edcih10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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For
the fiscal period ended
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December
31, 2008
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oTRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
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to
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Commission
File Number
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001-34015
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EDCI
HOLDINGS, INC.
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(Exact
Name of Registrant as Specified in Its Charter)
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DELAWARE
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26-2694280
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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1755
Broadway, 4th FL, New York, New York
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10019
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(Address
of principal executive offices)
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(Zip
Code)
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(212)
333-8400
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, $0.02 par value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
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Title of Class
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes o No
x
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Exchange Act. Yes o No
x
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Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. o
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Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer and large
accelerated filer,” “accelerated filer and smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated
filer (Do not check if a smaller reporting company) x Smaller
reporting company o
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2) Yes o No
x
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The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of Registrant, computed by reference to the closing price
of the Registrant’s common stock on June 30, 2008, was approximately $28.6
million. The number of shares of the Registrants’ common stock
outstanding on March 27, 2009 was 6,699,957.
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DOCUMENTS INCORPORATED BY
REFERENCE:
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Document
Location of
Form
Proxy
Statement for 2009 Annual Meeting of
Stockholders Part
III
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EDCI Holdings, Inc. and
Subsidiaries
INDEX
Page
Part
I
Item 1.
Business...............................................................................................................................................................................................................................................3
Item 1A.
Risk
Factors......................................................................................................................................................................................................................................8
Item 1B.
Unresolved Staff
Comments..........................................................................................................................................................................................................
13
Item 2.
Properties.............................................................................................................................................................................................................................................13
Item 3.
Legal
Proceedings..............................................................................................................................................................................................................................13
Item 4.
Submission of Matters to a Vote of Security
Holders..................................................................................................................................................................15
Part
II
Item 5.
Market for Registrant’s Common Equity Related Stockholder Matters and
Issuer................................................................................................................16
Purchases
of Equity Securities
Item 6.
Selected Financial
Data.....................................................................................................................................................................................................................18
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................................19
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk................................................................................................................................................32
Item 8.
Financial Statements
Report of
Independent Registered Public Accounting
Firm...................................................................................................................................................35
Consolidated Balance Sheets as of
December 31, 2008 and
2007...........................................................................................................................................36
Consolidated Statements of Operations
for the years ended December 31, 2008, 2007 and
2006.....................................................................................37
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Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the
years
ended
December 31, 2008, 2007 and
2006...................................................................................................................................................................................38
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Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and
2006....................................................................................39
Notes to
Consolidated Financial
Statements.............................................................................................................................................................................40
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................................78
Item 9A.
Controls and Procedures including Reports of Independent Registered Public
Accounting
Firm…..............................................................................78
Item 9B.
Other
Information...........................................................................................................................................................................................................................78
Part
III..............................................................................................................................................................................................................................................................79
Part
IV
Item 15.
Exhibits.............................................................................................................................................................................................................................................80
EX-21.1 SUBSIDIARIES OF ENTERTAINMENT
DISTRIBUTION COMPANY.
EX-23.1 CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1 SECTION 302, CERTIFICATION OF
THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF
THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF
THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF
THE CFO
We, from
time to time, make “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements reflect the
expectations of management at the time such statements are made. The reader can
identify such forward-looking statements by the use of words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intend(s),” “potential,” “continue,” or the negative of such terms,
or other comparable terminology. Forward-looking statements also include the
assumptions underlying or relating to any of the foregoing
statements.
Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Risk
Factors” below. All forward-looking statements included in this Report on Form
10-K are based on information available to us on the date hereof. We
assume no obligation to update any forward-looking statements.
PART
I
ITEM
1. BUSINESS
Overview
EDCI
Holdings, Inc. (“EDCIH”) is a recently formed holding company and parent of
Entertainment Distribution Company, Inc. which, together with its wholly owned
and controlled majority owned subsidiaries, is a multi-national company that is
seeking to enhance stockholder value by pursuing acquisition opportunities while
continuing to oversee its majority investment in Entertainment Distribution
Company, LLC (“EDC”), a business operating in the manufacturing and distribution
segment of the entertainment industry. EDCIH's principal
executive
offices are located in New York City at 1755 Broadway, 4th Floor, New York, New
York, 10019 and its telephone number for investor relations is (212) 333-8400.
In this Form 10-K, the terms “we,” “us,” “our” and “the Company” each refer to
EDCI Holdings, Inc. and its wholly-owned and controlled majority owned
subsidiaries on a consolidated basis unless the context requires
otherwise. The term “EDCI” refers only to EDCI Holdings, Inc. and its
direct and indirect wholly-owned subsidiaries, and the term “EDC” refers only to
Entertainment Distribution Company, LLC (“EDC”), and its direct and indirect
wholly-owned subsidiaries.
EDCI is
currently comprised of the following: First, EDCI, indirectly through
certain subsidiaries, owns 97.99% of the Limited Liability Company units of
EDC. Additionally, EDCI has approximately $52.6 million of cash and
cash equivalents that is unencumbered by EDC. (The
Company's total consolidated cash and cash equivalents of $75.1 million
includes $22.5 million of cash held at EDC). Finally, we believe EDCI
has substantial unrestriced U.S. net operating loss carryforwards ("NOLs")
aggregating approximately $288.0 million that do not begin to expire until 2019,
which may be used to offset taxable income of any business EDCI
acquires. See "Risk Factors," specifically limitations on NOLs.
EDCI does not have any short-term or long-term debt. All of the debt
discussed in this Report is solely debt of EDC.
Notwithstanding
the foregoing, during 2008, we had one reportable business segment operated by
our majority owned subsidiary, EDC. EDC is an industry leader in
providing pre-recorded products and distribution services to the optical
disc industry with operations currently serving central Europe and the
United Kingdom (“UK”). EDC was formed by the acquisition of the U.S.
and central European CD and DVD manufacturing and distribution operations from
Universal Music Group (“Universal”) in May 2005. As part of the
transaction, EDC entered into supply agreements with Universal with initial
terms of 10 years under which EDC became the exclusive manufacturer and
distributor for Universal’s CD and DVD manufacturing requirements and
distribution requirements for the U.S. and central Europe. In past
periods, including during fiscal year 2006, we had a second reportable business
segment – Glenayre Messaging. On December 31, 2006, EDCI sold
substantially of the assets comprising the Messaging business for $25.0
million.
EDCI
acquired its interest in EDC in May 2005, at a time when it was already apparent
that CD volumes would decline over time and continue to be superseded, though at
an unknown rate, by digital (vs. physical) means of distribution. At
that time, industry forecast decline rates were generally in the mid-to-low
single digit range and we believed that at those decline levels it would be
possible to replace lost units and grow the overall profitability of EDC by
acquiring new customers, organically and through acquisitions, in both the core
CD business as well as in adjacent industries that had long-term growth
opportunities. EDC’s supply agreements with Universal also provided
for the “reversion” of certain units that UMG had outsourced to third parties
that would further protect EDC from industry declines in the initial years of
the contract. As a result, we believed the EDC business would better
take advantage of EDCI’s NOLs than the Messaging business, and remained focused
on growing the EDC business throughout 2006 and in early 2007. In
furtherance of that strategy, in July 2006, EDC’s presence in the European
market was expanded through the acquisition of the largest CD manufacturing
operation in the United Kingdom.
This
acquisition also allowed EDC to secure all of Universal’s UK CD manufacturing
business. Also in furtherance of this strategy, in December 2006,
EDCI completed the sale of substantially all of the assets of its Messaging
business.
During
2007, physical music CD unit sales for the industry in the United States
declined 16% on a year over year basis. This severe decline rate
materially affected the near-term profitability of EDC’s U.S. business and also
limited the long-term potential benefit of utilizing EDCI’s NOLs. As
it became evident during 2007 that these levels of declines were not
abating, we determined that acquisitions, by EDC, especially acquisitions
requiring further investments of EDCI’s cash in EDC, were no longer
prudent. We therefore began to explore a sale or other divestiture of
the EDC business with the expectation that after such a sale EDCI would then use
its cash, NOLs and any additional cash resulting from the sale of EDC for
another acquisition that would better utilize its NOLs.
When it
became evident in early 2008 that there were no acquirers of EDC on acceptable
terms, EDCI determined to concurrently explore acquisitions in alternative
industries using EDCI’s cash while overseeing the EDC business with a focus on
cash flow and continuing to explore strategic alternatives for EDC as they
became available.
As part
of this strategy, we completed the following activities in 2008 and
2009:
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Restructured
EDCIH to Protect the Value of EDCIH's
NOLs: Effective August 25, 2008, EDCI consummated a
series of transactions that were designed to protect the value of our NOLs
by imposing certain transfer restrictions on the publicly
traded common stock of EDCI. Under section 382 of the Internal
Revenue Code (“section 382”), certain changes in the ownership of the
Company’s stock, or issuances of new shares, could, over time,
result in significant limitations being imposed on EDC’s ability to use
these NOLs — thereby reducing their long-term value. EDCI also
structured this transaction to have the effect of a 1-for-10 reverse split
to assist in avoiding a potential de-listing of EDCHI for failure to
maintain the minimum $1.00 per share requirement for continued inclusion
on the NASDAQ stock market. The reorganization was
approved at EDCI’s 2008 annual meeting by the affirmative vote of
shareholders holding 4,544,154 shares, with 82,187 shares against and
8,883 shares abstaining. On August 25, 2008, the stock of EDCI
ceased trading on the NASDAQ Global Market and the stock of the Company
now trades on the NASDAQ Capital
Market.
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Completed
the Sale of Substantially All of the U.S. Assets of EDC: We
announced on October 31, 2008, and closed on December 31, 2008, the sale
of substantially all of the U.S. business of EDC to Sony DADC U.S., Inc
(“Sony DADC”) for $26.0 million in cash and certain other
consideration. Following the transaction, EDC continues to
operate and serve its international customers through its facilities in
Hannover, Germany and Blackburn, UK. All information related to
EDC’s U.S. operations is reflected as discontinued operations in the
accompanying 10-K, including information from prior
periods.
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Appointed
New, Acquisition-Oriented Chief Executive Officer: As a
result of a search for a permanent Chief Executive Officer begun in
August, 2008, on January 5, 2009 we announced the appointment of Robert L.
Chapman, Jr. as Chief Executive Officer of EDCI and EDC. Mr. Chapman
replaced Interim Chief Executive Officer Clarke H. Bailey, who continues
to serve as non-Executive Chairman of the Board of EDCI. Mr.
Chapman’s primary goal as CEO is to lead EDCI’s transition into a
respected, fairly valued public company by prudently and diligently
applying all or part of EDCI’s $52.6 million in cash towards the equity
component of a small capitalization acquisition. As
Managing Member of Los Angeles, CA-based Chapman Capital L.L.C., an
investment advisor advising investment funds that own approximately 14% of
EDCIH, we believe Mr. Chapman’s interests are tightly aligned with all of
EDCIH’s owners.
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EDCI is
currently working to identify suitable acquisition
opportunities. EDCI is not targeting specific industries for
potential acquisitions. EDCI’s target acquisition criteria are as
follows:
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Valuation: Statistically
cheap multiples on troughing
fundamentals
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Fundamentals: Quantitative
evidence that “the worst is behind”; i.e. whatever events have caused the
statistically cheap multiples is
abating
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Non-Lethal
Balance Sheet: EBITDA / (debt
service + maintenance capital expenditures) of greater than 3 to
1
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Owner
Sentiment: Interested
in liquidity at a reasonable price
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Management: Worthy
operational management team that is interested in working with
EDCI
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EDCI
would consider incurring debt in connection with an acquisition to increase the
transaction size above EDCI's available cash for an
acquisition. However, based on current credit conditions, EDCI is
also evaluating opportunities that could be acquired with little or no
debt. EDCI could also utilize its common equity as acquisition
currency, subject to the section 382 “ownership change” rules described
elsewhere in this document. This strategy is subject to certain
risks. See "Risk Factors" below.
EDC
Business
EDC’s
core competencies are CD and DVD replication and logistic services, a market in
a secular decline. As an independent service provider, EDC is
pursuing opportunities to increase revenue by providing a wide range of physical
manufacturing, distribution and value added services to entertainment content
owners and their customers. These opportunities consist of manufacturing and/or
distribution services agreements with existing or new customers. The
rate of decline experienced in EDC’s international markets is, as yet, not
nearly as severe as that experienced in the US market. On March
20, 2009, the Board of Directors of EDC approved a plan to consolidate EDC’s
Blackburn, UK and Hannover, Germany manufacturing activities within the
Hannover facility. As a result, EDC intends to cease by year-end 2009
substantially all operations presently conducted at its Blackburn facility in
the United Kingdom, and resultantly produce all of the manufacturing volume for
Universal, its largest customer, in EDC’s Hannover plant through the expiration
of the Universal manufacturing agreements in May 2015.
Products
EDC’s
products include pre-recorded CDs and DVDs, and manufactured jewel boxes and
trays for the entertainment industry. Piracy and downloading of music
through web sites have caused CD volumes to decline. EDC expects that file
sharing and downloading, both legal and illegal, and portable personal digital
devices will continue to exert downward pressure on the demand for
CDs.
The
digital transfer and downloading of video files has also become more widespread
in large part due to improvement in the speed and quality with which video files
can be transferred and downloaded. As a result, file sharing and
downloading has exerted significant downward pressure on the demand for
DVDs.
Professional
Services
EDC
offers an array of professional services including:
Distribution
Services: Product
delivery to mass merchants’ regional distribution centers and wholesalers. EDC
provides direct to retail distribution in Europe and is well positioned to
deliver pre-recorded products throughout Europe. The services
provided are an integral part of EDC’s customers’ supply chain.
Printed
Components and Packaging Services: Purchase of printed components and
assembly of shelf ready packages. In response to customer demand for
more environmentally friendly packaging, EDC added the assembly of ECOPAK
products to our service line.
Value Added
Services: Custodial
responsibilities for inventory storage and control, returns processing,
fulfillment of promotional product, retail price stickering, product quality
evaluations, logistics advice, claims administration, data interfaces and cash
collections.
Markets,
Sales and Marketing
EDC
provides CD and DVD manufacturing and distribution services to entertainment
content providers in central Europe and manufacturing services in the UK. EDC
has sales personnel in Hannover, Germany and Blackburn, UK.
Competition
EDC’s
competitors include subsidiaries of media conglomerates that produce content
while others, like EDC, are purely manufacturers and/or
distributors. Competitors include:
Manufacturing
only: MPO, OK Media, DocData and CD-A.
Manufacturing and
Distribution: Arvato Digital Services, Cinram, Sony DADC/Sony
Entertainment Distribution, MPO Fiege and Optimal Media Production.
Competition
in the pre-recorded multimedia industry is intense and winning new customers, as
well as maintaining existing customers, is based on a combination of price,
capacity, reliability and the level of service and support. EDC
believes that its competency in providing complete end-to-end manufacturing and
distribution supply chain services differentiates it from many of its
competitors. However, some of EDC’s competitors are larger and may
have more resources available to them to help them manage their business and
respond as the industry continues to experience a decline in
demand.
Service
and Support
EDC is an
integral part of its customers’ supply chain, managing and delivering products
to mass merchant regional distribution centers and wholesalers, including direct
to retail distribution. EDC coordinates the printed material and packaging
functions and ships shelf-ready packages world wide on demand. EDC generally
does not own finished goods inventory. It provides custodial responsibilities
for inventory management, and storage of finished goods and component parts,
product quality evaluations, logistics advice, claims administration and data
interfaces for its customers.
Customers
EDC’s
major customers are Universal Music Group, Navteq, Vivendi Games, Ministry of
Sound, Union Square Music, Demon Music Group and Warner Music
Group.
Universal:
EDC’s manufacturing and distribution agreements with Universal accounted
for approximately 73%, 74% and 83% of its 2008, 2007 and 2006 revenues,
respectively. EDC plans, manages and monitors the use of resources based on
regular forecasts provided by Universal. Because EDC is dependent on Universal
for a significant amount of its revenues, if market or other factors cause
Universal to reduce or postpone significant levels of current or expected
purchase commitments for EDC’s products, EDC’s operating results and financial
condition may be adversely affected.
Other: All
other customers accounted for, in the aggregate, approximately 27%, 26% and 17%
of our 2008, 2007 and 2006 revenues, respectively. EDC has a business
development and sales and marketing team focused on providing a high level of
service to Universal as well as attracting new customers in the music, video,
gaming markets and health and fitness products.
International
Sales
EDC’s
international sales, which originate in Germany and the UK, are denominated in
Euros and British pounds, respectively. See Note 23 to the
consolidated financial statements for information concerning revenues and
long-lived assets by geographic area.
Operations
Manufacturing:
EDC currently manufactures its products for the central European market at its
facility in Hannover, Germany and for the UK market at its facility in
Blackburn, UK. EDC has an option to purchase the Hannover facility,
which it currently leases from Universal. EDC believes that this
facility is adequate for its current manufacturing
needs.
Distribution:
EDC distributes products for the central European market at its facility in
Hannover, Germany which is a combined manufacturing and distribution
facility.
EDC
believes in setting high standards of quality throughout its operations. EDC’s
Hannover, Germany, facility is registered Germany ISO 9001:2000 the
international standard for quality assurance and ISO 14001 for environmental
management. EDC’s Blackburn, UK facility is ISO 9001:2000 certified and is in
the process of obtaining ISO 14001 certification. EDC believes that adhering to
the stringent ISO 9001 and 14001 procedures not only creates efficiency in
operations, but also positions EDC to meet the exacting standards required by
its customers.
EDC is
also a member of the Content Delivery and Storage Association (CDSA) and fully
supports and complies with the worldwide CDSA Anti-Piracy program. This
compliance program ensures that EDC only provides services to those intellectual
property owners who have certified and documented ownership and proper use of
content, thus ensuring the legitimacy of customer products.
Raw
Materials and Components
EDC’s
principle raw materials are polystyrene used in the manufacture of jewel boxes
and trays (in Germany only) and polycarbonate used in the manufacture of CDs and
DVDs. EDC has a limited number of suppliers who are able to provide
raw materials. In Germany, we purchase polystyrene, polycarbonate and any jewel
boxes and trays, not internally manufactured, from several suppliers. In the UK,
we purchase polycarbonate and jewel boxes and trays from several suppliers.
These inputs are crucial to the production of CDs and DVDs and, while there are
alternative suppliers of these products, it would be disruptive to EDC’s
production if any of our suppliers were unable to deliver its product to EDC.
Proprietary
Technology
EDC has
non-exclusive CD replication licensing agreements with a member of the Philips
Group of Companies and with Discovision Associates and non-exclusive DVD
replication licensing agreements with MPEGLA, the 3-C and AC-3 Groups (both
administered by Philips Electronics), the 6-C Group (administered by Toshiba
Corporation) and Discovision Associates.
Registered
Trademarks
EDC’s
trademarks and service marks are also valued corporate assets protected through
registrations in various foreign countries.
Government
Regulation
EDC’s
manufacturing and distribution operations are subject to a range of federal,
state, local and international laws and regulations relating to the environment.
These include laws and regulations that govern discharges into the air, water
and landfills and the handling and disposal of hazardous substances and
wastes. EDC does not anticipate any material effect on its capital
expenditures, earnings or competitive position in order to remain in compliance
with government regulations involving environmental matters.
Seasonality
EDC
typically manufactures and distributes approximately 53% to 58% of its annual
demand by volume in the second half of the calendar year due to seasonality in
the entertainment business. Variability is also experienced on a quarterly basis
with the lowest demand typically being experienced in the first calendar quarter
and with the highest
demand
occurring in the last calendar quarter. This seasonality cycles year over year
and is influenced by EDC’s customers’ product release schedules.
Backlog
EDC’s
customers order products and services only as they are needed, therefore EDC
does not maintain any significant backlog.
Employees
At
December 31, 2008, EDC employed over 1,100 persons. In Germany, approximately
43% of the workforce of 822 employees is unionized and all employees, including
exempt staff, which represents approximately 4% of the total employees, are
represented by a works council. Collective bargaining agreements and works
council agreements cover all labor relations. In February 2008, EDC
reached an agreement with the works council on an eight year collective
bargaining agreement which runs through 2015. In the UK,
approximately 64% of the workforce of 313 employees is unionized and subject to
collective bargaining agreements. In October 2008, EDC entered into
an agreement with the UK employees that was retroactively effective January 1,
2008, and ran until January 1, 2009. The 2008 contract terms will remain in
effect until a new agreement is reached.
As
discussed above, on December 31, 2008, EDC completed the sale of EDC’s
distribution operations located in Fishers, Indiana, U.S. supply agreements with
Universal Music Group, all of the equipment located in the Fishers, Indiana
distribution facility and certain manufacturing equipment located in the Kings
Mountain, North Carolina facility, as well as the transfer of U.S. customer
relationships to Sony DADC U.S., Inc. Upon completion of the sale, EDC
effectively ceased its U.S. manufacturing and distribution
operations. At December 31, 2008, EDC had 419 employees at the Kings
Mountain, North Carolina facility as part of the transition service agreement.
All production employees were phased out by the end of February 2009 and the
remaining employees will be phased out by the end of April 2009.
EDCI
currently has a core corporate staff of 15 employees at various U.S.
locations.
SEC
Filings
We make
available all annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports free of charge
through our Internet website at www.edcih.com as soon
as reasonably practicable after they are filed with, or furnished to, the
Securities and Exchange Commission. These reports are also available on the
Securities and Exchange Commission's Internet website at www.sec.gov.
Our code
of ethics is posted on our Internet website at www.edcih.com. You
can also receive a copy free of charge by sending an email request to
[email protected] or by sending a written request to our offices at
1755 Broadway, 4th Floor, New York, NY 10019, Attention: Investor
Relations.
ITEM
1A. RISK FACTORS
Our
prospects are subject to certain risks and uncertainties including the
following:
Current Global and Economic
Downturn
EDC. EDC’s business
has been negatively impacted by the current global downturn. If this
downturn is prolonged or worsens, there could be several severely negative
implications that may exacerbate many of the risk factors we identified below
including, but not limited to, the following:
o
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The
global economic downturn and the associated credit crisis could continue
or worsen and reduce liquidity and this could have a negative impact on
financial institutions and the global financial system, which would, in
turn, have a negative impact on EDC and its
creditors.
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o
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Credit
insurers could drop coverage on EDC’s customers and increase premiums,
deductibles and co-insurance levels on remaining or prospective
coverage.
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o
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EDC’s
suppliers could tighten trade credit which could negatively impact EDC’s
liquidity.
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o
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EDC’s
customers, vendors and their suppliers may become insolvent and file for
bankruptcy, which could negatively impact its results of
operations
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o
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EDC’s
financial performance depends on consumer demand for its customers’
products. Substantially all of the purchases of the pre-recorded media
products sold by EDC’s customers are discretionary. Accordingly, weak
economic conditions or outlook or varying consumer confidence could
significantly reduce consumption in any of its customers’ major markets
thereby causing material declines in sales and net earnings. In addition,
because of the discretionary nature of EDC’s products, EDC’s customers
must continually compete for the public’s leisure time and disposable
income with other forms of entertainment, including legal and illegal
downloading of content, box office movies, sporting events, concerts, live
theatre and restaurants. As a result of this competition, demand for EDC’s
customers’ products could be reduced and sales volumes and gross profit
margins could be adversely
affected.
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EDCI. As a cause
and effect of the global downturn, various sectors of the credit markets and the
financial services industry have been experiencing a period of unprecedented
turmoil and upheaval characterized by the disruption in credit markets and
availability of credit and other financing. Uncertainty over the
extent and degree of the global downturn also creates substantial uncertainty
with regard to the fundamentals of many industries. While the
ultimate outcome of these events cannot be predicted, they may have a material
adverse effect on EDCI’s ability to find acquisition opportunities that meet its
acquisition criteria, obtain financing necessary (if desired) to
effectively execute its acquisition strategy and on the resulting value of any
consummated acquisition or the market value of its investment
portfolio.
Risks Related to EDCI’s
Acquisition Strategy
In
identifying, evaluating and selecting a target business for a potential
acquisition, EDCI expects to encounter intense competition from other entities
having a similar business objective, including private equity groups, blank
check companies, venture capital funds, leveraged buyout funds, and operating
businesses seeking strategic acquisitions. Many of these entities are
well-established and have extensive experience identifying and effecting
business combinations directly or through affiliates. Moreover, many of
these competitors possess greater financial, technical, human and other
resources than us, which will give them a competitive advantage in pursuing the
acquisition of certain target businesses. EDCI may not be able to
successfully identify such a business, obtain financing for such acquisition (if
desired), or successfully operate any business acquired.
Even if
EDCI identifies an appropriate acquisition opportunity, it may be unable to
negotiate favorable terms for that acquisition. EDCI may be unable to
select, manage, absorb or integrate any future acquisitions successfully.
Any acquisition, even if effectively integrated, may not benefit EDCI’s
stockholders. Any acquisition may involve a number of unique risks
including: (i) executing successful due diligence; (ii) exposure to unforeseen
liabilities of acquired companies; and (iii) EDCI’s ability to integrate and
absorb the acquired company successfully.
Because
EDCI may consummate an acquisition of a company in any industry and is not
limited to any particular type of business there is no current basis for you to
evaluate the possible merits or risks of the particular industry of an
acquired business. If EDCI completes an acquisition with an entity in an
industry characterized by a high level of risk, EDCI may be affected by the
currently unascertainable risks of that industry. Although EDCI management
will endeavor to evaluate the risks inherent in a particular industry or target
business, EDCI cannot assure you that it will properly ascertain or assess
all of the significant risk factors. Even if EDCI management properly
assesses those risks, some of them may be outside of its
control.
Declining Nature of CD and
DVD Industries
EDC’s
business is dependent on the continued viability of physical distribution of
music and video through authorized pre-recorded media. Alternative distribution
channels and methods, both authorized and unauthorized, for delivering music
have eroded and are expected to continue to erode the volume of sales and the
pricing of products and services. Because EDC’s business has high
fixed costs, EDC has limited ability to reduce costs in response to unit
declines. The growth of these alternatives is driven by advances in
technology that allow for the transfer and downloading of music and video files
from the Internet. The proliferation of this copying, use and distribution of
such files is supported by the increasing availability and decreasing price of
new technologies, such as personal video recorders, CD and DVD burners, portable
MP3 music and video players, widespread access to the Internet, and the
increasing number of peer-to-peer digital distribution services that facilitate
file transfers and downloading. EDC expects that file sharing and
downloading, both legally and illegally, the introduction of new optical formats
and portable personal digital devices will continue to exert downward pressure
on the demand for CDs. The digital transfer and downloading of video
files has become more widespread in large part due to improvement in the speed
and quality with which video files can be transferred and
downloaded. As a result, file sharing and downloading has also
exerted significant downward pressure on the demand for DVDs. In addition, EDC’s
business faces pressure from the emerging distribution alternatives, like video
on demand (“VOD”) and personal digital video recorders. As substantially all of
EDC’s revenues are derived from the sale of CDs and to a lesser extent DVDs,
increased file sharing, downloading and piracy or the growth of other
alternative distribution channels and methods, could materially adversely affect
EDC’s business, financial condition and results of
operations.
