DEFM14A 1 c71209defm14a.htm DEFINITIVE PROXY STATEMENT Filed by Bowne Pure Compliance
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o   Preliminary Proxy Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
o   Definitive Additional Materials
o   Soliciting Material Pursuant to §240.14a-12
 
IMAGE ENTERTAINMENT, INC.
 
(Name of Registrant as Specified In Its Charter)
 
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o   No fee required.
o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)   Title of each class of securities to which transaction applies:
 
     
 
     
 
 
  (2)   Aggregate number of securities to which transaction applies:
 
     
 
     
 
 
  (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
 
     
 
     
 
 
  (4)   Proposed maximum aggregate value of transaction:
 
     
 
     
 
 
  (5)   Total fee paid:
 
     
 
     
 
þ   Fee paid previously with preliminary materials.
 
o   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)   Amount Previously Paid:
 
     
 
     
 
 
  (2)   Form, Schedule or Registration Statement No.:
 
     
 
     
 
 
  (3)   Filing Party:
 
     
 
     
 
 
  (4)   Date Filed:
 
     
 
     
 


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(IMAGE ENTERTAINMENT LOGO)
 
Notice of Special Meeting
and
Proxy Statement

 

 


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(IMAGE ENTERTAINMENT LOGO)
SPECIAL MEETING OF STOCKHOLDERS
MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT
September 18, 2007
Dear Image Stockholder:
You are cordially invited to attend the special meeting of stockholders of Image Entertainment, Inc., which will be held at InterContinental Hotel Los Angeles Century City, 2151 Avenue of the Stars, Los Angeles, CA 90067, on October 22, 2007, at 10:00 a.m. local time.
On March 29, 2007, we entered into an agreement and plan of merger providing for the acquisition of Image by BTP Acquisition Company, LLC, a Delaware limited liability company. If the merger had been completed pursuant to the original March 29 merger agreement, you would have been entitled to receive $4.40 in cash, without interest, for each share of our common stock that you owned at the time of the merger. The original merger agreement also provided that BTP could elect to change the method of effecting the acquisition of Image to maintain the listing of our common stock on NASDAQ and the registration of our common stock under the Securities Exchange Act of 1934, as amended, after completion of the merger. BTP elected to do so and, as a result, on June 27, 2007, our board of directors approved an amended and restated merger agreement reflecting that alternative structure.
Pursuant to the amended and restated merger agreement, if the merger is completed, you will be entitled to receive $4.68 per share in cash, without interest, for 94% of the shares of our common stock that you own at the time of the merger and the remaining shares of common stock you hold will remain outstanding as shares of common stock of Image as the company surviving the merger. For example, if you own 100 shares of our common stock at the time of the merger, you would receive $439.92 in cash for 94 of your shares (i.e. $4.68 per share) and retain 6 shares of common stock of Image as the company surviving the merger.
In addition, if the merger is completed, the amended and restated merger agreement provides BTP with the right to receive at its election warrants to purchase 8,500,000 shares of common stock of Image as the company surviving the merger. If BTP elects to receive the warrants, Image will issue the warrants at an exercise price of either $1.00 per share or $4.25 per share, depending on certain circumstances described in greater detail in the attached proxy statement.
In connection with the amended and restated merger agreement, the board of directors also approved the execution and delivery of a securities purchase agreement, pursuant to which BTP will be entitled to purchase from Image up to an aggregate of 21,000,000 shares of our common stock and shares of a newly created Series A Convertible Preferred Stock, which will remain issued and outstanding after the merger, if BTP elects to purchase any such shares. The number of shares of common stock and convertible preferred stock will be automatically reduced by the number of shares of common stock subject to any warrants issued to BTP pursuant to the amended and restated merger agreement.

 

 


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At the special meeting, you will be asked to adopt the amended and restated merger agreement, which would constitute approval of its terms, including the issuance of warrants to BTP pursuant to the amended and restated merger agreement and the issuance of shares of common stock issuable upon exercise of any such warrants issued to BTP. You will also be asked to approve the “securities issuance proposal (proposal 2)”, which includes approval of (a) the issuance of shares of our common stock and convertible preferred stock pursuant to the securities purchase agreement, (b) the issuance of any shares of common stock issuable upon conversion of any convertible preferred stock issued pursuant to the securities purchase agreement and (c) the delivery of “eligible property” to pay off any principal amounts and accrued interest in accordance with the terms of any subordinated notes which BTP may deliver to Image to pay the purchase price of securities issued to BTP under the securities purchase agreement. In order for the merger to be completed, our stockholders must adopt the amended merger agreement and approve the securities issuance proposal (proposal 2). If the stockholders fail to adopt the amended merger agreement or fail to approve the securities issuance proposal (proposal 2), and if BTP does not waive the requirement that we execute and deliver the securities purchase agreement to BTP as a condition to closing, the merger will not occur. A copy of the amended and restated merger agreement and the securities purchase agreement are included with this proxy statement as Annexes A and B, respectively.
After careful consideration, the board of directors unanimously (i) approved and declared advisable each of the amended and restated merger agreement and the securities purchase agreement and the transactions contemplated thereby, including the issuance of the warrants and shares of common stock and convertible preferred stock contemplated thereby and upon conversion thereof, and (ii) determined that the amended and restated merger agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of, Image and its stockholders.
The board of directors unanimously recommends that Image stockholders vote, in person or by properly executed proxy, FOR adoption of the amended and restated merger agreement and FOR approval of the securities issuance proposal (proposal 2) described above.
The proxy statement attached to this letter provides you with information about the special meeting, the amended and restated merger agreement, the proposed merger, the securities purchase agreement and other related matters. We encourage you to read the entire proxy statement and its annexes carefully. You also may obtain more information about Image for free by accessing documents we have filed with the Securities and Exchange Commission at the SEC’s website at www.sec.gov.
Your vote is very important regardless of the number of shares of our common stock you own. The merger cannot be completed unless (a) we receive the affirmative vote of holders of a majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote and (b) the securities issuance proposal is approved by the stockholders. We cannot satisfy the condition to the merger that we execute and deliver to BTP the securities purchase agreement unless the securities issuance proposal (proposal 2) described above is approved by the affirmative vote of the holders of a majority of the shares of our common stock represented by proxy or in person at the special meeting. The completion of the merger and the matters contemplated by the securities issuance proposal (proposal 2) described above are also subject to the satisfaction or waiver of other conditions described in this proxy statement and such agreements, copies of which are attached as Annexes A and B to this proxy statement.
If you fail to vote on the proposal to adopt the amended and restated merger agreement, either by not returning a properly executed proxy card or not voting in person at the special meeting, or you abstain from voting, the effect will be the same as a vote against adoption of the amended and restated merger agreement.

 

 


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If you fail to vote on the proposal to approve the securities issuance proposal (proposal 2) described above either by not returning a properly executed proxy card or not voting in person at the special meeting, there will be no effect on the outcome of such proposal. However, abstentions will have the same effect as voting against such proposal.
Whether or not you plan to attend the special meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares are held for you in an account at a brokerage firm, bank or other nominee, you should instruct your broker, bank or other nominee how to vote in accordance with the voting instruction form furnished by your broker, bank or other nominee. If you do not instruct your broker, bank or other nominee how to vote your shares they hold for you, it will have the same effect as voting against adoption of the amended and restated merger agreement and will have no effect on the outcome of the voting on the approval of the securities issuance proposal (proposal 2) described above.
If you properly complete, sign and return your proxy and do not indicate how you want to vote, your proxy will be voted FOR adoption of the amended and restated merger agreement, FOR approval of the securities issuance proposal (proposal 2) described above and FOR any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies if there are not sufficient votes in favor of adoption of the amended and restated merger agreement or approval of the issuance of securities issuance proposal (proposal 2) described above.
Submitting your proxy card will not prevent you from voting your shares of common stock in person if you subsequently choose to attend the special meeting and vote in person.
I enthusiastically support this transaction and join the other members of our board of directors in recommending that you vote FOR adoption of both the amended and restated merger agreement and approval of securities issuance proposal (proposal 2) described above.
Thank you for your continued support of Image Entertainment, Inc.
Very truly yours,
(-s- Martin W. Greenwald)
Martin W. Greenwald
Chairman and Chief Executive Officer
Neither the SEC nor any state securities regulatory agency has approved or disapproved the merger, or the matters contemplated by the securities issuance proposal (proposal 2) described above passed upon the merits or fairness of the merger, or the matters contemplated by the securities issuance proposal (proposal 2) described above or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.
THIS PROXY STATEMENT IS DATED SEPTEMBER 18, 2007,
AND IS FIRST BEING MAILED TO IMAGE STOCKHOLDERS ON OR ABOUT SEPTEMBER 20, 2007.

 

 


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(IMAGE ENTERTAINMENT LOGO)
Image Entertainment, Inc.
20525 Nordhoff Street, Suite 200
Chatsworth, CA 91311-6104
Notice of Special Meeting of Stockholders
October 22, 2007
To Our Stockholders:
The special meeting of stockholders of Image Entertainment, Inc., a Delaware corporation, or Image, will be held at InterContinental Hotel Los Angeles Century City, 2151 Avenue of the Stars, Los Angeles, CA 90067, on October 22, 2007, at 10:00 a.m. local time, for the following purposes:
  1.   To consider and vote upon a proposal to adopt the Amended and Restated Agreement and Plan of Merger, dated as of June 27, 2007, among BTP Acquisition Company, LLC, a Delaware limited liability company, IEAC, Inc., a Delaware corporation and a direct wholly owned subsidiary of BTP, and Image, pursuant to which, among other things, (i) IEAC will merge with and into Image upon the terms and subject to the conditions set forth in the amended and restated merger agreement, with Image surviving the merger as a majority-owned subsidiary of BTP, (ii) each Image stockholder will be entitled to receive $4.68 per share in cash, without interest, for 94% of such stockholder’s shares of our common stock owned by such stockholder at the time of the merger and will retain the remaining shares of common stock owned at the time of the merger as shares of common stock of Image as the company surviving the merger and (iii) BTP will have the right to receive at its election warrants to purchase 8,500,000 shares of common stock of Image as the company surviving the merger at an exercise price of either $1.00 per share or $4.25 per share, depending on certain circumstances described in greater detail in the attached proxy statement;
  2.   To consider and vote upon, for purposes of the NASDAQ Marketplace Rules, the securities issuance proposal (proposal 2) described in greater detail in the attached proxy statement;
  3.   To consider and vote upon a proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the amended and restated merger agreement or to approve the securities issuance proposal (proposal 2) described in greater detail in the attached proxy statement; and
  4.   To transact any other business as may properly come before the special meeting and any adjournment or postponement of the special meeting.

 

 


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Our board of directors has fixed the close of business on September 6, 2007, as the record date for determining the stockholders entitled to receive notice of and to vote at the special meeting and any adjournment or postponement of the special meeting. A complete list of Image’s stockholders will be available at our executive offices at 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311, for review starting 10 days before the special meeting and will also be available for inspection at the special meeting itself.
A proxy statement and proxy card are enclosed with this notice. The proxy statement describes the amended and restated merger agreement and the merger and the other business to be transacted at the meeting and provides other information that may be important to you as you decide how to vote your shares. You may vote your shares in person at the special meeting or by using the enclosed proxy card. Please note, however, that if your shares are held of record by a broker, bank, or other nominee and you wish to vote at the special meeting, you must obtain a proxy card issued in your name from the recordholder. For additional information about attendance and voting at the special meeting, please refer to the Special Meeting Guidelines attached as Annex M to the proxy statement.
You may also vote your shares by mail by signing, dating and returning the enclosed proxy card in the enclosed postage paid envelop, and you can also vote by telephone or via the Internet by following the instructions for telephone and Internet voting on the enclosed proxy card. If you vote by telephone or Internet, you do not need to return a proxy card. We encourage you to take advantage of one of these convenient voting options.
Your vote is very important. Please submit your proxy or voting instructions as soon as possible to make sure that your shares are represented and voted at the special meeting, whether or not you plan to attend the special meeting. Whether you attend the special meeting or not, you may revoke your proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, or by properly submitting a proxy by mail with a later date, or by appearing at the special meeting and voting in person. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your shares are held for you in an account at a brokerage firm, bank or other nominee, you must contact your broker, bank or other nominee for instructions on how to vote your shares and how to revoke your proxy.
Under Delaware law, if the merger is completed, our stockholders who do not vote in favor of adoption of the amended and restated merger agreement will have the right to seek appraisal of the fair value of their shares of our common stock as determined by the Delaware Court of Chancery, but only if they submit a written demand for appraisal prior to the vote on the amended and restated merger agreement and they comply with other Delaware law procedures and requirements explained in the accompanying proxy statement. The procedures are described more fully in the accompanying proxy statement, and a copy of Delaware’s appraisal statute is attached as Annex L to the proxy statement.
For more information about the amended and restated merger agreement, the securities purchase agreement and the transactions contemplated by each, please review the accompanying proxy statement and the amended and restated merger agreement and securities purchase agreement attached as Annexes A and B to the proxy statement, respectively. The proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the amended and restated merger agreement or approve the securities issuance proposal (proposal 2) as described in greater detail in the accompanying proxy statement.

 

 


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The attached proxy statement is dated September 18, 2007, and is first being sent or given to Image stockholders on or about September 20, 2007.
By Order of the Board of Directors,
(-s- Dennis Hohn)
Dennis Hohn Cho
Senior Vice President, General Counsel and
Corporate Secretary
September 18, 2007
Chatsworth, California

 

 


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SUMMARY VOTING INSTRUCTIONS
YOUR VOTE IS IMPORTANT
Please ensure that your shares of Image Entertainment, Inc. common stock can be voted at the special meeting by submitting your proxy by mail, telephone or over the Internet today, or by contacting your broker, bank or other nominee to instruct them how to vote your shares. If you do not vote your shares or do not instruct your broker, bank or other nominee how to vote, it will have the same effect as voting against the adoption of the amended and restated merger agreement, but will have no effect on the outcome of the voting to approve the securities issuance proposal (proposal 2) described in this proxy statement or the outcome of the voting on any adjournment or postponement proposal.
If your Image shares are registered in the name of a broker, bank or other nominee, check the voting instruction card forwarded by your broker, bank or other nominee to see which voting options are available or contact your broker, bank or other nominee in order to obtain directions as to how to ensure that your shares are voted on the proposals at the special meeting.
If your Image shares are registered in your name, you can submit your proxy by:
    mail, by completing, signing, dating and mailing each proxy card or vote instruction card and returning it in the envelope provided.
    telephone, using the toll free number listed on each proxy card (if you are a registered stockholder, that is you hold your stock in your name) or voting instruction card (if your shares are held in “street name,” meaning that your shares are held in the name of a broker, bank or other nominee and your bank broker or other nominee makes telephone voting available); or
    the Internet, at the address provided on each proxy (if you are a registered stockholder) or voting instruction card (if your shares are held in “street name” and your bank broker or other nominee makes Internet voting available).
Voting by telephone or via the Internet will be subject to such verification required by applicable law or that Image or its agents otherwise deem appropriate.
If you have any questions about the merger or the other matters to be brought before the special meeting, or if you need assistance in voting your shares or additional copies of this proxy statement or the enclosed proxy card, please contact:
     
Image Entertainment, Inc.
Dennis Hohn Cho
Senior Vice President, Corporate Secretary and General Counsel
Telephone: (818) 407-9100
  Dawn Martens
Director of Corporate Affairs
Telephone: (818) 407-9100

 

 


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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This proxy statement, and certain documents to which we refer you in this proxy statement, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position, product development and business strategy. These statements may be identified by the use of the future tense and words such as “will,” “may,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other terms of similar import. There are forward-looking statements throughout this proxy statement, including, among others, under the headings “Summary,” and “Recommendation of Our Board of Directors; Our Reasons for the Merger.” All forward-looking statements are based on management’s current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations.
These factors include, among other things, whether the merger is completed, our inability to raise additional working capital, changes in debt and equity markets, increased competitive pressures, changes in our business plan, and changes in the retail DVD and entertainment industries. For further details and a discussion of these and other risks and uncertainties, see “Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K, and our most recent Quarterly Report on Form 10-Q.
In addition, we may not be able to complete the proposed merger on the proposed terms or other acceptable terms, or at all, due to a number of factors, including:
    the occurrence of any event, change or other circumstances that could give rise to the termination of the amended and restated merger agreement;
    the outcome of any legal proceedings that have been or may be instituted against Image and others following announcement of the proposed amended and restated merger agreement;
    the inability to complete the merger due to the failure to obtain stockholder approval or the failure to satisfy other conditions to the completion of the merger, including receipt of any required regulatory approvals;
    the failure to obtain the necessary financing provided for in commitment letters received prior to execution of the definitive merger agreement;
    risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger;
    the ability to recognize the benefits of the merger;
    diversion of management time on merger-related issues;

 

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    the amount of the costs, fees, expenses and charges related to the merger and the actual terms of certain financings that will be obtained for the merger;
    the impact on our business of the substantial indebtedness incurred to finance the consummation of the merger; and
    adverse results from ongoing litigation.
Many of the factors that will determine the outcome of the merger, or any benefits or detriments resulting therefrom, are beyond our ability to control or predict. Unless otherwise required by law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

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QUESTIONS AND ANSWERS
The following questions and answers briefly address some questions you may have regarding the special meeting, the proposed merger and the securities issuance contemplated by the securities purchase agreement, but may not address all questions that may be important to you as a stockholder of Image. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement, and the documents referred to or incorporated by reference in this proxy statement. In this proxy statement, the terms “Image,” “Company,” “we,” “our,” “ours,” and “us” refer to Image Entertainment, Inc.; the term “BTP” refers to BTP Acquisition Company, LLC; the term “securities issuance” refers collectively to (a) the issuance of shares of our common stock and convertible preferred stock (and the shares of common stock issuable upon conversion thereof) pursuant to the securities purchase agreement and (b) the delivery of “eligible property” to pay off any principal amounts and accrued interest in accordance with the terms of any subordinated notes which BTP may deliver to Image to pay the purchase price of securities issued to BTP under the securities purchase agreement; the term “convertible preferred stock” refers to the newly created Series A Convertible Preferred Stock; the term “original merger agreement” refers to the agreement and plan of merger, dated March 29, 2007, among BTP, IEAC, Inc., or IEAC, and the Company; and the term “amended merger agreement” refers to the amended and restated agreement and plan of merger, dated June 27, 2007, among BTP, IEAC and the Company.
Q:   As a stockholder, what matters will I vote on at the special meeting?
 
A:   You will be asked to consider and vote on the following proposals:
    a proposal to adopt the amended merger agreement, including BTP’s right to elect to receive warrants to purchase shares of our common stock at an exercise price of either $1.00 per share or $4.25 per share, depending on certain circumstances described in greater detail in this proxy statement, and the issuance of common stock issuable upon exercise of any warrants issued to BTP under the amended merger agreement;
    a proposal to approve, for purposes of the NASDAQ Marketplace Rules, the securities issuance proposal (proposal 2) described in greater detail in the section entitled “Proposal 2 — Approval of the Securities Issuance” beginning on page 128; and
    a proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the amended merger agreement and to approve the matters discussed in the proposal immediately above.
At this time, our board of directors is unaware of any matters, other than as set forth above, that may be presented for action at our special meeting. If other matters are properly presented, however, the persons named as proxies intend to vote in their discretion with respect to such matters.

 

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Q:   How does our board of directors recommend that I vote?
 
A:   For the reasons discussed below, our board of directors recommends that you vote:
    FOR the proposal to adopt the amended merger agreement (proposal 1);
    FOR the proposal to approve the securities issuance (proposal 2); and
    FOR any proposal to adjourn or postpone the special meeting to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the amended merger agreement or approve the securities issuance (proposal 3).
Q:   Is the effectiveness of any proposal conditioned on the approval of any other proposal?
 
A:   Yes, completion of the transactions contemplated by the amended merger agreement, including the merger, is conditioned upon the approval of both the proposal to adopt the merger agreement and approval of the proposal to approve the securities issuance. If both proposals are not approved, the merger may not be completed.
 
Q:   As a stockholder, what will I receive as a result of the merger?
 
A:   Unless you perfect your appraisal rights under Delaware law, if the merger is completed, you will be entitled to receive $4.68 per share in cash, without interest, for 94% of the shares of our common stock that you own at the time of the merger and you will retain the remaining shares of common stock owned at the time of the merger as shares of common stock of Image as the company surviving the merger. For example, if you own 100 shares of our common stock at the time the merger is completed, you would receive $439.92 in cash for 94 of your shares (i.e. $4.68 per share) and would also retain 6 shares of common stock of Image as the company surviving the merger.
 
Q:   As a stockholder, is there a difference between what I would have received under the original merger agreement versus the amended merger agreement?
 
A:   Yes. Under the original merger agreement you would have received $4.40 per share for 100% of your shares of our common stock. Under the amended merger agreement, you will receive more cash for each share of your common stock that is cancelled in the merger, but approximately the same aggregate amount of cash you would have received for 100% of your shares under the original merger agreement, and will also retain some shares in Image as the company surviving the merger. For example, a stockholder owning 100 shares of common stock would have received $440 in cash for 100% of its shares under the original merger agreement. Pursuant to the amended merger agreement, a stockholder who owns 100 shares of common stock immediately prior to the merger will receive $439.92 in cash for 94 shares (i.e. $4.68 per share), but will also retain 6 shares of Image common stock after the merger.
Q:   Why are we seeking approval for the matters contemplated by the securities issuance proposal (proposal 2)?
 
A:   Our common stock is traded on NASDAQ under the symbol “DISK”. Therefore, we are subject to the NASDAQ Marketplace Rules, which among other things require that we obtain stockholder approval of certain issuances of our securities. The securities issuance proposal (proposal 2) is a proposal to approve:
    the issuance of shares of common stock and convertible preferred stock pursuant to the securities purchase agreement;
    the issuance of shares of common stock upon the conversion of any convertible preferred stock issued pursuant to the securities purchase agreement; and
    the delivery of “eligible property” to pay off any principal amounts and accrued interest in accordance with the terms of any subordinated notes which BTP may deliver to Image to pay the purchase price of any securities issued to BTP under the securities purchase agreement.

 

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We are asking our stockholders to approve the securities issuance for two reasons:
    to comply with NASDAQ Marketplace Rules that may be applicable to such matters; and
    to permit Image to satisfy the condition to the merger that it must execute and deliver the securities purchase agreement to BTP.
If the securities issuance proposal is approved, you will have approved for purposes of the NASDAQ Marketplace Rules, (a) the issuance of any securities that may be issued to BTP under the securities purchase agreement, (b) the issuance of shares of common stock in the future upon conversion of any shares of convertible preferred stock that may be issued to BTP under the securities purchase agreement, and (c) the delivery of “eligible property” to Image by BTP to pay off any subordinated promissory notes that BTP may deliver to purchase securities under the securities purchase agreement. Whether or not stockholder approval is required for the securities issuance (or any element thereof) will depend on the actual timing, facts and circumstances, and it is possible that in fact no such stockholder approval would be required. However, Image and BTP are seeking stockholder approval in order to avoid any doubt (and any delays and expenses occasioned thereby) as to whether any such rules apply or have been satisfied. Notwithstanding the foregoing, the fact that stockholder approval of the securities issuance is being sought shall not be deemed an admission or acknowledgement that the securities issuance requires any stockholder approval under the Nasdaq Marketplace Rules or otherwise.
If the stockholders do not approve the securities issuance proposal, then Image might not be able to execute and deliver the securities purchase agreement to BTP. Such execution and delivery is a condition to the obligation of BTP to effect the merger. Therefore, if our stockholders do not approve the securities issuance proposal (proposal 2) and BTP determines not to waive this condition, then the merger would not be consummated.
Additional information regarding the NASDAQ Marketplace Rules which may require stockholder approval in connection with the issuance of securities pursuant to the securities purchase agreement is set forth in “Approval of the Securities Issuance—Stockholder Approval Requirements” beginning on page 132.
Q:   If I hold options to purchase shares of Image common stock, how will my options be treated in the merger?
 
A:   At the effective time of the merger, each holder of an outstanding option to purchase shares of our common stock will be entitled to receive an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the option, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) payable to holders of shares of our common stock that are cancelled in the merger over the exercise price per share of common stock under the option.
Q:   If I hold warrants to purchase shares of Image common stock, how will my warrants be treated in the merger?
 
A:   At the effective time of the merger, each holder of an outstanding warrant to purchase shares of our common stock (other than warrants to purchase common stock held by Portside Growth and Opportunity Fund) will be entitled to receive an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the warrant, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) payable to holders of shares of our common stock that are cancelled in the merger over the exercise price per share of our common stock under the warrant.

 

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Q.   If I hold restricted stock units of Image, how will my restricted units be treated in the merger?
 
A.   At the effective time of the merger, each holder of an outstanding restricted stock unit will be entitled to receive an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the restricted stock unit, by
 
    the per share cash consideration (i.e. $4.68 per share) payable to holders of shares of our common stock that are cancelled in the merger.
Q:   Is the approval of the BTP members required to complete the merger?
 
A:   No. BTP may complete the merger without obtaining the approval of its members.
Q:   When and where is the special meeting of our stockholders?
 
A:   The special meeting of our stockholders will be held at InterContinental Hotel Los Angeles Century City, 2151 Avenue of the Stars, Los Angeles, CA 90067, on October 22, 2007, at 10:00 a.m. local time.
 
Q:   What vote of stockholders is required to adopt the amended merger agreement?
 
A:   For us to complete the merger, stockholders holding at least a majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote on the merger must vote FOR adoption of the amended merger agreement. In addition, in order for us to complete the transactions contemplated by the amended merger agreement, including the merger, a majority of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon must also vote FOR approval of the securities issuance described above.
 
    Certain of our stockholders, consisting of Martin W. Greenwald, our Chairman and Chief Executive Officer, Image Investors Co. and Standard Broadcasting Corp. Ltd., have entered into amended and restated support agreements with BTP in their capacities as a stockholder of Image, pursuant to which they each agreed, among other things, to vote the shares of our common stock held by them in favor of adoption of the amended merger agreement and against other acquisition proposals, unless the amended merger agreement is terminated in accordance with its terms. The shares subject to these support agreements represent approximately 38% of the shares of our common stock outstanding as of the record date.
 
Q:   How many shares were issued and outstanding on the Record Date?
 
    At the close of business on the record date, 21,739,798 shares of our common stock were issued and outstanding and entitled to vote.
 

 

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Q:   Why did Image and BTP enter into an amended merger agreement?
 
A:   The original merger agreement provided that BTP could elect to change the method of effecting the acquisition of Image to maintain the listing of our common stock on NASDAQ and the registration of our common stock under the Securities Exchange Act of 1934, as amended, after completion of the merger. BTP elected to modify the structure, and the amended merger agreement reflects this modified structure.
 
Q:   Why did the Board approve the issuance of warrants under the amended merger agreement and the securities issuance under the securities purchase agreement?
 
A:   The original merger agreement provided that BTP would acquire 100% of the common stock of Image. In consideration for paying the same amount of aggregate cash consideration to our stockholders for less than 100% of our common stock and allowing our stockholders to retain shares in Image as the company surviving the merger, BTP requested, and our board approved, the issuance of warrants under the amended merger agreement and the issuance of common stock and convertible preferred stock pursuant to the securities purchase agreement. The board of directors recognizes that the securities issuance and the issuance of common stock upon the exercise of any warrants issued pursuant to the amended merger agreement would dilute the shares retained by our stockholders in Image as the company surviving the merger.
In addition, in order for us to complete the transactions contemplated by the amended merger agreement, including the merger, our stockholders must also vote FOR approval of the securities issuance.

 

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Q:   What are the rights, preferences and privileges of the convertible preferred stock?
 
A:   The convertible preferred stock will rank senior to our other capital stock as to dividends and distribution of assets upon liquidation, dissolution or the winding up of our affairs. In addition, the convertible preferred stock will be entitled to receive a mandatory dividend at a rate equal to 4.62% of the original purchase price paid for the convertible stock, to be payable on a yearly basis. Such dividend will be payable by us in kind in the form of additional shares of convertible preferred stock or at our election out of cash legally available for the payment of dividends. The holders of the outstanding shares of convertible preferred stock will not be entitled to vote on any matters submitted for a vote of holders of common stock, except with respect to amendments of our governing documents that would materially and adversely affect the holders of the outstanding shares of convertible preferred stock or to create any class or series of capital stock with rights and preferences ranking prior to or equal to the convertible preferred stock. Furthermore, the terms of the convertible preferred stock prohibit its conversion from non-voting convertible preferred stock into voting common stock to the extent that such conversion would cause the holder of the convertible preferred stock (or any collaborative group that includes such holder) to directly or indirectly benefically own 95% or more of the then-outstanding voting stock of Image.
 
Q:   What are the terms of the promissory note to be issued by BTP?
 
A:   The securities purchase agreement allows BTP to pay for any common stock and convertible preferred stock purchased with a promissory note equal to the purchase price, less the par value of the securities, which must be paid in cash. Under the terms of the promissory note, BTP may make any payment of principal or interest (a) in cash, (b) by surrendering outstanding shares of common stock or convertible preferred stock or (c) by contributing “eligible property.” Eligible property includes certain property consistent with our current operations or planned operational capabilities, or contribution of equity or convertible securities of an entity whose assets consist of such eligible property. The form of promissory note, which contains the specific definition of “eligible property,” is attached as Annex E to this proxy statement.

 

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Q:   What are the terms of the warrant that BTP has the right to elect to receive under the amended merger agreement?
 
A:   Pursuant to the amended merger agreement, we have granted BTP the right to elect to receive a warrant to purchase up to 8,500,000 shares of common stock of Image as the company surviving the merger at an exercise price of either $1.00 per share or $4.25 per share. If, prior to the effective time of the merger, Portside Growth and Opportunity Fund agrees to redeem or amend our outstanding convertible note and warrant held by it in a manner acceptable to us and BTP, then the exercise price of the warrant will be set at $1.00 per share. If no agreement with Portside Growth and Opportunity Fund is reached that is acceptable to us and BTP, then the exercise price of the warrant will be set at $4.25 per share. The warrant would be exercisable at any time from the date occurring 180 days after the date of issuance of the warrant until the fourth anniversary of its date of issuance. The warrant cannot be exercised if such exercise would cause the holder of the warrant (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of Image.
 
Q:   What vote of stockholders is required to approve the securities issuance?
 
A:   A majority of the votes represented by proxy or in person at the special meeting must vote FOR approval of the securities issuance.
 
Q:   What vote of stockholders is required to approve any proposal to adjourn or postpone the special meeting to a later date?
 
A:   A majority of the votes represented by proxy or in person at the special meeting must vote FOR approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the amended merger agreement or approve the securities issuance.
 
Q:   Who is entitled to notice of and to vote at the special meeting?
 
A:   All stockholders of record as of the close of business on September 6, 2007, the record date for the special meeting, are entitled to receive notice of and to vote at the special meeting, or any adjournment or postponement of the special meeting. If you wish to attend the special meeting and your shares are held for you in an account at a brokerage firm, bank or other nominee (i.e., in “street name”), you will need to bring a copy of your brokerage statement or other documentation reflecting your stock ownership as of the record date. In addition, “street name” holders who wish to vote at the special meeting will need to obtain a proxy authorizing them to vote at the special meeting from the broker, bank or other nominee that holds their shares.
 
Q:   Why is our board of directors recommending that I vote FOR the proposal to adopt the amended merger agreement?
 
A:   After careful consideration, our board of directors unanimously approved the amended merger agreement and unanimously determined that the merger is advisable and in the best interests of our company and our stockholders. In evaluating the merger, the board of directors consulted with our management, as well as our legal and financial advisors,

 

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    and in reaching its decision to approve the amended merger agreement and to recommend adoption of the amended merger agreement by our stockholders, considered the terms of the proposed amended merger agreement and the transactions contemplated by the amended merger agreement. Our board of directors also considered each of the items set forth on pages 55 through 59 under “The Merger—Recommendation of Our Board of Directors; Reasons for the Merger.”
 
Q:   Why is our board of directors recommending that I vote FOR the securities issuance?
 
A:   Completion of the transactions contemplated by the amended and restated merger agreement, including the merger, is conditioned upon the approval of the proposal to adopt the amended and restated merger agreement and approval of the proposal to approve the issuance of the securities pursuant to the securities purchase agreement. If both proposals are not approved, the merger may not be completed.
 
    Moreover, Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, but also retain 6% of their common shares in Image as the company surviving the merger. In addition, it is possible that BTP will not exercise its rights to purchase securities pursuant to the securities purchase agreement and therefore the securities would not be issued, and if issued, BTP will have to pay the company additional consideration for the securities purchased.
 
Q:   What will happen to our current directors if the amended merger agreement is adopted?
 
A:   If the amended merger agreement is adopted by our stockholders and the merger is completed, the directors of IEAC, and not our directors, will become the directors of the surviving corporation in the merger.
 
Q:   How many votes am I entitled to cast for each share of common stock I own?
 
A:   For each share of common stock that you owned on September 6, 2007, the record date for the special meeting, you are entitled to cast one vote on each matter to be voted upon at the special meeting.
 
Q:   How do I cast my vote?
 
A:   If you were a holder of record on September 6, 2007, the record date for the special meeting, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You can submit your proxy via:
    mail, by completing, signing, dating and mailing each proxy card or voting instruction card and returning in the envelope provided;
    telephone, using the toll free number listed on each proxy card (if you are a registered stockholder, that is if you hold your stock in your name) or voting instruction card (if your shares are held in “street name,” meaning that your shares are held in the name of a broker, bank or other nominee and your bank broker or other nominee makes telephone voting available); or

 

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    the Internet, at the address provided on each proxy (if you are a registered stockholder) or voting instruction card (if your shares are held in “street name” and your bank broker or other nominee makes Internet voting available).
Voting by telephone or via the Internet is subject to such verification required by applicable law or that Image or its agents otherwise deem appropriate.
    If you properly transmit your proxy but do not indicate how you want to vote, your proxy will be voted FOR adoption of the amended merger agreement (proposal 1), FOR approval of the securities issuance (proposal 2) and FOR any proposal to adjourn or postpone the special meeting to solicit additional proxies (proposal 3).
 
Q:   How are votes counted?
 
A:   For the proposal to adopt the amended merger agreement (proposal 1), you may vote FOR, against or abstain. Because approval of proposal 1 requires the affirmative vote of the majority of shares outstanding, the failure to vote, either by not returning a properly executed proxy card or not voting in person at the special meeting, failure to instruct your broker, bank or other nominee holding shares “in street name,” or abstaining from voting, has the same effect as a vote against adoption of the amended merger agreement.
For the proposal to approve the securities issuance (proposal 2), you may vote FOR, against or abstain. Since approval of proposal 2 requires the affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon, the failure to vote, either by not returning a properly executed proxy card or not voting in person at the special meeting, will have no effect on the outcome of the voting on the securities issuance proposal. However, abstentions will have the same effect as a vote against approval of the securities issuance proposal.
For the proposal relating to the adjournment or postponement of the special meeting in order to solicit additional proxies (proposal 3), you may vote FOR, against or abstain. Since approval of proposal 3 requires the affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon, the failure to vote, either by not returning a properly executed proxy card or not voting in person at the special meeting, will have no effect on the outcome of the voting on any proposal to adjourn or postpone the special meeting in order to solicit additional proxies. However, abstentions will have the same effect as a vote against any proposal to adjourn or postpone the special meeting.
If you sign, date and return your proxy card without indicating your vote, your shares will be voted FOR adoption of the amended merger agreement, FOR approval of the securities issuance, FOR any proposal to adjourn or postpone the special meeting to solicit additional proxies, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote.

 

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Q:   What is a “broker non-vote”?
 
A:   A “broker non-vote” generally occurs when a broker, bank or other nominee holding shares in “street name” on behalf of a client does not vote on a proposal because the broker, banks or other nominee has not received voting instructions from its client and lacks discretionary power to vote the shares. Generally, brokers, bank and other nominees cannot vote shares that they beneficially own on non-routine matters, including all of the proposals expected to come before the special meeting.
“Broker non-votes” will be treated as shares that are present and entitled to vote for the purpose of determining whether a quorum exists. However, for the purpose of determining the outcome of any matter as to which the broker, bank or other nominee has indicated on the proxy that it does not have discretionary authority to vote, those shares will be treated as not present or entitled to vote with respect to that matter, even though those shares are considered present for quorum purposes and may be entitled to vote on other matters.
As a result, “broker non-votes” will have the same effect as a vote against adoption of the amended merger agreement. However, “broker non-votes” will be disregarded and will have no effect on the outcome of the voting on the securities issuance proposal and the proposal to adjourn or postpone the special meeting.
Q:   Can I change my vote after I have delivered my proxy?
 
A:   Yes. If you are a recordholder of our common stock, you can change your vote at any time before your proxy is voted at the special meeting by properly delivering a later-dated proxy either by mail, by telephone or via the Internet. In addition, your proxy may be revoked by attending the special meeting and voting in person (you must vote in person, and simply attending the special meeting will not cause your proxy to be revoked). You also may revoke your proxy by delivering a notice of revocation to our corporate secretary prior to the vote at the special meeting.
 
    However, if you are not a recordholder, because you hold your shares in “street name”, if you have instructed a broker, bank or other nominee how to vote your shares, you can only change your vote by following instructions from your broker, bank or other nominee as to how to change your vote.
 
Q:   What should I do if I receive more than one proxy card or voting instruction card?
 
A:   You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you may receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you also may receive more than one set of proxy materials. Please vote each proxy and voting instruction card that you receive to ensure that all of your shares are voted at the special meeting.

 

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Q:   Am I entitled to appraisal rights?
 
A:   Yes. If you do not wish to accept the per share cash consideration payable in exchange for your shares of Image common stock pursuant to the merger, you may seek, under Section 262 of the General Corporation Law of the State of Delaware, judicial appraisal of the fair value of your shares by the Delaware Court of Chancery. This value could be, and you might receive, more than, less than or equal to the per share cash consideration payable in the merger. This right to appraisal is subject to a number of restrictions and technical requirements summarized under the section entitled “The Merger—Appraisal Rights” beginning on page 83.
We also have attached the full text of Section 262 of the General Corporation Law of the State of Delaware, Delaware’s appraisal statute, as Annex L to this proxy statement. We urge you to read all of Section 262 carefully if you wish to exercise your appraisal rights. If you fail to timely and properly comply with the requirements of Section 262, you will lose your appraisal rights under Delaware law.
Q:   Is the receipt of merger consideration taxable to me?
 
A:   If you are a United States person, for United States federal income tax purposes, as a result of the merger, you generally will recognize gain or loss on each share of our common stock cancelled in exchange for cash in the merger based on the difference, if any, between the per share cash consideration and your adjusted tax basis in that share. Retention of shares of common stock after the merger should not be treated as a taxable event. Subject to certain exceptions, a non-United States person will generally not be subject to United States federal income tax as a result of the merger.
You should read “The Merger—Material United States Federal Income Tax Consequences” beginning on page 88 for a more complete discussion of the material United States federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on your particular tax situation. We urge you to consult your tax advisor on the specific tax consequences of the merger to you.
Q:   If I am a holder of certificated shares, should I send in my share certificates now?
 
A:   No. Shortly after the merger is completed, you will receive a letter of transmittal with instructions informing you how to send your stock certificates to the paying agent in order to receive the merger consideration to which you are entitled. If your shares are held in “street name” by your broker, bank or other nominee, you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your “street name” shares and receive the merger consideration for those shares. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY.

 

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Q:   When do you expect the merger to be completed?
 
A:   We currently expect to complete the merger prior to October 31, 2007, subject to adoption of the amended merger agreement by our stockholders and the satisfaction of other closing conditions, including, approval of the securities issuance by our stockholders. We and BTP have agreed to extend the outside date in the amended merger agreement from September 29, 2007 to October 31, 2007.
 
Q:   Who is paying the cost of this solicitation?
 
A:   We will pay the cost of this solicitation, which will be made primarily by mail. Proxies also may be solicited in person, by telephone, facsimile, over the Internet or similar means, by our directors, officers or employees who will not receive any additional compensation for doing so. At this time, we have determined not to retain a third party proxy solicitor.
We will, on request, reimburse stockholders who are brokers, banks or other nominees for their reasonable expenses in sending proxy materials and special reports to the beneficial owners of the shares they hold of record.
Q:   Who can help answer my questions?
 
A:   If you have any questions about the merger or the other matters to be brought before the special meeting, or if you need assistance in voting your shares or additional copies of this proxy statement or the enclosed proxy card, you should contact:
     
Image Entertainment, Inc.
Dennis Hohn Cho
Senior Vice President, Corporate Secretary and General Counsel
Telephone: (818) 407-9100
  Dawn Martens
Director of Corporate Affairs
Telephone: (818) 407-9100

 

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SUMMARY TERM SHEET
This summary highlights selected information contained elsewhere in this proxy statement or its annexes and may not contain all the information that is important to you. We have included page references in parentheses to direct you to more complete descriptions of the topics presented in this summary term sheet. In addition, to understand the merger and the securities issuance fully and for a more complete description of the legal terms of the merger and the securities issuance, you should carefully read this proxy statement in its entirety, including the annexes and the other documents to which we refer you.
The Companies (Page 36)
Image Entertainment, Inc.
20525 Nordhoff Street, Suite 200
Chatsworth, California 91311-6104
(818) 407-9100
We are a Delaware corporation headquartered in Chatsworth, California and a leading independent licensee, producer and distributor of home entertainment programming in North America, with approximately 3,000 exclusive DVD titles and approximately 250 exclusive CD titles in domestic release and approximately 450 programs internationally via sublicense agreements. For many of its titles, the Company has exclusive audio and broadcast rights and, through its subsidiary Egami Media, Inc., has digital download rights to approximately 2,000 video programs and over 250 audio programs containing more than 4,000 tracks. For additional information about us and our business, see “Where You Can Find Additional Information” on page 152.
BTP Acquisition Company, LLC
10100 Santa Monica Blvd., Suite 1250
Los Angeles, California 90067
(310) 286-7200
BTP Acquisition Company, LLC is a newly organized Delaware limited liability company controlled by David Bergstein. Mr. Bergstein, along with his financing affiliates, owns several media distribution companies, including U.K.-based Capitol Films, which is a worldwide distributor of motion pictures and television programs; Thinkfilm, which is a North American motion picture and television program distributor; Sheridan Square Entertainment, which distributes record company music libraries; and film and television libraries with hundreds of individual titles. Collectively, Mr. Bergstein’s affiliates finance, produce and distribute hundreds of film, television and music titles worldwide.
IEAC, Inc.
10100 Santa Monica Blvd., Suite 1250
Los Angeles, California 90067
(310) 286-7200
IEAC, Inc., a Delaware corporation and a wholly-owned subsidiary of BTP, was formed solely for the purpose of completing the proposed merger. IEAC has not conducted any business operations other than those incidental to its formation and in connection with transactions contemplated by the amended merger agreement.

 

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Structure of the Transactions (Page 38)
The Merger
Pursuant to the amended merger agreement, IEAC will be merged with and into Image, with Image surviving the merger as a subsidiary of BTP. The following will occur in connection with the merger:
    94% of the shares of our common stock that are owned by each Image stockholder at the time of the merger (unless they properly exercise and perfect their appraisal rights under Delaware law) automatically will be converted into the right to receive $4.68 per share in cash, without interest.
    The remaining shares of common stock held by each Image stockholder at the time of the merger that are not cashed out in the merger will be retained as shares of common stock of Image as the company surviving the merger.
    Each option to purchase common stock that is outstanding immediately prior to the effective time of the merger will be cancelled and the holder of such option will be entitled to receive, in consideration for such cancellation, an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the option, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger over the exercise price per share of common stock under such option.
    Each restricted stock unit that is outstanding immediately prior to the effective time of the merger will be cancelled, and the holder of such restricted stock unit will be entitled to receive, in consideration for such cancellation, an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the restricted stock unit, by
    the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger.
    Each holder of a warrant (other than warrants to purchase common stock held by Portside Growth and Opportunity Fund) will be entitled to receive an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the warrant, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger over the exercise price per share of common stock under such warrant.
As of the effective time of the merger, all such warrants will no longer be outstanding and will automatically be canceled and the holder will only be entitled to receive the amount in cash described above upon surrender of such warrants.
    Image will grant BTP, at BTP’s election, a warrant to purchase up to 8,500,000 shares of common stock in Image as the company surviving the merger at an exercise price equal to either $1.00 per share or $4.25 per share depending on whether Portside Growth and Opportunity Fund agrees to redeem or amend our outstanding convertible note and warrant held by it prior to the effective time of the merger in a manner acceptable to us and BTP.

