Image fights for BTP distribution agreement

By Susanne Ault -- Video Business, 1/28/2008

JAN. 28 | With the Image Entertainment-BTP Acquisition Group merger faltering, Image is trying to enforce an output agreement for distribution of BTP’s Capitol Films and ThinkFilm product.

In documentation filed with the SEC on Jan. 28, BTP affiliate CT1 claims that Image promised CT1 $1 million as an initial payment for certain transfer of assets to Image. CT1 assets include films from BTP subsidiary companies ThinkFilm and Capitol Films; content that was to have been distributed through Image under the original output agreement, signed in December. Image disagreed with the $1 million terms, according to CT1.

On Jan. 25, Image filed for an injunction against CT1 and BTP in Los Angeles Superior Court, a motion that was shortly denied. BTP concluded Image was hoping to secure support for Image’s belief that BTP is in breach of its agreements, which had included long-held plans for BTP to purchase Image, as well as activation of the CT1 distribution pact. Citing Image’s behavior and objections to the output pact’s terms, CT1 is refusing to distribute content through the DVD supplier.

Image’s board of directors are currently exploring terminating the merger, most recently anticipated to close Feb. 1, complaining that BTP is not transparent about its finances and is in breach of contract. In turn, BTP believes Image is in breach of contract for reneging on a promise to secure $60 million from its lender that would go toward consummating the merger.

Although relations are quickly deteriorating between the companies, Image CEO Marty Greenwald wrote a letter, dated Jan. 28, to BTP and CT1 owner David Bergstein hoping to reinstate the CT1 output agreement. Image was due to generate $30 million from its CT1 pact, according to Greenwald.

Also, Greenwald says that it’s especially important for the CT1 pact to be upheld because Image accepted it as assurance that BTP was still committed to the merger. BTP also has given Image millions in a trust as additional security that it intended to complete the transaction.

“As was disclosed publicly December 2007, at your request, the Image board of directors agreed to a fifth extension of the closing date of the merger for an additional five weeks to Jan. 14, 2008, in exchange for the deposit into a trust account of $2 million in cash to support the $4.2 million business interruption fee called for in the Merger Agreement plus the Distribution Agreement,” said Greenwald in the letter. “The Distribution Agreement was the primary consideration our board required, and you agreed to provide, for the extension you claimed you needed to finalize your financing. In fact, it was Image that graciously gave you an opportunity to avoid breaching the Merger Agreement when you anticipated that you would be unable to close at that time.”

Greenwald says employees have already been hired and 150,000 units of product have been transferred in connection with the CT1 deal. He threatens that Image will consider suing CT1 if the distribution agreement isn’t resumed. Greenwald is concerned about long-term business damage to Image over CT1 associates allegedly notifying retail customers that Image has no right to sell them product.

“[This] will cause them to refuse to deal with either of us and may permanently destroy the value of the ThinkFilm brand,” said Greenwald. “Therefore, your actions not only fail to mitigate your purported damages, they actually exacerbate them.”

Greenwald indicates that Image and BTP can still salvage their original business objectives and states that Image still hopes to close the merger on Feb. 1.

However, BTP and CT1’s Bergstein is not backing down in contending Image is in breach of contract. In addition to not following merger and CT1 distribution deal points, Bergstein said he is offended by Image’s litigious behavior.

“I am truly astonished that Image chose this unfortunate course, after everything my companies did to assist Image with its operations and prospects, including offering to provide tens of millions of dollars of product value to Image,” said Bergstein in the SEC filing. “I have enjoyed a close and cordial relationship with Marty Greenwald of Image, and it is unfortunate to witness the melt-down of these two large transactions—the merger and the distribution relationship—by boardroom fiat, to the detriment of Marty and his team.”