Blackburn
– Hannover Consolidation
On March
20, 2009, the Board of Directors of EDC approved a plan to consolidate EDC’s
Blackburn, UK ("EDC Blackburn") and Hannover, Germany ("EDC
Germany")manufacturing activities within the Hannover facility (the
“Consolidation”). EDC will incur significant costs in connection with
the Consolidation and the plan will require the consent of the lenders pursuant
to EDC’s Senior Secured Credit Facility. These types of plans involve
numerous risks, such as the diversion of management and employee attention;
disruptions in customer, employee and vendor relationships, and execution
risks. These factors, as well as any delays in implementing the plan
or industry declines beyond those assumed in the plan, could increase the costs
associated with the plan and reduce the financial benefit of the plan. EDC
Germany has entered into an agreement to provide financial support of up to
£5.0 million
to EDC Blackburn to ensure that EDC Blackburn does not fall into insolvency due
to over indebtedness or illiquidity resulted from the planned closure of the
Blackburn facility.
Potential Intellectual
Property Infringement Claims from Third Parties
Substantial
litigation regarding intellectual property rights continues in the CD and DVD
manufacturing industry. In addition, EDCI remains liable for certain
intellectual property indemnity obligations related to discontinued businesses,
including the international messaging business, the assets of which were sold
during in December 2006 and the Paging business which EDCI began exiting in May
2001.
The
industry in which EDC competes has many participants who own, or who claim to
own, intellectual property for certain of the manufacturing processes EDC
employs, the products EDC produces or the content produced by its customers. EDC
pays licensing fees to certain third parties who claim to own the rights to
intellectual property that EDC employs in its manufacturing processes or
products. In addition, from time to time others may claim rights to
intellectual property EDC employs, asserting a right to royalties or penalties
for infringement. It is not possible to determine with certainty
whether these or any other existing third party patents or the issuance of any
new third party patents may require EDC to alter or obtain licenses relating to
our processes or products. New multimedia formats will likely require EDC to
obtain additional licenses. EDC may not be able to obtain any such
licenses on favorable terms and obtaining and paying royalties on new licenses
might materially increase its costs, which will decrease our
profits.
Any
intellectual property infringement claims asserted by a third party against us
could be time-consuming and costly to defend, divert management’s attention and
resources, cause product and service delays, or require us to pay damages to or
enter into licensing agreements with third party claimants. An adverse decision
in an infringement claim asserted against EDC could result in it being
prohibited from using such technology, as licensing arrangements may not be
available on commercially reasonable terms. EDC’s inability to license the
infringed or similar technology on commercially reasonable terms could have a
material adverse effect on its business, financial condition and results of
operations.
Variability of Quarterly
Results and Dependence on Key Customers
EDC’s
manufacturing and distribution agreements with Universal accounted for
approximately 73%, 74% and 83% of our 2008, 2007 and 2006 revenues,
respectively. If market or other factors cause Universal to reduce or postpone
significant levels of current or expected purchase commitments for EDC’s
products, EDC’s operating results and financial condition will be adversely
affected. EDC has a business development and sales and marketing team focused on
providing a high level of service to Universal as well as attracting other
customers in the music, video and games markets. Efforts to expand business with
parties other than Universal may not succeed, and as a result, EDC may not be
able to significantly reduce its dependence on Universal.
Under the
agreements with Universal, EDC is required to deliver substantial volumes of
products meeting stringent requirements. Failure to successfully manage the
production or supply of products, including the failure to meet scheduled
production and delivery deadlines, or the failure of products to meet required
quality standards, can result in significant penalties under the agreements with
Universal. Repeated failures, even if such failures are ultimately
corrected,
can result in significant liquidated damages, the right by Universal to source
EDC volumes from third parties, and in some cases, the right of Universal to
terminate the agreements, which events would materially adversely
affect EDC’s business, operating results and financial
condition.
EDC’s
production levels, revenue and cash flows are largely affected by its customers’
product release schedule. The release schedule is dependent on a
variety of factors such as consumer demand and the availability of marketable
content. EDC’s results of operations and cash flows in any period can be
materially affected by the timing of product releases by its customers, which
may result in significant fluctuations from period to period. In addition, the
entertainment business is seasonal and, as such, EDC typically manufactures and
distributes approximately 53% to 58% of its annual demand by volume in the
second half of the calendar year. Typically the lowest demand is experienced in
the first calendar quarter with the highest demand occurring in the last
calendar quarter. This seasonality cycles year over year and is also influenced
by customers’ new product release schedule.
Senior Secured Credit
Facility
EDC’s
Senior Secured Credit Facility contains usual and customary restrictive
covenants that, among other things, permit EDC to use the revolver only as a
source of liquidity for EDC and its subsidiaries and place limitations on (i)
EDC’s ability to incur additional indebtedness; (ii) EDC’s ability to make any
payments to us in the form of cash dividends, loans or advances (other than tax
distributions) and (iii) asset dispositions by EDC. It also
contains
financial
covenants relating to maximum consolidated EDC and subsidiaries leverage, fixed
charge coverage and maximum senior secured leverage as defined
therein. EDC’s ability to comply with these financial covenants is
dependent on its future performance, which is subject to prevailing economic
conditions and other factors that are beyond our control. EDC’s
failure to comply with any of these restrictions in the Senior Secured Credit
Facility may result in an event of default, which, if not cured or waived, would
allow the lenders to accelerate the payment of the loans and/or terminate the
commitments to lend or foreclose on EDC’s collateral in addition to other legal
remedies. At December 31, 2008, EDC was not in compliance with
one of its financial covenants as a result of the impairment of intangible
assets in 2008; however, the credit agreement was amended to exclude those
impairment charges from the applicable covenants.
Increased Costs or Shortages
of Raw Materials or Energy
EDC
purchases significant quantities of plastics (e.g., polystyrene and
polycarbonate), the key raw materials used in the production of DVDs, CDs, jewel
cases and trays. The availability and price of these materials may be influenced
by a number of different factors, many of which are beyond EDC’s control,
including weather, transportation, increased demand, production delays and the
price of oil. The costs of these raw materials are passed through to Universal,
but not for most other customers. EDC’s manufacturing and distribution
facilities are energy-intensive and increases in energy costs would adversely
affect its gross margins and results of operations.
International Business
Risks
EDC’s
international sales are subject to the customary risks associated with
international transactions, including political risks, local laws and taxes, the
potential imposition of trade or currency exchange restrictions, tariff
increases, transportation delays, difficulties or delays in collecting accounts
receivable and, to a lesser extent, exchange rate fluctuations.
Foreign Currency Translation and Transaction Risks
The
financial position and results of operations of EDC’s international subsidiaries
are reported in various foreign currencies and then translated into
U.S. dollars at the applicable exchange rate for inclusion in our
consolidated financial statements. As a result, the appreciation of the
U.S. dollar against these foreign currencies has a negative impact on our
reported sales and operating margin (and conversely, the depreciation of the
U.S. dollar against these foreign currencies has a positive impact). For
the year ended December 31, 2008, we estimate that foreign currency
translation favorably impacted sales and gross margin by approximately
$2.1 million and $0.5 million, respectively when compared to the year
ended December 31, 2007. The volatility of currency exchange rates may
materially adversely affect our operating results.
Limitations on NOLs
Resulting from Ownership Changes and Transfer
Restrictions
As a
result of certain transactions involving EDCIH’s common stock, we have
calculated, using the best available public information as of December 31,
2008, that approximately 26.6% of EDCIH’s share base has changed hands in the
past three years utilizing the methodologies outlined in section 382 of the
Internal Revenue Code (“section 382”). If EDCI had an “ownership change”, as
defined in section 382, EDCI’s net operating losses (“NOLs”) generated
prior to the ownership change would be subject to annual limitations, which
could reduce, eliminate, or defer the utilization of these NOLs.
Section 382 generally limits the amount of the taxable income that can be
offset by a pre-change loss to the product of (i) the long-term tax exempt
bond rate (published monthly by the U.S. Treasury) as of the date of the change
of ownership and (ii) the value of the company’s shares immediately before
the ownership change.
Generally,
a loss corporation incurs an “ownership change” within the meaning of section
382, if immediately after any change in the ownership of the stock in the loss
corporation affecting the percentage of stock owned by any 5% stockholder (the
date of any such change is referred to as a “testing date”), the percentage of
stock owned by one or more 5% stockholders, in the aggregate, has increased by
more than 50 percentage points over the lowest percentage of stock owned by
such 5% stockholders at any time during the three-year period ending on the
testing date. Thus, as of any testing date, changes in stock ownership occurring
more than three years prior to the testing date do not have to be taken into
account when determining whether an ownership change has occurred.
As a
result of a reorganization completed on August 25, 2008, EDCIH’s common stock is
subject to transfer restrictions designed to protect the NOLs by restricting any
person from buying or selling EDCIH’s stock (or any interest in EDCIH’s stock)
if the transfer would result in a stockholder (or several stockholders, in the
aggregate,
who hold
their stock as a “group” under the federal securities laws) owning 5% or more of
EDCIH’s stock. The purpose of these restrictions is to limit direct or indirect
transfers of stock of EDCIH that would affect the percentage of stock that is
treated as being owned by 5% stockholders. Stockholders who owned more than 5%
of the Company’s stock immediately prior to the reorganization are allowed to
sell their existing shares, other than in a transaction creating a new 5%
shareholder, or acquire additional shares of EDCIH common stock representing up
to one-half of 1% of the total outstanding shares of EDCIH’s common stock
immediately following the reorganization. These restrictions protect
the Company from third party transactions creating new 5% groups that could
cause an ownership change, but we must continue to monitor the ownership change
in issuing new shares or repurchasing existing shares, and in doing so, must
account for the possibility of the pre-existing 5% stockholders selling their
stock, which sales would also have an impact on the ownership
change.
The
amount of EDCI’s NOLs and the percentage of EDCI's share based that has
changed hands have not been audited or otherwise validated by the IRS or
others. The IRS could challenge the amount of EDCI’s NOLs, which could result in
an increase in our liability for income taxes to the extent the NOLs are
realized for income tax purposes. Therefore, we cannot assure you that the
calculation of the amount of our NOLs may not be changed as a result of a
challenge by a governmental authority or our learning of new information about
the ownership of, and transactions in, our securities. In addition, calculating
whether an ownership change has occurred is subject to uncertainty, both because
of the complexity and ambiguity of section 382 and because of limitations on a
publicly traded company’s knowledge as to the ownership of, and transactions in,
its securities. Based upon a review of past changes in our ownership, as of
December 31, 2008, we do not believe that EDCI has experienced an ownership
change (as defined under section 382) that would result in any limitation on our
future ability to use these net operating loss and capital loss carry forwards.
However, the IRS or some other taxing authority may disagree with that position
and contend EDCI has already experienced such an ownership change, which would
severely limit our ability to use our NOL carry forwards and capital loss carry
forwards to offset future taxable income.
Potential Anti-Takeover
Effect of the Transfer Restrictions
Although
the transfer restrictions are designed as a protective measure to preserve the
NOLs, the transfer restrictions may have the effect of impeding or discouraging
a merger, tender offer or proxy contest, even if such a transaction may be
favorable to the interests of some or all of the stockholders of EDCIH. This
effect might prevent stockholders from realizing an opportunity to sell all or a
portion of their shares of common stock of EDCIH at a premium above market
prices. In addition, the transfer restrictions may delay the assumption of
control by a holder of a large block of the common stock of EDCI Holdings and
the removal of incumbent directors and management, even if such removal may be
beneficial to some or all of the stockholders of EDCIH.
Environmental Laws and
Regulations
EDCI’s
manufacturing and distribution operations are subject to environmental laws and
requirements that may impose material costs or liabilities. EDC’s facilities are
subject to a range of laws and regulations relating to the environment. These
include laws, regulations and enforcement policies that govern discharges
and / or disposal of hazardous substances and wastes into the air, water
and landfills. Compliance with existing and future environmental laws and
regulations and enforcement policies may require EDCI to incur capital and other
costs, which may materially adversely
affect future financial conditions. Such costs, or related third-party personal
injury or property damage claims, could have a material adverse affect on EDC’s
business, results of operations or financial condition.
Ability to Attract and Retain Key
Personnel
Our
continued growth and success depends to a significant extent on the continued
service of senior management and other key employees, the development of
additional management personnel and the hiring of new qualified employees. There
can be no assurance that we will be successful in continuously recruiting new
personnel or in retaining existing personnel. The loss of one or more key or
other employees or our inability to attract additional qualified employees or
retain other employees could have a material adverse effect on our business,
results of operations or financial condition.
Competition
Some of
our competitors have substantially greater financial, technical and operating
resources than us and we may be unable to successfully compete with these
competitors. In addition, competitive pricing pressures may have an adverse
effect on our profit margins in the future.
Volatility of Stock
Price
The
market price of EDCIH’s common stock is volatile. The market price of EDCIH’s
common stock could be subject to significant fluctuations in response to
variations in quarterly operating results and other factors such as
announcements of technological developments or new products, developments in
relationships with our customers, strategic alliances and partnerships,
potential acquisitions and strategic investments, technological advances by
existing and new competitors, general market conditions in our industries and
changes in government regulations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
The
following table sets forth certain information regarding our principal
facilities used in its continuing operations:
|
Size
|
Owned
Or
|
Lease
|
|
Location
|
(Square
Feet)
|
Leased
|
Expiration
Date
|
Used
|
Blackburn,
Lancashire, UK (1)
|
148,869
|
Leased
|
2017
|
Manufacturing
facility and administrative offices for EDC UK information
services, finance and accounting.
|
Fishers,
Indiana, U.S.A.
|
3,500
|
Leased
|
2009
|
EDCI
and EDC information services and corporate accounting and
finance.
|
New
York, New York, U.S.A.
|
1,323
|
Leased
|
2009
|
EDCI
Corporate Headquarters
|
Hannover,
Germany
|
738,000
|
Leased
|
2015
|
Manufacturing
facility and full stocking warehouse and distribution center and
administrative offices for EDC central Europe information services,
finance and
accounting.
|
(1) The
principal lease for EDC’s UK manufacturing facility includes an option to break
the lease without penalty in June 2010, which we plan to exercise.
In
addition to the properties above, EDC owns the manufacturing facility located in
Kings Mountain, North Carolina that was formerly used in EDC’s U.S.
manufacturing operations. We expect to sell the facility in
2009 and thus, the facility is classified and recorded in assets held
for sale in the accompanying consolidated balance sheets and is valued at its
fair market value at December 31, 2008.
ITEM
3. LEGAL PROCEEDINGS
In
addition to the legal proceedings discussed below, we are, from time to time,
involved in various disputes and legal actions related to our business
operations. While no assurance can be given regarding the outcome of these
matters, based on information currently available, we believe that the
resolution of these matters will not have a material adverse effect on our
financial position or results of our future operations. However, because of the
nature and inherent uncertainties of litigation, should the outcome of these
actions be unfavorable, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Arbitration Claim under the
International Distribution Agreement. On
February 27, 2009, EDC, at its election, provided notice to Universal
International Music B.V. (“UIM”) of its demand to
arbitrate certain allegations by UIM, which EDC believes lack any
merit, that EDC had triggered certain “Key Failures” (or defaults) as
defined in the International Distribution Agreement between EDC and UIM dated
May 31, 2005 (the “International Distribution Agreement”). UIM is
part of the Universal Music Group, which is EDC’s largest
customer.. EDC’s demand to arbitrate was in response to a
notice from UIM dated February 19, 2009 alleging certain Key Failures related to
EDC’s performance levels in July through December of 2008. In
connection with the February 19, 2009 notice, UIM withdrew a prior Failure
Notice issued on December 11, 2008, which notice EDC had also objected to and
which EDC and UIM had been attempting to resolve in an amicable
manner. However, the February 19, 2009 notice from UIM purported to
be a substitution and restatement of many of the same underlying allegations set
forth in the withdrawn December 11, 2008 notice and EDC determined that further
attempts to resolve the matter amicably
would not
be successful. Accordingly, EDC determined to proceed to binding arbitration
under the International Distribution Agreement. At this time, both
parties are in the process of selecting arbitrators for the matter and no date
for the arbitration has been set.
Under the
International Distribution Agreement, EDC has various service level obligations
it is required to maintain. Repeated failures to meet those service
level obligations can result in Key Failures. In its February 27 2009
notice, UIM alleged that EDC has incurred two Key Failures. EDC
believes neither of the Key Failures are valid. Even if a Key Failure
had been validly established by UIM, EDC is provided with a contractual
opportunity to cure such. However, as EDC believes that no Key
Failure has occurred, it has provided notice to UIM that, despite its
willingness to work with UIM to cure any valid Key Failure, it is unable to do
so with regard to an invalid Key Failure.
There are
various penalties for both cured and uncured Key Failures. Depending
on whether one or two Key Failures were found valid by an arbitrator, and
whether EDC were able to cure any such valid Key Failures, EDC could face the
following penalties: Upon each of the first two uncured Key Failures
occurring within a five-year period, UIM has the right to source 30% of its
distribution requirements under the International Distribution Agreement and /
or 30% of its manufacturing requirements under the International Manufacturing
Agreement between UIM and EDC dated May 31, 2005 (together with the
International Distribution Agreement, the “Supply Agreements”) from a third
party for a period of 12 months or receive liquidated damages in the amount
of $0.6 million as a credit against its payments under such
contract. In addition, based upon the nature of the Key Failures
alleged by UIM and the timeframes in which they occurred, EDC would also face
penalties for those two Key Failures – if they are held to be valid – even if
both Key Failures were cured. The penalty in such an event, for both
Key Failures combined, would be the right by UIM to source 30% of its
requirements under the Supply Agreements from a third party for a period of 12
months or receive liquidated damages in the amount of approximately $0.6 million
as a credit against its payments under such contract.
Upon the
occurrence of additional Key Failures (which UIM has not asserted), additional
penalties apply as follows. Upon the occurrence of three Key Failures
within a five year period of the same category, whether cured or uncured, UIM
has the right to either source 100% of its distribution requirements under the
International Distribution Agreement from a third party for the remaining term
of the contract, terminate such contract outright or receive liquidated damages
in the amount of $1.7 million as a credit against its payments under such
contract. Upon the occurrence of four Key Failures within a five year
period of any category, whether cured or uncured, UIM has the right to either
source 30% of its distribution requirements under the International Distribution
Agreement from a third party for a period of 12 months, terminate such contract
outright or receive liquidated damages in the amount of $0.6 million as a credit
against its payments under such contract. The occurrence of five Key
Failures within a five year period of any category, whether cured or uncured,
would provide UIM with the same damages as three Key Failures within a five year
period of the same category.
As
described above, EDC believes that no Key Failures have occurred and intends to
vigorously defend its position in arbitration but at this early stage in
these matters, the EDC is not able to assess the likelihood of a favorable
outcome... If EDC is unsuccessful in arbitration, the alleged Key
Failures could result in substantial liquidated damages or the loss of volumes
that, based on the high fixed cost nature of EDC’s distribution operations,
would have a material adverse effect on its profitability. In
addition, as described above, subsequent Key Failures – even if cured – could
result in even greater damages and the ultimate right of UIM to terminate the
International Distribution Agreement.
Shareholder Derivative
Actions: On
September 6, 2006, Vladimir Gusinsky (“Gusinsky”), a Company
shareholder, commenced a derivative action (the “Gusinsky Action”) in the
Supreme Court of the State of New York, New YorkCounty,
against EDCI (as nominal defendant) and against certain of EDCI’s current and
former officers and directors as defendants. The complaint, as amended in
December 2006 and January 2007, purportedly on behalf of EDCI,
contained a variety of allegations relating to the backdating of certain stock
option grants. On January 26, 2007 and February 7, 2007, two additional
derivative actions were commenced in the United States District Court for the
Southern District of New York by two different Company shareholders, Larry L.
Stoll and Mark C. Neiswender, respectively (the “Subsequent Actions”). The
Subsequent Actions were identical to each other, and asserted the same claims as
those asserted in the Gusinsky Action regarding a subset of the same option
grants at issue in that action along with additional claims alleging violations
of federal securities laws.
A Special
Litigation Committee of the Board of Directors of EDCI, following an internal
investigation, concluded that there was no conclusive or compelling evidence
that any of the named defendants in the lawsuits breached the fiduciary duties
of care or loyalty, or acted in bad faith with respect to their obligations to
EDCI or its shareholders,
and
further concluded that it would not be in EDCI’s best interest to pursue any
claims with respect to these grants. EDCI also restated certain financial
statements as a result of this internal investigation.
On
January 30, 2008, all parties to the Gusinsky Action and the Subsequent Actions
entered into an agreement to settle both actions. The agreement was
subject to the approval of the Court. Pursuant to the settlement
agreement, EDCI’s insurer agreed to pay plaintiffs’ counsel in the Gusinsky
Action and the Subsequent Actions for their fees and expenses, and to pay for
the costs of notifying the Company’s shareholders of the
settlement. EDCI also implemented certain changes to its Equity
Compensation Policy and adopted related reform policies. In exchange,
the plaintiffs in both the Gusinsky Action and the Subsequent Actions agreed to
dismiss their claims with prejudice, forego any appeals and release all the
defendants from all claims that were or could have been asserted in either
action and arise out of or are based upon or relate in any way to any of the
allegations set forth in the complaints. The papers in support of
preliminary approval of the settlement were filed in the Gusinsky Action on
January 31, 2008 and on April 30, 2008 the Court granted preliminary
approval of the settlement and scheduled a settlement hearing. On
September 17, 2008, the Court issued a final order approving the settlement, but
denying plaintiffs’ counsels’ application for fees and expenses. A
judgment to that effect was then entered by the Court on September 25,
2008.
On
October 23, 2008, plaintiffs in the Subsequent Actions moved for leave to
reinstate their appeal of the federal court’s dismissal of the Subsequent
Actions on the basis that the state court should not have approved the
settlement. On January 12, 2009, the federal court denied that
motion. The plaintiffs in the state court action have until July 2009
to perfect their appeal under state law from that aspect of the state court
decision which denied their application for attorney's fees.
Patent Litigation: In March
2008, EDC was served as a defendant in an action by Koninklijke Philips
Electronics N. V. and U.S. Philips Corporation, pending in the U.
S. District Court for the Eastern District of Texas, Beaumont Division,
filed on January 18, 2008. This complaint was dismissed without prejudice
on April 30, 2008 and a substantially similar action was filed in the U.S.
District Court for the Southern District of New York (the “NY Complaint”) on
April 30, 2008. In the NY Complaint, plaintiffs allege breach of
contract for failure to pay royalties and patent infringement and claim
unspecified damages and, in addition to naming EDC and the Company, have
named James Caparro and Jordan Copland as defendants in their capacities as
former CEOs of EDC. EDC does not believe the complaint has merit,
intends to vigorously defend this action and believes it
has indemnification rights under certain contractual arrangements
covering a substantial portion of the alleged infringement but at this early
stage in the matter, EDC is not able to assess the likelihood of a favorable
outcome. The case is still pending and discovery and motion practice are
continuing. The most recent event is the Court's denial of plantiff's
motion for a summary judgement that EDC breached the contract. Pending before
the Court is a motion for a summary judgement by EDC that there is no patent
infringement. On February 19, 2009, oral arguments were held with regard to a
motion by the plaintiffs for summary judgment; no decision has been rendered to
date. In July 2008, Koninklijke Philips Electronics N.V.
filed a similar claim with the Brunswick Regional Court in Germany against a
subsidiary of EDC, demanding payment of approximately $1.8 million plus
interest. That subsidiary has indemnification rights under certain
contractual arrangements covering the alleged claims. EDC has filed a
defense and has received a court summons for May 28, 2009 to appear before the
Regional Court of Hannover. EDC does not believe the case has
merit, intends to vigorously defend this action, and believes it has
indemnification rights covering a substantial portion of the claim, but at this
early stage in the matter, EDC is not able to assess the likelihood of a
favorable outcome.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
EDCIH’s
common stock trades on the NASDAQ Capital Market under the symbol "EDCI." The
table below sets forth the inter-day high and low sale prices for the common
stock on the NASDAQ Capital Market for the periods indicated. All per share
amounts reflect the effect of the reorganization as described in Note 1 in the
consolidated financial statements
|
|
Price
Range of
|
|
|
Common
Stock
|
|
|
High
|
|
Low
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
First
Quarter
|
$ 7.40
|
|
$ 4.60
|
|
Second
Quarter
|
$ 5.80
|
|
$ 3.90
|
|
Third
Quarter
|
$ 5.90
|
|
$ 3.30
|
|
Fourth
Quarter
|
$ 4.96
|
|
$ 2.17
|
Year
Ended December 31, 2007
|
|
|
|
|
First
Quarter
|
$ 27.00
|
|
$ 21.30
|
|
Second
Quarter
|
$ 24.60
|
|
$ 17.80
|
|
Third
Quarter
|
$ 19.90
|
|
$ 12.30
|
|
Fourth
Quarter
|
$ 13.50
|
|
$ 5.70
|
At March
24, 2009 there were approximately 1,466 holders of record of EDCIH’s common
stock.
Cash
dividends have not been paid on our common stock since 1982 and we do not
anticipate paying cash dividends in the foreseeable future.
Stock
Performance Graph
The
following graph compares the cumulative total return on $100 invested on
December 31, 2003 in each of EDCIH’s Common Stock, the NASDAQ U.S.
Composite Index and the S&P 500 Movies & Entertainment Index at the end
of each fiscal year through 2008. The returns are calculated assuming
the reinvestment of dividends. EDCIH has not paid any cash dividends
during the period covered by the graph below.
The stock
price performance shown on the graph below is not necessarily indicative of
future stock price performance.
|
|
|
INDEXED
RETURNS
|
|
|
|
|
|
Base
|
Years
Ending
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Company
/ Index
|
Dec03
|
Dec04
|
Dec05
|
Dec06
|
Dec07
|
Dec08
|
|
EDCI
Holdings, Inc.
|
100
|
81.04
|
120.82
|
95.17
|
24.91
|
13.38
|
|
Nasdaq
Index
|
100
|
108.41
|
110.79
|
122.16
|
134.29
|
79.25
|
|
S&P
500 Movies & Entertainment Index
|
100
|
101.09
|
89.28
|
114.51
|
103.59
|
60.22
|
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2008, with respect to
EDCIH’s shares of common stock that may be issued under EDCI’s existing equity
compensation plan, which has been approved by the stockholders. EDCI
currently does not have any equity compensation plans related to our publicly
traded common stock that have not been approved by
stockholders.