 

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The Securities Issuance
Pursuant to the terms of the securities purchase agreement:
    Image will authorize a new series of convertible preferred stock with the rights, preferences and privileges described in the section entitled “Series A Convertible Preferred Stock” on page 138 and in Annex F attached to this proxy statement.
    Image will issue and sell to BTP in a private placement up to an aggregate of 21,000,000 shares of our common stock and convertible preferred stock, less the number of warrants, if any, that BTP elects to receive pursuant to the amended merger agreement.
    BTP will issue a promissory note payable to Image in an aggregate principal amount equal to the purchase price of the shares of common stock and convertible preferred stock, less the par value of the shares purchased, which would be paid in cash.
    Image will enter into a registration rights agreement pursuant to which we have agreed to register under the Securities Act of 1933, as amended, the securities issued to BTP pursuant to the amended merger agreement, the shares of common stock purchased pursuant to the securities purchase agreement and the shares of common stock issuable upon conversion of the convertible preferred stock and issuable upon exercise of any warrants.
Market Prices of Common Stock (Page 148)
Shares of our common stock are traded on the NASDAQ Global Market, or NASDAQ, under the symbol “DISK.” On March 29, 2007, the last trading day before the original merger agreement was announced, the closing price per share of our common stock was $3.37. On June 27, 2007, the last trading day before the amended merger agreement was announced, the closing price per share of our common stock was $4.17. On September 17, 2007, the last trading day before the date of this proxy statement, the closing price per share was $4.18.

 

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Recommendation of Our Board of Directors; Reasons for the Merger (Page 55)
After careful consideration, our board of directors has unanimously:
    determined that the amended merger agreement and the transactions contemplated thereby (including the merger and the potential issuance of the warrants to BTP) are fair to and in the best interests of Image and its stockholders;
    approved, authorized, adopted and declared the advisability of the amended merger agreement and the transactions contemplated thereby (including the merger and the potential issuance of the warrants to BTP and the issuance of common stock upon exercise thereof);
    approved BTP’s entering into the amended support agreements, including for purposes of Section 203 of the Delaware General Corporation Law, or DGCL;
    approved an amendment to our stockholder rights plan to render it inapplicable to the amended merger agreement, the support agreements and the securities purchase agreement;
    directed that the amended merger agreement be submitted for consideration by our stockholders; and
    recommended that our stockholders vote FOR adoption of the amended merger agreement.
Our board of directors continuously consulted with our management team and advisors in considering the terms of the amended merger agreement. In considering the recommendation of our board of directors with respect to the merger, you should be aware that some of our directors and officers who participated in meetings of our board of directors have interests in the merger that might be different from, or in addition to, the interests of our stockholders generally. Our directors were aware of these differing interests when they considered and voted to approve the amended merger agreement. See “The Merger—Interests of Certain of our Directors and Officers” beginning on page 78.
For the factors considered by our board of directors in reaching its decision to adopt the amended merger agreement and recommend that our stockholders vote FOR adoption of the amended merger agreement, see “The Merger—Recommendation of Our Board of Directors; Reasons for the Merger” beginning on page 55.

 

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Recommendation of Our Board of Directors; Reasons for the Securities Issuance (Page 128)
After careful consideration, our board of directors has unanimously:
    determined that the transactions contemplated by the securities purchase agreement, including the issuance of common stock and convertible preferred stock (and the common stock issuable upon conversion thereof), are fair to and in the best interests of Image and its stockholders;
    approved, authorized, adopted and declared the advisability of the transactions contemplated by the securities purchase agreement;
    directed that the issuance of common stock and convertible preferred stock (and the common stock issuable upon conversion thereof) contemplated by the securities purchase agreement be submitted for consideration by our stockholders; and
    recommended that our stockholders approve the issuance of common stock and convertible preferred stock contemplated by the securities purchase agreement, and the issuance of the shares of common stock upon conversion of any convertible preferred stock purchased pursuant to the securities purchase agreement.
BTP exercised its right under the original merger agreement to modify the acquisition structure in order to maintain the listing of company common stock on NASDAQ and the registration of company common stock under the Exchange Act after the effective time of the merger. Image and BTP thereafter engaged in negotiations to structure and arrive at the definitive terms and conditions of the amended merger agreement reflecting the alternative transaction structure. During these negotiations, Image insisted that BTP not reduce the aggregate cash consideration to be received by Image shareholders and insisted that shares retained by Image shareholders in order to maintain Image’s listing of on NASDAQ and the registration of company common stock under the Exchange Act constitute additional consideration and not replace any of the cash consideration Image shareholders were to receive under the original merger agreement. BTP would agree to these conditions only if we agreed to issue the warrant to BTP pursuant to the amended merger agreement, agreed to the securities issuance and agreed to grant registration rights related to the securities issued pursuant to the securities issuance and upon exercise of any warrant issued to BTP under the amended merger agreement. Given that we believed that the merger was in the best interests of Image’s shareholders and given that the retained shares constitute consideration in addition to the cash consideration to be received by our shareholders, we agreed to the issuance of the warrant, the securities issuance and to grant such registration rights.
To the extent that the exercise of the warrant and the securities issuance will dilute the shares held by the stockholders other than BTP after the merger, such shares nonetheless constitute additional consideration to Image stockholders, and as such our board approved BTP’s requirements that the modified structure include such securities issuance.
Certain Effects of the Merger (Page 77)
If the amended merger agreement is approved by our stockholders and the other conditions to closing are satisfied, including approval of the securities issuance by our stockholders, which would allow us to execute and deliver the securities purchase agreement at the closing, IEAC will be merged with and into Image with Image surviving the merger as a majority-owned subsidiary of BTP. Upon completion of the merger, 94% of the shares of our common stock outstanding immediately prior to the merger (and excluding any shares issued to BTP pursuant to the securities purchase agreement or upon exercise of any warrants that may be issued to BTP pursuant to the amended merger agreement) will be converted into the right to receive cash in the amount of $4.68 per share, without interest and less any required withholding taxes. The remainder of our common stock that is not cashed out in the merger will be retained by the holders thereof as common stock of Image as the company surviving the merger.

 

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Following the completion of the merger, the stockholders holding the outstanding common stock of Image immediately prior to the merger will retain and hold 6% of the outstanding common stock of Image, subject to future dilution resulting from the securities issuance and BTP’s exercise of any warrants issued to us it pursuant to the amended merger agreement. See “Certain Effects of the Merger” beginning on page 77.
Background to the Merger (Page 40); Recommendation of Our Board of Directors; Reasons for the Merger (Page 55)
For a description of the events leading to the approval of the amended merger agreement and the merger by our board of directors, you should refer to “The Merger—Background of the Merger” and “The Merger—Recommendation of Our Board of Directors; Reasons for the Merger.”
Payment for Shares (Page 101)
Following the effective time of the merger, which we currently expect to occur prior to October 31, 2007, a paying agent designated by BTP will mail a letter of transmittal and instructions to all of our stockholders. The letter of transmittal and instructions will tell you how to surrender your Image common stock certificates in exchange for the merger consideration to which you are entitled. You should NOT return any Image stock certificates you hold at this time, and you should not forward your stock certificates to the paying agent after the merger is completed without an accompanying fully completed and signed letter of transmittal.
Opinion of Lazard Frères & Co. LLC (Page 59 and Annex J)
In connection with the merger, the Image board of directors received an opinion, dated March 29, 2007, of Image’s financial advisor, Lazard Frères & Co. LLC, or Lazard, as to the fairness, from a financial point of view and as of the date of such opinion, of the $4.40 merger consideration payable to holders of Image common stock pursuant to the original merger agreement, dated as of March 29, 2007, for each outstanding share of our common stock, hereinafter referred to as the $4.40 original per share merger consideration. The full text of Lazard’s opinion is attached to this proxy statement as Annex J and is incorporated into this proxy statement by reference. Holders of Image common stock are encouraged to read Lazard’s opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Lazard in connection with its opinion. Lazard’s opinion was addressed to the Image board of directors, was only one of many factors considered by the Image board of directors in its evaluation of the merger and only addresses the fairness of the $4.40 original per share merger consideration from a financial point of view. Lazard’s opinion does not address the merits of the underlying decision by Image to engage in the merger or the relative merits of the merger as compared to any other transaction or business strategy in which Image might engage and is not intended to, and does not, constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the merger or any matters relating to the merger.

 

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Lazard was not requested to, and did not, render to the Image board of directors an opinion in connection with the amended merger agreement, dated as of June 27, 2007. Our board of directors did not request such opinion noting that Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, but also will retain common shares in Image as the company surviving the merger. Lazard’s opinion, dated March 29, 2007, does not take into account any events or developments after the date of such opinion, including any modification to the proposed merger or the per share merger consideration.
Opinion of Raymond James & Associates, Inc. (Page 65 and Annex K)
In connection with the merger, the Image board of directors received an opinion, dated March 29, 2007, of its financial advisor, Raymond James & Associates, Inc., or Raymond James, as to the fairness, from a financial point of view and as of the date of such opinion, of the original $4.40 per share merger consideration to be paid to holders of Image common stock for 100% of the outstanding common stock of Image. The full text of Raymond James’ opinion is attached to this proxy statement as Annex K and is incorporated into this proxy statement by reference. Holders of Image common stock are encouraged to read Raymond James’ opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Raymond James in connection with its opinion.
Raymond James’ opinion was addressed to the Image board of directors, was only one of many factors considered by the Image board of directors in its evaluation of the merger and only addresses the fairness of the merger consideration from a financial point of view. Raymond James’ opinion does not address the merits of the underlying decision by Image to engage in the merger or the relative merits of the merger as compared to any other transaction or business strategy in which Image might engage and is not intended to, and does not, constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the merger or any matters relating to the merger.
Raymond James was not requested to, and did not, render to the Image board of directors an opinion in connection with the amended merger agreement, dated as of June 27, 2007. Our board of directors did not request such opinion noting that Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, and will also retain common shares in Image as the company surviving the merger. Raymond James’ opinion, dated March 29, 2007, does not take into account any events or developments after the date of such opinion, including any modification to the proposed merger or the per share merger consideration.
Interests of Our Directors and Executive Officers in the Merger (Page 78)
Members of our board of directors and our executive officers may have interests in the merger that may differ from, or may be in addition to, those of other stockholders. For example:
    our executive officers and directors currently hold 893,432 shares of our common stock;

 

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    our directors and executive officers currently hold 15,920 restricted stock units. As a result of the merger, each restricted stock unit that is outstanding immediately prior to the effective time of the merger will vest and will be converted into the right to receive an amount in cash, without interest, equal to the product obtained by multiplying such number of shares of our common stock issuable upon the exercise in full of the restricted stock unit by the per share cash consideration (i.e. $4.68 per share) payable to the holders of our common stock pursuant to the merger;
    our directors and executive officers currently hold options to purchase approximately 1,250,000 shares of our common stock. All such options will be cashed out in the merger for an amount in cash, without interest, equal to the number of shares of common stock issuable upon exercise in full of the option multiplied by the excess, if any, of the per share cash consideration (i.e. $4.68 per share) payable to the holders or our common stock pursuant to the merger and the per share exercise price of the option;
    our executive officers may be entitled to change of control severance benefits pursuant to their employment contracts if their employment is terminated without cause or if such officer resigns for good reason after a change in control, including the merger. Such benefits would include continuation of the executive’s right to receive his base salary and bonus, stock options and stock-based awards, and fringe benefits through the expiration of the extended term of the agreement, or, if longer, for a period of one year following his termination after a change in control. In addition, after the payments and benefits described above terminate, the executive is entitled to severance consisting of continuation of his base salary for an additional period of six months, any bonus compensation payable but not previously paid for any prior fiscal year, additional pro-rated bonus compensation for the greater of six months or the balance of the current fiscal year and full insurance continuation for a period of six months, with COBRA entitlement thereafter;
    our current and former directors and officers will continue to be indemnified after the completion of the merger for actions and omissions taken in good faith in their capacities as directors and/or officers and will have the benefit of directors and officers liability insurance coverage for at least six years after completion of the merger; and
    we expect that our current executive officers will continue as executive officers of Image as the company surviving the merger. Upon the closing of the merger, Messrs. Greenwald, Borshell, and Framer have each agreed with BTP to amend his existing employment agreement to extend the term until October 31, 2008 and to eliminate contractual severance payments due at the end of the term. For Messrs. Borshell and Framer the amendment also includes an increase in cash salary. The service of our directors will end on the completion of the merger.

 

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The Amended Merger Agreement (Page 98 and Annex A)
Conditions to the Merger (Page 119)
We currently expect to complete the merger by October 31, 2007, subject to adoption of the amended merger agreement by our stockholders, approval of the securities issuance by our stockholders and the satisfaction of other closing conditions. If the stockholders do not approve the securities issuance proposal, then Image will not be able to satisfy the conditions to the closing of the merger that Image must execute and deliver the securities purchase agreement to BTP because, without stockholder approval, our representations and warranties in the securities purchase agreement as to the securities issuance not violating any NASDAQ rule will not be true. Therefore, if our stockholders do not approve the securities issuance proposal, and BTP does not waive this condition, then the merger will not be consummated.
The completion of the merger depends on a number of additional conditions being satisfied, including, but not limited to:
    the absence of any material statute, rule, regulation, order, decree or injunction issued by a court or other governmental entity that has the effect of making the merger illegal or that otherwise prevents or prohibits the consummation of the merger;
    the continued accuracy of the representations and warranties of each party to the amended merger agreement;
    the performance in all material respects by the parties to the amended merger agreement of their respective covenants contained in the amended merger agreement;
    Image meeting established targets for adjusted closing net worth;
    no material contract generating more than 25% of our consolidated net revenues will have been terminated;
    the absence of any dispute or proceeding pending against Image which exceeds established thresholds;
    our filing of the certificate of designation for the convertible preferred stock with the Secretary of State of Delaware and such certificate remaining in full force and effect; and
    our reservation for issuance of shares of our common stock issuable pursuant to the securities purchase agreement or upon conversion of any shares of convertible preferred stock issued under the securities purchase agreement.
Where legally permissible, a party may waive a condition to its obligation to complete the merger even though that condition has not been satisfied.

 

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No Solicitation (Page 111)
The amended merger agreement restricts our ability to, among other things, solicit or engage in discussions or negotiations with third parties regarding specified transactions involving Image. Notwithstanding these restrictions, until our stockholders adopt the amended merger agreement, under certain circumstances, our board of directors may respond to an unsolicited written bona fide proposal for an alternative acquisition if it determines in good faith after consultation with its outside counsel and financial advisors, that such acquisition proposal constitutes or may reasonably be expected to lead to a superior proposal and the board may terminate the amended merger agreement and enter into an acquisition agreement with respect to a superior proposal so long as we comply with certain terms of the amended merger agreement, including paying to BTP a fee of $3.2 million and reimbursing BTP’s expenses in an amount up to $1 million.
Termination (Page 121); Fiduciary Fee and Business Interruption Fee (Page 123)
The parties to the merger agreement can mutually or unilaterally agree to terminate the merger agreement in certain circumstances. In the event our stockholders do not approve the merger agreement despite the recommendation of our board of directors, we must pay to BTP an amount equal to $1.5 million as a reimbursement of expenses incurred by BTP and IEAC. Under certain other circumstances in which the amended merger agreement is terminated, we may be required to pay BTP a fee of $3.2 million and to reimburse BTP for its expenses up to $1 million. In certain other conditions in which the amended merger agreement is terminated, BTP may be required to pay us a business interruption fee of $4.2 million in immediately available funds. The payment of any business interruption fee payable by BTP pursuant to the merger agreement is guaranteed by CTI Holdings, LLC and R2D2, LLC, entities that are wholly owned by David Bergstein and his investor group.
Material United States Federal Income Tax Consequences (Page 88)
The merger will be a taxable transaction to you if you are a U.S. person. For U.S. federal income tax purposes, your receipt of cash (whether as merger consideration or pursuant to the proper exercise of appraisal rights) in exchange for your shares of our common stock generally will cause you to recognize a gain or loss measured by the difference, if any, between the cash you receive for the shares of common stock cancelled for cash in the merger and your adjusted tax basis in your shares of our common stock. To the extent you receive cash from Image attributable to the sale of warrants by Image to BTP, a portion of your shares may be treated as redeemed for income tax purpose. Under U.S. federal income tax law, you may be subject to information reporting on cash received in the merger unless an exemption applies. Backup withholding may also apply (the rate currently in effect for 2007 is 28%) with respect to the amount of cash received in the merger, unless you provide proof of an applicable exemption or a correct taxpayer identification number and otherwise comply with the applicable requirements of the backup withholding rules.
You should read “The Merger—Material United States Federal Income Tax Consequences” beginning on page 88 for a more complete discussion of the federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on your particular tax situation. We urge you to consult your tax advisor on the specific tax consequences of the merger to you.

 

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Regulatory Matters (Page 83)
The HSR Act and related rules provide that transactions such as the merger may not be completed until certain information and documents have been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and specified waiting period requirements have been expired or terminated. BTP is not required to effect any pre-merger notification filing under the HSR Act.
Except with respect to the filing of the articles of merger in Delaware at or before the effective date of the merger, and certain other filings described in more detail under “The Merger—Regulatory Matters” beginning on page 83, we are unaware of any material federal or state regulatory requirements or approvals required for the execution of the amended merger agreement or completion of the merger.
Appraisal Rights (Page 83 and Annex L)
Under Delaware law, stockholders who do not wish to accept the $4.68 per share cash consideration payable per share pursuant to the merger may seek judicial appraisal, under Section 262 of the General Corporation Law of the State of Delaware, or the DGCL, of the fair value of their shares by the Delaware Court of Chancery. This value could be, and you might receive, more than, less than or equal to the per share cash consideration. This right to appraisal is subject to a number of restrictions and technical requirements. In order to properly demand appraisal, among other things:
    you must not vote in favor of the proposal to adopt the amended merger agreement or consent to the merger in writing;
    you must deliver a written demand for appraisal to us in compliance with the DGCL before the vote on the proposal to adopt the amended merger agreement occurs at the special meeting; and
    you must hold your shares of record continuously from the time you deliver a written demand for appraisal through the effective time of the merger. A stockholder who is the recordholder of shares of our common stock on the date the written demand for appraisal is made but thereafter transfers those shares prior to the effective time of the merger will lose any right to appraisal in respect of those shares.
Merely voting against the amended merger agreement will not perfect your right to appraisal under Delaware law. Also, because a submitted proxy not marked against or abstain will be voted FOR the proposal to adopt the amended merger agreement, the submission of a signed and dated proxy that is not marked against or abstain will be voted FOR adoption of the amended merger agreement which will result in the waiver of your appraisal rights. If you are not the recordholder of your shares (e.g. your shares are held for you in the name of a broker, bank or other nominee) and you wish to have appraisal rights, you must instruct your nominee or other

 

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recordholder to take the steps necessary to enable you to demand appraisal for your shares. If you or your broker, bank or other nominee fails to follow all of the steps required by Section 262 of the DGCL, you will lose your right of appraisal. See “The Merger—Appraisal Rights” beginning on page 83 for a description of the procedures that you must follow in order to exercise your appraisal rights.
Annex L to this proxy statement contains the full text of Section 262 of the DGCL, which is Delaware’s appraisal statute. We encourage you to read these provisions carefully and in their entirety.
Merger Financing (Page 92)
The total amount of funds necessary to complete the merger and the related transactions is currently anticipated to be approximately $125 million. In addition to the approximate $98.5 million of cash payments to be made to our stockholders and holders of outstanding options, warrants (other than the warrant held by Portside Growth and Opportunity Fund) and restricted stock units, BTP may be required to pay up to approximately $22.5 million to Portside Growth and Opportunity Fund if Portside elects to exercise its redemption right with respect to certain of Image’s securities. These payments are expected to be funded through a combination of equity contributions by David Bergstein’s affiliate, R2D2 LLC, which is referred to below as the “investor”, and debt financing to be provided by D.B. Zwirn & Co., or DBZ. In the event DBZ does not provide the debt financing anticipated, BTP may obtain alternative financing in accordance with the terms and conditions of the amended merger agreement.
BTP has received a debt commitment letter from DBZ to provide up to $60 million comprised of a senior secured term loan, which may be used to finance a portion of the merger consideration. BTP’s obligation under the loan may be secured by a first priority lien on all of Image’s assets up to a maximum of $35 million. The remaining portion of the loan would be secured by other assets acceptable to DBZ. Any acquisition debt that is secured by Image’s assets will be reflected on the surviving Company’s financial statements.
BTP has received an equity commitment letter from the investor. Pursuant to the terms of the equity commitment letter, the investor will provide financing equal to the aggregate merger consideration, less the amount of debt financing provided by DBZ. The equity commitment is subject to the fulfillment of certain conditions, including consummation of the debt financing and the satisfaction or waiver of all conditions to BTP’s obligation to complete the merger contemplated by the amended merger agreement.
The amended merger agreement does not contain a financing condition to the closing of the merger.
Amended Support Agreements (Page 95 and Annex C)
In connection with the execution and delivery of the amended merger agreement, and as required by BTP as a condition to its execution of the amended merger agreement, on June 27, 2007, certain stockholders of Image, consisting of Martin W. Greenwald, our Chairman and Chief Executive Officer, Image Investors Co. and Standard Broadcasting Corp. Ltd. entered into amended support agreements with BTP, each in their capacities as a stockholder of Image, pursuant to which they each agreed, among other things, to vote the shares of common stock held by them in favor of adoption of the amended merger agreement and against other acquisition proposals. If the amended merger agreement is terminated in accordance with its terms, the support agreements will also terminate. The stockholders who have entered into support agreements beneficially owned shares of our common stock representing, in the aggregate, approximately 38% of the shares of our common stock outstanding as of the record date.

 

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Litigation Related to the Merger (Page 88)
On April 10, 2007, a purported class action shareholder complaint entitled Henzel v. Image Entertainment, Inc., et al. was filed against Image and certain of its officers and directors in the Superior Court of the State of California, County of Los Angeles. The named plaintiff purports to represent a class of our stockholders and claims, among other things, that in connection with the proposed business combination transaction with BTP the directors breached their fiduciary duties of due care, good faith and loyalty by failing to maximize stockholder value and by creating deterrents to third party offers. Among other things, the complaint seeks class action status, and a court order enjoining the merger and directing the defendants to take appropriate steps to maximize stockholder value. On August 8, 2007, after the parties exchanged documents, the plaintiff filed a request for dismissal of the lawsuit without prejudice. On August 9, 2007, the Superior Court of the State of California, County of Los Angeles, dismissed the lawsuit without prejudice.
Guarantee (Page 124)
In connection with the execution and delivery of the original merger agreement on March, 29, 2007, BTP delivered a guarantee, dated March 29, 2007, among Image, CT1 Holdings, LLC, a Delaware limited liability company, or CT1 Holdings, and R2D2, LLC, a California limited liability company, or R2D2. R2D2 is wholly owned by David Bergstein and his investor group.
Pursuant to the guarantee, CT1 Holdings and R2D2 have agreed to guarantee the payment to Image of the $4.2 million business interruption fee which BTP is required to pay to Image pursuant to the amended merger agreement. The obligations under the guarantee will automatically terminate in the event the amended merger agreement is terminated in circumstances in which the parties have agreed that Image is not entitled to be paid the business interruption fee, upon the entry of any non-appealable final order by a governmental entity in the event of a dispute, or at the effective time of the merger.
Amendment to Image’s Stockholder Rights Plan (Page 94)
Immediately prior to the execution of the amended merger agreement, Image and Computershare Trust Company, N.A., a Delaware corporation, as rights agent, entered into a second amendment to the rights agreement, dated as of October 31, 2005, which provides that the execution, delivery or performance of the amended merger agreement, the amended support agreements and the securities purchase agreement will not trigger certain provisions of the rights agreement.

 

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The Securities Issuance Pursuant to the Securities Purchase Agreement (Page 128 and Annex B)
We have agreed to execute and deliver to BTP a securities purchase agreement as a condition to the completion of the merger. Pursuant to this agreement, BTP would be entitled to elect to purchase up to an aggregate of 21,000,000 shares of our common stock and shares of our convertible preferred stock, less the number of shares of common stock issuable upon exercise of any warrants that may be issued to BTP pursuant to the amended merger agreement.
On or prior to the closing date of the merger, BTP will notify us of the number of shares of convertible preferred stock and shares of common stock, up to an aggregate of 21,000,000 shares, that BTP desires to acquire under the securities purchase agreement, if any. BTP may elect to purchase any combination of convertible preferred stock and common stock and may complete the purchase at any time or from time to time up to 270 days after the merger is completed.
The purchase price for the convertible preferred stock will be equal to the greater of (a) $4.25 per share and (b) the closing “bid” price of the common stock as reported by NASDAQ for the trading day immediately preceding the closing of the transactions pursuant to the securities purchase agreement. BTP may pay the purchase price for any convertible preferred stock purchased with:
    cash in an amount equal to the par value of the shares of convertible preferred stock; plus
    delivery of a promissory note in an aggregate principal amount equal to the purchase price of the shares less the par value of the shares purchased.
The purchase price for the common stock will be equal to the greater of (a) $4.25 per share and (b) the closing “bid” price of the common stock as reported by NASDAQ for the trading day immediately preceding the closing of the transactions pursuant to the securities purchase agreement. BTP may pay the purchase price for the common stock as follows:
    cash in an amount equal to the par value of the shares of common stock; plus
    delivery of a promissory note in an aggregate principal amount equal to the purchase price of the shares less par value of the shares purchased.
Series A Convertible Preferred Stock (Page 138 and Annex F)
The convertible preferred stock will rank senior to our other capital stock as to dividends, distribution of assets upon liquidation, dissolution or the winding up of our affairs. In addition, the convertible preferred stock will be entitled to receive a mandatory dividend at a rate equal to 4.62% of the original purchase price paid for the convertible preferred stock, payable on a yearly basis. Such dividend will be payable by us in kind in the form of additional shares of convertible preferred stock or out of cash legally available for the payment of dividends. The holders of the outstanding shares of convertible preferred stock will not be entitled to vote on any matters submitted for a vote of holders of common stock, except with respect to matters to amend our governing documents in a manner materially adverse to the holders of the outstanding shares of convertible preferred stock or the creation of any class or series of capital stock with rights and preferences ranking prior to or equal to the convertible preferred stock. The terms of the convertible preferred stock prohibits the conversion of convertible preferred stock into common stock to the extent that such conversion would cause the holder of the convertible preferred stock (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of the Company.

 

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Subordinated Promissory Note (Page 142 and Annex E)
Under the securities purchase agreement, BTP is entitled to pay for any shares of convertible preferred stock and/or common stock purchased with a promissory note in an aggregate amount equal to the purchase price, less the aggregate par value of the shares purchased (which would be paid in cash). The notes are due and payable on or before the third anniversary of issuance, may be prepaid without penalty and will bear interest from the date of issuance on the unpaid principal amount at a rate of 4.62% per year.
Under the terms of the promissory note, BTP is entitled to make any payment of principal or interest (a) in cash, (b) by surrendering shares of our convertible preferred stock or (c) by contributing “eligible property” with a value equal to the amount of payment, determined as provided in the note. Eligible property includes the contribution of certain property consistent with our current operations or planned operational capabilities, or contribution of equity or convertible securities of an entity whose assets consist of such eligible property.
Warrant to Purchase Shares of Common Stock (Page 125 and Annex D)
Pursuant to the amended merger agreement, we have granted BTP the right to elect to receive a warrant to purchase up to 8,500,000 shares of our common stock at an exercise price of either $1.00 per share or $4.25 per share. If, prior to the effective time of the merger, Portside Growth and Opportunity Fund agrees to redeem or amend our outstanding convertible note and warrant held by it in a manner acceptable to us and BTP, then the exercise price of the warrant will be set at $1.00 per share. If no agreement with Portside Growth and Opportunity Fund is reached that is acceptable to us and BTP, then the exercise price of the warrant will be set at $4.25 per share. The warrant would be exercisable at any time after 180 days after the date of issuance of the warrant until the fourth anniversary of issuance.
BTP may exercise the warrant, in whole or in part, by surrendering of the warrant to us together with payment of an amount equal to the exercise price per share multiplied by the number of shares to be purchased. BTP may pay the exercise price in cash, by cancellation of bona fide indebtedness or other obligations we owe to BTP or a combination of such exercise methods. In addition, BTP may elect to receive a net issuance of the shares of common stock pursuant to a formula based on the fair market value of the shares at the time of exercise. The warrant cannot be exercised if such exercise would cause the holder of the warrant (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of the Company.
Registration Rights Agreement (Page 136 and Annex G)
Pursuant to the securities purchase agreement , we have agreed to enter into a registration rights agreement with BTP providing for demand rights and piggyback rights to register the resale of the following with the SEC:

 

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    any shares of common stock issued pursuant to the amended merger agreement;
    any shares of common stock issuable upon the exercise of any warrant issued to BTP pursuant to the amended merger agreement;
    any shares of common stock issued pursuant to the securities purchase agreement; and
    any shares of common stock issuable upon conversion of any shares of convertible preferred stock issued pursuant to the securities purchase agreement.
Pursuant to the registration rights agreement, we would bear all fees, costs and expenses in connection with the first five registration statements in connection with the registration rights agreement. All expenses related to any additional registration statements will be paid by the holders of registrable securities on a pro rata basis.

 

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THE IMAGE SPECIAL MEETING
We are furnishing this proxy statement to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting. In order for the merger to be completed, our stockholders must adopt the amended merger agreement and approve the securities issuance. If the stockholders fail to adopt the amended merger agreement or fail to approve the securities issuance, and if BTP does not waive the requirement that we execute and deliver the securities purchase agreement to BTP as a condition to closing, the merger will not occur. A copy of the amended merger agreement and the securities purchase agreement are included with this proxy statement as Annexes A and B, respectively.
Date, Time and Place
The special meeting will be held on October 22, 2007, beginning at 10:00 a.m. local time at InterContinental Hotel Los Angeles Century City, 2151 Avenue of the Stars, Los Angeles, CA 90067.
Purpose of the Special Meeting
At the special meeting, holders of record of our common stock as of the record date will be asked to consider and vote on the following proposals:
    A proposal to adopt the amended merger agreement (see “Proposal 1—Adoption of the Amended Merger Agreement” beginning on page 36);
    A proposal to approve the securities issuance (see “Proposal 2—Approval of the Securities Issuance” beginning on page 128); and
    A proposal to adjourn or postpone the special meeting to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the amended merger agreement or approve the securities issuance (see “Proposal 3—Adjournment or Postponement of the Special Meeting” beginning on page 146).
Recommendation of Our Board of Directors
Our board of directors recommends that you vote FOR the proposal to adopt the amended merger agreement, FOR approval of the securities issuance and FOR any proposal to adjourn or postpone the special meeting to solicit additional proxies if there are not enough votes to approve Proposals 1 and 2 at the special meeting.
Record Date; Stockholders Entitled to Vote; Quorum
Only holders of our common stock at the close of business on September 6, 2007, the record date for the special meeting, are entitled to notice of and to vote at the special meeting. At the close of business on the record date, 21,739,798 shares of our common stock were issued and outstanding and entitled to vote. On the record date, our common stock was held by 1,215 holders of record. Holders of our common stock on the record date are entitled to one vote per share on each proposal to be brought before at the special meeting. A list of our stockholders will be available for review at our executive offices and principal place of business during regular business hours for a period of 10 days before the special meeting and will also be available for inspection at the special meeting itself.

 

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A quorum is required to hold the special meeting. A quorum will be present at the special meeting if the holders of a majority of the shares of our common stock outstanding and entitled to vote on the record date are present in person or represented by proxy at the special meeting. If a quorum is not present at the special meeting, we plan to adjourn or postpone the special meeting to solicit additional proxies. Abstentions and “broker non-votes” count as present for establishing a quorum for the transaction of all business. Generally, “broker non-votes” occur when shares held by a broker, bank or other nominee for a beneficial owner are not voted with respect to a particular proposal because (a) the broker, bank or other nominee has not received voting instructions from the beneficial owner and (b) the broker, bank or other nominee lacks discretionary voting power to vote such shares.
Generally, brokers, banks and other nominees cannot vote shares of our common stock that they hold beneficially on non-routine matters, including all of the proposals we expect to come before the special meeting.
Vote Required
Adoption of the Amended Merger Agreement. The adoption of the amended merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote at the special meeting as of the record date. Therefore, failure to vote your shares, abstentions and “broker non-votes” will have the same effect as voting against adoption of the amended merger agreement.
Approval of the Securities Issuance. The approval of the securities issuance requires the affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon. Because abstentions are counted as shares entitled to vote at the special meeting, abstentions will have the effect of votes against such proposal. However, “broker non-votes” will have no effect on the outcome of such proposal.
Adjournment or Postponement of Special Meeting. The affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon is required to approve any proposal to adjourn or postpone the special meeting to solicit additional proxies. Because abstentions are counted as shares entitled to vote at the special meeting, abstentions will have the effect of votes against such proposal. However, “broker non-votes” will have no effect on the outcome of such proposal.
Voting by Our Directors and Executive Officers
As of September 6, 2007, the record date for our special meeting, our directors and executive officers held and are entitled to vote at the special meeting an aggregate of 893,432 shares of our common stock, representing approximately 4.11% of the shares of our common stock outstanding as of the record date. The directors and executive officers have informed us that they intend to vote all of their shares of our common stock FOR the proposal to adopt the amended merger agreement, FOR the securities issuance and FOR any adjournment or postponement of the special meeting to solicit additional proxies.

 

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Voting by Certain Stockholders
In connection with the amended merger agreement, and as required by BTP as a condition to its execution of the amended merger agreement, on June 27, 2007, certain stockholders of Image, consisting of Martin W. Greenwald, our Chairman and Chief Executive Officer, Image Investors Co. and Standard Broadcasting Corp. Ltd. entered into amended support agreements with BTP, each in their capacities as a stockholder of Image, pursuant to which they each agreed, among other things, to vote the shares of common stock held by them in favor of adoption of the amended merger agreement and against other acquisition proposals. If the amended merger agreement is terminated in accordance with its terms, the support agreements will also terminate. The stockholders who have entered into these support agreements owned common stock representing, in the aggregate, approximately 38% of the shares of our common stock outstanding as of the record date.
Voting Procedures
Voting by Proxy or in Person at the Special Meeting. Holders of record can ensure that their shares are voted at the special meeting by one of the following methods:
    mail, by completing, signing, dating and mailing each proxy card or vote instruction card and returning in the envelope provided;
    telephone, using the toll free number listed on each proxy card (if you are a registered stockholder, that is if you hold your stock in your name) or voting instruction card (if your shares are held in “street name,” meaning that your shares are held in the name of a broker, bank or other nominee and your bank broker or other nominee makes telephone voting available); or
    the Internet, at the address provided on each proxy (if you are a registered stockholder) or voting instruction card (if your shares are held in “street name” and your bank broker or other nominee makes Internet voting available).
Submitting by any of the above methods will not affect your right to attend the special meeting and to vote in person. If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares are held in “street name” by a broker, bank or other nominee and you wish to vote at the special meeting, you will need to bring a copy of your brokerage statement or other documentation reflecting your stock ownership as of the record date. In addition, “street name” holders who wish to vote at the special meeting will need to obtain a proxy authorizing them to vote at the special meeting from the broker, bank or other nominee that holds their shares.

 

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Voting of Shares Held in Street Name. If you hold your shares through a broker, bank or other nominee, you should check the voting instruction card forwarded by your broker, bank or other nominee to see which voting options are available to you.
Read and follow the instructions on your proxy or voting instruction card carefully to ensure ALL your shares are represented and voted at the special meeting.
Adjournments or Postponements
Adjournments or postponements of the special meeting may be made for the purpose of soliciting additional proxies. An adjournment or postponement requires the affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy at the special meeting and entitled to vote thereon, without further notice other than by an announcement made at the special meeting of the date, time and place at which the meeting will be reconvened. However, if the adjournment or postponement is for more than 30 days, or if after the adjournment or postponement a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting will be given to each stockholder of record entitled to vote at the meeting. We do not currently intend to seek an adjournment or postponement of the special meeting, unless at the time of the special meeting there are insufficient votes to adopt the amended merger agreement and approve the securities issuance.
Other Business
We do not expect that any matter other than Proposals 1, 2 and 3 will be brought before the special meeting. If, however, other matters are properly presented at the special meeting or any adjournment or postponement thereof, the persons named as proxies will vote in their discretion with respect to those matters.
Revocation of Proxies
Submitting a proxy on the enclosed form does not mean you can’t vote in person at the special meeting. If you are a stockholder of record, you may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy by mail, by telephone or via the Internet with a later date or by appearing at the special meeting and voting in person. If you are a stockholder of record, you may revoke a proxy by any of these methods, regardless of the method you used to deliver your previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your shares are held in “street name,” you must contact your broker, bank or other nominee to get instructions on how to revoke your proxy.
Solicitation of Proxies
We are soliciting proxies for the special meeting from our stockholders. We will bear the entire cost of soliciting proxies from our stockholders. In addition to the solicitation of proxies by mail, we will request that banks, brokers and other nominees send proxies and proxy materials to the beneficial owners of our common stock held by them and secure their voting instructions if necessary. We will reimburse those banks, brokers and other nominees for their reasonable expenses in so doing. Our directors, officers and employees may solicit proxies from our stockholders, either personally or by telephone, mail, Internet or facsimile, but will not receive additional compensation for doing so. We have determined not to retain a third party proxy solicitor at this time.

 

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Appraisal Rights
Under Delaware law, holders of our common stock who do not vote in favor of adopting the amended merger agreement will have the right to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery if the merger is completed, but only if they submit a written demand for an appraisal prior to the vote on the adoption of the amended merger agreement and they comply with the provisions of Section 262 of the DGCL, the complete text of which is attached as Annex L to this proxy statement.
Assistance
If you have any questions about the merger or the other matters to be brought before the special meeting, or if you need assistance in voting your shares or additional copies of this proxy statement or the enclosed proxy card, please contact:
     
Image Entertainment, Inc.
Dennis Hohn Cho
Senior Vice President, Corporate Secretary and General Counsel
Telephone: (818) 407-9100
  Dawn Martens
Director of Corporate Affairs
Telephone: (818) 407-9100

 

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PROPOSAL 1
ADOPTION OF THE AMENDED MERGER AGREEMENT
THE MERGER
The following is a summary description of the terms of the merger. While we believe that the following describes the material terms and other information regarding the merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the amended merger agreement attached as Annex A and the other annexes to this proxy statement, for a more complete understanding of the merger and the other transactions described in this proxy statement. The following description is subject to, and is qualified in its entirety by reference to, the amended merger agreement, which is the actual legal document that will govern the merger.
The Companies
Image Entertainment, Inc.
We are a vertically-integrated independent home entertainment content supplier engaged in the acquisition, production and worldwide distribution of exclusive content for release on a variety of formats and platforms, including:
                 
  DVD     Broadcast
  CD         Traditional
  HD-DVD         Cable
  Blu-ray Disc®         Satellite
  UMD         Video-On-Demand (VOD)
  VHS     Theatrical
We are primarily engaged in the domestic acquisition and wholesale distribution of content for release on DVD. We acquire and exploit, on DVD and other home entertainment formats, exclusive distribution rights to a diverse array of general and specialty content, including:
             
  Comedy     Theatrical catalog films
  Music concerts     Independent films
  Urban     Foreign and silent films
  Latin     Youth culture/lifestyle
  Theatre     Television
  Country     Gospel

 

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We also acquire exclusive rights to audio content for distribution on CD spread across a variety of genres and configurations, including:
             
  Albums     Broadway original cast recordings
  Compilation CDs     Audio recordings from our live concert event DVDs
  TV and movie soundtracks     Stand-up comedy programs
Through our wholly-owned subsidiary, Egami Media, Inc., or Egami, we are focused on the acquisition and exploitation of content in the expanding digital distribution marketplace for delivery systems such as:
             
  Download-to-rent (VOD)    
 
    “A la carte” download-to-rent    
 
    Subscription rental    
 
    Ad-supported rental    
  Electronic sell-through    
Egami aggressively continues to add numerous video and audio titles to its growing library of exclusive digital rights each month. Egami has established direct relationships with many digital industry-retailers and continues to seek additional distribution partners as they emerge.
We strive to grow a stream of revenues by maintaining and building a library of titles that can be exploited in a variety of formats and distribution channels. Our active library currently contains:
    Over 2,800 exclusive DVD titles;
    Approximately 250 CD titles;
    Digital rights to
    Nearly 2,000 video titles;
 
    Over 250 audio titles;
    Containing more than 4,000 individual tracks.
We currently release an average of 30-35 new exclusive DVD titles and five new exclusive CD titles each month.

 

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We acquire programming mainly by entering into exclusive licensing or distribution arrangements with producers and other content providers. We typically supplement such content by designing and producing additional value-added features. We routinely produce our own original entertainment programming, focused on DVD live performance music concerts and comedy events with some of the most recognizable names in each industry, and also various forms of urban genre content. We are also co-producing feature horror and other genre specific titles with budgets from less than $500,000 to $3.5 million through co-production agreements with:
    Dark Horse Entertainment;
    Graymark Productions; and
    Amicus Entertainment.
In addition, we co-produced with Sisters Wooster, Inc. a thriller feature film, Sisters, which is a remake of the classic Brian De Palma film. We will also look to co-produce individual films with other established independent producers as such opportunities may arise.
BTP Acquisition Company, LLC
BTP Acquisition Company, LLC is a newly organized Delaware limited liability company controlled by David Bergstein. Mr. Bergstein, along with his financing affiliates, owns several media distribution companies, including U.K.-based Capitol Films, which is a worldwide distributor of motion pictures and television programs; Thinkfilm, which is a North American motion picture and television program distributor; Sheridan Square Entertainment, which distributes record company music libraries; and film and television libraries with hundreds of individual titles. Collectively, Mr. Bergstein and his affiliates finance, produce and distribute hundreds of film, television and music titles worldwide.
IEAC, Inc.
IEAC, Inc., a Delaware corporation and a wholly-owned subsidiary of BTP, was formed solely for the purpose of completing the proposed merger. IEAC has not conducted any business operations other than incidental to its formation and in connection with transactions contemplated by the amended merger agreement. Under the terms of the amended merger agreement, at the effective time of the merger, IEAC will merge with and into us. We will survive the merger and IEAC will cease to exist.
Structure of the Transaction
The proposed transaction is a merger of IEAC with and into Image, with Image surviving the merger as a majority owned subsidiary of BTP. At the effective time of the merger:
    94% of the shares of our common stock that are owned by each Image stockholder at the time of the merger (unless they exercise and perfect their appraisal rights under Delaware law) automatically will be converted into the right to receive $4.68 per share in cash, without interest.
    The remaining shares of common stock held by each Image stockholder at the time of the merger will be retained as shares of common stock of Image as the company surviving the merger.

 

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    Each option to purchase common stock that is outstanding immediately prior to the effective time of the merger will be cancelled and the holder of such option will be entitled to receive, in consideration for such cancellation, an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the option, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled in the merger over the exercise price per share of common stock under such option.
    The restricted stock units that are outstanding immediately prior to the effective time of the merger will be cancelled, and the holder will be entitled to receive at the effective time, in consideration of such cancellation, an amount in cash, without interest, equal to the product obtained by multiplying such number of shares of our common stock issuable upon the exercise in full of the restricted stock unit by the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled in the merger.
    Each holder of a warrant (other than warrants held by Portside Growth and Opportunity Fund) will be entitled to receive an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the warrant, by
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled in the merger over the exercise price per share of common stock under such warrant.
As of the effective time of the merger, all such warrants will no longer be outstanding and will automatically be canceled and the holder will only be entitled to receive the amount in cash described above.
Management and Board of Directors of the Surviving Corporation
The board of directors of IEAC will be the board of directors of the surviving corporation upon the completion of the merger. However, we currently expect that our current executive officers will continue as executive officers of Image as the company surviving the merger. Upon the closing of the merger, Messrs. Greenwald, Borshell and Framer have each agreed with BTP to amend his existing employment agreement to extend the term until October 31, 2008 and to eliminate contractual severance payments due at the end of the term. For Messrs. Borshell and Framer the amendment also includes an increase in cash salary. In addition, due to the amount of time required to negotiate and execute the amended merger agreement, Messrs. Greenwald, Borshell and Framer signed two amendments to their employment agreements with Image extending the time by which Image might exercise its option to extend their employment agreements for an additional one year term. These amendments extended the time for Image to exercise this option from March 31, 2007 to May 31, 2007 and then to July 20, 2007.

