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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For The Quarterly Period Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period From ....................To
....................
Commission File Number 0-11071
_______________________
IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
_______________________
California 84-0685613
(State or other jurisdiction (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 February 8,
2001: 15,848,049
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
--------------------
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and March 31, 2000
- --------------------------------------------------------------------------------
ASSETS
(In thousands) December 31, 2000 March 31, 2000
----------------- --------------
(unaudited)
Cash and cash equivalents $ 865 $ 1,532
Accounts receivable, net of allowances of
$4,445 - December 31, 2000;
$3,664 - March 31, 2000 16,347 13,457
Inventories 18,981 17,881
Royalty and distribution fee advances 12,413 8,868
Prepaid expenses and other assets 3,066 2,576
Property, equipment and improvements, net of
accumulated depreciation and amortization of
$6,728 - December 31, 2000;
$5,190 - March 31, 2000 14,186 14,067
Goodwill, net of accumulated amortization of
$996 - December 31, 2000;
$614 - March 31, 2000 6,633 7,014
------- -------
$72,491 $65,395
======= =======
See accompanying notes to consolidated financial statements
-1-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and March 31, 2000
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share data) December 31, 2000 March 31, 2000
------------------ ---------------
(unaudited)
LIABILITIES:
Accounts payable and accrued liabilities $22,235 $15,606
Accrued royalties and distribution fees 4,194 3,550
Revolving credit and term loan facility 8,360 10,790
Real estate credit facility 3,047 3,176
Distribution equipment lease facility 1,156 1,432
Equipment line of credit 647 -
Convertible subordinated note payable 5,000 5,000
------- -------
Total liabilities 44,639 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;
15,977,000 and 16,462,000 issued and outstanding
at December 31, 2000 and March 31, 2000, respectively 30,185 31,819
Additional paid-in capital 3,064 3,064
Accumulated deficit (5,397) (9,042)
------- -------
Net shareholders' equity 27,852 25,841
------- -------
$72,491 $65,395
======= =======
See accompanying notes to consolidated financial statements
-2-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended December 31, 2000 and 1999
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(In thousands, except per share data) 2000 1999
------- -------
NET REVENUES $24,736 $25,067
OPERATING COSTS AND EXPENSES:
Cost of sales 16,863 18,106
Selling expenses 2,895 2,214
General and administrative expenses 2,403 2,040
Amortization of production costs 1,419 1,032
Amortization of goodwill 127 128
------- -------
23,707 23,520
------- -------
OPERATING INCOME 1,029 1,547
OTHER EXPENSES (INCOME):
Interest expense, net 446 397
Other (12) (111)
------- -------
434 286
------- -------
INCOME BEFORE INCOME TAXES 595 1,261
INCOME TAX EXPENSE 18 -
------- -------
NET INCOME $ 577 $ 1,261
======= =======
NET INCOME PER SHARE:
Basic and diluted $ .04 $ .08
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 16,224 16,459
======= =======
Diluted 16,225 17,843
======= =======
See accompanying notes to consolidated financial statements
-3-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------------
(In thousands, except per share data) 2000 1999
------- -------
NET REVENUES $73,826 $60,904
OPERATING COSTS AND EXPENSES:
Cost of sales 50,122 44,999
Selling expenses 8,140 6,426
General and administrative expenses 6,984 5,819
Amortization of production costs 3,621 2,896
Amortization of goodwill 381 377
------- -------
69,248 60,517
------- -------
OPERATING INCOME 4,578 387
OTHER EXPENSES (INCOME):
Interest expense, net 1,295 1,119
Other (475) (437)
------- -------
820 682
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 3,758 (295)
INCOME TAX EXPENSE 113 -
------- -------
NET INCOME (LOSS) $ 3,645 $ (295)
======= =======
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ .22 $ (.02)
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 16,387 16,449
======= =======
Diluted 17,774 16,449
======= =======
See accompanying notes to consolidated financial statements
-4-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended December 31, 2000 and 1999
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(In thousands) 2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,645 $ (295)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of production costs 3,621 2,896
Amortization of goodwill 381 377
Depreciation and other amortization 1,538 1,235
Amortization of restricted stock units 194 150
Provision for slow-moving inventories - 699
Provision for estimated doubtful accounts 482 15
Gain on sale of land (499) (23)
Changes in assets and liabilities associated
with operating activities:
Accounts receivable (3,372) (3,262)
Inventories (302) (2,846)
Royalty and distribution fee advances, net (3,545) (4,027)
Production cost expenditures (4,419) (3,947)
Prepaid expenses and other assets (490) (1,561)
Accounts payable, accrued royalties and liabilities 7,294 6,201
------- -------
Net cash provided by (used in) operating activities 4,528 (4,388)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,557) (1,799)
Net proceeds from sale of land 1,399 1,823
------- -------
Net cash (used in) provided by investing activities (1,158) 24
------- -------
See accompanying notes to consolidated financial statements
-5-
IMAGE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
For the Nine Months Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------------
(In thousands) 2000 1999
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving credit and term loan facility $ 68,169 $ 64,029
Advances under equipment line of credit 647 -
Repayment of advances under revolving credit and
term loan facility (70,599) (58,662)
Repayment of advances under real estate credit facility (129) (129)
Repayment of note payable - (1,350)
Principal payments under equipment lease facility (276) (255)
Repurchase of common stock (1,849) -
Net proceeds from exercise of stock options - 60
Other - (52)
-------- --------
Net cash (used in) provided by financing activities (4,037) 3,641
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (667) (723)
Cash and cash equivalents at beginning of period 1,532 1,552
-------- --------
Cash and cash equivalents at end of period $ 865 $ 829
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,294 $ 1,049
======== ========
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 nine
months ended December 31, 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 nine months
ended December 31, 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 December 31, 2000 and March 31, 2000 are summarized as follows:
December 31, March 31,
(In thousands) 2000 2000
------------- ---------
DVD $13,404 $12,989
laserdisc and other 2,954 6,339
------- -------
16,358 19,328
Reserve for slow-moving inventories:
DVD (880) (767)
laserdisc and other (2,193) (5,578)
------- -------
(3,073) (6,345)
------- -------
13,285 12,983
Production costs, net 5,696 4,898
------- -------
$18,981 $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 $9,361,000 and
$6,701,000 at December 31, 2000 and March 31, 2000, respectively.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
Note 3. Debt.
