. This segment was formed in June 1999. Approximately
$871,000, or 65% of segment revenues, was derived from international wholesale
distribution of the Company's licensed DVD and VHS programming, either through
local sub-distribution or local sub-licensees. Approximately $337,000, or 25%
of segment revenues, was derived from international broadcast exploitation of
the Company's licensed programming. Approximately $128,000, or 10% 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 September 30, 2000 and 1999:
Three Months Ended
September 30,
-------------------
2000 1999
------- -------
(in thousands)
Cost of sales:
Domestic wholesale distribution $16,296 $13,103
Retail distribution 3,154 2,965
International wholesale distribution 849 --
Inter-segment eliminations (3,181) (2,801)
------- -------
Consolidated $17,118 $13,267
======= =======
As a percentage of segment net revenues: % Change
-------
Domestic wholesale distribution 69.1% 76.0% (6.9)%
Retail distribution 86.5 86.0 0.5
International wholesale distribution 63.5 -- *
------- ------- -------
Consolidated 67.5% 74.5% (7.0)%
======= ======= =======
___________________________
* not meaningful
Consolidated cost of sales for the September 2000 quarter was $17,118,000,
or 67.5% of net revenues, compared to $13,267,000, or 74.5% of net revenues, for
the September 1999 quarter. Consolidated gross profit margin improved to 32.5%
for the September 2000 quarter from 25.5% for the September 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 anticipates that DVD replication costs will
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.
-14-
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, 2000 and 1999:
Three months ended
September 30,
----------------------
2000 1999 % Change
------ ----- --------
(in thousands)
Selling expenses:
Domestic wholesale distribution $1,786 $1,172 52.4%
Retail distribution 717 887 (19.2)
International wholesale distribution 345 131 163.4
------ ------ -----
Consolidated $2,848 $2,190 30.0%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 7.6% 6.8% 0.8%
Retail distribution 19.7 25.7 (6.0)
International wholesale distribution 25.8 * *
------ ------ -----
Consolidated 11.2% 12.3% (1.1)%
====== ====== =====
--------------------
* not meaningful
Consolidated selling expenses for the September 2000 quarter increased
30.0% to $2,848,000 from $2,190,000 for the September 1999 quarter. As a
percentage of consolidated net revenues, consolidated selling expenses for the
September 2000 quarter decreased to 11.2% from 12.3% for the September 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 as well as certain one-time
DVDPlanet promotional expenditures incurred during the September 1999 quarter.
The increase in selling expenses in absolute dollars for the September 2000
quarter was also due to the increased promotional and advertising expenditures
for the domestic and international wholesale distribution segments in the
September 2000 quarter.
Selling expenses for the domestic wholesale distribution segment were up
52.4% to $1,786,000 for the September 2000 quarter from $1,172,000 for the
September 1999 quarter. As a percentage of segment net revenues, selling
expenses for the September 2000 quarter were 7.6%, up from 6.8% for the
September 1999 quarter. The Company increased its promotional and advertising
expenditures during the September 2000 quarter over that of the September 1999
quarter by approximately $284,000. The Company advertised and promoted its
first theatrical release PHISH: BITTERSWEET MOTEL during the quarter as well as
its exclusive music-related DVD programming. The Company expects to continue to
increase its promotional and advertising activities during the second half of
the fiscal year over that of comparative prior periods. Additionally, increased
comparative quarterly revenues contributed to higher comparative net freight-out
expenditures for the September 2000 quarter (higher by $218,000).
Selling expenses for the retail distribution segment decreased 19.2% to
$717,000 for the September 2000 quarter from $887,000 for the September 1999.
As a percentage of segment net revenues, selling expenses for the September 2000
quarter were 19.7%, down from 25.7% for the September 1999 quarter. The 19.2%
decrease in absolute dollar selling expenses were primarily due to the September
1999 quarter's one-time charge of approximately $366,000 in connection with a
RCA brand national DVD hardware/software promotion. Exclusive of this charge,
the segment's selling expenses as a percentage of segment net revenues for the
September 2000 quarter were higher than the September 1999 quarter by 4.6%. The
September 2000 quarter had increased personnel costs (higher by $171,000)
compared to the September 1999 quarter as a result of increased sales and
customer service staff and annual raises.