 

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Background of the Merger
As part of an ongoing evaluation of our business, our board of directors and senior management regularly evaluate our long-term strategic alternatives and prospects for continued operation as an independent company in order to enhance stockholder value. This evaluation took on heightened focus in the summer of 2005 when, on August 30, 2005, Lions Gate Entertainment Corp., or Lions Gate, sent a letter to our board of directors, which we refer to as the August 30 letter, expressing its interest in pursuing a negotiated strategic merger transaction with us. In the August 30 letter, Lions Gate expressed an interest in acquiring 100% of the outstanding shares of our common stock in exchange for Lions Gate common stock at an exchange ratio in the range of 0.38 to 0.42 per share, subject to due diligence and the negotiation of definitive documents acceptable to Lions Gate. Based on a closing price of $9.57 per share for Lions Gate’s common stock on August 30, 2005, the implied value of Lions Gate’s offer was between $3.64 and $4.02 per share of our common stock.
On September 2, 2005, we sent a letter to Lions Gate indicating a willingness to discuss the expression of interest contained in the August 30 letter.
On September 9, 2005, at an executive session, our board of directors discussed the possibility that Lions Gate or another potential acquirer could approach members of our management and offer them an opportunity to invest in the surviving company following any business combination or other acquisition transaction. After this discussion, the board of directors formed a special committee consisting of independent directors Gary Haber, Robert J. McCloskey and Ira S. Epstein (appointed as chairman) for the purpose of considering and evaluating Lions Gate’s expression of interest and other potential strategic alternatives to enhance long-term stockholder value. The special committee was given the authority to engage independent financial advisors, legal counsel and other advisors to assist it in its delegated duties, as appropriate. Subsequently, in October, 2006, our board appointed David Coriat as an additional member of the special committee.
On September 13, 2005, Lions Gate filed a Schedule 13D with the SEC stating that it had acquired approximately 18.98% of our outstanding common stock through open-market purchases and negotiated transactions. Lions Gate also publicly announced its intent to pursue negotiations with us to acquire 100% of our outstanding common stock. Lions Gate asserted that the acquisition of our company would be consistent with a desire to broaden and deepen its library of filmed entertainment, as well as to add an important musical component to its business.
On September 14, 2005, we issued a press release announcing Lions Gate’s expression of interest contained in the August 30 letter and the formation of the special committee.
On September 19, 2005, we publicly announced that our special committee had engaged The Salter Group to provide financial advisory services in connection with evaluating the expression of interest contained in Lions Gate’s August 30 letter, as well as other potential alternatives to enhance long-term value for our stockholders. Our special committee did not engage The Salter Group to provide investment banking services nor to render any fairness opinion.

 

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On September 26, 2005, at an executive session, our board of directors discussed the presentation to be given by Lions Gate to the special committee on September 30, 2005, at which Lions Gate intended to describe its proposal in more detail and explain why its proposal was in the best interests of our stockholders. The board also discussed measures that could be taken to prevent Lions Gate from launching a hostile tender or exchange offer that did not adequately compensate our stockholders while the board was considering available alternatives to enhance stockholder value, including the possibility of adopting a stockholder rights plan. In addition, the board discussed the compensation committee’s recommendation to extend the employment agreements of all our executive officers and senior vice-presidents in light of a potential transaction with Lions Gate.
On September 30, 2005, our board held another executive session and discussed Lions Gate’s presentation to the special committee earlier that day as well as the presentation given to Lions Gate at that same meeting by The Salter Group on behalf of the special committee. The board also discussed the possibility, raised during the meeting with Lions Gates, of executing a confidentiality agreement with Lions Gate in order to provide Lions Gate with due diligence materials and information about our company. During the executive session, the board again discussed the possibility of adopting a stockholder rights plan and the necessity and appropriateness of executing new indemnification agreements with our executive officers and directors in light of our then recent reincorporation as a Delaware corporation.
On September 30, 2005, we signed a confidentiality agreement with Lions Gate, at which time the special committee directed our management to provide Lions Gate with due diligence information about our company.
On October 14, 2005, at the direction of our special committee, our senior management made a comprehensive presentation to Lions Gate and provided additional due diligence information to Lions Gate. Following that presentation, and in an effort to facilitate the possibility of a transaction, the special committee requested that Lions Gate submit a revised proposal by October 31, 2005 that more closely reflected what the special committee believed to be the true value of our company.
On October 14, 2005, our board held another executive session and discussed the status of Lions Gate’s due diligence review. The board also discussed whether to adopt a stockholder rights plan and discussed and approved a proposed form of director and officer indemnification agreement. During the course of the October 14 meeting, the board also discussed the compensation committee’s recommendation to extend the employment agreements of all of our executive officers and senior vice-presidents to provide our company with additional security that we would be able to retain our most critical employees in light of the considerable uncertainty created by Lions Gate’s unsolicited offer. The board then authorized the compensation committee to give notice of exercise of our company’s one-year option to extend the term of employment of each of our executive officers to March 31, 2008, and to enter into amendments to the employment agreements of each of our senior vice-presidents to extend the terms of their employment agreements to March 31, 2008.

 

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Thereafter, on October 18, 2005, we gave written notice to our executive officers of our company’s exercise of the option to extend their employment agreements. In addition, on October 18, 2005, we began entering into indemnification agreements with all of our directors and executive officers. Pursuant to the terms of the indemnification agreements, we are generally required to provide the maximum indemnification available to officers and directors under Section 145 of the Delaware General Corporation Law and our certificate of incorporation, as well as additional procedural protections. The indemnification agreements also require us to indemnify officers and directors against liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct, to advance any expenses incurred by our officers or directors as a result of any proceeding against them as to which they could be indemnified, and to obtain directors’ and officers’ insurance if available on reasonable terms.
On October 20, 2005, we issued a press release announcing that (i) we had executed a confidentiality agreement with Lions Gate and thereafter had begun providing Lions Gate with due diligence information, (ii) our management had made a comprehensive presentation to Lions Gate and (iii) the special committee had requested that Lions Gate submit a revised proposal by October 31, 2005.
On October 31, 2005, our special committee received a letter containing a revised proposal from Lions Gate, which we refer to as the October 31 letter, in which Lions Gate indicated a desire to acquire 100% of our common stock for $4.00 in cash per share, subject to the completion of due diligence and the negotiation and execution of definitive agreements. In addition, the October 31 letter stated that the definitive merger agreement would include a $3.5 termination million fee plus expense reimbursement payable to Lions Gate in the event of termination, provisions allowing our board of directors to respond to a superior proposal and customary representations and warranties of both parties. In its October 31 letter, Lions Gate indicated that it would expect to execute voting agreements with stockholders representing approximately 39% of our outstanding shares and noted that it would expect to execute mutually satisfactory employment agreements with certain executives and key employees, including, in particular, Marty Greenwald.
A meeting of our special committee was immediately convened on October 31, 2005 to discuss and evaluate Lions Gate’s October 31 letter. The special committee determined that the proposal remained below the price that the special committee would find acceptable for our stockholders based upon its good faith determination of value and its discussions with The Salter Group. Following further discussion, the special committee rejected the proposal in the October 31 letter and terminated the diligence period under the Lions Gate confidentiality agreement.
During the course of the October 31 meeting, the special committee discussed the stockholder rights plan previously considered by the special committee and the board of directors, including a review of the current protections we had against an unsolicited or coercive takeover bid, and the advantages and disadvantages of adopting a stockholder rights plan to provide our board with adequate time to properly evaluate available strategic alternatives in an effort to enhance stockholder value. The special committee concluded that adopting a stockholder rights plan was desirable and in the best interests of our company and our stockholders in order to

 

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preserve the long-term value of the company in the event that a third party commenced a hostile takeover. Following that review and discussion, the special committee resolved to adopt the stockholder rights plan. Following the special committee meeting, our full board, acting by unanimous written consent, approved and authorized the adoption of a stockholder rights plan.
On November 1, 2005, we issued a press release announcing that our special committee had unanimously rejected Lions Gate’s revised proposal, terminated the due diligence period under the Lions Gate confidentiality agreement and adopted a stockholders rights plan to protect the interests of our stockholders. We also stated that continuing our growth and maximizing long-term stockholder value continued to be major goals of our board and management.
On December 16, 2005, our board of directors granted options to purchase shares of common stock pursuant to our 2004 Incentive Compensation Plan to three board members as additional compensation for serving on the special committee. Mr. Epstein, as chairman of the special committee, received options to purchase 20,000 shares and Mr. Haber and Mr. McCloskey each received options to purchase 10,000 shares.
At a meeting of the special committee on February 13, 2006, management and the special committee discussed the various parties which had contacted the special committee and had engaged in discussions with the special committee regarding a potential transaction with us. The special committee also approved the engagement of a major investment bank as its financial advisor in connection with the special committee’s examination of potential strategic and financial opportunities to enhance our long-term value. Lazard Frères & Co. LLC, or Lazard, was subsequently engaged as the special committee’s financial advisor.
On March 14, 2006, in contemplation of nominating a slate of directors for our 2006 annual meeting of stockholders, Lions Gate filed a complaint in the Court of Chancery of the State of Delaware, CA No. 2011, seeking, among other things, declaratory relief to prevent the classification of our board of directors into three separate classes until immediately after our 2006 annual meeting of stockholders to ensure that all of our board seats would be up for election at the 2006 annual meeting and that all of our incumbent directors would be required to stand for re-election at the 2006 meeting. Lions Gate also sought a declaration establishing the correct period during which advance notice had to be given of a stockholder’s intent to nominate candidates for director.
On March 17, 2006, our board of directors met and discussed the complaint filed by Lions Gate.
On March 24, 2006, the Delaware court granted expedited status to Lions Gate’s lawsuit and scheduled a hearing for April 25, 2006, regarding the parties’ motions. In addition, on March 24, we filed a current report on 8-K announcing that our next annual meeting would not be held on the June 30 default date described in our bylaws.
On or about April 10, 2006, we publicly announced Lazard’s engagement as financial advisor to assist in the special committee’s examination of potential strategic and financial opportunities to enhance our long-term value. Promptly thereafter, in accordance with the special committee’s directives, Lazard contacted Lions Gate and advised it that Lazard had been engaged by the special committee and that the special committee was interested in discussing further Lions Gate’s proposal.

 

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On April 26, 2006, at a meeting of the special committee, the special committee discussed with its financial advisor strategic challenges facing our company. After discussion among the members of the special committee, the special committee decided that it would not put the company up for sale but would proceed with a further strategic review process to explore the possible sale of the company and to examine all other potential strategic and financial opportunities to maximize long-term value for the company’s stockholders.
Between mid-April and early May 2006 and in accordance with the special committee’s directives, approximately 30 parties were contacted, including potential acquisition candidates, to determine their interest in a potential transaction with us.
On or about May 2, 2006, the special committee determined to hire counsel for the special committee separate from the company’s regular outside counsel to assist the special committee in its assessment of strategic and financial opportunities. Shortly thereafter, Ira Epstein, chairman of the special committee, on behalf of the special committee, engaged Gibson, Dunn & Crutcher LLP, or Gibson Dunn, to act as counsel to the special committee. The special committee ratified the selection of Gibson Dunn as its special counsel at a meeting of the special committee on May 8, 2006.
The special committee held its initial meeting after retaining Gibson Dunn on May 8, 2006. Special counsel to the special committee gave an overview of the work done thus far and described additional work needed to be done in the near future. Special counsel also reminded members of the special committee of their obligations with respect to trading in our company’s securities or the securities of entities with which we were engaged in discussions regarding a potential strategic transaction. The special committee then set a second meeting date to continue its special counsel discussions.
The special committee held that additional meeting on May 18, 2006 to (i) review the special committee’s duties and legal obligations, (ii) review the charge of the committee as originally established by our board on September 9, 2005, and (iii) receive an update on the status of the strategic review process, including the various contacts with third parties to gauge interest in a potential acquisition of our company and with at least three companies which might be an acquisition target for us. Gibson Dunn explained in detail the current duties and responsibilities of the special committee as delegated by the full board of directors and discussed with the special committee potential revisions to the special committee’s delegated duties. Gibson Dunn also reviewed with the special committee the legal principles and standards applicable to the special committee’s actions and decisions under Delaware law.
After discussion, the special committee decided to recommend to the board an expansion of the special committee’s duties, including (i) monitoring the negotiation of, and, to the extent deemed advisable by the special committee, to negotiate, by and on behalf of the company, the terms of a transaction with Lions Gate or other potential alternatives to enhance stockholder value, (ii) determining whether a potential transaction would be in the best interests of the company and its stockholders and (iii) recommending to the full board of directors whether the proposed terms of any potential transaction were advisable to, and in the best interests of, the company and its stockholders and what action, if any, should be taken by the company with respect to a potential transaction.

 

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On June 5, 2006, the Delaware Chancery Court granted summary judgment in favor of Lions Gate and ruled that our board of directors would become classified immediately following our 2006 annual meeting of stockholders and, therefore, all six of our incumbent directors would be up for election at the 2006 annual meeting of stockholders scheduled for October 10, 2006.
On June 6, 2006, Lions Gate delivered a notice to our secretary formally notifying us of its intent to nominate a slate of six directors for our 2006 annual meeting and to solicit votes for its slate with the goal of removing the incumbent board of directors at our 2006 annual meeting of stockholders.
On June 7, 2006, our board of directors met to discuss the ruling of the Delaware Chancery Court, Lions Gate’s intention to nominate director nominees, the possibility of Lions Gate remaining a potential buyer of our company and the status of the strategic review process. In addition, at the June 7 meeting, the board considered and approved the expansion of the duties of the special committee as recommended by the special committee upon the advice of Gibson Dunn.
Following the June 5, 2006 Delaware court ruling, Lions Gate was contacted regarding its potential participation in our process and was provided with a revised confidentiality agreement. As of late June 2006, we had entered into confidentiality agreements with 14 parties other than Lions Gate, and 11 of these parties received a confidential information memorandum relating to us and our business and access to a virtual data room. Although these parties were requested to submit proposals by June 27, 2006, we received no proposals by that date. However, discussions regarding a potential transaction continued with a leading independent home-entertainment distribution company, or Company A, and the film production division of a leading foreign entertainment and media company, or Company B.
On June 29, 2006, we signed the revised confidentiality agreement with Lions Gate to facilitate Lions Gate’s further due diligence review. Among other provisions, the revised confidentiality agreement contained a provision prohibiting Lions Gate from disclosing the fact that discussion or negotiations were taking place concerning a possible transaction with us, or any of the terms, conditions, or other facts with respect to any possible transaction prior to March 31, 2007. However, the provision permitted Lions Gate to disclose such information in connection with the solicitation of proxies beginning on the earliest of (i) September 10, 2006, (ii) if the date of the 2006 annual meeting of the stockholders was changed to a date prior to October 10, 2006, then 30 days prior to such new date or (iii) the first date on which we made any public statement regarding a definitive transaction.

 

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On July 5, 2006, Lions Gate submitted a non-binding proposal which would expire on July 7, 2006, to acquire 100% of the outstanding shares of our common stock for $4.00 per share in cash. Lions Gate’s proposal indicated that the merger agreement would include at least a $4.0 termination million fee plus expense reimbursement payable to Lions Gate in the event of termination, provisions allowing our board of directors to respond to a superior proposal and customary representations and warranties of both parties. In addition, the proposal was subject to Lions Gate’s satisfactory completion of due diligence, the final approval of its board of directors and the execution of a definitive merger agreement. In accordance with the special committee’s directives, Lazard contacted Lions Gate’s financial advisor and informed it that the special committee was not planning to meet and respond to Lions Gate’s proposal by July 7, 2006. Lions Gate’s financial advisor acknowledged that the offer would not be withdrawn on July 7, 2006.
On July 14, 2006, a meeting of the special committee was convened. At the meeting, the special committee’s financial advisor updated the special committee on the status of the strategic review process, including a review of financial aspects of the Lions Gate proposal and continuing discussions with Company A and Company B regarding a potential transaction. The possibility of setting a firm timetable to respond to the Lions Gate proposal and any other potential proposals also was discussed. Following these discussions, the special committee decided to delay any response to the July 5 Lions Gate offer for a few days in order to permit other potential transaction partners to make proposals. During the course of the July 14 meeting, Gibson Dunn reviewed with the special committee the specific terms of the revised confidentiality agreement signed with Lions Gate.
On July 17, 2006, in accordance with the special committee’s directives, the special committee’s financial advisor met with Lions Gate’s advisors and informed them that the special committee had carefully considered Lions Gate’s July 5 proposal, and that in light of the fact that the offer per share was the same price offered by Lions Gate previously (which had been rejected by our full board of directors), the special committee did not find the offer compelling and would continue to explore strategic alternatives, including an increased offer from Lions Gate if it chose to submit one.
In late July, 2006, Company B withdrew from our process.
On August 2, 2006, Lions Gate sent a letter to the special committee requesting that we immediately advise it as to the status of its July 5 proposal.
A meeting of the special committee was convened on August 4, 2006 to discuss the substance of Lions Gate’s August 2 letter and an appropriate response to Lions Gate. On August 7, 2006, we sent a letter to Lions Gate in response to its August 2 letter, reaffirming our interest in further discussions with Lions Gates in the event it chose to increase its $4.00 offer.
After the special committee meeting, our full board of directors also held a meeting on August 4, 2006. Management presented a detailed update regarding the status of a potential ten-year output agreement with Relativity Media, LLC, or Relativity, to distribute theatrical motion pictures independently financed and produced by Relativity on all home video and digital formats. Following a discussion among the members of the board and input from management, the board approved the Relativity agreement, including as partial consideration for Relativity’s performance under the agreement, the potential issuance of 3.4 million shares of our common stock, which would be subject to certain restrictions on sale or transfer until the satisfaction of various conditions and terms of the agreement. The board also approved enlarging the board

 

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from six to seven members, contingent upon the execution of the Relativity agreement, the nomination of Lynwood Spinks, co-founder and co-managing member of Relativity, as a director by our nominations and governance committee and the agreement by Mr. Spinks to serve on our board. On August 9, 2006, the nominations and governance committee approved the nomination of Mr. Spinks, and the full board of directors ratified his nomination and approved the agreement with Relativity after discussing the terms and conditions of the agreement with Raymond James & Associates, Inc., or Raymond James, the financial advisor that the company had retained in connection with the evaluation of the Relativity transaction. On August 14, 2006, we publicly announced the agreement with Relativity and the appointment of Mr. Spinks to our board.
On August 8, 2006, we received another letter from Lions Gate requesting that we provide an update as to the status of our review of strategic alternatives.
The special committee held a meeting on August 10, 2006 to discuss the nature and timing of a response to the August 8 letter from Lions Gate. Following this meeting, the special committee approved and authorized Gibson Dunn to send a response letter on behalf of the special committee, which letter was sent on August 11, 2006. In the letter, the special committee’s counsel noted, among other things, that the company continued to explore a number of strategic alternatives with respect to the company, and that the special committee was interested in making sure all interested parties were heard from and had an opportunity to make proposals to the company. Gibson Dunn also reiterated that the company had not announced an auction of the company and that no decision had been made to recommend a sale of the company or any other particular kind of transaction to our board of directors or stockholders.
At a meeting of our board of directors on August 24, 2006, management discussed the current financial status of our company and proposals for raising capital. Following discussions among the members of the board and input from management, the board approved the issuance of up to 20% of our existing shares at not less than market price, along with the issuance of a five-year warrant for up to 25% of the shares of our common stock at an exercise price not less than $4.00 per share.
On August 29, 2006, we received another letter from Lions Gate challenging Image’s transaction with Relativity and the company’s efforts to raise capital. On August 31, 2006, we responded to Lions Gate’s August 29, 2006 letter.
On August 31, 2006, we also announced the closing of a $17 million convertible debenture financing with the Portside Growth and Opportunity Fund in order to finance our recently-announced exclusive DVD and digital distribution deal with Relativity, to enhance our ability to acquire and produce the best independent programming available and to repay all outstanding obligations under our revolving credit line, which carried a higher interest than the debenture. The debenture was convertible into 4,000,000 shares of our common stock. In connection with the financing, we also issued five-year warrants for 1,000,000 shares of our common stock.

 

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On September 7, 2006, Lions Gate filed an amended Schedule 13D stating that the combined effect of the Relativity and Portside transactions substantially diluted the ownership interest of our stockholders and that the transactions supported its belief that our board of directors was not acting in the best interests of our stockholders to evaluate our business and strategic alternatives and to maximize long-term value to all of our stockholders. Rather, Lions Gate claimed that our management and board appeared to be primarily concerned with rapidly implementing impediments to change prior to receiving stockholder input at our annual meeting in October.
On September 11, 2006, a meeting of the special committee was convened. At the meeting, management informed the special committee of the contents of the Schedule 13D and the special committee discussed various options for dealing with Lions Gate. Following these discussions, the special committee concluded that any decision would be deferred until a meeting of the full board. During the course of the meeting, the special committee was updated by Lazard on the status of the strategic review process, including continued discussions with Company A.
On September 12, 2006, Lions Gate publicly issued a letter addressed to our stockholders setting forth arguments in favor of the election of its nominees to our board of directors, and urging our stockholders to vote in favor of its nominees.
At a meeting of our board of directors on September 12, 2006, management discussed with the board the September 12 Lions Gate press release and the most recent letter distributed by Lions Gate. Following these discussions, the board authorized a response, which included a letter to both Lions Gate’s counsel and our stockholders. In addition, at the September 12 meeting, management discussed with the board the financial outlook for our company and the process and assumptions used in arriving at its views regarding our financial outlook.
On September 13, 2006, we sent a letter to Lions Gate expressing our concern that Lions Gate appeared to be engaged in an unfair and anti-competitive campaign to negatively impact and artificially deflate our share price through the dissemination of incomplete and misleading information, which was beneficial to it but detrimental to our other stockholders. We also stated our belief that Lions Gate’s recent statements, public filings and overall actions demonstrated its desire to depress our share price in the hope that its $4.00 offer would be accepted.
On September 18, 2006, Lions Gate sent a letter to us in response to our September 13 letter. In its September 18 letter, Lions Gate denied that it was engaged in any effort to negatively impact or artificially deflate our stock price because such actions would be counterproductive to its interests as our second largest stockholder. Lions Gate also stated its belief that it had nominated six highly qualified, independent directors to protect and create value for all of our stockholders. Lions Gate also put forth its reasons as to why our stock price continued to trade below its all-cash $4.00 per share offer, which according to Lions Gate included certain actions taken by our board and management to further entrench themselves to the detriment of all of our non-management stockholders such as the imminent implementation of a staggered board, the adoption of a poison pill and the recent issuance of stock equivalent securities.
On September 25, 2006, a representative of David Bergstein contacted the special committee’s financial advisor to express an interest in a potential transaction with us. At such representative’s request, a confidentiality agreement was provided to Capitol Films, an affiliate of Mr. Bergstein and BTP, and was executed on September 27, 2006.

 

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On September 26, 2006, Company A submitted a proposal for the acquisition of each outstanding share of our common stock in exchange for 2.17 shares of Company A common stock. Based on the closing price of Company A’s common stock on September 22, 2006, the implied value of Company A’s proposal was approximately $4.00 per share of our common stock. The proposal was conditioned on receipt of approval from Company A’s board of directors, the completion, to Company A’s sole satisfaction, of accounting and legal due diligence and confirmatory business due diligence, the negotiation of definitive documents with customary representations, warranties, covenants and conditions, as well as a break-up fee, and other third party approvals. Company A also requested a 45-day exclusivity period.
The special committee held a meeting on September 27, 2006 at which Gibson Dunn again reviewed the functions and duties of the special committee. Gibson Dunn also reviewed with the special committee the various legal principles that would apply to the special committee’s actions.
The special committee’s financial advisor then reviewed with the special committee the strategic review process to date, including the various parties contacted throughout the process, events that transpired after the special committee’s decision to keep the process open following the initial bid date and financial aspects of Lions Gate’s proposal and Company A’s proposal. The special committee was informed that these were the only proposals received to date, but that other parties continued to express an interest in a potential transaction with our company, with two other parties recently expressing an interest, including BTP, which was then reviewing materials in our due diligence data room.
After additional discussion, the special committee decided to postpone any decisions regarding the Lions Gate and Company A proposals at that time and to continue discussion at a subsequent meeting, which would be held on September 29, 2006.
On September 29, 2006, our special committee met to continue its discussions from the September 27 meeting. The special committee reviewed its prior discussions regarding the Lions Gate and Company A proposals as of the end of the prior meeting on September 27. The special committee discussed whether to continue the strategic review process. The special committee discussed potential financial outcomes for our company from the Relativity agreement, and possible synergies (and costs savings) were we to consummate a transaction with either Lions Gate or Company A. The special committee authorized the continuance of the strategic review process, and noted that it did not consider, in making the decision to continue the process, the pendency of the upcoming annual stockholder meeting to be relevant.
After further discussion, the special committee instructed its financial advisor to inform both Lions Gate and Company A that their respective proposals were not acceptable from a financial standpoint. The special committee based its decision on various factors, including its knowledge of our business and prospects, the potential increase in cash flow under the Relativity deal, financial aspects of the Lions Gate and Company A proposals, and potential cost savings available to any strategic acquirer of our company (which included both Lions Gate and Company A). The special committee also instructed its financial advisor to inform both Lions Gate and Company A that it remained interested in discussing potential transactions with them, but only at a valuation in excess of $4.00 per share.

 

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After the special committee’s September 29 meeting, in accordance with the special committee’s directives, Lazard continued to approach parties about their interest in engaging in a transaction with our company. Approximately six additional parties were provided access to our data room after the September 29 meeting, although none ultimately submitted any proposal for a transaction with the company.
We held our annual meeting of stockholders on Tuesday, October 10, 2006. On October 17, 2006, we issued a press release announcing that all seven current members of our board of directors had been re-elected by our stockholders. We also stated that we would continue with our ongoing strategy and process of seeking to enhance long-term value on behalf of all of our stockholders.
On October 23, 2006, David Bergstein informed the special committee’s financial advisor that a proposal could be forthcoming as soon as the following week.
On November 3, 2006, we received a letter from David Bergstein and BTP expressing an interest in acquiring 100% of our common stock for aggregate cash consideration in the range of $119 million to $125 million, plus up to $10 million of additional participation interests payable over four years contingent upon our company meeting agreed upon performance criteria. The expression of interest was conditioned upon our company being debt-free, except for the Chatsworth and Las Vegas leases and up to $9 million of our obligations pertaining to the Sonopress advance. BTP indicated that it intended to fund 50% of the purchase price from equity and the remainder pursuant to borrowings under a senior secured credit facility to be collateralized by all of the assets of our company. In the expression of interest, Mr. Bergstein and BTP requested exclusivity of up to 90 days and reimbursement of their expenses.
On November 8, 2006, the special committee met to discuss and evaluate BTP’s expression of interest. Members of the special committee noted that the terms and conditions contained in the expression of interest were not customary for a transaction of the type that we were considering and would not be acceptable to our company. The special committee determined, however, to recommend that our board further assess such proposal and, if appropriate, commence negotiations with BTP.
At a meeting of our board of directors on November 9, 2006, our board discussed the engagement of Manatt, Phelps & Phillips, LLP, or Manatt, as our company’s new special counsel to assist us with any potential sale. The board also discussed retaining Raymond James to provide an additional opinion with respect to the fairness, from a financial point of view, of the consideration to be received by our stockholders in any potential transaction. Following that discussion, the board approved the hiring of both Manatt and Raymond James in those respective capacities.

 

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At a meeting of the special committee on November 13, 2006, Gibson Dunn, at the direction of the special committee, reviewed for the benefit of Manatt and as background for the committee’s further discussions, the special committee’s role in the strategic review process to date. The special committee, Gibson Dunn and Manatt then reviewed what the special committee’s role was in the context of the then-current new BTP expression of interest and whether it needed to continue as a special committee separate from the full board of directors. The special committee concluded that the full board of directors, rather than the special committee, should continue negotiations with all interested parties (including BTP) because none of the interested parties had approached members of our management during the course of our strategic review process to offer them an opportunity to invest or a commitment to be a member of management in the surviving company following a transaction. The special committee reserved the right to review and negotiate any transaction (whether with BTP or any other party) that included an investment by members of our management team in the surviving company or other similar agreements with management. At the conclusion of the meeting, the special committee also adopted resolutions recommending that the strategic review process be continued but concluded if possible by December 31, 2006.
At a meeting of our board of directors on November 20, 2006, the board was updated on developments in connection with the strategic review process, including negotiations with BTP regarding the terms and conditions of a proposed revised confidentiality agreement. After this discussion, the board authorized management to enter into a revised confidentiality agreement with BTP on substantially the terms and conditions discussed at the meeting.
On November 20, 2006, we announced that Lynwood Spinks resigned from our board of directors, but that the resignation was not because of any disagreement with us on any matter relating to our operations, policies or practices.
On November 22, 2006, we executed a revised confidentiality agreement with BTP and Manatt circulated an initial draft of the merger agreement to BTP and its counsel.
On December 11, 2006, our management, Manatt, Lazard and BTP and its counsel met to negotiate a proposed form of merger agreement, including preliminary discussions regarding a $132 million all-cash offer for our company. The negotiations also addressed the form and substance of an expense reimbursement agreement and the circumstances under which we would be required to reimburse BTP for certain of its expenses in connection with its evaluation of a potential transaction with us.
At a meeting of our board of directors on December 11, 2006, our board, together with Manatt and Lazard, discussed the status and progress of negotiations with BTP, including the proposed expense reimbursement letter and BTP’s current proposal to acquire us. After that discussion, our board authorized the execution of the expense reimbursement letter and authorized our management to continue negotiations with BTP.
Between December 11, 2006 and January 5, 2007, we negotiated the specific terms and conditions of the expense reimbursement letter. On January 5, 2007, we executed an expense reimbursement letter with BTP, pursuant to which we agreed, subject to certain conditions, to reimburse BTP for out-of-pocket expenses reasonably incurred by it (up to a maximum of $800,000) in connection with or related to its due diligence review and its evaluation and consideration of a transaction with us.

 

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At a meeting of our board of directors on January 3, 2007, our board reviewed the status of discussions with BTP. At the meeting, Lazard informed the board that BTP had indicated that it did not want its proposal being used as a “stalking horse” for other offers. The board nonetheless believed it appropriate for other potential alternative transaction partners to be solicited and requested that Lazard continue to do so.
Following the January 3, 2007 meeting, in accordance with the board’s directives, Lazard continued to approach parties about their interest in engaging in a transaction with our company, and we continued to provide other parties which had signed confidentiality agreements access to our data room. None of these parties ultimately submitted any proposal for a transaction with the company.
At a meeting of our board of directors on February 23, 2007, our board discussed the possibility of granting BTP an exclusive arrangement for two weeks as opposed to extending the term of the expense reimbursement letter. At the meeting, management and Lazard also informed the board that BTP had lowered its initial price range approximately $4 million as a result of its continued due diligence and evaluation of our company. Following these discussions, the board approved the execution of an agreement pursuant to which BTP would be granted exclusivity for two weeks. Later in the day on February 23, 2007, we executed an agreement with BTP, pursuant to which we granted BTP the sole and exclusive negotiating and due diligence right with respect to a potential transaction with our company until March 9, 2007. In connection with the execution of the exclusivity agreement, we and BTP agreed to terminate the January 5 expense reimbursement agreement.
On March 8, 2007, we executed an agreement with BTP, pursuant to which we agreed to reimburse BTP for out-of-pocket expenses reasonably incurred by it (up to a maximum of $500,000) in connection with or related to its due diligence review, its evaluation and consideration of a transaction with us and the procurement of financing commitments. Pursuant to the agreement, our obligation to reimburse BTP was conditioned on BTP obtaining customary written financing commitments of not less than $128 million from financially qualified parties. In addition, we and BTP agreed to terminate the February 23 exclusivity agreement. The termination of the exclusivity agreement allowed our company and its advisors to contact other parties and determine their level of interest in consummating a transaction with us, which we did.
On March 8, 2007, BTP provided us with an equity commitment letter executed by its principal affiliates. The letter confirmed commitments to provide BTP equity financing equal to the aggregate merger consideration less the amount of any debt financing, subject to certain stated conditions. The letter also stated that the equity commitment was conditioned on the execution of a merger agreement on or before March 16, 2007. On March 15, 2007, at the request of our board, BTP delivered to us an amended equity commitment letter extending this deadline to March 30, 2007.
On March 12, 2007, BTP provided us with an executed debt commitment letter in an aggregate principal amount of $60 million. The debt commitment letter was subject to customary conditions, including that the borrowing had to occur prior to April 27, 2007. On March 28, 2007, at the request of our board, BTP delivered to us an amended debt commitment letter extending this deadline to May 26, 2007.

 

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On March 14, 2007, the board held a meeting to receive a status update on negotiations with BTP.
On March 29, 2007, our board of directors held a meeting to consider whether to approve the acquisition of our company by BTP. Manatt reviewed the legal aspects of the merger, the terms and provisions of the merger agreement, and the directors’ legal and fiduciary duties in connection with an extraordinary transaction such as the proposed merger. Lazard provided an overview of the strategic review process noting that 39 parties, including both potential strategic and financial parties, had been contacted to solicit interest in a possible transaction with us. Of these parties, 13 accessed our online data room and three strategic parties, BTP, Lions Gate and Company A, ultimately submitted formal acquisition proposals to us.
Lazard then reviewed with our board of directors Lazard’s financial analysis of the $4.40 original per share merger consideration and rendered to our board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion, dated March 29, 2007, to the effect that, as of that date and based upon and subject to the assumptions, factors and qualifications set forth in its opinion, the $4.40 original per share merger consideration payable to holders of our common stock pursuant to the original merger agreement was fair, from a financial point of view, to such holders.
Our board of directors then requested that Raymond James render an opinion as to whether the $4.40 original per share merger consideration provided for in the proposed merger with BTP was fair from a financial point of view to our stockholders. Raymond James delivered to our board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion, dated March 29, 2007, to the effect that, as of that date and based upon and subject to the assumptions, factors and qualifications set forth in its opinion, the original $4.40 per share merger consideration to be paid to holders of our common stock was fair, from a financial point of view, to such holders.
Following additional discussion and deliberation, our board unanimously approved the original merger agreement and the transactions contemplated by the original merger agreement and unanimously resolved to recommend that our stockholders vote in favor of adoption of the original merger agreement.
On March 29, 2007, after the closing of trading on NASDAQ, we executed the original merger agreement with BTP and issued a joint press release with BTP announcing the execution of the agreement.
Pursuant to Section 5.17 of the original merger agreement, we agreed to permit BTP to elect to change the method of effecting the acquisition of our company to maintain the listing of our common stock on NASDAQ and the registration of our common stock under the Exchange Act after the closing of the merger. However, we insisted and BTP agreed that any change to the structure of the transaction could not (i) reduce the aggregate cash consideration to be paid to our stockholders, (ii) change the federal income tax treatment of the transaction in a manner adverse to our stockholders or (iii) prevent, or impede in any material respect or delay in any material respect the consummation of the merger. Shortly after execution of the original merger agreement, BTP notified us of its desire to modify the structure of the transaction pursuant to Section 5.17.

 

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Subsequently, we and BTP engaged in negotiations to structure and arrive at the definitive terms and conditions of the amended merger agreement reflecting the alternative transaction structure. During these negotiations, BTP requested and we agreed to add two elements to the transaction: (i) pursuant to the amended merger agreement, the right for BTP, at its election, to receive warrants to purchase 8,500,000 shares of common stock in Image as the company surviving the merger; and (ii) as a condition to the merger, we would have to execute and deliver to BTP the securities purchase agreement.
The board of directors met several times during the three-month period subsequent to the execution of the original merger agreement to receive updates as to the status of the negotiations of the alternative transaction, including on May 10, 2007, May 14, 2007, May 21, 2007, May 25, 2007 and June 19, 2007. At each of these meetings, the Board discussed and weighed the potential benefits to our stockholders from the alternative structure with the length of time necessary to negotiate the alternative structure.
On June 19, 2007, our board of directors convened a meeting to consider whether to approve the acquisition of our company by BTP through the alternative structure. At this meeting, among other things, Manatt reviewed the legal aspects of the merger, the terms and provisions of the merger agreement, and the directors’ legal and fiduciary duties in connection with the alternative transaction.
Following additional discussion and deliberation, our board unanimously approved the amended merger agreement and the transactions contemplated by the amended merger agreement and unanimously resolved to recommend that our stockholders vote to adopt the amended merger agreement.
On June 27, 2007, after the closing of trading on NASDAQ, we executed the amended merger agreement with BTP and issued a joint press release with BTP announcing the execution of the amended merger agreement.
In connection with the amended merger agreement, our board of directors decided not to request that Lazard or Raymond James update their respective opinions, each dated March 29, 2007, delivered to our board of directors at the time the original merger agreement was signed, noting that Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, but also will retain common shares in Image as the company surviving the merger.
On September 7, 2007, we and BTP agreed to extend the outside closing date from September 29, 2007, to October 31, 2007.

 

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Recommendation of Our Board of Directors; Reasons for the Merger
After careful consideration, our board of directors unanimously:
    determined that the amended merger agreement and the transactions contemplated thereby (including the merger) are fair to and in the best interests of Image and its stockholders;
    approved, authorized, adopted and declared the advisability of the amended merger agreement and the transactions contemplated thereby (including the merger);
    approved BTP’s and the stockholders party thereto entering into the support agreements, including for purposes of Section 203 of the DGCL;
    approved an amendment to our stockholder rights plan to render it inapplicable to the execution, delivery and performance of the amended merger agreement, the support agreements and the securities purchase agreement;
    directed that the amended merger agreement be submitted for consideration by our stockholders; and
    recommended that our stockholders vote FOR adoption of the amended merger agreement.
The board of directors analyzed the value of the amended merger agreement to Image’s stockholders based on the value of the cash consideration payable to our stockholders pursuant to the merger. While the board of directors recognizes that the amended merger agreement provides our stockholders with the opportunity to participate in any post-closing growth of the company or stock price appreciation in connection with the shares of our common stock that they retain and considered this fact in evaluating the merger and in negotiating the amended merger agreement with BTP, the board did not evaluate the potential value of the shares of Image common stock each stockholder will retain after the closing of the merger. The Board does expect, however, that the retained shares might have some value.
In the course of evaluating the terms of the merger pursuant to the amended merger agreement, our board of directors consulted with management and our legal and financial advisors and, in reaching its decision considered the following material factors, each of which it believed supported its approval of the amended merger agreement:
    the evaluation we conducted with the assistance of management and our legal and financial advisors to explore potential alternatives to a sale, including continuing to operate as a stand-alone company, as well as the risks and uncertainties associated with those alternatives;
    the fact that our stockholders would receive the same aggregate cash consideration under the amended merger agreement as our stockholders would have received under the original merger agreement, and the board’s belief that such merger consideration represented a fair price for 100% of the shares of our common stock;

 

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    general industry, economic and market conditions, both on an historical and on a prospective basis;
    the fact that following the provision of due diligence to, and discussions with, certain other likely purchasers, none of such persons gave us any expression of interest or submitted any proposal with respect to a strategic transaction at a price comparable to or higher than the BTP merger price;
    the current and historical market prices of our common stock, including the market price of our common stock relative to those of other industry participants and general market indices;
    the uncertainty surrounding Image’s future as an independent supplier of DVD programming due to retail buyer insecurity;
    the opportunity for our stockholders to realize substantial value and liquidity based on the receipt of $4.68 in cash per share for 94% of the shares of our common stock they hold immediately prior to the merger, representing a 35.26% premium over the market price at which our common stock traded on the last trading day prior to the announcement of the original merger agreement;
    the opinion of Lazard, and its financial presentation, dated March 29, 2007, to the Image board of directors as to the fairness, from a financial point of view and as of the date of the opinion, of the $4.40 original per share merger consideration payable to holders of Image common stock pursuant to the original merger agreement (see “The Merger — Opinion of Lazard Frères & Co. LLC”);
    the opinion of Raymond James, including its financial presentation, dated March 29, 2007, to the Image board of directors that the $4.40 original per share merger consideration to be received by the shareholders pursuant to the original merger agreement was fair, from a financial point of view, to such shareholders (see “The Merger — Opinion of Raymond James & Associates, Inc.”);
    the financial and other terms and conditions of the amended merger agreement as reviewed by our board of directors (see “The Amended and Restated Merger Agreement”) and the fact that such terms and conditions were the product of arm’s-length negotiations between the parties;
    the fact that a significant portion of the merger consideration is cash, which allows our stockholders to immediately realize a fair value, in cash, for their investment and provides our stockholders certainty of value for their shares;
    the board’s understanding of the current state of the capital markets, the terms of BTP’s financing commitments and the likelihood that BTP could successfully obtain the financing required to fully fund the payment of the merger consideration, and the board’s understanding of the proposed debt and equity financing arrangements for the merger;

 

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    the fact that, subject to compliance with the terms and conditions of the amended merger agreement, we are permitted to terminate the amended merger agreement, prior to the adoption of the amended merger agreement by our stockholders, in order to approve an alternative transaction proposed by a third party that is a “superior proposal,” upon the payment to BTP of a fiduciary fee of $3.2 million and reimbursement of expenses up to $1 million (see “The Amended and Restated Merger Agreement—Termination” and “The Amended and Restated Merger Agreement—Fiduciary Fee and Business Interruption Fee”);
    the fact that the aggregate termination fee and expense reimbursement we might have to pay under the amended merger agreement represents approximately 3.5% of the total value of the transaction, which is within the customary percentage range of such payments for transactions such as the merger (see “The Amended and Restated Merger Agreement—Fiduciary Fee and Business Interruption Fee”);
    the availability of appraisal rights to holders of our common stock who comply with all of the required procedures under Delaware law, which allows such holders to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery (see “Appraisal Rights” and Annex L);
    the commitment made by BTP to maintain compensation, employee benefit plans and arrangements and severance pay and benefits for those employees who remain employed with the surviving company that are, in the aggregate, no less favorable than those provided immediately prior to the merger for at least a year from the effective time, which will encourage our employees to remain with us between signing of the amended merger agreement and the effective time of the merger, ensure a smooth transition and maintain Image as an active and on-going business for its stockholders in the event the merger is not consummated;
    the fact that if we terminate the amended merger agreement due to BTP’s material breach or failure to perform any of its representations, warranties or covenants contained in the amended merger agreement, which breach reasonably cannot be cured by the date of the completion of the merger or an additional 60 day extension period, BTP would be required to pay us a $4.2 million business interruption fee and that such fee is guaranteed by BTP’s affiliates, R2D2 LLC and CT1 Holdings LLC; and
    the fact that all of our stockholders would have the opportunity to participate in the post-closing equity of Image and, accordingly have the opportunity to benefit from any potential future increase in value of an investment in Image’s business.

 

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Our board of directors also considered a variety of risks and other potentially negative factors concerning the amended merger agreement and the merger, including the following:
    the risk that the merger may not be completed in a timely manner or at all, including the risk that the merger will not occur if the financing contemplated by the debt financing commitment letter is not obtained;
    the fact that the cash consideration will be taxable to our stockholders for U.S. federal income tax purposes;
    the risks and costs to us if the merger does not close, including the diversion of management and employee attention, potential employee attrition, the potential effect on business and customer relationships, the legal costs incurred in connection with the merger and the possibility of a business interruption fee;
    the fact that Image entered into the amended merger agreement with newly formed entities with essentially no assets, and that Image’s remedy in connection with a breach of the amended merger agreement by BTP or IEAC, even if deliberate or willful, is limited to a business interruption fee of $4.2 million;
    the restrictions on the conduct of our business prior to the completion of the merger, requiring us to conduct our business only in the ordinary course, subject to specific limitations or BTP’s consent, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger;
    the interests of our executive officers and directors in the merger (see “Interests of Certain of Our Directors and Officers”);
    the restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving us, and the requirement that we pay BTP a fiduciary fee of $3.2 million and reimbursement of expenses up to $1 million in order for the board of directors to accept a superior proposal; and
    the potentially significant dilution of the equity ownership of Image stockholders who retained shares after the merger, as a result of the issuance of up to 21,000,000 shares of common stock, upon conversion of the convertible preferred stock and the exercise by BTP of any warrants.
The foregoing discussion summarizes the material factors considered by our board of directors in evaluating the merger. After considering these factors, as well as others, the board of directors concluded that the positive factors supporting approval of the amended merger agreement and the merger outweighed the negative factors. In view of the wide variety of factors considered by our board of directors, our board of directors did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of our board of directors may have assigned different weights to different factors.