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
Category
|
|
Number
of Common
Shares
to be Issued
Upon
Exercise of
Outstanding
Options
|
|
Weighted
Average
Exercise
Price
of
Outstanding
Options
|
|
Number
of Common Shares
Remaining
Available for Future
Issuance
Under Equity Compensation
Plans
(Excluding Common Shares
Reflected
in Column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plan approved by stockholders
|
|
|
142,053
|
|
$
|
33.91
|
|
|
861,136
|
|
ITEM
6. SELECTED FINANCIAL DATA
The
Selected Consolidated Financial Data presented below for each of the five years
in the period ended December 31, 2008, has been derived from our audited
consolidated financial statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with Item 7, “Management’s Discussion and Analysis-Financial
Condition and Results of Operations” and the consolidated financial statements
and Notes thereto included in Item 8 of this Form 10-K to fully
understand factors that may affect the comparability of the information
presented below.
|
|
Year
Ended December 31,
|
|
|
2008
(2)
|
|
2007
(3)
|
|
2006
(3) (4)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data (1):
|
|
|
(In
thousands, except per share data)
|
|
Total
revenues
|
$238,428
|
|
$253,443
|
|
$208,211
|
|
$95,439
|
|
$ -
|
|
Income
(loss) from continuing operations
|
(12,865)
|
|
2,167
|
|
4,241
|
|
1,089
|
|
-
|
|
Income
(loss) from discontinued operations
|
(11,502)
|
|
(18,345)
|
|
(14,011)
|
|
6,886
|
|
4,519
|
|
Gain
on sale of Messaging business
|
-
|
|
1,044
|
|
6,127
|
|
-
|
|
-
|
|
Gain
on sale of EDC U.S. Operations
|
2,712
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Extraordinary
Gain
|
-
|
|
-
|
|
7,668
|
|
-
|
|
-
|
|
Net
income (loss)
|
(21,655)
|
|
(15,134)
|
|
4,025
|
|
7,975
|
|
4,519
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
Per
Weighted Average Common Share:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
(1.88)
|
|
0.31
|
|
0.62
|
|
0.16
|
|
-
|
|
Income
(loss) from discontinued operations
|
(1.68)
|
|
(2.62)
|
|
(2.04)
|
|
1.03
|
|
0.68
|
|
Gain
on sale of Messaging business
|
-
|
|
0.15
|
|
0.89
|
|
-
|
|
-
|
|
Gain
on sale of EDC U.S. operations
|
0.40
|
|
|
|
|
|
|
|
|
|
Extraordinary
Gain
|
-
|
|
-
|
|
1.11
|
|
-
|
|
-
|
|
Net
income (loss)
|
(3.17)
|
|
(2.16)
|
|
0.59
|
|
1.19
|
|
0.68
|
|
Per
Weighted Average Common Share – Assuming Dilution:
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
(1.88)
|
|
0.31
|
|
0.60
|
|
0.16
|
|
-
|
|
Income
(loss) from discontinued operations
|
(1.68)
|
|
(2.62)
|
|
(2.00)
|
|
0.99
|
|
0.68
|
|
Gain
on sale of Messaging business
|
-
|
|
0.15
|
|
0.87
|
|
-
|
|
-
|
|
Gain
on sale of EDC U.S. operations
|
0.40
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Extraordinary
Gain
|
-
|
|
-
|
|
1.09
|
|
-
|
|
-
|
|
Net
income (loss)
|
(3.17)
|
|
(2.16)
|
|
0.57
|
|
1.15
|
|
0.68
|
|
At
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
(In
thousands)
|
|
|
Balance
Sheet Data (1):
|
|
|
|
|
|
|
|
|
|
Working
capital
|
$ 81,392
|
|
$ 56,795
|
|
$ 59,874
|
|
$ 47,539
|
|
$ 89,120
|
Total
assets
|
192,550
|
|
296,021
|
|
324,236
|
|
313,472
|
|
121,282
|
Long-term
Debt
|
7,996
|
|
20,312
|
|
35,375
|
|
46,802
|
|
-
|
Accumulated
Deficit
|
(294,988)
|
|
(273,333)
|
|
(258,199)
|
|
(262,224)
|
|
(270,199)
|
Stockholders
Equity
|
79,399
|
|
106,236
|
|
112,785
|
|
103,681
|
|
95,185
|
(1)
|
On
December 31, 2008 EDC completed the sale of its distribution operations
located in Fishers, Indiana, U.S. supply agreements with Universal Music
Group, all of the equipment located in its Fishers, Indiana distribution
facility and certain manufacturing equipment located in its Kings
Mountain, North Carolina facility, as well as transferred U.S. customer
relationships to Sony DADC U.S., Inc. We recorded a gain on the
sale of $2.7 million in 2008. Due to this sale, the results of
our EDC U.S. operations have been reclassified from continuing to
discontinued operations for all periods presented. See Note 4
to the consolidated financial statements. Income (loss) from
discontinued operations includes an impairment charge of $9.8 million in
2007.
|
(2)
|
Income
( loss) from continuing operations for the year ended
December 31, 2008, includes an impairment charge of $26.4 million
associated with the write down of the carrying value of certain intangible
assets related to EDC’s central European
operations.
|
(3)
|
On
December 31, 2006, EDCI completed the sale of substantially all of its
assets of the Messaging business. We recorded a gain on this sale of $6.1
million in the fourth quarter of 2006 and additional gain of $1.0 million
during 2007. Due to this sale, the results of Messaging
operations have been reclassified from continuing to discontinued
operations for all periods presented. See Note 4 to the
consolidated financial statements.
|
(4)
|
On
July 21, 2006, EDC acquired Deluxe’s CD Manufacturing operations in
Blackburn, England. An extraordinary gain of $7.7 million
was recorded on the acquisition. See Note 3 to the consolidated
financial statements.
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We
believe transparency and clarity are the primary goals of successful financial
reporting. We remain committed to increasing the transparency of our financial
reporting, providing our shareholders with informative financial disclosures and
presenting an accurate view of our financial position and operating
results.
Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") is intended to provide a reader of our financial statements with a
narrative from the perspective of our management on our financial condition,
results of operations, liquidity and certain other factors that may affect our
future results. Our MD&A is presented in seven sections:
• Overview and Key
Events
• Results of
Operations
• Financial Condition and
Liquidity
• Outlook
• Critical Accounting Policies and
Estimates
• Recently Issued Accounting
Pronouncements
• Other
Our MD&A should be read in conjunction with the Consolidated
Financial Statements and related Notes included in item 8, Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K
Overview
We have
one reportable business segment operated by our majority owned subsidiary,
EDC. EDC, our only continuing segment, is an industry leader in
providing pre-recorded products and distribution services to the entertainment
industry with operations serving central Europe and the United Kingdom
(“UK”). EDC was formed by the acquisition of the U.S. and central
European CD and DVD manufacturing and distribution operations from Universal
Music Group (“Universal”) in May 2005. As part of the transaction,
EDC entered into supply agreements with Universal with initial terms of 10 years
under which it became the exclusive manufacturer and distributor for Universal’s
CD and DVD manufacturing requirements and distribution requirements for the U.S.
and central Europe. In July 2006, EDC’s presence in the European market was
expanded when it acquired a CD manufacturing operation in Blackburn, UK
(“Blackburn”). Blackburn is the largest CD replicator in the
UK. Its customer base includes Universal Music Group, its largest
customer, as well as Ministry of Sound, Union Square Music, Demon Music Group
and Warner Music Group. This acquisition also allowed EDC to secure
all of Universal’s UK CD manufacturing business, a portion
of which reverted to EDC in 2007 as part of EDC’s international supply agreement
with Universal.
We
announced on October 31, 2008, and closed on December 31, 2008, the sale of
substantially all of the U.S. business of EDC to Sony DADC U.S., Inc (“Sony
DADC”) for $26.0 million in cash subject to certain post-closing adjustments and
additional consideration. The specific assets transferred were: EDC’s
distribution operations located in Fishers, Indiana; EDC’s U.S. supply
agreements with Universal Music Group; all of the equipment located in EDC’s
Fishers, Indiana distribution facility and certain manufacturing equipment
located in EDC’s Kings Mountain, North Carolina facility; and the transfer of
certain other of EDC’s U.S. customer relationships. EDC no longer
operates manufacturing and distribution facilities in North
America. Post-closing adjustments and additional consideration
include an additional approximate $1.5 million for equipment sold to Sony
DADC to be received by the end of April, 2009, certain customary post-closing
working capital adjustments and up to $2.0 million as contingent
consideration related to the transferred operations achieving certain target
criteria during 2009. The sale agreement included customary representations
and warranties accompanied by certain limited indemnification rights, secured by
a second lien on EDC's U.S. assets in favor of Sony DADC. EDC
agreed to provide certain transition services to Sony following the
closing. The required production service process was completed at the
end of February 2009. Following the transaction, EDC continues to
operate and serve its international customers through its facilities in
Hannover, Germany and Blackburn, UK. All information related to EDC’s
U.S. operations is reflected as discontinued operations in the accompanying
10-K, including information from prior periods.
Negative operating
conditions encountered in 2008, anticipated declines in future sales volumes and
the loss of a significant distribution customer at EDC’s central European
operation indicated that the carrying value of its central European operation’s
Universal manufacturing and distribution supply agreement, one of EDC’s third
party distribution agreements, and third party customer relationship agreement
intangible assets would not be recovered from the cash flows related to
operations of these assets. EDC made certain assumptions when estimating future
cash flows to be generated from these assets including declines in future sales
volumes, pricing, and costs saving initiatives in support of the
assets. As a result of this analysis, EDC recorded an impairment of
intangible assets of $26.4 million in 2008. We recorded an impairment of
intangible assets of $9.8 million related to our EDC U.S. operations in
2007. The impairment charge is included in loss from discontinued
operations in the consolidated statements of operations.
Results
of Operations
Revenues
for 2008, 2007 and 2006 were $238.4 million, $253.5 million and $208.2 million.
2008 revenues decreased $15.1 million compared to 2007 primarily due to a
decrease of $17.6 million due to a decline in volumes, offset partially by the
impact of favorable exchange rate fluctuations of $2.1 million and changes in
product mix of $0.4 million. The results for 2008 included a loss
from continuing operations of $12.9 million compared to income from continuing
operations of $2.2 million in 2007 and income from continuing operations of $4.2
million in 2006. The 2008 period included a charge of $26.4 million for the
impairment of long-lived assets.
Year
Ended December 31, 2008 compared to Year Ended December 31,
2007
Revenues.
Revenues for 2008 were $238.4 million compared to $253.5 million for
2007. The following table illustrates the components of changes in
revenue when comparing 2007 to 2008 by revenue line.
|
|
2007
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
195.3
|
|
(12.1)
|
|
(0.6)
|
|
(1.5)
|
|
181.1
|
Service
Revenues
|
58.2
|
|
(5.5)
|
|
1.0
|
|
3.6
|
|
57.3
|
Total
Revenue
|
$ 253.5
|
|
$ (17.6)
|
|
$ 0.4
|
|
$ 2.1
|
|
$ 238.4
|
Product Revenues. Product
revenues were $181.1 million in 2008 compared to $195.3 million in
2007. The decrease is primarily due to volume declines from
both our central European and UK operations and the impact of net
unfavorable exchange rate fluctuations in the Euro and British
pound. Our central European operation volumes were down 8.6% from
2007 primarily due to a decrease in volumes from Universal. Our
central European operations product revenues were negatively impacted by lower
per unit pricing, which primarily relates to revised pricing with Universal,
partially offset by a favorable impact of exchange rate
fluctuations. Revenues from our UK operations decreased in 2008
primarily due to the unfavorable impact of exchange rate fluctuations and lower
volumes from customers other than Universal, which were partially offset by
improved pricing and increased revenues from Universal.
Service
Revenues. Service revenues were $57.3 million in 2008 compared
to $58.2 million in 2007. Our central European operations experienced
a 9.7% decline in volumes in 2008 primarily due to lower volumes from
Universal and the loss of a large customer, which was partially
offset by the favorable impact of exchange rate fluctuations , positive volumes
and pricing for special shipments. Our UK operation does not
provide distribution services.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were $47.9 million,
or 20.1% of revenues, during 2008 compared to $49.7 million, or 19.6% of
revenues, in 2007. The following table shows the elements impacting
gross profit when comparing 2007 to 2008 by revenue
line.
|
|
2007
|
|
|
Volume
|
|
|
Cost/Mix
|
|
|
Exchange
Rate
|
|
2008
|
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
30.7
|
15.7%
|
|
(4.4)
|
-1.7%
|
|
3.6
|
2.4%
|
|
(0.5)
|
-0.2%
|
|
29.4
|
16.2%
|
Service
Revenues
|
19.0
|
32.6%
|
|
(1.9)
|
-1.4%
|
|
0.4
|
0.4%
|
|
1.0
|
0.7%
|
|
18.5
|
32.3%
|
Total
Gross Profit
|
$
49.7
|
19.6%
|
|
$
(6.3)
|
-1.7%
|
|
$ 4.0
|
2.1%
|
|
$
0.5
|
0.1%
|
|
$
47.9
|
20.1%
|
Product Revenues. Gross
profit on product revenues were $29.4 million, or 16.2% of product revenues, in
2008 compared to $30.7 million, or 15.7% of product revenues, in
2007. Gross profit in our central European operations increased
compared to 2007 primarily due to the impact of favorable exchange rate
fluctuations and cost saving initiatives, which more than offset the impact of
lower volumes and pricing. Gross profit in our UK operations
decreased primarily due to the impact of unfavorable exchange rate fluctuations,
severance related costs recorded in 2008 and lower volumes from customers other
than Universal, which offset improved volumes and pricing from
Universal.
Service Revenues. Gross
profit on service revenues was $18.5 million, or 32.3% of service revenues, in
2008 compared to $19.0 million, or 32.6% of service revenues, in 2007. Our
central European operations gross profit on service revenues decreased slightly
in 2008 compared to 2007 primarily due to volume declines, which were partially
offset by the favorable impact of exchange rate fluctuations, improved pricing
on special projects and labor and cost savings initiatives.
Selling, General
and Administrative Expense (SG&A). SG&A expense was $32.2 million
in 2008 compared to $38.0 million in 2007. The decrease is primarily
due to $2.9 million in lower professional fees primarily related to stock option
litigation, accounting services and consulting, a decrease of $2.3 million in
compensation costs, including expenses related to severance, stock compensation
and the vesting of profit interests and a $2.2 million reserve recorded in
2007 for a doubtful accounts receivable, offset in part by a $1.6 million
unfavorable impact from exchange rate fluctuations.
Impairment of
Long-Lived Assets. We recorded an impairment of long-lived assets of
$26.4 million in 2008 related to the decline in value of intangible assets
related to our central European operations, Universal manufacturing and
distribution service supply agreements and third party customer supply and
relationship agreements .
Amortization of
Intangible Assets. Amortization expense
was $6.2 million in 2008 compared to $5.8 million in 2007. The
increase is due to the unfavorable impact of exchange rate
fluctuations. The Company’s amortizable intangible assets consist
primarily of manufacturing and distribution services agreements that EDC entered
into with Universal as part of the acquisition in 2005, and agreements with
various central European customers.
Other
Income (Expenses)
Interest
Income. Interest income in 2008 was $3.4 million compared to
$4.5 million in 2007. Interest income is primarily derived from
income earned on excess cash held in interest-bearing money market accounts,
treasury-bills and short-term investments. The decrease reflects
lower interest rates and cash balances during 2008.
Interest
Expense. Interest expense in 2008 was $2.2 million compared to
$2.4 million in 2007. Interest expense includes interest on
term debt, cross-currency swap, and amortization of debt issuance costs as
well as amortization of interest on our rebate obligations with Universal
and interest due on loans to EDC by employees of our central European operations
under a government regulated employee savings plan.
Gain (Loss) on Currency Swap, net.
We recorded a gain on our currency swap of $1.5 million in 2008 compared
to a loss of $3.2 million in 2007. The gain in 2008 reflects the devaluation of
the Euro against the U.S. dollar compared to 2007, which saw the Euro strengthen
against the U.S. dollar resulting in a loss. The currency swap is not
subject to hedge accounting; instead fluctuations in the fair value of the
instrument are recorded in earnings for the period. In January 2009, the U.S.
dollar strengthened versus the Euro and EDC was able to settle the currency swap
obligation for $2.1 million on January 23, 2009
Gain (Loss) on Currency Transaction,
net. We recorded a loss of $3.2 million in 2008 compared to a gain of
$0.8 million in 2007 on intercompany transactions among EDC’s U.S. and
international operations denominated in their
local
currency. The loss in 2008 reflects the devaluation of the Euro and
Pound against the U.S. dollar, compared to 2007, which saw the Euro strengthen
against the U.S. dollar resulting in a gain.
Other Income (Expense),
net. We recorded a loss of $0.4 million in 2008 compared to
income of $0.2 million in 2007. The loss in 2008 is primarily due to
a realized loss on the sale of investments of $0.3 million and an impairment
charge of $0.1 million related to the write down of certain investments to fair
value. The income in 2007 is primarily due to realized gains and investment
income associated with a deferred compensation plan.
Income Taxes. We recorded an
income tax benefit of $4.6 million in 2008 compared to income tax expense of
$3.4 million in 2007. The change of $8.0 million is primarily due to
pre-taxes losses for our central European operations driven by the impairment of
intangibles assets. The expense in 2007 included a benefit of $2.6 million
to adjust the values of our deferred tax assets and liabilities for the impact
of UK and German tax rate changes enacted in the third quarter of 2007, which
partially offset taxable income from these operations. No tax benefit has
been provided for losses in the U.S. Additionally, we continue to maintain
a full valuation allowance on our U.S. deferred tax assets until we reach an
appropriate level of profitability in the U.S. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, we have concluded that a full
valuation allowance is necessary at December 31, 2008. In the event we
determine that we will be able to realize our deferred tax assets in the future,
an adjustment to the valuation allowance would increase income in the period
such determination is made.
Year
Ended December 31, 2007 compared to Year Ended December 31, 2006
Revenues.
Revenues for 2007 were $253.4 million compared to $208.2 million for
2006. The following table illustrates the components of changes in
revenue when comparing 2006 to 2007 by revenue line.
|
|
2006
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
154.6
|
|
30.8
|
|
(4.5)
|
|
14.4
|
|
195.3
|
Service
Revenues
|
53.6
|
|
1.2
|
|
(1.8)
|
|
5.1
|
|
58.1
|
Total
Revenue
|
$ 208.2
|
|
$ 32.0
|
|
$ (6.3)
|
|
$ 19.5
|
|
$ 253.4
|
Product Revenues. Product
revenues were $195.3 million in 2007 compared to $154.6 million in
2006. The increase is primarily due to a full twelve months of
revenue from our UK operations, which were acquired in July 2006, and
favorable exchange rate fluctuations from the strengthening of the Euro and
British pound. Our UK operations revenues were positively impacted by a
full-year of business, but per unit price suffered as lower priced new business
replaced declines in existing business. Our central European operation volumes
in 2007 were up slightly compared to 2006, but included a larger percentage of
lower priced units
Service Revenues. Service
revenues were $58.2 million in 2007 compared to $53.6 million in
2006. Our central European operations saw a positive impact from
favorable exchange rate fluctuations and a 2.4% increase in volumes, offset by
the impact of changes in distribution services requested by our
customers.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were $49.7 million,
or 19.6% of revenues, during 2007 compared to $51.0 million, or 24.5% of
revenues, in 2006.
The following table shows the
elements impacting gross profit when comparing 2006 to 2007 by revenue
line.
|
|
2006
|
|
|
Volume
|
|
|
Cost/Mix
|
|
|
Exchange
Rate
|
|
2007
|
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
35.1
|
22.7%
|
|
0.3
|
0.3%
|
|
(7.0)
|
-11.1%
|
|
2.3
|
3.7%
|
|
30.7
|
15.7%
|
Service
Revenues
|
15.9
|
29.7%
|
|
0.4
|
0.4%
|
|
1.0
|
0.9%
|
|
1.7
|
1.7%
|
|
19.0
|
32.7%
|
Total
Gross Profit
|
$
51.0
|
24.5%
|
|
$ 0.7
|
2.6%
|
|
$ (6.0)
|
-22.4%
|
|
$
4.0
|
15.0%
|
|
$
49.7
|
19.6%
|
Product Revenues. Gross
profit on product revenues were $30.7 million, or 15.7% of product revenues, in
2007 compared to $35.1 million, or 22.7% of product revenues, in
2006. Gross profit for our UK operations, acquired in
July
2006, increased in 2007 compared to the abbreviated 2006
period. However, the UK gross margin percent was negatively impacted
by low margins and volumes during the first half of 2007, which were not a
factor in the abbreviated 2006 period. Gross profit in our central
European operations declined compared to 2006 primarily due to product mix for
2007 including a larger percentage of lower margin units than 2006, offset
partially by improved volumes and the impact of favorable exchange rate
fluctuations.
Service Revenues. Gross
profit on service revenues were $19.0 million, or 32.6% of service revenues, in
2007 compared to $15.9 million, or 29.7% of service revenues, in 2006. Our
central European operations gross profit on service revenues improved in 2007
compared to 2006 primarily due to favorable exchange rate fluctuations, improved
volumes and improved labor and cost efficiencies.
Selling, General
and Administrative Expense (SG&A). SG&A expense was $38.0 million
in 2007 compared to $33.4 million in 2006. The increase is primarily
due to $2.5 million of additional SG&A costs from our UK operations acquired
in July 2006, a $2.2 million unfavorable impact from exchange rate changes, a
$2.2 million reserve for a doubtful customer accounts receivable and $0.9
million in severance costs, offset by $1.1 million for lower amortization of
profits interests due to profits interests vesting and $2.1 million primarily
related to cost savings.
Amortization of
Intangible Assets. Amortization expense was $5.8 million in 2007 compared
to $5.2 million in 2006. The increase is due to finalizing the
purchase accounting valuation for the acquisition of EDC during 2006 and the
unfavorable impact of exchange rate fluctuations. Amortizable
intangible assets consist primarily of manufacturing and distribution
services agreements with original 10 year terms that EDC entered into with
Universal as part of the acquisition in 2005, and agreements with various
central European customers.
Other
Income (Expenses)
Interest
Income. Interest income in 2007 was $4.5 million compared to
$4.2 million in 2006. Interest income is primarily derived from
income earned on excess cash held in interest-bearing money market
accounts and short-term investments.
Interest
Expense. Interest expense in 2007 was $2.4 million compared to
$3.1 million in 2006. Interest expense includes interest on EDC’s
term debt and amortization of debt issuance costs as well as amortization of
interest on EDC’s rebate obligations with Universal and interest due on loans to
EDC by employees of our central European operations under a government regulated
employee savings plan. The decrease was primarily due to a
combination of lower outstanding balances and lower interest rates on EDC’s debt
and reduced amortization of interest on EDC’s rebate obligations with Universal
during 2007.
Losses on Currency Swap, net.
We recorded losses on EDC’s currency swap of $3.2 million in each of 2007
and 2006. The losses are due to the strengthening of the Euro against the U.S.
dollar. The currency swap is not subject to hedge accounting; instead
fluctuations in the fair value of the instrument are recorded in earnings for
the period.
Gain on Currency Transaction, net.
We recorded gains of $0.8 million and $2.1 million in 2007 and 2006,
respectively, on intercompany transactions among EDC’s U.S. and international
operations which are denominated in their local currency.
Income
Taxes. We
recorded income tax expense of $3.4 million in 2007 compared to $7.9 million in
2006. The decrease in expense in 2007 relates primarily to favorable
adjustments of $2.6 million with respect to tax rate changes in the UK and
Germany and a decrease in taxable income from our central European and UK
operations. The tax rate changes are effective in 2008, but we were required to
adjust the value of our related deferred tax assets and liabilities in 2007, the
period the rate changes were enacted. No tax benefit has been
provided for losses in the U.S. Additionally, we continue to maintain
a full valuation allowance on our U.S. deferred tax assets until we reach an
appropriate level of profitability in the U.S. In the event we
determine that we will be able to realize our deferred tax assets in the future,
an adjustment to the valuation allowance would increase income in the period
such determination is made.
Extraordinary
Gain. We recorded an extraordinary gain of $7.7 million in
2006 as a result of the acquisition of the net assets of our UK
operations with fair values in excess of the purchase price.
Discontinued
Operations and Gains on Sale
Our
discontinued operations include the results of EDC’s U.S. operations of which
certain assets were sold on December 31, 2008, the Messaging business of which
substantially all of the assets were sold on December 31, 2006, the
international Messaging business, the assets of which were sold during 2007 and
the Paging business which we began exiting in May 2001. We recorded loss from
discontinued operations of $11.5 million, $18.3 million and $14.0 million for
the years ended December 31, 2008, 2007 and 2006, respectively.
We also
recorded a gain of $2.7 million in 2008 related to the sale of the U.S. EDC
operations and gains of $1.0 million and $6.1 million in 2007 and 2006,
respectively, related to the sale of the Messaging business.
For a
more detailed discussion of the results of these discontinued operations and
gains on the sale of these businesses see Note 4 included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Financial
Condition and Liquidity
Overview
At
December 31, 2008, we had cash and cash equivalents totaling $75.1 million, of
which $52.6 million was cash held by the EDCI and $22.5 was cash held at EDC. At
December 31, 2008, our principal sources of liquidity were our $75.1 million of
unrestricted cash and cash equivalents and the $2.5 million unused revolving
line of credit under the EDC Senior Secured Credit Facility, which expires on
June 30, 2010. At the end of the third quarter of 2008 we moved the
majority of our unrestricted cash into treasury bills with maturities of sixty
days or less. EDCI's investment policy permits investments in other highly-rated
instruments including: Banker's acceptances and certificates of deposits, money
market funds, municipal securities, auction-rate securities and other reset
notes, corporate obligations and repurchase agreements backed by the U.S.
government or U.S. government sponsored enterprises. No more than 10% of
the total portfolio may be invested in the securities of any one issuer (other
than treasury and money market funds). In addition, on March 10, 2009, the
policy was amended to permit the investment of up to $10 million in below
investment grad funds that are traded on a recognized stock exchange, subject to
authorization from both the CEO and Chairman of EDCI.
At
December 31, 2008, EDCI had investments of $1.0 million in auction-rate
securities held at December 31, 2008 that experienced failed auctions in fiscal
2008. Due to the uncertainty surrounding the liquidation of the
investments, these investments have been classified as long-term on our
consolidated balance sheet at December 31, 2008.
EDC
expects to use its cash and cash equivalents for working capital and other
general corporate purposes. EDC also expects to use its cash and cash
equivalents for payments of debt obligations. EDCI plans to use its cash
and cash equivalents in connection with its acquisition strategy. We
believe that the liquidity position of both EDCI and EDC are adequate to
fund their operating needs and, in the case of EDC, to fund its debt
maturities in 2009 and to provide EDC with flexibility to respond to further
changes in its business environment. The challenges of the present business
environment as well as risks related to the planned Blackburn – Hannover
Consolidation may cause a material reduction in EDC’s liquidity as a result of
an adverse change in its cash flow from operations or its access to credit or
other capital. EDC’s ability to service its debt and operational
requirements depends in part on the results of operations of its European
subsidiaries and upon the ability of those subsidiaries to repay intercompany
loans or otherwise distribute cash to EDC’s U.S. entities.
