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Article by DailyStocks_admin    (12-26-13 10:33 PM)

Description

RLJ Entertainment. 10% Owner SPAC Acquisition, LLC RLJ bought 83,332 shares on 12-10-2013 at $ 4.1

BUSINESS OVERVIEW

Overview

Image Entertainment, Inc. (or Image , we , us or our ) was incorporated in Colorado as Key International Film Distributors, Inc. in April 1975. In 1983, we changed our name to Image Entertainment, Inc. We reincorporated in California in November 1989 and reincorporated again in Delaware in September 2005. Our principal executive offices are located at 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311.

We are a leading independent licensee and distributor of entertainment programming in North America. We release our library of exclusive content on a variety of formats and platforms, including DVD, Blu-ray Disc® (or Blu-ray ), digital (video-on-demand (or VOD ), electronic sell-through (or EST ) and streaming), broadcast television (cable or satellite, including VOD), theatrical and non-theatrical (airplanes, libraries, hotels and cruise ships) exploitation.

Our focus is on a diverse array of general and specialty content, including:


Feature films

Theatrical catalogue films

Comedy

Independent films

Music concerts

Foreign films

Urban (including stage plays)

Youth culture/lifestyle

Theatre/ Broadway

Television

Documentaries

Sports

Faith and family

Fitness

We also acquire exclusive rights to audio content for distribution via digital platforms and on CD in a variety of genres and configurations.

We strive to grow revenue by maintaining and building a library of titles that can be exploited in a variety of formats and distribution channels. Our library of exclusive rights contains approximately 4,000 titles that we are currently exploiting in the following formats:


Approximately 3,700 DVD/Blu-ray titles/300 CD titles

Digital rights to approximately:

o
2,600 video programs

o
400 audio titles containing more than 5,600 individual tracks

Each month, we release an average of 20-25 exclusive titles for distribution in a variety of formats, including DVD, Blu-ray, digital, broadcast, and VOD.

Strategy

We believe our current strategy, which we began implementing in fiscal 2010, continues to allow us to be more flexible and act upon opportunities at a more rapid pace.

The main components of our current strategy include:


Pursuing Exclusive Content Acquisition: Image has refocused its content acquisition efforts by focusing on:

o
Cast-driven feature films, which may result in fewer new titles, but have potentially higher consumer recognition and revenue on each release.

o
Well-known, talent-driven music and comedy selections.

o
Film, television and specialty libraries of all sizes.


Exercising Financial Discipline: Image has implemented an improved ‘greenlight’ process that we believe allows Image to better evaluate the potential profit in a given content acquisition opportunity versus the financial investment and potential risks.


Acquiring All Rights: When appropriate, Image now acquires the greatest variety of distribution rights regarding acquired content in the greatest variety of formats, including DVD, Blu-ray, broadcast, VOD and digital, for both domestic and international use. This allows us to further diversify our revenue streams.


Pursuing Strategic Opportunities: Image has, and will continue to, actively pursue accretive business acquisitions, joint ventures and other creative partnering arrangements. Our management team’s significant network of relationships and depth of expertise provide opportunities for us to grow in areas we know best. Image has either acquired or entered into exclusive distribution relationships with and acquired rights to distribute films and libraries of several companies such as Madacy Entertainment, Lakeshore Entertainment, Handmade Films, Amity Entertainment and Sony Pictures Home Entertainment adding over 900 titles to Image’s library over the past two years.


Maximizing Cost Efficiencies: We are continuing our ongoing evaluation of all cost categories in an effort to effectively convert fixed costs to variable expenses.


Focusing on Core Competencies: As a result of our early-2011 reorganization, we believe that the most profitable use of management and staff time is in the acquisition, sales and marketing of exclusive content. Image has been able to successfully outsource other time and resource intensive functions, such as distribution, merchandising, manufacturing and other logistical functions.


Expanding Distribution Opportunities into New Channels and Media: Image has increased its focus on emerging means of distribution that have opened significant new opportunities, many of which have not yet realized their full potential. For example, we have recently been testing day-and-date VOD release to coincide with theatrical release.


Building Relationships with Existing and Potential Content Suppliers: The substantial business relationships of Image’s management team have allowed Image to substantially expand the depth and breadth of content suppliers willing to do business with Image.

Pending Merger

On April 2, 2012, we entered into an agreement and plan of merger (that we call the merger agreement) with RLJ Acquisition, Inc., or RLJ. Concurrently with the execution of the merger agreement, RLJ, Acorn Media Group, Inc., and the shareholders of Acorn entered into a stock purchase agreement. After the completion of the proposed business combination contemplated by the merger agreement and the stock purchase agreement, the current stockholders of Image and Acorn will own approximately 11% and 5%, respectively, of a new combined company, RLJ Entertainment, Inc., and the current stockholders of RLJ will own approximately 84% of RLJ Entertainment, assuming that none of the RLJ stockholders exercises rights to redeem RLJ stock in the RLJ stock redemption described below. RLJ Entertainment is expected to list its shares on The Nasdaq Stock Market.

General

Based the methods used by management to manage, evaluate, operate and internally report the business activities of Image, we have one reporting segment called Worldwide Entertainment. Our Worldwide Entertainment business consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing.

DVD and Blu-ray. Most of the product we release is in the standard DVD format with an increasing number of titles released on Blu-ray as the format’s acceptance continues to grow. We are a leading independent supplier of content in the music, comedy, special interest, television episodes and urban genres.

Many of our DVD and Blu-ray titles include special features, enhancements and ancillary materials, such as multiple audio tracks, behind-the-scenes footage, director commentaries, interviews and discographies. As more consumers purchase high-definition televisions and are exposed to high-definition content through satellite and cable, we believe that they will expect the same level of quality from their video movie rentals and purchases. Additionally, high-definition video-on-demand continues to gain traction with consumers and we provide high-definition source materials for this format as well. In fiscal 2012, Image released 625 titles on Blu-ray, an increase of 356% over fiscal 2011.

Digital. We engage in the exclusive wholesale distribution of the digital rights to our library of audio and video content. The demand for the types of programming found in our library continues to increase as new distributors enter this primarily online marketplace. We seek to differentiate ourselves competitively by being a one-stop source for these distributors for the large and diverse collection of entertainment represented by our digital library.

