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Image Inks Replication Deal

10 Jul, 2006 By: Erik Gruenwedel

Image Entertainment has signed a five-year DVD/CD replication deal with Ashville, N.C.-based Sonopress LLC, a division of German media giant Bertlesmann.

Image previously replicated discs through Vernon Hills, Ill.-based Deluxe Media Services.

Under the terms of the 75 million disc deal, Sonopress agreed to give Image an interest-free $10 million advance that would be repaid at 20 cents per manufactured disc plus a 4.2-cent administrative fee per disc, according to a filing with the Securities and Exchange Commission.

As a result, Image would be responsible to Sonopress for more than $18.1 million over the life of the agreement, which some experts say appeared tantamount to a loan.

An Image representative wouldn't comment. Sonopress CFO John Pierce declined to address the issue directly, stating only, “It happens in the DVD replication business from time to time.”Image, which lost $283,000 in the fourth quarter and $207,000 in fiscal 2006, has been the subject of acquisition scuttlebutt after its second-largest shareholder, Lionsgate, failed to acquire the company last year.

Lionsgate has submitted a slate of candidates for Image's board election in September.

Analyst David Miller, with Sander Morris Harris in Los Angeles, said the replication deal appeared unusual and reiterated that Image would be better off as part of a larger organization such as Lionsgate.

“There really is no other white-knight-oriented suitor out there,” Miller said.

He said the issue revolves around Image CEO Martin Greenwald wanting $8 per share for his company versus the $4-per-share cash offered by Lionsgate. Miller said Greenwald wants to be given credit (as capitalized assets) on a per-share basis for films now in production.

“That's fine if you are Disney, and you have already filmed Pirates of the Caribbean 3,” Miller said. “There is a certain value that title holds. But if you are Image, you don't really have a track record as a pure-play content creator, and you are not going to get credit for that on the street.”

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