 

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Opinion of Lazard Frères & Co. LLC
Lazard is acting as financial advisor to Image in connection with the merger. As part of that engagement, the Image board of directors requested that Lazard evaluate the fairness, from a financial point of view, to holders of Image common stock of the consideration to be paid to such holders in the merger. At a meeting of the Image board of directors held on March 29, 2007 to evaluate the merger, Lazard delivered to the Image board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion, dated March 29, 2007, to the effect that, as of that date and based upon and subject to certain assumptions, factors and qualifications set forth therein, the $4.40 original per share merger consideration payable to holders of Image common stock pursuant to the original merger agreement was fair, from a financial point of view, to such holders.
Lazard was not requested to, and did not, render to the Image board of directors an opinion in connection with the amended merger agreement, dated as of June 27, 2007. Our board of directors did not request such opinion noting that Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, and will also retain common shares of Image as the company surviving the merger. Accordingly, the revised terms of the merger were deemed by our Board to be no worse than the original terms of the merger from a financial point of view. Lazard’s opinion, dated March 29, 2007, does not take into account any events or developments after the date of such opinion, including any modification to the proposed merger or the per share merger consideration.
The full text of Lazard’s opinion is attached as Annex J to this proxy statement and is incorporated into this proxy statement by reference. The description of Lazard’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of Lazard’s opinion. Holders of Image common stock are encouraged to read Lazard’s opinion carefully and in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Lazard in connection with its opinion. Lazard’s opinion was delivered to the Image board of directors in connection with its evaluation of the $4.40 original per share merger consideration payable pursuant to the original merger agreement and only addresses the fairness of the $4.40 original per share merger consideration from a financial point of view. Lazard’s opinion does not address the merits of the underlying decision by Image to engage in the merger or the relative merits of the merger as compared to any other transaction or business strategy in which Image might engage and is not intended to, and does not, constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the merger or any other transaction or business strategy in which Image might engage. Lazard’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, March 29, 2007, the date of its opinion. Lazard assumes no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of the opinion.

 

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In connection with its opinion, Lazard:
    reviewed the financial terms and conditions of the original merger agreement;
    analyzed publicly available historical business and financial information relating to Image;
    reviewed various financial forecasts and other data provided to Lazard by Image relating to Image’s business;
    held discussions with members of Image’s senior management with respect to Image’s business and prospects;
    reviewed public information with respect to other companies in lines of business Lazard believed to be generally comparable to Image’s business;
    reviewed the financial and other transaction terms of certain business combination transactions involving companies in lines of business Lazard believed to be generally comparable to Image’s business;
    reviewed historical stock prices and trading volumes of Image common stock; and
    conducted other financial studies, analyses and investigations as Lazard deemed appropriate.
Lazard relied on the accuracy and completeness of the foregoing information and did not assume any responsibility for any independent verification of such information. Lazard did not conduct any independent valuation or appraisal of any assets or liabilities (contingent or otherwise) of Image, or concerning the solvency or fair value of Image, and Lazard was not furnished with any such valuation or appraisal. With respect to financial forecasts that Lazard reviewed, Lazard assumed, at Image’s direction, that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of Image’s management as to Image’s future financial performance. Lazard assumed no responsibility for and expressed no view as to such forecasts or projections or the assumptions on which they were based.
Image advised Lazard, and Lazard assumed, that the merger would be consummated on the terms described in the original merger agreement, without any waiver or modification of any material terms or conditions by Image, BTP or IEAC. Lazard also assumed that obtaining the necessary regulatory or third party approvals and consents for the merger would not have an adverse effect on Image or the merger in any respect material to Lazard’s opinion. Lazard further assumed that the representations and warranties of Image, BTP and IEAC contained in the original merger agreement were true and complete in all material respects. Lazard expressed no opinion as to any tax or other consequences that might result from the merger, and Lazard’s opinion did not address any legal, tax, regulatory or accounting matters, as to which Lazard understood that Image obtained such advice as it deemed necessary from qualified professionals. Except as described above, Image imposed no other instructions or limitations on Lazard with respect to the investigations made or the procedures followed by Lazard in rendering its opinion.

 

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The following is a brief summary of the material financial and comparative analyses that Lazard deemed to be appropriate for this type of transaction and that were reviewed with the Image board of directors by Lazard in connection with rendering its opinion. The summary of Lazard’s analyses described below is not a complete description of the analyses underlying Lazard’s opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances, and, therefore, is not readily susceptible to summary description. In arriving at its opinion, Lazard considered the results of all the analyses and did not draw, in isolation, conclusions from or with regard to any factor or analysis considered by it. Rather, Lazard made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses.
In its analyses, Lazard considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Image. No company, business or transaction used in Lazard’s analyses as a comparison is identical to Image or the merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or businesses analyzed. The estimates contained in Lazard’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Lazard’s analyses are inherently subject to substantial uncertainty.
The financial analyses summarized below include information presented in tabular format. In order to fully understand Lazard’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Lazard’s financial analyses.
Discounted Cash Flow Analysis
Lazard performed a discounted cash flow analysis of Image to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that Image could generate during Image’s fiscal years ending March 31, 2008 through March 31, 2012 utilizing internal estimates of Image’s management, before taking into account Image’s distribution arrangement with Relativity Media, LLC. Lazard calculated estimated terminal values for Image by applying a range of earnings before interest, taxes, depreciation and amortization, referred to as EBITDA, terminal value multiples of 8.0x to 10.0x to Image’s fiscal year 2012 estimated EBITDA. The unlevered, after-tax free cash flows and terminal values were discounted to present value using

 

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discount rates ranging from 15.0% to 17.0% and then adjusted to reflect the estimated present value of Image’s net operating losses anticipated by Image’s management to be utilized by Image. This analysis indicated the following implied per share equity reference range for Image, as compared to the $4.40 original per share merger consideration:
     
Implied Per Share   Original Per Share Merger
Equity Reference Range for Image   Consideration
$2.96 — $3.92   $4.40
Lazard also performed a discounted cash flow analysis of Image as described above based on the standalone unlevered, after-tax free cash flows that Image could generate during calendar years 2007 through 2018 utilizing internal estimates of Image’s management, after taking into account Image’s distribution arrangement with Relativity Media, LLC under three cases, referred to, respectively, as the “low units case,” the “moderate units case” and the “high units case.” Each case assumed that three titles would be released by Relativity Media to Image in calendar year 2007 and seven titles would be released annually thereafter until calendar 2016 and reflected varying assumptions as to the average units sold per title during the first year of release. This analysis indicated the following implied per share equity reference ranges for Image under the low units case, the moderate units case and the high units case, as compared to the $4.40 original per share merger consideration:
             
Implied Per Share Equity    
Reference Ranges for Image Based on:   Original Per Share Merger
Low Units Case   Moderate Units Case   High Units Case   Consideration
$3.08 — $4.00   $3.43 — $4.36   $4.12 — $5.06   $4.40
Selected Precedent Transactions Analysis
Lazard reviewed, to the extent publicly available, financial information relating to the following 17 selected transactions involving companies or businesses in the entertainment production and distribution industry:
         
Announcement        
Date   Acquiror   Target/Seller
•    02/14/07
 
•    Marwyn Investment
Management LLP
 
•    Entertainment One Income
Fund
•    01/10/07
 
•    CanWest Global
Communications Corp. and
GS Capital Partners
 
•    Alliance Atlantis
Communications Inc.
•    05/16/06
  •    Liberty Media Corporation   •    Starz Entertainment, LLC
•    03/29/06
  •    Qualia Capital LLC  
•    Rysher Entertainment
Inc./Gaylord Films Inc.
•    03/17/06
 
•    Soros Strategic Partners LP
and Dune Entertainment II LLC
  •    DreamWorks Live-Action LLC
•    12/11/05
 
•    Paramount Pictures
Corporation
  •    DreamWorks SKG

 

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Announcement        
Date   Acquiror   Target/Seller
•    10/21/05
  •    Handleman Company   •    Crave Entertainment Group Inc.
•    05/04/05
 
•    Entertainment One Income Fund
  •    KOCH Entertainment Inc.
•    03/21/05
 
•    Apax Partners Worldwide LLC
(Sunshine Acquisition Limited)
  •    HIT Entertainment Plc
•    01/10/05
  •    Navarre Corporation   •    FUNimation Productions, Ltd.
•    11/18/04
  •    Source Interlink Companies, Inc.   •    Alliance Entertainment Corp.
•    09/13/04
  •    Investor Group   •    Metro-Goldwyn-Mayer Inc
•    10/27/03
  •    Lions Gate Entertainment Corp.   •    Artisan Entertainment Inc.
•    10/08/03
  •    General Electric Company  
•    Vivendi Universal Entertainment LLP
•    06/25/02
  •    HIT Entertainment Plc   •    Gullane Entertainment, Inc.
•    04/12/01
  •    Crown Media Holdings, Inc.   •    Hallmark Entertainment, Inc.
•    09/18/00
  •    Corus Entertainment Inc.   •    Nelvana Limited
Lazard reviewed transaction values, calculated as the equity value implied for the target company based on the consideration payable in the selected transaction, plus debt, minority interest and preferred stock, less cash and cash equivalents, as multiples of latest 12 months estimated revenue and EBITDA, with particular focus on the following transactions, each of which involved a target company primarily engaged in distribution: Marwyn Investment Management LLP/Entertainment One Income Fund, Qualia Capital LLC/Rysher Entertainment Inc./Gaylord Films Inc., Handleman Company/Crave Entertainment Group Inc., Entertainment One Income Fund/KOCH Entertainment Inc., Navarre Corporation/FUNimation Productions, Ltd. and Lions Gate Entertainment Corp./Artisan Entertainment Inc. Lazard then applied a range of selected multiples of latest 12 months revenue and EBITDA derived from these selected transactions to Image’s fiscal year 2007 estimated revenue and fiscal year 2008 estimated EBITDA. Financial data of the selected transactions were based on publicly available information. Financial data of Image were based on internal estimates of Image’s management. This analysis indicated the following implied per share equity reference ranges for Image based on the financial metrics referred to above, as compared to the $4.40 original per share merger consideration:
         
Implied Per Share Equity    
Reference Ranges for Image Based on:   Original Per Share Merger
Fiscal Year 2007 Revenue   Fiscal Year 2008 EBITDA   Consideration
$1.03 — $1.78   $0.60 — $1.12   $4.40

 

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Selected Public Companies Analysis
Lazard reviewed publicly available financial and stock market information for the following seven publicly traded companies in the entertainment production and distribution industry:
    4Kids Entertainment, Inc.
 
    Genius Products, Inc.
 
    Handleman Company
 
    Lions Gate Entertainment Corp.
 
    Navarre Corporation
 
    Source Interlink Companies, Inc.
 
    World Wrestling Entertainment, Inc.
Lazard reviewed, among other things, enterprise values of the selected companies, calculated as market value based on closing stock prices on March 27, 2007, plus debt, minority interest and preferred stock, less cash and cash equivalents, as multiples of estimated revenue and EBITDA for the 12-month period ending March 31, 2008. Lazard then applied a range of selected multiples of estimated revenue and EBITDA for the 12-month period ending March 31, 2008 derived from the selected companies to Image’s fiscal year 2008 estimated revenue and EBITDA. Financial data of the selected companies were based on publicly available research analysts’ estimates and other publicly available information. Financial data of Image were based on internal estimates of Image’s management. This analysis indicated the following implied per share equity reference ranges for Image based on the financial metrics referred to above, as compared to the $4.40 original per share merger consideration:
         
Implied Per Share Equity    
Reference Ranges for Image Based on:   Original Per Share Merger
Fiscal Year 2008 Revenue   Fiscal Year 2008 EBITDA   Consideration
$2.64 — $3.66   $1.50 — $2.11   $4.40
Miscellaneous
In connection with Lazard’s services as Image’s financial advisor, Image has agreed to pay to Lazard an aggregate fee currently estimated to be approximately $1.9 million, portions of which were payable upon Lazard’s engagement and the rendering of Lazard’s opinion and a substantial portion of which is contingent upon the closing of the merger. Image also has agreed to reimburse Lazard for its expenses (including attorneys’ fees) and to indemnify Lazard and certain related parties against certain liabilities that may arise out of the rendering of its advice, including certain liabilities under U.S. federal securities laws.
Lazard, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, leveraged buyouts, and valuations for estate, corporate and other purposes. In addition, in the ordinary course of their respective businesses, affiliates of Lazard and LFCM Holdings LLC (an entity indirectly owned in large part by managing directors of Lazard) may actively trade securities of Image for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities.

 

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Lazard is an internationally recognized investment banking firm providing a full range of financial advisory and securities services. Lazard was selected to act as Image’s financial advisor because of its qualifications, experience and reputation in investment banking and mergers and acquisitions.
Lazard prepared the above analyses for the purpose of providing an opinion to the Image board of directors as to the fairness, from a financial point of view, to holders of Image common stock of the merger consideration to be paid to such holders. Lazard did not recommend any specific merger consideration to the Image board of directors or that any given merger consideration constituted the only appropriate consideration for the merger.
The opinion and financial analyses of Lazard were only one of many factors taken into consideration by the Image board of directors in its evaluation of the merger. Consequently, the analyses described above should not be viewed as determinative of the views of the Image board of directors or Image’s management with respect to the $4.40 original per share merger consideration or as to whether the Image board of directors would have been willing to determine that a different merger consideration was fair.
Opinion of Raymond James & Associates, Inc.
Image retained Raymond James as financial advisor on November 30, 2006. In connection with that engagement, our board of directors requested that Raymond James evaluate the fairness, from a financial point of view, to the holders of our outstanding common stock of the consideration to be received by such holders pursuant and subject to the terms of the original merger agreement.
At the March 29, 2007 meeting of the our board of directors, Raymond James gave its opinion that, as of such date and based upon and subject to various qualifications and assumptions described with respect to its opinion, the consideration to be received by the holders of Image’s outstanding common stock pursuant and subject to the terms of the original merger agreement was fair, from a financial point of view, to such holders.
Raymond James was not requested to, and did not, render to the Image board of directors an opinion in connection with the amended merger agreement, dated as of June 27, 2007. Our board of directors did not request such opinion noting that Image stockholders will receive approximately the same aggregate cash consideration as provided under the original merger agreement, and will also retain common shares of Image as the company surviving the merger. Accordingly, the revised terms of the merger were deemed by our Board to be no worse than the original terms of the merger from a financial point of view. Raymond James’s opinion, dated March 29, 2007, does not take into account any events or developments after the date of such opinion, including any modification to the proposed merger or the per share merger consideration.

 

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The full text of the written opinion of Raymond James, dated March 29, 2007, which sets forth assumptions made, matters considered, and limits on the scope of review undertaken, is attached as Annex K to this proxy statement. The summary of the opinion of Raymond James set forth in this document is qualified in its entirety by reference to the full text of such opinion.
Holders of our common stock are urged to read this opinion in its entirety. Raymond James’s opinion, which is addressed to the board of directors, is directed only to the fairness, from a financial point of view, of the original merger consideration to be received by holders of our common stock. Raymond James’s opinion does not constitute a recommendation to any holder of Image’s common stock as to how such stockholder should vote at the special meeting of Image stockholders and does not address any other aspect of the proposed merger or any related transaction.
In connection with rendering its opinion, Raymond James, among other things:
    reviewed the financial terms and conditions of the merger as stated in the original merger agreement;
 
    reviewed Image’s annual reports to stockholders filed on Form 10-K of Image for the three fiscal years ended March 31, 2006;
 
    reviewed Image’s quarterly reports filed on Form 10-Q for the three fiscal quarters ended June 30, 2006, September 30, 2006 and December 31, 2006;
 
    reviewed other Image financial and operating information requested from and/or provided by Image;
 
    reviewed certain other publicly available information on Image;
 
    met with and discussed with members of the senior management of Image certain information relating to the aforementioned and any other matters which Raymond James deemed relevant to its inquiry;
 
    reviewed and discussed with senior management of Image the historical and anticipated future financial performance of Image, including the review of forecasts prepared by senior management of Image;
 
    reviewed the historical stock price and trading activity for the shares of Image’s common stock;
 
    compared financial and stock market information for Image with similar information for comparable companies with publicly traded equity securities;

 

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    reviewed the financial terms and conditions of certain recent business combinations involving companies in businesses comparable to those of Image; and
 
    performed such other financial analyses and studies, and considered such other factors, as Raymond James considered appropriate.
In connection with its review, Raymond James assumed and relied upon the accuracy and completeness of all information supplied or otherwise made available to Raymond James by Image, IEAC, BTP or any other party, and did not undertake any duty or responsibility to verify independently any of such information. Raymond James has not made or obtained an independent appraisal of the assets or liabilities (contingent or otherwise) of Image. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Raymond James, Raymond James assumed that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management, and relied upon each party to advise Raymond James promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.
In rendering its opinion, Raymond James assumed that the merger would be consummated on the terms described in the original merger agreement. Furthermore, Raymond James assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the original merger agreement were true and correct, that each party would perform all of the covenants and agreements required to be performed by it under the original merger agreement and that all conditions to the consummation of the merger as contemplated by the original merger agreement would be satisfied without being waived. Raymond James also assumed that all material governmental, regulatory or other consents and approvals would be obtained and that, in the course of obtaining any necessary governmental, regulatory or other consents and approvals, or any amendments, modifications or waivers to any documents to which Image is a party, as contemplated by the original merger agreement, no restrictions would be imposed or amendments, modifications or waivers made that would have any material adverse effect on Image. In its financial analyses, Raymond James assumed the consideration had a cash value of $4.40 per share of common stock. Raymond James expressed no opinion as to the underlying business decision to effect the merger, the structure or tax consequences of the original merger agreement, or the availability or advisability of any alternatives to the merger. In the capacity of rendering the opinion, Raymond James reviewed the terms of the original merger agreement and offered no judgment as to the negotiations resulting in such terms.
In conducting its investigation and analyses and in arriving at its opinion, Raymond James took into account such accepted financial and investment banking procedures and considerations as it deemed relevant, including the review of: (i) historical and projected revenues, operating earnings, net income and capitalization of Image and certain other publicly held companies in businesses Raymond James believed to be comparable to Image; (ii) the current and projected financial position and results of operations of Image; (iii) the historical market prices and trading activity of the common stock of Image; (iv) financial and operating information concerning selected business combinations which Raymond James deemed comparable in whole or in part; and (v) the general condition of the securities markets.

 

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The following summarizes the material financial analyses presented by Raymond James to the Image board of directors at its meeting on March 29, 2007, which material was considered by Raymond James in rendering the opinion described below. No company or transaction used in the analyses described below is directly comparable to Image, IEAC, or BTP, or the proposed merger.
Trading Analysis
Raymond James analyzed historical closing prices of Image and compared them to the value of the proposed consideration. The results of this analysis are summarized below:
                 
    Price Per     Implied  
    Share     Premium  
Original Consideration value
  $ 4.40        
Image closing stock price as of 3/28/07
    3.40       29.4 %
52-week high Image stock price (4/20/2006)
    3.95       11.4 %
52-week low Image stock price (3/8/2007)
    3.05       44.3 %
Comparable Company Analysis
Raymond James analyzed the relative valuation multiples of seven (7) publicly-traded entertainment distribution companies, including:
    Genius Products, Inc.
 
    Handleman Company
 
    4Kids Entertainment, Inc.
 
    Lions Gate Entertainment Corp.
 
    Navarre Corporation
 
    Rentrak Corporation
 
    Source Interlink Companies, Inc.
Raymond James calculated various financial multiples for each company, including (i) enterprise value (market value plus debt, less cash) compared to both revenue and earnings before interest, taxes, depreciation and amortization, or EBITDA, for the calendar years ending December 31, 2006 and 2007, referred to as CY06 and CY07, and (ii) equity value per share compared to earnings per share, using the actual results when available as well as Wall Street estimates for the selected companies for CY06 and CY07. The estimates published by Wall Street research analysts were not prepared in connection with the merger or at Raymond James’s request and may or may not prove to be accurate. Raymond James reviewed the minimum, mean, median and maximum relative valuation multiples of the selected public companies and compared them to corresponding valuation multiples for Image implied by the consideration. The results of the selected public companies analysis are summarized below:

 

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    Enterprise Value /     Enterprise Value /     Equity Value / Net  
    Revenue     EBITDA     Income  
    CY06E     CY07E     CY06E     CY07E     CY06E     CY07E  
Minimum
    0.2x       0.2x       4.4x       5.1x       10.9x       7.7x  
Mean
    0.9x       0.8x       11.8x       12.1x       20.1x       21.0x  
Median
    0.8x       0.9x       11.0x       12.3x       20.0x       21.2x  
Maximum
    1.9x       1.6x       20.9x       24.6x       29.7x       40.0x  
 
                                               
Original Consideration
    1.2x       1.1x       NM       25.4x       NM       NM  
Furthermore, Raymond James applied the minimum, mean, median and maximum relative valuation multiples for each of the metrics to Image’s actual and projected financial results and determined the implied equity price per share of Image common stock and then compared those implied equity values per share to the $4.40 original per share merger consideration. The results of this are summarized below:
                                                 
    Enterprise Value /     Enterprise Value /     Equity Value / Net  
    Revenue     EBITDA     Income  
    CY06E     CY07E     CY06E     CY07E     CY06E     CY07E  
Minimum
  $ 0.00     $ 0.00     $ 0.00     $ 0.13     $ 0.00     $ 0.00  
Mean
    2.98       3.07       0.00       1.59       0.00       0.00  
Median
    2.62       3.55       0.00       1.63       0.00       0.00  
Maximum
    7.39       6.64       0.00       4.23       0.00       0.00  
 
                                               
Original Consideration
  $ 4.40     $ 4.40     $ 4.40     $ 4.40     $ 4.40     $ 4.40  
In certain instances the implied equity price per share of Image Common stock was negative. For those calculations where the implied value was negative, Raymond James has denoted this as “$0.00” in the table above as the market value per share of Image’s common stock can not fall below $0.00 per share.
Precedent Transaction Analysis
Raymond James analyzed publicly available information relating to selected acquisitions of media distribution companies and prepared a summary of the relative valuation multiples paid in these transactions. The selected transactions used in the analysis included:
             
        Target   Acquiror
 
    Entertainment One Income Fund   Marwyn Investment Management LLP
 
    Allumination FilmWorks / UAV Corp Assets   ContentFilm PLC
 
    Baker & Taylor, Inc.   Castle Harlan, Inc.

 

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    Ventura Entertainment Enterprises   First Look Studios, Inc.
 
    Crave Entertainment Group   Handleman Company
 
    Redbus Film Distribution Limited   Lions Gate Entertainment Corp.
 
    Home Vision Entertainment (Public Media)   Image Entertainment, Inc.
 
    The Koch Entertainment Group of Companies, LLC   Entertainment One Income Fund
 
    FUNimation Productions, Ltd.   Navarre Corporation
 
    Alliance Entertainment Corp.   Source Interlink Companies, Inc.
 
    Anchor Bay Entertainment Corp.   IDT Entertainment, Inc.
 
    Integrity Media, Inc.   Investor Group
 
    BCI Eclipse, LLC   Navarre Corporation
 
    Artisan Entertainment, Inc.   Lions Gate Entertainment Corp.
Raymond James examined valuation multiples of transaction enterprise value compared to the target companies’ revenue and EBITDA, in each case for twelve months ended prior to announcement of the transaction, where such information was publicly available. Raymond James reviewed the minimum, mean, median and maximum relative valuation multiples of the selected transactions and compared them to corresponding valuation multiples for Image implied by the consideration. Furthermore, Raymond James applied the minimum, mean, median and maximum relative valuation multiples to Image’s actual last twelve months revenue and EBITDA to determine the implied equity price per share and then compared those implied equity values per share to the $4.40 original per share merger consideration. The results of the selected transactions analysis are summarized below:
                 
    Enterprise Value /        
    Last Twelve Months     Implied Equity Price  
    Revenue     Per Share  
Minimum
    0.2x     $ 0.00  
Mean
    0.7x       1.95  
Median
    0.5x       1.19  
Maximum
    1.8x       7.14  
 
               
Original Consideration
    1.2x     $ 4.40  
                 
    Enterprise Value /        
    Last Twelve Months     Implied Equity Price  
    EBITDA     Per Share  
Minimum
    2.2x     $ 0.00  
Mean
    5.9x       0.00  
Median
    6.0x       0.00  
Maximum
    11.2x       0.00  
 
               
Original Consideration
    NM     $ 4.40  

 

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In certain instances the implied equity price per share of Image common stock was negative. For those calculations where the implied value was negative, Raymond James has denoted this as “$0.00” in the tables above as the market value per share of Image’s common stock can not fall below $0.00 per share.
Premiums Paid Analysis
Raymond James analyzed the stock price premiums paid in 44 merger and acquisition transactions announced since January 2005 with enterprise values between $50 million and $250 million, excluding companies primarily engaged in real estate and financial services businesses. Raymond James measured each transaction price per share relative to each target’s closing price per share one day, one week and four weeks prior to announcement of the transaction. Raymond James compared the minimum, mean, median and maximum premiums paid from this set of transactions to the consideration expressed as a premium relative to the closing stock price of Image one day, one week and four weeks prior. The results of the transaction premium analysis are summarized below:
                         
    Implied Premium  
    1-day     1-week     4-week  
Minimum
    (8.6 )%     (8.6 )%     1.8 %
Mean
    35.5 %     35.6 %     40.7 %
Median
    31.2 %     29.4 %     34.9 %
Maximum
    106.2 %     102.7 %     114.1 %
 
                       
Original Consideration
  $ 4.40     $ 4.40     $ 4.40  
Image closing stock price per share
  $ 3.40     $ 3.22     $ 3.28  
Implied Transaction premium
    29.4 %     36.7 %     34.2 %
Furthermore, Raymond James applied the minimum, mean, median and maximum premiums for each of the metrics to Images actual corresponding closing stock prices to determine the implied equity price per share and then compared those implied equity values per share to the $4.40 original per share merger consideration. The results of this are summarized below:
                         
    Implied Equity Price Per Share  
    1-day     1-week     4-week  
Minimum
  $ 3.11     $ 3.11     $ 3.46  
Mean
    4.61       4.61       4.78  
Median
    4.46       4.40       4.59  
Maximum
    7.01       6.89       7.28  
 
                       
Original Consideration
  $ 4.40     $ 4.40     $ 4.40  

 

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Discounted Cash Flow Analysis
Raymond James analyzed the discounted present value of Image’s projected free cash flows for the years ending March 31, 2007 through 2011 on a standalone basis. Raymond James used unleveraged free cash flows, defined as earnings before interest, after taxes, plus depreciation, plus amortization, less capital expenditures, less investment in working capital.
The discounted cash flow analysis was based on projections of the financial performance of Image that represented the best available estimates and judgment of management. Consistent with the periods included in the financial projections, Raymond James used fiscal year 2011 as the final year for the analysis and applied multiples, ranging from 8.0x to 10.0x, to fiscal 2011 EBITDA in order to derive a range of terminal values for Image in 2011.
The projected unleveraged free cash flows and terminal values were discounted using rates ranging from 13.0% to 16.0%, which reflected the weighted average after-tax cost of debt and equity capital associated with executing Image’s business plan. The resulting range of present enterprise values was adjusted by Image’s current capitalization and divided by the number of diluted shares outstanding in order to arrive at a range of present values per share. Raymond James reviewed the range of per share prices derived in the discounted cash flow analysis and compared them to the $4.40 original per share merger consideration. The results of the discounted cash flow analysis are summarized below:
         
    Equity Value/  
    Per Share  
Minimum
  $ 3.30  
Maximum
    4.63  
 
       
Original Consideration
  $ 4.40  
Additional Considerations
The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. Raymond James believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the analyses taken as a whole, would create an incomplete view of the process underlying the analyses set forth in its opinion. In addition, Raymond James considered the results of all such analyses and did not assign relative weights to any of the analyses, but rather made qualitative judgments as to significance and relevance of each analysis and factor, so the ranges of valuations resulting from any particular analysis described above should not be taken to be Raymond James’ view of the actual value of Image.

 

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In performing its analyses, Raymond James made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond the control of Image. The analyses performed by Raymond James are not necessarily indicative of actual values, trading values or actual future results which might be achieved, all of which may be significantly more or less favorable than suggested by such analyses. Such analyses were provided to the Image board of directors and were prepared solely as part of Raymond James’s analysis of the fairness, from a financial point of view, to the holders of Image’s common stock of the consideration to be received by such holders in connection with the proposed merger. The analyses do not purport to be appraisals or to reflect the prices at which companies may actually be sold, and such estimates are inherently subject to uncertainty. The opinion of Raymond James was one of many factors taken into consideration by the Image board of directors in making its determination to approve the merger. Consequently, the analyses described above should not be viewed as determinative of the Image board of directors’ or Image management’s opinion with respect to the value of Image. Image placed no limits on the scope of the analysis performed, or opinion expressed, by Raymond James.
Raymond James’s opinion was necessarily based upon market, economic, financial and other circumstances and conditions existing and disclosed to it on March 28, 2007, and any material change in such circumstances and conditions may affect Raymond James’s opinion, but Raymond James does not have any obligation to update, revise or reaffirm that opinion.
For services rendered in connection with the delivery of its opinion, Image paid Raymond James a fee of approximately $225,000 upon delivery of its opinion. Image also agreed to reimburse Raymond James for its expenses incurred in connection with its services, including the fees and expenses of its counsel, and will indemnify Raymond James against certain liabilities arising out of its engagement. In the past, Raymond James has performed investment banking services for Image for transactions unrelated to the proposed merger for which it has received customary fees.
Raymond James is actively involved in the investment banking business and regularly undertakes the valuation of investment securities in connection with public offerings, private placements, business combinations and similar transactions. In the ordinary course of business, Raymond James may trade in the securities of Image for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.
Projected Financial Information of the Company
We do not as a matter of course publicly disclose detailed forecasts or internal projections as to future revenues, earnings or financial condition (see the discussion regarding forward-looking statements based on estimates and assumptions under the heading “Cautionary Statements Regarding Forward-Looking Information”). However, we have set forth below a summary of the financial projections as of March 13, 2007 prepared by our senior management referenced in this proxy statement, as this information was made available to the board of directors, Lazard, Raymond James and potential purchasers, including BTP, and their respective financing sources prior to execution and delivery of the original merger agreement on March 29, 2007. This information was not prepared with a view towards public disclosure.

 

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This information was also not prepared with a view to complying with the published guidelines of the SEC regarding forecasts, and our management did not prepare the information in accordance with the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts. Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the prospective financial information contained in the projections, nor have they expressed any opinion or given any form of assurance on the financial projections or their achievability. The financial projections as of March 13, 2007, which were provided to Lazard and Raymond James and to potential purchasers prior to their submission of final bid proposals, included the following estimates of our future financial performance:

 

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Image Entertainment, Inc.
Statements of Earnings
Projections — Fiscal 2008 through 2012 (1)
(March 13, 2007)
                                         
    FY 2008     FY 2009     FY 2010     FY 2011     FY 2012  
 
                                       
NET REVENUES
  $ 113,921     $ 130,380     $ 151,317     $ 168,673     $ 185,284  
 
                                       
COST OF SALES
  $ 86,740     $ 96,581     $ 111,411     $ 123,115     $ 134,386  
 
                             
 
                                       
GROSS PROFIT
  $ 27,181     $ 33,800     $ 39,905     $ 45,557     $ 50,898  
 
    23.9 %     25.9 %     26.4 %     27.0 %     27.5 %
 
                             
 
                                       
OPERATING COSTS & EXPENSES:
                                       
 
                                       
Selling Expenses
  $ 9,894     $ 10,655     $ 11,620     $ 12,436     $ 13,223  
General & Administrative Expenses
  $ 13,539     $ 14,415     $ 15,945     $ 17,950     $ 20,335  
 
                             
 
                                       
 
  $ 23,433     $ 25,070     $ 27,565     $ 30,387     $ 33,558  
 
                             
 
                                       
EARNINGS FROM OPERATIONS
  $ 3,747     $ 8,730     $ 12,341     $ 15,171     $ 17,340  
 
                             
 
                                       
INTEREST EXPENSE (INCOME)
  $ 3,256     $ 3,078     $ 1,961     $ 778     $ (100 )
 
                             
 
                                       
EARNINGS BEFORE TAXES
  $ 492     $ 5,652     $ 10,380     $ 14,392     $ 17,440  
 
                                       
INCOME TAX EXPENSE
  $ 86     $ 170     $ 486     $ 5,166     $ 6,372  
 
                             
 
                                       
NET EARNINGS FROM CON’T
  $ 406     $ 5,483     $ 9,894     $ 9,226     $ 11,069  
 
                             
(1) The information contained in this table does give effect to the merger or the financing of the merger and provides only a summary example of certain estimates provided by management and excludes any financial impact from our distribution agreement with Relativity Media LLC.
The principal assumptions of our management in preparing the projected financial information described above included:
Assumed projected revenue growth from:
    the expected return of retail customers purchasing and inventory stocking levels of our content, after a completed corporate sale, due to retailer perceived stability at Image;

 

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    the use of new exclusive content providers and our continued exploitation of previously released exclusive content;
 
    digital delivery of our exclusive content to a growing base of retail customers and increasing customer acceptance of digital delivery;
 
    an increased focus on feature film DVD and digital distribution;
 
    a supply of significant content from The Criterion Collection resulting from their new agreements with major motion picture suppliers;
 
    our distribution of exclusive content on HD-DVD and Blu-ray disc; and
Assumed net operating expense reduction from:
    management’s initiatives to reduce operating costs; and
 
    closure of our warehouse and distribution center in Las Vegas, Nevada and our new fulfillment agreement with DVD manufacturer Sonopress LLC.
Although the above-described projected financial information was prepared in good faith by our management, no assurance can be made regarding future events and, accordingly, such information cannot be considered necessarily predictive of actual future operating results and should not be relied on as such. In the view of our management, the information in this table was prepared on a reasonable basis, reflecting the best currently available estimates and judgments, and reflected, to the best knowledge and belief of our management, our expected course of action and our expected future financial performance. However, these projections were based on numerous variables and assumptions which are inherently uncertain and which may not be within the control of management, including, without limitation, factors related to general economic, regulatory, and competitive conditions. Accordingly, actual results could vary materially from those set forth in such forecasts, projections and estimates. In addition, as discussed above, this information is subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and business developments. In light of those facts, this information is neither fact nor any guarantee of future performance and should not be relied upon as being necessarily indicative of actual future results, and you are cautioned not to place undue reliance on this information.
We have not updated or otherwise revised, and do not intend to update or otherwise revise, the projected financial information described above to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error. Furthermore, we have not updated or otherwise revised, and do not intend to update or otherwise revise, the projected financial information to reflect changes in general economic or industry conditions or the existence or occurrence of any circumstances of events subsequent to the preparation of such projected financial information. These projections are by their nature forward-looking information, and you should read the section entitled “Cautionary Statements Regarding Forward-Looking Information” beginning on page 1 of this proxy statement for additional information regarding the risks of unduly relying on such information.

 

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Certain Effects of the Merger
If the amended merger agreement is approved by our stockholders and the other conditions to closing are satisfied, including the approval of the securities issuance by our stockholders, IEAC will be merged with and into Image with Image being the surviving corporation. If the merger is completed, you will be entitled to receive $4.68 per share in cash, without interest, for 94% of the shares of our common stock that you own immediately prior to the merger, and you will retain the balance of your shares as common stock of Image as the company surviving the merger.
In the event that the amended merger agreement is not adopted by our stockholders, or if the securities issuance is not approved by our stockholders and we cannot execute and deliver the securities purchase agreement and thereby satisfy that condition to the merger, or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company. In addition, if the merger is not completed, we expect that management will operate the business in a manner similar to that in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities as they currently are, including, among other things, general industry, economic and market conditions. Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock.
In addition, even if you retain shares of Image common stock after the merger, the value and liquidity of your shares could be adversely affected if Image is unable to satisfy the continued listing standards of NASDAQ and the common stock is therefore delisted. In order to maintain a listing on NASDAQ Image’s common stock must continue to trade at prices above specified minimum dollar amounts, Image’s market capitalization must satisfy certain minimum standards, and other requirements under the NASDAQ Marketplace Rules must be met. There can be no assurance that these standards will continue to be met or that our common stock will be eligible to trade on NASDAQ or another securities exchange after the merger.
In the event the merger is not completed, our board of directors will continue to evaluate and review our business operations, properties and capitalization, among other things, and make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to maximize stockholder value. If the amended merger agreement is not adopted by our stockholders or if the merger is not consummated for any other reason, including if our stockholders do not approve the securities issuance (proposal 2), there can be no assurance that any other transaction acceptable to us will be offered, or that our business, prospects or results of operations will not be adversely impacted.

 

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Interests of Certain of Our Directors and Officers
In considering the recommendation of our board of directors to vote for the proposal to adopt the amended merger agreement, you should be aware that some of our directors and executive officers may have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below. Our board of directors was aware of these interests and considered them, among other matters, during its deliberations of the merits of the amended merger agreement and in determining to recommend to our stockholders that they vote to adopt the amended merger agreement and the other proposals to be brought before the special meeting.
Beneficial Ownership of Directors and Executive Officers
As of the close of business on September 6, 2007, the record date for the special meeting, our directors and executive officers beneficially owned and were entitled to vote approximately 4.11% of our total common stock outstanding on that date. These numbers do not give effect to outstanding stock options or restricted stock units, which are not entitled to vote at the special meeting.
Treatment of Outstanding Options and Restricted Stock Units
As of the date hereof, our directors and executive officers hold options to purchase approximately 1,250,000 shares of our common stock, of which options to purchase 1,060,000 shares of our common stock had an exercise price lower than the anticipated per share cash consideration for which compensation will be received. At the effective time of the merger, each option to purchase common stock outstanding immediately prior to the effective time will be cancelled and will be entitled to receive for such cancellation, consideration equal to an amount in cash, without interest, equal to the product obtained by multiplying the total number of shares of our common stock issuable upon the exercise in full of the option, by the excess, if any, of the per share cash consideration paid to the holders of our common stock (i.e. $4.68 per share) over the exercise price per share of common stock under such option.
As of the date hereof, there are approximately 15,920 restricted stock units held by our directors and executive officers. Under the terms of the amended merger agreement, at the effective time of the merger, each restricted stock unit that is then outstanding will be cancelled, and the holder of each such share of restricted stock will receive a cash payment equal to the product of the number of shares of our common stock subject to such restricted stock unit and the per share cash consideration (i.e. $4.68 per share) payable to the holders of our common stock in the merger. Such payment will be subject to the terms and conditions in our equity incentive plans, including the terms and conditions with respect to distributions and timing of payment under such plans and compliance with Section 409A of the Internal Revenue Code, or the Code.
The following table summarizes, as of the date hereof, for each of our directors and executive officers:
    the number of stock options held by such persons;

 

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    the aggregate cash payments that will be made in respect of such stock options upon consummation of the merger;
 
    the aggregate cash payment that will be made in respect of the restricted stock units upon consummation of the merger; and
 
    the total cash payment such person will receive in respect of all payments described in this table if the merger is consummated.
                                         
    Options     Stock Units        
            Cash             Cash     Total Cash  
Name   Number(1)     Payment(2)     Number     Payment(3)     Payment  
Directors
                                       
Ira Epstein
    55,000     $ 91,250.00       3,184     $ 14,901.12     $ 106,101.12  
Gary Haber
    15,000     $ 24,100.00       3,184     $ 14,901.12     $ 39,001.12  
M. Trevenen Huxley
    25,000     $ 30,750.00       3,184     $ 14,901.12     $ 45,651.12  
Robert McCloskey
    30,000     $ 41,500.00       3,184     $ 14,901.12     $ 56,401.12  
David Coriat(4)
    5,000     $ 8,700.00       3,184     $ 14,901.12     $ 23,601.12  
 
                                       
Executive Officers
                                       
Martin W. Greenwald
    419,500     $ 667,475.00                 $ 667,475.00  
David Borshell
    277,250     $ 452,282.50                 $ 452,282.50  
Jeff M. Framer
    233,250     $ 372,862.50                 $ 372,862.50  
 
(1)   Certain of the above officers and directors held options whose exercise price exceeded the merger consideration. Because such officer or director will not receive consideration for the shares subject to such options, they have been excluded from this table.
 
(2)   Illustrates the economic value of the options with exercise prices lower than $4.68 that will be cashed out in connection with the merger. Such amount is calculated for each individual by multiplying the number of shares underlying eligible options by the difference, if any, between $4.68 and the exercise price of each option.
 
(3)   Upon vesting, the holder of each restricted stock unit will be entitled to receive one share of common stock. The cash payment is calculated for each individual by multiplying the number of shares of our common stock subject to such restricted stock unit by $4.68.
 
(4)   Mr. Coriat is an officer and director of Standard Broadcasting Corp. Ltd. Standard Broadcasting Corp. Ltd. owns 1,542,283 shares of Image common stock and will receive $6,876,045.20 in cash for 94% of its shares of Image stock and retain the remaining 6% of its shares of Image common stock just like all other holders of Image common stock. As discussed above, Standard Broadcasting Corp. Ltd. has signed the amended support agreement with BTP as a stockholder of Image whereby Standard Broadcasting Corp. Ltd. has agreed to vote its shares in support of the amended merger agreement, subject to certain conditions.
Employment Agreements: Change in Control Provisions
In accordance with the terms of their employment agreements, as amended, certain of our executive officers may be entitled to severance payments and continued benefits that will be triggered if their employment is terminated under certain circumstances following a change in control.

 

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On April 1, 2004, the Company entered into an employment agreement with its Chairman of the Board and Chief Executive Officer, Martin W. Greenwald, which agreement was extended through March 31, 2008 by a letter from the board of directors dated October 18, 2005 and amended on March 29, 2007 and June 29, 2007. Under the agreement, Mr. Greenwald is entitled to receive his base salary and bonus, stock options and stock-based awards and the fringe benefits listed in the agreement through the expiration of the extended term of the agreement, or, if longer, for a period of one year following the termination of the agreement after a change in control. In addition, after the payments and benefits described above terminate, Mr. Greenwald is entitled to severance consisting of continuation of his base salary for an additional period of six months, any bonus compensation payable but not previously paid for any prior fiscal year, additional prorated bonus compensation for the greater of six months or the balance of the current fiscal year, and full insurance continuation for a period of six months, with COBRA entitlement thereafter, if permissible (or otherwise, six months insurance continuation under COBRA, payable by the Company for the first six months, and payable by Mr. Greenwald at his option for the balance of the COBRA term). The amendment dated June 29, 2007 extended the date by which Image must exercise the second one year option to extend the term of Mr. Greenwald’s employment for an additional year from June 15, 2007 to July 20, 2007. Upon the closing of the merger, Mr. Greenwald and BTP have agreed to amend his existing employment agreement to extend the term until October 31, 2008 and to eliminate any contractual severance payments due at the end of the term.
On April 1, 2004, the Company entered into an employment agreement with its Chief Operating Officer, David Borshell, which agreement was extended through March 31, 2008 by a letter from the board of directors dated October 18, 2005 and amended on March 29, 2007 and June 29, 2007. Under the agreement, Mr. Borshell is entitled to receive his base salary and bonus, stock options and stock-based awards and the fringe benefits listed in the agreement through the expiration of the extended term of the agreement, or, if longer, for a period of one year following the termination of the agreement after a change in control. In addition, after the payments and benefits described above terminate, Mr. Borshell is entitled to severance consisting of continuation of his base salary for an additional period of six months, any bonus compensation payable but not previously paid for any prior fiscal year, additional prorated bonus compensation for the greater of six months or the balance of the current fiscal year, and full insurance continuation for a period of six months, with COBRA entitlement thereafter, if permissible (or otherwise, six months insurance continuation under COBRA, payable by the Company for the first six months, and payable by Mr. Borshell at his option for the balance of the COBRA term). The amendment dated June 29, 2007 extended the date by which Image must exercise the second one year option to extend the term of Mr. Borshell’s employment for an additional year from June 15, 2007 to July 20, 2007. Upon the closing of the merger, Mr. Borshell and BTP have agreed to amend his existing employment agreement to extend the term until October 31, 2008, to eliminate contractual severance payment due at the end of the term and to increase cash salary from $318,275 to $450,000 annually.
On April 1, 2004, the Company entered into an employment agreement with its Chief Financial Officer, Jeff Framer, which agreement was extended through March 31, 2008 by a letter from the board of directors dated October 18, 2005 and amended on March 29, 2007 and June 29, 2007. Under the agreement, Mr. Framer is entitled to receive his base salary and bonus, stock options and stock-based awards and the fringe benefits listed in the agreement through the expiration of the extended term of the agreement, or, if longer, for a period of one year following the termination of the agreement after a change in control. In addition, after the payments and benefits described above terminate, Mr. Framer is entitled to severance consisting of continuation of his base salary for an additional period of six months, any bonus compensation payable but not previously paid for any prior fiscal year, additional prorated bonus compensation for the greater of six months or the balance of the current fiscal year, and full insurance continuation for a period of six months, with COBRA entitlement thereafter, if permissible (or otherwise, six months insurance continuation under COBRA, payable by the Company for the first six months, and payable by Mr. Framer at his option for the balance of the COBRA term). The amendment dated June 29, 2007 extended the date by which Image must exercise the second one year option to extend the term of Mr. Framer’s employment for an additional year from June 15, 2007 to July 20, 2007. Upon the closing of the merger, Mr. Framer and BTP have agreed to extend the term of his employment agreement until October 31, 2008, to eliminate contractual severance payment due at the end of the term and to increase cash salary from $300,259 to $375,000 annually.