We enter into non-exclusive distribution arrangements with retail and consumer-direct entities whose business models include the digital delivery of content.

We aggressively continue to add numerous video and audio titles to our growing library of exclusive digital rights each month. Our current digital video library contains approximately 2,600 individual video programs.

We are actively participating in many digital business models, including sell-through, direct-to-own, rental, subscription, streaming and advertising-supported streaming. As consumers adopt these (or future) models, we believe we are well-positioned to grow along with our distribution partners. The near-term challenges faced by all digital distributors are to develop ways to increase consumer awareness and integrate this awareness into their buying and consumption habits. Additionally, we support several technology companies and original equipment manufacturer device manufacturers with programming in an effort to generate consumer interest in digital distribution and increase awareness and demand for our titles. Examples of our digital accounts are Netflix (video), iTunes (audio and video, ringtones), Amazon.com (audio and video), Hulu (video), Microsoft Xbox Live Marketplace (audio and video), Sony Playstation (video), YouTube/Google (video), Vudu (video), Vevo (video) and Samsung (video).

Broadcast. Our television division is responsible for all forms of television distribution, including the worldwide sales of our content across broadcast television, VOD and non-theatrical platforms. Buyers of our standard and high-definition content are typically cable or satellite broadcasters, and sometimes terrestrial (free) television broadcasters. Examples of our key broadcast sublicensees are BET, Bounce, Comedy Partners, Documentary Channel, Fuse Networks, NBC Universal, Oxygen Media and Showtime.

We have a two-pronged approach to VOD. First, we continue to expand our direct relationships with customers. In North America, we have direct relationships with InDemand, Avail-TVN, AT&T U-verse, Direct TV and Echostar (Dish Net) along with several specialty labels such as Sky Angel, Havoc TV and Eurocinema. Revenue is typically derived on a revenue-sharing basis. These direct relationships account for the majority of our VOD revenues.

Second, we entered into a North American sales agency agreement with Warner Digital Distribution, a division of Time-Warner, Inc., or Warner , which sublicenses a selection of our programs to cable, satellite and hotel/motel operators in the VOD businesses. Revenue is typically derived on a revenue-sharing basis. Internationally, we work with North American-based outlets that already have international operations in addition to opening discussions with a variety of internationally based entities.

Worldwide Hotel/Motel. In North America, we work directly with Lodgenet/OnCommand, Movie Beam, Warner and Avail-TVN and have direct relationships with several other entities providing entertainment to the hotel/motel arena. For exploitation of our music and stand-up comedy programs for hotels and motels, we have a non-exclusive output agreement with Instant Media Network, which is partially owned by Lodgenet/OnCommand – the largest distributor of entertainment product to the hotel/motel industry in North America. In addition, we entered into a non-exclusive output agreement with Video On Demand International Productions, Inc. for all types and genres of programming. As with broadcast (including VOD, as described above), internationally we work with North American-based outlets that have existing international operations as well as internationally based outlets.

Sublicensing. We hold international distribution rights to more than 550 video and audio programs currently exploited on all formats to countries outside of North America. Outside North America, we sublicense distribution in the areas of home entertainment, television and digital, through distribution partners such as Universal Music Group International, BET International, Warner Music Australia and Universal Pictures Australia, which pay us a royalty for their distribution of our products.

Theatrical Distribution . In some cases, a limited theatrical release (playing on between two to 200 screens, in two to 20 markets), which includes an outlay of prints and advertising costs, may be required of us by the licensor as part of the distribution rights acquisition deal. A modest theatrical release may also serve as a cost-effective marketing platform for the subsequent DVD/Blu-Ray, digital and broadcast releases.

Exclusive Acquisition. We acquire exclusive distribution rights to our content across multiple entertainment formats. We acquire our exclusive titles from a wide range of content holders and those who represent content holders, including:


independent content suppliers;


producers;


music artists and record labels;


artist management and talent agencies; and


foreign sales companies.

We market and exploit our exclusive content according to royalty or distribution fee agreements that typically range from five to 25 years in duration.

The Criterion Collection Distribution Agreement. We have been distributing The Criterion Collection for over 20 years. We have an exclusive home video distribution agreement with The Criterion Collection to distribute its product on DVD, Blu-Ray and certain digital formats. The Criterion Collection, including its related labels Eclipse, Janus Films and Essential Art House, currently contains approximately 600 active titles and releases approximately 60 titles annually. Distribution of programming from The Criterion Collection contributed approximately 23% and 26% of our net revenue in fiscal 2012 and 2011, respectively.

New Library Acquisition Strategy. Since January 2010, we have broadened our content acquisition focus to include complete libraries from both studios and independents, such as the Handmade Films library (announced in March 2010) Lakeshore Entertainment library (announced in April 2011), Amity Entertainment library (announced in May 2012) and strategically aligned companies, such as our Madacy Home Video acquisition (announced in October 2010).

Mining of Image’s Library. We continue to create new and special editions of previously released content that will encourage consumers to repurchase the product in these technically superior versions. We also continue to expand on strategies that extend the life cycle of our titles, including “second bite” strategies that focus on repricing and/or remarketing and repromotion; increased focus on budget product and shippers; and product shipped with merchandising displays.

Marketing. Our in-house marketing department directs marketing efforts toward consumers as well as Theatrical exhibition, DVD/Blu-ray/digital retailers and cable/VOD programmers. Our marketing efforts include:



point-of-sale advertising;


print advertising in trade and consumer publications;


television, outdoor, in-theater and radio advertising campaigns;


Internet advertising, including viral and social network marketing campaigns;


direct response campaigns;


dealer incentive programs;


trade show exhibits; and


bulletins featuring new releases and catalogue promotions.

Sales. Image maintains its own sales force, and has a direct selling relationship with the majority of our customers. We sell our products to traditional retailers, specialty retailers, rental customers, Internet retailers, wholesale distributors and through alternative distribution, which includes direct-to-consumer print catalogs, direct response campaigns, subscription service/club sales, home shopping television channels, other non-traditional sales channels, kiosks and subdistributors.

Examples of our key sell-through customers are Walmart, Amazon.com, Best Buy Co., Target and Barnes & Noble. Examples of our key distribution customers are Alliance Entertainment (or AEC ), Entertainment One, Video Products Distributors, and Ingram Entertainment. Examples of our key rental customers are Redbox and Netflix. In fiscal 2012, Walmart and AEC each accounted for approximately 11% of our net revenues.