Revolving Credit and Term Loan Facility. At December 31, 2000, the Company had
- ---------------------------------------
$7,940,000 outstanding under its $15,000,000 revolving credit facility and
$420,000 outstanding under its $500,000 term loan facility with Foothill Capital
Corporation ("Foothill") and had borrowing availability of $6,610,000 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 December 31, 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 December 31, 2000, the Company had $450,000 of outstanding standby letters of
credit issued by Foothill of which $300,000 expire on June 30, 2001 and $150,000
expire on November 18, 2001. These standby letters of credit secure trade
payables due to program suppliers.
Real Estate Credit Facility. At December 31, 2000, $3,047,000 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% (9.05% at December 31, 2000). The Company may
repay and reborrow principal amounts provided the outstanding borrowings do not
exceed the maximum commitment of $3,047,000 at December 31, 2000, reduced
quarterly by $43,000. The credit facility expires on January 31, 2008.
Distribution Equipment Lease Facility. At December 31, 2000, $1,156,000 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 $647,000
outstanding under this line at December 31, 2000, all of which bore interest at
LIBOR plus 2.50% (ranging from 9.01% to 9.22% at December 31, 2000).
Convertible Subordinated Note Payable. At December 31, 2000, the Company had
- -------------------------------------
$5,000,000 outstanding under the convertible subordinated note payable, bearing
interest at 8.0% and due September 29, 2002.
At December 31, 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
nine months ended December 31, 2000 and 1999:
Three months Three months Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
(In thousands, except per share data) 2000 1999 2000 1999
------------ ----------- ----------- ------------
Net income (loss) (basic numerator) $ 577 $ 1,261 $ 3,645 $ (295)
======= ======= ======= =======
Interest, net of taxes, on assumed
conversion of dilutive security - 100 292 -
------- ------- ------- -------
Net income (loss) (diluted numerator) $ 577 $ 1,361 $ 3,937 $ (295)
======= ======= ======= =======
Weighted average common shares
outstanding(basic denominator) 16,224 16,459 16,387 16,449
======= ======= ======= =======
Effect of dilutive securities 1 1,384 1,387 -
------- ------- ------- -------
Weighted average common shares
outstanding(diluted denominator) 16,225 17,843 17,774 16,449
======= ======= ======= =======
Net income (loss) per share
Basic and diluted $ .04 $ .08 $ .22 $ (.02)
======= ======= ======= =======
The calculation of diluted net income per share for the three months ended
December 31, 2000 did not include the 1,379,000 shares of common stock
underlying the convertible subordinated note payable. The effect of its
inclusion along with the related interest, net of taxes, on assumed conversion
would be antidilutive. Diluted net loss per share for the nine months ended
December 31, 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 2,696,000) would be antidilutive. Outstanding common
stock options not included in the computation of diluted net income per share
totaled 1,522,000 and 1,140,000 for the three and nine months ended December 31,
2000, respectively, and 1,301,000 for the three months ended December 31, 1999
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 nine months ended December 31, 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
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
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. Certain reclassifications have been made to the
fiscal 2000 three and nine month periods to conform with the fiscal 2001
presentation.
For the Three Months Ended December 31, 2000:
2000
---------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- -------------- ------------
NET REVENUES $21,825 $ 4,322 $ 1,708 $(3,119) $24,736
OPERATING COSTS AND EXPENSES 19,769 4,949 2,120 (3,131) 23,707
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 2,056 (627) (412) 12 1,029
OTHER EXPENSES (INCOME) 446 -- -- (12) 434
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 1,610 $ (627) $ (412) $ 24 $ 595
======= ======= ======= ======= =======
For the Three Months Ended December 31, 1999:
1999
---------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- -------------- ------------
NET REVENUES $24,502 $ 4,175 $ 60 $(3,670) $25,067
OPERATING COSTS AND EXPENSES 22,317 4,658 203 (3,658) 23,520
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 2,185 (483) (143) (12) 1,547
OTHER EXPENSES (INCOME) 374 -- -- (88) 286
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 1,811 $ (483) $ (143) $ 76 $ 1,261
======= ======= ======= ======= =======
For the Nine Months Ended December 31, 2000:
2000
---------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- -------------- ------------
NET REVENUES $67,384 $11,347 $ 4,452 $(9,357) $73,826
OPERATING COSTS AND EXPENSES 60,321 13,456 4,825 (9,354) 69,248
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 7,063 (2,109) (373) (3) 4,578
OTHER EXPENSES 796 -- -- 24 820
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 6,267 $(2,109) $ (373) $ (27) $ 3,758
======= ======= ======= ======= =======
For the Nine Months Ended December 31, 1999:
1999
---------------------------------------------------------------------------
Domestic International
Wholesale Retail Wholesale Inter-segment
(In thousands) Distribution Distribution Distribution Eliminations Consolidated
------------ ------------ ------------- -------------- ------------
NET REVENUES $58,761 $11,401 $ 60 $(9,318) $60,904
OPERATING COSTS AND EXPENSES 56,207 13,117 457 (9,264) 60,517
------- ------- ------- ------- -------
OPERATING INCOME (LOSS) 2,554 (1,716) (397) (54) 387
OTHER EXPENSES (INCOME) 897 -- -- (215) 682
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES $ 1,657 $(1,716) $ (397) $ 161 $ (295)
======= ======= ======= ======= =======
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
As of
----------------------------------------
(In thousands) December 31, 2000 March 31, 2000
----------------- --------------
Total Assets:
Domestic wholesale distribution $65,234 $59,376
Retail distribution 4,614 6,000
International wholesale distribution 3,984 1,264
Inter-segment eliminations (1,341) (1,245)
------- -------
Consolidated total assets $72,491 $65,395
======= =======
Note. 7. Legal Proceeding.