Derivative
Activities
EDC
entered into a cross currency rate swap agreement with a commercial bank on May
31, 2005. The objective of this swap agreement is to manage foreign currency
exposure arising from EDC’s intercompany loan to its German subsidiary, and is
therefore for purposes other than trading. The loan is denominated in Euros and
repayment is due on the earlier of demand or May 31, 2010. In accordance with
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, the currency swap does
not qualify for hedge accounting. Therefore we report the foreign
currency exchange gains or losses attributable to changes in the U.S.$/Euro€
exchange rate on the currency swap in earnings.
The fair
value of the currency rate swap was calculated based on mathematical
approximations of market values derived from the commercial banks’ proprietary
models as of a given date. These valuations are calculated on a mid-market basis
and do not include a bid/offered spread that would be reflected in an actual
price quotation. Therefore, the actual price quotations for unwinding
these transactions would be different. These valuations and models rely on
certain assumptions regarding past, present and future market conditions and are
subject to change at any time.
Valuations
based on other models or assumptions may yield different results. At
December 31, 2008, we were in a net loss position of $4.2 million on the fair
value of the EDC currency swap. In January 2009, the U.S. dollar
strengthened versus the Euro and EDC was able to settle the currency swap
obligation for $2.1 million on January 23, 2009.
Cash
Flows
Operating Activities. Cash
provided by operating activities in 2008 was $8.3 million compared to $21.2
million in 2007. The positive cash flows from operating activities in
2008 were primarily due to $17.3 million in income (adjusted for non-cash
items), increases in EDC’s pension and benefit obligations of $1.9 million and
decreases in other assets of $0.8 million, offset in part by working capital
changes of $11.6 million. The working capital changes in 2008 were
primarily driven by decreases in accrued liabilities and income taxes and
accounts payable of $10.0 million and $11.1 million, respectively, offset by
decreases in accounts receivable, prepaid and other current assets, and
inventory of $5.6 million, $2.0 million and $1.9 million,
respectively. Income (adjusted for non-cash items) decreased by $4.3
million from income (adjusted for non-cash items) of $21.6 million for 2007
primarily due to lower sales volumes and higher severance costs of EDC, which
EDC was not able to fully offset with cost reductions.
Working
capital changes in 2008 included the following:
●
|
A
decrease of $10.0 million in accrued liabilities and income taxes payable
for 2008 and 2007. 2008 included current and prior year income tax
payments of $9.9 million for German income taxes and $0.6 million
for UK income taxes and $1.1 million for corporate severance
payments, offset in part by an increase in accrued severance of $1.2
million for Germany. 2007 included payments of $9.7
million for 2005, 2006 and 2007 German and UK income taxes and $2.0
million related to Messaging sale closing
costs
|
●
|
A decrease of $11.1
million in accounts payable in 2008 compared to an increase of $1.4
million in 2007 was primarily due to lower purchasing levels for
all locations as volumes declined as well as the timing of when payments
were made compared to the 2007
period.
|
●
|
A decrease of $5.6
million in accounts receivable in 2008 compared to a decrease of $7.5
million in 2007. The overall decrease in AR reflects the collection
of significant third party receivables in 2008 which were included in AR
balance at year end 2007 and the overall decrease in sales volume,
primarily related to now discontinued U.S
operations.
|
●
|
A
decrease in prepaid and other current assets of $2.0 million in 2008
compared to an increase of $0.4 million in 2007 was primarily due to the
receipt of an insurance reimbursement receivable of $1.6 million and a
decrease in interest receivables primarily due to lower interest
rates.
|
●
|
A decrease of $1.9
million in inventories in 2008 compared to a decrease of less than $0.1
million in 2007 reflects
a decrease of $0.6 million for the usage of inventories
at the UK location, for which high quantities of inventory were
on hand at year end 2007 and $1.1 million related to U.S.
operations.
|
Investing Activities.
Investing activities in 2008 included proceeds of $41.1 million
from the sale of certain investments in debt securities and proceeds of $26.0
million from the sale of certain U.S. assets to Sony DADC U.S.,
Inc. Also, during 2008, $12.6 million of cash was invested in various
debt securities available for sale and classified in the consolidated balance
sheet as short-term investments, $5.4 million of cash was escrowed for the
wind-down of discontinued U.S. operations and we had capital
expenditures of $3.0 million.
Investing
activities in 2007 included $6.8 million for capital expenditures, and $29.6
million of cash invested by EDCI in various debt securities available for sale
and classified in the consolidated balance sheet as short-term
investments. Also during 2007, we received proceeds of $3.8
million from the settlement of a portion of the long-term receivable and
Messaging sale cash and working capital adjustments.
Financing
Activities. During 2008, EDC made payments of $44.1 million under
its long-term debt and capital lease obligations and $1.3 million under its
employee loan agreements. Payments under EDC’s long-term debt and capital lease
obligation included $25.2 million in scheduled payments, $11.4 million in
additional payments required as conditions to such sale by counterparties to the
EDC term loan and Universal obligations, and $6.8 million on
EDC’s
revolving
credit facility, net of costs, which was borrowed on during 2008. We
also repurchased 0.3 million shares of our common stock for $1.4
million.
EDC has a
Senior Secured Credit Facility with Wachovia Bank, National Association, as
agent, for an aggregate principal amount of $10.5 million as of December 31,
2008, consisting of a term facility of $8.0 million, and a European revolving
credit facility of up to €2.0 million (subject to a maximum of $2.5 million
based on prevailing interest rates). Substantially all of EDC’s assets are
pledged as collateral to secure obligations under the Senior Secured Credit
Facility.
Since
January 1, 2008, the Senior Secured Credit Facility was amended on five
separate occasions, as noted below:
●
|
On
March 4, 2008, EDC completed an amendment to the facility which changed
the definition of earnings before interest, taxes, depreciation and
amortization (“EBITDA”) to allow for the add back of up to $9.9 million in
non-cash impairment charges in calculating EBITDA for its debt covenant
calculations through the quarter ended September 30,
2008.
|
●
|
On
May 30, 2008, EDC completed an amendment to the facility to extend
the revolving credit facility for one year to May 29, 2009 and to reduce
the amount that may be borrowed under the revolver to $7.5 million from
its previous level of $10.0
million.
|
●
|
On
October 31, 2008, EDC completed an amendment to the facility, which became
effective December 31, 2008, to allow for the sale of the U.S. operating
assets described in Note 4, continue the blanket lien on EDC’s U.S. assets
and pledge of 65% of the stock of EDC’s Dutch Holding Company (which
subsidiary directly or indirectly owns all the stock EDC’s Germany and
UK), amend the payment terms on the term loan (see below), provide for the
repayment of the existing revolving credit facility and replace it with a
new European revolving credit facility of up to €2.0 million (subject to a
maximum U.S. $2.5 million based on prevailing interest rates) secured by a
blanket lien on substantially all of the assets of EDC’s European
subsidiaries, add provisions which require a portion of the proceeds from
the Sony Sale to be held in escrow for use in the wind-down of certain EDC
U.S. operations or prepayment of loans, and provide for modifications to
certain financial covenants.
|
●
|
On
December 30, 2008, EDC completed an amendment to the facility, which
became effective on December 31, 2008, to clarify certain security
provisions, modify certain requirements set forth in the amendment dated
October 31, 2008 relating to the transaction with Sony DADC and create two
new events of default related to EDC failing to own two-thirds or more of
the outstanding voting stock of its Dutch holding company subsidiary or
Sony taking enforcement action not terminated or rescinded within 30 days
with respect to its second lien security interest securing its
indemnification rights unless permitted by the relevant
documentation.
|
●
|
On
March 27, 2009, EDC completed an amendment to the facility which changed
the EBITDA definition as follows: for the fiscal quarter ended
December 31, 2008, and each fiscal quarter thereafter, EBITDA shall be
calculated by adding back impairment charges, non-cash charges and
one-time charges for the Sony Sale and any charges related to U.S.
operations or discontinued operations (but not including any ongoing
overhead from U.S. operations), and impairment charges pertaining to the
write-down of intangibles of the German operations, which charges to be
added back shall not exceed, in the aggregate, $30,000,000, to the extent
such charges were deducted for the applicable
period.
|
EDC’s
term loan expires on December 31, 2010. EDC’s Senior Secured Credit
Facility bears interest at EDC’s option, at
either: (a) the higher of (i) the Prime Rate in effect and (ii) the Federal
Funds Effective Rate in effect plus ½ of 1% and a 1.75% margin on the non-cash
collateralized portion; or (b) LIBOR plus a 2.0% margin. The applicable LIBOR is
determined periodically based on the length of the interest term selected by
EDC. The weighted average interest rate on EDC’s outstanding debt was 5.77%
at December 31, 2008. In addition to interest, EDC pays a commitment
fee of 0.5% per annum on the average daily unused amount. At December
31, 2008, $8.0 million was outstanding on the term loan and the $2.5 million
revolving credit facility was unused. Scheduled payments under the
term loan are due as follows: $1.8
million due on December 31 2009, $2.2 million due on June 30, 2010, and $4.0
million due on December 31, 2010.
The
Senior Secured Credit Facility contains usual and customary restrictive
covenants that, among other things, permit EDC to use the revolver only as a
source of liquidity for EDC and its subsidiaries and place limitations on (i)
EDC’s ability to incur additional indebtedness; (ii) EDC’s ability to make any
payments to EDCI in the form of cash dividends, loans or advances (other than
tax distributions) and (iii) asset dispositions by EDC. It also contains
financial covenants relating to EDC’s capital expenditures, minimum
interest coverage and maximum senior secured leverage as defined
therein. As of December 31, 2008, EDC was in compliance with all
such covenants, as amended, under the facility.
EDC
believes that it will continue to be in compliance with its debt covenants, as
amended throughout 2009. However, there continues to be a great deal of
uncertainty regarding the current economic downturn and the impact it will have
on the pre-recorded products and distribution services sector of the
entertainment industry during 2009. Due to this uncertainty, there is always the
possibility that the economy will decline faster than EDC can react to with cost
and debt reduction, which increases the risk of not complying with EDC’s debt
covenants. EDC expects the cost reductions and debt reductions it achieved in
2008, combined with its 2009 initiatives, to allow EDC to be in compliance with
these debt covenants in 2009.
Capital
Expenditures
Capital
expenditures amounted to approximately $3.0 million in 2008 and are anticipated
to be approximately $2.8 million in 2009. Anticipated expenditures in 2009
are primarily targeted for normal equipment and facility maintenance,
replacement and upgrades and efficiency improvements.
Income
Tax Matters
Our
recent cash outlays for income taxes have been limited primarily to foreign
income taxes paid by EDC. At December 31, 2008, EDCI had U.S. and international
net operating loss carryforwards (“NOLs”) aggregating approximately $359.5
million, which may be used to offset certain future taxable income and reduce
federal and international income taxes. The amount of EDCI NOLs and the
percentage of EDCI's share base that has changed hands has not been audited by
the IRS or others.
These
NOLs begin to expire in 2009 as noted in the table below.
|
Unrestricted U.S.
|
Total
|
2009
|
$ -
|
$ 7.3
|
2010
|
-
|
45.4
|
2011
|
-
|
9.0
|
2012
|
-
|
9.4
|
2015
|
-
|
0.2
|
2019
|
44.3
|
44.3
|
2020
|
50.6
|
50.6
|
2021
|
65.0
|
65.0
|
2022
|
13.4
|
13.4
|
2023
|
20.7
|
20.7
|
2024
|
48.4
|
48.4
|
2025
|
2.0
|
2.0
|
2026
|
29.0
|
29.2
|
2027
|
12.8
|
12.8
|
2028
|
1.8
|
1.8
|
TOTAL
|
$ 288.0
|
$ 359.5
|
EDCI also
has $28.0 million of restricted U.S. NOL's which relate to losses
incurred by former messaging subsidiaries before they were acquired by EDCI and
can only be utilized by each subsidiary generating taxable income. EDCI
has discontinued operations in those subsidiaries, so it does not expect those
losses will be utilized before they expire. EDCI also has $43.5 million of
Canadian NOLs. The Canadian NOL's were generated by EDCI's Messaging
business and can only be utilized if the company generates taxable income in
Canada before their expiration. At this time, the company has no business
activity in Canada to generate income needed to utilize the NOL's and it is
expected that those NOL's will expire without being utilized.
Contractual
Obligations
The
following table summarizes our contractual obligations, as discussed in the
notes to consolidated financial statements, as of December 31, 2008 (in
thousands):
|
Payments
Due by Period
|
|
Total
|
|
2009
|
|
2010-2012
|
|
2013-2015
|
|
Thereafter
|
Long-term
debt (1)
|
10,749
|
|
$ 2,236
|
|
$ 7,597
|
|
$ 916
|
|
$ -
|
Capital
Lease (2)
|
74
|
|
74
|
|
-
|
|
-
|
|
-
|
Loans
from employees (3)
|
3,632
|
|
1,142
|
|
2,490
|
|
-
|
|
-
|
Operating
leases (4)
|
34,050
|
|
6,433
|
|
15,935
|
|
11,682
|
|
-
|
Pension
and post-retirement benefit obligations (5)
|
14,445
|
|
843
|
|
3,145
|
|
4,356
|
|
6,101
|
Non-current
liabilities (6)
|
4,180
|
|
-
|
|
4,180
|
|
-
|
|
-
|
Total
|
$ 67,130
|
|
$ 10,728
|
|
$ 33,347
|
|
$ 16,954
|
|
$ 6,101
|
(1)
|
Long-term
debt includes EDC’s commercial bank loan and deferred acquisition payments
due to Universal. See Note 17 to the consolidated financial
statements.
|
(2)
|
Capital
lease includes a piece of production related equipment in EDC’s central
European facility.
|
(3)
|
EDC
loans from employees. See Note 17 to the consolidated financial
statements.
|
(4)
|
EDC
leases manufacturing, distribution and office facilities, and equipment
under operating leases. The principal lease for EDC’s UK
manufacturing facility includes an option to break the lease without
penalty in June 2010. EDC plans to exercise the option to break the lease
in 2010 and we have excluded future payments for the UK facility beyond
June 2010 from the above table.
|
(5)
|
Pension
obligations. A significant portion of this balance will be settled using
cash held in escrow. See Note 19 to the consolidated financial
statements.
|
(6)
|
Non-current
liabilities consist of the fair value of the payout on EDC’s currency swap
which matures in May of 2010. In January 2009, the U.S. dollar
strengthened versus the Euro and EDC was able to settle the currency swap
obligation for $2.1 million on January 23, 2009. Liabilities
for unrecognized tax benefits of $3.5 million and deferred officers
compensation of $0.5 million are excluded as reasonable estimates could
not be made regarding the timing of future cash outflows associated with
those liabilities. See Note
15.
|
Outlook
EDC
The
difficult operating environment and economic trends that EDC saw in 2007
continued in 2008. Looking ahead to 2009, with the sale and wind down
of EDC’s U.S. operations, the sole EDC focus will be on maximizing its
historically profitable international operations. Industry estimates
for decline rates have been in the 10 - 15% range for 2009, but the
challenging economic conditions render such forecasts particularly uncertain. As
EDC did in 2008, EDC will continue its cost-savings initiatives and plan to
right size operating capacity in 2009 to deal with forecasted and actual
volume declines.
Blackburn
– Hannover Consolidation
On March
20, 2009, the Board of Directors of EDC approved a plan to consolidate EDC’s
Blackburn, UK and Hannover, Germany manufacturing volumes within the Hannover
facility (the “Consolidation”). As a result of the Consolidation, EDC
intends to cease by year-end 2009 all operations presently conducted at its
Blackburn facility in the United Kingdom, and resultantly produce all of the
manufacturing volume for Universal, its largest customer, in EDC’s Hannover
plant through the expiration of the Universal manufacturing agreements in May,
2015.
EDC is
implementing the Consolidation at this time as the result of on an extensive
feasibility analysis that was based in part on a particular
customer delivering to EDC in early February 2009 a sizable percentage cut
in that customer's volume forecast for Blackburn that
month. As a result of those and other forecast cuts, reasonable
forecasts of continued unpredictability, if not outright erosion of the volume
of sales and the pricing of music CDs that comprise substantially all of the
business conducted at the Blackburn facility, and the potential loss of credit
insurance for UK third party customers and other significant risks associated
with the continued operations in Blackburn, Management determined and EDC’s
Board of Directors confirmed that it was not commercially reasonable to
continue operating the Blackburn manufacturing facility. EDC
Germany has entered into an agreement to provide financial support of up to
£5.0 to EDC
Blackburn to insure that EDC Blackburn does not fall into insolvency due to over
indebtedness or illiquidity resulting from the planned closure of the Blackburn
facility.
Blackburn
closure costs currently are forecast at approximately $9-10 million, comprised
primarily of severance costs for approximately 300 employees, costs associated
with exiting Blackburn’s existing leases and costs
associated
with relocating equipment, parts and inventory from Blackburn to
Hannover. Closure costs will be financed out of existing cash in the
United Kingdom with additional financial and other support from
the Hannover operations. As a result of continuing to
manufacture in Hannover the Universal volume that was previously manufactured in
Blackburn, without any significant increase in Hannover’s fixed costs, after
completion of the consolidation the overall profitability of the European
operations is expected to be increased materially compared to what it would have
been without such consolidation, resulting in an estimated payback of the
closure costs in approximately 2.0 – 2.5 years.
EDC will
begin the implementation of the consolidation immediately, with the Blackburn
operations largely ceasing operations at the end of 2009, after completion of
the high-volume “peak” manufacturing period, to limit any potential customer
disruption. Final closure of Blackburn will be completed prior to the
next break option under the Blackburn lease on June 18,
2010. Consummation of the consolidation transaction will require the
consent of the lenders pursuant to EDC’s Senior Secured Credit
Facility.
Critical
Accounting Policies and Estimates
General. Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates. We believe the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of the
Company’s consolidated financial statements.
Revenue
Recognition. Our revenue consists of pre-recorded entertainment product
revenues and distribution service revenues earned from the fulfillment of
services. Pursuant to Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104), we recognize revenue when a signed contract exists, the fee is fixed and
determinable, delivery terms are met, and collection of the resulting receivable
is probable. Service revenue is recognized as services are performed. For
certain components, including printed materials, we may act as an agent for the
customer, and the customer reimburses us for any incurred costs plus a handling
fee. The reimbursement for the costs is reported as a reduction to expense and
the handling fees are recognized as revenue. Shipping and handling costs that
are reimbursed by customers for invoice charges such as postage, freight packing
and small order surcharges are recorded as revenue and cost of
revenue.
Bad
Debt. We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. On a quarterly basis,
we perform a reserve calculation based on the aging of receivables and either
increase or decrease the estimate of doubtful accounts accordingly. Additional
allowances may be required if one or more customer’s financial condition
deteriorates, resulting in an impairment of their ability to make payments. Such
allowances, if any, would be recorded in the period the impairment is
identified.
Inventory. Inventories are
valued using a first in, first out method and are stated at the lower of cost or
market.
Generally,
EDC does not own the finished goods and component parts produced by
it. Consequently, reserves relate primarily to raw materials. Our
inventories at December 31, 2008 were $4.8 million, net of reserves of $1.0
million.
Impairment of
Long-Lived Assets. We record the impairment or disposal of long-lived
assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We review the recoverability of long-lived
assets, including property, plant and equipment and intangible assets with
finite lives when events or changes in circumstances occur that indicate that
the carrying value of the asset may not be recoverable. The assessment of
possible impairment is based on our ability to recover the carrying value of the
asset from the expected future cash flows of the related operations. To the
extent that the asset is not recoverable, we measure the impairment based on the
projected discounted cash flows of the asset over the remaining useful life. The
measurement of impairment requires us to make estimates of these cash flows
related to long-lived assets, as well as other fair value
determinations.
Negative
operating conditions encountered in 2008 and the loss of a significant
distribution customer at our central European operation indicated that
the carrying value of our central European operation’s Universal
manufacturing and distribution supply agreement, one of our third party
distribution agreements, and third party customer relationship agreement
intangible assets would not be recovered from the cash flows related to
operations of these assets. We made certain assumptions when
estimating future cash flows to be generated from these assets
including
decline in future sales volumes, pricing, and costs saving initiatives in
support of the assets. As a result of our analysis, we
recorded an impairment of assets of $26.4 million in 2008.
Fair
Value. On January 1, 2008, we adopted SFAS No. 157,
subject to the deferral provisions of FSP No. 157-2. This standard defines
fair value, establishes a framework for measuring fair value and expands
disclosure requirements about fair value measurements. SFAS No. 157 defines
fair value as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
Note 10
in the accompanying consolidated financial statements describes the valuation
techniques that were used to estimate fair value. The fair value
measurements of our assets and liabilities are sensitive to certain internally
generated inputs that were used in our valuation models. If these inputs were to
change significantly, the fair value of our assets and liabilities could
fluctuate. The total amount of assets and liabilities that were
measured using significant unobservable inputs was $1.0 million or approximately
17.9% of the total assets and liabilities measured at fair value. We
recognized a loss of $0.1 million in 2008 related to the write down of assets
which were measured using significant unobservable inputs, primarily due to a
discount on the value relating to the liquidity of the instruments.
Self-insurance
accrual. We maintain a self-funded insurance plan for our U.S.
employee group health insurance. Our insurance accruals are based on
claims filed and estimates of claims incurred but not reported and are developed
by our management with assistance from a third-party claims administrator.
The insurance accruals are influenced by our past claims experience factors,
which have a limited history. If we experience insurance claims or costs
above or below our historically evaluated levels, our estimates could be
materially affected. The frequency and amount of claims or incidents could
vary significantly over time, which could materially affect our self-insurance
liabilities. Additionally, the actual costs to settle the self-insurance
liabilities could materially differ from the original estimates and cause us to
incur additional costs in future periods associated with prior year
claims. We maintain stop loss coverage with third party insurers to
limit our individual claim exposure on our employee health benefit
program. Beginning January 1, 2009, due to the discontinuing of the U.S.
operations and the limited number of retained U.S. employees, our U.S. employee
group health insurance plan became a fully-funded plan. We will continue to
estimate accruals for any outstanding claims incurred prior to January 1,
2009.
Pension, Early
Retirement and Long-term Service Awards. Our Pension,
Early Retirement and Long-term Service Awards cover employees
of our German operation and Long-term Service Awards cover employees
of our UK operation. The benefit costs and obligations for these plans are
actuarially calculated based on various assumptions including discount rates,
salary growth rates and other factors. The discount rate assumption is based on
current investment yields on high quality fixed income investments. The salary
growth assumptions include long-term actual experience and expectations for
future growth. The differences between actual experience and the assumptions are
accumulated and amortized over the estimated future working life of the plan
participants. See Note 19 to the consolidated financial statements for specific
assumption values.
Post-retirement
Health Care Benefit. We have a plan
for post-retirement health care benefits covering a limited number of employees
and retirees. The post-retirement benefit costs and obligations for this plan
are actuarially calculated based on various assumptions. These assumptions
relate to discount rates, medical cost trend rates and other factors. The
discount rate assumption is based on current investment yields on high quality
fixed income investments. The salary growth assumptions include long-term actual
experience and expectations for future growth. The medical cost trend
assumptions are based on historical cost data, the near-term outlook and an
assessment of likely long-term trends. The differences between actual experience
and the assumptions are accumulated and amortized over the estimated future
working life of the plan participants. See Note 19 to the consolidated financial
statements for specific assumption values.
We
believe our pension and retiree medical plan assumptions are appropriate based
on the above factors. If the health-care-cost trend rates were to
change by one percentage point each future year, the aggregate of the service
cost and the interest cost components of the 2008 annual expense would change by
an amount less than $0.1 million. If the 2008 discount rate for
pension plan and post-retirement health care benefit plan were changed by a
quarter percentage point, loss before income taxes would change by an amount
less than $0.1 million.
Taxes. Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes,
(SFAS 109) establishes financial
accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial
statements
or tax returns. In June 2006, the FASB issued Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes
(FIN 48), to create a single model to address accounting for uncertainty
in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was effective
for fiscal years beginning after December 15, 2006.
Our
operations involve uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent
upon many factors, including negotiations with taxing authorities in various
jurisdictions and resolution of disputes arising from federal, state, and
international tax audits. We recognize potential liabilities and record tax
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. As of January 1, 2007, we follow FIN 48
guidance to record these liabilities (refer to Note 18 for additional
information). We adjust these reserves in light of changing facts and
circumstances; however, due to the complexity of some of these uncertainties,
the ultimate resolution may result in a payment that is materially different
from our current estimate of the tax liabilities. If our estimate of tax
liabilities proves to be less than the ultimate assessment, an additional charge
to expense would result. If payment of these amounts ultimately proves to be
less than the recorded amounts, the reversal of the liabilities would result in
tax benefits being recognized in the period when we determine the liabilities
are no longer necessary. On January 20, 2009, we received
notification from the Internal Revenue Service that the audit of our 2005
federal tax return had been completed with no changes to the original
filing.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (revised 2007) “Business Combinations”.
SFAS No. 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for us beginning January 1,
2009. The impact of the adoption of SFAS 141R will be prospective in
nature
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB
No. 51”. SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160
must be applied prospectively. SFAS No. 160 is effective for us beginning
January 1, 2009. The adoption of SFAS 160 will impact the
presentation of minority interest in our consolidated financial
statements.
In
December 2007, the FASB ratified the Emerging Issues Task Force consensus
on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” that
discusses how parties to a collaborative arrangement (which does not establish a
legal entity within such arrangement) should account for various activities. The
consensus indicates that costs incurred and revenues generated from transactions
with third parties (i.e. parties outside of the collaborative arrangement)
should be reported by the collaborators on the respective line items in their
income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue
Gross as a Principal Versus Net as an Agent.” Additionally, the consensus
provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon (i) existing
authoritative pronouncements; (ii) analogy to such pronouncements if not within
their scope; or (iii) a reasonable, rational, and consistently applied
accounting policy election. EITF Issue No. 07-1 is effective for us
beginning January 1, 2009 and is to be applied retrospectively to all
periods presented for collaborative arrangements existing as of the date of
adoption. We do not expect the adoption of EITF Issue No. 07-1 to have a
material impact on our consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (SFAS No. 161). SFAS No. 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
requires entities to provide enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position,
results of operations, and cash flows. SFAS No. 161 is effective for us
beginning January 1, 2009. We do not expect the adoption of SFAS
No. 161 to have a material impact on our consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP No. 142-3”). This FSP
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142, “Goodwill and Other Intangible Assets.” The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of
the asset under SFAS No. 141(R) and other U.S.
generally accepted accounting principles. FSP No. 142-3 is effective for
us as of January 1, 2009. We do not expect the adoption of FSP No.
142-3 to have a material impact on our consolidated financial
statements.
