Private Equity Firm to Invest in Image

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Image Entertainment Inc. said that a San Francisco private equity firm plans to invest up to $30 million in the struggling home entertainment distributor in a preferred stock deal that will require nearly all of the current board to resign.

The Chatsworth company said late Monday that its board of directors approved the sale of 22,000 shares of new Series B cumulative preferred stock and 196,702 shares of Series C junior participating preferred stock for a total $22 million to affiliates of JH Partners LLC.

The securities purchase agreement also grants the investors the right to purchase up to $8 million worth of additional series B and C stock in two later transactions. In addition, JH Partners will provide $5 million in credit support to persuade the company’s lenders to allow more borrowing under its current credit facility until a new one can be arranged.

JH Partners, which according to its Web site typically targets “growth-oriented businesses with sustainable competitive advantages” and revenues of $10 million to $300 million, is now investing a $390 million fund raised in 2008. It currently has $600 million under investment.

Image, which had been facing a possible Chapter 11 reorganization, has struggled for years to make the transition from VHS and DVD discs to downloadable and other digital media. Last week it defaulted on a $4 million debt payment for a $15.7 million senior convertible note.

“The company has struggled in recent periods because of a lack of resources,” Image President Jeff Framer said in a statement. “The company’s new investors bring a wealth of entertainment industry experience coupled with access to sufficient capital to allow the company to continue growing.”

The initial stock sale is expected to close by Jan.8. Image said it will use the net proceeds to repay outstanding indebtedness, other liabilities and for general working capital. As a condition for the investment, four directors approved by the new investors will be appointed to the board and all but one of the current directors will resign.

The company, which has seen its market cap dwindle to about $6 million, also received a Nasdaq delisting notice last week that it plans to appeal. Because the notice was triggered by the company’s low share price, it is unclear how the preferred share investment will influence the appeal.

Image shares were down 1 cent, or 3 percent, to 27 cents in midday trading on the Nasdaq.

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