 

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In addition, we have entered into employment agreements and employment letters with a number of key employees. These employment agreements and employment letters provide for certain severance payments and benefits if such employees are terminated following a change of control. Pursuant to such agreements, if certain of our senior vice presidents leave Image for good reason following a change in control, they will be entitled to receive their base salaries and bonus, stock options and stock-based awards and the fringe benefits listed in the agreement, through March 31, 2008. In addition, after the payments and benefits described above terminate, such employees will be entitled to severance consisting of continuation of their base salary for an additional period of six months. Upon termination following a change in control, all of such employees’ then unvested stock options and other stock-based awards will immediately vest in full as of the date of termination.
We are also parties to certain employment letters, confirmation of employment letters and confirmation of promotion letters with eleven current employees which provide for severance pay and continuation of health and dental coverage for the employee, spouse and dependents for a specified period ranging from four to eight months in the event of position elimination, layoff, termination without cause after a change in control, death or permanent disability.
The table bellow reflects the estimated present value of the severance obligations that may be payable to our executive officers and certain employees in the event of termination following a change of control, and an estimate of the expense of continuing coverage and other benefits under our group health, dental and life insurance plans to each such executive officer or employee.
         
    Amount of  
    Potential Cash  
    Severance  
    Payment in the  
    Event of  
Name   Termination(1)  
Martin W. Greenwald
  $ 819,920  
David Borshell
  $ 413,813  
Jeff Framer
  $ 397,116  
Additional Severance Obligations
  $ 1,879,373 (2)
Total
  $ 3,510,222  
 
(1)   Includes contractual severance payments, accrued vacation, continuation of fringe benefits and continuation of insurance coverage for the specified period. The calculation assumes the closing of the merger will occur on September 29, 2007.
 
(2)   Assumes the termination and/or departure for good reason of all senior vice presidents and key employees who are parties to employment contracts with Image following a change in control.

 

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Indemnification and D&O Liability Insurance
Indemnification. Following the effective time of the merger, BTP will cause the surviving corporation to indemnify and hold harmless, and cause the surviving corporation to advance costs and expenses, including reasonable attorney’s fees and expenses, to the fullest extent permitted under applicable law to all of our and our subsidiaries’ past and present directors, officers, employees and agents and all other persons who may presently serve or have served at our request as a director, officer, employee or agent of another person against any costs or expenses, including reasonable attorney’s fees, judgments, amounts paid in settlement, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil or criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the effective time of the merger (including for acts or omissions occurring in connection with the approval of the amended merger agreement and the consummation of the merger), whether asserted or claimed prior to, at or after the effective time of the merger, to the same extent such individuals are indemnified or have the right to advancement of expenses as of the date of the amended merger agreement by us or our subsidiaries pursuant to their respective charter documents, or similar organizational documents, as applicable, and the indemnification agreements.
If the surviving corporation later merges or consolidates with or transfers all or substantially all of its properties and assets to another entity, the entity surviving such transaction will assume these obligations.
The rights of each indemnified party under the amended merger agreement will be in addition to any right such person might have under our charter documents or the similar organizational documents of any of our subsidiaries, under applicable law (including the DGCL), or under any agreement of any of our indemnification agreements.
BTP has agreed that its obligations with respect to indemnification under the amended merger agreement will not be terminated or modified in such a manner as to adversely affect any indemnified party to whom such provision of the amended merger agreement applies without the written consent of such affected party.
D&O Liability Insurance. Prior to the closing, we have agreed to purchase a prepaid “tail” policy or policies of officers’ and directors’ liability insurance and fiduciary liability insurance with coverage for acts and omissions occurring prior to the effective time from an insurance carrier with the same or better credit rating as our current insurance carrier with coverage in amount and scope at least as favorable as our existing directors’ and officers’ liability insurance and fiduciary liability insurance coverage until the sixth anniversary of the effective time.

 

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Management Agreements
Due to the amount of time required to negotiate and execute the amended merger agreement, Messrs. Greenwald, Borshell and Framer signed two amendments to their employment agreements with Image extending the time by which Image might exercise its option to extend their employment agreements for an additional one year term. These amendments extended the time for Image to exercise this option from March 31, 2007 to May 31, 2007 and then to July 20, 2007. In addition, upon the closing of the merger, Messrs. Greenwald Borshell and Framer have each agreed with BTP to amend his existing employment agreement to extend the term until October 31, 2008 and to eliminate contractual severance payments due at the end of the term. For Messrs. Borshell and Framer the amendment includes an increase in cash salary. Furthermore, as of the date of this proxy statement, no member of our management has entered into any agreement, arrangement or understanding with BTP or their affiliates regarding the right to purchase or participate in the equity of the surviving corporation. BTP has informed us that it is their current intention to retain members of our existing management team with the surviving corporation after the merger is completed and to negotiate new employment agreements.
Regulatory Matters
To complete the merger, we and BTP must obtain approvals or consents from, or make filings with certain regulatory authorities. In particular, we are required to file this proxy statement and such other reports and documents under the Exchange Act as may be required in connection with the amended merger agreement, file a certificate of merger with the Secretary of State of the State of Delaware, file appropriate documents with the relevant authorities of other states in which we are qualified to do business, make any filings and obtain any approvals required under the rules and regulations of NASDAQ and comply with all applicable requirements, if any, of state blue sky laws. We and BTP are not currently aware of any other material governmental consents, approvals or filings that are required prior to the parties’ consummation of the merger other than those described in this section. If additional approvals, consents and filings are required to complete the merger, we and BTP contemplate that such consents, approvals and filings will be sought or made.
The HSR Act and related rules provide that transactions such as the merger may not be completed until certain information and documents have been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and specified waiting period requirements have been observed. Even after the HSR Act waiting period expires or terminates, the FTC or DOJ may later challenge the transaction on antitrust grounds. Neither we nor BTP believes that the merger will be prohibited by virtue of federal antitrust laws, but there can be no guarantee that the DOJ or the FTC will not take a different position. We have been notified by BTP that BTP is not required to effect any pre-merger notification filing under the HSR Act.
Appraisal Rights
The following discussion is not a complete statement of Delaware law pertaining to appraisal rights under Section 262 and is qualified in its entirety by the full text of Section 262 which is attached as Annex L to this proxy statement. The following summary does not constitute legal or other advice nor does it constitute a recommendation that

 

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stockholders exercise their appraisal rights under Section 262. All references in Section 262 and in this summary to a “stockholder” are to the recordholder of the shares of our common stock as to which appraisal rights are asserted. A person having a beneficial interest in shares of our common stock held of record in the name of another person, such as a broker, fiduciary, depositary or other nominee, must act promptly to cause the recordholder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights.
Under Section 262, persons who hold shares of our common stock who do not vote in favor of the adoption of the amended merger agreement and who otherwise follow the procedures set forth in Section 262 will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, as determined by the court.
Under Section 262, where a merger is to be submitted for approval at a meeting of stockholders, as in the case of the adoption of the amended merger agreement by our stockholders, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders entitled to appraisal rights that appraisal rights are available and include in the notice a copy of Section 262. This proxy statement shall constitute the required notice, and the full text of Section 262 is attached as Annex L to this proxy statement. Any holder of our common stock who wishes to exercise appraisal rights, or who wishes to preserve such holder’s right to do so, should review the following discussion and Annex L carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights. Moreover, because of the complexity of the procedures for exercising the right to seek appraisal of shares of common stock, we believe that if you consider exercising such rights, you should seek the advice of legal counsel.
Any stockholder wishing to exercise appraisal rights must deliver to us a written demand for the appraisal of the stockholder’s shares before the vote on the adoption of the amended merger agreement at the special meeting and must not vote in favor of the adoption of the amended merger agreement. A holder of shares of our common stock wishing to exercise appraisal rights must hold the shares of record on the date the written demand for appraisal is made and must continue to hold the shares of record through the effective time of the merger, since appraisal rights will be lost if the shares are transferred prior to the effective time of the merger. A proxy which is properly signed, dated and returned and does not contain voting instructions will, unless revoked, be voted FOR the adoption of the amended merger agreement. Therefore, a stockholder who votes by proxy and who wishes to exercise appraisal rights must vote against the adoption of the amended merger agreement or abstain from voting on the amended merger agreement. However, neither voting against the adoption of the amended merger agreement (in person or by proxy), nor abstaining from voting or failing to vote on the proposal to adopt the amended merger agreement will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262. The written demand for appraisal must be in addition to and separate from any proxy or vote. The demand must reasonably inform us of the identity of the holder as well as the intention of the holder to demand an appraisal of the “fair value” of the shares held by the holder. A stockholder’s failure to make the written demand prior to the taking of the vote on the adoption of the amended merger agreement at the special meeting of stockholders will constitute a waiver of any appraisal rights.

 

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Only a holder of record of shares of our common stock is entitled to assert appraisal rights for the shares registered in that holder’s name. A demand for appraisal in respect of shares of our common stock should be executed by or on behalf of the holder of record, fully and correctly, as the holder’s name appears on the holder’s stock certificates, should specify the holder’s name and mailing address and the number of shares registered in the holder’s name and must state that the person intends thereby to demand appraisal of the holder’s shares in connection with the merger. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity. If the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand for appraisal should be executed by or on behalf of all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose that, in executing the demand, the agent is acting as agent for the record owner or owners. A recordholder such as a bank or broker who holds shares as nominee for several beneficial owners may exercise appraisal rights with respect to the shares held for one or more beneficial owners while not exercising the rights with respect to the shares held for other beneficial owners; in such case, however, the written demand should set forth the number of shares as to which appraisal is sought and where no number of shares is expressly mentioned the demand will be presumed to cover all shares of our common stock held in the name of the record owner. Stockholders who hold their shares in brokerage or bank accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for demanding appraisal.
All written demands for appraisal pursuant to Section 262 should be sent or delivered to Image Entertainment, Inc., 20525 Nordhoff Street, Suite 2002, Chatsworth, CA 91311, Attention: Corporate Secretary.
Within 10 days after the effective time of the merger, the surviving corporation must notify each holder of our common stock who has complied with Section 262, and who has not voted in favor of the adoption of the amended merger agreement that the merger has become effective. Within 120 days after the effective time of the merger, but not thereafter, the surviving corporation or any holder of our common stock who has so complied with Section 262 and is entitled to appraisal rights under Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all dissenting holders. The surviving corporation is under no obligation to and has no present intention to file a petition and holders should not assume that the surviving corporation will file a petition. Accordingly, it is the obligation of the holders of our common stock to initiate all necessary action to perfect their appraisal rights in respect of shares of our common stock within the time prescribed in Section 262.

 

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Within 120 days after the effective time of the merger, any holder of our common stock who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate number of shares not voted in favor of the adoption of the amended merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The statement, if any, must be mailed within 10 days after a written request therefor has been received by the surviving corporation or within 10 days after the expiration of the period for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of our common stock and a copy thereof is served upon the surviving corporation, the surviving corporation will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to the stockholders as required by the Court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware Court of Chancery may require the stockholders who demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceeding; and if any stockholder fails to comply with the direction, the Court of Chancery may dismiss the proceedings as to the stockholder.
After determining the holders of our common stock entitled to appraisal and where proceedings are not dismissed, the Delaware Court of Chancery will appraise the “fair value” of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining fair value, the Court of Chancery of Delaware will take into account all relevant factors. In Weinberger v. UOP, Inc., the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”
Stockholders considering seeking appraisal should be aware that the fair value of their shares as so determined could be more than, the same as or less than the per share cash consideration they would receive pursuant to the merger if they did not seek appraisal of their shares and that an investment banking opinion as to the fairness, from a financial point of view, of the consideration payable in a merger (such as the opinions of Lazard or Raymond James described in, and attached to, this proxy statement) is not an opinion as to

 

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fair value under Section 262. Although we believe that the merger consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Court of Chancery of Delaware and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the merger consideration. We currently do not anticipate offering more than the merger consideration to any stockholder exercising appraisal rights and we reserve the right to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of our common stock is less than the merger consideration. The Delaware Court of Chancery will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose shares of our common stock have been appraised. If a petition for appraisal is not timely filed, then the right to an appraisal will terminate.
The costs of the appraisal action may be determined by the Court and taxed upon the parties as the Court deems equitable under the circumstances. The Court may also order that all or a portion of the expenses incurred by a stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all the shares entitled to be appraised.
Any holder of shares of our common stock who has duly demanded an appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote the shares subject to the demand for any purpose or be entitled to the payment of dividends or other distributions on those shares (except dividends or other distributions payable to holders of record of Image common stock as of a record date prior to the effective time of the merger).
If any stockholder who demands appraisal of shares of our common stock under Section 262 fails to perfect, or successfully withdraws or loses, such holder’s right to appraisal, the stockholder’s shares of our common stock will be deemed to have been converted at the effective time of the merger into the right to receive the per share cash consideration, without interest. A stockholder will fail to perfect, or effectively lose or withdraw, the holder’s right to appraisal if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder delivers to the surviving corporation a written withdrawal of the holder’s demand for appraisal and an acceptance of the merger, except that any attempt to withdraw made more than 60 days after the effective time of the merger will require the written approval of the surviving corporation and, once a petition for appraisal is filed, the appraisal proceeding may not be dismissed as to any holder absent approval by the Delaware Court of Chancery, which approval may be conditioned upon the terms the court deems just.
Failure to comply strictly with all of the procedures set forth in Section 262 of the DGCL will result in the loss of a stockholder’s statutory appraisal rights. Consequently, any stockholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise those rights.

 

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Litigation Related to the Merger
On April 10, 2007, a purported class action shareholder complaint entitled Henzel v. Image Entertainment, Inc., et al. was filed against Image and certain of its officers and members of its board of directors in the Superior Court of the State of California, County of Los Angeles. The named plaintiff proposes to represent a class of the Company’s stockholders and claims, among other things, that in connection with the proposed business combination transaction with BTP the directors breached their fiduciary duties of due care, good faith and loyalty by failing to maximize stockholder value and by creating deterrents to third party offers. Among other things, the complaint seeks class action status, and a court order enjoining the consummation of the merger and directing the defendants to take appropriate steps to maximize stockholder value. On August 8, 2007, after the parties exchanged documents, the plaintiff filed a request for dismissal of the lawsuit without prejudice. On August 9, 2007, the Superior Court of the State of California, County of Los Angeles, dismissed the lawsuit without prejudice.
Material United States Federal Income Tax Consequences
The following is a summary of the material United States federal income tax consequences of the merger to holders of our common stock. This summary is based on the Code, applicable Treasury Regulations, and administrative and judicial interpretations thereof, each as in effect as of the date hereof, all of which may change, possibly with retroactive effect. This summary assumes that shares of our common stock are held as capital assets. It does not address all of the tax consequences that may be relevant to particular holders in light of their personal circumstances, or to other types of holders, including, without limitation:
    banks, insurance companies or other financial institutions;
 
    broker-dealers;
 
    traders;
 
    expatriates;
 
    tax-exempt organizations;
 
    persons who are subject to alternative minimum tax;
 
    persons who hold their shares of our common stock as a position in a “straddle” or as part of a “hedging” or “conversion” transaction;
 
    persons deemed to sell their shares of common stock under the constructive sale provisions of the Code;
 
    United States persons that have a functional currency other than the United States dollar; or
 
    persons who acquired their shares of our common stock upon the exercise of warrants or otherwise as compensation, for example, as a grant of restricted stock.

 

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In addition, this discussion does not address any state, local or foreign tax consequences of the merger.
We urge each holder of our common stock to consult its tax advisor regarding the United States federal income or other tax consequences of the merger to such holder. For purposes of this discussion, a “United States Holder” means a holder of our common stock that is:
    a citizen or resident of the United States;
 
    a corporation, or an entity treated as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or any State or the District of Columbia;
 
    an estate the income of which is subject to United States federal income taxation regardless of its source; or
 
    a trust (a) the administration over which a United States court can exercise primary supervision and (b) all of the substantial decisions of which one or more United States persons have the authority to control and certain other trusts considered United States Holders for federal income tax purposes.
A “Non-United States Holder” is a holder of our common stock that is not a United States Holder and that is not a partnership.
If a partnership (or an entity treated as a partnership for United States federal income tax purposes) holds our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our common stock, and partners in such partnerships, should consult their tax advisors regarding the tax consequences of the merger to them.
Consequences of the Merger to United States Holders of Our Common Stock
Exchange of Our Common Stock for Cash
The receipt of cash in exchange for shares of our common stock pursuant to the merger will be a taxable transaction for United States federal income tax purposes. In general, a United States Holder who receives cash in exchange for a share of our common stock pursuant to the merger will recognize capital gain or loss for United States federal income tax purposes equal to the difference, if any, between the amount of cash received and the holder’s adjusted tax basis in that share. Any such gain or loss will be long-term capital gain or loss if the United States Holder’s holding period for the share exceeds one year at the time of the merger. Long-term capital gains of non-corporate taxpayers generally are taxable at a maximum federal rate of 15%. Capital gains of corporate stockholders generally are taxable at the regular tax rates applicable to corporations. The deductibility of capital losses may be subject to limitations.

 

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To the extent a United States Holder receives cash from Image attributable to the sale of warrants by Image to BTP, a portion of such United States Holder’s shares may be treated as redeemed by Image for income tax purposes. In some circumstances a share redemption by Image is treated as a sale or exchange for income tax purposes and in other circumstances a share redemption is treated as a distribution. United States Holders should consult their tax advisor to determine the specific tax consequences of the receipt of cash from Image attributable to the sale of warrants by Image to BTP.
Backup Withholding
Backup withholding may apply to payments made in connection with the merger. Backup withholding will not apply, however, to a United States Holder who (1) furnishes a correct taxpayer identification number and certifies that it is not subject to backup withholding on the substitute Form W-9 substitute form included in the letter of transmittal to be delivered to holders of Image common stock prior to completion of the merger, or (2) otherwise establishes an exemption from backup withholding. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder’s United States federal income tax liability provided the required information is furnished to the Internal Revenue Service, or IRS.
Consequences of the Merger to Non-United States Holders of Our Common Stock
Exchange of Our Common Stock for Cash
A Non-United States Holder will recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received and the holder’s adjusted tax basis in the shares of our common stock exchanged for cash pursuant to the merger. A Non-United States Holder will generally not, however, be subject to United States federal income tax, including withholding, on any gain recognized as a result of the merger unless:
    that gain is effectively connected with the Non-United States Holder’s conduct of a trade or business in the United States;
 
    the Non-United States Holder is an individual who is present in the United States for 183 days or more in the taxable year of the exchange, and certain other conditions are met; or
 
    the Non-United States Holder is subject to Code provisions applicable to certain United States expatriates.
A Non-United States Holder described in the first bullet point above will be required to pay United States federal income tax on the net gain derived from the exchange, except as otherwise required by an applicable income tax treaty, and if such holder is a foreign corporation, it may also be required to pay a branch profits tax at a 30% rate or a lower rate if so specified by an applicable income tax treaty. A Non-United States Holder described in the second bullet point above will be subject to a 30% (or, if applicable, a lower treaty rate) United States federal income tax on the gain derived from the exchange, which may be offset by United States source capital losses, even though the holder is not considered a resident of the United States. A Non-United States Holder described in the third bullet point above should consult a tax advisor to determine the United States federal, state, local and other tax consequences that may be relevant to such holder.

 

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To the extent a United States Holder receives cash from Image attributable to the sale of warrants by Image to BTP, a portion of such United States Holder’s shares may be treated as redeemed by Image for income tax purposes. In some circumstances a share redemption by Image is treated as a sale or exchange for income tax purposes and in other circumstances a share redemption is treated as a distribution. United States Holders should consult their tax advisor to determine the specific tax consequences of the receipt of cash from Image attributable to the sale of warrants by Image to BTP.
Backup Withholding
Payments made to a Non-United States Holder in connection with the merger may be subject to information reporting and backup withholding unless the Non-United States Holder establishes an exemption, for example by properly certifying such holder’s non-United States status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that the Non-United States Holder is a United States person.
Backup withholding is not an additional tax; rather, the United States income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is furnished to the IRS in a timely manner.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO THE MERGER AND IS NOT TAX ADVICE. THEREFORE, HOLDERS OF IMAGE COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
Accounting Treatment
We expect that the merger will be accounted for by BTP using the purchase method of accounting, in accordance with United States GAAP. This means that BTP will record as goodwill the excess, if any, of the purchase price over the fair value of our identifiable assets, including intangible assets, and liabilities.
Staff Accounting Bulletin “SAB” Topic 5J of SAB No. 54 “Push Down Basis of Accounting Required in Certain Limited Circumstances”, addresses the Securities and Exchange Commission (“SEC”) staff’s position on the appropriateness of applying the “push-down” basis of accounting in the separate financial statements of subsidiaries acquired in purchase transactions. SAB Topic 5J states that push-down accounting should be performed in purchase transactions that result in a company becoming “substantially wholly owned.”
Generally, push-down accounting requires that the financial statements of the acquired company reflect the acquiring entity’s cost of purchasing the acquired company, even where such costs are not incurred or paid by the acquired company. In determining whether a company is “substantially wholly owned,” the SEC staff has stated that push-down accounting would be required if 95% or more of the outstanding voting stock of a company has been acquired, that push-down accounting may be elected (and is encouraged) if 80% to less than 95% of the outstanding voting stock is acquired, and push-down accounting is prohibited if less than 80% of the outstanding voting stock is acquired.
Because BTP is purchasing less than 95% of Image’s outstanding common stock, push-down accounting is not required, and BTP and Image have determined not to electively apply push-down accounting. As a result, there will be no effects relating to push-down accounting on the financial statements of Image as a result of the merger transaction. In addition, BTP and Image have agreed to include provisions in the securities purchase agreement and the common stock purchase warrant described in this proxy statement which restrict the right of the holder of the warrant (and any collaborative group that includes such holder) to acquire additional voting securities of Image if such issuance would cause such holder (or any collaborative group that includes such holder) to own 95% or more of Image’s outstanding common stock. Furthermore, the terms of the convertible preferred stock prohibit its conversion from non-voting securities into voting common stock to the extent that such conversion would cause the holder of the convertible preferred stock (or any collaborative group that includes such holder) to own 95% or more of Image’s outstanding common stock.
Copies of the securities purchase agreement, the form of common stock warrant and the certificate of designations of the convertible preferred stock, which contain the full text of these restrictions, are attached as Annexes B, D and F to this proxy statement.
Notwithstanding the foregoing, it is possible that BTP (or a collaborative group of which BTP is a member) could in the future acquire additional voting securities of Image in the public markets, although BTP has no current plans to do so. If, as a result of acquiring any such additional voting securities, BTP (or a collaborative group of which BTP is a member) were to hold shares representing more than 95% of the then-outstanding voting securities of Image, then push-down accounting would be required.

 

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NASDAQ
Our shares of common stock are traded on NASDAQ under the symbol “DISK”. Consequently, we are subject to the NASDAQ Marketplace Rules. We will use our commercially reasonable best efforts to satisfy the listing criteria applicable to our common stock and otherwise maintain the listing of our common stock on NASDAQ immediately following the merger. However, there will be no assurance that Image will be able to satisfy those criteria or any other exchange, despite our efforts. If we were unable to maintain such a listing, it could have a material adverse effect on the value and liquidity of the trading market for Image shares.
Merger Financing

The total amount of funds necessary to complete the merger and the related transactions is currently anticipated to be approximately $125 million. In addition to the approximate $98.5 million of cash payments to be made to our stockholders and holders of our options, warrants (other than the warrant held by Portside Growth and Opportunity Fund) and restricted stock units, BTP may be required to pay up to approximately $22.5 million to Portside Growth and Opportunity Fund, if Portside elects to exercise its redemption right with respect to certain of Image’s securities. These payments are expected to be funded through a combination of equity contributions by the investor, and debt financing to be provided by DBZ. In the event DBZ does not provide the debt financing anticipated, BTP may obtain alternative financing in accordance with the terms and conditions of the amended merger agreement.

As a result of the merger and pursuant to their respective terms,  BTP may be required to pay (i) approximately $20.4 million, including a $3.4 million contractual redemption premium, to redeem Image’s outstanding convertible note held by Portside Growth and Opportunity Fund, and (ii) approximately $2.1 million to redeem the warrant to purchase 1,000,000 shares of Image common stock held by Portside Growth and Opportunity Fund. However, if Portside Growth and Opportunity Fund elects not to exercise its redemption right as to all or part of such securities, such unredeemed securities will remain outstanding in accordance with their terms, and the total amount of funds which BTP will need to complete the merger and the related transactions will be correspondingly reduced.

The amended merger agreement does not contain a financing condition to the closing of the merger.
Equity Financing
BTP has received an equity commitment letter from the investor. Pursuant to the terms of the equity commitment letter, the investor will provide financing equal to the aggregate merger consideration, less the amount of debt financing provided by DBZ. The equity commitment is subject to the fulfillment of certain conditions, including consummation of the debt financing and the satisfaction or waiver of all conditions to BTP’s obligation to complete the merger contemplated by the amended merger agreement.
Debt Financing
In connection with the execution and delivery of the amended merger agreement, BTP has received a debt commitment letter from DBZ.

 

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The debt financing is anticipated to consist of a senior secured term loan in the aggregate principal amount of up to $60 million, which may be used to finance a portion of the merger consideration, of which up to $35 million may be secured by a first priority lien on our assets, subject to certain existing liens, and up to $25 million of which may be secured by other security provided by the investor or its affiliates. Any acquisition debt that is secured by Image’s assets will be reflected on the surviving company’s financial statements.
DBZ’s commitment is subject to certain conditions, including the following:
    the absence of a material adverse effect to BTP and/or Image;
 
    the conditions to be set forth in the legal documentation relating to the financing facility;
 
    the absence of a material adverse change or disruption in the financial, bank loan syndication or capital markets since DBZ provided its commitment on May 26, 2007;
 
    the receipt of prior approval by DBZ of any change in the structure or terms of the merger or amended merger agreement which would have a material adverse effect;
 
    DBZ’s completion of due diligence regarding us;
 
    the negotiation, execution and delivery of loan documents mutually acceptable to BTP and DBZ;
 
    the receipt of projected monthly balance sheets, income statements and statements of cash flows in a form satisfactory to DBZ;
 
    the terms and conditions of the merger, including the pro forma capital structure, must be satisfactory to DBZ;
 
    the investor and/or its affiliates will have provided the equity financing described above;
 
    the financing shall not exceed $60 million, including the closing fee;
 
    the termination of any liens in favor of our existing credit facility and the repayment of outstanding loans and termination of any other liens in existence;
 
    the corporate legal structure of BTP and Image shall be acceptable to DBZ, and the nature and status of all material contracts, copyrights, securities, labor, tax, litigation, environmental matters and other material matters involving or affecting BTP or Image shall be satisfactory to DBZ;
 
    the grant of perfected first priority liens on all of our collateral and the receipt of UCC, tax and judgment lien searches; and
 
    the payment of all fees and expenses owed to DBZ.

 

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Upon the closing of the debt financing, BTP will reimburse DBZ for all reasonable fees and expenses incurred by or on behalf of DBZ in connection with the preparation, negotiation, execution and delivery of any and all loan documentation, including DBZ’s attorneys fees. In connection with this obligation, BTP was obligated to pay a $150,000 expense deposit to be applied to any expenses incurred by DBZ in connection with the financing facility.
Amendment to Image’s Stockholder Rights Plan
On October 31, 2005, we entered into a rights plan with Computershare Trust Company, Inc., as rights agent, in order to protect the interests of stockholders by discouraging coercive, unfair or abusive takeover tactics that do not offer fair value to all stockholders. Under the rights plan, preferred stock purchase rights would be distributed as a dividend at the rate of one right for each share of our common stock held by stockholders of record as of the close of business on October 31, 2005. Each right entitled stockholders to buy one unit of a share of preferred stock for $12.42. The rights generally would be exercisable only if a person or group acquires beneficial ownership of 30% or more of our common stock, or commences or publicly announces a tender or exchange offer upon consummation of which they would beneficially own 30% or more of our common stock.
Under the rights plan, if any person becomes the beneficial owner of 30% or more of our common stock, other than pursuant to a tender or exchange offer for all the outstanding shares of Image approved by our board of directors, then each right not owned by a 30%-or-more stockholder or related parties would entitle its holder to purchase, at the right’s then current exercise price, shares of our preferred stock (or, in certain circumstances as determined by the board of directors, cash, other property, or other securities) having a value of twice the right’s then current exercise price. In addition, after any person has become a 30%-or-more stockholder, if we are involved in a merger or other business combination transaction with another person in which we do not survive or in which its common stock is changed or exchanged, or 50% or more of our assets or earning power is sold to another person, each right will entitle each holder, other than any person who has become a 30%-or-more stockholder, to purchase, at the right’s then current exercise price, shares of common stock of such other person having double the value of the right’s then current exercise price.
If a person or group acquires 30% or more of our common stock, then all rights holders except the acquirer will be entitled to acquire our common stock at a significant discount. Stockholders may recognize taxable income if and when the rights become exercisable or if the rights should ever be redeemed. The effect will be to discourage acquisitions of 30% or more of our common stock without negotiation with the board of directors.
On June 27, 2007, immediately prior to the execution and delivery of the amended merger agreement, we and the rights agent entered into a second amendment to the rights plan, or the rights agreement amendment, which provides that the execution or performance of the amended merger agreement, the amended support agreements or the securities purchase agreement will not trigger the provisions of the rights plan.

 

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In particular, the rights agreement second amendment provides the following: (i) none of BTP, IEAC, nor any of their respective affiliates or associates, shall be deemed to be an “acquiring person,” (ii) none of Section 11(a)(ii) Event, Section 13 Event, Distribution Date, nor Share Acquisition Date (as each such term is defined in the rights plan) shall be deemed to have occurred and (iii) no holder of any rights shall be entitled to exercise such rights under, or be entitled to any rights pursuant to, any of Sections 3(a), 7(a), 11(a) or 13 of the rights plan, in any such case by reason of (a) the announcement of the merger, (b) the approval, execution or delivery of the amended merger agreement or any amendments thereof, (c) the execution and delivery of the support agreements or any amendments thereof, (d) the approval, execution and delivery of the securities purchase agreement or any amendments thereof, (e) commencement or, the consummation of, any of the transactions contemplated by the amended merger agreement, including the merger, (f) the commencement or, the consummation of, any of the transactions contemplated by the amended support agreements or (g) the commencement or, the consummation of, any of the transactions contemplated by the securities purchase agreement.
On June 19, 2007, at a special meeting of the board of directors, the board concluded that, for the purpose of facilitating the merger, the second amendment of the rights agreement is in the best interest of us and our stockholders and directed the executive officers to finalize, deliver and execute the rights agreement second amendment.
Stockholders are not required to approve the amendment of the rights plan described above, and you are not being asked to vote on the amendment. The description above is being provided to our stockholders purely for informational purposes.
Amended and Restated Support Agreements
The following is a summary of the material terms of the amended support agreements between BTP and each of Martin W. Greenwald, Image Investors Co. and Standard Broadcasting Corp. Ltd. This summary is qualified in its entirety by reference to the complete text of the amended support agreements, a form of which is attached to this proxy statement as Annex C and is incorporated by reference into this document.
Stockholders are not required to approve the amended support agreements described below, and you are not being asked to vote on these agreements. The description below is being provided to our stockholders purely for informational purposes.
In connection with the amended merger agreement, and as required by BTP as a condition to its execution of the amended merger agreement, on June 27, 2007, Martin W. Greenwald, Image Investors Co. and Standard Broadcasting Corp. Ltd. entered into amended support agreements with BTP, each in their capacities as a stockholder of Image.
As of the date of the amended support agreements, the stockholders were the beneficial owners of the following number of shares:
    Martin W. Greenwald was the beneficial owner of 1,321,604 shares of common stock, which shares consist of 822,104 shares of common stock outstanding and 499,500 shares subject to unexercised options to purchase shares of common stock;

 

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    Image Investors Co., a Delaware corporation, was the beneficial owner of 6,069,767, which shares consist of 5,969,767 shares of common stock outstanding and 100,000 shares subject to unexercised warrants to purchase shares of our common stock; and
 
    Standard Broadcasting Corp. Ltd., a Delaware limited liability company, was the beneficial owner of 1,542,283 shares of common stock. Mr. Coriat who is one of our directors is also an officer and director of Standard Broadcasting Corp. Ltd.
Pursuant to the amended support agreements, each stockholder has agreed to vote the shares beneficially owned by him or it, or those shares over which such stockholder has the right to vote, FOR:
    adoption of the amended merger agreement; and
 
    any other matter that is required to be approved by the stockholders of Image to facilitate the transactions contemplated by the amended merger agreement.
Each stockholder also agreed to vote against:
    any acquisition proposal other than the merger contemplated by the amended merger agreement;
 
    any liquidation or winding up of Image;
 
    any extraordinary dividend by Image;
 
    any changes in the capital structure of Image; and
 
    any other action that could reasonably be expected to impede, interfere with, delay or postpone or attempt to discourage the consummation of the merger, result in any breach of covenant, representation, warranty or other obligation, or materially delay or adversely affect the parties to the amended merger agreement to consummate the merger.
In addition, pursuant to the amended support agreements, each of the stockholders granted to BTP an irrevocable proxy to vote their shares if the stockholder does not take certain actions agreed to in the support agreement. Each irrevocable proxy and all of the voting covenants in the amended support agreement terminate upon the occurrence of certain specified events, including (i) termination of the amended merger agreement in accordance with its terms, (ii) the date our board of directors withdraws its recommendation that the stockholders of Image vote to adopt the amended merger agreement, and (iii) the date the amended merger agreement is amended in a manner not permitted under the amended support agreements.

 

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The stockholders who entered into the amended support agreements owned in the aggregate approximately 38% of the outstanding shares of our common stock as of the record date.
In addition, the stockholders who entered into the amended support agreements have agreed to continue to hold the retained shares and have granted to BTP an option to purchase a certain number of such retained shares upon satisfaction of certain conditions, which are not entirely within BTP’s control. Such holding period and option will expire on the later of (i) 120 days following the effective time of the merger and (ii) 182 days after the execution of the amended support agreements.

 

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THE AMENDED AND RESTATED MERGER AGREEMENT
The following description of the material terms and provisions of the amended merger agreement is qualified in its entirety by reference to the amended merger agreement, a copy of which is attached as Annex A to this proxy statement and which is incorporated by reference into this proxy statement. We urge you to read the amended merger agreement in its entirety as it is the legal document that will govern the merger.
The amended merger agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about Image, BTP, or their respective subsidiaries and affiliates.
The representations, warranties and covenants contained in the amended merger agreement were made only for purposes of that agreement and as of the specific dates set forth therein, were solely for the benefit of the parties to the amended merger agreement, and may be subject to limitation agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allotting contractual risk between the parties to the amended merger agreement instead of establishing these matters as facts and also may be subject to standards of materiality deemed relevant to the contracting parties but that differ from those matters that may be deemed material to investors. Investors are not third-party beneficiaries under the amended merger agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of Image, BTP or IEAC or any of their respective subsidiaries or affiliates. In addition, the respective compliance dates for any such representations, warranties and covenants vary, and thus any individual term or condition may not be relevant at any particular time.
Moreover, information concerning the subject matter of the representation and warranties may change after the date of the amended merger agreement, which subsequent information may or may not be fully reflected in the our public disclosure. The amended merger agreement should not be read alone, but should instead be read together with the other information regarding the companies and the merger that is contained in this proxy statement (including its annexes) as well as in the filings that we make from time to time with the SEC.
The Merger
The amended merger agreement provides that, at the effective time of the merger, IEAC, a wholly owned subsidiary of BTP, will merge with and into Image. Upon completion of the merger, IEAC will cease to exist, and we will continue as the corporation surviving the merger and a subsidiary of BTP. All of the properties, rights, privileges, immunities and authority, and all of the debts, liabilities and duties of our company and BTP will become those of the surviving corporation following the merger. We expect that our common stock will continue to be listed on NASDAQ and remain registered under the Exchange Act immediately following the merger.

 

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Completion of the Merger
The merger will be completed when a certificate of merger is filed with the Secretary of State of the State of Delaware and all other filings or recordings are made as required under the DGCL. The parties have agreed to file the certificate of merger no later than the tenth business day following the satisfaction or waiver of all of the closing conditions in the amended merger agreement if the amended merger agreement has not been terminated, which closing conditions and termination provisions are described below. The merger will become effective at the time the parties file the certificate of merger, or the parties may agree to a later time for the effective time of the merger and designate such effective time in the certificate of merger.
We are working to complete the merger as quickly as possible. We cannot, however, predict the exact timing of the merger because the merger is subject to the receipt of regulatory approvals and other closing conditions. While we expect to obtain all required regulatory approvals, we cannot assure you that these regulatory approvals will be obtained and, even if they are ultimately obtained, they might not be obtained for a substantial period of time following the adoption of the amended merger agreement at the special meeting.
Certificate of Incorporation, Bylaws and Directors and Officers of the Surviving Corporation
At the effective time of the merger:
    our certificate of incorporation shall be amended so as to read in its entirety as set forth in Annex H attached to this proxy statement;
 
    our bylaws will be amended so as to read in their entirety as set forth in Annex I attached to this proxy statement;
 
    the directors of IEAC at the effective time of the merger will be the initial directors of the surviving corporation; and
 
    our officers at the effective time of the merger will be the initial officers of the surviving corporation.
Conversion of Stock
At the effective time of the merger:
    94% of the shares of common stock owned by each stockholder immediately prior to the effective time of the merger (unless they properly exercise and perfect their appraisal rights under Delaware law) automatically will be converted into the right to receive $4.68 per share in cash, without interest; and
 
    the remaining shares of common stock held by such stockholders immediately prior to the merger will remain outstanding as common stock of Image as the company surviving the merger.

 

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Treatment of Options, Warrants and Restricted Stock Units
At the effective time of the merger:
    Each option to purchase common stock that is outstanding immediately prior to the effective time of the merger will be cancelled and the holder of such option will be entitled to receive, in consideration for such cancellation, an amount in cash, without interest, equal to the product obtained by multiplying:
    the total number of shares of our common stock issuable upon the exercise in full of the option, multiplied by
 
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger over the exercise price per share of common stock under such option.
    The restricted stock units that are outstanding immediately prior to the effective time of the merger will be cancelled, and the holder will be entitled to receive at the effective time of the merger, in consideration for such cancellation, an amount in cash, without interest, equal to:
    the total number of shares of our common stock issuable upon the exercise in full of the restricted stock unit, multiplied by
 
    the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger.
    Image will grant BTP, at BTP’s election, a warrant to purchase up to 8,500,000 shares of common stock in Image as the company surviving the merger at an exercise price of either $1.00 per share or $4.25 per share, depending on whether Portside Growth and Opportunity Fund agrees to redeem or amend our outstanding convertible note and warrant held by it prior to the effective time of the merger in a manner acceptable to us and BTP.
 
    Each holder of a warrant (other than warrants to purchase common stock held by Portside Growth and Opportunity Fund) will be entitled to receive an amount in cash, without interest, equal to
    the total number of shares of our common stock issuable upon the exercise in full of the warrant, multiplied by
 
    the excess, if any, of the per share cash consideration (i.e. $4.68 per share) to be received by the holders of shares of our common stock that are cancelled pursuant to the merger over the exercise price per share of common stock under such warrant.
As of the effective time of the merger, all such warrants will no longer be outstanding and will automatically be canceled and the holder will only be entitled to receive the amount in cash described above upon surrender of such warrants.

 

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Payment for Shares
Prior to the effective time of the merger, BTP will designate a bank or trust company, reasonably acceptable to us, to act as paying agent for the merger, and enter into a paying agent agreement with such bank or trust company. The paying agent agreement will provide for BTP to deposit with the paying agent an amount of cash necessary for the payment of the merger consideration upon surrender of the appropriate number of certificates or book-entry shares.
No later than five days after the effective time of the merger, the paying agent will mail a letter of transmittal in customary form and mutually agreed to by BTP and us, which will specify that delivery will be effected, and the risk of loss and title to the certificates and book-entry shares will pass, only upon delivery of the certificates or book-entry shares to the paying agent. The letter of transmittal will be accompanied by instructions that will tell you how to surrender your Image certificates and book-entry shares in exchange for the merger consideration.
You should not return your certificates at this time, and you should not forward your certificates to the paying agent without an accompanying properly completed and signed letter of transmittal.
You will not be entitled to receive the merger consideration until you surrender your Image certificates or book-entry shares to the paying agent, together with a duly completed and signed letter of transmittal and any other documents as the paying agent may require. Upon surrender of a certificate or book-entry share for cancellation and related documents, you will be entitled to receive (i) the cash consideration of $4.68 per share for 94% of your shares of common stock and (ii) a certificate or certificates representing your retained shares. Until surrendered and exchanged, each certificate or book-entry share will be deemed at any time after the effective time of the merger to represent only the right to receive the per share cash consideration in exchange for the applicable percentage of such shares and the right to receive a stock certificate representing the remaining percentage of your shares.
No interest will be paid or will accrue on the cash payable upon surrender of the certificates or book-entry shares.
None of the paying agent, the surviving corporation, BTP or its subsidiaries or Image or any of their respective directors, officers, members, managers, employees or agents will be liable to any person for any shares or cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration deposited with the paying agent that remains undistributed to the holders of certificates or book-entry shares after the time such shares would escheat to the state, will become, to the extent permitted under applicable law, the property of BTP.
If you have lost a certificate, or if it has been stolen or destroyed, then you will be required to make an affidavit of that fact before you will be entitled to receive the merger consideration. In addition, if required by the surviving corporation, you will have to post a bond in a reasonable amount determined by the surviving corporation indemnifying the surviving corporation against any claims made against it with respect to the lost, stolen or destroyed certificate.

 

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Each of BTP and the surviving corporation will be entitled to deduct and withhold any applicable taxes from the merger consideration and pay such withholding amount over to the appropriate taxing authority.
The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. In addition, the person requesting payment must either pay any applicable stock transfer taxes or establish to the reasonable satisfaction of the surviving corporation that such stock transfer taxes have been paid or are not applicable.
The paying agent agreement will also provide that BTP will deposit with the paying agent, immediately prior to the effective time, for the benefit of the holders of our outstanding warrants, immediately available funds in an amount necessary for the payment of the consideration each holder is entitled to in exchange for the warrants. The procedures described in this section will apply to any surrender of a warrant.
No Further Ownership Rights in Shares Exchanged for Cash
At the effective time of the merger, all cash paid upon the surrender of shares for cash consideration will be deemed to have been paid in full satisfaction of all rights pertaining to such shares surrendered. No dividends or other distributions with respect to cash shares with a record date after the effective time of the merger will be paid to holders of any shares that have been converted into the right to receive the cash merger consideration.
Representations and Warranties
Our Representations and Warranties
We make various representations and warranties in the amended merger agreement that are subject, in some cases, to specific exceptions and qualifications. Our representations and warranties relate to, among other things:
    organization, good standing and qualification to do business;
 
    our charter documents;
 
    our capitalization, including in particular the number of shares of our common stock, restricted stock units, options and warrants;
 
    our corporate power and authority to enter into the amended merger agreement and to consummate the transactions contemplated by the amended merger agreement;
 
    the absence of any violation of or conflict with our charter documents, applicable law or certain agreements as a result of entering into the amended merger agreement and consummating the merger;

 

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    required consents and approvals of governmental entities in connection with the transactions contemplated by the amended merger agreement;
 
    our SEC filings since March 31, 2005, including the financial statements contained therein;
 
    our compliance with the provisions of the Sarbanes-Oxley Act of 2002;
 
    the absence of certain changes and events since March 31, 2006, including the absence of a “material adverse effect”;
 
    the accuracy and completeness of information supplied by us in this proxy statement and other documents filed with the SEC;
 
    employment and labor matters affecting us, including matters relating to our employee benefit plans;
 
    the absence of material litigation or outstanding court orders against us;
 
    our compliance with applicable laws and our possession of all licenses and permits necessary to operate our properties and carry on our business;
 
    certain tax matters;
 
    our labor relations and employment matters;
 
    environmental matters;
 
    our material contracts;
 
    our real and personal property;
 
    our intellectual property;
 
    our film and music assets;
 
    our distribution agreements;
 
    our insurance policies;
 
    the inapplicability of certain state takeover laws to the transactions contemplated by the amended merger agreement;
 
    the absence of undisclosed brokers’ fees;
 
    receipt by us of separate opinions, dated March 29, 2007, from each of our financial advisors;

 

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    the approval and recommendation by our board of directors of the amended merger agreement and the merger;
 
    the required vote of our stockholders in connection with the adoption of the amended merger agreement is the only vote of stockholders necessary to adopt the amended merger agreement;
 
    the amendment to our rights plan rendering the rights thereunder inapplicable to the amended merger agreement and the merger;
 
    the absence of undisclosed affiliate transactions;
 
    the absence of any circumstances preventing the transaction from closing; and
 
    the absence of undisclosed liabilities.
For the purposes of the amended merger agreement, “material adverse effect” means an effect, event, circumstance, development, or change which, individually or in the aggregate with other effects, events, developments or changes, is materially adverse to the business, assets, properties, financial condition, or results of operations of us and our subsidiaries taken as a whole. A “material adverse effect” will not have occurred, however, as a result of any effect, development, or change arising out of or resulting from:
    changes or conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates;
 
    changes or conditions in the industries in which we and our subsidiaries operate, provided that the impact on us is not materially disproportionate to the impact on other similar situated entities;
 
    changes in laws, including tax laws and regulatory laws or general economic conditions, provided that the impact on us is not materially disproportionate to the impact on other similarly situated entities;
 
    changes in GAAP;
 
    the execution, announcement or compliance with, the amended merger agreement or the consummation of the transactions contemplated thereby, including the impact thereof on relationships, contractual or otherwise, with governmental entities, customers, suppliers, licensors, distributors, partners or employees;
 
    acts of war or acts of terrorism; or
 
    any change in our stock price or trading volume on NASDAQ.