In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles in the
United States for non-governmental entities. SFAS No. 162 is effective 60 days
following approval by the U.S. Securities and Exchange Commission (“SEC”) of the
Public Company Accounting Oversight Board’s amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. We are currently evaluating the
potential impact of the adoption of SFAS No. 162 on our consolidated financial
statements.
In June
2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF No. 03-6-1”). This FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in computing earnings per share under the
two-class method described in SFAS No. 128, “Earnings Per Share.” This FSP
will be effective for us as of January 1, 2009 and will be applied
retrospectively. We do not expect the adoption of FSP EITF No. 03-6-1
to have a material impact on our consolidated financial statements.
Other
Leases
EDC
leases manufacturing, warehouse, and office facilities and equipment under
operating leases. The office leases generally include provisions for rent
escalation of 3% or less and hold over options to continue occupancy without
renewal. The lease for EDC’s facility in Germany escalates in 5% increments if
the German Consumer Price Index has increased 5% or greater. Contingent rentals
are estimated based on provisions in the lease and historical trends. The
principal lease for EDC’s UK manufacturing facility includes an option to break
the lease without penalty in 2010 along with a rent escalation of 11%. We
intend the exercise the lease break option.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements including special purpose
entities.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are
subject to market risk arising from adverse changes in interest rates, foreign
exchange, customer credit and the market for auction rate securities. We do not
enter into financial investments for speculation or trading purposes and are not
a party to any financial or commodity derivatives except for a cross currency
rate swap discussed below.
Interest
Rate Risk
EDC has
variable rate debt that is not hedged by interest rate swaps. A 100 basis point
change in the interest rate would affect earnings by approximately $0.1 million
per year, based on variable rate balances outstanding at December 31,
2008.
Changes
in interest rates would also affect cash, cash equivalents, restricted cash, and
investment portfolios of both EDC and EDCI. Changes in the overall
level of interest rates affect interest income generated from our cash and
investments. If overall interest rates were one percentage point lower than
current rates, our annual interest income would decline by $1.1 million based on
our cash, cash equivalents, and restricted cash balances at December 31,
2008
and less than $0.1 million based on our investments portfolio at
December 31, 2008. We do not currently manage our investment interest-rate
volatility risk through the use of derivative instruments.
Foreign
Currency Risk
EDC
operates internationally and is exposed to movements in foreign currency
exchange rates primarily related to its German manufacturing and distribution
operations and its UK manufacturing operations. Approximately 71% and
29% of the revenues and 73% and 25% of the expenses for EDC were transacted in
Euros and British pounds, respectively, during 2008. At December
31,
2008 EDC was party to a cross currency rate swap agreement with a commercial
bank entered into in 2005 to offset the effect of exchange rate fluctuations
with its German subsidiary. In January 2009, the U.S. dollar
strengthened versus the Euro and EDC was able to settle the currency swap
obligation, which was $4.2 million as of December 31, 2008, for $2.1 million on
January 23, 2009.
At
December 31, 2008, approximately $0.9 million or 1% of EDCI’s cash and cash
equivalent balances were denominated in currencies other than the U.S
dollar, Pound, or Euro. The impact of a 10% strengthening or decline
in the dollar related to these balances would be immaterial to EDCI’s results of
operations. EDCI seeks to mitigate the risk associated with
non-functional currency deposits by monitoring and limiting the total cash
deposits held in non-functional currencies. Additionally, EDCI may seek to
mitigate the risk by entering into currency derivative
transactions.
Credit
Risk
Credit risk represents the loss that we
would incur if a counterparty fails to perform under its contractual
obligations. We have established controls to determine and monitor the
creditworthiness of customers. Credit concentration exists when a
group of customers have similar business characteristics and/or are engaged in
like activities that would cause their ability to meet their contractual
commitments to be adversely affected, in a similar manner, by changes in the
economy or other market conditions. EDC’s primary customer,
Universal, represented approximately 73%, 74% and 83% of EDC’s revenue in 2008,
2007 and 2006, respectively, our exposure to credit risk largely depends on
Universal’s performance under its contractual obligations.
Other
financial instruments potentially subjecting us to concentrations of credit risk
consist of temporary cash investments and a currency swap. We place our
temporary cash investments and currency swap with large diversified entities
with operations throughout the U.S.
ITEM
8. FINANCIAL STATEMENTS
Our
consolidated financial statements, which include our wholly owned and controlled
majority owned subsidiaries as of December 31, 2008 and 2007 and for each of the
three years in the period ended December 31, 2008, as well as the report of
independent auditors thereon, are set forth on the following pages. The index to
such financial statements is set forth below.
INDEX TO
FINANCIAL STATEMENTS
Financial
Statements: Page
Report of
Ernst & Young LLP Independent Registered Public Accounting
Firm...........................................................................................................................................35
Consolidated
Balance Sheets at December 31, 2008 and
2007............................................................................................................................................................................36
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006.................................................................................................................37
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years
ended
December
31, 2008, 2007 and
2006.......................................................................................................................................................................................................................38
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006................................................................................................................39
Notes to
Consolidated Financial
Statements.........................................................................................................................................................................................................40
All
other schedules are omitted because they are not applicable or not
required.
REPORT
OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
EDCI
Holdings, Inc.
We have
audited the accompanying consolidated balance sheets of EDCI Holdings, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss)
and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of EDCI Holdings, Inc.
and subsidiaries at December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
/s/
Ernst & Young LLP
Indianapolis,
Indiana
March 27,
2009
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
December 31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except share data)
|
ASSETS
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$ 75,112
|
|
|
$ 63,850
|
Restricted
cash
|
|
|
7,258
|
|
|
1,940
|
Short-term
investments
|
|
|
-
|
|
|
29,589
|
Accounts
receivable, net of allowances for doubtful accounts of
|
|
|
|
|
|
|
$3,008
and $2,811 for 2008 and 2007, respectively
|
|
|
19,129
|
|
|
24,620
|
Current
portion of long-term receivable
|
|
|
599
|
|
|
515
|
Inventories,
net
|
|
|
4,845
|
|
|
6,303
|
Prepaid
expenses and other current assets
|
|
|
12,513
|
|
|
14,689
|
Deferred
income taxes
|
|
|
105
|
|
|
277
|
Assets
held for sale
|
|
|
7,154
|
|
|
-
|
Current
assets, discontinued operations
|
|
|
8,691
|
|
|
15,256
|
Total
Current Assets
|
|
|
135,406
|
|
|
157,039
|
Restricted
cash
|
|
|
25,439
|
|
|
26,015
|
Property,
plant and equipment, net
|
|
|
21,186
|
|
|
28,199
|
Long-term
receivable
|
|
|
3,066
|
|
|
4,244
|
Long-term
investments
|
|
|
1,020
|
|
|
-
|
Intangible
assets
|
|
|
-
|
|
|
35,053
|
Deferred
income taxes
|
|
|
1,694
|
|
|
1,934
|
Other
assets
|
|
|
4,739
|
|
|
4,510
|
Non-current
assets, discontinued operations
|
|
|
-
|
|
|
39,027
|
TOTAL
ASSETS
|
|
|
$ 192,550
|
|
|
$ 296,021
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
|
$ 15,930
|
|
|
$ 22,860
|
Accrued
expenses and other liabilities
|
|
|
24,435
|
|
|
30,218
|
Income
taxes payable
|
|
|
-
|
|
|
3,697
|
Deferred
income taxes
|
|
|
-
|
|
|
126
|
Loans
from employees
|
|
|
1,142
|
|
|
1,267
|
Current
portion of long-term debt
|
|
|
2,281
|
|
|
16,480
|
Current
liabilities, discontinued operations
|
|
|
10,226
|
|
|
25,596
|
Total
Current Liabilities
|
|
|
54,014
|
|
|
100,244
|
Other
non-current liabilities
|
|
|
8,353
|
|
|
11,704
|
Loans
from employees
|
|
|
2,490
|
|
|
3,646
|
Long-term
debt
|
|
|
7,996
|
|
|
20,312
|
Pension
and other defined benefit obligations
|
|
|
35,052
|
|
|
36,155
|
Deferred
income taxes
|
|
|
-
|
|
|
10,195
|
Non-current
liabilities, discontinued operations
|
|
|
41
|
|
|
1,758
|
Total
Liabilities
|
|
|
107,946
|
|
|
184,014
|
Minority
interest in subsidiary company
|
|
|
5,205
|
|
|
5,771
|
Commitments
and contingencies
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; authorized: 1,000,000 shares, no
shares
|
|
|
|
|
|
|
issued
and outstanding
|
|
|
-
|
|
|
-
|
Common
stock, $.02 par value; authorized: 15,000,000 shares, issued
and
|
|
|
|
|
|
|
outstanding:
2008 -- 7,019,436 shares; 2007 -- 7,015,594 shares
|
|
|
140
|
|
|
140
|
Additional
paid in capital
|
|
|
371,091
|
|
|
370,928
|
Accumulated
deficit
|
|
|
(294,988)
|
|
|
(273,333)
|
Accumulated
other comprehensive income
|
|
|
4,583
|
|
|
8,501
|
Treasury
stock at cost:
|
|
|
|
|
|
|
2008
-- 324,794 shares; 2007 -- 0 shares
|
|
|
(1,427)
|
|
|
-
|
Total
Stockholders' Equity
|
|
|
79,399
|
|
|
106,236
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
$ 192,550
|
|
|
$ 296,021
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands, except per share amounts)
|
REVENUES:
|
|
|
|
|
|
|
Product
revenues
|
|
$ 181,159
|
|
$ 195,288
|
|
$ 154,618
|
Service
revenues
|
|
57,269
|
|
58,155
|
|
53,593
|
Total
Revenues
|
|
238,428
|
|
253,443
|
|
208,211
|
COST
OF REVENUES:
|
|
|
|
|
|
|
Cost
of product revenues
|
|
151,722
|
|
164,550
|
|
119,470
|
Cost
of service revenues
|
|
38,757
|
|
39,182
|
|
37,755
|
Total
Cost of Revenues
|
|
190,479
|
|
203,732
|
|
157,225
|
GROSS
PROFIT
|
|
47,949
|
|
49,711
|
|
50,986
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
32,180
|
|
37,974
|
|
33,383
|
Impairment
of long-lived assets
|
|
26,354
|
|
-
|
|
-
|
Amortization
of intangible assets
|
|
6,242
|
|
5,846
|
|
5,222
|
Total
Operating Expenses
|
|
64,776
|
|
43,820
|
|
38,605
|
OPERATING
INCOME (LOSS)
|
|
(16,827)
|
|
5,891
|
|
12,381
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
Interest
income
|
|
3,447
|
|
4,496
|
|
4,187
|
Interest
expense
|
|
(2,225)
|
|
(2,422)
|
|
(3,088)
|
Gain
(loss) on currency swap, net
|
|
1,462
|
|
(3,152)
|
|
(3,211)
|
Gain
(loss) on currency transactions, net
|
|
(3,233)
|
|
761
|
|
2,143
|
Other
income (expense), net
|
|
(440)
|
|
234
|
|
(37)
|
Total
Other Income (Expense)
|
|
(989)
|
|
(83)
|
|
(6)
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
|
|
|
|
|
|
|
TAXES
AND MINORITY INTEREST
|
|
(17,816)
|
|
5,808
|
|
12,375
|
Income
tax provision (benefit)
|
|
(4,643)
|
|
3,400
|
|
7,921
|
Minority
interest (income) expense
|
|
(308)
|
|
241
|
|
213
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
|
(12,865)
|
|
2,167
|
|
4,241
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
(11,502)
|
|
(18,345)
|
|
(14,011)
|
GAIN
ON SALE OF MESSAGING BUSINESS
|
|
-
|
|
1,044
|
|
6,127
|
GAIN
ON SALE OF EDC U.S. OPERATIONS
|
|
2,712
|
|
-
|
|
-
|
LOSS
BEFORE EXTRAORDINARY ITEM
|
|
(21,655)
|
|
(15,134)
|
|
(3,643)
|
Extraordinary
gain - net of income tax
|
|
-
|
|
-
|
|
7,668
|
NET
INCOME (LOSS)
|
|
$ (21,655)
|
|
$ (15,134)
|
|
$ 4,025
|
INCOME
(LOSS) PER WEIGHTED AVERAGE COMMON SHARE (1):
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ (1.88)
|
|
$ 0.31
|
|
$ 0.62
|
Discontinued
Operations:
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
(1.68)
|
|
(2.62)
|
|
(2.04)
|
Gain
on sale of Messaging business
|
|
-
|
|
0.15
|
|
0.89
|
Gain
on sale of EDC U.S. Operations
|
|
0.40
|
|
-
|
|
-
|
Extraordinary
gain
|
|
-
|
|
-
|
|
1.11
|
Net
income (loss) per weighted average common share
|
|
$ (3.17)
|
|
$ (2.16)
|
|
$ 0.59
|
INCOME
(LOSS) PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ (1.88)
|
|
$ 0.31
|
|
$ 0.60
|
Discontinued
Operations:
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
(1.68)
|
|
(2.62)
|
|
(2.00)
|
Gain
on sale of Messaging business
|
|
-
|
|
0.15
|
|
0.87
|
Gain
on sale of EDC U.S. Operations
|
|
0.40
|
|
-
|
|
-
|
Extraordinary
gain
|
|
-
|
|
-
|
|
1.09
|
Net
income (loss) per diluted weighted average common share
|
|
$ (3.17)
|
|
$ (2.16)
|
|
$ 0.57
|
|
|
|
|
|
|
|
(1)
Income (loss) per weighted average common share amounts are rounded to the
nearest $.01; therefore, such rounding may
|
impact
individual amounts presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
AND
COMPREHENSIVE INCOME (LOSS)
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
Common Stock
|
Additional
|
Accumulated
|
Comprehensive
|
Treasury Stock
|
Comprehensive
|
|
Shares
|
Amount
|
Paid-in Capital
|
Deficit
|
Income (Loss)
|
Shares
|
Amount
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2006
|
6,806
|
$ 136
|
$ 366,951
|
$ (262,224)
|
$ (1,182)
|
$ -
|
$ -
|
|
Net
income
|
-
|
-
|
-
|
4,025
|
-
|
-
|
-
|
$ 4,025
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
3,429
|
-
|
-
|
3,429
|
Effect
of adopting FAS 158 on
|
|
|
|
|
|
|
|
|
post-retirement
and pension
|
|
|
|
|
|
|
|
|
benefit
obligations, net of
|
|
|
|
|
|
|
|
|
income
tax of $528
|
-
|
-
|
-
|
-
|
(1,143)
|
-
|
-
|
(1,143)
|
Comprehensive
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$ 6,311
|
Shares
issued for ESP Plan, other
|
|
|
|
|
|
|
|
|
awards
and option exercises
|
126
|
3
|
2,790
|
-
|
-
|
-
|
-
|
|
Balances,
December 31, 2006
|
6,932
|
$ 139
|
$ 369,741
|
$ (258,199)
|
$ 1,104
|
-
|
$ -
|
|
Net
loss
|
-
|
-
|
-
|
(15,134)
|
-
|
-
|
-
|
$ (15,134)
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
4,436
|
-
|
-
|
4,436
|
Post-retirement
and pension benefit
|
|
|
|
|
|
|
|
|
obligation
adjustment, net of
|
|
|
|
|
|
|
|
|
income
tax of $1,754
|
|
|
|
|
3,071
|
-
|
-
|
3,071
|
Net
unrealized investment losses
|
|
|
|
|
(110)
|
-
|
-
|
(110)
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$ (7,737)
|
Shares
issued for ESP Plan, other
|
|
|
|
|
|
|
|
|
awards
and option exercises
|
84
|
1
|
1,187
|
-
|
-
|
-
|
-
|
|
Balances,
December 31, 2007
|
7,016
|
$ 140
|
$ 370,928
|
$ (273,333)
|
$ 8,501
|
-
|
$ -
|
|
Net
loss
|
-
|
-
|
-
|
(21,655)
|
-
|
-
|
-
|
$ (21,655)
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
(3,866)
|
-
|
-
|
(3,866)
|
Post-retirement
and pension benefit
|
|
|
|
|
|
|
|
|
obligation
adjustment, net of
|
|
|
|
|
|
|
|
|
income
tax of $83
|
-
|
-
|
-
|
-
|
222
|
-
|
-
|
222
|
Net
unrealized investment losses
|
-
|
-
|
-
|
-
|
(274)
|
-
|
-
|
(274)
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$ (25,573)
|
Shares
issued for restricted stock
|
|
|
|
|
|
|
|
|
awards
|
3
|
-
|
163
|
-
|
-
|
-
|
-
|
|
Acquisition
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
(325)
|
(1,427)
|
|
Balances,
December 31, 2008
|
7,019
|
$ 140
|
$ 371,091
|
$ (294,988)
|
$ 4,583
|
(325)
|
$
(1,427)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial
Statements.
|
ENTERTAINMENT
DISTRIBUTION COMPANY, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income (loss)
|
$ (21,655)
|
|
$ (15,134)
|
|
$ 4,025
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Gain
on sale of messaging business
|
-
|
|
(1,044)
|
|
(6,127)
|
Gain
on sale of U.S. operations
|
(2,712)
|
|
-
|
|
-
|
Extraordinary
gain
|
-
|
|
-
|
|
(7,668)
|
Depreciation
and amortization
|
22,970
|
|
21,641
|
|
21,946
|
Impairment
of long-lived assets
|
26,354
|
|
9,782
|
|
-
|
Stock
compensation expense
|
163
|
|
445
|
|
934
|
Compensation
expense on profit interest in EDC, LLC
|
-
|
|
504
|
|
1,610
|
Bad
debt expense
|
829
|
|
2,456
|
|
437
|
Unrealized
(gain) loss on currency swap
|
(1,462)
|
|
3,152
|
|
3,211
|
Foreign
currency transaction (gain) loss
|
3,233
|
|
(761)
|
|
(1,081)
|
Gain
on adjustment to discontinued operations tax
payable
|
(1,499)
|
|
(52)
|
|
(3,972)
|
Deferred
income taxes
|
(9,495)
|
|
(572)
|
|
(1,719)
|
Non-cash
interest expense
|
912
|
|
1,834
|
|
2,407
|
Minority
interest (income) expense
|
(513)
|
|
(126)
|
|
94
|
Other
|
151
|
|
(549)
|
|
269
|
Changes
in operating assets and liabilities, net of effects of business
dispositions and acquisitions:
|
|
|
|
|
|
Restricted
cash
|
(530)
|
|
(748)
|
|
2,043
|
Accounts
receivable
|
5,645
|
|
7,483
|
|
(3,496)
|
Inventories
|
1,866
|
|
61
|
|
2,337
|
Prepaid
and other current assets
|
1,999
|
|
(398)
|
|
(3,503)
|
Long-term
receivables
|
512
|
|
1,684
|
|
5,463
|
Other
assets
|
810
|
|
(1,217)
|
|
(1,476)
|
Accounts
payable
|
(11,141)
|
|
1,362
|
|
(3,766)
|
Deferred
revenue
|
-
|
|
-
|
|
(6,255)
|
Accrued
liabilities and income taxes payable
|
(9,991)
|
|
(10,023)
|
|
2,253
|
Other
liabilities
|
1,879
|
|
1,460
|
|
1,448
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
8,325
|
|
21,240
|
|
9,414
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
(2,964)
|
|
(6,823)
|
|
(15,322)
|
Asset
and share purchase of EDC operations, net of cash acquired
|
-
|
|
-
|
|
(5,591)
|
Proceeds
from sale of U.S. operations
|
26,000
|
|
-
|
|
-
|
Cash
restricted under long-term borrowing agreement
|
(5,400)
|
|
-
|
|
16,500
|
Purchase
of available for-sale securities
|
(12,615)
|
|
(29,623)
|
|
-
|
Proceeds
from sale of short-term securities
|
41,087
|
|
-
|
|
-
|
Proceeds
from settlements related to the EDC acquisition and Messaging
sale
|
-
|
|
3,788
|
|
25,000
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
46,108
|
|
(32,658)
|
|
20,587
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Repayment
of employee loans
|
(1,281)
|
|
(1,286)
|
|
(1,156)
|
Proceeds
from long-term borrowing, net of costs
|
-
|
|
-
|
|
729
|
Proceeds
from long term debt
|
6,799
|
|
-
|
|
-
|
Repayment
of long-term borrowing, including debt associated with discontinued
operations
|
(44,086)
|
|
(22,840)
|
|
(15,406)
|
Proceeds
from sales of LLC interest in subsidiary
|
-
|
|
-
|
|
58
|
Acquisitions
of treasury stock
|
(1,427)
|
|
-
|
|
-
|
Issuance
of common stock under our stock-based compensation and stock purchase
plans
|
-
|
|
741
|
|
1,836
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(39,995)
|
|
(23,385)
|
|
(13,939)
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(3,176)
|
|
2,565
|
|
1,223
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
11,262
|
|
(32,238)
|
|
17,285
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
63,850
|
|
96,088
|
|
78,803
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ 75,112
|
|
$ 63,850
|
|
$ 96,088
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash
transactions:
|
|
|
|
|
|
Cash
paid during period for Interest
|
$ 2,700
|
|
$ 2,614
|
|
$ 3,918
|
Cash
paid during period for Income taxes
|
$ 10,539
|
|
$ 9,673
|
|
$ 3,267
|
Non
cash transactions:
|
|
|
|
|
|
Pension
and post-retirement benefit obligation adjustment
|
$ 305
|
|
$ 4,825
|
|
$ -
|
Capital
lease obligation
|
$ -
|
|
$ -
|
|
$ 1,118
|
|
|
|
|
|
|
See
Notes to Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
1.
|
Business
Liquidity and Continuing Operations
|
a.
Business
EDCI
Holdings, Inc. (“EDCIH” or the “Company”), is a recently formed holding company
and parent of Entertainment Distribution Company, Inc. (“EDCI”),
which, together with its wholly owned and controlled majority owned
subsidiaries, is a multi-national company in the manufacturing and distribution
segment of the entertainment industry. The Company has one reportable
business segment operated by its majority owned subsidiary, Entertainment
Distribution Company, LLC (“EDC”). EDC provides pre-recorded products and
distribution services to the entertainment industry. The primary customer of EDC
is Universal Music Group (“Universal”).
Effective
August 25, 2008, EDCI consummated a reorganization, pursuant to which EDCI
became a wholly owned subsidiary of the Company and each ten shares of common
stock of EDCI were exchanged for the right to receive one share of common stock
of the Company. All share and per share amounts discussed and
disclosed in this Annual Report on Form 10-K reflects the effect of the
reorganization. Following the reorganization, the Company holds 100%
of the stock of EDCI and the consolidated assets, liabilities and stockholders’
equity of the Company are the same as the consolidated assets, liabilities and
stockholders’ equity of EDCI immediately prior to the
reorganization. On August 25, 2008, the stock of EDCI ceased trading
on the Nasdaq Global Market and the stock of the Company now trades on the
Nasdaq Capital Market.
b.
Liquidity and Continuing Operations
Sale of EDC’s U.S. Operations
- The Company announced on October 31, 2008, and closed on
December 31, 2008, the sale of substantially all of the U.S. business of EDC to
Sony DADC U.S., Inc (“Sony DADC”) for $26.0 million in cash and certain other
consideration. The specific assets transferred were: EDC’s
distribution operations located in Fishers, Indiana; EDC’s U.S. supply
agreements with Universal Music Group; all of the equipment located in EDC’s
Fishers, Indiana distribution facility; certain manufacturing equipment located
in EDC’s Kings Mountain, North Carolina facility; and the transfer of certain
other of EDC’s U.S. customer relationships. EDC no longer operates
manufacturing and distribution facilities in North America. EDC agreed to
provide certain transition services to Sony following the
closing. The required production service process was completed at the
end of February 2009.
Following
the transaction, the Companycontinues to operate and serve its international
customers through its facilities in Hannover, Germany and Blackburn,
UK. The Company's business continues to be impacted by trends
that have negatively impacted the manufacturing and distribution segment of the
entertainment industry in general, including industry overcapacity, recessionary
economic conditions in many parts of the world and weakness in demand for our
core products. Several of the Company's international
customers have been impacted by the threat of credit insurers dropping coverage
and thus increasing the risk of the Company's continued business with
these parties. In addition, the Company also faces the continuing
burden of legacy pension and other post-retirement benefit plans related
to its EDC subsidiaries.
On March
20, 2009, the Board of Directors of the Company approved a plan to
consolidate the European operations. As a result of this
plan, the Company would cease all operations presently conducted at
its Blackburn facility in the United Kingdom and relocate the production of
units required by Universal, its largest customer, that were previously
manufactured in the Blackburn facility, to EDC’s Hannover plant through the
expiration of the Universal manufacturing agreements in May,
2015. EDC would also relocate certain equipment and related
assets from Blackburn to Hannover, and any remaining equipment or assets would
be sold or disposed of. See Note 26.
2.
|
Summary
of Significant Accounting Policies
|
a.
Basis of Presentation
The
consolidated financial statements of EDCIH are presented in U.S. dollars in
conformity with accounting principles generally accepted in the United States.
The financial statements include the accounts of EDCIH and its wholly-owned, as
well as its controlled majority-owned, subsidiaries and have been prepared from
records maintained by EDCIH and its subsidiaries in their respective countries
of operation. The consolidated accounts
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
include
100% of assets and liabilities of its majority owned subsidiaries, and the
ownership interest of minority investors are recorded as minority interest. All
significant intercompany accounts and transactions are eliminated in
consolidation.
b.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
c.
Cash Equivalents
The
Company maintains cash and cash equivalents with various financial institutions.
These financial institutions are large diversified entities and the
Company's policy is designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative credit standing of
those financial institutions which are considered in its investment
strategy. The
Company classifies investments with maturities of three months or less when
purchased as cash equivalents.
d.
Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents, trade accounts and notes
receivable, investments and other current and long-term liabilities approximates
their respective fair values.
The use
of derivative instruments is limited to non-trading purposes. The estimated fair
values of derivative instruments are calculated based on market rates. These
values represent the estimated amounts the Company would receive or
pay to terminate agreements, taking into consideration current market rates and
the current credit-worthiness of the counterparties. In accordance with SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended, the derivatives held by
the Comany do not qualify for hedge accounting, and accordingly, the
Company records the gains and losses from the derivative instruments in
earnings.
e.
Accounts Receivable, Net
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company calculates a reserve based on the aging of
receivables and either increases or decreases the estimate of doubtful accounts
accordingly. Additional allowances may be required if one or more
of the Company's customers’ financial condition deteriorates,
resulting in an impairment of their ability to make payments. Such allowances,
if any, would be recorded in the period the impairment is
identified. The Company recorded bad debt expense of $0.6
million, $2.2 million and less than $0.1 million in 2008, 2007 and 2006,
respectively related to our continuing operations. Write offs of accounts
receivable were less than $0.1 million in 2008, 2007 and 2006,
respectively
Accounts
receivable at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Trade
receivables
|
$ 22,137
|
|
$ 27,431
|
Less:
allowances for doubtful accounts
|
(3,008)
|
|
(2,811)
|
|
$ 19,129
|
|
$ 24,620
|
f.