On November 16, 2000, Universal Studios Home Video, Inc. ("USHV") filed a
complaint against the Company in Los Angeles Superior Court, alleging causes of
action for breach of contract and breach of the covenant of good faith and fair
dealing. USHV's claims arise out of a three year license agreement between the
parties pursuant to which USHV licensed to the Company the exclusive right to
distribute, within the United States and Canada, 52 delineated motion pictures
(the "Pictures") in the DVD format for the term September 15, 1997 to September
14, 2000. In its complaint, USHV alleges that, by reducing the wholesale price
and suggested retail price of the Pictures, the Company breached the license
agreement. In its complaint, USHV has demanded "compensatory damages according
to proof but reasonably believed to be in excess of $5,000,000," reasonable
attorneys' fees and costs of suit. On January 10, 2001, the Company filed its
answer to the complaint, denying all of USHV's material allegations and
asserting numerous affirmative defenses. The parties are currently beginning
pre-trial discovery. No trial date has been set. The Company intends to
vigorously defend itself in this action.
-11-
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 the VHS home video
format. The Company is winding down its laserdisc distribution operations. 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. See "Liquidity and Capital
Resources -- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating
Results."
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 was renewed for an additional two year
period through December 31, 2002. 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 nine
months ended December 31, 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 December 31, 2000 Compared to The Three Months Ended
December 31, 1999
The following table presents consolidated net revenues by reportable
business segment for the three months ended December 31, 2000 and 1999:
Three months ended
December 31,
------------------
2000 1999 % Change
------- ------ ----------
(in thousands)
Net revenues:
Domestic wholesale distribution $21,825 $24,502 (10.9)%
Retail distribution 4,322 4,175 3.5
International wholesale distribution 1,708 60 *
Inter-segment eliminations (3,119) (3,670) *
------- ------- ------
Consolidated $24,736 $25,067 (1.3)%
======= ======= ======
----------------------
* not meaningful
Consolidated net revenues for all segments for the December 2000 quarter
decreased 1.3% to $24,736,000 from $25,067,000 from the December 1999 quarter
primarily as a result of the factors discussed below.
Consolidated net revenues of DVD programming for the December 2000 quarter
decreased 0.4% to $23,013,000, or 93.0% of consolidated net revenue, from
$23,100,000, or 92.2% of consolidated net revenue, for the December 1999
quarter. Approximately 65.7% of consolidated net revenues of DVD programming
for the December 2000 quarter was derived from exclusively licensed or
distributed programming as compared to 58.5% for the December 1999 quarter. Net
revenues of VHS and CD programming for the December 2000 quarter were
$1,329,000, or 5.4% of consolidated net revenues, as compared to $1,113,000, or
4.4% of consolidated net revenues for the December 1999 quarter. Net revenues
of laserdisc programming for the December 2000 quarter were $394,000, or 1.6% of
consolidated net revenues, as compared to $854,000, or 3.4% of consolidated net
revenues for the December 1999 quarter.
Net revenues for the Company's domestic wholesale distribution segment for
the December 2000 quarter decreased 10.9% to $21,825,000 from net revenues of
$24,502,000 for the December 1999 quarter. Segment net revenues for the
December 2000 quarter included approximately $1,200,000 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. Although the Company released
a greater number of exclusive new titles during the December 2000 quarter, the
wholesale customer demand for those titles as a whole were not as strong as the
December 1999 quarter's new releases. Additionally, the Company experienced a
significant decline in the December 2000 quarter's net revenues from the
distribution of DVD programming to certain Internet retailing customers. Two of
the Company's top four Internet retailing customers during the December 1999
quarter did not purchase from the Company during the December 2000 quarter. One
of those customers is no longer operating and the other is on credit hold due to
its financial instability. During the December 2000 quarter, the Company
released 130 exclusive DVD titles domestically, an 8.3% increase from 120
exclusive DVD titles released during the December 1999 quarter. The Company
anticipates that worldwide household penetration of DVD players will continue to
grow and will positively impact the Company's future DVD revenues.
-13-
The Company's retail distribution segment, DVDPlanet, experienced continued
growth in its DVD revenues. DVD revenues increased 21.8% to $4,129,000, or
95.5% of segment net revenues, for the December 2000 quarter from $3,391,000, or
81.2% of segment net revenues, for the December 1999 quarter. Net revenues of
DVD programming via Internet/mail order increased 22.8% to $3,001,000 for the
December 2000 quarter from $2,444,000 for the December 1999 quarter. Overall
net revenues for DVDPlanet for the December 2000 quarter increased 3.5% to
$4,322,000 from $4,175,000 for the December 1999 quarter. Management believes
DVDPlanet's net revenues have been positively impacted by the financial
difficulties and related contraction of the Internet retailing sector, which
includes many of DVDPlanet's direct competitors. The December 1999 quarter
included laserdisc revenues of approximately $784,000 compared to only $193,000
for the December 2000 quarter. See "Liquidity and Capital Resources --
---
Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results."
Net revenues for the Company's international wholesale distribution segment
for the December 2000 quarter were $1,708,000, the third full quarter of revenue
generating operations, as compared to $60,000 for the December 1999 quarter.
This segment was formed in June 1999. Approximately $1,369,000, or 80.2% 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 $249,000, or 14.6% of
segment revenues, was derived from international broadcast exploitation of the
Company's licensed programming. Approximately $90,000, or 5.3% 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 December 31, 2000 and 1999:
Three Months Ended
December 31,
------------------
2000 1999
-------- --------
(in thousands)
Cost of sales:
Domestic wholesale distribution $15,069 $18,109
Retail distribution 3,792 3,627
International wholesale distribution 1,133 28
Inter-segment eliminations (3,131) (3,658)
------- -------
Consolidated $16,863 $18,106
======= =======
As a percentage of segment net revenues: % Change
--------
Domestic wholesale distribution 69.0% 73.9% (4.9)%
Retail distribution 87.7 86.9 0.8
International wholesale distribution 66.3 46.7 *
------- ------- --------
Consolidated 68.2% 72.2% (4.0)%
======= ======= ========
----------------------------
* not meaningful
Consolidated cost of sales for the December 2000 quarter was $16,863,000,
or 68.2% of net revenues, compared to $18,106,000, or 72.2% of net revenues, for
the December 1999 quarter. Consolidated gross profit margin improved to 31.8%
for the December 2000 quarter from 27.8% for the December 1999 quarter. The
increase in gross profit margin primarily reflects the sales mix of higher-
margin exclusive DVD programming and, to a lesser extent, 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
-14-
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.