-15-
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, 2000 and 1999:
Three months ended
September 30,
-----------------------
2000 1999 % Change
------ ------ --------
(in thousands)
General and administrative expenses:
Domestic wholesale distribution $1,883 $1,541 22.2%
Retail distribution 376 322 16.8
International wholesale distribution 64 43 48.8
------ ------ -----
Consolidated $2,323 $1,906 21.9%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 8.0% 8.9% (0.9)%
Retail distribution 10.3 9.3 1.0
International wholesale distribution 4.8 * *
------ ------ -----
Consolidated 9.2% 10.7% (1.5)%
====== ====== =====
--------------------
* not meaningful
Consolidated general and administrative expenses for the September 2000
quarter increased 21.9% to $2,323,000 from $1,906,000 for the September 1999
quarter. The increase in consolidated general and administrative expenses in
absolute dollars for the September 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 September 2000 quarter decreased to 9.2%
from 10.7% for the September 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 September 2000 quarter were up 22.2% to $1,883,000 from
$1,541,000 for the September 1999 quarter. However, as a percentage of segment
net revenues, general and administrative expenses for the September 2000 quarter
were 8.0%, down from 8.9% for the September 1999 quarter. The 22.2% increase in
absolute dollar general and administrative expenses for the September 2000
quarter results primarily from a higher provision for potential uncollectible
accounts receivables to allow for, among other factors, the financial risk of e-
commerce sector customers (higher by $234,000). Additionally, the September
2000 quarter included increased personnel costs, including annual raises,
performance-based bonuses and amortization of restricted stock units (higher by
$132,000).
General and administrative expenses for the retail distribution segment
increased 16.8% to $376,000 for the September 2000 quarter from $322,000 for the
September 1999 quarter. As a percentage of segment net revenues, general and
administrative expenses for the September 2000 quarter were 10.3%, up from 9.3%
for the September 1999 quarter. The increase in absolute dollar general and
administrative expenses was primarily due to higher depreciation expense for the
September 2000 quarter related to expansion of computer systems.
Amortization of production costs for the September 2000 quarter increased
40.5% to $1,203,000, or 4.7% of consolidated net revenues, from $856,000, or
4.8% of consolidated net revenues, for the September 1999 quarter. This
increase is a result of the increased number of exclusively licensed programs
(versions for both domestic and international distribution) placed into
production during the period as compared to the prior period.
Interest expense, net of interest income, for the September 2000 quarter
increased 4.2% to $419,000 from $402,000 for the September 1999 quarter. The
increase is attributable primarily to higher weighted average debt and interest
rate levels during the September 2000 quarter as compared to the September 1999
quarter.
-16-
Other income for the September 2000 quarter was $478,000 consisting of a
gain on sale of land of $499,000, net of the minority interest expense from the
Aviva joint venture of $21,000. Other income for the September 1999 quarter of
$87,000 consists primarily of minority interest in the Aviva joint venture.
Income tax expense of $55,000 for the September 2000 quarter reflects an
estimated consolidated effective tax rate of approximately 3.0%. 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 September 1999 quarter due
to the consolidated net loss.
Consolidated net income for the September 2000 quarter was $1,753,000, or
$.10 per diluted share, as compared to a consolidated net loss of $842,000, or
$.05 per diluted share, for the September 1999 quarter.
The Six Months Ended September 30, 2000 Compared to The Six Months Ended
September 30, 1999
The following table presents consolidated net revenues by reportable
business segment for the six months ended September 30, 2000 and 1999:
Six months ended
September 30,
---------------------------
2000 1999 % Change
------- ------- --------
(in thousands)
Net revenues:
Domestic wholesale distribution $45,559 $34,259 33.0%
Retail distribution 7,025 7,226 (2.8)
International wholesale distribution 2,744 -- *
Inter-segment eliminations (6,238) (5,648) *
------- ------- ----
Consolidated $49,090 $35,837 37.0%
======= ======= ====
--------------------
* not meaningful
Consolidated net revenues for all segments for the six months ended
September 30, 2000 increased 37.0% to $49,090,000 from $35,837,000 for the six
months ended September 30, 1999. 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 anticipated continued licensing of
exclusive programming and the continued growth in DVD player-household
penetration.