 

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BTP’s and IEAC’s Representations and Warranties
The amended merger agreement also contains customary representations and warranties made by BTP and IEAC that are subject, in some cases, to specified exceptions and qualifications. The representations and warranties relate to, among other things:
    organization, good standing and qualification to do business;
 
    their respective power and authority to enter into the amended merger agreement and to consummate the transactions contemplated by the amended merger agreement;
 
    the absence of any violation of or conflict with their respective organizational documents, applicable law or certain agreements as a result of entering into the amended merger agreement and consummating the merger;
 
    required consents and approvals of governmental entities in connection with the transactions contemplated by the amended merger agreement;
 
    the absence of any pending litigation that questions the validity of the amended merger agreement or would have a material adverse effect on BTP;
 
    the accuracy and completeness of information supplied for inclusion in this proxy statement or other documents filed with the SEC;
 
    the purpose of formation and prior activities of BTP and IEAC that are a party to the amended merger agreement;
 
    no ownership interests in our common stock;
 
    the financing arrangements;
 
    the solvency of the surviving company;
 
    no knowledge of facts or circumstances that would prevent the merger;
 
    the conduct of independent due diligence and the absence of any express or implied warranty;
 
    no agreements with any of our stockholders or ownership of our capital stock;
 
    no undisclosed arrangements with company employees;
 
    no vote of BTP’s stockholders is required to complete the merger; and
 
    execution of the guarantee.

 

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The representations and warranties of each of the parties to the amended merger agreement will expire upon completion of the merger.
Conduct of Our Business Pending the Merger
Until the effective time of the merger and unless otherwise contemplated by the amended merger agreement, subject to certain identified exceptions, we have agreed to:
    conduct our business in the ordinary course of business and in a manner consistent with past practice; and
 
    use commercially reasonable efforts to preserve intact our business organization, to keep available the services of our present officers and employees and to preserve our current relationships with customers, suppliers, manufacturers, licensors, licensees, advertisers, distributors and other persons with which we have business dealings.
Except as disclosed in the disclosure letter to the amended merger agreement or as contemplated by the amended merger agreement or required by law, we have agreed that until the effective time of the merger, without the prior written consent of BTP, which consent shall not be unreasonably withheld or delayed, we will not nor will we permit any of our subsidiaries to:
    adopt or amend in any material respect, any bonus, profit sharing, compensation, severance, change-in-control, termination, stock option, restricted stock, stock purchase, stock appreciation right, pension, retirement, employment or other employee benefit agreement, trust, plan or other arrangement for the benefit or welfare of any director, officer or employee or increase in any manner the compensation or fringe benefits of any director, officer or employee (except, in each case, for annual increases and cost of living increases for the benefit of officers (including as set forth in any employment agreements) and employees which are consistent with past practice and, in the case of any individual officer or employee, are not greater than fifteen percent of the salary paid to such individual in the previous year and, in the aggregate to all officers and employees, not greater than five percent of the Company’s total salaries paid in the previous year);
 
    sell, lease, license, mortgage or otherwise encumber or subject to any lien or otherwise dispose of any of our properties or assets other than immaterial properties or assets, except in the ordinary course of business, and other than liens:
    arising as a matter of law;
 
    granted in connection with the incurrence, assumption or guarantee of any indebtedness permitted under the amended merger agreement;
 
    liens created in connection with the refinancing of our credit facility; and

 

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    as required by after acquired property covenants in contracts evidencing our indebtedness and liens created in connection with the refinancing of indebtedness that are no less favorable to us than liens created in connection with the indebtedness that is being refinanced and except for sales of excess or obsolete assets in the ordinary course of business consistent with past practice;
    declare, set aside or pay any dividends on, or make any other distributions in respect of, our common stock, split, combine or reclassify any of our common stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of our common stock or purchase, redeem or otherwise acquire any shares of our common stock or any rights or warrants to acquire any common stock, except that any of our subsidiaries may pay dividends to the us;
 
    authorize for issuance, issue, deliver, sell or agree or commit to issue, sell or deliver, pledge or otherwise encumber any shares of our common stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or any other securities or equity equivalents, other than:
    issuances upon exercise of options, warrants, the warrant with Portside Growth and Opportunity Fund, or the note with Portside Growth and Opportunity Fund; or
 
    in connection with stock-based awards outstanding as of the date of the amended merger agreement;
    amend our charter documents or the constituent documents of any of our subsidiaries;
 
    acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof or any assets, except:
    acquisitions of assets (other than capital expenditures) in the ordinary course of business; and
 
    the making of capital expenditures (i) in accordance with our capital expenditures plan, (ii) to repair or replace critical facilities destroyed or damaged due to casualty or accident, or (iii) otherwise, in an aggregate amount not to exceed $200,000;
    pay, discharge, settle or satisfy any claims, liabilities, obligations other than in the ordinary course of business;

 

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    pay, discharge, settle or satisfy any claims, liabilities, obligations in connection with any litigation or settlement where the amounts paid or payable do not exceed $50,000 individually or $250,000 in the aggregate;
 
    make or rescind any tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the tax liability or tax attributes of us or our subsidiaries;
 
    settle or compromise any material income tax liability, except as required by applicable law;
 
    except as required by applicable law, materially change any method of accounting for tax purposes or prepare or file any tax return in a manner inconsistent with past practice;
 
    make any material changes in our accounting methods, except:
    as required by changes in GAAP or Regulation S-X of the SEC, in each case as required by our independent public accountants;
 
    as may be required by a change in applicable law;
 
    as disclosed in our filings with SEC prior to the date of the amended merger agreement; or
 
    as required by a governmental entity;
    incur, assume or guarantee any indebtedness for borrowed money or enter into any “keep well” or other agreement to maintain any financial condition of another person or enter into any arrangement having the economic effect of any of the foregoing, other than:
    in the ordinary course of business consistent with past practice;
 
    borrowings made to finance permitted capital expenditures and other permitted acquisitions;
 
    borrowings permitted under the amended merger agreement; and
 
    other borrowings in an aggregate amount not to exceed $100,000;
    enter into any new distribution or license agreement involving aggregate payments in excess of $500,000 and if BTP does not deliver to Image its objection within 48 hours of BTP’s receipt of notice that Image intends to enter into such a contract, BTP will have been deemed to have granted its written consent to the action;
 
    amend or modify in any material respect any material agreement;

 

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    amend or modify the warrant or the convertible note, held by Portside Growth and Opportunity Fund; or
 
    authorize, permit or commit or agree to take, any of the foregoing actions.
Stockholders’ Meeting; Proxy Statement
Pursuant to the amended merger agreement, we are required to call and give notice of a special meeting of our stockholders as promptly as reasonably practicable and to prepare and file with the SEC this proxy statement within a specified period after the date of the amended merger agreement. We also agreed to use all commercially reasonable efforts to respond as promptly as practicable to any comments of the SEC, to prepare and file any amendments to the proxy statement necessary to address or correct matters raised in the SEC’s comments, and to cause the proxy statement to be mailed to our stockholders as promptly as practicable following the date of the amended merger agreement, but in no event later than five days following the filing of the definitive proxy statement with the SEC. We will promptly notify BTP upon the receipt of any comments from the SEC or any request from the SEC for amendments or supplements to this proxy statement and provide BTP with copies of all correspondence between us and our representatives, on the one hand, and the SEC, on the other hand, relating to this proxy statement.
We may adjourn or postpone the stockholders’ meeting if at the time of special meeting there are insufficient shares of common stock to constitute a quorum. If the special meeting is adjourned or postponed, we are obligated to hold the special meeting as promptly as permitted by our governing documents and by applicable law.
As promptly as reasonably practicable, but in any event within three (3) business days after filing this proxy statement in definitive form, we will prepare and file with the NASDAQ Listing Qualifications Department applications to list the additional shares of common stock issuable upon exercise of the warrants to be issued by us to BTP at its election, the additional shares of common stock issuable upon conversion of the preferred convertible stock, and the shares of common stock to be purchased by BTP pursuant the securities purchase agreement. For a description of such warrants, convertible preferred stock and common stock, see “Approval of the Securities Purchase Agreement-Purchase and Sale of Securities”, beginning on page 128.
We have agreed to use our commercially reasonable efforts to take, or cause to be taken, all actions reasonably necessary or advisable in order to obtain the approvals of such applications, including requesting expedited processing, if applicable, and promptly responding to questions and request for information from NASDAQ, after consulting with BTP.
Board Recommendation
Except as set forth below, our board of directors has agreed to (a) recommend that our stockholders vote FOR adoption of the amended merger agreement, and (b) take all action that is reasonable and lawful to solicit proxies FOR the adoption of the amended merger agreement. Except as set forth below under “The Amended and Restated Merger Agreement—No Solicitation,” neither our board of directors nor any committee of our board of directors may:

 

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    withdraw, amend or modify in a manner adverse to BTP, or publicly propose to withdraw, amend or modify in a manner adverse to BTP, the recommendation of our board of directors (or a committee) of the amended merger agreement;
 
    approve, adopt or recommend, or propose publicly to approve, adopt or recommend, the approval or adoption of any acquisition proposal; or
 
    cause or permit us to enter into any letter of intent, memorandum of understanding, agreement in principle, amended merger agreement, acquisition agreement, option agreement, joint venture or partnership agreement or other similar agreement (other than a confidentiality agreement) constituting or related to, or that is intended to or may reasonably be expected to lead to any acquisition proposal.
If, prior to the adoption of the amended merger agreement by our stockholders, upon having received an unsolicited bona fide written acquisition proposal that our board of directors concludes in good faith, after consulting with its financial advisors and outside legal counsel, and after consultation with its outside legal counsel that taking such action is necessary to comply with its fiduciary duties under applicable law, that such proposal constitutes a superior proposal, our board may:
    withdraw, amend or modify its recommendation of the amended merger agreement and the merger;
 
    approve or recommend the superior proposal;
 
    terminate the amended merger agreement; or
 
    make modifications to our rights agreement or exempt any person (other than BTP or IEAC) from the restrictions on “business combinations” in Section 203 of the DGCL or otherwise cause or permit such restrictions not to apply.
However, our board may not take such action unless we have first provided notice to BTP that an acquisition proposal constitutes a superior proposal, have given BTP three business days to propose revisions to the terms of the amended merger agreement and have negotiated in good faith with BTP during such three days with respect to such proposed revisions or other proposal, and at the end of such period, determined in good faith, after considering the proposals made by BTP, that such acquisition proposal remains a superior proposal.
In circumstances other than in connection with the receipt of a superior proposal, our board of directors may, if it determines in good faith, after consulting with outside legal counsel, that the failure to take such action could result in a breach of its fiduciary obligations under applicable law, withdraw or modify, or propose publicly to withdraw, amend or modify, the recommendation by the board of the amended merger agreement and the merger, but only after we have provided BTP with forty-eight hours prior written notice of such a determination.

 

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Nothing in the amended merger agreement will prohibit us from taking and disclosing to our stockholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or from making any required disclosure to our stockholders if, in the good faith judgment of our board of directors, after consultation with outside legal counsel, failure to so disclose would be inconsistent with its fiduciary obligations under applicable law.
“Acquisition proposal” means any inquiry, proposal or offer from any person (other than BTP and IEAC) relating to (i) any direct or indirect acquisition or purchase of more than 15% of the outstanding shares of our common stock; (ii) any tender offer or exchange offer that, if consummated, would result in any person beneficially owning more than 15% of the outstanding shares of our common stock; (iii) the direct or indirect acquisition of assets of us that generate or constitute 15% or more of our net revenues, net income or our assets; (iv) a merger, consolidation, business combination, recapitalization, liquidation, restructuring, dissolution or other similar transaction involving us or any of our significant subsidiaries; and (v) any sale, lease, exchange, transfer, license, acquisition or disposition of assets of us or any of our subsidiaries for consideration equal to 15% or more of the aggregate fair market value of all of the shares of our common stock outstanding on the date prior to the signing of the amended merger agreement, in each case other than the transactions contemplated by the amended merger agreement.
“Superior proposal” means an acquisition proposal for assets that generate more than 50% of our net revenues or for assets that constitute more than 50% of the our assets (based on the fair market value of our assets), or for more than 50% of our equity interest or that provides for a merger between us and another person which results in such person owning more than 50% of the equity interests of the surviving entity, and that our board of directors determines in its good faith judgment, after consideration of all relevant material terms of such proposal with its outside legal counsel and financial advisor, is (x) reasonably capable of being completed, taking into account all legal, financial, regulatory and other aspects of the acquisition proposal (including the likelihood and timing of completion of such transaction) and the person submitting such proposal, and (y) more favorable to our stockholders from a financial point of view than the merger and the other transactions contemplated by the amended merger agreement.
No Solicitation
We have agreed that we will not, and will use our reasonable best efforts not to permit any of our subsidiaries or representatives to:
    solicit, initiate or knowingly encourage the submission of any acquisition proposal;
 
    enter into any agreement regarding an acquisition proposal;
 
    solicit, knowingly encourage, participate or engage in or assist in any manner any discussions or information with respect to, or knowingly take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any acquisition proposal; or

 

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    take any action:
    other than as contemplated in the amended merger agreement in connection with the merger, to render the company rights issued pursuant to the terms of our rights agreement inapplicable to any acquisition proposal or the transactions contemplated by any acquisition proposal;
 
    to exempt or exclude any person from the definition of acquiring person in our rights agreement;
 
    to allow the company rights to expire prior to their expiration date under our rights agreement; or
 
    to exempt any person (other than BTP or IEAC) from the restrictions on “business combinations” in Section 203 of the DGCL or otherwise cause or permit such restrictions not to apply.
Nevertheless, in response to an acquisition proposal that was not the result of any prohibited actions above and that was received prior to the adoption of the amended merger agreement by our stockholders and which our board of directors determines, in good faith, after consultation with its outside legal counsel and financial advisor, may reasonably be expected to lead to a superior proposal, and, if our board of directors determines that the following actions are required for our board of directors to act in a manner consistent with its fiduciary duties to our stockholders under applicable law, we may:
    enter into a customary confidentiality agreement with the person making the acquisition proposal with terms and conditions not in the aggregate materially more favorable than the terms of our confidentiality agreement with BTP;
 
    furnish, and authorize and permit our representatives to furnish, information with respect to us and our subsidiaries to the person making the acquisition proposal pursuant to a confidentiality agreement; and
 
    participate in discussion or negotiation with such person and its representatives regarding any acquisition proposal.
We have agreed to notify BTP within 24 hours of our receipt of any acquisition proposal. In our notice to BTP, we have agreed to specify the material terms and conditions of the acquisition proposal and, to the extent not prohibited by any confidentiality agreement or other similar agreement in existence on the date of the amended merger agreement, identify the third party making the acquisition proposal. We have also agreed to keep BTP reasonably informed, on a prompt basis, of the status of any such discussions or negotiations and all written due diligence materials or other information provided by or on behalf of us and not previously provided to BTP.

 

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Access to Information; Confidentiality
We have agreed that, upon reasonable notice, we will, and will cause our subsidiaries to, afford BTP and its representatives reasonable access, during normal business hours throughout the period prior to the effective time of the merger or until the amended merger agreement is terminated, to such information regarding us and our subsidiaries as may reasonably be requested by BTP. We have also agreed to cause our executive officers and other relevant personnel to be reasonably available to BTP to respond to reasonable questions regarding our business.
We may restrict the foregoing access and assistance to the extent that, in our reasonable judgment, any applicable law requires us to restrict or prohibit access to any such properties or information, the information is subject to confidentiality obligations to a third party or disclosure of any such information or document could result in the loss of attorney-client privilege.
BTP and Image will remain subject to the terms of that certain confidentiality agreement, dated November 22, 2006, notwithstanding termination of the amended merger agreement.
Regulatory Matters; Reasonable Best Efforts
Each party to the amended merger agreement has agreed:
    to cooperate and promptly prepare and file all necessary documentation to effect all necessary applications, notices, petitions and filings, and to use reasonable best efforts, in order to obtain all approvals and authorizations of all required governmental entities to consummate the merger and the other transactions contemplated by the amended merger agreement, in the most expeditious manner reasonably practicable;
 
    that the other party will have the right to review and approve in advance all characterizations of the information relating to such party that appear in any application, notice, petition or filing made in connection with the merger or the other transactions contemplated by the amended merger agreement, but neither party will unreasonably condition, withhold or delay its approval;
 
    to consult and cooperate with each other with respect to the obtaining of all necessary approvals and authorizations of governmental entities and in connection with any investigation or other inquiry, including any proceedings initiated by a third party;
 
    to promptly inform the other party of any communication received by such party from, or given by such party to, any governmental entity regarding any of the transactions contemplated hereby;

 

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    to permit the other party, or the other party’s legal counsel, to review any communication given by it to, and consult with each other in advance of any meeting or conference with any governmental entity;
 
    to the extent agreed or not objected to by the relevant governmental entity, give the other party the opportunity to attend and participate in such meetings and conferences; and
 
    to use its commercially reasonable best efforts to take all actions, and to do, and to assist and cooperate with the other party in doing all things reasonably necessary or advisable to consummate the merger in the most expeditious manner reasonably practicable, including (i) taking all steps required to cause the conditions to the other party’s obligation to effect the merger to be satisfied as promptly as reasonably practicable, (ii) defending any lawsuits or other legal proceedings challenging the amended merger agreement or the consummation of the merger, (iii) executing and delivering any additional instruments reasonably necessary to consummate the merger; and (iv) in our case, ordering a NOBO list or other stockholder or stock ledger information, as and when reasonably requested by BTP.
We and BTP have agreed not to enter into, engage in or agree to engage in any transaction or series of transactions that would present a significant risk of making it more difficult for it or us to obtain any approval or authorization required in connection with the merger or otherwise prevent or materially delay the consummation of the merger and the other transactions contemplated by the amended merger agreement.
Fee and Expenses
We have agreed with BTP that, whether or not the merger is consummated, each party will pay their own expenses incurred in connection with the amended merger agreement, except that we will pay the costs incurred in connection with the filing, printing and mailing of the proxy statement.
Public Announcements
We and BTP have agreed to use commercially reasonable efforts to develop a joint communications plan with respect to the amended merger agreement. We each agree to use commercially reasonable efforts to ensure that all press releases and other public statements with respect to the transactions are consistent with the joint communications plan.
We and BTP further agreed that we will not issue any press release or otherwise make any public statements with respect to the amended merger agreement, the merger or the other party’s business, financial condition or results of operations without the consent of the other party, which consent will not be unreasonably withheld or delayed, except as may be required by law or any listing agreement with or rules of any a national securities exchange or trading system to which we are a party.

 

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Notification of Certain Matters
We will give prompt notice to BTP, and BTP will give prompt notice to us, of the occurrence, or non-occurrence, of any event that, individually or in the aggregate, would be reasonably expected to result in any failure of such party at closing to comply with or satisfy any condition, covenant or agreement to be satisfied under the amended merger agreement. The delivery of any notice does not limit or otherwise affect the remedies available to any party sending or receiving such notice.
Employee Benefit Matters
Under the amended merger agreement, for the period commencing at the effective time of the merger through at least the first anniversary of the merger, BTP has agreed to cause the surviving corporation and its subsidiaries to maintain compensation, employee benefit plans and arrangements and severance pay and benefits for our employees and employees of our subsidiaries who remain employed by the surviving corporation or its subsidiaries after the effective time of the merger, that are, in the aggregate, no less favorable than as provided under our compensation arrangements, benefit plans, severance plans and current policies or practices and those of our subsidiaries as in effect on the date of the amended merger agreement.
BTP will honor, or will cause the surviving corporation to honor, all benefit plans and other contractual commitments, including, without limitation, deferred compensation, severance and change of control agreements, in effect immediately prior to the effective time of the merger between us and our employees, retirees or former employees. In addition, BTP will, or will cause the surviving corporation to:
    pay all annual bonuses (or any pro rated earned portions thereof, where applicable) that are payable to our employees, retirees and former employees with respect to the fiscal year in which the merger occurs, including bonuses accrued on our consolidated financial statements under our bonus plan; and
 
    honor all vacation, holiday, sickness and personal days accrued by our employees and, to the extent applicable, our former employees or any of our subsidiaries as of the effective time of the merger.
Subject to its obligations under applicable law and applicable collective bargaining agreements, the surviving corporation will give all employees full credit for purposes of benefit accrual, eligibility and vesting under any employee benefit plan arrangement maintained by BTP or the surviving corporation or any subsidiary to the same extent recognized by us or any subsidiary under any benefit plan maintained by us immediately prior to the effective time, provided there is no duplication of benefits.
Subject to its obligations under applicable law and applicable collective bargaining agreements, the surviving corporation will:

 

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    with respect to any life, health or long-term disability insurance plan, waive all limitations as to pre-existing conditions, exclusions and waiting periods with respect to participation and coverage requirements under any welfare benefit plan established after the effective time but before the one year anniversary of the merger to replace any benefit plan in which such employees may be eligible to participate after the effective time, other than limitations or waiting periods that are already in effect with respect to such employee and that have not been satisfied as of the effective time under any plan maintained for the employee immediately prior to the effective time;
 
    with respect to any health insurance plan adopted after the effective time but before the one year anniversary of the merger, provide each employee with credit for any co-payments and deductibles paid prior to the effective time in satisfying any applicable deductible or out-of-pocket requirements under any such plan that such employees are eligible to participate in after the effective time; and
 
    with respect to any life or long-term disability plan in effect after the effective time but before the one year anniversary of the merger, waive any medical certification otherwise required in order to assure the continuation of coverage at a level not less than that in effect immediately prior to the implementation of such plan (but subject to any overall limit on the maximum amount of coverage under such plans).
The provisions of the amended merger agreement with respect to employees are solely for the benefit of the parties to the agreement, and no employee or former employee or any other individual associated with such employee will be regarded for any person as a third party beneficiary. Nothing in the amended merger agreement is to be construed as an amendment to any of our benefit plans for any purpose.
In addition, the provisions of the amended merger agreement with respect to employees do not obligate BTP or the surviving corporation to continue to employ any person or any employee for any minimum period of time after the effective time of the merger.
NASDAQ
We have agreed to use our commercially reasonable best efforts to satisfy the listing criteria applicable to our common stock and otherwise maintain the listing of the common stock on NASDAQ until the effective time.
BTP Financing for the Merger
BTP has agreed to use its commercially reasonable best efforts to obtain the full amount of the financing contained in the revised financing commitments on the terms and conditions described in the revised financing commitments delivered to us by BTP. However, in the event any portion of such financing commitment becomes unavailable on the terms and conditions of the revised financing commitments, BTP will use its commercially reasonable best efforts to obtain alternative financing in an amount sufficient to consummate the merger as promptly as reasonably practicable following the occurrence of such event.

 

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BTP acknowledges and agrees that its obligation to consummate the merger on the terms and conditions specified in the amended merger agreement is not subject to a financing condition and is not conditional upon the receipt by BTP of the proceeds of the revised financing commitments required to effect the closing and to satisfy its obligations under the amended merger agreement, including depositing (or causing to be deposited) with the paying agent sufficient funds to make all payments pursuant to the amended merger agreement.
BTP will give us prompt notice of any material breach by any party to the revised financing commitments, of which BTP or IEAC becomes aware, or any termination of the revised financing commitments. BTP agrees to keep us reasonably informed of the status of the financing and/or any alternative financing.
We agree to provide, and to cause our officers and employees to provide, all necessary cooperation and information in connection with the arrangement and obtaining of the financing described in the revised financing commitments and any alternative financing as may be reasonably requested by BTP, including:
    facilitating customary due diligence on us;
 
    arranging our senior officers, as selected by BTP, to meet with prospective lenders and investors in customary presentations (including “road show” presentations and sessions with rating agencies);
 
    cooperation in preparing and filing any offering documents, the issuance of any comfort letter, obtaining any consents of our auditors, certifications of our chief financial officer with respect to solvency matters, the delivery of consolidated pro forma financial information, the use of commercially reasonable efforts to cause each of our independent auditors to so cooperate or otherwise; and
 
    the use of commercially reasonable efforts to facilitate the grant, attachment and perfection of first priority security interests in substantially all of our assets for the lender(s) providing the debt financing, except for liens (and the assets securing such liens), which are contemplated to continue after the effective time of the merger.
BTP will not amend, supplement, modify or terminate (whether unilaterally or by mutual consent), in a manner either materially adverse to us or to the consummation of the merger, any equity financing commitment, or waive any rights under such equity financing commitment, prior to the termination of the amended merger agreement, without our written consent, which such consent will not to be unreasonably withheld.
In addition, we acknowledge that, prior to the effective time, we and our subsidiaries will, at the request of BTP, take commercially reasonable actions with respect to:
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    restructuring or terminating our existing credit facility.
In connection with this obligation, we will provide all necessary information and take all necessary actions, including calling for prepayment or redemption, or renegotiating, as the case may be, the convertible note, provided that:
    we will not make such a prepayment or redemption until substantially contemporaneous with or after, or, in the case of the call for prepayment or redemption, immediately prior to or contemporaneous with, the effective time;
 
    no such call for prepayment or redemption will be required prior to the effective time unless we are permitted to condition such call for prepayment or redemption on the occurrence of the effective time or to withdraw such call for prepayment or redemption if the effective time shall not have occurred on or prior to the applicable scheduled prepayment or redemption date; and
 
    we will not be required to enter into any bank commitment that will become effective prior to the effective time.
No Agreement with Image Stockholders
BTP has agreed that it has not and will not authorize or permit any of its affiliates or representatives to enter into any agreement, arrangement or understanding, pursuant to which any of our stockholders would be entitled to receive consideration of a different amount or nature than the merger consideration pursuant to the amended merger agreement or, other than the support agreements described in this proxy statement, pursuant to which a stockholder agrees to vote to adopt the amended merger agreement or agrees to vote against any superior proposal.
No Undisclosed Arrangements with our Employees
BTP will not enter into any agreement, arrangement or understanding (in each case, whether oral or written), or authorize, commit or agree to enter into any agreement, arrangement or understanding (in each case, whether oral or written), with any of our officers, directors or employees or any of their affiliates, pursuant to which any such person would be employed or compensated by, or would have any direct or indirect financial interest, in the surviving corporation or its assets, income or business following the closing that has not been disclosed by or on behalf of BTP to our board of directors prior to (i) the execution of any such agreement, arrangement or understanding or (ii) the commitment or agreement to enter into any such agreement, arrangement or understanding.
Rule 16b-3
Prior to the effective time of the merger, we may approve any dispositions of our equity securities (including derivative securities with respect to our equity securities) resulting from the transactions contemplated by the amended merger agreement by each of our officers or directors who are subject to Section 16 of the Exchange Act with respect to our equity securities.

 

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Certain Tax Aspects
We and BTP intend that any issuance of the warrant to BTP will be in exchange for a payment by BTP of an amount of cash equal to the fair market value of the warrants and that any such cash amount shall then be distributed to the holders of shares eligible to receive cash consideration as partial payment of the per share cash consideration.
Professional Fees
We agree to cause our attorneys, accountants, investment bankers and other advisors and agents to submit final bills for all professional fees owed by us at least two business days prior to the closing date. We will have paid all professional fees in full prior to the effective time and agree that the amounts paid to Lazard and Raymond James will not exceed a certain threshold. In addition, we undertake to notify BTP if the professional fees payable to our attorneys and accounts exceeds a certain amount.
Additional Agreements
Immediately prior to, but subject to, the satisfaction and valid waiver of all other conditions to our obligations to effect the merger, we agree to execute and deliver to BTP the securities purchase agreement. For more details concerning the securities purchase agreement, see “Proposal 2 — Approval of the Securities Issuance” beginning on page 128.
Conditions to the Merger
The obligations of the parties to complete the merger are subject to the following mutual conditions:
    receipt of approval of our stockholders of the amended merger agreement;
 
    the absence of any governmental injunctions, orders issued by a court of competent jurisdiction or other governmental entity or other legal restraint or prohibition that have the effect of making the consummation of the merger illegal or that otherwise prevents or prohibits the consummation of the merger; and
 
    receipt from all governmental authorities of all material consents, approvals and authorizations legally required to be obtained to consummate the merger.
The obligations of BTP to complete the merger are subject to the following additional conditions:
    the truth and correctness of our representations and warranties, without giving effect to any limitation on any representation or warranty as to “material adverse effect,” or “materiality,” except where the failure of our representations and warranties to be true and correct, would not, individually or in the aggregate, constitute a material adverse effect;

 

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    the performance, in all material respects, by us of all material covenants and agreements in the amended merger agreement;
 
    the achievement of a certain adjusted closing net worth;
 
    no material contract generating more than 25% of our consolidated net revenues will have been terminated;
 
    no dispute proceeding will be pending that would reasonably be expected to result in payment of more than a certain net litigation threshold amount;
 
    our delivery to BTP of a certificate signed by an executive officer to the effect that the conditions set forth in the amended merger agreement have been satisfied;
 
    our filing of the certificate of designation for the convertible preferred stock with the Secretary of State of Delaware and such certificate must remain in full force and effect;
 
    our reservation for issuance shares of our common stock issuable upon exercise of BTP’s warrants and any shares of our common stock issuable pursuant to the securities purchase agreement or upon conversion of any shares of convertible preferred stock issued under the securities purchase agreement;
 
    our delivery of a certificate signed by our secretary, dated the closing date, certifying the resolutions of our board which approved the securities purchase agreement and the related transaction and approved and authorized the sale and issuance of the series A convertible preferred stock, our common stock and the warrant to be issued to BTP;
 
    our delivery of written evidence reflecting payment in full of our fees and expenses of all professional advisors for services rendered in connection with the merger and securities issuance;
 
    receipt of approval of our stockholders of the securities issuance; and
 
    our execution and delivery to BTP of the securities purchase agreement.
Our obligation to complete the merger is subject to the following additional conditions:
    the truth and correctness of BTP’s representations and warranties, without giving effect to any limitation on any representation or warranty as to “material adverse effect,” or “materialty,” except where the failure of BTP’s representations and warranties to be true and correct, would not, individually or in the aggregate, constitute a material adverse effect;

 

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    the performance, in all material respects, by BTP of all material covenants and agreements in the amended merger agreement;
 
    the delivery at closing of a certificate signed by an executive officer of each of BTP and IEAC to the effect that the conditions set forth in the amended merger agreement have been satisfied; and
 
    the delivery at closing of a certificate signed by the chief financial officer of BTP to the effect that at the effective time, after giving effect to the transactions contemplated in the amended merger agreement and any other transactions contemplated in connection with the merger, including, the securities purchase agreement, the transactions contemplated by the securities purchase agreement, and the securities issuance, and assuming the accuracy of our representations and warranties, BTP and IEAC, taken as a whole, will not:
    be insolvent (either because the financial condition is such that the sum of its debts is greater than the fair value of its assets or because the fair saleable value of its assets will be less than the amount required to pay its probable liability on its debts as they become absolute and matured);
 
    have unreasonably small capital with which to engage in its business, either as presently conducted or as intended by BTP to be conducted; or
 
    have incurred or planned to incur debts beyond its ability to pay as they become absolute and matured.
Termination
The amended merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, whether before or after stockholder approval has been obtained, as follows:
    by mutual consent of us and BTP;
 
    by either BTP or us if:
    our stockholders do not vote to adopt the amended merger agreement at the special meeting or any adjournment or postponement thereof;
 
    an injunction or order has been entered or an action has been taken by a governmental authority that has the effect of making completion of the merger illegal or otherwise prohibits completion of the merger, provided that the terminating party has used reasonable best efforts to prevent, remove or lift the restraint; or

 

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    the merger has not been consummated on or before October 31, 2007; however if on such date all conditions to the closing have been fulfilled or are capable of being fulfilled, then either party may extend such date (on one or more occasions) by up to 60 days in the aggregate for all such extensions by providing written notice to the other party on or before October 31, 2007 or prior to the expiration of any such extension. We and BTP have agreed to extend the outside date in the amended merger agreement from September 29, 2007 to October 31, 2007. The right to terminate the amended merger agreement pursuant to this provision is not available to any party whose failure to perform any of its obligations under the amended merger agreement results in the failure of the merger to be consummated by October 31, 2007, or any extension period;
    by us, prior to obtaining stockholder approval of the amended merger agreement, if we receive a superior proposal in accordance with the terms of the amended merger agreement and subject to payment to BTP of a termination fee of $3.2 million and reimbursing BTP for up to $1 million of BTP’s expenses;
 
    by BTP, if, prior to when our stockholder approval is obtained, our board of directors:
    amends, withdraws or modifies or changes its recommendation or approval of the amended merger agreement or the merger;
 
    recommends or approves another acquisition proposal;
 
    publicly proposes to approve or recommend any acquisition proposal;
 
    made modifications to our rights agreement or modifications under Section 203 of the DGCL;
 
    resolved to effect any of the above; or
 
    we failed to include the recommendation of the Board of Directors in this proxy statement or refused to publicly affirm such recommendation if reasonably requested by BTP;
    by BTP, if we breach or fail to perform any of our representations, warranties or covenants contained in the amended merger agreement, which breach or failure to perform has not been waived, would give rise to the failure to satisfy a closing condition, and cannot reasonably be cured by the date of the completion of the merger or a 60 day extension, provided that BTP will not have the right to terminate the amended merger agreement if we are then entitled to terminate the amended merger agreement due to a breach by BTP; or
 
    by us, if BTP or IEAC breaches or fails to perform any of its representations, warranties or covenants contained in the amended merger agreement, which breach or failure to perform has not been waived, would give rise to the failure to satisfy a closing condition, and cannot reasonably be cured by the date of the completion of the merger or a 60 day extension, provided that we will not have the right to terminate the amended merger agreement if BTP is then entitled to terminate the amended merger agreement due to a breach by us.

 

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Fiduciary Fee and Business Interruption Fee
Fiduciary Fee
We have agreed to pay to BTP a termination fee and/or fiduciary fee under the following circumstances:
    in the event the amended merger agreement is validly terminated by either party as a result of the failure to obtain stockholder approval or by BTP on the basis of a breach of our representations and warranties, we will pay to BTP an amount equal to $1.5 million as a reimbursement of expenses incurred by BTP and IEAC;
 
    in the event the amended merger agreement is validly terminated by us or BTP upon our Board of Directors’ good faith determination that an acquisition proposal constitutes a superior proposal, we will pay to BTP a fiduciary fee equal to the sum of $3.2 million and the sum of BTP’s expenses, which expenses may not exceed $1 million in the aggregate;
 
    in the event the amended merger agreement is validly terminated by BTP if:
    prior to obtaining our stockholder approval, an acquisition proposal has been publicly proposed by any person (other than BTP) and not publicly withdrawn by the 10th calendar day prior to the special meeting;
 
    the agreement is terminated by either party as a result of the failure to obtain our stockholder approval or the merger is not consummated by October 31, 2007, subject to the 60 day extension provided for in the amended merger agreement; and
 
    any person (other than BTP) enters into a definitive agreement to consummate or consummates an acquisition proposal within nine months following the termination of the amended merger agreement;
we will pay to BTP a fiduciary fee equal to the sum of $3.2 million and the sum of BTP’s expenses, which expenses may not exceed $1 million in the aggregate.
We acknowledged in the amended merger agreement that the arrangements with respect to the termination fee are integral to the transactions contemplated by the amended merger agreement and as such, if we fail to promptly pay the fees described above and such matter is litigated, we have agreed to pay BTP’s costs in connection with such litigation. Following payment of the fees described above, BTP has agreed to release us from liability arising out of the amended merger agreement. However, we are not released from fraud or BTP’s right to sue for damages resulting from our breach of a covenant.

 

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Business Interruption Fee
BTP has agreed to pay us a “business interruption fee” of $4.2 million if we terminate the amended merger agreement due to a material breach or failure of BTP or IEAC to perform any of its representations, warranties or covenants contained in the amended merger agreement even if willful or intentional.
BTP acknowledged in the amended merger agreement that the arrangements with respect to the termination fee are integral to the transactions contemplated by the amended merger agreement and as such, if BTP fails to promptly pay the fees described above and such matter is litigated, BTP has agreed to pay our costs in connection with such litigation. Following payment of the fees described above, we have agreed to release BTP from liability arising out of the amended merger agreement. However, BTP is not released from fraud.
Guarantee
Payment of the business interruption fee is secured by a guarantee, provided by R2D2, which is wholly-owned by David Bergstein and his investor group. Pursuant to the guarantee, entered into on March 29, 2007, CT1 Holdings LLC and R2D2 LLC have guaranteed the prompt and complete payment to Image of the business interruption fee and any expenses to which Image becomes entitled to pursuant to the amended merger agreement.
Amendment and Waiver
The amended merger agreement may be amended prior to the effective time of the merger by mutual agreement of the parties. However, after the amended merger agreement has been adopted by our stockholders, no amendment will be made to the amended merger agreement except as allowed under applicable law. The amended merger agreement also provides that, at any time prior to the effective time of the merger, either party may extend the time for the performance of any obligations or other acts of the other party, waive any inaccuracies in the representations and warranties of the other party or waive compliance with any agreement of the other party or any condition to its own obligations contained in the amended merger agreement.

 

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WARRANT TO PURCHASE SHARES OF COMMON STOCK
General
Pursuant to the amended merger agreement, we have granted BTP the right to elect to receive a warrant to purchase up to 8,500,000 shares of our common stock at a price of either $1.00 per share or $4.25 per share. If, prior to the effective time of the merger, Portside Growth and Opportunity Fund agrees to redeem or amend our outstanding convertible note and warrant held by it in a manner acceptable to us and BTP, then the exercise price of the warrant will be set at $1.00 per share. If no agreement with Portside Growth and Opportunity Fund is reached that is acceptable to us and BTP, then the exercise price of the warrant will be set at $4.25 per share. The warrant is exercisable at any time from the date occurring 180 days after the date of issuance of the warrant until the fourth anniversary of such issuance date.
Method of Exercise; Payment
BTP may exercise the warrant, in whole or in part, by the surrender of the warrant to us, together with payment of an amount equal to the exercise price multiplied by the number of shares to be purchased. BTP may pay the exercise price by wire transfer or certified check payable to the order of Image, by cancellation of bona fide indebtedness or other obligations of Image to BTP or a combination of such exercise methods. In addition, BTP may elect to receive a net issuance of the shares of common stock pursuant to a formula based on the fair market value of the shares.
“Fair market value” under the warrant is defined as:
    the average of the closing bid and asked prices of the common stock quoted on NASDAQ or in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the common stock is then principally listed, as applicable, for the 20 trading days prior to the date of determination of such fair market value;
 
    if our common stock is not traded on an exchange, the independent members of the board of directors in good faith will determine the fair market value of a share of common stock; or
 
    if the exercise is in connection with a public offering of shares of our common stock, and if our registration statement relating to such public offering has been declared effective by the SEC, then the fair market value will be the initial “price to the public” specified in the final prospectus with respect to the offering.
In the event BTP exercises the warrant, we will, at our expense, as soon as practicable but in no event later than 10 days, issue and deliver the certificates to the person or persons entitled to received the certificates for the shares of our common stock issuable upon exercise of the warrant. If BTP exercises the warrant in part, we, at our expense, will execute and deliver a new warrant exercisable for the number of shares of common stock remaining subject to the warrant after the partial exercise. The warrant cannot be exercised if such exercise would cause the holder of the warrant (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of the Company.

 

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Stock Fully-Paid
The shares of common stock issuable upon the exercise of the warrant will, upon issuance and our receipt of the exercise price, be fully paid and nonassessable, and free from all preemptive rights, rights of first refusal or first offer, taxes, liens, adverse claims and charges with respect to the issuance of such shares. We will at all times during the period during which the warrant is exercisable have authorized and reserved for issuance sufficient shares of our common stock or other applicable securities for the exercise of the warrant. We have agreed to take all steps necessary to amend our charter documents to provide sufficient reserves for the shares of common stock or other securities issuable upon exercise of the warrant. We agreed that the issuance of the warrant will constitute full authority to the officers charged with executing stock certificates to issue to BTP the necessary common stock certificates upon the exercise of the warrant.
Adjustments
The number of shares issuable upon exercise of the warrant and the exercise price will be adjusted in the event of reorganization, merger or consolidation of Image or any split, subdivision, combination or reclassification of shares. In addition, in the event of any dividend or distribution, the holder of the warrant will be entitled to receive upon exercise of the warrant and without payment of additional consideration, such other additional stock, securities or property that the holder would have received had the holder exercised the warrant in full on the date of the warrant and retained such shares of common stock through the date of the actual exercise. Upon any adjustment of the exercise price and any increase or decrease in the number or type of shares of common stock or other securities purchasable upon the exercise of the warrant, we will give written notice, within 30 days of such adjustment, to the holder stating the exercise price as adjusted and the change or increase or decrease in the number and type of shares or other securities purchasable upon the exercise of the warrant and setting forth the factual basis and method of calculation for the change.
Rights of Stockholders
The holder of the warrant will not be entitled to vote or receive dividends or be deemed the holder of common stock or any of our other securities that may be issuable upon the exercise of the warrant.
The holder of the warrant will not have any rights of a stockholder or rights to any of the following until the warrant is exercised and the shares issuable upon such exercise have become deliverable:
    vote for the election of directors or upon any matter submitted to the stockholders at any stockholder meeting;
 
    to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance of otherwise);
 
    to receive notice of meetings; or
 
    to receive dividends or subscription rights.

 

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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE “FOR” THE ADOPTION OF THE AMENDED MERGER AGREEMENT.