Inventories
Inventories
are valued using a first in, first out method and are stated at the lower of
cost or market. The Company's inventories are comprised of raw
materials, work in process and finished goods components. The raw
materials inventory includes polystyrene used in production of jewel cases and
trays production in central Europe; polycarbonate for the production of CDs and
DVDs and packaging components including pallets, corrugated cardboard, jewel
boxes and trays. Generally, the Company does not own
finished goods. Finished goods include CDs and DVDs not yet
shipped.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Inventories,
net of reserves, at December 31, 2008 and 2007 consisted of:
|
|
|
|
|
2008
|
|
2007
|
Raw
materials
|
$ 3,859
|
|
$ 5,135
|
Finished
goods
|
426
|
|
488
|
Work
in process
|
560
|
|
680
|
Total
|
$ 4,845
|
|
$ 6,303
|
At
December 31, 2008 and 2007, reserves were approximately $1.0 million and $1.3
million, respectively.
g.
Property, Plant and Equipment
Property,
plant and equipment are stated at cost. Assets obtained through capital leases
are capitalized and amortized over the shorter of the lease term or the
estimated useful life of the assets. Leasehold improvements are amortized over
their estimated useful lives not to exceed the life of the lease. Depreciation
is computed principally using the straight-line method based on the estimated
useful lives of the related assets (buildings, 20-40 years; furniture, fixtures
and equipment, 3-20 years; software and computer equipment, 3-5 years).
Depreciation includes amortization on assets recorded under a capital
lease.
Property,
plant and equipment at December 31, 2008 and 2007 consisted
of:
|
2008
|
|
2007
|
Buildings
and improvements
|
486
|
|
492
|
Equipment
|
48,000
|
|
48,814
|
|
48,486
|
|
49,306
|
Less:
Accumulated depreciation
|
(27,300)
|
|
(21,107)
|
|
$ 21,186
|
|
$ 28,199
|
Depreciation
expense in continuing operations was $7.8 million, $7.8 million and $7.1 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. Depreciation expense related
to the Company's discontinued operations was $5.7 million, $5.5
million and $6.9 million for the years ended December 31, 2008, 2007, and 2006,
respectively.
h.
Intangible Assets
Intangible
assets are stated at their estimated fair values at acquisition. In
accordance with SFAS 142, the fair values of the identifiable intangible assets
are amortized over their estimated useful lives in a manner that best reflects
the economic benefits derived from such assets.
Intangible
assets are comprised of supply agreements and contractual and non-contractual
customer relationships arising from the acquisition of Universal’s U.S. and
central European manufacturing and distribution operations. The supply
agreements and customer relationships were entered into in 2005 and include
10-year term manufacturing and services supply agreements with Universal, two
third party distribution supply agreements with automatic renewal terms and
relationships with several central European customers for CD and DVD
manufacturing services. Intangible assets are being amortized over their
estimated useful lives.
The final
allocation of the purchase price for the EDC acquisition was completed in 2006,
which resulted in the allocation of $2.4 million of goodwill to the
Company's U.S. operations. During the year ended December 31,
2007, in conjunction with the settlement of a portion of the long-term
receivable, goodwill was reduced by $2.4 million.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
As of
December 31, 2008, intangible assets subject to amortization and related
accumulated amortization are as follows:
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value
|
Balance
at December 31, 2007
|
$ 50,236
|
|
$ (15,183)
|
|
$ 35,053
|
Euro
foreign exchange impact
|
(3,370)
|
|
913
|
|
(2,457)
|
Impairment
|
(46,866)
|
|
20,512
|
|
(26,354)
|
Amortization
expense
|
-
|
|
(6,242)
|
|
(6,242)
|
Balance
at December 31, 2008
|
$ -
|
|
$ -
|
|
$ -
|
During
the fourth quarter of 2008, the Company conducted an impairment
analysis of its intangible assets which resulted in a $26.4 million
impairment related to its central European intangible assets.
Amortization
expense was $6.2 million, $5.8 million and $5.2 million for the periods ended
December 31, 2008, 2007 and 2006, respectively. Amortization expense related to
the Company's discontinued operations was $3.2 million, $2.5 million and $2.6
million for the periods ended December 31, 2008, 2007 and 2006,
respectively.
i.
Impairment of Long-Lived Assets
The
Company records the impairment or disposal of long-lived assets in
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company reviews the
recoverability of long-lived assets, including property, plant and equipment and
intangible assets with finite lives when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on its ability to recover the
carrying value of the asset from the expected future cash flows of the related
operations. To the extent that the asset is not recoverable, the
Company measures the impairment based on the projected discounted cash
flows of the asset over the remaining useful life. The measurement of impairment
requires the Company to make estimates of these cash flows
related to long-lived assets, as well as other fair value
determinations.
Negative
operating conditions encountered in 2008, anticipated declines in future sales
volumes and the loss of a significant distribution customer at the
Company's central European operation indicated that the carrying value
of its central European operation’s Universal manufacturing and
distribution supply agreement, one third of its party distribution agreements,
and third party customer relationship agreement intangible assets would not be
recovered from the cash flows related to operations of these
agreements. The Company made certain assumptions when estimating
future cash flows to be generated from these assets including decline in future
sales volumes, pricing, and costs saving initiatives in support of the
intangible assets. As a result of the analysis, the
Company recorded an impairment of intangible assets of $26.4 million in
2008.
j.
Foreign Currency Translation
The
financial statements of the Company's foreign subsidiaries whose
functional currency is the local currency are accounted for and have been
translated into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency
Translation”. Foreign currency transaction gains and losses
resulting from a subsidiary’s foreign currency denominated assets and
liabilities were a $3.2 million loss in 2008 and gains of $0.8 million and $2.1
million in 2007 and 2006, respectively. Assets and liabilities have been
translated using the exchange rate in effect at the balance sheet date. Revenues
and expenses have been translated using a weighted-average exchange rate for the
period. The resulting gains and losses on currency translations are included as
foreign currency translation in the consolidated statement of stockholders’
equity and comprehensive income (loss).
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
k.
Revenue Recognition
The
Company's revenue consists of pre-recorded entertainment product sales and
distribution service revenue earned from the fulfillment of services. Pursuant
to Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104), the Company recognizes revenue when a signed contract exists,
the fee is fixed and determinable, delivery terms are met, and collection of the
resulting receivable is probable. Service revenue is recognized as services are
performed. For certain components, including printed materials, the
Company may act as an agent for the customer, and the customer
reimburses the Company for any incurred costs plus a handling fee. The
reimbursement for the costs is reported as a reduction to expense and the
handling fees are recognized as revenue. Shipping and handling costs that are
reimbursed by customers for invoice charges such as postage, freight packing and
small order surcharges are recorded as revenue and cost of revenue.
l.
Shipping Costs
Shipping
costs reimbursed by customers for invoice charges such as freight, postage,
freight packing and small order surcharges are recorded as revenue and are also
included in cost of sales.
m.
Stock-Based Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,”
utilizing the modified prospective method. SFAS No. 123R requires the
recognition of stock-based compensation expense in the consolidated financial
statements for awards of equity instruments to employees and non-employee
directors based on the grant-date fair value of those awards, estimated in
accordance with the provisions of SFAS No. 123R. The
Company recognizes these compensation costs on a straight-line basis over
the requisite service period of the award, which is generally the option vesting
period. Under the modified prospective method, the provisions of SFAS
No. 123R apply to all awards granted or modified after the date of
adoption. In addition, the unrecognized expense of awards not yet vested at the
date of adoption, determined under the original provisions of SFAS No. 123,
“Accounting for Stock-Based
Compensation,” are recognized in net income (loss) in the periods after
the date of adoption. SFAS No. 123R also requires the benefits of tax
deductions in excess of recognized compensation expense to be reported as a
financing cash flow, rather than as an operating cash flow as prescribed under
the prior accounting rules. This requirement reduces net operating cash flow and
increases net financing cash flows in periods after adoption. Total cash flow
remains unchanged from what would have been reported under the prior accounting
rules.
n.
Income Taxes
Income
taxes are accounted for using the liability method in accordance with SFAS No.
109, Accounting for Income
Taxes (SFAS 109). Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes
(FIN 48), to create a single model to address accounting for uncertainty
in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company adopted
FIN 48 on January 1, 2007.
o.
Income (Loss) Per Common Share
The
Company computes income (loss) per common share pursuant to SFAS No. 128, Earnings per
Share. Basic earnings per share is computed on the basis of
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed on the basis of the weighted
average number of shares of common
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
stock
plus the effect of dilutive shares issuable upon the exercise of outstanding
stock options or other stock-based awards during the period using the treasury
stock method. See Note 21.
p.
Impact of Recently Issued Accounting Standards
In
December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations.
SFAS No. 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS No. 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for the
Company beginning January 1, 2009. The impact of the adoption of
SFAS 141R will be prospective in nature.
In
December 2007, the FASB issued Statement SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51.
SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS No. 160 must be applied
prospectively. SFAS No. 160 is effective for the Company beginning January 1,
2009. The adoption of SFAS 160 will impact the presentation of
minority interest in the Company's consolidated financial
statements.
In
December 2007, the FASB ratified the Emerging Issues Task Force consensus
on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements that discusses how parties to a collaborative arrangement
(which does not establish a legal entity within such arrangement) should account
for various activities. The consensus indicates that costs incurred and revenues
generated from transactions with third parties (i.e. parties outside of the
collaborative arrangement) should be reported by the collaborators on the
respective line items in their income statements pursuant to EITF Issue
No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent. Additionally,
the consensus provides that income statement characterization of payments
between the participants in a collaborative arrangement should be based upon
existing authoritative pronouncements; analogy to such pronouncements if not
within their scope; or a reasonable, rational, and consistently applied
accounting policy election. EITF Issue No. 07-1 is effective for the
Company beginning January 1, 2009 and is to be applied retrospectively
to all periods presented for collaborative arrangements existing as of the date
of adoption. The Company does not expect the adoption of EITF Issue
No. 07-1 to have a material impact on its consolidated financial
statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS No. 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement requires entities
to provide enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations, and cash flows. SFAS No. 161 is effective for the
Company beginning January 1, 2009. The Company does not
expect the adoption of SFAS No. 161 to have a material impact on its
consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP No. 142-3”). This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R) and other U.S.
generally accepted accounting principles. FSP No. 142-3 is effective for
the Company as of January 1, 2009. The Company does not expect
the adoption of FSP No. 142-3 to have a material impact on its consolidated
financial statements.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
In May 2008, the FASB issued
SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles. This standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted
accounting principles in the United States for non-governmental entities. SFAS
No. 162 is effective 60 days following approval by the U.S. Securities and
Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The Company is
currently evaluating the potential impact of the adoption of SFAS No. 162
on its consolidated financial statements.
In June
2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF No. 03-6-1”). This FSP addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in computing earnings per share
under the two-class method described in SFAS No. 128, Earnings Per Share.
This FSP will be effective for the Company as of January 1, 2009
and will be applied retrospectively. The Company does not expect
the adoption of FSP EITF No. 03-6-1 to have a material impact on its
consolidated financial statements.
The
results of EDC’s and Blackburn’s operations, discussed below, are included in
the consolidated financial statements since their respective acquisition
dates.
(a) EDC Acquisition
On
May 31, 2005, The Company acquired the U.S. and central European
CD and DVD manufacturing and distribution operations from Universal Music Group
(“Universal”). The transaction was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, Business
Combinations.
On
December 31, 2008, the Company's EDC subsidiary sold its distribution
operations located in Fishers, Indiana, U.S. supply agreements with Universal
Music Group, all of the equipment located in our Fishers, Indiana distribution
facility and certain manufacturing equipment located in our Kings Mountain,
North Carolina facility, as well as transferred its U.S. customer relationships
to Sony DADC U.S., Inc. All information related to the Company's U.S.
operations is reflected as discontinued operations in the accompanying 10-K,
including information from prior periods. See Note 4.
(b) Blackburn
Acquisition
On
July 21, 2006, EDC acquired the shares of Deluxe Global Media Services
Blackburn Limited (“Blackburn”), a subsidiary of The Rank Group Plc, for a
purchase price of ₤3.0 million ($5.6 million) in cash, including closing
costs, using the July 21, 2006 British pound to U.S. dollar exchange rate
of 1.8465. Under the
purchase method of accounting, the assets and liabilities acquired were recorded
on the Company's balance sheet at their respective fair values as of
the date of the acquisition.
In
accordance with SFAS 141, the excess of the fair value of acquired assets
over the purchase price was allocated as a pro rata reduction of the amounts
assigned to long-lived assets with the remaining excess recorded as an
extraordinary gain in the Company's consolidated statements of
operations for the twelve months ended December 31, 2006.
4.
|
Discontinued
Operations
|
(a)
EDC U.S.
Operations
On
October 31, 2008, the Company announced that its EDC
subsidiary entered into an Asset Purchase Agreement (the “Agreement”) with Sony
DADC for the sale of its distribution operations located in Fishers, Indiana,
U.S. supply agreements with Universal Music Group, the equipment located in its
Fishers, Indiana distribution facility and certain manufacturing equipment
located in its Kings Mountain, North Carolina facility, as well as the transfer
of U.S. customer relationships to Sony DADC (collectively, the “Sony
Sale”). On December 31, 2008, the Sony Sale closed. In accordance with
the Agreement, EDC received $26.0 million in cash at closing and will
receive
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
by the
end of April 2009 an additional approximate $1.5 million for equipment
sold to Sony DADC pursuant to the Agreement and $0.6 million for inventory
acquired. The $26.0 million purchase price is subject to certain
post-closing working capital adjustments, as provided in the Agreement. The
Agreement also provides for up to $2.0 million as contingent consideration
related to the transferred operations achieving target criteria during 2009. The
Agreement includes customary representations and warranties accompanied by
certain limited indemnification rights, secured by a second lien on EDC's U.S.
assets in favor of Sony DADC.
The
Company's Kings Mountain, North Carolina facility which was not disposed of
in the Sony Sale was written down to its fair market value of $7.0 million and
reclassified to held for sale in the accompanying consolidated balance
sheet.
At
December 31, 2008, the Company recorded a gain on the Sony sale as
follows:
Assets
Sold and Liabilities Assumed
|
|
|
|
Accounts
receivable
|
|
$ (381)
|
|
Inventory
|
|
(820)
|
|
Other
current assets
|
|
(198)
|
|
Fixed
assets
|
|
(7,532)
|
|
Intangible
assets
|
|
(6,368)
|
|
Accounts
payable
|
|
163
|
|
Accrued
liabilities
|
|
878
|
|
|
|
$ (14,258)
|
Other
expenses
|
|
(10,488)
|
Transaction
costs
|
|
(600)
|
|
|
|
$ 25,346
|
Proceeds
|
|
$ 28,058
|
Gain
on sale
|
|
$ 2,712
|
The
operating results of the Company's EDC U.S. operations are classified
as discontinued operations for all periods presented in the consolidated
statements of operations. Additionally, the
Company reported all of the remaining EDC U.S. operations assets at their
net realizable value in the consolidated balance sheet as of December 31, 2008
and their carrying value as of December 31, 2007.
Other
expenses primarily includes $7.6 million for the impairment of property, plant
and equipment not acquired by Sony DADC which is held for sale at December 31,
2008, severance costs of $0.9 million and the write off $1.9 million of
inventory and other assets related to the Kings Mountain facility.
Severance charges are being recorded over the employees’ service
period. The Company also had certain EDC U.S. operations employees who
were terminated effective upon the closing of the Sony Sale. The
Company has recorded severance charges amounting to $0.9 million into
current liabilities, discontinued operations for the year ended December 31,
2008. In fiscal 2009, the Company anticipates incurring an
additional $0.8 million in severance related costs related to the exit
plan. All severance payments are expected to be paid by the end of
the second quarter of 2009.
During
the fourth quarter of 2008, the Company terminated the contracts
governing its Reno, Nevada and Wilkes-Barre, Pennsylvania distribution
facilities' operating leases. The Company recognized costs associated
with the termination of the leases of approximately $0.7
million. These amounts were recorded in the accompanying consolidated
balance sheet as current liabilities of discontinued operations and in the gain
on sale of U.S. operations line of the statements of operations.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Results
for the EDC U.S. Operations consist of the following:
|
Year
Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
Net
sales
|
$ 104,802
|
|
$ 131,114
|
|
$ 140,317
|
Loss
from discontinued operations:
|
|
|
|
|
|
Loss
from operations before income taxes
|
(13,136)
|
|
(17,803)
|
|
(5,791)
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
Loss
from operations
|
$ (13,136)
|
|
$ (17,803)
|
|
$ (5,791)
|
Gain
on disposal before income taxes
|
2,712
|
|
-
|
|
-
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
2,712
|
|
-
|
|
-
|
Loss
from discontinued operations
|
$ (10,424)
|
|
$ (17,803)
|
|
$ (5,791)
|
The loss
from discontinued operations consists of operating losses for the
Company's EDC U.S. operations adjusted for a gain on the disposal which
includes charges for transaction costs. Certain estimates and
assumptions were made in determining the net realizable value related to the
discontinued assets and operating results noted above. Interest
expense was allocated to the discontinued EDC U.S. Operations based on debt
incurred to finance its acquisition and its working capital needs, including the
Universal loan. In total, the Company allocated $1.6 million, $2.4
million, and $3.0 million of interest expense from continuing operations to
discontinued operations in 2008, 2007, and 2006,
respectively. There is no provision or benefit for income taxes
recorded due to the uncertainty about the Company's ability to utilize
NOLs. The 2007 period includes an impairment charge of approximately $9.8
million dollars related to the write down of certain EDC U.S. intangible assets
and equipment.
The
classes of assets and liabilities included as part of the sale of the Company's
EDC U.S. operations are reported as discontinued operations on the
Company's consolidated balance sheet as follows:
|
December
31,
|
|
2008
|
|
2007
|
Current
Assets
|
|
|
|
Accounts
receivable
|
$ 5,093
|
|
$ 10,957
|
Inventory
|
515
|
|
$ 2,808
|
Prepaid
and other current assets
|
3,082
|
|
$ 1,380
|
|
$ 8,690
|
|
$ 15,145
|
|
-
|
|
|
Long-Term
Assets
|
|
|
|
Property,
plant and equipment, net
|
-
|
|
$ 27,046
|
Intangible
assets
|
-
|
|
$ 9,551
|
Other
Assets
|
-
|
|
$ 2,430
|
|
$ -
|
|
$ 39,027
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable
|
$ 3,268
|
|
$ 10,428
|
Accrued
employee wages and benefits
|
1,651
|
|
$ 1,719
|
Accrued
income and other taxes
|
2
|
|
$ 6
|
Current
portion of long-term debt
|
-
|
|
$ 7,883
|
Accrued
other
|
4,759
|
|
$ 4,996
|
|
$ 9,680
|
|
$ 25,032
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
Debt
|
-
|
|
$ 1,277
|
Other
|
41
|
|
$ 481
|
|
$ 41
|
|
$ 1,758
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(b)
Messaging and
Paging
On
December 14, 2006, the Comany entered into an Asset Purchase Agreement
(the “Agreement”) with IP Unity, for the sale of substantially all of the assets
of the Messaging business, including inventory, fixed assets, intellectual
property rights, contracts and certain real estate, and the assumption of
certain related liabilities. The sale of the U.S. Messaging assets closed on
December 31, 2006 with the transfer of certain international locations closing
during the first, second and fourth quarters of 2007. The
Company continued to operate the international locations on IP Unity’s
behalf during the transition period from December 31, 2006 until their
transfer. In accordance with the Agreement, the
Company received $25.0 million in cash (subject to a working capital
adjustment as provided in the Agreement). The proceeds from the sale
related to both domestic and international operations.
During
the first quarter of 2007, the Company transferred the outstanding
equity of its Messaging subsidiaries in Hong Kong, South Africa and
Netherlands and substantially all of the assets of its Singapore subsidiary
to IP Unity and recorded a gain of $0.5 million as a result of these
transfers. Also, during the first quarter, the
Company completed the calculation of the working capital adjustment related
to the U.S. assets, which resulted in the recording of a receivable for these
additional proceeds and a resulting gain of $0.6 million. This gain
is also reflected in the following table. The Company has also
recorded a net receivable of $0.5 million due from the purchaser representing an
estimate of the cash assumed by the purchaser and cash provided by EDCI for
normal operating expenses incurred by the Company for the continued
operation of the international operations prior to their final transfer to IP
Unity, for which the Company is entitled to reimbursement from IP
Unity subject to final review and adjustment.
During
the second quarter of 2007, the Company transferred the outstanding
equity of its subsidiaries in the Philippines and substantially all of the
assets of our UK subsidiary to IP Unity and recorded a gain of $0.1 million from
the transfer of these two international subsidiaries. The Philippines
transaction remains subject to certain post-closing registrations. As
part of the gain, the Company has recorded a receivable of $0.1
million due from the purchaser representing an estimate of the cash assumed by
the purchaser and cash provided by EDCI for normal operating expenses incurred
by it for the continued operation of the international operations
prior to the final transfer to IP Unity. Also during the second quarter of
2007, the Company collected the working capital adjustment receivable
of $0.6 million.
During
the third quarter of 2007, the Company completed the reconciliation of
cash assumed by IP Unity and cash provided by EDCI for normal operating expenses
incurred by the Company for the continued operation of the
international operations prior to the final transfer to IP Unity and, as a
result, recorded an additional gain on the sale of $0.1 million.
During
the fourth quarter of 2007, the Company completed the transfer of
outstanding equity in its subsidiaries in Dubai and Brazil. No additional
gain or loss resulted from this transfer. Also during the fourth
quarter, the Company reached an agreement in principle related to any
remaining or potential severance obligations which might be covered under the
agreement. These obligations will be offset against amounts owed under the cash
reconciliation completed in the third quarter of 2007. An additional
loss on the sale of $0.3 million was recorded.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
At
December 31, 2007 and December 31, 2006, the Company recorded an
accumulated gain on the sale as follows:
|
|
|
Settlement
of
|
|
|
|
December
31,
|
|
International
|
|
December
31,
|
|
2006
|
|
Subsidiaries
|
|
2007
|
Assets
Sold and Liabilities Assumed
|
|
|
|
|
|
Cash
|
$ -
|
|
$ 592
|
|
$ 592
|
Accounts
receivable
|
8,210
|
|
-
|
|
8,210
|
Inventory
|
7,393
|
|
-
|
|
7,393
|
Other
current assets
|
416
|
|
647
|
|
1,063
|
Fixed
assets
|
8,223
|
|
(2)
|
|
8,221
|
Accounts
payable
|
(2,388)
|
|
(326)
|
|
(2,714)
|
Accrued
liabilities
|
(2,288)
|
|
(820)
|
|
(3,108)
|
Deferred
revenue
|
(2,747)
|
|
-
|
|
(2,747)
|
|
$ 16,819
|
|
$ 91
|
|
$ 16,910
|
Other
write-offs and expenses
|
54
|
|
7
|
|
61
|
Estimated
closing costs
|
2,000
|
|
36
|
|
2,036
|
|
$ 18,873
|
|
$ 134
|
|
$ 19,007
|
Receivables
due from purchaser
|
-
|
|
544
|
|
544
|
Proceeds
|
25,000
|
|
634
|
|
25,634
|
Gain
on sale
|
$ 6,127
|
|
$ 1,044
|
|
$ 7,171
|
The
Company did not record any gain or loss on the Messaging sale during 2008.
Beginning in the fourth quarter 2006, the Messaging segment was reported as a
disposal of a segment of business.
Results
of Discontinued Operations
The
operating results of the Messaging and Paging segments are classified as
discontinued operations for all periods presented in the condensed consolidated
statements of operations. Additionally, the
Company reported all of the remaining Messaging and Paging segment assets
at their estimated net realizable value in the condensed consolidated balance
sheet as of December 31, 2008 and December 31, 2007.
Results
for discontinued operations consist of the following:
|
Year
Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
Net
sales
|
$ -
|
|
$ -
|
|
$ 53,546
|
|
|
|
|
|
|
Income
(loss) from discontinued operations:
|
|
|
|
|
|
Income
(loss) from operations before income taxes
|
143
|
|
(463)
|
|
(11,572)
|
Provision
(benefit) for income taxes
|
(1,491)
|
|
79
|
|
(3,352)
|
Income
(loss) from operations
|
$ 1,634
|
|
$ (542)
|
|
$ (8,220)
|
Gain
on disposal before income taxes
|
-
|
|
1,044
|
|
6,127
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
-
|
|
1,044
|
|
6,127
|
Income
(loss) from discontinued operations
|
$ 1,634
|
|
$ 502
|
|
$ (2,093)
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
The
income (loss) from discontinued operations consists of operating losses incurred
in the Messaging and Paging segments adjusted for an estimated gain on disposal
of the Messaging segment which includes charges for transaction
costs. The years ended December 31, 2008 and 2007 include a credit of
$1.5 million and $1.0 million, respectively, for expiration of tax-related
statutes of limitation, offset by additional interest and the impact of foreign
currency
movements on tax contingencies. Results for the year ended December
31, 2006 included an income tax benefit of $4.1 million from the release of a
reserve for international business taxes upon receipt of clearance from the
applicable foreign country’s taxing authority. Numerous estimates and
assumptions were made in determining the net realizable value related to the
discontinued assets and operating results noted above. These
estimates are subject to adjustment resulting from, but not limited to,
operations of foreign assets for IP Unity during the transitional
period.
The major
classes of assets and liabilities included as part of the sale of the Messaging
and Paging group reported as discontinued operations on the
Company's consolidated balance sheet were $0.5 million for accrued taxes at
December 31, 2008 and $0.1 million for accrued tax receivables and $0.5 million
for accrued taxes at December 31, 2007.
In
accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and based on the Company's plan
to market and sell these instruments, the Company classifies
auction-rate securities (as discussed below) as available-for-sale and carries
them at fair market value. Changes in the fair value are included in
accumulated other comprehensive income in the accompanying condensed
consolidated financial statements, except for auction-rate securities as
described below.
The
Company has invested in securities with issuers who have high-quality
credit and limit the amount of investment exposure to any one issuer.
During 2008, the Company liquidated the majority of its
investments portfolio and directed the proceeds into cash and cash
equivalents. The Company recorded losses on sales of investments
of $0.3 million in 2008, which are included in other income (expense) in the
accompanying condensed consolidated statements of operations. During
2008, the Company reclassified less than $0.1 million of unrealized
losses on investments out of accumulated other comprehensive income into
earnings for the period using the specific identification method.