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 December 31, 2000 and 1999:
Three months ended
December 31,
------------------
2000 1999 % Change
------ ------ --------
(in thousands)
Selling expenses:
Domestic wholesale distribution $1,736 $1,550 12.0%
Retail distribution 647 534 21.2
International wholesale distribution 512 130 293.8
------ ------ -----
Consolidated $2,895 $2,214 30.8%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 8.0% 6.3% 1.7%
Retail distribution 15.0 12.8 2.2
International wholesale distribution 30.0 * *
------ ------ -----
Consolidated 11.7% 8.8% 2.9%
====== ====== =====
------------------------------------
* not meaningful
Consolidated selling expenses for the December 2000 quarter increased 30.8%
to $2,895,000 from $2,214,000 for the December 1999 quarter. As a percentage of
consolidated net revenues, consolidated selling expenses for the December 2000
quarter increased to 11.7% from 8.8% for the December 1999 quarter. Factors
leading to the increase in selling expenses for the December 2000 quarter as
compared to the December 1999 quarter are detailed below.
Selling expenses for the domestic wholesale distribution segment were up
12.0% to $1,736,000 for the December 2000 quarter from $1,550,000 for the
December 1999 quarter. As a percentage of segment net revenues, selling
expenses for the December 2000 quarter were 8.0%, up from 6.3% for the December
1999 quarter. The December 2000 quarter had increased expenditures for net
freight (higher by $85,000), advertising and promotion (higher by $53,000) and
sale commissions (higher by $46,000) over that of the December 1999 quarter.
Selling expenses for the retail distribution segment increased 21.2% to
$647,000 for the December 2000 quarter from $534,000 for the December 1999
quarter. As a percentage of segment net revenues, selling expenses for the
December 2000 quarter were 15.0%, up from 12.8% for the December 1999 quarter.
The December 2000 quarter had increased personnel costs (higher by $114,000)
compared to the December 1999 quarter as a result of increased sales and
customer service staff and annual raises. See "Liquidity and Capital Resources
---
- -- Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results."
Selling expenses for the international wholesale distribution segment
increased 293.8% to $512,000 for the December 2000 quarter from $130,000 for the
December 1999 quarter. The December 2000 quarter had increased expenditures for
advertising (higher by $222,000), promotion (higher by $64,000) and
international travel and trade shows (higher by $61,000), to increase retail and
wholesale awareness of the Company's internationally distributed programming.
-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 December 31, 2000 and 1999:
Three months ended
December 31,
------ ------
2000 1999 % Change
------ ------ --------
(in thousands)
General and administrative expenses:
Domestic wholesale distribution $1,891 $1,626 16.3%
Retail distribution 383 369 3.8
International wholesale distribution 129 45 186.7
------ ------ -----
Consolidated $2,403 $2,040 17.8%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 8.7% 6.6% 2.1%
Retail distribution 8.9 8.8 0.1
International wholesale distribution 7.6 * *
------ ------ -----
Consolidated 9.7% 8.1% 1.6%
====== ====== =====
---------------------------------
* not meaningful
Consolidated general and administrative expenses for the December 2000
quarter increased 17.8% to $2,403,000 from $2,040,000 for the December 1999
quarter. As a percentage of consolidated net revenues, consolidated general and
administrative expenses for the December 2000 quarter increased to 9.7% from
8.1% for the December 1999 quarter. Factors that led to the increase in
consolidated general and administrative expenses for the December 2000 quarter
as compared to the December 1999 quarter are detailed below.
General and administrative expenses for the domestic wholesale distribution
segment for the December 2000 quarter were up 16.3% to $1,891,000 from
$1,626,000 for the December 1999 quarter. As a percentage of segment net
revenues, general and administrative expenses for the December 2000 quarter were
8.7%, up from 6.6% for the December 1999 quarter. The increase in general and
administrative expenses for the December 2000 quarter results primarily from
increased personnel costs, including annual raises, performance-based bonuses
and amortization of restricted stock units (higher by $259,000) and higher
depreciation and amortization expense (higher by $67,000), offset in part, by
reduced expenditures for professional fees (lower by $68,000).
General and administrative expenses for the retail distribution segment
increased 3.8% to $383,000 for the December 2000 quarter from $369,000 for the
December 1999 quarter. As a percentage of segment net revenues, general and
administrative expenses for the December 2000 quarter were 8.9%, up from 8.8%
for the December 1999 quarter.
Amortization of production costs for the December 2000 quarter increased
37.5% to $1,419,000, or 5.7% of consolidated net revenues, from $1,032,000, or
4.1% of consolidated net revenues, for the December 1999 quarter. This increase
is a result of the increased number of exclusively licensed programs for
international distribution released and amortized during the period as compared
to the prior period. Production costs for international programming are higher
on a per-title basis than that for domestic programming. International programs
often require dubbing, subtitling and format conversions. Additionally, DVD
authoring and compression for international titles is typically performed out-
of-house whereas these processes for domestic titles are primarily performed in-
house.
Interest expense, net of interest income, for the December 2000 quarter
increased 12.3% to $446,000 from $397,000 for the December 1999 quarter. The
increase is attributable primarily to higher weighted average debt and interest
rate levels during the December 2000 quarter as compared to the December 1999
quarter.
-16-
Other income was $12,000 and $111,000 for the three months ended December
31, 2000 and 1999, respectively, consisting primarily of the minority interest
in the net loss of the Aviva joint venture.
Income tax expense of $18,000 for the December 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 that offset Federal and state income tax liabilities. 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 December 1999
quarter due to the cumulative consolidated net loss for the nine-month period
ended December 31, 1999.
Consolidated net income for the December 2000 quarter was $577,000, or $.04
per diluted share, as compared to $1,261,000, or $.08 per diluted share, for the
December 1999 quarter.