Additionally, in connection with our August 2010 Distribution Services and License Agreement with Sony Pictures Home Entertainment (or SPHE ), SPHE agreed to perform certain sales functions at Walmart, Best Buy and Target on behalf of Image. We now have the benefit of having a major studio present Image’s product in conjunction with SPHE releases, including motion pictures. SPHE is our primary vendor of record for shipments of physical product to North American retailers and wholesalers and, as vendor of record, responsible for collecting these receivables and remitting these proceeds to Image. See “Managed Value-Added and Distribution Services” below.

We allow retail customers to return unsold inventory. We reserve for estimated returns at the time the sale is recognized, based in part upon our historical returns experience and knowledge of specific product movement within distribution channels. Our inventory returns, as a percentage of our gross distribution revenues, were 26% in fiscal 2012 and 18% in fiscal 2011. The increase in returns was primarily attributable to the higher shipments to Walmart, and their specific new release business model. Returns from Walmart have been higher historically than other retail customers. Returns of defective product have been minimal and are generally covered by manufacturers’ warranties.

We also focus on special market sales channels, outside the traditional marketplace, to take advantage of our large and diverse catalog and specifically target niche sales opportunities. Within special markets, examples of our key customers are Midwest Tapes and Waxworks. Another special market channel is scanned-based trading in conjunction with SPHE. Through SPHE’s scanned-based trading system, our products are also placed in grocery and drug store retail chains such as Albertsons, Stater Brothers, Hannaford, CVS, Shopko, Kroger and Safeway.

Managed Value-Added and Distribution Services. In February 2010, we outsourced the post-production and creative services necessary to prepare a disc master and packaging/advertising materials for manufacturing and marketing of our products. Such services include:


packaging design;


DVD/Blu-ray authoring and compression;


menu design;


video master quality control;


music clearance; and


for some titles, the addition of enhancements such as:

o
multiple audio tracks;

o
commentaries;

o
foreign language tracks;

o
behind-the-scenes footage; and

o
interviews.

These services now are performed by third-party vendors, managed by Company personnel.

Our manufacturing, warehousing and distribution services are currently provided by Sony Pictures Home Entertainment (or SPHE ) under our Distribution Service and License Agreement. In addition to conventional manufacturing, we also have manufacturing-on-demand (or MOD ). MOD services are provided for replication of slower moving titles, which helps avoid replicating larger minimum quantities of certain titles and can be used for direct-to-consumer sales as needed. Under our agreement, SPHE also provides certain operational services at Image’s direction, including credit and collections, merchandising, returns processing, and certain IT functions.

CEO BACKGROUND

Officers and Directors of New RLJ

Upon completion of the business combination, the following individuals will serve as directors and management of New RLJ:

Name & Position

Robert L. Johnson,Executive Chairman of the Board

Theodore S. Green,Chief Executive Officer, Director

Peter Edwards,Non-Executive Vice-Chairman, Independent Director

Miguel Penella,President and Chief Operating Officer, Director

H. Van Sinclair,Independent Director

John W. Hyde,President, Global and Strategic Development, Director

John P. Avagliano,Chief Financial Officer

Robert L. Johnson has served as RLJ’s chairman of the board since November 2010. Mr. Johnson founded and has served as chairman of The RLJ Companies, an innovative business network that owns or holds interests in a diverse portfolio of companies in the banking, private equity, real estate, hospitality, professional sports, film production, gaming, and automobile dealership industries, since February 2003. Prior to forming The RLJ Companies, Mr. Johnson was founder and chief executive officer of Black Entertainment Television (BET), which was acquired by Viacom Inc. in 2001. He continued to serve as chief executive officer of BET until February 2006. In July 2007, Mr. Johnson was named by USA Today as one of the 25 most influential business leaders of the past 25 years. Mr. Johnson currently serves on the boards of directors of RLJ Lodging Trust, KB Homes, Lowe’s Companies, Inc., Rollover Systems, Inc. and Strayer Education, Inc. He previously served as a director of Hilton Hotels Corporation, US Airways Group, Inc., General Mills, Inc. and IMG Worldwide, Inc. RLJ believes that Mr. Johnson’s professional background, his prior senior leadership positions at various companies, and current and past board positions, make him well qualified as a member of the RLJ board.

H. Van Sinclair has served as RLJ’s president, chief executive officer and general counsel and as a member of the RLJ board since November 2010. Since February 2003, Mr. Sinclair has served as president and chief executive officer of The RLJ Companies. Mr. Sinclair also served as Vice President of Legal and Business Affairs for the RLJ Urban Lodging Funds, a private equity fund concentrating on limited and focused service hotels in the United States and for RLJ Development, RLJ Companies’ hotel and hospitality company, from January 2006 to May 2011. Prior to joining The RLJ Companies, Mr. Sinclair spent 28 years, from October 1978 to February 2003, with the law firm of Arent Fox, PLLC. Mr. Sinclair remains of counsel to Arent Fox. RLJ believes that Mr. Sinclair’s professional background, his prior senior leadership positions at various companies, and extensive legal experience, make him well qualified as a member of the RLJ board.

Lisa W. Pickrum has served as RLJ’s chief financial officer since December 2010. Ms. Pickrum has served as executive vice president and chief operating officer of The RLJ Companies since August 2004. Prior to that, Ms. Pickrum was a senior associate at Katalyst Venture Partners, a private equity firm, from September 2000 to January 2003. She has served as a member of the board of directors of DeVry, Inc., a provider of educational services (NYSE:DV) since November 2008 and a member of the Christopher & Banks board (NYSE:CBK) since 2011. Ms. Pickrum currently serves on the board of directors of Rollover Systems, Inc., and the RLJ McLarty Landers Automotive Group.

William S. Cohen has served as a director of RLJ since February 2011. He has been Chairman and Chief Executive Officer of The Cohen Group, a business consulting firm, since January 2001. Prior to founding The Cohen Group, Mr. Cohen served as the United States Secretary of Defense from January 1997 to 2001. He also served as a United States Senator from 1979 to 1997, and as a member of the United States House of Representatives from 1973 to 1979. Mr. Cohen has served on the board of directors of CBS Corporation since 2003. He has also served as a director of Viacom Inc. (2003 – 2006), American International Group, Inc. (2004 – 2006) and Head N.V. (2001 – 2007). RLJ believes that Mr. Cohen’s professional background, his prior senior leadership positions both at The Cohen Group and in politics, and current and past board positions, make him well qualified as a member of the RLJ board.