The
following table presents the fair market value amounts, by major security types
for the Company's investments in debt securities:
|
|
December
31, 2008
|
|
December 31, 2007
|
|
|
Fair
Value
|
|
Fair
Value
|
|
|
|
|
|
Auction-rate
securities
|
|
$ 1,020
|
|
$ 10,800
|
Corporate
bonds
|
|
-
|
|
6,913
|
Short-term
notes
|
|
-
|
|
4,889
|
Certificates
of deposit
|
|
-
|
|
2,000
|
Commercial
paper
|
|
-
|
|
2,487
|
Municipal
bonds
|
|
-
|
|
1,492
|
Euro
dollar bonds
|
|
-
|
|
1,008
|
Total
investments
|
|
$ 1,020
|
|
$ 29,589
|
Auction-rate
securities represent interests in collateralized debt obligations with
high-quality credit ratings, the majority of which are collateralized by bonds
and other financial instruments. Liquidity for these auction-rate
securities is typically provided by an auction process that resets the
applicable interest rate at pre-determined intervals, usually every 7, 28, 35 or
90 days.
In
mid-February 2008, auctions began to fail due to insufficient buyers, as
the amount of securities submitted for sale in auctions exceeded the aggregate
amount of the bids. For each failed auction, the interest rate on the
security moves to a maximum rate specified for each security, and generally
resets at a level
higher than specified short-term interest rate
benchmarks. However, during 2008, the Company was able to sell
$8.8 million in auction-rate securities at par.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
The
Company evaluates the fair value of our auction-rate securities portfolio
for impairment at each reporting period. As a result of this review, the
Company determined that the fair value of its auction-rate securities
at December 31, 2008 was less than the carrying amount and accordingly recorded
an impairment charge of approximately $0.1 million, which is included in other
income (expense) in the accompanying condensed consolidated statements of
operations. The estimated fair values could change significantly based on future
market conditions. The Company will continue to assess the fair value
of its auction-rate securities for substantive changes in relevant market
conditions, changes in financial condition or other changes that may alter our
estimates described above. The Company may be required to record
future impairment charges to earnings if it is determined
that its investment portfolio has incurred a further permanent decline in
fair value. Because of the Company's inability to liquidate these
securities in the near term, auction rate securities have been
reclassified to long-term investments.
6.
|
Risks
and Uncertainties
|
Concentrations
of Credit Risk
Financial
instruments potentially subjecting the Company to concentrations of
credit risk consist of temporary cash investments, a currency swap and trade
accounts receivable. The Company places its temporary cash
investments and currency swaps with large diversified entities with operations
throughout the U.S. and Germany. The Company is exposed to
credit-related losses in the event of non-performance by the parties in these
contracts. (See Note 9.)
The
Company's primary customer is Universal, which individually accounted for
approximately 73%, 74% and 83% of EDC’s total 2008, 2007 and 2006 revenue,
respectively. Outstanding accounts receivable due from Universal were $7.8
million and $7.7 million, at December 31, 2008 and 2007,
respectively. The Company believes that its reserves for
bad debt are adequate considering our concentrations of credit
risk.
Concentrations
of Suppliers
The
Company's principle raw materials are polystyrene used in the manufacture of
jewel boxes and trays (in Germany only) and polycarbonate used in the
manufacture of CDs and DVDs. EDC has a limited number of suppliers
who are able to provide raw materials. In Germany, the
Company purchases polystyrene, polycarbonate and any jewel boxes and trays,
not internally manufactured, from several suppliers. In the UK, the
Company purchases polycarbonate and jewel boxes and trays from
several suppliers. These inputs are crucial to the production of CDs and DVDs
and while there are alternative suppliers of products, it would be disruptive to
EDC’s production if any of our suppliers were unable to deliver its product to
EDC.
Workforce
Subject to Collective Bargaining Agreements
At
December 31, 2008, the Company employed over 1,100 persons. In
Germany, approximately 43% of the Company's workforce of 822 employees is
unionized and all employees, including exempt staff, which represents
approximately 4% of the total employees, are represented by a works council.
Collective bargaining agreements and works council agreements cover all labor
relations. In February 2008, an agreement was reached with
the works council on an eight year collective bargaining agreement which runs
through 2015. In the UK, approximately 64% of the workforce of
313 employees is unionized and subject to collective bargaining
agreements. In October 2008, an agreement was reached with the UK
employees that was retroactively effective January 1, 2008, and ran until
January 1, 2009. The 2008 contract terms will remain in effect until a new
agreement is reached.
As
discussed above, on December 31, 2008, the Company completed the sale
of EDC’s distribution operations located in Fishers, Indiana, U.S. supply
agreements with Universal Music Group, all of the equipment located in the
Company's Fishers, Indiana distribution facility and certain manufacturing
equipment located in its Kings Mountain, North Carolina facility, as
well as the transfer of U.S. customer relationships to Sony DADC U.S., Inc. Upon
completion of the sale, EDC effectively ceased its U.S. manufacturing and
distribution operations. At December 31, 2008, the
Company had 419 employees at its Kings Mountain, North Carolina
facility as part of the transition service agreement. Production employees were
phased out by the end of February 2009 and the remaining employees will be
phased out by the end of April 2009.
The
Company currently has a core corporate staff of employees at various U.S.
locations.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
7.
|
EDC
LLC Agreement - Profits Interests and Minority
Interest
|
EDC
Profits Interests
Upon the
completion of the acquisition of the U.S. and central European CD and DVD
manufacturing and distribution operations from Universal, EDC issued profits
interests to certain key employees, Universal, and the
Company's financial advisor, that will entitle these parties to up to 30%
of EDC’s distributed profits after the Company has received a return
of its equity capital contribution and certain internal rate of return
hurdles and other profitability conditions have been met. No payments were
required from these parties to acquire the profits interests. These profits
interests do not carry any voting rights.
The
estimated fair value of the profits interests at the date of grant represents
the present value of estimated future cash flows to those profits interests. The
fair value of the profits interests granted to Universal and the financial
advisor are included in the acquisition costs of EDC. The profits interests
issued to members of management were accounted for as compensation expense, are
included in selling, general and administrative expenses in the consolidated
statements of operations and are being amortized over the vesting schedule of
one-third immediately upon grant and two-thirds ratably in each of the two years
after grant. Compensation expense included in EDC’s results for the twelve
months ended December 31, 2007 and 2006 was $0.5 million and $1.6 million,
respectively. The Company did not incur compensation expense
related to profit interests in the twelve months ended December 31, 2008 as they
vested fully in 2007. Profits interests are included with minority interests in
our consolidated balance sheets.
Minority
Interest
As part
of the May 31, 2005 acquisition of EDC, the Company sold 772 Class A
units of EDC it owned (representing 2.2% of EDC’s outstanding units) to two
key employees at the fair value of $1,000 per unit upon which such Class A units
were automatically converted into Class B units. The Class A and Class B units
carry equivalent economic rights. During 2006, in association with the Blackburn
acquisition, the Company purchased additional Class A units and
increased our holdings by $8,151,000 and one of the key employees, pursuant to
rights under the Entertainment Distribution Company, LLC (“EDC LLC”) Agreement,
purchased additional Class B units and increased his holdings by
$99,000. As a result of these investments, the Company has
97.99% of the Class A and Class B units of EDC. Further, as a result
of these investments the Level One, Two and Three Threshold Amounts and Level
One, Two and Three Pro Rata Percentages applicable to distributions pursuant to
Section 3.1 of the EDC LLC Agreement were automatically adjusted. As
a result of these adjustments, upon a board approved distribution pursuant to
Section 3.1(b) of the EDC LLC Agreement, the following order and priorities
would apply: (i) for distributions up to $43.25 million, 100% of such
distributions would be apportioned pro rata to the holders of Class A and Class
B units; (ii) for distributions above $43.25 million and up to $68.99 million,
84.02% of such distributions would be apportioned pro rata to the holders of
Class A and Class B units, and 15.98% would be apportioned pro rata to the
holders of Tier 1 Profits Interests; (iii) for distributions above $68.99
million and up to $96.78 million, 77.8% of such distributions would be
apportioned pro rata to the holders of Class A and Class B units, 14.8% of such
distributions would be apportioned pro rata to the holders of Tier 1 Profits
Interests and 7.4% of such distributions would be apportioned pro rata to the
holders of Tier 2 Profits Interests; and (iv) for distributions above $96.78
million, 72.44% of such distributions would be apportioned pro rata to the
holders of Class A and Class B units, 13.78% of such distributions would be
apportioned pro rata to the holders of Tier 1 Profits
Interests, 6.89% of such distributions would be apportioned pro rata
to the holders of Tier 2 Profits Interests and 6.89% of such distributions would
be apportioned pro rata to the holders of Tier 3 Profits
Interests. In all events, if, after receipt of all distributions
above, holders of Class A and Class B Units have not received an amount equal to
their aggregate contributions plus an amount equal to a return of 20%,
compounded annually (the “IRR Hurdle”), then only distributions pursuant to (ii)
shall be made until satisfaction of the IRR Hurdle, after which distributions
pursuant to (iii) and (iv) shall resume.
In 2007
and 2008, key employees received minority interest distributions of $20,000 to
cover taxes on minority interest income. The Company has recorded
minority interest income of $0.3 million in 2008 and minority interest
expense of $0.2 million in 2007 and 2006, respectively. If EDC does
not undergo an initial public offering prior to the earlier of (1) May 31, 2015
or (2) the date on or after May 31, 2013 on which the terms of all EDC’s
manufacturing and distribution agreements with Universal shall have been
extended to a term ending on or after May 31, 2018, holders of Class B units and
profits interests would have the right for a five-year period beginning on such
date to sell their interests to us at fair value.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
EDC
Central European Operation
Restricted
cash of EDC’s central European operation at December 31, 2008 was $27.3 million,
including $1.9 million classified as current, being held in escrow to fund
various pension and other employee related obligations. As part of the
acquisition of the Universal manufacturing and distribution operations, one of
Universal’s subsidiaries deposited these escrowed funds into an account
controlled by an Escrow Agreement restricting the disbursement of the funds.
Universal and EDC participate in determining and approving disbursement. The
earnings on the funds are paid to EDC monthly. On June 1, 2010, the restrictions
expire, and any remaining funds in escrow will be released to EDC and the
Company intends to fund the EDC pension benefits using funds held in escrow and
included in restricted cash in the consolidated balance sheets.
EDC
U.S. Operation
Restricted
cash relating to EDC’s U.S. operation at December 31, 2008 was $5.4 million. As
part of the Sony Sale, EDC’s Senior Secured Credit Facility was amended to
include provisions which required a portion of the proceeds from the Sony Sale
to be held in escrow in the name of the administrative agent for use in the
wind-down of certain U.S. operations or prepayment of loans under the terms of
the Seventh Amendment to the credit agreement.
The
Company entered into a cross currency rate swap agreement with a commercial
bank on May 31, 2005. The Company’s objective was to manage foreign currency
exposure arising from its intercompany loan to its German subsidiary,
acquired in May of 2005 and is therefore for purposes other than trading. The
loan is denominated in Euros and repayment is due on demand, or by May 31, 2010.
In accordance with SFAS No. 52, “Foreign Currency
Translation”, and SFAS No. 133, the currency swap does not qualify for
hedge accounting and, as a result, the Company will report the foreign currency
exchange gains or losses attributable to changes in the U.S.$/€ exchange rate on
the currency swap in earnings.
The swap
matures in two years on May 31, 2010. The significant terms of the
swap are as follows:
●
|
The
Company makes quarterly payments, which commenced August 31, 2005,
based on a notional amount of €21,300,000 at the EURIBOR plus
3.12%;
|
●
|
The
Company receives quarterly payments, based on a notional amount of
$26.0 million at the USD LIBOR plus 3.0%;
and
|
●
|
The
Company will exchange with the counterparty the above notional
amounts upon maturity of the swap
agreement.
|
As of
December 31, 2008, the swap is carried at its fair value, which is currently in
a loss position, of approximately $4.2 million and is included in non-current
liabilities in the consolidated balance sheets. The swap was in a loss position
of approximately $5.6 million at December 31, 2007, and included in non-current
liabilities in the consolidated balance sheets. The fair value of the currency
rate swap was calculated based on mathematical approximations of market values
derived from the commercial banks’ proprietary models as of a given date. These
valuations are calculated on a mid-market basis and do not include a bid/offer
spread that would be reflected in an actual price quotation. Therefore, the
actual price quotations for unwinding these transactions would be different.
These valuations and models rely on certain assumptions regarding past, present
and future market conditions and are subject to change at any time. Valuations
based on other models or assumptions may yield different results. In
January 2009, the U.S. dollar strengthened versus the Euro and the Company was
able to settle the currency swap obligation for $2.1 million on January 23,
2009.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
10.
|
Fair
Value Measurements
|
On
January 1, 2008, the Company adopted SFAS No. 157, subject to the
deferral provisions of FSP No. 157-2. This standard defines fair value,
establishes a framework for measuring fair value and expands disclosure
requirements about fair value measurements. SFAS No. 157 defines fair value
as the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly
transaction
between market participants on the measurement date. The fair value hierarchy
prescribed by SFAS No. 157 contains three levels as follows:
Level 1 — Unadjusted quoted
prices that are available in active markets for the identical assets or
liabilities at the measurement date.
Level 2 — Other observable
inputs available at the measurement date, other than quoted prices included in
Level 1, either directly or indirectly, including:
●
|
Quoted
prices for similar assets or liabilities in active
markets;
|
●
|
Quoted
prices for identical or similar assets in non-active
markets;
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability;
and
|
●
|
Inputs
that are derived principally from or corroborated by other observable
market data.
|
Level 3 — Unobservable inputs
that cannot be corroborated by observable market data and reflect the use of
significant management judgment. These values are generally determined
using pricing models for which the assumptions utilize management’s estimates of
market participant assumptions.
Assets
and Liabilities that are Measured at Fair Value on a Recurring
Basis
The fair
value hierarchy requires the use of observable market data when available.
In instances in which the inputs used to measure fair value fall into different
levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company's assessment of the
significance of a particular item to the fair value measurement in its entirety
requires judgment, including the consideration of inputs specific to the asset
or liability.
The
following table sets forth by level within the fair value hierarchy, the
Company's financial assets and liabilities that were accounted for at fair
value on a recurring basis at December 31, 2008, according to the valuation
techniques it used to determine their fair values.
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
December
31,
|
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Description
|
|
2008
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Auction-Rate
Securities
|
|
$ 1,020
|
|
$ -
|
|
$ -
|
|
$ 1,020
|
|
Deferred
Comp Trust Plan
|
|
503
|
|
503
|
|
-
|
|
-
|
|
Total
|
|
$ 1,523
|
|
$ 503
|
|
$ -
|
|
$ 1,020
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Currency
Swap
|
|
$ 4,180
|
|
$ -
|
|
$ 4,180
|
|
$ -
|
|
Total
|
|
$ 4,180
|
|
$ -
|
|
$ 4,180
|
|
$ -
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
The
following table provides a reconciliation between the beginning and ending
balances of items measured at fair value on a recurring basis in the table above
that used significant unobservable inputs (Level 3).
|
|
|
Fair
Value Measurements
|
|
|
|
Using
Significant
|
|
|
|
Unobservable
Inputs
|
|
|
|
|
(Level
3)
|
|
|
|
|
Auction-Rate
Securities
|
Beginning
balance
|
|
$ 10,800
|
|
Purchases,
sales and settlements, net
|
|
(9,650)
|
|
Total
gains or losses (realized/unrealized)
|
|
|
|
included
in earnings
|
|
(130)
|
Ending
Balance
|
|
$ 1,020
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Auction-Rate Securities. The
Company classifies its investments in debt securities as available-for-sale
and generally classify them as Level 1, except as otherwise noted. At
December 31, 2008, the Company's investments consisted of auction-rate
securities as described in Note 5. Investments in auction-rate securities
are classified as Level 3 as quoted prices were unavailable due to events
described in Note 5. Due to limited market information, the
Company utilized a discounted cash flow (“DCF”) model to derive an estimate
of fair value at December 31, 2008. The assumptions used in preparing the
DCF model included estimates with respect to the amount and timing of future
interest and principal payments, the probability of full repayment of the
principal considering the credit quality and guarantees in place, and the rate
of return required by investors to own such securities given the current
liquidity risk associated with auction-rate securities.
Deferred Compensation.
Deferred compensation assets consist of investments in mutual funds. These
investments are classified as Level 1 as the shares of these mutual funds trade
with sufficient frequency and volume to enable the Company to obtain
pricing information on an ongoing basis.
Currency Swap. The
fair value of the currency rate swap was calculated based on
mathematical approximations of market values derived from the commercial
banks’ proprietary models as of a given date. These valuations and
models rely on certain assumptions regarding past, present and future market
conditions and are subject to change at any time. Valuations based on other
models or assumptions may yield different results. The currency swap
is classified as Level 2 investment. At December 31, 2008, the
Company was in a net loss position of $4.2 million on the fair value of the
currency swap.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis
The
effective date of SFAS No. 157 was deferred under FSP No. 157-2.
SFAS No. 157 relates to nonfinancial assets and liabilities that are
measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applies to such items as nonfinancial assets
and liabilities initially measured at fair value in a business combination (but
not measured at fair value in subsequent periods) or nonfinancial long-lived
asset groups measured at fair value for an impairment assessment. During the
year ended December 31, 2008, the measurements of fair value affected by the
deferral under FSP No. 157-2 related to the nonfinancial asset group
at the Company's central European operations, which was measured for
impairment. See note 2i. The Company had no other
significant measurements of non-financial assets or liabilities at fair value
during 2008 that were affected by the deferral.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
11.
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expenses and other current assets related to the Company's continuing operations
at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Prepaid
expenses
|
$ 2,539
|
|
$ 1,435
|
Recoverable
input costs and taxes
|
1,927
|
|
1,887
|
Other
customer receivables and pass-through costs
|
7,479
|
|
8,639
|
Other
current assets
|
568
|
|
2,728
|
|
$ 12,513
|
|
$ 14,689
|
During
the year ended December 31, 2008, the Company received insurance proceeds of
$1.6 million related to the settlement of a portion of our receivable for
covered costs incurred related to its stock option litigation. The
Company used the proceeds received during 2008 for general corporate
purposes and have recognized the cash inflow as part of its cash flows from
operations. There was no impact on the Company's statement
of operations in 2008 related to the receipt of these funds.
The
current and noncurrent portions of the long-term receivable are as follows for
the years ended December 31:
|
2008
|
|
2007
|
Current
portion of long-term receivable
|
$ 599
|
|
$ 515
|
Non-current
portion of long-term receivable
|
3,066
|
|
4,244
|
|
$ 3,665
|
|
$ 4,759
|
Under the
terms of the share purchase agreement relating to the acquisition of Universal’s
central European operations, Universal is required to reimburse EDC relating to
the liabilities net of accounts receivable and other receivables assumed by EDC
at the acquisition date. Amounts not paid or received in future periods for
these assumed liabilities and receivables, with the exception of the pension
obligations, will be adjusted through the receivable. The balances at
December 31, 2008 and 2007 relate to the long-term service award plan discussed
in note 19d.
Other
assets at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Equipment
spare parts
|
$ 3,471
|
|
$ 3,240
|
Deferred
Compensation Trust Plan
|
503
|
|
885
|
Deferred
debt issuance costs
|
765
|
|
385
|
|
$ 4,739
|
|
$ 4,510
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
14.
|
Accrued
and Other Liabilities
|
Accrued
liabilities at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Accrued
salaries and benefits
|
$ 4,943
|
|
$ 5,461
|
Accrued
pension and other benefit obligations
|
2,337
|
|
2,015
|
Accrued
vacation
|
738
|
|
842
|
Accrued
VAT and other taxes
|
3,534
|
|
6,488
|
Accrued
royalty expense
|
2,796
|
|
3,089
|
Accrued
professional services
|
1,206
|
|
1,522
|
Other
current liabilities
|
8,881
|
|
10,801
|
|
$ 24,435
|
|
$ 30,218
|
Other
liabilities at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Other
liabilities
|
$ 177
|
|
$ 227
|
Deferred
compensation
|
503
|
|
885
|
Unrealized
loss on currency swap
|
4,180
|
|
5,604
|
Tax
contingency accrual
|
3,493
|
|
4,988
|
|
$ 8,353
|
|
$ 11,704
|
The other
liabilities include accruals for activities taken by Universal prior to the sale
of its international CD and DVD manufacturing and distribution operations to EDC
on May 31, 2005. EDC assumed these liabilities as part of the acquisition of
Universal’s central European operations, and Universal is required to reimburse
EDC for such liabilities. The loss on currency swap relates to a five
year currency swap arrangement (See Note 9) under which EDC is obligated and is
currently in a loss position. The tax contingency accrual relates to
tax liabilities recorded in conjunction with the adoption of FIN 48 (See Note
18). Finally, the deferred compensation accrual relates to amounts
deferred by director level and above employees (See Note 19).
During
2008, the Company implemented a plan to streamline our
manufacturing operations in Blackburn, UK in order to reflect industry change
and to reduce our cost base accordingly. As part of the
plan, the Company offered a voluntary exit program to employees
in selected areas. In total, the plan resulted in the reduction of
our UK employment by approximately 15%, predominately in our manufacturing
operations. As a result of these
actions, the Company has recorded severance charges of
approximately $1.3 million into cost of revenues in the year ended December 31,
2008. The Company made payments of $1.3 million related to the plan
through December 31, 2008, and thus no expense remains accrued in the
accompanying consolidated balance sheets.
During
2008, the Company implemented a plan to reduce staffing at the
Company's combined manufacturing and distribution operations in Hanover,
Germany in response to the loss of a distribution customer in the third quarter
of 2008. In total, the plan resulted in the reduction of our Germany
employment by approximately 5%, predominately in our distribution
operations. As a result of these actions, the Company has
recorded severance charges of approximately $1.5 million into cost of revenues
in the year ended December 31, 2008. The Company has made
payments of $0.3 million related to the plan and as of December 31, 2008, $1.2
million is recorded in accrued expenses and other liabilities in the
accompanying consolidated balance sheets.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Long-term
debt at December 31, 2008 and 2007 consisted of:
|
2008
|
|
2007
|
Senior
Secured Credit Facility
|
$ 8,000
|
|
$ 27,000
|
Payable
to Universal - undiscounted
|
2,749
|
|
10,126
|
Capital
Lease
|
74
|
|
593
|
Employee
Loans
|
3,632
|
|
4,913
|
Subtotal
|
14,455
|
|
42,632
|
Less:
Unamortized Discount
|
(546)
|
|
(927)
|
Total
Debt
|
$ 13,909
|
|
$ 41,705
|
Less:
Current Portion
|
(3,423)
|
|
(17,747)
|
Total
Long Term Debt
|
$ 10,486
|
|
$ 23,958
|
Total
scheduled principal payments for all long-term debt are as follows:
|
Total
|
2009
|
3,445
|
2010
|
7,620
|
2011
|
1,263
|
2012
|
1,211
|
2013
|
458
|
Thereafter
|
458
|
Total
|
$ 14,455
|
Senior
Secured Credit Facility
EDC has a
Senior Secured Credit Facility with Wachovia Bank, National Association, as
agent, for an aggregate principal amount of $10.5 million, consisting of a term
facility of $8.0 million, and a European revolving credit facility of up to €2.0
million (subject to a maximum $2.5 million based on prevailing interest rates).
Substantially all of EDC’s assets are pledged as collateral to secure
obligations under the Senior Secured Credit Facility.
Since
January 1, 2008, the Senior Secured Credit Facility was amended on five
separate occasions, as noted below:
●
|
On
March 4, 2008, EDC completed an amendment to the facility which changed
the definition of earnings before interest, taxes, depreciation and
amortization (“EBITDA”) to allow for the add back of up to $9.9 million in
non-cash impairment charges in calculating EBITDA for its debt covenant
calculations through the quarter ended September 30,
2008.
|
●
|
On
May 30, 2008, EDC completed an amendment to the facility to extend
the revolving credit facility for one year to May 29, 2009 and to reduce
the amount that may be borrowed under the revolver to $7.5 million from
its previous level of $10.0
million.
|
●
|
On
October 31, 2008, EDC completed an amendment to the facility, which became
effective December 31, 2008, to allow for the sale of the U.S. operating
assets described in Note 4, continue the blanket lien on EDC’s U.S. assets
and pledge of 65% of the stock of EDC’s Dutch Holding Company (which
subsidiary directly or indirectly owns all of the stock of EDC’s German
and UK subsidiaries) amend the payment terms on the term loan (see below),
provide for the repayment of the existing revolving credit facility and
replace it with a new European revolving credit facility of up to €2.0
million (subject to a maximum of U.S. $2.5 million based on
prevailing interest rates) secured by a blanket lien on substantially all
the assets of EDC’s European subsidiaries, add provisions which require a
portion of the proceeds from the Sony Sale to be held in escrow for use in
the wind-down of certain EDC U.S. operations or prepayment of loans, and
provide for modifications to certain financial
covenants.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
●
|
On
December 30, 2008, EDC completed an amendment to the facility, which
became effective on December 31, 2008, to clarify certain security
provisions, modify certain requirements set forth in the amendment dated
October 31, 2008 relating to the transaction with Sony DADC and create two
events of default related to EDC failing to own two-thirds or more of the
outstanding voting stock of its Dutch holding company subsidiary or Sony
DADC taking enforcement action not terminated or rescinded within 30 days
with respect its second lien security interest securing its
indemnification rights unless permitted by the relevant
documentation.
|
●
|
On
March 27, 2009, EDC completed an amendment to the facility which changed
the EBITDA definition as follows: for the fiscal quarter ended
December 31, 2008, and each fiscal quarter thereafter, EBITDA shall be
calculated by adding back impairment charges, non-cash charges and
one-time charges for the Sony Sale and any charges related to U.S.
operations or discontinued operations (but not including any ongoing
overhead from U.S. operations), and impairment charges pertaining to the
write-down of intangibles of the German operations, which charges to be
added back shall not exceed, in the aggregate, $30,000,000, to the extent
such charges were deducted for the applicable
period..
|
The term
loan expires on December 31, 2010. The Senior Secured Credit Facility bears
interest, at the EDC's option, at either: (a) the higher of (i)
the Prime Rate in effect and (ii) the Federal Funds Effective Rate in effect
plus ½ of 1% and a 1.75% margin on the non-cash collateralized portion; or (b)
LIBOR plus a 2.0% margin. The applicable LIBOR is determined periodically based
on the length of the interest term selected by EDC. The weighted average
interest rate on outstanding debt was 5.77% at December 31, 2008. In
addition to interest, EDC pays a commitment fee of 0.5% per annum on the
average daily unused amount. At December 31, 2008, $8.0 million was
outstanding on the term loan and the $2.5 million revolving credit facility was
unused. Scheduled payments under the term loan are due as
follows: $1.8
million due on December 31 2009, $2.2 million due on June 30, 2010, and $4.0
million due on December 31, 2010.
The
Senior Secured Credit Facility contains usual and customary restrictive
covenants that, among other things, permit EDC to use the revolver only as a
source of liquidity for EDC and its subsidiaries and place limitations on (i)
EDC’s ability to incur additional indebtedness; (ii) EDC’s ability to make any
payments to EDCI in the form of cash dividends, loans or advances (other than
tax distributions) and (iii) asset dispositions by EDC. It also contains
financial covenants relating to maximum consolidated EDC’s and
subsidiaries’ capital expenditures, minimum interest coverage and maximum
senior secured leverage as defined therein. As of December 31,
2008, EDC was in compliance with all such covenants, as amended, under
the facility.