 

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PROPOSAL 2
APPROVAL OF THE SECURITIES ISSUANCE
General
As a condition to BTP’s obligation to consummate the merger, Image must execute and deliver to BTP a securities purchase agreement, pursuant to which we will agree to issue and sell to BTP, in a private placement, up to an aggregate of 21,000,000 shares of our common stock and/or shares of our convertible preferred stock, less the number of shares of common stock issuable upon exercise of any warrants that may be issued to BTP under the amended merger agreement. However, if the stockholders do not approve the securities issuance proposal, then Image will not be able to execute and deliver the securities purchase agreement to BTP because our representations and warranties in the securities purchase agreement as to the issuance not violating any NASDAQ rule will not be true absent stockholder approval. Such execution and delivery is a condition to the obligation of BTP and IEAC to effect the merger. Therefore, if our stockholders do not approve the securities issuance proposal and BTP and IEAC determine not to waive this condition, then the merger will not be consummated.
Recommendation of our Board of Directors; Reasons for the Securities Issuance
After careful consideration, our board of directors has unanimously:
    determined that the transactions contemplated by the securities purchase agreement, including the issuance of common stock and convertible preferred stock (and the issuance of common stock upon conversion thereof), are fair to and in the best interests of Image and its stockholders;
    approved, authorized, adopted and declared the advisability of the transactions contemplated by the securities purchase agreement;
    directed that the issuance of common stock and convertible preferred stock (and the issuance of common stock upon conversion thereof) contemplated by the securities purchase agreement be submitted for consideration by our stockholders; and
    recommended that our stockholders approve the issuance of common stock and convertible preferred stock contemplated by the securities purchase agreement, and the issuance of the shares of common stock upon conversion of any convertible preferred stock purchased pursuant to the securities purchase agreement.
BTP exercised its right under the original merger agreement to modify the acquisition structure in order to maintain the listing of company common stock on NASDAQ and the registration of company common stock under the Exchange Act after the effective time of the merger. Image and BTP thereafter engaged in negotiations to structure and arrive at the definitive terms and conditions of the amended merger agreement reflecting the alternative transaction structure. During these negotiations, Image insisted that BTP not reduce the aggregate cash consideration to be received by Image shareholders and insisted that shares retained by Image shareholders in order to maintain Image’s listing of on NASDAQ and the registration of company common stock under the Exchange Act constitute additional consideration and not replace any of the cash consideration Image shareholders were to receive under the original merger agreement. BTP would agree to these conditions only if we agreed to the securities issuance and to grant registration rights related to the securities issued pursuant to the securities issuance and upon exercise of any warrant issued to BTP under the amended merger agreement. Given that we believed that the merger was in the best interests of Image’s shareholders and given that the retained shares constitute consideration in addition to the cash consideration to be received by our shareholders, we agreed to the securities issuance and to grant such registration rights.
To the extent that the securities issuance will dilute the shares held after the merger, such shares nonetheless constitute additional consideration to Image stockholders, and as such our board approved BTP’s requirements that the modified structure include such securities issuance.
Purchase and Sale of Securities
On or prior to the closing date of the amended merger agreement, BTP must notify us of the number of shares of convertible preferred stock and shares of common stock, up to an aggregate of 21,000,000 shares, that BTP desires to acquire under the securities purchase agreement. BTP may elect to purchase any number and any combination of shares of convertible preferred stock and/or common stock in its discretion. However, the total number of common shares plus the number of common shares issuable upon conversion of the convertible preferred stock may not exceed 21,000,000 shares in the aggregate, less the number of shares of common stock subject to the warrants, if any, that BTP elects to receive pursuant to the amended merger agreement.
Purchase of Series A Convertible Preferred Stock
Under the securities purchase agreement, BTP is entitled to elect to acquire up to 21,000,000 shares of convertible preferred stock at a purchase price equal to the greater of (a) $4.25 per share and (b) the closing “bid” price of the common stock as reported by NASDAQ for the trading day immediately preceding the closing of the transactions pursuant to the securities purchase agreement.
BTP would pay the purchase price for any convertible preferred stock purchased with:
    cash in an amount equal to the par value of the shares of convertible preferred stock; plus
 
    delivery of a promissory note in an aggregate principal amount equal to the purchase price of the shares less the par value of the shares purchased.

 

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Purchase of Common Stock
Under the securities purchase agreement, BTP is entitled to elect to acquire up to 21,000,000 shares of our common stock at a purchase price equal to the greater of (a) $4.25 per share and (b) the closing “bid” price of the common stock as reported by NASDAQ for the trading day immediately preceding the closing of the transactions pursuant to the securities purchase agreement.
On the date of the closing, BTP will pay the purchase price for the common stock as follows:
    cash in an amount equal to the par value of the shares of common stock; plus
 
    delivery of a promissory note in an aggregate principal amount equal to the purchase price of the shares less par value of the shares purchased.
Closing of the Transactions Relating to the Securities Purchase Agreement
The closing will be at a time of BTP’s designation, occurring between the date and time immediately prior to the effective time of the merger and the date 270 days after the effective time of the merger, unless we and BTP agree to another date.
Representations and Warranties
BTP Representations and Warranties
The securities purchase agreement contains customary representations and warranties made by BTP which are subject, in some cases, to specified exceptions and qualifications. The representations and warranties relate to, among other things:
    acquisition of the securities for an investment purposes;
 
    BTP’s status as an “accredited investor” under Rule 501(a) of Regulation D;
 
    BTP’s acknowledgment that the shares are being offered and sold to it in reliance on specific exemptions and buyer’s compliance with its representations and warranties in connection with such exemptions;
 
    BTP’s acknowledgment that it has been furnished with due diligence regarding Image;
 
    BTP’s acknowledgment that the investment involves a high degree of risk;
 
    BTP’s acknowledgement that there has been no government review of the securities;

 

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    BTP’s acknowledgement of the existence of transfer restrictions and restrictive legends;
 
    the authorization, execution and delivery of the securities; and
 
    no conflict with any governing document or existing obligation.
Our Representations and Warranties
The securities purchase agreement also contains customary representations and warranties made by us which are subject, in some cases, to specified exceptions and qualifications. The representations and warranties relate to, among other things:
    our corporate power and authority to enter into the securities purchase agreement and perform our obligations under the securities purchase agreement and the other related transaction documents;
 
    authorization of the issuance of the convertible preferred stock and the common stock;
 
    the common stock is validly issued, fully paid and non-assessable and free from all preemptive or similar rights and upon conversion the common stock issuable upon conversion of the convertible preferred stock will be validly issued, fully paid and non-assessable;
 
    the absence of any violation of or conflict with our charter documents, applicable law or certain agreements as a result of entering into the securities purchase agreement;
 
    compliance with required consents and approvals of governmental entities in connection with the transactions contemplated by the securities purchase agreement; and
 
    the arms-length nature of the transaction.
Covenants
In connection with the securities purchase agreement, the parties have agreed to do the following:
    each will use its commercially reasonable best efforts to timely satisfy all of the conditions under the securities purchase agreement;
 
    Image will take such action as we reasonably determine is necessary to obtain an exemption for the securities for sale to BTP under applicable securities laws;

 

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    Image will secure the listing of all the registrable securities (as defined in the registration rights agreement) upon a national securities exchange and use commercial reasonable efforts to maintain such listing;
 
    Image will acknowledge BTP’s right to pledge the securities in connection with a bona fide margin agreement or other loan or financing arrangement secured by the securities and agree such pledge will not be deemed a transfer, sale or assignment of the securities;
 
    Image will take all action necessary to at all times have authorized and reserved for the purpose of issuance 100% of the of the shares of common stock issuable upon conversion of the convertible preferred stock; and
 
    Image will use commercially reasonable best efforts to cause the certificate of designations to authorize 21,000,000 shares of common stock and shares of convertible preferred stock.
Conditions to the Securities Issuance
Our obligation to issue the shares of common stock and shares of convertible preferred stock under the securities purchase agreement is subject to the following conditions:
    execution and delivery of the agreement by BTP;
 
    delivery of the promissory notes and payment in cash of par value representing the purchase price for the common stock and the convertible preferred stock purchased;
 
    the representations and warranties of BTP shall be true and correct in all material respects;
 
    BTP shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required to be performed under the securities purchase agreement; and
 
    all conditions to the merger and related transactions contemplated by the amended merger agreement shall have been satisfied or waived.
The obligations of BTP to purchase the convertible preferred stock and common stock are subject to BTP’s election to purchase the shares and the following additional conditions:
    we shall have duly executed and delivered the securities purchase agreement, the convertible preferred stock certificates and/or the common certificates, as elected by BTP;
 
    our representations and warranties shall be true and correct in all material respects;

 

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    we shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the securities purchase agreement to be performed, satisfied or complied with;
 
    we shall have obtained all governmental, regulatory or third party consents and approvals necessary for the sale of the securities;
 
    all conditions to the merger and related transactions contemplated by the amended merger agreement shall have been satisfied or waived; and
 
    any purchase of common stock may only be consummated if, as a result, BTP (or any collaborative group that includes BTP) would directly or indirectly own less than 95% of the then-outstanding voting stock of the Company.
Termination
The securities purchase agreement and the transactions contemplated by the securities purchase agreement will terminate upon the earliest of the (a) the mutual agreement of us and BTP; and (b) the termination of the amended merger agreement in accordance with its terms.
Stockholder Approval Requirements
General
Our common stock is traded on the NASDAQ Global Stock Market under the symbol “DISK”. Consequently, we are subject to the NASDAQ Marketplace Rules. The issuance of the shares of common stock and convertible preferred stock purchased under the securities purchase agreement requires stockholder approval under the NASDAQ Marketplace Rules.
Under Rule 4350(i)(1)(B) and 4350(i)(1)(D), respectively, stockholder approval must be obtained prior to the issuance of securities in connection with, among other things, (A) a transaction involving the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable into common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock, hereinafter referred to as the 20% Rule; (B) when the issuance or potential issuance will result in a change of control of the issuer, hereinafter referred to as the change of control rule; or (C) in connection with the acquisition of the stock or assets of another company when any director, officer or substantial stockholder of Image has a 5% or greater interest (or such individuals collectively have a 10% or greater interest) directly or indirectly, in the company or assets to be acquired or in the consideration to be paid, and the present or potential issuance of common stock, or securities convertible in to or exercisable for common stock, could result in an increase in outstanding common stock or voting power of 5% or more, hereinafter referred to as the affiliated transaction rule.
The potential applicability of the change of control rule, the 20% rule and the affiliated transaction rule are discussed below.
Whether or not stockholder approval is required for the securities issuance (or any element thereof) will depend on the actual timing, facts and circumstances, and it is possible that in fact no such stockholder approval would be required. However, Image and BTP are seeking stockholder approval in order to avoid any doubt (and any delays and expenses occasioned thereby) as to whether any such rules apply or have been satisfied. Notwithstanding the foregoing, the fact that stockholder approval of the securities issuance is being sought shall not be deemed an admission or acknowledgement that the securities issuance requires any stockholder approval under the Nasdaq Marketplace Rules or otherwise.

 

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The 20% Rule
The 20% rule requires NASDAQ-listed issuers to obtain stockholder approval prior to any issuance or potential issuance of securities representing 20% or more of the outstanding common stock or voting power of the issuer (on an as-converted or as-exercised basis) before such issuance for a price less than the greater of the book or market value of the issuer’s common stock.
Although the 20% rule applies only to sales of securities below such threshold prices, the potential issuances of the company securities pursuant to the securities issuance just prior to, concurrently with, or following the effectiveness of the merger could create some lack of clarity as to what threshold price (i.e. the market price, as of what particular date) is applicable to the issuance and exercise transactions. In addition, the market price of the company’s common stock may vary after the effective time (either up or down), which might also create some lack of clarity as to what threshold price could be deemed applicable to an exercise transaction. In addition, the ability of BTP to purchase securities with a subordinated note in connection with the securities issuance could create additional lack of clarity with respect to the face value versus discounted value of any such note, including as such relates to the then-current value of the securities being purchased. As such, we along with BTP believe it prudent to solicit and procure the consent of the company’s stockholders to the securities issuance, in order to avoid any doubt (and any delays and expenses occasioned thereby) as to whether the 20% rule (and any related stockholder approval) requirement has been satisfied.

 

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Furthermore, if BTP elects to receive warrants pursuant to the amended merger agreement, such warrants will be issued by Image to BTP with an exercise price equal to $ per share. This potential issuance of the warrants may also create scenarios whereby the 20% rule could conceivably apply. As the warrant exercise price may be below such threshold prices set forth in the 20% rule, both the potential issuances of the warrants, and their exercise, could be argued to trigger the 20% rule, depending upon the then-current capitalization of the company.
However, if any warrants are issued by Image, such warrants will be issued to BTP as merger consideration in connection with the amended merger agreement. Adoption of the merger agreement by our stockholders requires the affirmative vote of the holders of a majority of our outstanding common stock, which is a threshold that is more rigorous than that required for approval of the securities issuance proposal. Accordingly, the adoption of the amended merger agreement will constitute approval of our stockholders (for purposes of the 20% rule) of the issuance of the warrants and the issuance of common stock upon exercise of the warrants, and such approval is NOT part of Proposal 2.
The Change of Control Rule
The change of control rule requires us to obtain stockholder approval prior to certain issuances with respect to common stock or securities convertible into common stock which will result in a change of control of the issuer. Generally, NASDAQ interpretations provide that 20% ownership of the shares of an issuer by one person or group of affiliated persons is deemed to be control of such issuer. The number of shares of common stock that we may issue under the securities purchase agreement plus the number of shares of common stock issuable upon conversion of the convertible preferred stock that may be issued under the securities purchase agreement may equal as many as 21 million shares of common stock. This issuance, if effected, will constitute approximately % of our issued and outstanding shares of common stock, and will cause BTP to own approximately % of our issued and outstanding shares of common stock on a post-issuance basis.
The securities issuance cannot occur unless a majority of stockholders approve the adoption of the amended merger agreement and the merger is consummated. Despite this requirement of stockholder approval, it is unclear whether Nasdaq’s change of control rule would require a separate vote and approval in connection with the securities issuance(s), and whether such rule would be applicable depending upon when the potential issuance were consummated. This is particularly true where the potential issuances of the company securities pursuant to the securities issuance may occur just prior to, concurrently with, or following the effectiveness of the merger. The company and BTP believe it prudent to solicit and procure the consent of the company’s stockholders to the securities issuance, in order to avoid any doubt (and any delays and expenses occasioned thereby in the company fulfilling its obligation to register such securities under BTP’s registration rights agreement and obtaining all necessary approvals in accordance therewith) as to whether the change of control rule and related stockholder approval requirement has been satisfied.
The Affiliated Transaction Rule
The affiliated transaction rule requires stockholder approval prior to the issuance of any securities in a transaction in which any director, officer or substantial stockholder of the issuer has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5% or more. BTP may receive as many as 21,000,000 shares of common stock pursuant to the securities purchase agreement, representing an issuance of approximately % of our issued and outstanding common stock on a post-issuance basis. At the time that BTP closes the transactions under the securities purchase agreement and receives the common stock and/or convertible preferred stock, BTP may at such time own more than 5% of Image’s stock. Accordingly, such transactions may be deemed to be transactions subject to the affiliated transaction rule and, therefore, stockholder approval arguably could be required. Accordingly, we along with BTP believe it prudent to procure the consent of the Image stockholders to the securities issuance with respect to the affiliated transaction rule.
BTP may purchase the securities with a note, and may repay the note in cash or in-kind, by delivering certain “eligible property” to the company. Although we do not believe the Affiliated Transaction Rule should apply to any payment in kind of a note issued in partial payment for outstanding securities, as such a transaction could involve BTP effecting a transaction between or involving the company (of which BTP will be a major holder) and BTP or BTP’s affiliate, the affiliated transaction rule could be argued to cover such note repayment or related transaction. As such, and notwithstanding our views as to the inapplicability of this rule, we along with BTP believe it prudent to solicit and procure the consent of the company’ stockholders to the securities issuance, in order to avoid any doubt (and any delays and expenses occasioned thereby in the company fulfilling its obligations to register such securities under BTP’s registration rights agreement and obtaining all necessary approvals in accordance therewith) as to whether the affiliated transaction rule (and any related stockholder approval) requirement has been satisfied.
Notwithstanding the foregoing, the fact that stockholder approval of the securities issued is being sought shall not be deemed an admission or acknowledgement that the securities issued requires any stockholder approval under the Nasdaq Marketplace Rules or otherwise.

 

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Effect of Stockholder Approval of the Securities Issuance
If our stockholders approve the securities issuance proposal, then Image shall have obtained stockholder approval in satisfaction of NASDAQ Marketplace Rule 4350(i) and our stockholders shall have authorized (i) the issuance to BTP of shares of our common stock and shares of our convertible preferred stock up to an aggregate amount of 21,000,000 shares pursuant to the securities purchase agreement, less any shares of common stock issued pursuant to any warrants received pursuant to the amended merger agreement; (ii) the issuance of shares of common stock upon the conversion of the convertible preferred stock; and (iii) the delivery of “eligible property” to pay off any principal amounts and accrued interest in accordance with the terms of any subordinated notes which BTP may deliver to Image to pay the purchase price of securities issued to BTP under the securities purchase agreement.
Even if the stockholders approve the securities issuance proposal, BTP may elect not to purchase any shares of our common stock and shares of our convertible preferred stock. Furthermore, approval by our stockholders of the securities issuance proposal does not guarantee that the merger will be consummated.
The 21,000,000 shares of our common stock which may be issued pursuant to the securities purchase agreement and issuable upon conversion of the convertible preferred stock would represent on a pro forma basis approximately 96.6% of the shares of our common stock outstanding as of the record date and, assuming such shares of common stock are issued, would significantly represent a dilution of the voting and economic interests of our stockholders. In addition, such issuance of our common stock will also have a dilutive effect on earnings per share and may adversely affect the market price of the common stock.
Effect of Failure to Obtain Stockholder Approval of the Securities Issuance Proposal
If the stockholders do not approve the securities issuance proposal, then Image will not be able to satisfy the condition to the merger that we execute and deliver the securities purchase agreement to BTP, because our representations and warranties in the securities purchase agreement as to the issuance not violating any NASDAQ rule may not be true absent stockholder approval (depending on the timing, facts and circumstances of the matters contemplated by the securities issuance proposal (proposal 2)). Such execution and delivery is a condition to the obligation of BTP and IEAC to effect the merger. Therefore, if our stockholders do not approve the securities issuance proposal and BTP and IEAC determines not to waive this condition, then the merger will not be consummated.
BTP will have remedies against the company if the merger is not consummated on account of a failure of company stockholders to approve the securities issuance, including BTP’s right to receive the termination fee from the Company.

 

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Registration Rights Agreement
The following is a summary of the material terms of the registration rights agreement between BTP and Image. This summary is qualified in its entirety by reference to the complete text of the registration rights agreement, a form of which is attached to this proxy statement as Annex G and is incorporated by reference into this document. Image stockholders are urged to read the registration rights agreement in its entirety.
Stockholders are not required to approve the registration rights agreement described below, and you are not being asked to vote on the agreement. The description below is being provided to our stockholders purely for informational purposes.
In connection with the securities purchase agreement , we have agreed to enter into a registration rights agreement with BTP providing for demand rights and piggyback rights to register the resale of the following with the SEC:
    any shares of common stock issued pursuant to the amended merger agreement;
 
    any shares of common stock issuable upon the exercise of any warrant issued to BTP pursuant to the amended merger agreement;
 
    any shares of common stock issued pursuant to the securities purchase agreement; and
 
    any shares of common stock issuable upon conversion of the convertible preferred stock
Underwritten Demand Registration
At any time from the date of the registration rights agreement, any holder of securities entitled to registration under the registration rights agreement will have the right to request, by delivery of a written notice to us, that we file a registration statement under the Securities Act covering all or a portion of the securities entitled to registration under the registration rights agreement.
Shelf Registration
At any time from the date of the registration rights agreement, any holder of securities entitled to registration under the registration rights agreement will have the right to request, by delivery of a written notice to us, that we file a shelf registration statement under the Securities Act covering all or a portion of the securities entitled to registration rights under the registration rights agreement. We must be eligible to register such securities under a Form S-3 registration for the request to be granted.
Underwritten Offerings
All holders of securities entitled to registration under the registration rights agreement will have the right to select the managing underwriter for any underwritten offering carried out for the shelf registration or underwritten demand registration described above. The selection of the managing underwriter will be subject to the reasonable approval of the Board.

 

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Piggyback Registration
All holders of securities entitled to registration under the registration rights agreement will receive prompt written notice from us each time we decide to file a registration statement under the Securities Act in connection with the proposed offer and sale of any of our securities of the same class as the securities entitled to registration. (This does not include registration statements filed on Form S-4 or Form S-8 or a registration statement on Form S-1 or Form S-3 covering solely an employee benefit plan.) The holders of registrable securities may request to be included in any such registration statement by submitting a written request within fifteen days after the delivery of the notice to holders.
If we fail to file a registration statement as required, we may owe cash damages to a securities holder, not to exceed 10% of the aggregate purchase price for the securities.
We will bear all fees, costs and expenses in connection with the first five registration statements in connection with the registration rights agreement. All expenses related to any additional registration statements will be paid by the holders of registrable securities on a pro rata basis.

 

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SERIES A CONVERTIBLE PREFERRED STOCK
In connection with the issuance of any shares of convertible preferred stock pursuant to the securities purchase agreement, we will authorize a new series of convertible preferred stock.
Designation and Amount
The convertible preferred stock will consist of 20,000,000 shares and will rank senior to our other capital stock as to dividends, distribution of assets upon liquidation, dissolution or the winding up of our affairs, whether voluntary or involuntary. A copy of the certificate of designations for the convertible preferred stock, which will govern the rights, preferences and privileges of the convertible preferred stock, is attached as Annex F to this proxy statement.
Dividends
There will be no mandatory dividends payable, or accumulating with respect to the convertible preferred stock.
From and after the date of the issuance of the convertible preferred stock, dividends on the convertible preferred stock will accrue and be payable to the holder of such stock on June 30th of each year at a rate equal to 4.62% of the original purchase price paid for the convertible stock. Such dividends, or mandatory dividends, will be payable in kind in the form of additional shares of convertible preferred stock based on the amount of dividends so accrued and payable and a purchase price per share equal to the original purchase price on which the mandatory dividend calculation was based. We may also, at our election, pay the mandatory dividends out of cash legally available if permitted to do so under the terms of our outstanding indebtedness.
In the event any dividends are declared or paid with respect to our common stock (whether in the form of cash, securities or other property), the holders of the convertible preferred stock outstanding as the of the record date established for such dividend will be entitled to receive the amount the holder would have been entitled to receive if the convertible preferred stock had been converted into common stock immediately prior to the dividend or distribution. Any dividends payable on the convertible preferred stock will be payable at the same time and in the same form as the dividend on the common stock.
We may not pay or declare a dividend on any share of common stock, unless we pay or declare a dividend, as the case may be, on each then-outstanding share of convertible preferred stock. “Dividends” under the certificate of designations includes any pro rata distribution by us to the holders of any class or series of its capital stock, out of funds or assets we have legally available for such a purpose, whether or not paid out of capital, surplus or earnings.
We have agreed to take all prior corporate action necessary to authorize the issuance of any securities or rights as a concurrent dividend with the convertible preferred stock.

 

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Liquidation Preference
In the event of any liquidation, dissolution or winding up of us, whether voluntary or involuntary, the holders of the convertible preferred stock then outstanding will be entitled to receive prior and in preference to any distribution of any of our assets to any other class our series of capital stock, an amount in cash equal to $4.40 per share of convertible preferred stock plus the amount of any mandatory dividends accrued but unpaid and any other dividends declared but unpaid with respect to the convertible preferred stock. Such payment to the holders of the convertible preferred stock will be made before any payment can be made or any assets distributed to the of our common stock or the holders of any other class or series of our capital stock ranking junior to the convertible preferred stock.
If upon any liquidation the assets available upon liquidation are insufficient to permit the full amount due to the holders of the convertible preferred stock, then all of our remaining available assets will be distributed ratably among the holders of the then outstanding convertible preferred stock in proportion to the preferential amount each such holder is otherwise entitled to receive. A consolidation or merger of us with or into any other entity, or the conveyance of all or substantially all of the assets of us in one or more transactions, will be deemed a liquidation, unless prior to such transaction the holders of a majority of the outstanding convertible preferred stock determine that such a transaction should not be considered a liquidation.
Voting Rights
The holders of outstanding shares of the convertible preferred stock will not be entitled to vote on any matters submitted for a vote of holders of common stock, and will have only such voting rights as are specified in the certificate of designation, in the certificate of incorporation or as otherwise provided by applicable law. However, we have agreed that so long as any shares of the convertible preferred stock remain outstanding, we will not, without the written consent or affirmative vote of the holders of at least two-thirds (2/3) of the then-outstanding shares of convertible stock:
    amend, alter, waive or repeal, whether by merger, consolidation, combination, reclassification or otherwise, the certificate of incorporation, including the preferred stock certificate of designations, or our bylaws or any such provisions of our governing documents (including the adoption of a new provisions) in a manner materially adverse to the holders of the convertible preferred stock; or
 
    create, authorize or issue any class, series or shares of convertible preferred stock or any other class of capital stock or rights ranking under any circumstances either as to payment of dividends, distributions or as to distributions of assets upon liquidation prior to or on a parity with the convertible preferred stock.

 

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Conversion Rights
Right to Convert
Each share of convertible preferred stock will be convertible, at the option of the holder of such shares, at any time from and after the date that is one hundred and eighty (180) days after the date the shares are issued at an initial conversion rate of one share of convertible preferred stock for one share of our common stock; provided, that such initial conversion rate will be subject to adjustment from time to time, as described below. The convertible preferred stock cannot be converted into common stock if such exercise would cause the holder of such shares (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of the Company.
Automatic Conversion
Each share of convertible preferred stock will automatically be deemed converted into shares of our common stock at the conversion rate then in effect immediately upon the earliest to occur of the following:
    the date (which must be on or after the date of option conversion above) specified by an affirmative vote of the holders of a majority of the shares of convertible preferred stock then outstanding; and
 
    the fourth anniversary of the issuance of the shares;
provided, however, that no such automatic conversion may be effected if such automatic conversion would cause the holder of such shares (or any collaborative group that includes such holder) to directly or indirectly beneficially own 95% or more of the then-outstanding voting stock of the Company. However, partial automatic conversions up to such 95% ownership limit will be permitted.
Mechanics of Conversion
In order for a holder of convertible preferred stock to convert his or her shares into shares of our common stock, he or she must surrender the stock certificate or certificates for such shares, duly endorsed, at our offices or the office any transfer agent for the convertible preferred stock, and will give written notice to us at our principal corporate office, of the election to convert the shares of convertible preferred stock. Such notice must state the name or names in which the certificate or certificates for the shares of common stock issuable upon conversion are to be issued, subject to compliance with applicable laws. As soon as practicable after receiving the notice, we will issue and deliver to the holder or the holder’s nominee a certificate or certificates representing the number of shares of common stock the holder is entitled to receive upon conversion. Such conversion will be deemed to have been made immediately prior to the close of business on the date of the holder’s surrender of the shares of convertible preferred stock, and the person or persons entitled to receive the shares of common stock issuable upon conversion will be treated for all purposes as the record holder or holders of such shares of our common stock as of such date.
Conversion Rate Adjustments of Preferred Stock for Certain Dilutive Issuances; Splits and Combinations.
The initial conversion rate will be subject to adjustment from time to time in the event that we effectuate a split, subdivision or reverse stock split of the outstanding shares of our common stock or determine holders of common stock are entitled to receive a dividend or other distribution payable in additional shares of common stock or other securities or rights convertible into additional shares of common stock without payment of any consideration, then the conversion rate of the convertible preferred stock will be appropriately adjusted in proportion to such increase or decrease, as applicable, in the aggregate number of shares of common stock outstanding after giving effect to such dividend, distribution, split, reverse stock split, subdivision or other combination.

 

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Recapitalizations
If at any time or from time to time there is a recapitalization of our common stock, we will provide that the holders of the convertible preferred stock will thereafter be entitled to receive upon conversion of the convertible preferred stock, the number of shares of stock or other securities or property of us or otherwise, to which a holder of our common stock deliverable upon conversion would have been entitled to upon the effectiveness of such recapitalization had such shares of common stock been outstanding immediately prior to the recapitalization.
Impairment
We will not, by amendment of our certificate of incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the performance of any of the terms to be observed or performed by us under the securities purchase agreement. We will at all times in good faith assist in the carrying out of all the conversion provisions of the certificate of designation and take all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the convertible preferred stock against impairment.
Reservation of Stock Issuable Upon Conversion
We will at all times reserve and keep available out of our authorized but unissued shares of common stock, solely for the purpose of effecting the conversion of the shares of the convertible preferred stock, such number of shares of common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the convertible preferred stock. If at any time the number of authorized but unissued shares of common stock shall not be sufficient to allow the conversion of all then outstanding shares of the convertible preferred stock, in addition to the other remedies available to the holder of the convertible preferred stock, we may take such corporate action that may be necessary to increase our authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purposes.
No Reissuance of Series A Preferred Stock
Shares of the convertible preferred stock that are converted into shares of common stock will not be reissued.

 

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SUBORDINATED PROMISSORY NOTES
General
BTP is entitled to pay for any securities issued pursuant to the securities purchase agreement with subordinated promissory notes, referred to collectively as the notes, in an aggregate amount equal to the aggregate purchase price payable by BTP for such securities, less the aggregate par value of such securities, which must be paid in cash. The notes mature on the third anniversary of the issuance of the notes, or the maturity date. Under the notes, BTP is obligated to pay interest from the date of issuance on the notes’ unpaid principal at a rate of 4.62% per year. The form of promissory note is attached as Annex E to this proxy statement.
Interest; Pay-in-Kind
Interest under the notes will be payable by BTP in cash in arrears on June 30th of each year until the maturity date. In addition, so long as no event of default under the notes has occurred and is continuing and provided there is no “blockage”, BTP may, in its sole discretion, elect not to pay all or part of an interest payment in cash and instead may issue additional notes in lieu of the interest otherwise due and payable on June 30th of each year.
Under the notes, “blockage” means the refusal of any non-affiliated holders of one million dollars or more in aggregate principal amount of any of BTP’s senior indebtedness to allow cash interest to be paid to us or BTP’s lack of available cash to timely make the required cash interest payment.
Any principal payment on the notes not paid when due, and to the extent permitted by applicable law, any interest payment on the notes not paid in cash or in kind when due, whether at stated maturity, by notice of prepayment, by acceleration or otherwise, will subsequently bear interest at the rate of 10% per year. If any interest rate to be charged under the notes would exceed the maximum amount permitted by applicable law, then the rate of interest will be reduced to the maximum level that would be permitted under applicable law.
Payment and Prepayment
Each payment under the notes will, at our option, first be credited to accrued and unpaid interest, and the remainder will be credited to principal. The notes may be prepaid in whole or in part at any time and any prepayment will be without premium or penalty.
BTP may make any payment of principal or interest under the notes in cash, by surrendering to us securities purchased pursuant to the securities purchase agreement or in the form of “Eligible Property.”
“Eligible Property” means:

 

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    distribution and other commercial exploitation rights respecting motion pictures, music or other audio, visual or audio-visual property, which is when considered as a whole is generally capable of being distributed commercially by us in accordance with either:
    our then-current commercial operations (i.e., titles and libraries that may be added to our existing catalogue of titles being exploited); or
 
    our current or planned operational capabilities (i.e., distribution via new media channels which we are developing, or plan to develop in the foreseeable future);
    equity or convertible securities of a corporation, limited liability company, limited partnership or other corporate entity whose assets consist substantially of Eligible Property and which company is not substantially engaged in active operations other than ownership of such Eligible Property (provided, that being party to asset license agreements, and routine management of such license agreements, shall not constitute active operations per se); or
 
    any combination of the above.
To tender a payment with Eligible Property, BTP will tender such Eligible Property to us together with a copy of an appraisal of the fair market value of such property, as well as full details respecting any indebtedness, liens, security interests or other encumbrances on such Eligible Property, and any proposals for the repayment, refinancing or assignment of such debt or encumbrances. Unless we elect arbitration within thirty (30) days after such tender, we will be deemed to have conclusively accepted such appraisal as to fair market value of the Eligible Property so tendered, and the fair market value of such Eligible Property will be applied dollar-for-dollar to reduce and repay an equivalent amount of principal and interest under the notes. Within such thirty (30) day period, a majority of the “independent” members of our board of directors, may, at our expense, engage a third-party appraiser of generally accepted professional standing in order to receive an independent appraisal of the fair market value of the Eligible Property at issue.
BTP has informed us that no specific “eligible property” has been identified as of the date of this proxy statement.
BTP may repay the notes to in whole or in part with the tender of our securities purchased pursuant to the securities purchase agreement, and the value of the security(ies) tendered to us will be:
    the purchase price of such security as set forth in the securities purchase agreement (plus any accrued but unpaid mandatory dividends and any other dividends declared but unpaid) payable with respect thereto, including capitalized or deferred dividends); or

 

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    at BTP’s request, the fair market value of such security at the time it is tendered in payment of the notes; provided, that any tender of a security in payment of the notes at the fair market value thereof will be subject to the unanimous approval of a majority of the “independent” members of our board of directors. Such approval shall be in the independent directors’ sole and absolute discretion and may be withheld for any reason or no reason.
If our independent directors do not approve the fair market value of the securities, then the value will be determined as described in the first bullet above.
Subordination/Standstill
Standstill
The notes are subordinated in right in payment to BTP’s senior indebtedness.
If the notes are declared due and payable prior to its maturity, then for a period ending the earlier of (i) 180 days following the accelerated maturity date under the note and (ii) 30 days following the maturity date of the senior indebtedness, no direct or indirect payment under this notes that is due solely by reason of such accelerated maturity (or declaration of such accelerated maturity) of the notes will be made, nor will application or any distribution or assets of BTP be made (whether by setoff or in any other manner, including, without limitation, from or by way of collateral), to the payment, purchase or other acquisition or retirement of the notes, unless, in either case, during the standstill period, all principal, interest and other amounts due or to become due on or in respect of the senior indebtedness will have been previously paid in full in cash or other immediately available funds.
For so long as any senior indebtedness remains outstanding, we will neither commence nor join with any other creditor of BTP to commence any bankruptcy, insolvency, reorganization or other similar proceeding against BTP, and we agreed to waives such rights to the fullest extent permitted by law. No payment or distribution to any holder of senior indebtedness pursuant to the provisions of the notes will entitle us to exercise any right of subrogation in respect thereof until all senior indebtedness will have been paid in full in cash.
Events of Default
An “Event of Default” will occur under the notes if:
    BTP defaults in the payment of interest either in cash or in kind on any note when the same becomes due and payable and such default has not been cured within five (5) days;
 
    BTP defaults in the payment of the principal of any note when the same becomes due and payable at maturity or otherwise;
 
    BTP fails to comply with any of its material covenants or other obligations in the notes, and such default continues for a period of 30 days after notice by us to BTP of such noncompliance;

 

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    BTP (i) commences a voluntary bankruptcy case or proceeding, (ii) consents to, or acquiesces in, the institution of a bankruptcy, liquidation or an insolvency proceeding against it or entry of a judgment, decree or order for relief against it in an involuntary case or proceeding, (iii) applies for, consents to or acquiesces in the appointment of or taking possession by a custodian of the notes or any substantial part of its property, or (iv) makes a general assignment for the benefit of its creditors;
 
    BTP defaults with respect to any indebtedness of more than five (5) million dollars, which default is not cured or waived within any applicable grace and cure period, and such default results in the immediate maturity of such indebtedness obligations; or
 
    BTP fails to comply with or to perform any material obligation or material covenant contained in the notes or the securities purchase agreement, or any representation made to us by BTP under the securities purchase agreement is false in any material respect.
Acceleration
If an Event of Default occurs and is continuing, we by written notice to BTP may declare all unpaid principal and accrued interest on the notes immediately due and payable and, upon any such declaration, the unpaid principal and accrued interest will become immediately due and payable. If an Event of Default occurs, all unpaid principal of and the accrued interest on the notes then outstanding will automatically become due and payable without any declaration or other act on our part.
COMPLETION OF THE TRANSACTIONS CONTEMPLATED BY THE AMENDED
MERGER AGREEMENT IS CONDITIONED UPON THE APPROVAL OF THE
PROPOSAL TO ADOPT THE AMENDED MERGER AGREEMENT AND APPROVAL
OF THE PROPOSAL TO APPROVE THE ISSUANCE OF THE SECURITIES
PURSUANT TO THE SECURITIES PURCHASE AGREEMENT.
THE BOARD OF DIRECTORS RECOMMENDS YOU
VOTE FOR THE APPROVAL OF THE SECURITIES ISSUANCE (PROPOSAL 2)

 

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PROPOSAL 3
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING
We are asking our stockholders to vote on a proposal to adjourn or postpone the special meeting to a later date in order to allow for the solicitation of additional proxies if there are insufficient votes at the special meeting to adopt the amended merger agreement or approve the securities issuance proposal.
If, at the special meeting, the number of shares of our common stock, present in person or represented by proxy, is insufficient to constitute a quorum, or the number of shares of our common stock voting in favor of the adoption of the amended merger agreement or the approval of the securities issuance proposal is insufficient to approve adoption of the amended merger agreement or the securities issuance proposal under applicable law, our management intends to move to adjourn or postpone the special meeting in order to enable our board of directors to solicit additional proxies. In that event, we will hold the vote on the adjournment or postponement proposal and not the proposal relating to the adoption of the amended merger agreement or approval of the securities issuance proposal.
If our stockholders approve the adjournment or postponement proposal, we could adjourn or postpone the special meeting, and any adjourned session of the special meeting, and use the additional time to solicit additional proxies, including the solicitation of proxies from stockholders that have previously voted. Among other things, approval of the adjournment or postponement proposal could mean that, even if we had received proxies representing a sufficient number of votes against the adoption of the amended merger agreement and/or approval of the securities issuance proposal, we could adjourn or postpone the special meeting without a vote on the proposal and seek to convince the holders of those shares who voted against any proposal to change their votes to votes in favor of the applicable proposal.
If the special meeting is adjourned, no notice of the adjourned meeting is required to be given to stockholders, other than an announcement at the special meeting of the place, date and time to which the meeting is adjourned, unless the adjournment or postponement is for more than 30 days, or if after the adjournment or postponement a new record date is fixed for the adjourned meeting.
The affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy and entitled to vote on the proposal is required to approve the adjournment or postponement proposal. Accordingly, “broker non-votes” will not affect the outcome of the vote on the proposal, although abstentions will have the same effect as a vote against the proposal. Unless instructed to the contrary in the proxy, the shares represented by properly completed and submitted proxies will be voted FOR the proposal to approve the adjournment or postponement proposal.
Our board of directors believes that if the number of shares of our common stock present in person or represented by proxy at the special meeting and voting in favor of the adoption of the amended merger agreement or approval of the securities issuance is insufficient to approve such proposals, it is in the best interests of our stockholders to enable the board to continue to seek to obtain a sufficient number of additional votes in favor of the adoption of the amended merger agreement and/or approval of the securities issuance proposal.

 

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THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO ADJOURN OR POSTPONE THE SPECIAL MEETING FOR THE
PURPOSE OF SOLICITING ADDITIONAL PROXIES.

 

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MARKET PRICES OF COMMON STOCK
Market Price of Common Stock
Our common stock is traded on the Nasdaq Global Market under the symbol “DISK.”
On March 29, 2007, the last trading day prior to the announcement of the original merger agreement, the closing price per share of our common stock was $3.46. On June 27, 2007, the last trading day prior to the announcement of the amended merger agreement, the closing price per share of our common stock was $4.17. The average closing price per share of our common stock over the one-year period ended September 17, 2007, was $3.81 per share. On September 14, 2007, the last trading day before the date of this proxy statement, the closing price per share of our common stock was $4.18. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares.
The following table sets forth the high and low closing sales prices per share of our common stock on the Nasdaq Global Market for the periods indicated.
                 
    Common Stock  
    High     Low  
Fiscal Year Ending March 31, 2008
               
Quarter ended June 30, 2007
  $ 4.34     $ 4.17  
 
               
Fiscal Year Ended March 31, 2007
               
Quarter ended June 30, 2006
  $ 3.95     $ 3.50  
Quarter ended September 30, 2006
  $ 3.85     $ 3.42  
Quarter ended December 31, 2006
  $ 3.65     $ 3.26  
Quarter ended March 31, 2007
  $ 4.19     $ 3.05  
 
               
Fiscal Year Ended March 31, 2006
               
Quarter ended June 30, 2005
  $ 5.36     $ 2.70  
Quarter ended September 30, 2005
  $ 4.43     $ 2.68  
Quarter ended December 31, 2005
  $ 4.15     $ 3.02  
Quarter ended March 31, 2006
  $ 3.73     $ 3.20  
 
               
Fiscal Year Ended March 31, 2005
               
Quarter ended June 30, 2004
  $ 3.95     $ 2.72  
Quarter ended September 30, 2004
  $ 4.14     $ 3.59  
Quarter ended December 31, 2004
  $ 6.48     $ 4.23  
Quarter ended March 31, 2005
  $ 6.69     $ 5.28  
We have never declared or paid cash dividends on our common stock. Our current policy is to retain earnings for use in our business.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 6, 2007, with respect to the beneficial ownership of shares of our common stock owned by (i) each person, who, to our knowledge based on Schedules 13G or 13D filed with the SEC, is the beneficial owner of more than 5% of our outstanding common stock, (ii) each person who is currently a director, (iii) each named executive officer, and (iv) all of our current directors and executive officers as a group. Unless indicated otherwise below, the person or entity listed has sole voting and dispositive power with respect to the shares that are deemed beneficially owned by such person or entity.
                 
            Percent of  
    Shares of Common Stock     Common  
Name of Beneficial Owner   Beneficially Owned(1)     Stock(2)  
BTP Acquisition Company, LLC(3)
    8,334,154       38.34 %
Image Investors Co.(4)
    6,069,767       27.79 %
Standard Broadcasting Corp. Ltd.(5)
    1,542,283       7.09 %
MMCAP International Inc. SPC and MM Asset Management Inc.(6)
    1,090,465       5.02 %
Martin W. Greenwald(7)
    1,321,604       5.94 %
David Borshell
    357,657       1.62 %
Jeff M. Framer
    292,031       1.33 %
Ira S. Epstein
    69,720       *  
M. Trevenen Huxley
    41,720       *  
Robert J. McCloskey
    30,000       *  
Gary Haber
    25,700       *  
David Coriat
    5,000       *  
All directors and executive officers as a group (8 persons)
    2,143,432       9.32 %
 
(1)   The number of shares beneficially owned includes shares of common stock in which a person has sole or shared voting power and/or sole or shared investment power. Except as noted below, each owner’s mailing address is c/o Image Entertainment, Inc., 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311-6104 and each owner named reportedly has sole voting and investment powers with respect to the common stock beneficially owned by that owner, subject to applicable community property and similar laws.
 
(2)   On September 6, 2007, there were 21,739,798 shares of our common stock, $.0001 par value, outstanding. Common stock not outstanding but which underlies options and rights (including warrants) vested as of, or vesting within, 60 days after September 6, 2007, is deemed to be outstanding for the purpose of computing the percentage of the common stock beneficially owned by each named person (and the directors and executive officers as a group), but is not deemed to be outstanding for any other purpose.
 
(3)   Based on information provided on Schedule 13D (filed on July 2, 2007), filed with the SEC by BTP. The principal executive office of BTP is located at 10100 Santa Monica Boulevard, Suite 1250, Los Angeles, California 90067. In connection with the amended merger agreement, Image Investors Co., Standard Broadcasting Corp. Ltd. and Martin W. Greenwald agreed to vote their shares in favor of the merger. The above does not include unexercised options or warrants. However, as noted in the Schedule 13D filed by BTP, BTP may be deemed to have beneficial ownership of 8,933,654 shares (including 599,500 shares subject to unexercised options or warrants) or 39.99%, of the outstanding common stock, although BTP and R2D2 expressly disclaim beneficial ownership of the shares subject to unexercised options or warrants.
 
(4)   Based on information provided on Amendment No. 15 (filed on April 5, 2007) to Schedule 13D dated July 18, 1988, filed with the SEC by Image Investors Co. (“IIC”), John W. Kluge and Stuart Subotnick. The mailing address of Image Investors Co. is c/o Metromedia Company, One Meadowlands Plaza, East Rutherford, NJ 07073. All of the shares of common stock are held of record by IIC. The shares of common stock listed in the table as beneficially owned by IIC may also be deemed to be beneficially owned by John W. Kluge and Stuart Subotnick by virtue of their being directors, executive officers and the only stockholders of IIC. With respect to these shares, IIC has the sole power to vote and dispose of such shares and options. Amendment No. 11 (dated December 30, 1992) to a Schedule 13D dated July 18, 1988, filed by IIC, John W. Kluge, and Stuart Subotnick, states that IIC and Messrs. Kluge and Subotnick each “disclaims membership in a group, although a group might be deemed to exist.”

 

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(5)   The mailing address of Standard Broadcasting Corp. Ltd. is 2 St. Clair Avenue West, Suite 1100, Toronto, Ontario, Canada M4V 1L6. Ownership based on information provided on Amendment No. 2 (filed May 11, 2006) to Schedule 13G dated September 25, 2002, filed with the SEC by Standard Broadcasting Corp. Ltd.
 
(6)   The mailing address of MMCAP International Inc. SPC is P.O. Box 32021, SMB, Admiral Financial Centre, 90 Fort Street, Grand Cayman, Cayman Islands BWI. The mailing address of MM Asset Management Inc. is 141 Adelaide Street West, Suite 410, Toronto, Ontario, Canada M5H 3L5. The information provided herein is based on information provided on Schedule 13G, dated July 16, 2007, filed with the SEC on behalf of MMCAP International Inc. SPC and MM Asset Management Inc. The parties share voting and dispositive power with respect to the shares indicated as beneficially owned by them.
 
(7)   Based on information provided on Schedule 13D (filed April 6, 2007), filed with the SEC by Martin W. Greenwald. Includes options to purchase 499,500 shares of common stock and 1,030 shares owned by MomAnDad, Inc., of which Martin W. Greenwald is a 50% owner.