Mario J. Gabelli has served as a director of RLJ since February 2011. He has served as Chairman and Chief Executive Officer of GAMCO Investors, Inc. (NYSE: GBL) since February 1999, and as a director since November 1976. Mr. Gabelli has also served as Chief Investment Officer — Value Portfolios of GAMCO Asset Management Inc. since August 1978. In connection with those responsibilities, he serves as director or trustee of registered investment companies managed by GAMCO and its affiliates, or Gabelli Funds. Mr. Gabelli has been a portfolio manager for Teton Advisors, Inc., an asset management company which was spun-off from GAMCO in March 2009, since 1998. Mr. Gabelli has served as Chairman of LICT Corporation, a public company engaged in multimedia and other services, since 2004, director of CIBL, Inc., a holding company with operations in broadcasting and wireless telecommunications, since 2007 and Chairman and Chief Executive Officer of The Morgan Group Holding Co., a public holding company, since 2001. In addition, Mr. Gabelli is the Chief Executive Officer, a director and the controlling shareholder of GGCP, Inc., a private company which owns a majority of GAMCO’s Class B Stock, and the Chairman of MJG Associates, Inc., which acts as a investment manager of various investment funds and other accounts. Mr. Gabelli serves as Overseer of Columbia University Graduate School of Business and Trustee of Boston College and Roger Williams University. He also serves as Trustee of The Winston Churchill Foundation and The E. L. Wiegand Foundation, and as a member of the board of directors of The National Italian American Foundation, The American-Italian Cancer Foundation, The Foundation for Italian Art & Culture and The Mentor/National Mentoring Partnership. He is also Chairman of the Gabelli Foundation, Inc., a Nevada private charitable trust. RLJ believes that Mr. Gabelli’s professional background, his prior senior leadership positions at various companies, and current and past board positions, make him well qualified as a member of the RLJ board.

Morris Goldfarb has served as a director of RLJ since February 2011. He serves as Chairman of the Board and Chief Executive Officer of G-III Apparel Group, Ltd. (NASDAQ: GIII), a designer, manufacturer, importer and marketer of apparel, handbags and luggage. Mr. Goldfarb has served as an executive officer and director of G-III and its predecessors since its formation in 1974. Mr. Goldfarb served as a director of Lakes Entertainment, Inc. from June 1998 until March 2010. RLJ believes that Mr. Goldfarb’s professional background, his senior leadership position at G-III Apparel Group, Ltd., and current and past board positions, make him well qualified as a member of the RLJ board.

Number and Terms of Office of Directors and Officers

The RLJ board is divided into three classes with only one class of directors being elected at each annual meeting of stockholders and each class (except for those directors appointed prior to RLJ’s first annual meeting of stockholders) serving a three-year term. The term of office of the first class of directors, consisting of Mr. Cohen, will expire at RLJ’s first annual meeting of stockholders. The term of office of the second class of directors, consisting of Messrs. Sinclair and Gabelli, will expire at the second annual meeting of stockholders. The term of office of the third class of directors, consisting of Messrs. Johnson and Goldfarb, will expire at the third annual meeting of stockholders. RLJ does not currently intend to hold an annual meeting of stockholders until after RLJ consummates a business combination, and thus may not be in compliance with NRS 78.330, which requires an annual meeting of stockholders be held for the purposes of electing directors unless such election is made by written consent in lieu of such a meeting. Therefore, if RLJ’s stockholders want RLJ to hold an annual meeting prior to RLJ’s consummation of a business combination, they may attempt to force RLJ to hold one by submitting an application to the district court in accordance with NRS 78.345.

RLJ’s officers are appointed by the RLJ board and serve at the discretion of the RLJ board, rather than for specific terms of office. The RLJ board is authorized to appoint persons to the offices set forth in RLJ’s amended and restated bylaws as it deems appropriate. RLJ’s amended and restated bylaws provide that RLJ’s officers may consist of a chairman of the board, chief executive officer, president, chief financial officer, vice presidents, secretary, treasurer and such other offices as may be determined by the RLJ board.

Collectively, through their positions described above, RLJ’s officers and directors have extensive experience in the private equity business, which RLJ believes will help RLJ in identifying and evaluating prospective acquisition candidates, selecting the target businesses, and structuring, negotiating and consummating their acquisition.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

General

We are a leading independent licensee and distributor of home entertainment programming in North America. Our discussion and analysis of our financial condition and results of operations is based on our single reporting segment, Worldwide Entertainment.

Our Worldwide Entertainment business consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), video-on-demand (or VOD ), streaming video, downloading and sublicensing.

Revenue Sources

DVD and Blu-ray

Our primary source of revenues continues to be from the acquisition and distribution of exclusive content on DVD and Blu-ray, which accounted for approximately 74.9% and 84.2% of our consolidated net revenues in fiscal 2012 and 2011, respectively.

Digital and Broadcast

Revenues derived from the digital distribution of our exclusive content rights, while still relatively modest, continue to grow as a percentage of revenues. Net revenues derived from digital distribution accounted for approximately 14.1% and 7.0% of our consolidated net revenue in fiscal 2012 and 2011, respectively.

In general, we have seen the strongest growth on the VOD and Subscription VOD (or SVOD ) side, with steady growth on the electronic sell-through (or EST ) side. This is consistent with consumer adoption trends. As retailers continue to offer consumer-friendly devices that make access to these on-demand services easier, including allowing consumption in the consumer’s home, we believe we are well-positioned to capture business in that growing distribution channel. Broadcast sales includes all forms of television distribution, including the sales of our content across broadcast television, VOD and non-theatrical platforms.

We are a valued provider of digital content in several key content categories, including stand-up comedy, long-form music, titles filmed for the IMAX format and feature films. Many of our titles have consistently made top rental charts on key retail sites. We have also experienced increased revenue streams from advertising-supported models like Hulu and YouTube, which have been promising, especially for catalogue product.