The Nine Months Ended December 31, 2000 Compared to The Nine Months Ended
December 30, 1999
The following table presents consolidated net revenues by reportable
business segment for the nine months ended December 31, 2000 and 1999:
Nine months ended
December 31,
------------------
2000 1999 % Change
------- ------- --------
(in thousands)
Net revenues:
Domestic wholesale distribution $67,384 $58,761 14.7%
Retail distribution 11,347 11,401 (0.5)
International wholesale distribution 4,452 60 *
Inter-segment eliminations (9,357) (9,318) *
------- ------- ----
Consolidated $73,826 $60,904 21.2%
======= ======= ====
------------------------
* not meaningful
Consolidated net revenues for all segments for the nine months ended
December 31, 2000 increased 21.2% to $73,826,000 from $60,904,000 for the nine
months ended December 31, 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 nine months ended
December 31, 2000 increased 34.3% to $69,077,000, or 93.6% of consolidated net
revenues, from $51,416,000, or 84.4% of net revenues, for the nine months ended
December 31, 1999. Approximately 67.4% of consolidated net revenues of DVD
programming for the nine months ended December 31, 2000 were derived from
exclusively licensed or distributed programming as compared to 58.3% for the
nine months ended December 31, 1999. Net revenues of VHS and CD programming for
the nine months ended December 31, 2000 were $3,478,000, or 4.7% of consolidated
net revenues, as compared to $2,587,000, or 4.3% of consolidated net revenues
for the nine months ended December 31, 1999. Net revenues of laserdisc
programming for the nine months ended December 31, 2000 were $1,271,000, or 1.7%
of consolidated net revenues, as compared to $6,901,000, or 11.3% of
consolidated net revenues, for the nine months ended December 31, 1999.
Net revenues for the Company's domestic wholesale distribution segment for
the nine months ended December 31, 2000 increased 14.7% to $67,384,000 from net
revenues of $58,761,000 for the nine months ended December 31, 1999. Segment
net revenues for the nine months ended December 31, 2000 included approximately
$5,200,000 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 re-promotion program. During
the nine months ended December 31, 2000, the Company released
-17-
443 exclusive DVD titles domestically, a 29.5% increase from 342 exclusive DVD
titles released during the nine months ended December 31, 1999.
Net revenues of DVD programming for the Company's retail distribution
segment were up 38.9% to $10,581,000, or 93.2% of segment net revenues, for the
nine months ended December 31, 2000 from $7,620,000, or 66.8% of segment net
revenues, for the nine months ended December 31, 1999. Net revenues of DVD
programming via Internet/mail order increased 35.6% to $7,530,000 for the nine
months ended December 31, 2000 from $5,553,000 for the nine months ended
December 31, 1999. Overall net revenues for DVDPlanet for the nine months ended
December 31, 2000 decreased 0.5% to $11,347,000 from $11,401,000 for the nine
months ended December 31, 1999. Although comparative net revenues for DVDPlanet
for the nine months ended December 31, 2000 were down due to anticipated
declining laserdisc sales, DVD sales were 38.9% higher. See "Liquidity and
---
Capital Resources -- Management's Plan to Improve Fiscal 2002 DVDPlanet
Operating Results."
Net revenues for the Company's international wholesale distribution segment
for the nine months ended December 31, 2000 were $4,452,000 compared to $60,000
for the nine months ended December 31, 1999. This segment was formed in June
1999. Approximately $3,368,000, or 75.7% 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 $869,000, or 19.5% of segment revenues, was derived from
international broadcast exploitation of the Company's licensed programming.
Approximately $215,000, or 4.8% 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
nine months ended December 31, 2000 and 1999:
Nine Months Ended
December 31,
------------------
2000 1999
------- ------
(in thousands)
Cost of sales:
Domestic wholesale distribution $46,628 $44,537
Retail distribution 9,891 9,698
International wholesale distribution 2,957 28
Inter-segment eliminations (9,354) (9,264)
------- -------
Consolidated $50,122 $44,999
======= =======
As a percentage of segment net revenues: % Change
--------
Domestic wholesale distribution 69.2% 75.8% (6.6)%
Retail distribution 87.2 85.1 2.1
International wholesale distribution 66.4 -- *
------- ------- --------
Consolidated 67.9% 73.9% (6.0)%
======= ======= ========
----------------------
* not meaningful
Consolidated cost of sales for the nine months ended December 31, 2000 was
$50,122,000, or 67.9% of net revenues, compared to $44,999,000, or 73.9% of net
revenues, for the nine months ended December 31, 1999. Consolidated gross
profit margin improved to 32.1% for the nine months ended December 31, 2000 from
26.1% for the nine months ended December 31, 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.
-18-
The following tables present consolidated selling expenses by reportable
business segment and as a percentage of related segment net revenues for the
nine months ended December 31, 2000 and 1999:
Nine months ended
December 31,
------------------
2000 1999 % Change
------ ------- --------
(in thousands)
Selling expenses:
Domestic wholesale distribution $4,946 $4,070 21.5%
Retail distribution 2,070 2,036 1.7
International wholesale distribution 1,124 320 251.3
------ ------ -----
Consolidated $8,140 $6,426 26.7%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 7.3% 6.9% 0.4%
Retail distribution 18.2 17.9 0.3
International wholesale distribution 25.2 * *
------ ------ -----
Consolidated 11.0% 10.6% 0.4%
====== ====== =====
----------------------
* not meaningful
Consolidated selling expenses for the nine months ended December 31, 2000
increased 26.7% to $8,140,000 from $6,426,000 for the nine months ended December
31, 1999. As a percentage of consolidated net revenues, consolidated selling
expenses for the nine months ended December 31, 2000 increased to 11.0% from
10.6% for the nine months ended December 31, 1999. Factors that led to the
increase in consolidated selling expenses for the nine months ended December 31,
2000 as compared to the December 1999 period are detailed below.
Selling expenses for the domestic wholesale distribution segment were up
21.5% to $4,946,000 for the nine months ended December 31, 2000 from $4,070,000
for the nine months ended December 31, 1999. As a percentage of segment net
revenues, selling expenses for the nine months ended December 31, 2000 were
7.3%, up from 6.9% for the nine months ended December 31, 1999. The Company
incurred comparatively higher promotional and advertising expenditures (higher
by $335,000) during the nine months ended December 31, 2000. Additionally, as
compared to the December 1999 nine-month period, the December 2000 period
included comparatively higher net freight expenditures (higher by $269,000) due
primarily to comparatively higher net revenues for the period as well as higher
sales commissions and personnel costs (higher by $176,000).