Consolidated net revenues of DVD programming for the six months ended
September 30, 2000 increased 62.7% to $46,063,000, or 93.8% of consolidated net
revenues, from $28,316,000, or 79.0% of net revenues, for the six months ended
September 30, 1999. Approximately 68.3% of consolidated net revenues of DVD
programming for the six months ended September 30, 2000 were derived from
exclusively licensed or distributed programming as compared to 58.4% for the six
months ended September 30, 1999. Net revenues of VHS and CD programming for the
six months ended September 30, 2000 were $2,150,000, or 4.4% of consolidated net
revenues, as compared to $1,474,000, or 4.1% of consolidated net revenues for
the six months ended September 30, 1999. Net revenues of laserdisc programming
for the six months ended September 30, 2000 were $877,000, or 1.8% of
consolidated net revenues, as compared to $6,047,000, or 16.9% of consolidated
net revenues, for the six months ended September 30, 1999.
Net revenues for the Company's domestic wholesale distribution segment for
the six months ended September 30, 2000 increased 33.0% to $45,559,000 from net
revenues of $34,259,000 for the six months ended September 30, 1999 due to the
aforementioned factors. During the six months ended September 30, 2000, the
Company released 313 exclusive DVD titles domestically, a 41.0% increase from
222 exclusive DVD titles released during the six months ended September 30,
1999.
-17-
Net revenues of DVD programming for the Company's retail distribution
segment were up 52.6% to $6,453,000, or 91.9% of segment net revenues, for the
six months ended September 30, 2000 from $4,229,000, or 58.5% of segment net
revenues, for the six months ended September 30, 1999. Net revenues of DVD
programming via Internet/mail order increased 45.7% to $4,529,000 for the six
months ended September 30, 2000 from $3,109,000 for the six months ended
September 30, 1999. Overall net revenues for DVDPlanet for the six months ended
September 30, 2000 decreased 2.8% to $7,025,000 from $7,226,000 for the six
months ended September 30, 1999. Although comparative net revenues for
DVDPlanet for the six months ended September 30, 2000 were down due to
anticipated declining laserdisc sales, DVD sales were significantly higher.
Net revenues for the Company's international wholesale distribution segment
for the six months ended September 30, 2000 were $2,744,000. There were no
segment revenues recognized during the six months ended September 30, 1999.
This segment was formed in June 1999. Approximately $1,335,000, or 48% of
segment revenues, was derived from international wholesale distribution of the
Company's licensed DVD and VHS programming, either through local sub-
distribution or local sub-licensees. Approximately $1,226,000, or 45% of segment
revenues, was derived from international broadcast exploitation of the Company's
licensed programming. Approximately $183,000, or 7% 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 six
months ended September 30, 2000 and 1999:
Six Months Ended
September 30,
------------------------
2000 1999
------ ------
(in thousands)
Cost of sales:
Domestic wholesale distribution $31,559 $26,428
Retail distribution 6,099 6,071
International wholesale distribution 1,824 --
Inter-segment eliminations (6,223) (5,606)
------- -------
Consolidated $33,259 $26,893
======= =======
As a percentage of segment net revenues: % Change
--------
Domestic wholesale distribution 69.3% 77.1% (7.8)%
Retail distribution 86.8 84.0 2.8
International wholesale distribution 66.5 -- *
------- ------- -------
Consolidated 67.8% 75.0% (7.2)%
======= ======= =======
-------------------
* not meaningful
Consolidated cost of sales for the six months ended September 30, 2000 was
$33,259,000, or 67.8% of net revenues, compared to $26,893,000, or 75.0% of net
revenues, for the six months ended September 30, 1999. Consolidated gross
profit margin improved to 32.2% for the six months ended September 30, 2000 from
25.0% for the six months ended September 30, 1999. 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 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, 2000 and 1999:
-18-
Six months ended
September 30,
-------------------------
2000 1999 % Change
------ ------ --------
(in thousands)
Selling expenses:
Domestic wholesale distribution $3,210 $2,520 27.4%
Retail distribution 1,423 1,502 (5.3)
International wholesale distribution 612 190 222.1
------ ------ -----
Consolidated $5,245 $4,212 24.5%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 7.0% 7.4% (0.4)%
Retail distribution 20.3 20.8 (0.5)
International wholesale distribution 22.3 * *
------ ------ -----
Consolidated 10.7% 11.8% (1.1)%
====== ====== =====
-------------------
* not meaningful
Consolidated selling expenses for the six months ended September 30, 2000
increased 24.5% to $5,245,000 from $4,212,000 for the six months ended September
30, 1999. As a percentage of consolidated net revenues, consolidated selling
expenses for the six months ended September 30, 2000 decreased to 10.7% from
11.8% for the six months ended September 30, 1999. 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 as
well as certain one-time retail segment promotional expenditures incurred during
the September 1999 period. The increase in selling expenses in absolute dollars
for the six months ended September 30, 2000 was also due to increased
promotional and advertising activities for the domestic and international
wholesale distribution segments in the September 2000 period.