Domestic consumption of mobile video has been concentrated in more channel-oriented content like Sprint Movies, FloTV, ESPN and CNN. While some genre-based subscription channels exist, the mobile network has not yet been able to provide a true broadband experience, and in turn mobile video growth has not yet met industry projections. We currently provide programming to two mobile aggregators who manage channels on all four major mobile carriers. Certain programs have had success, but the overall number of available programs is relatively small and our revenue expectations are modest.

Sublicensing and Other

We continue our efforts to acquire more programming with international rights. Revenues derived outside the U.S. and Canada primarily represent proceeds from sublicenses with Universal Music Group International, BET International, Warner Music Australia and Universal Pictures Australia for their distribution of our exclusive content. Music-related DVDs have performed well for us internationally. To date, most of the feature films we have acquired do not include international rights. However, we continue our efforts to acquire more programming with international rights. When appropriate, we now seek the greatest variety of distribution rights regarding acquired content in the greatest variety of formats, including DVD, Blu-ray, broadcast, VOD and digital, for both domestic and international use. This will allow us to further diversify revenue streams.

We also derive modest revenues from theatrical and non-theatrical revenue streams.

Cost Structure

Our most significant costs and cash expenditures relate to acquiring content for exclusive distribution. Additionally, we incurred substantial legal, investment banking and other expenses during fiscal 2012 related to the RLJ Acquisition, Inc. (or RLJ ) transaction and during fiscal 2011 related to the Madacy Entertainment US, Inc. (or Madacy ) and Sony Pictures Home Entertainment Inc. (or SPHE ) transactions described below.

We acquire primarily North American distribution rights to completed feature films while maintaining our focus on acquiring distribution rights to genres that have been successful in the past. We continue to seek early trend opportunities in advance of mainstream acceptance in an effort to keep acquisition costs lower by bringing titles to market before spikes in demand drive up acquisition costs.

We generally acquire programming through exclusive license/distribution agreements, under which we either pay royalties or receive distribution fees and pay net profits after recoupment of our upfront costs. Upon entering into a typical license (royalty) agreement, we pay, as an advance, royalties which normally become due to the content supplier 45 days following the quarter in which the sale of the title to our retail customers has occurred. Under a typical exclusive distribution agreement, we may pay upfront fees, which are expressed as advances against future net profits, or we may pay for the cost of the content’s production in advance.

In addition to advances, upfront fees and production costs, the other significant costs we incur are:



DVD/Blu-ray replication;


packaging;


advertising, promotion, and market development funds provided to retail customers;


domestic shipping costs from self-distribution of exclusive content;


personnel; and


music publishing on exclusive music-related DVD/Blu-ray and CD titles.

We focus on achieving long-term, sustainable growth and profitability. We also seek to improve our cash flow position in order to continue funding operations and licensing, or entering into exclusive distribution agreements, for high-quality entertainment content.

Fiscal 2012 Financial Highlights and Subsequent Event



Consolidated net revenues increased 12.5% to $100,086,000 for fiscal 2012, from $88,959,000 for fiscal 2011, primarily due to the performance of high-profile new releases The Double , The Way Back and Beneath the Darkness as well as the Blu-ray release of many of The Criterion Collection titles.

o
Packaged goods (DVD and Blu-ray) net revenues increased slightly to $75,000,000, from $74,924,000.

o
Digital distribution net revenues increased 125.2% to $14,092,000, from $6,258,000.

o
Broadcast net revenues increased 31.8% to $7,854,000, from $5,961,000.

o
Other net revenues, including theatrical and non-theatrical, increased 72.9% to $3,140,000, from $1,816,000.



Consolidated gross profit margin decreased slightly to 22.8% for fiscal 2012, compared to 23.0% for fiscal 2011, primarily as a result of higher levels of budget line product in Walmart and Target, which generally carry a lower margin.



Consolidated selling expenses were $8,195,000 for fiscal 2012 compared to $6,326,000 for fiscal 2011, primarily due to higher advertising and promotional expenses associated with our high-profile new releases. See “Results of Operations—Selling Expense” below.



Consolidated general and administrative expenses were $15,733,000 for fiscal 2012, up from $13,482,000 for fiscal 2011, primarily due to higher legal and consulting fees associated with the pending RLJ transaction that were partially offset by lower depreciation and bad debt expense. See “Results of Operations—General and Administrative Expense” below.



Noncash interest expense related to amortization of debt discount and deferred financing costs totaled $597,000, for fiscal 2012, up 52.3% from $392,000 for fiscal 2011.



Our net loss applicable to common shareholders for fiscal 2012 was $3,184,000 ($0.01 per diluted share), compared to a net loss applicable to common shareholders of $1,575,000 ($0.01 per diluted share) for fiscal 2011, primarily because of costs attributable to the RLJ transaction.



On April 2, 2012, we entered into an agreement and plan of merger with RLJ Acquisition, Inc.

The highlights above and the discussion below are intended to identify some of our more significant results and transactions during our fiscal year ended March 31, 2012 and subsequent, and should be read in conjunction with the related discussions in this Annual Report, including below under “Liquidity and Capital Resources” and “Results of Operations” and our consolidated financial statements and footnotes included in Item 8.

Liquidity and Capital Resources

Working Capital

At March 31, 2012, we had a working capital deficit of $6.4 million, which unfavorably compares to a working capital deficit of $3.4 million at March 31, 2011.

Our working capital has historically been generated from the following sources:


operating cash flows;


availability under our revolving credit facility;


private placement of debt and equity instruments;


advances from our disc manufacturer, sublicensors, subdistributors; and


trade credit.

The more significant factors affecting cash used in our operating and financing activities during fiscal 2012 were:



increased royalties and distribution fee advances for exclusive content of $5.6 million;


increased production cost expenditures of $3.5 million;


repayment of manufacturing advance of $2.5 million;


decreased deferred revenue of $1.9 million;


increased inventories of $1.8 million; and


increased accounts receivable of $1.3 million.

The more significant factors affecting cash provided by our operating and financing activities during fiscal 2012 were:



increase in borrowings under our revolving credit facility of $6.8 million; and


increased accounts payable of approximately $1.3 million.