Selling expenses for the retail distribution segment increased 1.7% to
$2,070,000 for the nine months ended December 31, 2000 from $2,036,000 for the
nine months ended December 31, 1999. As a percentage of segment net revenues,
selling expenses for the nine months ended December 31, 2000 were 18.2%, up from
17.9% for the nine months ended December 31, 1999. The nine months ended
December 31, 2000 included comparatively higher personnel costs (higher by
$508,000) as a result of increased sales and customer service staff and annual
raises. The December 1999 period included comparatively higher promotional
expenses (higher by $449,000). See "Liquidity and Capital Resources --
---
Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results."
Selling expenses for the international wholesale distribution segment
increased 251.3% to $1,124,000 for the nine months ended December 31, 2000 from
$320,000 for the comparative 1999 period. The December 2000 nine month period
had increased expenditures for advertising (higher by $363,000), promotion
(higher by $286,000) and international travel and trade shows (higher by
$79,000), to increase retail and wholesale awareness of the Company's
internationally distributed programming.
-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 nine months ended December 31, 2000 and 1999:
Nine months ended
December 31,
-----------------
2000 1999 % Change
------ -------- --------
(in thousands)
General and administrative expenses:
Domestic wholesale distribution $5,607 $4,704 19.2%
Retail distribution 1,114 1,006 10.7
International wholesale distribution 263 109 141.3
------ ------ -----
Consolidated $6,984 $5,819 20.0%
====== ====== =====
As a percentage of segment net revenues:
Domestic wholesale distribution 8.3% 8.0% 0.3%
Retail distribution 9.8 8.8 1.0
International wholesale distribution 5.9 * *
------ ------ -----
Consolidated 9.5% 9.6% (0.1)%
====== ====== =====
---------------------
* not meaningful
Consolidated general and administrative expenses for the nine months ended
December 31, 2000 increased 20.0% to $6,984,000 from $5,819,000 for the nine
months ended December 31, 1999. As a percentage of consolidated net revenues,
consolidated general and administrative expenses for the nine months ended
December 31, 2000 were 9.5%, down from 9.6% for the nine months ended December
31, 1999. Factors that led to the increase in consolidated general and
administrative expenses in absolute dollars for the nine months ended December
31, 2000 as compared to the nine months ended December 31, 1999 are detailed
below.
General and administrative expenses for the domestic wholesale distribution
segment for the nine months ended December 31, 2000 were up 19.2% to $5,607,000
from $4,704,000 for the nine months ended December 31, 1999. As a percentage of
segment net revenues, general and administrative expenses for the nine months
ended December 31, 2000 were 8.3%, up from 8.0% for the nine months ended
December 31, 1999. The increase in general and administrative expenses for the
nine months ended December 31, 2000 results primarily from higher personnel
costs, including annual raises, performance-based bonuses and amortization of
restricted stock units (higher by $586,000), a higher provision for potential
uncollectible accounts receivable (higher by $429,000), and higher depreciation
and amortization expense (higher by $182,000), offset in part, by reduced
expenditures for professional fees (lower by $314,000).
General and administrative expenses for the retail distribution segment
increased 10.7% to $1,114,000 for the nine months ended December 31, 2000 from
$1,006,000 for the nine months ended December 31, 1999. As a percentage of
segment net revenues, general and administrative expenses for the nine months
ended December 31, 2000 were 9.8%, up from 8.8% for the nine months ended
December 31, 1999. The increase in general and administrative expenses was
primarily due to higher depreciation expense for the nine months ended December
31, 2000.
Amortization of production costs for the nine months ended December 31,
2000 increased 25.0% to $3,621,000, or 4.9% of consolidated net revenues, from
$2,896,000, or 4.8% of consolidated net revenues, for the nine months ended
December 31, 1999 resulting from an increase in exclusive titles (domestic and
international versions) released and amortized during the December 2000 period
compared to the December 1999 period.
Interest expense, net of interest income, for the nine months ended
December 31, 2000 increased 15.7% to $1,295,000 from $1,119,000 for the nine
months ended December 31, 1999. The increase is attributable primarily to
-20-
higher weighted average debt and interest rate levels during the nine months
ended December 31, 2000 as compared to the nine months ended December 31, 1999.
Other income for the nine months ended December 31, 2000 was $475,000
consisting of gain on sale of land of $499,000, net of the minority interest in
the net loss of the Aviva joint venture of $24,000. Other income for the nine
months ended December 31, 1999 of $437,000 consists primarily of minority
interest in the net loss of the Aviva joint venture.
Income tax expense of $113,000 for the nine months ended December 31, 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 that offset Federal and state income tax
liabilities. 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
nine months ended December 31, 1999 due to the consolidated net loss.
Consolidated net income for the nine months ended December 31, 2000 was
$3,645,000, or $.22 per diluted share, as compared to a consolidated net loss of
$295,000, or $.02 per diluted share, for the nine months ended December 31,
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, Nine Months Ended December 31, 2000 and
1999.
Net cash provided by operating activities for the nine months ended
December 31, 2000 was $4,528,000 compared to net cash used in operating
activities of $4,388,000 for the comparative December 1999 period. The major
factors contributing to the significant increase in net cash provided by
operating activities for the nine months ended December 31, 2000 are as follows:
(i) the nine months ended December 31, 2000 provided net income of $3,645,000
compared to a net loss of $295,000 for the nine months ended December 31, 1999;
(ii) the nine months ended December 31, 2000 had a higher comparative
depreciation and amortization of property, equipment and improvements,
production costs and restricted stock units; and, (iii) the nine months ended
December 31, 1999 had a higher comparative increase in inventories and prepaid
assets.
Investing activities used net cash of $1,158,000 for the nine months ended
December 31, 2000 compared to $24,000 net cash provided for the comparative
December 1999 period. The December 2000 period included increased capital
expenditures incurred to upgrade the Company's distribution facility in Las
Vegas, Nevada as well as upgrade the Company's in-house production facility.