 

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STOCKHOLDER PROPOSALS
Even if the merger is completed, we will continue to be a publicly held company and thus our stockholders will continue to be entitled to attend and participate in our stockholders’ meetings.
If the merger is not completed and you wish to make a proposal at the next annual meeting without including the proposal in our proxy statement, you must notify us by August 25, 2007 and must satisfy the requirements of our bylaws and applicable SEC regulations. If you fail to give notice by this date, then the persons named as proxies in the proxies we solicit for the next annual meeting will have discretionary voting authority with respect to the proposal.
Under Article II, Section 10 of our bylaws, nominations for election of members of the board may be made by the board or any stockholder of any outstanding class of our voting stock entitled to vote for the election of directors. Notice of intention to make any nominations, other than the board of directors, must be made in writing and be received by the Secretary of Image by the notice deadline. The notice must contain the following information about each nominee:
    name, age and address,
 
    principal occupation, and
 
    number of shares of Image voting stock owned.
The notice must also contain the name and residence address of the notifying stockholder, and the number of shares voting stock of Image owned by the notifying stockholder. Nominations not made in accordance with these procedures will be disregarded by the chairman of the meeting, and the inspectors of election will then disregard all votes cast for the nominees.
COMMUNICATIONS WITH OUR BOARD OF DIRECTORS
Stockholders may send communications to our board of directors. Communications should be addressed to our Corporate Secretary at our principal offices at 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311. The Corporate Secretary will forward any communications received directly to the board of directors. While we do not have a policy with regard to board of directors attendance at special meetings, we expect all the members of our board of directors to attend.
OTHER MATTERS
Other Business at the 2007 Special Meeting
Management does not know of any matter to be brought before the special meeting, other than the matters described in the Notice of Special Meeting accompanying this proxy statement. The persons named in the form of proxy solicited by our board of directors will vote all proxies, which have been properly executed, and if any matters not set forth in the Notice of Special Meeting are properly brought before the meeting, such persons will vote thereon in accordance with their best judgment.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file special, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information that we file with the SEC at the following location of the SEC:
Public Reference Room
100 F Street, N.E.
Room 1580
Washington, D.C. 20549
Please call the SEC at (800) SEC-0330 for further information on the public reference room. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Our public filings are also available to the public from document retrieval services and the Internet Web site maintained by the SEC at www.sec.gov.
Reports, proxy statements or other information concerning us may also be inspected at the offices of the Nasdaq National Market at:
One Liberty Plaza
165 Broadway
New York, NY 10006
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference information into this proxy statement. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference into this proxy statement is considered a part of this proxy statement.
We incorporate by reference into this proxy statement the documents listed below:
    Our Annual Report on Form 10-K for the year ended March 31, 2007;
 
    Our Current Reports on Form 8-K filed on August 14, 2007, August 10, 2007, July 3, 2007, July 2, 2007, June 27, 2007, June 1, 2007, May 8, 2007, April 13, 2007, April 4, 2007 and April 2, 2007.
Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of reports, proxy statements or other information concerning us, without charge, by written or telephonic request directed to us at Image Entertainment, Inc., 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311-6104, Attention: Corporate Secretary. If you would like to request documents, please do so by October 8, 2007, in order to receive them before the special meeting.

 

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No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated September 18, 2007. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to stockholders shall not create any implication to the contrary.
By Order of the Board of Directors,
-s- Dennis Hohn Cho
Dennis Hohn Cho
Senior Vice President, General Counsel and
Corporate Secretary
Image Entertainment, Inc.
September 18, 2007

 

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Annex A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
among
BTP ACQUISITION COMPANY, LLC,
IEAC, INC,
and
IMAGE ENTERTAINMENT, INC.
Dated as of June 27, 2007

 

 


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TABLE OF CONTENTS
                 
            Page  
 
               
ARTICLE I          THE MERGER     2  
 
  SECTION 1.01   Certain Definitions     2  
 
  SECTION 1.02   The Merger     11  
 
  SECTION 1.03   Closing     12  
 
  SECTION 1.04   Effective Time     12  
 
  SECTION 1.05   Effects of the Merger     12  
 
  SECTION 1.06   Certificate of Incorporation and Bylaws     12  
 
  SECTION 1.07   Directors     13  
 
  SECTION 1.08   Officers     13  
ARTICLE II          EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT CORPORATIONS;
                                EXCHANGE PROCEDURES
    13  
 
  SECTION 2.01   Effect on Capital Stock     13  
 
  SECTION 2.02   Exchange of Certificates     16  
ARTICLE III          REPRESENTATIONS AND WARRANTIES     19  
 
  SECTION 3.01   Representations and Warranties of the Company     19  
 
  SECTION 3.02   Representations and Warranties of Parent and Merger Sub     39  
ARTICLE IV          COVENANTS     44  
 
  SECTION 4.01   Conduct of Business of the Company     44  
 
  SECTION 4.02   Conduct of Business of Parent and Merger Sub Pending the Merger     47  
 
  SECTION 4.03   Control of Other Party's Business     47  
ARTICLE V          ADDITIONAL AGREEMENTS     47  
 
  SECTION 5.01   Preparation of Proxy Statement; Stockholders' Meeting     47  
 
  SECTION 5.02   No Solicitation     48  
 
  SECTION 5.03   Access to Information; Confidentiality     52  
 
  SECTION 5.04   Regulatory Matters; Reasonable Best Efforts     52  
 
  SECTION 5.05   Fees and Expenses     53  
 
  SECTION 5.06   Indemnification; Directors' and Officers' Insurance     53  
 
  SECTION 5.07   Public Announcements     55  
 
  SECTION 5.08   Transfer Taxes     55  
 
  SECTION 5.09   State Takeover Laws     55  
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TABLE OF CONTENTS
(continued)
                 
            Page  
 
               
 
  SECTION 5.10   Notification of Certain Matters     55  
 
  SECTION 5.11   Employees     56  
 
  SECTION 5.12   NASDAQ     57  
 
  SECTION 5.13   Financing     57  
 
  SECTION 5.14   No Agreements with Company Stockholders     59  
 
  SECTION 5.15   No Undisclosed Arrangements with Company Employees     59  
 
  SECTION 5.16   Rule 16b-3     59  
 
  SECTION 5.17   Certain Tax Aspects     60  
 
  SECTION 5.18   Professional Fees     60  
 
  SECTION 5.19   Additional Agreements     60  
ARTICLE VI          CONDITIONS     60  
 
  SECTION 6.01   Conditions to Each Party's Obligation to Effect the Merger     60  
 
  SECTION 6.02   Additional Conditions to Obligations of Parent and Merger Sub     61  
 
  SECTION 6.03   Additional Conditions to Obligations of the Company     62  
ARTICLE VII          TERMINATION, AMENDMENT AND WAIVER     63  
 
  SECTION 7.01   Termination     63  
 
  SECTION 7.02   Effect of Termination     64  
 
  SECTION 7.03   Amendment     67  
 
  SECTION 7.04   Extension; Waiver     67  
ARTICLE VIII          GENERAL PROVISIONS     67  
 
  SECTION 8.01   Nonsurvival of Representations and Warranties     67  
 
  SECTION 8.02   Notices     67  
 
  SECTION 8.03   Interpretation     69  
 
  SECTION 8.04   Counterparts     69  
 
  SECTION 8.05   Entire Agreement; Third Party Beneficiaries     69  
 
  SECTION 8.06   Governing Law     70  
 
  SECTION 8.07   Severability     70  
 
  SECTION 8.08   Assignment     70  
 
  SECTION 8.09   Submission To Jurisdiction; Waivers     70  
 
  SECTION 8.10   Enforcement     71  
 
  SECTION 8.11   WAIVER OF JURY TRIAL     71  
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THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of June 26, 2007, is among BTP Acquisition Company, LLC, a Delaware limited liability company (“Parent”), IEAC, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and Image Entertainment, Inc., a Delaware corporation (the “Company”).
WHEREAS, Parent, Merger Sub and the Company entered into that certain Agreement and Plan of Merger on March 29, 2007 (the “Original Agreement”), pursuant to which the parties agreed that Merger Sub would merge with and into the Company with the Company surviving such merger in accordance with the terms thereof (the “Merger”);
WHEREAS, pursuant to Section 5.17 of the Original Agreement, Parent elected to change the method of effecting the Merger to maintain (a) the listing of Company Common Stock (as defined below) on NASDAQ (as defined below) and (b) the registration of Company Common Stock under the Exchange Act (as defined below) after the Effective Time (as defined below), subject to certain conditions stated therein;
WHEREAS, the Company Board and the respective boards of directors or managing members, as the case may be, of Parent and Merger Sub have determined that it is advisable and in the best interests of their respective entities and stockholders or members that the Original Agreement be amended and restated as set forth herein;
WHEREAS, the Company Board and the respective boards of directors or managing members, as the case may be, of Parent and Merger Sub have duly approved this Agreement and the Merger, upon the terms and conditions set forth in this Agreement;
WHEREAS, pursuant to Section 5.19 hereof, the Company is agreeing to execute and deliver immediately prior to the Effective Time a securities purchase agreement in the form attached as Exhibit D hereto (the “Securities Purchase Agreement”), pursuant to which Parent will be entitled to purchase from the Company, and the Company will agree to issue and sell to Parent, shares of Company Common Stock and/or shares of series a convertible preferred stock of the Company (collectively, the “Company Additional Securities”), any such issuance and sale to occur substantially concurrently with, but immediately prior to the consummation of the Merger, on the terms and subject to the conditions set forth in the Securities Purchase Agreement; and
WHEREAS, the parties hereto desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree that the Original Agreement is hereby amended and restated in its entirety as follows:

 

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ARTICLE I
THE MERGER
SECTION 1.01 Certain Definitions. As used in this Agreement, the following terms shall have the meanings indicated below. Other capitalized terms defined elsewhere in this Agreement and not defined in Section 1.01 shall have the meanings assigned to such terms elsewhere in this Agreement.
affiliate” of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person. For purposes of this definition, “control” when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
Adjusted Base Net Worth” means 95% of the adjusted net worth of the Company as of December 31, 2006 (calculated in accordance with Section 1.01 of the Company Disclosure Letter).
Adjusted Closing Net Worth” means the adjusted net worth of the Company as of the Measurement Date (calculated in accordance with the hypothetical calculation in Section 1.01 of the Company Disclosure Letter).
Aggregate Merger Consideration” means the sum of the Per Share Cash Consideration, the Option Consideration, the Warrant Consideration, the Relativity Merger Consideration and the RSU Cash Consideration.
beneficial ownership” or “beneficially own” shall have the respective meanings as those terms are used under Section 13(d) of the Exchange Act and the rules and regulations thereunder.
Benefit Plan” means each employee benefit plan, program, arrangement or contract (including, without limitation, any “employee benefit plan,” as defined in Section 3(3) of ERISA and any welfare, bonus, deferred compensation, stock bonus, stock purchase, restricted stock, stock option, employment, termination, stay agreement or bonus, retiree medical or life insurance, change-in-control, severance or other employee benefit plan, program, policy, arrangement and contract, whether written or unwritten) which the Company or any of its Subsidiaries maintains, or contributes to, has any obligation to contribute to or has any liability, actual or contingent, with respect to, Section 4069, 4201 or 4212(c) of ERISA or otherwise.
Business” means, collectively, the businesses of the Company and its Subsidiaries.
Business Day” means any day on which banks are not required or authorized to close in the City of New York or the City of Los Angeles.
Cash Shares” means, with respect to each Company Stockholder, the percentage of such Company Stockholder’s Shares equal to the Cash Share Percentage (with any resulting fractional Cash Share rounded down to the nearest whole Share).

 

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Cash Share Percentage” means one hundred percent (100%) minus the Retained Share Percentage.
Charter Documents” means the Company’s certificate of incorporation and bylaws, in each case as may be amended from time to time.
Code” means the Internal Revenue Service Code of 1986, as amended.
Company Board” means the board of directors of the Company and any committees thereof.
Company Common Stock” means the common stock, par value $.0001 per share, of the Company, together with the associated Company Rights.
Company Convertible Note” means that certain senior convertible note issued to Portside Growth and Opportunity Fund, originally dated as of August 30, 2006, in an original principal amount of Seventeen Million Dollars ($17,000,000), as amended on November 10, 2006.
Company Credit Facility” means the Company’s secured senior revolving line of credit currently in an aggregate principal amount of up to Fifteen Million Dollars ($15,000,000) pursuant to the Loan and Security Agreement, dated May 4, 2007, by and among the Company, Wachovia Capital Finance Corporation (Western) and the other parties named therein.
Company Disclosure Letter” means the disclosure letter dated March 29, 2007 delivered to Parent by the Company in connection with the execution and delivery of the Original Agreement (with specific reference to the representations and warranties in Section 3.01 to which the information in such letter relates), as amended on the date hereof, in connection with the execution and delivery of this Agreement.
Company Equity Incentive Plans” means the Company’s 2004 Incentive Compensation Plan, 1998 Incentive Plan, 1994 Eligible Directors Stock Option Plan and the Egami Media, Inc. 2005 Incentive Compensation Plan.
Company Material Adverse Effect” means an effect, event, development or change which, individually or in the aggregate with other effects, events, developments or changes, is materially adverse to the business, assets, properties, financial condition, or results of operations of the Company and its Subsidiaries taken as a whole, other than any effect, event, development or change arising out of or resulting from (A) changes or conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates, (B) changes or conditions in the industries in which the Company and its Subsidiaries operate (provided, that the impact on the Company is not materially disproportionate to the impact on other similarly situated entities), (C) changes in laws (including, without limitation, tax laws and regulatory laws) or general economic conditions (provided, that the impact on the Company is not materially disproportionate to the impact on other similarly situated entities), (D) changes in GAAP, (E) the execution, announcement of, or compliance with,

 

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this Agreement or the consummation of the transactions contemplated herein, including the impact thereof on relationships, contractual or otherwise, with Governmental Entities, customers, suppliers, licensors, distributors, partners or employees, (F) acts of war or acts of terrorism, or (G) any change in the Company’s stock price or trading volume.
Company Preferred Stock” means the preferred stock, par value $.0001 per share, of the Company.
Company Rights” means the preferred stock purchase rights associated with the Company Common Stock pursuant to the Company Rights Agreement.
Company Rights Agreement” means the Rights Agreement, dated as of October 31, 2005, between the Company and Computershare Trust Company, Inc., a Colorado limited purpose trust company, as Rights Agent.
Company Share Issuance” means the issuance and sale of the Company Additional Securities pursuant to the Securities Purchase Agreement.
Company Stockholders” means the holders of the outstanding shares of Company Common Stock.
Company Stockholder Issuance Approval” means the affirmative vote of the holders of a majority of the shares of Company Common Stock present in person or represented by proxy and entitled to vote at the Stockholders’ Meeting required to approve the Company Share Issuance pursuant to the Charter Documents.
Company Stockholder Merger Approval” means the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock required to adopt this Agreement pursuant to Section 251(c) of the DGCL.
Confidentiality Agreement” means the letter agreement, dated November 22, 2006 between Parent and the Company.
DGCL” means the Delaware General Corporation Law.
Dissenting Shares” means any shares of Company Common Stock that are outstanding immediately prior to the Effective Time, the holders of which shall have properly delivered a written demand for appraisal and otherwise perfected the right to an appraisal of the fair value of such shares of Company Common Stock in accordance with Section 262 of the DGCL.
Egami Media” means Egami Media, Inc., a Delaware corporation and wholly owned subsidiary of the Company.
Elements” means all physical elements of or relating to a Film, including all negatives, duplicate negatives, fine grain prints, soundtracks, positive prints (cut-outs and trims excepted), and sound, all video formats (including PAL/NTSC), and other physical properties in connection with a Film and the trailer for such Film, exposed film,

 

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developed film, positives, negatives, prints, answer prints, special effects, pre-print materials (including interpositives, negatives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices and all other forms of pre-print elements which may be necessary or useful to produce prints or other copies or additional pre-print elements, whether now known or hereafter devised), soundtracks, recordings, audio and video tapes and discs of all types and gauges, cutouts, trims, non-analog recordings and tapes, including without limitation, any video digital recordings and HDTV format recordings, and any and all other physical properties of every kind and nature relating to a Film in whatever state of completion, and all duplicates, drafts, versions, variations and copies of each thereof.
Environmental Laws” means all Laws relating to the protection of human health, safety, or welfare or the environment, including any emission, discharge, generation, storage, treatment, disposal, abatement, Release, threatened Release, reporting, licensing, permitting, investigation, cleanup, mitigation, remediation, transportation, or other handling of any Hazardous Materials, including the following federal Laws as amended and their state counterparts: (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901, et seq.; the Clean Water Act, 33 U.S.C. §§ 1251, et seq.; the Clean Air Act, 42 U.S.C. §§ 7401, et seq.; and the Toxic Substances Control Act, 15 U.S.C. §§ 2601, et. seq.; and (ii) all other requirements pertaining to protection of air, surface water, groundwater or land and subsurface, natural resources, and related human health, safety, or welfare.
Environmental Liabilities and Costs” means all damages, natural resource damages, claims, losses, expenses, costs, obligations, and liabilities (collectively, “Environmental Losses”) imposed by, under or pursuant to Environmental Laws, including all Environmental Losses related to Remedial Actions, and all fees, compliance costs, disbursements, penalties, fines and expenditures necessary to cause property, the Company, any Subsidiary of the Company or the Business to be in compliance with the requirements of Environmental Laws.
Environmental Permits” means any federal, state or local permit, license, registration, consent, order, administrative consent order, certificate, approval, waiver or other authorization necessary for the conduct of the Business as currently conducted under any applicable Environmental Law.
ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.
Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Expenses” means all out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) paid or incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance

 

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of this Agreement and the transactions contemplated hereby, including (i) any due diligence and valuation costs and expenses, (ii) the preparation, printing, filing and mailing of the Proxy Statement and the solicitation of the Company Stockholder Merger Approval and the Company Stockholder Issuance Approval, (iii) the preparation and filing of all applications, notices, registrations, declarations, petitions and filings with any Governmental Entity in connection with the Required Statutory Approvals and (iv) all other matters related to the transactions contemplated hereby.
Fee Guarantee” means that certain guarantee in favor of the Company, dated as of the date of the Original Agreement, pursuant to which the payment of the Business Interruption Fee to the Company is being guaranteed if the Company becomes entitled to such payment pursuant to Section 7.02(c) hereof.
Film” or “Films” means such motion pictures (including, features and shorts), television programming, animated programming, Internet programming, direct-to-video programming, direct-to-DVD programming or other filmed, taped or recorded entertainment of any kind or nature, in whatever stage of development, production, completion, abandonment, turnaround or release, in which Company owns or controls any right, title or interest.
Film Rights” means those rights with respect to any Film, including all “Components” thereof, owned or controlled by Company or its Subsidiaries. For such purpose “Components” shall mean titles, themes, contents, dialogue, characters, plots, characterizations, elements and music (whether or not now known or recognized) including: (a) underlying literary, musical and dramatic and other material and intellectual property associated with or related to or necessary to the exploitation of such Film including copyrights pertaining thereto; (b) sequel, prequel, remake rights and other derivative production rights, including all novelization, merchandising, character, serialization, games and interactive rights; (c) all other allied, ancillary, subsidiary and derivative rights (including theme park rights) throughout the universe related to the Films; (d) all Elements related to the Films; and (e) all contractual and other rights associated with or related to the Films, whether in any media now known or hereafter developed.
GAAP” means generally accepted accounting principles in the United States.
Governmental Entity” means any federal, state, municipal, local or foreign government, any instrumentality, subdivision, court, administrative agency or commission or other authority thereof, or any quasi-governmental or private body with legal jurisdiction to exercise any regulatory, judicial, taxing, importing or other governmental authority.
Hazardous Materials” means any substance that (a) is defined, listed, identified or otherwise regulated under any Environmental Law, or (b) requires investigation, remediation, or other protective measures under such Environmental Law.

 

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HSR Act” means the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations promulgated thereunder.
Intellectual Property Right” means any trademark, service mark, trade name, copyright, patent, software license, other database, invention, trade secret, know-how (including any registrations or applications for registration of any of the foregoing) or any other similar type of proprietary intellectual property right.
known,” “knowingly” or “Knowledge” means, with respect to any party, the actual knowledge of the persons listed on Schedule 1.01, presuming such persons have completed a reasonable investigation of the matter in question.
Law” or “Laws” means, as applicable, (A) statutes, laws, rules, regulations, ordinances or codes of any Governmental Entity and (B) writs, orders, decisions, injunctions, judgments, awards and decrees of any Governmental Entity.
Letter Agreement” means that certain expense reimbursement agreement, dated March 8, 2007, by and between the Company and Parent.
Liens” means all mortgages, liens, pledges, encumbrances, charges and security interests.
Licensors” mean those persons from which the Company or its Subsidiaries has acquired any right, title or interest in any Film or any Music Product.
Master Recordings” shall mean the original Recordings of the performances of musical artists as embodied on the original Master Tape, which are owned by, or licensed to, Company.
Master Tapes” shall mean all original master recording tapes (whether digital or analog) and every recording of sound (by any method and on any substance or material, now known or hereafter developed), whether or not coupled with a visual image, including the following elements: (a) master mix reels (i.e., two-track master mixes on analog tape) recorded and compiled at the mixing studio (i.e., prior to mastering); (b) analog and/or digital multitrack tapes (masters and slaves) (including any two, three, four, eight, sixteen, twenty-four and forty-eight track master tapes) with accompanying tone reels (if available); (c) two track mastered and edited tapes (whether on analog reels, digital audio tapes, U-Matic 1630 tape, CD-R or otherwise) with respect to each recording of sound, whether or not coupled with a visual image in a format used or useful in the production or manufacture of Records; (d) computer-based recording storage formats (e.g., ProTools session and audio data files, Exabyte reels, magneto-optical discs, CD-Rs, hard discs, etc.); (e) sample and automation discs (if any); (f) all existing documentation (e.g., console strips, outboard settings, session notes, etc.); and (g) and all acetates and metal or other equivalent parts or reproductions of such master tapes and recordings, and all other materials used or useful in the recording, production or manufacture of Records.
Measurement Date” shall mean June 30, 2007.

 

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Musical Compositions” shall mean that portion of all right, title and interest in and to any musical composition (whether published or unpublished, registered or unregistered) which is owned by or licensed to Company, including, without limitation, all rights to: (a) the exploitation thereof in the form of sheet music, orchestrations, folios, compilations, songbooks and other forms of print; (b) the exploitation thereof as embodied in Records; (c) the inclusion of performances thereof in motion pictures, videotapes and other audiovisual works; and (d) the granting to third parties of the right to perform such musical compositions publicly, world-wide.
Music Distribution Agreements” shall mean all agreements relating to the distribution, license or other exploitation of any item or items of Music Product or otherwise in the Music Library or any Records embodying the same.
Music Distribution Rights” shall mean the rights of the Company, including pursuant to any license, to distribute, license or otherwise exploit any Music Product.
Music Inventory” shall mean all Records and all related packaging, all copies of published Musical Compositions (whether in the form of sheet music, orchestrations, folios, compilations, song books or any other form of print), all other physical embodiments of any of the foregoing (other than Master Tapes themselves) all promotional materials (including music videos, promotional Music Products, merchandising or any other similar materials), any other materials created, produced or manufactured pursuant to a Music Agreement (other than Master Recordings), and related products and other readily marketable materials, including raw materials, of a type manufactured by or on behalf of the Company or its Subsidiaries in the ordinary course of business as presently conducted.
Music Library” shall mean, for any person, the catalogue of all Music Product owned, held by or licensed to such person.
Music Product” shall mean: (a) Master Recordings; (b) Musical Compositions; and (c) any and all and all appurtenant rights to the Master Recordings and Musical Compositions.
NASDAQ” means the National Association of Securities Dealers Automated Quotations system.
other party” means, with respect to the Company, Parent and Merger Sub, collectively, and with respect to Parent and Merger Sub, the Company, unless the context otherwise requires.
Parent Material Adverse Effect” means an effect, event, development, change, occurrence or state of facts which prevents or materially impedes, interferes with, hinders or delays (to a date beyond the Outside Date or the Extended Outside Date (if applicable) (each as defined in Section 7.01(a)(iii) below)) the consummation by Parent and Merger Sub of the Merger, the Financing (as defined in Section 3.02(h) below) and the other transactions contemplated hereby.

 

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Per Share Cash Consideration” means an amount in cash equal to the quotient of (a) $4.40 divided by (b) the Cash Share Percentage. By way of example only, if the Cash Share Percentage is equal to ninety four percent (94%), then the Per Share Cash Consideration shall be equal to $4.68.
person” means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in the Exchange Act).
Portside Warrant” means that certain warrant, dated August 30, 2006, as amended as of November 10, 2006, in the name of the Portside Warrantholder, pursuant to which the Portside Warrantholder is entitled to purchase from the Company at the exercise price then in effect One Million (1,000,000) shares of Company Common Stock.
Portside Warrantholder” means Portside Growth and Opportunity Fund or its permitted assigns.
Professional Advisor” means with respect to any person, any attorney, accountant, investment banker and other advisor and agent.
Professional Fees” means all fees and expenses of all Professional Advisors for services rendered in connection with this Agreement and the transactions contemplated hereby, including fees and expenses of Professional Advisors arising out of, relating to or incidental to the discussion, evaluation, financing, negotiation and documentation of the transactions contemplated hereby.
Proxy Statement” means, collectively, the preliminary and definitive proxy statements and related proxy solicitation materials files with the SEC (as amended or supplemented from time to time) relating to the Company Stockholder Merger Approval and the Company Stockholder Issuance Approval.
Recording” shall mean any recording of sound, whether or not coupled with a visual image, by any method and on any substance or material, whether now or hereafter known, which is used or useful in the recording, production and/or manufacture of Records or for any other exploitation of sound.
Records” shall mean any form of reproduction, distribution, transmission or communication of Recordings (whether or not in physical form) now or hereafter known (including reproductions of sound alone or together with visual images) which is manufactured, distributed, transmitted or communicated primarily for personal use, home use, institutional (e.g., library or school) use, jukebox use, or use in means of transportation, including any computer-assisted media (e.g., CD-ROM, DVD Audio, CD Extra, Enhanced CD) or use as a so-called “ring tone.” For the avoidance of doubt, “Records” shall include the transmission or communication of a Master Recording directly to the consumer regardless of whether previously or subsequently embodied in a physical record configuration by any Person.
Relativity” means Relativity Media, LLC, a California limited liability company.

 

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Relativity Merger Consideration” means the aggregate amount in cash calculated on Section 1.01 of the Company Disclosure Letter.
Relativity Shares” means, collectively, the 3,400,000 contingently issuable shares of Company Common Stock granted to Relativity pursuant to, and on the terms and conditions of, the Relativity Transaction Documents.
Relativity Transaction Documents” means, collectively, the following agreements: (a) that certain Home Video Distribution Agreement, dated as of August 11, 2006, by and between the Company and Relativity; (b) that certain Stock Purchase Agreement, dated as of August 11, 2006, by and between the Company and Relativity; (c) that certain Security Agreement, dated as of August 11, 2006, by and between the Company and Relativity; (d) that certain Stock Pledge, dated as of August 11, 2006, by and between the Company and Relativity; and (e) that certain Stock Release Agreement, dated as of August 11, 2006, by and between the Company and Relativity.
Release” means any releasing, spilling, leaching, disposing or other transmission or discharging of Hazardous Materials into the environment (including air, soil, subsurface, surface water and groundwater).
Remedial Action” means all actions required by the Environmental Laws to investigate, monitor, clean up, remove, treat or in any other way remediate any Release.
Representatives” means with respect to any person, any director, officer or employee of, or any investment banker, financial advisor, accountant, attorney or other agent or representative of, such person.
Retained Shares” means, with respect to each Company Stockholder, the percentage of such Company Stockholder’s Shares equal to the Retained Share Percentage (with any resulting fractional Retained Share rounded up to the nearest whole Share).
Retained Share Percentage” means a specified percentage equal to the total shares of Company Common Stock outstanding immediately prior to the Effective Time as determined by Parent after taking into account (a) the applicable listing standards for continued listing of the Company Common Stock (and the common stock of the Surviving Corporation after the Merger) on NASDAQ following the Merger, (b) the anticipated stockholder base and market for such shares following the Merger, and (c) any other factors deemed relevant by Parent in its reasonable discretion; provided, however, that the Retained Share Percentage shall be determined by Parent not later than two (2) Business Days prior to the filing by the Company of the Proxy Statement in definitive form with the SEC; provided further, however, that in no event shall the Retained Share Percentage be greater than nine percent (9%) or less than five percent (5%).

 

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Returns” means all federal, state, local and foreign returns, forms, estimates, information statements and reports required to be filed with any Governmental Entity relating to Taxes.
RSUs” means restricted stock units entitling the holder thereof to shares of Company Common Stock.
SEC” means the Securities and Exchange Commission.
Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Shares” means shares of Company Common Stock.
Stockholders’ Meeting” means a meeting of Company Stockholders (which may be the regular annual meeting, if approved by Parent, such approval not to be unreasonably withheld or delayed) for the purposes of obtaining the Company Stockholder Merger Approval and the Company Stockholder Issuance Approval.
Subsidiary,” means, when used with respect to Parent, Merger Sub, the Surviving Corporation or the Company, any other person (whether or not incorporated) with respect to which Parent, Merger Sub or the Company, as applicable, directly or indirectly (a) owns or has the power to vote or control more than 50% of any class or series of capital stock or other voting interests of such person or (b) is a general partner, managing member or joint venturer.
Taxes” means any and all federal, state, local and foreign taxes, including, without limitation, gross receipts, income, profits, capital, sales, use, license, registration, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, assessments, governmental charges and duties and similar amounts together with all interest, penalties and additions imposed with respect to any such amounts.
Trading Day” means any day on which the shares of Company Common Stock are traded on The NASDAQ Global Market, or, if The NASDAQ Global Market is not the principal trading market for the shares of Company Common Stock, then on the principal securities exchange or securities market on which the shares of Company Common Stock are then traded; provided, that “Trading Day” shall not include any day on which the shares of Company Common Stock are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the shares of Company Common Stock are suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
Transfer Taxes” means all stock transfer, real estate transfer, property, documentary, stamp, recording and other similar Taxes incurred in connection with the transactions contemplated by this Agreement.

 

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SECTION 1.02 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, Merger Sub shall be merged with and into the Company at the Effective Time (as defined below). Following the Effective Time, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the corporation surviving the Merger (the “Surviving Corporation”) and shall succeed to and assume all of the rights and obligations of the Company and Merger Sub in accordance with the DGCL. As a result of the Merger, the Surviving Corporation shall become a wholly-owned subsidiary of Parent. The effects and consequences of the Merger shall be as set forth in Section 1.05.
SECTION 1.03 Closing. The closing of the Merger (the “Closing”) shall take place at 8:00 a.m. local time on a date to be specified by the parties hereto, which shall be no later than the tenth Business Day after satisfaction or, to the extent permitted by this Agreement and applicable Law, waiver of the conditions set forth in Article VI of this Agreement (other than those conditions that by their terms are to be satisfied at the Closing, but subject to such satisfaction at the Closing or, to the extent permitted by this Agreement and applicable Law, waiver of those conditions at or prior to the Closing), at the offices of Manatt, Phelps & Phillips, LLP, 11355 West Olympic Blvd., Los Angeles, California 90064, unless another time, date or place is agreed to by Parent and the Company. The actual date on which the Closing occurs is referred to in this Agreement as the “Closing Date.”
SECTION 1.04 Effective Time. Subject to the provisions of this Agreement, the parties shall prepare, and on the Closing Date the parties shall cause to be filed with the Delaware Secretary of State, a certificate of merger in accordance with Section 251 of the DGCL (in any such case, the “Certificate of Merger”) and shall make all other filings or recordings required under the DGCL to effectuate the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Delaware Secretary of State, or at such later time as the parties hereto may agree and specify in the Certificate of Merger (the time and date the Merger becomes effective being hereinafter referred to as the “Effective Time”).
SECTION 1.05 Effects of the Merger. The Merger shall have the effects set forth in this Agreement and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, immunities, powers, franchises and authority of the Company and Merger Sub will be vested in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub will become the debts, liabilities and duties of the Surviving Corporation, in each case as contemplated by Section 259 of the DGCL.
SECTION 1.06 Certificate of Incorporation and Bylaws.
(a) At the Effective Time, the certificate of incorporation of the Company shall be amended so as to read in its entirety as is set forth on Exhibit A hereto, and, as so amended, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended in accordance with its terms or applicable Law.

 

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(b) At the Effective Time, the bylaws of the Company shall be amended so as to read in their entirety as is set forth on Exhibit B hereto, and, as so amended, shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with their terms or applicable Law.
SECTION 1.07 Directors. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation from and after the Effective Time, each to hold office until their respective successors are duly elected and qualified.
SECTION 1.08 Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, each to hold office until their successors are duly appointed by the board of directors of the Surviving Corporation or a duly authorized committee thereof.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE
CONSTITUENT CORPORATIONS; EXCHANGE PROCEDURES
SECTION 2.01 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent, Merger Sub or the holders of any of the following securities:
(a) Capital Stock of Merger Sub. The shares of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall automatically be converted into and become that number of fully paid and nonassessable shares of common stock, par value $.0001 per share, of the Surviving Corporation equal to the number of shares of Company Common Stock outstanding immediately prior to the Effective Time minus the Retained Shares, plus (ii) the right to receive at Parent’s election at the Effective Time warrants to purchase 8,500,000 shares of common stock of the Surviving Corporation, in the form of Exhibit C hereto (the “BTP Warrants”). The issuance of the BTP Warrants, if such issuance is elected by Parent, is referred to as the “BTP Warrants Issuance.
(b) Cancellation of Treasury Stock. Each share of Company Common Stock that is owned by the Company as treasury stock immediately prior to the Effective Time (collectively, the “Canceled Shares”) immediately prior to the Effective Time shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.
(c) Conversion and Retention of Company Common Stock.
(i) Each Cash Share issued and outstanding immediately prior to the Effective Time, other than the Canceled Shares and any Dissenting Shares (each such Cancelled Share and Dissenting Share, an “Excluded Share” and collectively, the “Excluded Shares”), automatically shall be converted as of the Effective Time into the right to receive the Per Share Cash Consideration, without interest, less any required withholding Taxes in accordance with Section 2.02(h) hereof.

 

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(ii) Each Retained Share shall remain outstanding and beneficially owned after the Merger as a share of common stock of the Surviving Corporation of the Person who beneficially owned such Retained Share immediately prior to the Effective Time, and otherwise shall be unaffected by the Merger.
(d) Cancellation of Shares. At the Effective Time, all Cash Shares (other than Dissenting Shares) shall no longer be outstanding and such Cash Shares shall automatically be canceled and retired and shall cease to exist, and, in the case of book-entry Cash Shares (“Book-Entry Shares”), the names of the former registered holders shall be removed from the registry of holders of such Cash Shares, and each holder of Book-Entry Shares or any stock certificate representing any such Cash Shares (each, a “Certificate” and collectively, the “Certificates”) shall cease to have any rights with respect thereto, except the right to receive cash with respect to each such Cash Share in accordance with, or as otherwise contemplated by, Section 2.02 of this Agreement.
(e) Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Dissenting Shares shall not be converted into or represent the right to receive the Per Share Cash Consideration as provided in this Section 2.01. At the Effective Time, the Dissenting Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of Dissenting Shares shall be entitled only to such rights as are granted under Section 262 of the DGCL, except that all Dissenting Shares held by persons who fail to perfect or who effectively waive, withdraw or lose their rights as a dissenting stockholder in respect of such Dissenting Shares under Section 262 of the DGCL shall automatically be deemed to have been converted as of the Effective Time into the right to receive only the Per Share Cash Consideration and to retain such holders’ Retained Shares as provided in this Article II and will no longer be Dissenting Shares or Excluded Shares for purposes of the Agreement. The Company shall give prompt notice and copies to Parent of any demands for appraisal of any Shares, withdrawals of such demands and any other instruments served pursuant to the DGCL received by the Company, and Parent shall have the right to participate in and direct all negotiations, settlements and proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, without the prior written consent of Parent, voluntarily make any payment with respect to, or settle or offer to settle, any such demands, or agree to do or commit to do any of the foregoing.
(f) Options. At the Effective Time, each option (each, an “Option”) to purchase Company Common Stock granted under the Company Equity Incentive Plans that is outstanding and unexercised immediately prior to the Effective Time (whether vested or unvested) shall be cancelled, and the holder thereof shall be entitled to receive at the Effective Time from the Company, or as soon as practicable thereafter (but in no event later than two (2) Business Days after the Effective Time) from the Surviving Corporation, in consideration for such cancellation, only an amount in cash (the “Option Consideration”), without interest, equal to the product obtained by multiplying (x) the total number of shares of Company Common Stock issuable upon the exercise in full of such Option by (y) the excess, if any, of the amount of the Per Share Cash Consideration over the exercise price per share of Company Common Stock subject to such Option (with the aggregate amount of such payment rounded up to the nearest cent), and in each case less any required withholding for Taxes in accordance with Section 2.02(h) hereof.

 

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(g) Restricted Stock Units. At the Effective Time, each RSU that is outstanding immediately prior to the Effective Time (whether vested or unvested) shall be canceled, and the holder thereof shall be entitled to receive at the Effective Time from the Company, or as soon as practicable thereafter (but in no event later than two (2) Business Days after the Effective Time) from the Surviving Corporation, in consideration of such cancellation, an amount in cash (the “RSU Consideration”), without interest, equal to the product of (i) the number of shares of Company Common Stock subject to such RSU and (ii) the Per Share Cash Merger Consideration, and in each case less any required withholding for Taxes in accordance with Section 2.02(h) hereof, but in each case subject to the terms and conditions set forth in the Company Equity Incentive Plans, including the terms and conditions with respect to distributions and timing of payment thereunder and any provisions requiring compliance with Section 409A of the Code.
(h) Warrants. Other than the Portside Warrantholder, each holder (each, a “Warrantholder”) of a warrant (each, a “Warrant”) to purchase Company Common Stock (other than the Portside Warrant) shall only be entitled to receive an amount in cash (the “Warrant Consideration”), without interest, equal to the product obtained by multiplying (x) the total number of shares of Company Common Stock issuable upon the exercise in full of such Warrant held by such Warrantholder by (y) the excess, if any, of the Per Share Cash Consideration over the exercise price per share of Company Common Stock under such Warrant (with the aggregate amount of such payment rounded up to the nearest cent), and in each case less any required withholding for Taxes in accordance with Section 2.02(h) hereof. As of the Effective Time, all such Warrants shall no longer be outstanding and shall automatically be canceled and retired and cease to exist and each Warrantholder shall cease to have any rights with respect thereto, except the right to receive the Warrant Consideration, without interest, upon the surrender of the original Warrant to the Paying Agent in accordance with Section 2.02(k).
(i) Portside Warrant.
(i) If the Portside Warrant is outstanding and unexercised immediately prior to the Effective Time, the Company, as the Surviving Corporation in the Merger, shall continue to be obligated to perform under the Portside Warrant in accordance with the terms and conditions thereof. No waiver of any of the Company’s rights or powers under the Portside Warrant shall be deemed to have occurred as a result of the Merger.
(ii) Upon consummation of the Merger and if the Portside Warrant is then outstanding and unexercised, the Company, as the Surviving Corporation, shall deliver to the Portside Warrantholder any confirmations required to be delivered to the Portside Warrantholder pursuant to the terms and conditions of the Portside Warrant.
(j) Relativity Shares. Subject to the terms and conditions of the Relativity Transaction Documents, the Relativity Shares shall be converted into the right to receive the Relativity Merger Consideration, without interest and less any required withholding Taxes in accordance with Section 2.02(h) hereof. As of the Effective Time and subject to the terms and conditions of the Relativity Transaction Documents, all Relativity Shares shall no longer be outstanding or issuable and all Relativity Shares shall automatically be canceled and retired and shall cease to exist, and Relativity shall thereafter only have the right to receive from the

 

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Company at the Effective Time, or as soon as practicable thereafter (but in no event later than two Business Days after the Effective Time) from the Surviving Corporation, in consideration of such cancellation, only the Relativity Merger Consideration, without interest.
(k) Company Convertible Note.
(i) The Company shall provide to the holder of the Company Convertible Note, all notices required by the terms of the Company Convertible Note to be provided to the holder of such Company Convertible Note.
(ii) If the Company Convertible Note is outstanding and unconverted immediately prior to the Effective Time, then at the Effective Time the Company, as the Surviving Corporation, shall continue to be obligated to perform under the Company Convertible Note in accordance with the terms and conditions thereof; provided, that, in accordance with the terms of the Company Convertible Note, Section 14 of the Company Convertible Note shall be deemed deleted and of no force and effect after the Effective Time. No waiver of any of the Company’s rights or powers under the Company Convertible Note shall be deemed to have occurred as a result of the Merger.
(iii) Upon consummation of the Merger and if the Company Convertible Note is then outstanding, the Company, as the Surviving Corporation, shall deliver to the holder of the Company Convertible Note any confirmations required to be delivered to the holder of the Company Convertible Note pursuant to the terms and conditions of the Company Convertible Note; provided, that, in accordance with the terms of the Company Convertible Note, Section 14 of the Company Convertible Note shall be deemed deleted and of no force and effect from and after the Effective Time.
SECTION 2.02 Exchange of Certificates.
(a) Paying Agent. Prior to the Effective Time, Parent shall designate a bank or trust company, reasonably acceptable to the Company, to act as paying agent in the Merger (the “Paying Agent”) and, prior to the Effective Time, Parent shall enter into an agreement with the Paying Agent (the “Paying Agent Agreement”), which Paying Agent Agreement shall provide, among other things, that Parent shall deposit with the Paying Agent, immediately prior to the Effective Time, for the benefit of the holders of Cash Shares (other than the Excluded Shares), immediately available funds in an aggregate amount necessary for the payment of the Per Share Cash Consideration upon surrender of Certificates or Book-Entry Shares pursuant to this Section 2.02. The cash deposited with the Paying Agent by Parent in accordance with this Section 2.02 shall hereinafter be referred to as the “Exchange Fund.” The Exchange Fund shall not be used for any purpose other than such payments.
(b) Exchange Procedures for Certificates. No later than five Business Days after the Effective Time, Parent shall cause the Paying Agent to mail to each holder of record of Shares (other than the Excluded Shares), (i) a letter of transmittal in customary form and mutually agreed upon by Parent and the Company, which shall specify that delivery shall be effected, and risk of loss and title to the Certificates and Book-Entry Shares shall pass, only upon delivery of the Certificates or Book-Entry Shares, as the case may be, to the Paying Agent and

 

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(ii) instructions for effecting the surrender of the Certificates (or Affidavits (as defined below) in lieu of any lost, stolen or destroyed Certificates) and Book-Entry Shares in exchange for the Per Share Cash Consideration payable with respect to such holders Cash Shares (the “Initial Notice”). Upon surrender of a Certificate (or an Affidavit in lieu thereof) or Book-Entry Share for cancellation to the Paying Agent, together with a duly executed and properly completed letter of transmittal and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate or Book-Entry Share shall be entitled to receive in exchange therefor (i) the Per Share Cash Consideration for each Cash Share of such holder, and (ii) a certificate or certificates representing the number of whole Retained Shares to be retained by the holder thereof by virtue of the Merger pursuant to Section 2.01, and the Certificate or Book-Entry Share so surrendered shall forthwith be canceled. Until surrendered and exchanged as contemplated by this Section 2.02, each Certificate and Book-Entry Share shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Per Share Cash Consideration for any Cash Shares and the right to receive a stock certificate representing the Retained Shares such holder is entitled to retain pursuant to Section 2.01. No interest will be paid or will accrue to holders of Certificates or Book-Entry Shares on the cash payable upon the surrender of any Cash Shares.
(c) No Further Ownership Rights in Cash Shares Exchanged for Cash; Distributions with Respect to Unexchanged Cash Shares.
(i) All cash paid upon the surrender of Cash Shares in accordance with the terms of this Section 2.02 shall be deemed to have been paid in full satisfaction of all rights pertaining to the Cash Shares surrendered or theretofore represented by the portion of such Certificates or Book-Entry Shares that constitute Cash Shares.
(ii) No dividends or other distributions with respect to Cash Shares with a record date after the Effective Time of the Merger shall be paid to the holder of such Cash Shares.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed one hundred and thirty-five (135) days after the Effective Time (including any net profit, interest or other earnings or gains thereon) shall be delivered to the Surviving Corporation (or, to a wholly owned subsidiary of the Surviving Corporation, if the Surviving Corporation