During fiscal 2012, we maintained our overall liquidity and financial condition because, among other things, we continued to work with SPHE to reduce our outstanding accounts receivable and we improved our borrowing availability as a result of amending our revolving credit facility with PNC Bank, N.A., which specifically (i) decreased the availability block, (ii) increased the availability from broadcast and digital receivables, and (iii) increased the credit support provided to PNC by JH Partners. We also continue to benefit from the cost reduction plan initiated in the latter half of fiscal 2010. These improvements in liquidity enabled Image to increase its investment in high-profile content (including Radio Rebel (starring Debby Ryan), Paul Rodriguez: Just for the Record , Note to Self (starring Christian Keys, Letoya Luckett), Love Buddies (starring Tatyana Ali, Keith Robinson), The Heart of Christmas (starring Candace Cameron Bure, George Newbern) and a program by David E. Talbert , You Can’t Choose Family ) not released in fiscal 2012. Should the transaction contemplated with RLJ Acquisition, Inc. not be consummated, Image will continue to focus on exploiting the value of our 4,000 title catalog, continue to make strategic acquisition of new products and remain committed to pursuing business combinations to maximize shareholder value. Image has several options to improve liquidity for product acquisition, which include (i) seek new cash infusion/added credit enhancements from our major shareholder, JH Partners, (ii) renegotiate terms with key suppliers/distributors, and (iii) further outsource non-core activities. Management cannot provide any assurance that we will be able to execute the options described above.

Capital Resources

Cash. As of March 31, 2012, we had cash of $368,000, as compared to $333,000 as of March 31, 2011.

Borrowing Availability. At March 31, 2012, our borrowing availability was $2.7 million ($4.1 million based upon eligible accounts receivable less the $1.35 million availability block).

Revolving Credit Facility. During a portion of the fiscal year ended March 31, 2012 (until June 23, 2011), we had a revolving credit facility with Wells Fargo Capital Finance, LLC, as successor by merger to Wachovia Capital Finance Corporation (Western), (or Wells Fargo ) for up to $15 million (reduced from $20 million on February 1, 2011), and since June 23, 2011, we have replaced the Wells Fargo credit facility with a revolving credit facility with PNC Bank, N.A. The term of our Wells credit facility would have matured on July 31, 2011; however, on June 23, 2011, we entered into our three-year PNC credit facility and repaid and terminated our Wells credit facility. The PNC credit facility provides for up to a $17.5 million revolving line of credit commitment including a letter of credit subfacility with a $1.5 million sublimit. Advances under the PNC credit facility generally are limited to the total of: (i) 85% of eligible accounts receivable; (ii) 60% of eligible inventory (with an inventory sublimit of 25% of the borrowing base); and (iii) the lesser of $3 million or the amount of certain letters of credit provided by one or more affiliates of JH Partners, LLC. The reserve against the borrowing base, or availability block, may be reduced upon meeting certain terms and conditions at PNC’s discretion. In addition, the amount of outstanding credit under the PNC credit facility is capped at $5 million during a 30-day clean-up period annually between January 1 and April 30, with such period to commence each year on a date we select. This clean-up period was waived by PNC for calendar year 2012.

We were in compliance with all financial and operating covenants under the Wells credit facility at June 23, 2011 and are in compliance with all financial and operating covenants under our PNC credit facility at March 31, 2012. These covenants are measured at various times through-out the year, and while we believe we will be in compliance with all financial and operating covenants at those dates, given our current liquidity constraints there can be no assurance that we will continue to be in compliance.

Disc Replication Advance. SPHE manufactures our tangible goods, including DVDs and Blu-ray discs. On September 8, 2010, we received an interest-free $2.5 million advance against future manufacturing from SPHE, to be repaid at $0.15 per disc manufactured until the advance is repaid. In November 2011, the advance was repaid in full.

Results of Operations

Net Revenues

Net revenues for fiscal 2012 were $100,086,000, compared with $88,959,000 for fiscal 2011. The increase in net revenues for fiscal 2012 as compared to fiscal 2011 was primarily due to the performance of high-profile new releases The Double , The Way Back and Beneath the Darkness as well as the Blu-ray release of many of The Criterion Collection titles. Sublicensing and other revenues in the table below includes sublicensing, theatrical and non-theatrical revenue streams.

In fiscal 2012, Walmart and AEC each accounted for approximately 11% of our net revenues. In fiscal 2011, Amazon.com and AEC each accounted for approximately 16% of our net revenues. Our top five customers accounted for over 45% of our fiscal 2012 net revenues. Our top performing 30 new release titles for fiscal 2012 and fiscal 2011 generated net revenues of $24.5 million and $17.5 million, respectively. Our 30 top performing titles, whether initially released in the fiscal year or in prior fiscal years, generated net revenues of $28 million and $21.8 million in fiscal 2012 and fiscal 2011, respectively.

Cost of Sales

Our consolidated cost of sales for fiscal 2012 was $77,234,000, or 77.2% of net revenues, compared to $68,480,000, or 77.0% of net revenues, for fiscal 2011. The minimal fluctuation in consolidated cost of sales as percentage of consolidated net revenue between the two years is discussed in Gross Profit below.

Gross Profit

Our consolidated gross profit for fiscal 2012 was $22,852,000, or 22.8% of consolidated net revenues, compared to $20,479,000, or 23.0% of consolidated net revenues, for fiscal 2011, primarily as a result of higher pricing discounts and market development funds provided to customers as well as higher freight and fulfillment costs from budget line product, partially offset by changes in product mix by format and lower manufacturing and production costs.

Items affecting our gross profit included:


the sales mix of individual titles (because each of our exclusive agreements has differing terms);


the strength of a title’s sales performance;


the selling price of a title;


the costs that we are responsible for, including disc manufacturing and distribution costs; and


third-party net profit participations, specifically the royalty rates, distribution fees retained and profit splits inherent in the agreements.

Selling Expenses

Selling expenses for fiscal 2012 were $8,195,000 compared to $6,326,000 for fiscal 2011 and, as a percentage of consolidated net revenues, increased to 8.2% from 7.1% for fiscal 2011. This increase was primarily due to advertising and promotional expenses associated with our high-profile new releases.

General and Administrative Expenses

General and administrative expenses for fiscal 2012 were $15,733,000 compared to $13,482,000 for fiscal 2011 and, as a percentage of consolidated net revenues, increased slightly to 15.7% from 15.2% for fiscal 2011, primarily due to legal and consulting fees associated with merger and acquisition activity, including the pending RLJ transaction.