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 nine months ended December
31, 2000 was $4,037,000 compared to net cash provided by financing activities
for the nine months ended December 31, 1999 of $3,641,000. The increased
-21-
use of cash is primarily due to net repayment of interest-bearing debt during
the nine months ended December 31, 2000 compared to net borrowings during the
nine months ended December 31, 1999. Additionally, the Company spent $1,849,000
related to its stock repurchase program during the December 2000 period.
Financing Activities.
Revolving Credit and Term Loan Facility. At December 31, 2000, the Company
---------------------------------------
had $7,940,000 outstanding under its $15,000,000 revolving credit facility and
$420,000 outstanding under its $500,000 term loan facility with Foothill Capital
Corporation ("Foothill") and had borrowing availability of $6,610,000 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 December 31, 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 December 31, 2000, $3,047,000 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% (9.05% at December 31, 2000). The Company may
repay and reborrow principal amounts provided the outstanding borrowings do not
exceed the maximum commitment of $3,047,000 at December 31, 2000, reduced
quarterly by $43,000. The credit facility expires January 31, 2008.
Distribution Equipment Lease Facility. At December 31, 2000, $1,156,000 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 $647,000
outstanding under this line at December 31, 2000, all of which bore interest at
LIBOR plus 2.50% (ranging from 9.01% to 9.22% at December 31, 2000).
Convertible Subordinated Note Payable. At December 31, 2000, the Company
-------------------------------------
had $5,000,000 outstanding under the convertible subordinated note payable,
bearing interest at 8.0% and due September 29, 2002.
At December 31, 2000, the Company was in compliance with all financial and
operating covenants under its debt agreements.
Other Obligations.
At December 31, 2000, the Company had future license obligations for
royalty advances, minimum guarantees and other fees of $3,613,000 due during the
remainder of fiscal 2001, $4,651,000 due during fiscal 2002 and $122,000 due
during fiscal 2003. These advances and guarantees are recoupable against
royalties and distribution fees earned (in connection with Company revenues) by
the licensors and program suppliers, respectively. Depending upon the
competition for license and exclusive distribution rights, the Company may have
to pay increased advances, guarantees and/or royalty rates in order to acquire
or retain such rights in the future.
-22-
At December 31, 2000, the Company had $450,000 of outstanding standby
letters of credit issued by Foothill of which $300,000 expire on June 30, 2001
and $150,000 expire on November 18, 2001. These letters of credit secure trade
payables due program suppliers.
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 $1,399,000.
Under the Company's reinstated stock repurchase program announced in August
2000, the Company has repurchased 513,600 shares through December 31, 2000 for
$1,849,000 (average price of $3.60 per share), including brokerage commissions.
At December 31, 2000, there were 320,400 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.
Management's Plan to Improve Fiscal 2002 DVDPlanet Operating Results.
In July 1999, the Company began expanding the DVDPlanet employee base in
anticipation of growth in DVD revenues through Internet direct-to-consumer
distribution. The majority of the new employees hired were based in the
Company's Chatsworth, California corporate headquarters and not at DVDPlanet's
retail store and distribution center in Westminster, California. From mid-
calendar 1999 and throughout calendar 2000, competing Internet retailers offered
DVD programming to consumers at deep discounts, often at or below their actual
cost, in an effort to capture new customers. Management believes that
profitability for these Internet retailers was ultimately sacrificed to obtain
rapid revenue growth during this period. Although DVDPlanet did lower its
pricing to consumers with an additional discount from the suggested retail
price, it did not eliminate its entire gross profit margin to match its
competitors' pricing. Management believes, in large part because of its of
competitors' pricing policies, DVDPlanet's revenue growth has been below
management's expectations. In the past 120 days, the financial difficulties and
related attrition experienced by certain Internet DVD retailers has led to
generally increased pricing to consumers by the remaining Internet DVD
retailers. Management believes this recent overall pricing increase by
DVDPlanet's competitors has positively impacted recent DVDPlanet Internet-based
revenues, because the disparity in pricing between DVDPlanet and its competitors
has narrowed.
With lower than expected revenue growth and a significant increase in
operating expenses, DVDPlanet has sustained upwardly trending quarterly losses.
In response to this continued negative trend in the operating results of
DVDPlanet, management has developed an "Action Plan" to improve the operating
results of DVDPlanet with the goal of achieving positive cash flows and
profitability. The Action Plan principally involves (a) initiatives which have
been implemented or will be implemented prior to 100% fulfillment of DVDPlanet's
distribution from the Company's Las Vegas warehouse and distribution facility
(currently the majority of DVDPlanet's distribution is from the Westminster
location) and (b) initiatives which will be implemented after achieving 100%
fulfillment from Las Vegas (now anticipated to occur by fiscal year end March
31, 2001) and is described in more detail below:
(a) Initiatives implemented or to be implemented prior to 100% fulfillment:
----------------------------------------------------------------------
1. Reduce traditional discounts offered customers, effective March
1, 2001. Management estimates that this will positively impact
overall segment gross profit margins by 3% to 5% and further
believes this new pricing model will be competitive with the
current Internet retailing competition.
-23-
2. Increase DVDPlanet's shipping charges to consumers, effective
March 1, 2001. Management estimates this change could increase
annual segment shipping revenues by approximately $140,000 based
upon historical segment shipping levels. Management further
believes DVDPlanet's new shipping charge policy is competitive
with the current Internet retailing competition.
3. Decrease segment selling expenses by eliminating publication of
the monthly The Source solicitation mailer, which is primarily
----------
used by DVDPlanet's mail order customers, effective February 1,
2001. Information contained in The Source, which includes
----------
upcoming DVD release information as well as product specials and
highlights is available on-line at DVDPlanet.com. Management
estimates the related annual savings (printing and postage, net
of advertising income received) will be approximately $200,000.