Selling expenses for the domestic wholesale distribution segment were up
27.4% to $3,210,000 for the six months ended September 30, 2000 from $2,520,000
for the six months ended September 30, 1999. As a percentage of segment net
revenues, selling expenses for the six months ended September 30, 2000 were
7.0%, down from 7.4% for the six months ended September 30, 1999. The Company
incurred comparatively higher promotional and advertising expenditures during
the six months ended September 30, 2000 (higher by $314,000) than that of the
September 1999 period. Expenditures relating to the Company's first theatrical
release PHISH: BITTERSWEET MOTEL as well as its exclusive music-related DVD
programming contributed to the increase. Additionally, as compared to the
September 1999 six-month period, the September 2000 period included
comparatively higher net freight-out expenditures (higher by $184,000) due to
comparatively higher net revenues for the period as well as higher personnel
cost (higher by $137,000) due to additional personnel and annual salary
increases.
Selling expenses for the retail distribution segment decreased 5.3% to
$1,423,000 for the six months ended September 30, 2000 from $1,502,000 for the
six months ended September 30, 1999. As a percentage of segment net revenues,
selling expenses for the six-months ended September 30, 2000 were 20.3%, down
from 20.8% for the six months ended September 30, 1999. The 5.3% decrease in
absolute dollar selling expenses was primarily due to the September 1999 six
month period's one-time charge of $366,000 for a DVD hardware/software
promotion. Exclusive of this charge, segment selling expenses as a percentage
of segment net revenues, for the September 2000 six-month period were higher
than the September 1999 period by 4.1%. DVDPlanet's personnel costs for the
September 2000 six-month period were higher by $373,000 as a result of increased
sales and customer service staff and annual raises.
-19-
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, 2000 and 1999:
Six months ended
September 30,
--------------------------
2000 1999 % Change
------ ------ --------
(in thousands)
General and administrative expenses:
Domestic wholesale distribution $3,717 $3,078 20.8%
Retail distribution 731 637 14.8
International wholesale distribution 134 64 109.4
------ ------ -----
Consolidated $4,582 $3,779 21.2%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 8.2% 9.0% (0.8)%
Retail distribution 10.4 8.8 1.6
International wholesale distribution 4.9 * *
------ ------ -----
Consolidated 9.3% 10.5% (1.2)%
====== ====== =====
-------------------
* not meaningful
Consolidated general and administrative expenses for the six months ended
September 30, 2000 increased 21.2% to $4,582,000 from $3,779,000 for the six
months ended September 30, 1999. The increase in consolidated general and
administrative expenses in absolute dollars for the six months ended September
30, 2000 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 six
months ended September 30, 2000 decreased to 9.3% from 10.5% for the six months
ended September 30, 1999. 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 six months ended September 30, 2000 were up 20.8% to $3,717,000
from $3,078,000 for the six months ended September 30, 1999. However, as a
percentage of segment net revenues, general and administrative expenses for the
six months ended September 30, 2000 were 8.2%, down from 9.0% for the six months
ended September 30, 1999. The 21.2% increase in absolute dollar general and
administrative expenses for the six months ended September 30, 2000 results
primarily from a higher provision for potential uncollectible accounts
receivable (higher by $414,000), higher personnel costs, including annual
raises, performance-based bonuses and amortization of restricted stock units,
(higher by $310,000) and higher depreciation and amortization expense (higher by
$115,000).