More specifically, the increase in general and administrative expenses was due to the following:


$1.4 million higher external legal fees associated with merger activities with Acorn Media and RLJ;


$682,000 higher stock compensation expense;


$279,000 higher personnel costs;


$275,000 higher amortization of intangibles;


$199,000 higher consulting fees; and


$152,000 higher external management fees.

Offsetting the above expense increases were:



$572,000 lower bad debt expense; and


$257,000 lower depreciation costs.

Other Expenses/Income

Other Expenses/Income consisted of interest expense, change in fair value of noncontrolling interest and other income.

Interest expense, net, for fiscal 2012 increased as compared to fiscal 2011 primarily as a result of increased interest-bearing debt levels. Net noncash charges to interest expense, representing amortization of the SPHE manufacturing advance debt discount and deferred financing costs, for fiscal 2012 and 2011, totaled $597,000 and $392,000, respectively. See “Note 6—Long-Term Debt” for more information on the amortization and deferred financing costs.

Change in Fair Value of Noncontrolling Interest

The change in fair value of noncontrolling interest due to the valuation of the mandatorily redeemable right to purchase the Image/Madacy Home Entertainment, LLC (or IMHE ) Noncontrolling Interest resulted in income of $2,103,000 in fiscal 2012 and expense of $526,000 in fiscal 2011. The decrease in value is primarily attributable to lower projected revenues as a result of changes in the business environment.

Other Income

Other income of $72,000 for fiscal 2012 resulted from the change in fair value of the stock warrant liability.

Other income of $2,386,000 for fiscal 2011 primarily consisted of $2,370,000 resulting from the change in fair values of the stock warrant liability and purchase rights.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

First Quarter Fiscal 2013 Highlights


Net revenues for the quarter ended June 30, 2012 were essentially flat at $23,269,000, compared to net revenues of $23,286,000 for the three months ended June 30, 2011. However, the net revenues by format were substantially different due to changes in product and format mix, including the digital and broadcast release of two high profile new releases in the prior year quarter ended June 30, 2011.

o
Packaged goods (DVD and Blu-ray) revenues increased 12.1% to $19.6 million, from $17.5 million.

o
Digital distribution revenues decreased 37.7% to $2.1 million, from $3.3 million.

o
Broadcast revenues decreased 44.6% to $1.2 million, from $2.1 million.

o
Other net revenues, including theatrical and non-theatrical, increased 10.2% to $422,000, from $383,000.


Gross profit margins were 24.3%, compared to 23.6% for the three months ended June 30, 2011, primarily as a result of changes in product and format mix.


Selling expenses approximated 7.0% of net revenues, down from 10.6% of net revenues for the three months ended June 30, 2011, primarily due to lower advertising and promotional expenses compared to the June 2011 quarter, which included two high profile new releases The Way Back and Passion Play .


General and administrative expenses were $3,182,000 compared to $3,929,000, for the three months ended June 30, 2011, and, as a percentage of consolidated net revenues, decreased to 13.7% from 16.9% for three months ended June 30, 2011. Lower management fees and legal fees primarily accounted for the decrease in overall expense as compared to the prior year quarter.


Income from operations was $846,000, compared to loss from operations of $915,000, for the three months ended June 30, 2011.


Net loss applicable to common shareholders was $495,000 ($0.00 per diluted share), compared to a net loss applicable to common shareholders of $1,819,000 ($0.01 per diluted share) for the three months ended June 30, 2011.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended June 30, 2012. However, these highlights are not intended to be a full discussion of our results for the quarter. These highlights should be read in conjunction with the following discussion of “Results of Operations” and “Liquidity and Capital Resources” and with our consolidated financial statements and notes thereto accompanying this Quarterly Report.

Recent Events

RLJ Transaction

On April 2, 2012, RLJ Acquisition, Inc., which we refer to as RLJ, and Image entered into an Agreement and Plan of Merger, which we refer to as the merger agreement. Concurrently with the execution of the merger agreement, RLJ, Acorn Media Group, Inc. (or Acorn), and the shareholders of Acorn entered into a stock purchase agreement, which we refer as the Acorn purchase agreement. At the closing of the transactions contemplated by the merger agreement and the Acorn purchase agreement, each of Image and Acorn will be wholly owned subsidiaries of RLJ Entertainment, Inc. After the completion of the proposed business combination contemplated by the merger agreement and the Acorn purchase agreement, the current stockholders of Image and Acorn will own approximately 11% and 5%, respectively, of a new combined company, RLJ Entertainment, Inc., which we refer to as RLJ Entertainment, and the current stockholders of RLJ will own approximately 84% of RLJ Entertainment, assuming that none of the RLJ stockholders exercise rights to redeem the RLJ stock they hold. RLJ Entertainment is expected to apply to list its shares on The Nasdaq Stock Market. The purchase consideration for Image shareholders is valued at approximately $44.0 million. The purchase consideration includes $22.6 million in cash and notes to purchase the Series B Preferred Stock of Image and RLJ Entertainment common stock valued at approximately $21.4 million in exchange for the outstanding common shares of Image. A registration statement filed with the SEC by RLJ Entertainment, Inc. to effect the forgoing transactions has been declared effective.

Results of Operations

Our unaudited consolidated financial information for the three months ended June 30, 2012, should be read in conjunction with our consolidated financial statements and the notes thereto and the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed on June 14, 2012.

We have one reporting segment, our Worldwide Entertainment business, which consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast, including cable and satellite, video-on-demand, streaming video, downloading and sublicensing.

Net Revenues

Net Revenues . Our consolidated net revenues were flat at $23,269,000, compared to $23,286,000 for the three months ended June 30, 2011.

Cost of Sales

Our consolidated cost of sales for the quarter ended June 30, 2012 was $17,609,000, or 75.7% of net revenues, compared to $17,795,000, or 76.4% of net revenues, for the same quarter last year. The fluctuation in consolidated cost of sales as a percentage of consolidated net revenue between the two periods is discussed in Gross Profit Margin below.

Gross Profit Margins

Our consolidated gross margins for the June 2012 quarter were $5,660,000, or 24.3% of net revenues, compared to $5,491,000, or 23.6% of net revenues, for the June 2011 quarter, primarily as a result of changes in product and format mix.