4. Decrease segment payroll expenses by reducing DVDPlanet staff.
In late January 2001, DVDPlanet reduced its staff by four
employees (three full-time and one part-time). Management
estimates the related annual savings will be $138,000 in salary
and benefits. Additionally, seven full-time employees of
DVDPlanet were transferred to the Company's wholesale
distribution segment, eliminating that segment's immediate need
to increase staffing in the areas of production, selling and
business-to-business web site development. Management estimates
the savings to the DVDPlanet segment by moving these employees
will be approximately $390,000 in annual salary and benefits.
(b) Initiatives to be implemented upon achieving 100% fulfillment in Las
--------------------------------------------------------------------
Vegas:
-----
1. Realignment of all customer service, sales and distribution
functions at the Westminster facility. The Company expects to
significantly reduce staff levels as a result of this
realignment, with an estimated segment salary and benefits
savings ranging from approximately $230,000 to $280,000.
2. Change class of shipping on majority of shipments from United
States Postal Service "Priority" to "First Class" mail.
Management estimates the related annual segment shipping expense
savings will be approximately $200,000 based upon historical
segment shipping activity. Management further believes that this
class of service is competitive with the current Internet
retailing competition.
Management believes that the implementation of this Action Plan, as well as
a continuing review of cost savings opportunities, will improve DVDPlanet's cash
flows and operating results for the fiscal year ending March 31, 2002 as
compared to the results, which will be reported for the fiscal year ending March
31, 2001. There can be no assurance that DVDPlanet's operating results will
improve as a result of implementing these initiatives or that the goal of
achieving positive cash flows and profitability will be reached.
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 $6,610,000 at December 31, 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
$1,507,000. The Company would consider raising the line's maximum above
$15,000,000 should it need access to this
-24-
availability to grow its business and believes that given the positive trend of
its financial results, the lender would accommodate the request, although there
can be no assurance the lender would do so.
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 would be available in amounts or on terms acceptable
to the Company, it 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) that worldwide DVD player household
penetration will continue to grow and positively impact the Company's DVD
revenues; (2) that DVD replication costs will further decline in the near
future; (3) the implementation of any or all initiatives under management's
DVDPlanet Action Plan will increase revenues, improve segment gross margins,
increase annual segment shipping revenues, decrease segment selling expenses,
decrease segment payroll expenses and decrease segment shipping expenses; (4)
the implementation of any or all initiatives under management's DVDPlanet Action
Plan will result in improved segment cash flows, operating results and
profitability; (5) the Company's Las Vegas distribution center will fulfill 100%
of DVDPlanet's orders by March 31, 2001; and (6) 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 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; (3) the DVDPlanet Action Plan
might reduce sales volume; (4) the DVDPlanet Action Plan might reduce sales
volume which, in turn, might reduce the benefit of certain economies of scale
expected to be achieved upon implementation of the DVDPlanet Action Plan; (5)
any further delay in 100% fulfillment of DVDPlanet's orders from the Company's
Las Vegas facility could negatively impact the effectiveness of the DVDPlanet
Action Plan in reducing expenses; (6) the Company will not successfully
implement certain software upgrades and modifications for efficient third-party
fulfillment; and (7) the Company's lender may refuse to increase the Company's
maximum borrowing availability, if so requested by the Company. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. Unless otherwise required by law, the
Company disclaims any obligation to update any such factors or to announce
publicly the result of any revisions to any of the forward-looking statements
contained in this and other Securities and Exchange Commission filings of the
Company to reflect future events or developments. In addition to the foregoing
risk factors, the risks facing the Company include those contained in the
Company's Annual Report on Form 10-K for the year ended March 31, 2000. The
Risk Factors described in that Form 10-K are applicable to all forward-looking
statements wherever they appear in this report.
-25-
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 December 31, 2000, 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 December 31,
2000.
Foreign Exchange Rate Fluctuations. At December 31, 2000, approximately
$1,213,000 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 $121,000 impact on pretax income (loss) based
upon those outstanding receivables at December 31, 2000.
-26-
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The condensed consolidated financial statements as of December 31, 2000 and
for the three- and nine-month periods ended December 31, 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.
-27-
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 December 31, 2000, and the related
condensed consolidated statements of operations and cash flows for the three-
and nine-month periods ended December 31, 2000 and 1999. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews 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
February 1, 2001
-28-
================================================================================
PART II - OTHER INFORMATION
================================================================================
ITEM 1. Legal Proceedings.
-----------------
On November 16, 2000, Universal Studios Home Video, Inc. ("USHV") filed
a complaint against the Company in Los Angeles Superior Court (Case No.
BC240429), alleging causes of action for breach of contract and breach
of the covenant of good faith and fair dealing. USHV's claims arise out
of a three year license agreement between the parties pursuant to which
USHV licensed to the Company the exclusive right to distribute, within
the United States and Canada, 52 delineated motion pictures (the
"Pictures") in the DVD format for the term September 15, 1997 to
September 14, 2000. In its complaint, USHV alleges that, by reducing
the wholesale price and suggested retail price of the Pictures, the
Company breached the DVD license agreement. In its complaint, USHV has
demanded for "compensatory damages according to proof but reasonably
believed to be in excess of $5,000,000," reasonable attorneys' fees and
costs of suit. On January 10, 2001, the Company filed its answer to the
complaint, denying all of USHV's material allegations and asserting
numerous affirmative defenses. The parties are currently beginning pre-
trial discovery. No trial date has been set. The Company intends to
vigorously defend itself in this action.
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
-29-
================================================================================
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: February 13, 2001 By: /s/ MARTIN W. GREENWALD
-----------------------
Martin W. Greenwald
Chairman of the Board, Chief Executive
Officer,
President and Treasurer
Date: February 13, 2001 By: /s/ JEFF M. FRAMER
------------------
Jeff M. Framer
Chief Financial Officer
-30-
================================================================================
EXHIBIT INDEX
================================================================================
Exhibit No. Description
- --------------------------------------------------------------------------------
10.1 *+ Form of Director Stock Unit Award Agreement, dated as of October
1, 2000, between the Company and each of Ira Epstein, M. Trevenen
Huxley and Stuart Segall.
15 * Consent Letter of KPMG LLP, Independent Certified Public
Accountants.
-----------------------------------------------
* Exhibit(s) not previously filed with the Securities and
Exchange Commission.
+ Management Contracts, Compensatory Plans or Arrangements.
i