General and administrative expenses for the retail distribution segment
increased 14.8% to $731,000 for the six months ended September 30, 2000 from
$637,000 for the six months ended September 30, 1999. As a percentage of
segment net revenues, general and administrative expenses for the six months
ended September 30, 2000 were 10.4%, up from 8.8% for the six months ended
September 30, 1999. The increase in absolute dollar general and administrative
expenses was primarily due to higher depreciation expense for the six months
ended September 30, 2000.
Amortization of production costs for the six months ended September 30,
2000 increased 18.1% to $2,202,000, or 4.5% of consolidated net revenues, from
$1,864,000, or 5.2% of consolidated net revenues, for the six months ended
September 30, 1999 resulting from an increase in exclusive titles (domestic and
international versions) placed into production during the September 2000 period
compared to the September 1999 period.
Interest expense, net of interest income, for the six months ended
September 30, 2000 increased 17.6% to $849,000 from $722,000 for the six months
ended September 30, 1999. The increase is attributable primarily to higher
-20-
weighted average debt and interest rate levels during the six months ended
September 30, 2000 as compared to the six months ended September 30, 1999.
Other income for the six months ended September 30, 2000 was $464,000
consisting of gain on sale of land of $499,000, net of the minority interest
expense from the Aviva joint venture of $35,000. Other income for the six
months ended September 30, 1999 of $326,000 consists primarily of minority
interest in the Aviva joint venture.
Income tax expense of $95,000 for the six months ended September 30, 2000
reflects an estimated consolidated effective tax rate of approximately 3.0%.
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 six months
ended September 30, 1999 due to the consolidated net loss.
Consolidated net income for the six months ended September 30, 2000 was
$3,068,000, or $.18 per diluted share, as compared to a consolidated net loss of
$1,556,000, or $.09 per diluted share, for the six months ended September 30,
1999.
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, Six Months Ended September 30, 2000 and
1999.
Net cash provided by operating activities for the six months ended
September 30, 2000 was $1,575,000 compared to net cash used in operating
activities of $5,379,000 for the comparable September 1999 period. The major
factors contributing to the significant increase in net cash provided by
operating activities for the six months ended September 30, 2000 quarter are as
follows: (i) the six months ended September 30, 2000 provided net income of
$3,068,000 compared to a net loss of $1,556,000 for the six months ended
September 30, 1999 and (ii) the six months ended September 30, 2000 had a higher
comparative period-end level of accounts receivable, accounts payable, accrued
royalties and liabilities than the period ended September 30, 1999 as a result
of comparatively higher DVD revenues generated and increased DVD inventory
purchases.
Investing activities used net cash of $376,000 for the six months ended
September 30, 2000 compared to $1,231,000 for the comparative September 1999
period. The September 2000 period included increased capital expenditures
incurred primarily to upgrade the Company's distribution facility in Las Vegas,
Nevada. Offsetting these expenditures, the Company received net proceeds of
approximately $1,399,000 from the sale of vacant land adjacent to its
distribution facility.
Net cash used in financing activities for the six months ended September
30, 2000 was $1,528,000 compared to net cash provided by financing activities
for the six months ended September 30, 1999 of $5,784,000. The increased use of
cash is primarily due to net repayment of interest-bearing debt during the six
months ended September 30, 2000
-21-
compared to net borrowings during the six months ended September 30, 2000.
Additionally, the Company spent $421,000 related to its stock repurchase program
during the September 2000 period.
Financing Activities.