Generally, items affecting our gross margins include:


the sales mix of individual titles (each of our exclusive agreements has differing terms);


the strength of a title’s sales performance;


the selling price of a title;


the costs that we are responsible for, including disc manufacturing and distribution costs; and


third-party net profit participations, specifically the royalty rates, distribution fees retained and profit splits provided for in the agreements.

Selling Expenses

Selling expenses for the three months ended June 30, 2012 were $1,632,000 compared to $2,477,000 for three months ended June 30, 2011 and, as a percentage of consolidated net revenues, decreased to 7.0% from 10.6% for three months ended June 30, 2011. This decrease was primarily due to lower advertising and promotional expenses compared to the June 2011 quarter, which included two high profile new releases The Way Back and Passion Play .

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2012 were $3,182,000 compared to $3,929,000 for three months ended June 30, 2011 and, as a percentage of consolidated net revenues, decreased to 13.7% from 16.9% for three months ended June 30, 2011.

The decrease in general and administrative expenses was due to the following changes compared to the quarter ended June 30, 2011:


legal fees were $423,000 less;


external management fees were $261,000 lower; and


bad debt expense was $69,000 lower.

Other Expenses/Income

Other Expenses/Income consisted of interest expense, change in fair value of noncontrolling interest and other expense/income.

Interest expense, net of interest income, for the three months ended June 30, 2012, decreased to $198,000, from $393,000 for the three months ended June 30, 2011 primarily as a result of increased interest-bearing debt fees. Net noncash charges to interest expense, representing amortization of the manufacturing advance debt discount and deferred financing costs for the three months ended June 30, 2012, totaled $50,000 compared to $329,000 for the three months ended June 30, 2011.

Change in Fair Value of Noncontrolling Interest

The change in the fair value of noncontrolling interest liability due to the valuation of the mandatorily redeemable right to purchase the IMHE Noncontrolling Interest resulted in expense of $21,000 for the three months ended June 30, 2012 and income of $173,000 for the three months ended June 30, 2011.

Other Expense (Income)

Other expense of $165,000 for the three months ended June 30, 2012 resulted from the noncontrolling interest portion of the IMHE net operating results. Other expense of $9,000 for the three months ended June 30, 2011 resulted from $72,000 of income from the change in fair value of a warrant and $81,000 of expense relating to the noncontrolling interest portion of the IMHE net operating results.

Income Taxes

We recorded federal and state tax expense of approximately $77,000 for the quarter ended June 30, 2012, using an estimated effective tax rate of (24.8)% for fiscal 2013. The tax rate is lower than statutory rates due to the utilization of net operating loss carryforwards. We recorded federal and state tax benefit of $116,000 for the quarter ended June 30, 2011.

Liquidity and Capital Resources

At June 30, 2012, we had a working capital deficit of $2.6 million compared to a working capital deficit of $6.4 million at March 31, 2012.

Our working capital has historically been generated from the following sources:


operating cash flows;


availability under our revolving line of credit;


private placement of debt and equity instruments;


advances from our disc manufacturer; and


trade credit.

The more significant factors affecting cash provided by operating activities during the quarter ended June 30, 2012 were:


decreased royalties and distribution fee advances paid for exclusive content of $5.0 million.

The more significant factors affecting cash used in operating activities during the quarter ended June 30, 2012 were:


increased accounts receivable of $7.5 million as a result of timing differences where collections forecasted for the latter part of June 2012 were subsequently received in the first week of July;


increased production cost expenditures of $893,000; and


increased inventories of $723,000.

Capital Resources

Cash. As of June 30, 2012, we had cash of $266,000, as compared to $368,000 as of March 31, 2012.

Borrowing Availability. At June 30, 2012, our borrowing availability was $2.4 million ($3.8 million based upon eligible accounts receivable less the $1.35 million reserve against the borrowing base).

Revolving Credit Facility. During the three months ended June 30, 2012, we had a revolving credit facility with PNC Bank, N.A. (or PNC ) that provides for up to a $17.5 million revolving line of credit commitment including a letter of credit subfacility with a $1.5 million sublimit. Advances under the PNC revolving credit facility generally are limited to the total of: (i) 85% of eligible accounts receivable; (ii) 60% of eligible inventory (with an inventory sublimit of 25% of the borrowing base); and (iii) the lesser of $3 million or the amount of certain letters of credit provided by one or more affiliates of JH Partners, LLC (or JH Parties ). Reserves against the borrowing base and eligibility determinations generally are made at PNC’s discretion. In addition, the amount of outstanding credit under the PNC revolving credit facility is capped at $5 million during a 30-day clean-up period annually between January 1 and April 30, with such period to commence each year on a date we select. This clean-up period was waived by PNC for calendar year 2012.

We were in compliance with all financial and operating covenants under the PNC revolving credit facility at June 30, 2012. These covenants are measured at various times through-out the year, and while we believe we will be in compliance with all financial and operating covenants at those dates, given our current liquidity constraints there can be no assurance that we will continue to be in compliance.

Disc Replication Advance. Sony Pictures Home Entertainment Inc. (or SPHE ) manufactures our tangible goods, including DVDs and Blu-ray discs. On September 8, 2010, we received an interest-free $2.5 million advance against future manufacturing from SPHE, that was repaid at the rate $0.15 per disc manufactured.

Given our history of losses and negative cash flows, we may need to supplement our sources of working capital with additional financing to sustain operations. Future capital requirements will depend on many factors, including our rate of revenue growth and acquisition of programming content. If existing capital resources and sales growth are not sufficient to fund future activities, we may need to raise funds through private equity offerings, debt-financing and public financing, as well as to limit cash outflows through monitoring and controlling our expenditures. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.

While our working capital deficit has improved over the past quarter, our cash requirements for content acquisition continue to exceed the level of cash generated by day-to-day operations. At June 30, 2012, we had a working capital deficit of $2.6 million, compared to a working capital deficit of $6.4 million at March 31, 2012. At June 30, 2012, we had an accumulated deficit of $59.4 million, compared to an accumulated deficit of $58.9 million at March 31, 2012. We may need to raise additional funds to acquire the rights to content we find desirable, particularly with respect to our competition for home entertainment rights to feature films. Therefore, maximizing available working capital is critical to our business operations. Our ability to borrow against collateralized assets such as receivables and inventory is more favorable compared to our previous revolving credit line.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Critical Accounting Policies and Procedures

There have been no significant changes in the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed on June 14, 2012.

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