Revolving Credit and Term Loan Facility. At September 30, 2000, the
---------------------------------------
Company had $9,093,000 outstanding under its $15,000,000 revolving credit
facility and $447,000 outstanding under its $500,000 term loan facility with
Foothill Capital Corporation ("Foothill") and had borrowing availability of
$5,207,000 under its revolving credit facility, net of amounts utilized for
outstanding standby letters of credit. The Company has fully utilized its
borrowing availability under its term loan facility. Borrowings under the
revolving credit and term loan facility bear interest at prime plus 0.75%
(10.25% at September 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 September 30, 2000, $3,090,000 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% (8.99% at September 30, 2000). The Company
may repay and reborrow principal amounts provided the outstanding borrowings do
not exceed the maximum commitment of $3,090,000 at September 30, 2000, reduced
quarterly by $43,000. The credit facility expires January 31, 2008.
Distribution Equipment Lease Facility. At September 30, 2000, $1,250,000
-------------------------------------
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 $411,000
outstanding under this line at September 30, 2000, $257,000 bearing interest at
LIBOR plus 2.5% (9.50% at September 30, 2000) and $154,000 bearing interest at
prime plus 1.25% (10.75% at September 30, 2000).
Convertible Subordinated Note Payable. At September 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 September 30, 2000, the Company had future license obligations for
royalty advances, minimum guarantees and other fees of $5,602,000 due during the
remainder of fiscal 2001 and $505,000 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 September 30, 2000, the Company had $700,000 of outstanding standby
letters of credit issued by Foothill of which $250,000 expire on November 18,
2000, $300,000 expire on June 30, 2001 and $150,000 expire on September 30,
2001. These letters of credit secure trade payables due program suppliers.
-22-
Other Items.
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 $1,400,000. 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.
Under the Company's reinstated stock repurchase program announced in August
2000, the Company has repurchased 106,500 shares through September 30, 2000 for
$421,000 (average price of $3.95 per share), including brokerage commissions.
At September 30, 2000, there were 727,700 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, the Company 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.
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. The
borrowing availability under the Company's revolving credit facility was limited
to $5,207,000 at September 30, 2000 by the $15,000,000 line maximum. Had there
not been this limit, the Company's borrowing availability, calculated using the
facility-defined borrowing base, would have been higher by approximately
$3,900,000. The Company would consider raising the line's maximum above
$15,000,000 should it need access to this availability to grow its business. The
Company believes that given the positive trend of its financial results, the
lender would accommodate the request, although there can be no assurance.
If future 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) worldwide DVD player household penetration
will continue to grow and positively impact the Company's DVD revenues; (2) DVD
replication costs will decline in the future; and (3) the Company's lender would
increase the Company's maximum borrowing availability under its revolving credit
facility if requested by the Company. Actual events or results may differ
materially as a result
-23-
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 Company's then-financial position and results
of operations and its effect on the lender's internal risk assessment of
increasing the maximum borrowing availability. 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.
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, 2000, approximately $13.0 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 $130,000 annual impact
on pretax income (loss) based upon those outstanding borrowings at September 30,
2000.
Foreign Exchange Rate Fluctuations. At September 30, 2000, approximately
$969,000 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 $97,000 impact on pretax income (loss) based upon
those outstanding receivables at September 30, 2000.
-24-
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The condensed consolidated financial statements as of September 30, 2000
and for the three- and six-month periods ended September 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.
-25-
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, 2000, and the related
condensed consolidated statements of operations and cash flows for the three-
and six-month periods ended September 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
November 8, 2000
-26-
================================================================================
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
-27-
================================================================================
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, 2000 By:/S/ MARTIN W. GREENWALD
-----------------------
Martin W. Greenwald
Chairman of the Board, Chief Executive Officer,
President and Treasurer
Date: November 13, 2000 By:/S/ JEFF M. FRAMER
------------------
Jeff M. Framer
Chief Financial Officer
-28-
Exhibit No. Description
- -----------------------------------------------------------------------------
10.1 *+ Loan Agreement, dated as of August 18, 2000, by and between
the Company and Martin W. Greenwald.
15 * Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
27 * Financial Data Schedule as of and for the six months ended
September 30, 2000.
-------------------------------------------------
* Exhibit(s) not previously filed with the Securities and
Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
i