Universal
Under the
terms of the supply contracts entered into as part of the transaction, EDC is
obligated to pay to Universal deferred acquisition payments with a net present
value using a discount rate of 6.52% which totaled approximately $39.8 million
at acquisition, using the May 2005 Euro to U.S. dollar exchange rate of 1.2474.
At December 31, 2008 the obligation to Universal decreased to $2.7 million due
to $7.6 million in principal payments and changes in the Euro to U.S. dollar
exchange rates offset by $0.2 million of accretion for imputed interest.
Additionally, in 2008 the Company paid Universal $9.5 million related
to its discontinued U.S. operations. Scheduled payments of $0.5
million are due on December 31 for the next six years, ending in
2014.
Capital
Lease
During
2006, the Company entered into a lease for a piece of production
related equipment in our central European facility. The lease expires
June 30, 2010, at which time title to the equipment will be transferred to EDC
at no cost.
Employee
Loans
Employees
of EDC’s German operations participate in a government regulated employee
savings plan whereby a portion of their earnings are held by the
Company in savings accounts and are therefore treated as loans to the
Company. These loans are for six-year terms and are signed annually in
January. The loans, including all accumulated interest, are paid at the end of
the term. Interest rates are determined prior to the loans being assigned and
remain constant for the six-year period. In addition to interest, each
participant receives a grant of approximately €0.1 million ($0.2 million), which
is included in the employee loan balance. The value of the loans outstanding at
December 31, 2008 totaled $3.6 million and accumulated interest was $0.7 million
with interest rates ranging from 3.9% to 5.3%. Funds for these loans
are held in escrow as restricted cash. See Note 8. These loans are 100%
guaranteed by several different banks and are not convertible. Under certain
hardship conditions the employee loan may be paid out early. The
employee savings plan is closed to new entrants.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
The Company’s
income tax provision (benefit) for continuing operations consist of the
following:
|
2008
|
|
2007
|
|
2006
|
Current
provision:
|
|
|
|
|
|
Federal
|
$ -
|
|
$ -
|
|
$ -
|
Foreign
|
4,852
|
|
3,972
|
|
9,640
|
State
and local
|
-
|
|
-
|
|
-
|
Total
current
|
4,852
|
|
3,972
|
|
9,640
|
Deferred:
|
|
|
|
|
|
Federal
|
(566)
|
|
3,305
|
|
(1,862)
|
Foreign
|
(9,638)
|
|
(698)
|
|
(1,719)
|
State
and local
|
(272)
|
|
(610)
|
|
(410)
|
Adjustment
to valuation allowance
|
981
|
|
(2,569)
|
|
2,272
|
Total
deferred
|
(9,495)
|
|
(572)
|
|
(1,719)
|
Total
provision (benefit)
|
$ (4,643)
|
|
$ 3,400
|
|
$ 7,921
|
The
sources of income (loss) from continuing operations before income taxes are
presented as follows:
|
2008
|
|
2007
|
|
2006
|
United
States
|
$ (3,819)
|
|
$ (9,439)
|
|
$ (7,567)
|
Foreign
|
(13,997)
|
|
15,247
|
|
19,942
|
|
$ (17,816)
|
|
$ 5,808
|
|
$ 12,375
|
The
consolidated income tax provision (benefit) from continuing operations was
different from the amount computed using the U.S. statutory income tax rate for
the following reasons:
|
2008
|
|
2007
|
|
2006
|
Income
tax provision at Federal U.S. statutory rate
|
$ (6,237)
|
|
$ 2,033
|
|
$ 4,331
|
Increase
(decrease) in valuation allowance
|
981
|
|
(2,569)
|
|
2,272
|
Deferred
taxes on earnings of foreign subsidiary per APB 23
|
675
|
|
5,946
|
|
-
|
Foreign
tax rate changes
|
-
|
|
(2,553)
|
|
-
|
Reserve
contingency
|
34
|
|
33
|
|
503
|
Foreign
tax impact
|
29
|
|
319
|
|
316
|
State
taxes
|
(177)
|
|
(397)
|
|
(267)
|
Minority
interest in earnings of subsidiary
|
-
|
|
171
|
|
71
|
Profit
interest awards
|
-
|
|
176
|
|
563
|
Other
non-deductibles
|
52
|
|
241
|
|
132
|
Income
tax provision (benefit)
|
$ (4,643)
|
|
$ 3,400
|
|
$ 7,921
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
During
2007, the Company recorded a favorable adjustment of $2.6 million
related to tax rate changes in the UK and Germany. The tax rate changes were
effective for 2008, but the Company was required to adjust the value of its
deferred tax assets and liabilities in 2007, the period the rate changes were
enacted.
The tax
effect of temporary differences and net operating loss carryforwards (“NOLs”)
related to continuing and discontinued operations that gave rise to the
Company's deferred tax assets and liabilities at December 31, 2008 and 2007
are as follows:
|
2008
|
|
2007
|
Deferred
Tax Assets:
|
|
|
|
U.S.
net operating loss carry forwards
|
$ 110,693
|
|
$ 108,081
|
State
net operating loss carry forwards
|
2,981
|
|
11,307
|
Canada
net operating loss carry forwards
|
11,752
|
|
14,570
|
Other
tax carry forwards
|
11,446
|
|
12,098
|
Property
and equipment
|
2,844
|
|
|
Other
|
9,070
|
|
10,247
|
|
148,786
|
|
156,303
|
Less:
Valuation allowance
|
(146,300)
|
|
(155,334)
|
Net
Deferred Tax Assets
|
2,486
|
|
969
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
Intangibles
|
-
|
|
(6,293)
|
Property
and equipment
|
-
|
|
(1,412)
|
Other
|
(687)
|
|
(1,374)
|
Deferred
asset (liability), net
|
$ 1,799
|
|
$ (8,110)
|
During
2008, the valuation allowance decreased by $9.0 million due to decreases in NOL
carry forwards of $8.5 million and decreases in tax credit carry forwards of
$0.7 million, offset by a valuation allowance of $0.2 million being recorded
against UK net deferred tax assets. During 2007, the valuation
allowance, decreased by $0.4 million due to decreases in NOL carry forwards of
$5.0 million offset by an increase in tax credit carry forwards of $1.1 million,
and net changes in temporary differences of $4.3 million.
The
Company has U.S. NOLs of $316 million, state NOLs of $106 million, and
Canada NOLs of $44 million. These NOLs begin to expire in 2009, 2018,
and 2009, respectively. Of the $316 million of U.S. NOLs, $28 million
are subject to restrictions under the Internal Revenue Code of 1986, as
amended. The Company also has other tax carry forwards, a
portion which begins to expire in 2009. The Company's other tax
carry forwards include research and development tax credits, alternative minimum
tax credits, state tax credits, charitable contributions, foreign investment tax
credits and foreign capital losses. The alternative minimum tax
credit, state tax credits and foreign capital losses do not
expire. However, the other credits and charitable contributions will
expire beginning in 2009.
During
2007, the Company determined that it would pay dividends
from its foreign subsidiaries of approximately $17.0 million in
2008. Under APB 23, income taxes were provided on those dividends in
2007. Undistributed earnings of our foreign subsidiaries amounted to
approximately $19.0 million at December 31, 2008. The
Company considers those earnings reinvested indefinitely and, accordingly,
no provision for U.S. federal and state income taxes has been
provided. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to withholding
taxes payable to the various foreign countries, however, no U.S. income taxes
will be incurred due to NOL carryovers available to offset the income from the
dividend payment. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with its hypothetical calculation. Withholding taxes payable upon remittance of
all previously unremitted earnings at December 31, 2008 would be
minimal.
As of
December 31, 2008, $3.5 million of tax benefits related to the exercise of stock
options have not been recorded. These tax
benefits cannot be recognized until a current tax benefit is
realized. Upon recognition, the $3.5 million will be recorded through
additional paid in capital. As of December 31, 2008, the Company
has recognized tax benefits of approximately $7.7 million from the
exercise of stock options. These benefits are currently offset with a
valuation allowance that, when reversed, will be recorded through additional
paid in capital.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
FIN
48
On
January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109," (FIN
48). Pursuant to FIN 48, the Company identified,
evaluated, and measured the amount of income tax benefits to be recognized for
all income tax positions. The net income tax assets recognized under FIN 48 did
not differ from the net assets recognized before adoption, and,
therefore, the Company did not record an adjustment related to the
adoption of FIN 48. The adoption of FIN 48 did not impact the
Company's consolidated financial condition, results of operations or cash
flow.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
2008
|
|
2007
|
|
|
|
|
Balance
at the beginning of the year
|
$ 9,423
|
|
$ 3,615
|
Additions
based on tax positions related to current year
|
-
|
|
-
|
Additions
for tax positions of prior years
|
138
|
|
5,960
|
Reductions
for tax positions of prior years
|
(4,806)
|
|
-
|
Settlements
|
-
|
|
-
|
Statute
of limitations expirations
|
(690)
|
|
(770)
|
Foreign
currency adjustments
|
(434)
|
|
618
|
Balance
at the end of the year
|
$ 3,631
|
|
$ 9,423
|
The total
amount of unrecognized tax benefits that would, if recognized, affect the
effective income tax rate was approximately $2.4 million and $3.5 million as of
December 31, 2008 and 2007, respectively.
The above
amounts for tax positions of prior years have been classified as reductions of
the related deferred tax asset in the accompanying balance sheet.
The
Company also recognize accrued interest expense and penalties related to
the unrecognized tax benefits as additional income tax expense, which is
consistent with prior periods. The total amount of accrued interest and
penalties was approximately $1.0 million and $1.5 million as of December 31,
2008 and 2007, respectively.
FIN 48
permits the Company to prospectively change our accounting policy as
to where penalties and interest on tax liabilities are classified on the
consolidated statements of income. Effective January 1, 2007, the Company
confirmed its accounting policy to continue to classify penalties and
interest on tax liabilities in “provision for income taxes” on the consolidated
statements of income consistent with prior period classifications.
Of the
unrecognized tax benefits noted above, it is anticipated that over the next 12
months various tax-related statutes of limitations will expire effecting a $0.5
million reduction in the unrecognized tax benefits, consisting of $0.4 million
in taxes and $0.1 million in accrued interest and penalties on these
balances. The nature of these uncertainties relates primarily to
transfer pricing. All of these uncertainties relate to discontinued
operations.
The
Company and its subsidiaries are subject to U.S. federal income tax as
well as income tax in multiple state and foreign jurisdictions. On February 6,
2008, we were notified by the Internal Revenue Service of the intent to audit
our 2005 federal tax return. On January 20, 2009, the
Company received notification from the IRS that there were no changes as a
result of their audit. Statutes of limitations remain open for all years
beginning in 1993 for U.S. federal and most state purposes due to unutilized
NOLs; 2002 for Canada due to unutilized NOLs; all years beginning with 2005 for
Germany; and all years beginning with 2007 for the UK.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
19.
|
Employee
Benefit Plans
|
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R”). SFAS No. 158 required
the recognition of the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or
liability in its statement of financial position, the measurement of a plan’s
assets and its obligations that determine its funded status as of the end of the
employer’s fiscal year, and the recognition of changes in that funded status
through comprehensive income in the year in which the changes occur. The
Company adopted the provisions of SFAS No. 158 on December 31,
2006.
(a)
Post-retirement Health Care Benefits
The
Company provides certain U.S. employees of its former Messaging
business with certain health care benefits upon retirement assuming the
employees met minimum age and service requirements as of the date of disposition
of the Messaging business. The Company's policy is to fund benefits as they
become due. Consequently, the plan has no assets. For non-funded plans, the
expected employer contributions equal the benefit payments. The plan
is closed to new participants.
The
actuarial present value of accumulated post-retirement benefit obligations at
December 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Retirees
|
|
|
|
|
|
$ 860
|
|
$ 918
|
Fully
eligible plan participants
|
|
|
|
-
|
|
-
|
Other
active plan participants
|
|
|
|
-
|
|
-
|
Accumulated
post-retirement benefit obligation
|
|
|
860
|
|
918
|
Unrecognized
loss
|
|
|
|
|
(149)
|
|
(202)
|
Unrecognized
prior service cost
|
|
|
|
382
|
|
401
|
Accumulated
other comprehensive income
|
|
|
|
(233)
|
|
(199)
|
Post-retirement
benefit liability recognized in balance sheet
|
|
$ 860
|
|
$ 918
|
The
change in Accumulated Post-retirement Benefit Obligation (“APBO”) from year to
year is as follows:
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
APBO
at the beginning of the year
|
|
|
|
$ 918
|
|
$ 1,518
|
Service
cost
|
|
|
|
|
|
-
|
|
-
|
Interest
cost
|
|
|
|
|
|
53
|
|
61
|
Plan
participants' contributions
|
|
|
|
22
|
|
-
|
Amendments
|
|
|
|
|
|
-
|
|
(420)
|
Curtailments
of Active Participants
|
|
|
|
-
|
|
-
|
Actuarial
gain
|
|
|
|
|
|
(44)
|
|
(115)
|
Benefits
paid
|
|
|
|
|
|
(89)
|
|
(126)
|
APBO
at end of the year
|
|
|
|
|
$ 860
|
|
$ 918
|
Net
post-retirement benefit costs for the years ended December 31, 2008, 2007 and
2006 consist of the following components:
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
|
|
$ -
|
|
$ -
|
|
$ 10
|
Interest
cost on APBO
|
|
|
|
53
|
|
61
|
|
83
|
Amortization
of prior service costs
|
|
|
(19)
|
|
(19)
|
|
(273)
|
Amortization
of prior service costs due to curtailment
|
|
-
|
|
-
|
|
(615)
|
Amortization
of actuarial loss
|
|
|
10
|
|
12
|
|
34
|
|
|
|
|
|
$ 44
|
|
$ 54
|
|
$ (761)
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
The
assumed discount rates utilized for 2008 and 2007 were 6.3% and 6.2%,
respectively. The assumed health care trend rate in measuring the accumulated
post-retirement benefit obligation as of December 31, 2008 was varied between
non-Medicare and Medicare eligible retirees. The 2008 trend rate is 10.0%,
decreasing to 4.5% in 2015, after which it remains constant. A one percentage
point increase in the assumed health care cost trend rate for each year would
increase the accumulated post-retirement benefit obligation as of December 31,
2008 by approximately 1.3% and the 2008 aggregate interest and service cost by
approximately 1.2%. A one percentage point decrease in the assumed health care
cost trend rate for each year would decrease the accumulated post-retirement
benefit obligation as of December 31, 2008 by approximately 1.1% and the 2008
aggregate interest and service cost by approximately 1.1%.
The
estimated employer benefits paid are as follows:
2009
|
$ 85
|
2010
|
85
|
2011
|
83
|
2012
|
82
|
2013
|
79
|
Succeeding
five years
|
368
|
(b)
Defined Contribution Plans
The
Company maintains, for substantially all of its full-time U.S.
employees, 401(k)-retirement savings plans, which are defined contribution
plans. The Company also sponsors additional retirement defined contribution
plans for certain non-U.S. employees. Under these plans, the employees may
contribute a certain percentage of their compensation and the Company
matches a portion of the employees' contribution. The Company's
contributions for continuing operations under these plans amounted to
approximately $0.8 million, $0.9 million and $0.9 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
(c)
Pension Plans
As a
result of the May 31, 2005 acquisition of EDC, the Company assumed the
obligations of various defined benefit plans. Employees and managing directors
of EDC’s operations in Germany participate in the pension plans. These benefits
are based on pay, years of service and age. The plans are not funded and
therefore have no plan assets. The Company intends to fund the pension
benefits using funds held in escrow and included in restricted cash in the
consolidated balance sheets. These pension plans are closed to new
entrants.
The rates
assumed in the actuarial calculations for the Company's pension plans
as of their respective measurement dates were as follows:
|
|
|
|
December 31, 2008
|
December 31, 2007
|
|
|
|
|
|
|
Discount
rate
|
|
|
|
5.70%
|
5.50%
|
Rate
of Compensation increase
|
|
|
2.50%
|
3.00%
|
Rate
of post-retirement pension increase
|
|
2.30%
|
2.00%
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share
Amounts)
The
following table shows the collective actuarial results for the defined benefit
pension plans of EDC’s central European operations.
|
|
|
|
December 31, 2008
|
December 31, 2007
|
|
|
|
|
|
|
|
Change
in Projected Benefit Obligations:
|
|
|
|
|
Projected
benefit obligation, January 1
|
|
$ 28,061
|
|
$ 27,559
|
Service
cost
|
|
|
|
837
|
|
1,036
|
Interest
cost
|
|
|
|
1,462
|
|
1,369
|
Benefits
paid
|
|
|
|
(445)
|
|
(637)
|
Foreign
exchange translation
|
|
|
(1,204)
|
|
3,185
|
Actuarial
gain
|
|
|
|
(272)
|
|
(4,451)
|
Projected
benefit obligation, December 31
|
|
$ 28,439
|
|
$ 28,061
|
|
|
|
|
|
|
|
Funded
Status:
|
|
|
|
|
|
|
Funded
status at end of year
|
|
|
$ (28,439)
|
|
$ (28,061)
|
Unrecognized
net (gain) loss
|
|
|
(3,073)
|
|
(2,955)
|
Net
amount recognized
|
|
|
$ (31,512)
|
|
$ (31,016)
|
|
|
|
|
|
|
|
Amounts
included in the Consolidated Balance Sheet
|
|
|
|
Accrued
benefit short-term liability
|
|
|
$ (716)
|
|
$ (591)
|
Accrued
benefit long-term liability
|
|
|
(27,723)
|
|
(27,470)
|
Accumulated
other comprehensive income
|
|
(3,073)
|
|
(2,955)
|
Net
amount recognized
|
|
|
$ (31,512)
|
|
$ (31,016)
|
|
|
|
|
|
|
|
Additional
Information:
|
|
|
|
|
|
Projected
benefit obligation
|
|
|
$ 28,439
|
|
$ 28,061
|
Accumulated
benefit obligation
|
|
|
$ 25,394
|
|
$ 24,276
|
|
|
|
|
|
|
|
Components
of net periodic pension cost:
|
|
|
|
|
Service
cost
|
|
|
|
$ 837
|
|
$ 1,036
|
Interest
cost
|
|
|
|
1,462
|
|
1,369
|
Amortization
of net actuarial gain
|
|
|
(27)
|
|
-
|
Net
periodic pension cost
|
|
|
$ 2,272
|
|
$ 2,405
|
The
following table shows the expected future benefits to be paid:
2009
|
|
|
|
$ 716
|
2010
|
|
|
|
793
|
2011
|
|
|
|
941
|
2012
|
|
|
|
1,034
|
2013
|
|
|
|
993
|
Succeeding
5 Years
|
|
|
|
8,533
|
The
Company also has a pension plan which covers two employees who are
retired. The Company has accrued approximately $0.4 million
related to the pension plan. The expected future benefits to be paid
are approximately $0.2 million spread evenly over 2009-2013 and $0.2 million for
the succeeding five years.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(d)
Long-term Service Award Plan
The
Company maintains a Long-Term Service Awards program, a defined benefit plan,
for qualified employees in our German and UK operations.
Under the
German plan, qualified employees receive a service gratuity (“Jubilee”) payment
once they have reached a certain number of years of service. The Jubilee payment
is determined based on 1/12th of the
employee’s annual salary. The projected benefit obligation at
December 31, 2008 was $4.4 million. The projected service cost as of January 1,
2009 for fiscal year 2009 amounts to approximately $0.2 million.
The rates
assumed in the actuarial calculations for our defined benefit plan at December
31, 2008 are as follows:
Interest
rate
|
|
|
6.20%
|
|
|
Salary
increase
|
|
|
2.50%
|
|
|
Fluctuation
rate
|
|
|
1.00%
|
until
age 49
|
|
The
following table shows the expected future benefits to be paid assuming 100% plan
participation.
2009
|
|
$ 599
|
2010
|
|
1,419
|
2011
|
|
909
|
2012
|
|
319
|
2013
|
|
320
|
Succeeding
5 Years
|
|
2,462
|
Included
in the $6.0 million future benefits to be paid under the Long-term Service Award
Plan is $3.7 million related to the long-term receivable discussed in Note
12.
Under the
UK plan, qualified employees receive a Jubilee payment once they have reached 25
or 40 years of service. The payment is determined based on 1/25th or
1/40th of two
months of the employee’s salary. The projected benefit obligation at
December 31, 2008 was $0.9 million.
The rates
assumed in the actuarial calculations for our UK defined benefit plan at
December 31, 2008 are as follows:
Interest
rate
|
|
|
5.00%
|
Salary
increase
|
|
|
3.00%
|
Fluctuation
rate
|
|
|
8.00%
|
The
following table shows the expected future benefits to be paid assuming 100% plan
participation.
2009
|
|
$ -
|
2010
|
|
12
|
2011
|
|
83
|
2012
|
|
123
|
2013
|
|
80
|
Succeeding
5 Years
|
|
322
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(e) Deferred
Compensation Plan
The
Company maintains a deferred compensation plan to which employees at the
director level and above can defer receipt of part or all of their
compensation. Each year eligible employees can elect to defer a
specified portion of salary and bonus. There are specific provisions
under which the deferred amounts will be paid to the
employee. Generally, amounts deferred will be invested in the same
manner as the participant’s investments in the Company’s 401(k) plan or equally
among certain specified mutual funds if the participant does not participate in
the 401(k) plan.
An asset,
representing the fair market value of the deferrals, and a corresponding
liability, representing the Company's obligation to the employee, is
recorded in the accompanying consolidated balance sheets. As of
December 31, 2008, $0.5 million was included in other assets and other
non-current liabilities, respectively. As of December 31, 2007, $0.9
million was included in other assets and other non-current liabilities,
respectively
(f)
Early Retirement and Post-employment Programs
In
Germany, Altersteilzeit (“ATZ”) is an early retirement program established by
law, and is designed to create an incentive for employees, within a certain age
group, to transition from (full or part-time) employment into retirement before
their legal retirement age. The German government provides a subsidy to
employers taking advantage of this legislation for bonuses paid to the employee
and the additional contributions paid into the German government pension scheme
under an ATZ arrangement for a maximum of six years. To receive this subsidy, an
employer must meet certain criteria established by the German
government.
The
Company accrues for ATZ based on current and future contracts.
The rates
assumed by the Company in the actuarial calculations for the ATZ at
December 31, 2008 are as follows:
Interest
rate
|
|
|
6.20%
|
Salary
increase
|
|
|
1.50%
|
Fluctuation
rate
|
|
|
0.00%
|
At
December 31, 2008, the accrual for ATZ was $2.3 million. The projected benefit
obligation at December 31, 2008 was $0.8 million.
The
following table shows the expected future benefits to be paid assuming 100% plan
participation. The accrual included in the Company's consolidated
financial statements, however represents an amount based upon expected plan
participation.
2009
|
|
$ 913
|
2010
|
|
1,213
|
2011
|
|
1,114
|
2012
|
|
990
|
2013
|
|
854
|
Succeeding
5 Years
|
|
854
|
20.
|
Stockholders’
Equity and Stock-Based Compensation
|
(a)
|
Stockholder
Rights Plan
|
Effective
as of August 25, 2008, upon the consummation of the reorganization described in
Note 1, the Company’s Rights Agreement expired in accordance with its
terms.
(b)
|
Share
Repurchase Program
|
On June
4, 2008, the Board of Directors of the Company announced the approval of the
repurchase of up to 1 million shares of common stock of the Company, taking into
account the reorganization described in Note 1, over the next 12
months. The repurchase program will be funded using the
Company's available cash. Pursuant to the repurchase
program, the Company intends to purchase shares of its common stock
from time to time on the open market or in negotiated transactions as market and
business conditions warrant, in compliance with securities laws and other legal
requirements, and taking into consideration any potential impact on its NOL
Carryforward position under Section 382 of the Internal Revenue
Code. The repurchase program may be suspended or discontinued at any
time. Since the announcement of the plan, the Company has
acquired approximately 0.2 million shares of its common stock for a total
purchase price of approximately $0.8 million under the approved
plan. Separately, in the first quarter of 2008, the
Company acquired, in a privately negotiated transaction with a
non-affiliate, approximately 0.2 million shares of our common stock for a total
purchase price of $0.7 million.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(c)
|
Equity
Compensation Plans
|
The
Company grants or has granted stock options and other stock-based awards under
the following equity compensation plans:
Incentive Stock
Plans. The Company maintains an incentive stock option plan
(the “1996 Plan”) that was approved by the stockholders, is administered by the
Compensation and Plan Administration Committee of the Board of Directors (the
“Compensation Committee”) and is used to promote the long-term financial
interests and growth of EDCIH. At December 31, 2008, the
Company is authorized to grant up to 1,485,000 shares of its common
stock for issuance in connection with the grant of stock options, stock
appreciation rights, restricted stock and performance shares under the 1996
Plan. Participation under the 1996 Plan is limited to non-officer
directors, key employees and other key persons. Options are generally
granted with an exercise price equal to the market price of our stock at the
date of grant, generally vest based on three years of continuous service and
have 10-year contractual terms. Generally, one-third of the options granted vest
on each of the first, second and third anniversaries of the grant.
The 1996
Plan also provides for the grant of restricted stock units (“RSUs”) to
non-officer directors on an annual basis. RSUs are intended to align the
interest of directors and stockholders in enhancing the value of our common
stock and to encourage such directors to remain with and to devote their best
efforts to EDCIH. Beginning in January 2006, non-officer
directors received annual grants of RSUs with an increased value of
$18,000. Effective November 5, 2007, the Board agreed to implement a
10% reduction in the value of the annual restricted stock awards granted to
non-officer directors.
(d)
Grant-Date Fair Value
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award. The fair values of options granted were calculated using
the following estimated weighted-average assumptions:
|
2008
|
|
2007
|
|
2006
|
Options
granted (in thousands)
|
-
|
|
9
|
|
131
|
Weighted-average
exercise prices stock options
|
-
|
|
$12.67
|
|
$28.20
|
Weighted-average
grant date fair-value stock options
|
-
|
|
$8.63
|
|
$15.60
|
Assumptions:
|
|
|
|
|
|
Weighted-average
expected volatility
|
-
|
|
0.78
to 0.79
|
|
0.65
to 0.78
|
Weighted-average
expected term (in years)
|
-
|
|
5.5
|
|
3.5
to 5.5
|
Risk-free
interest rate
|
-
|
|
3.8
to 4.7%
|
|
4.4
to 4.5%
|
Expected
dividend yield
|
-
|
|
0.0%
|
|
0.0%
|
In
general, the expected life in years was based on the weighted average of
historical grants assuming that outstanding options are exercised at the
midpoint of the future remaining term, adjusted for current demographics. The
risk free interest rate was the U.S. Treasury five-year spot rate on the date of
grant. Volatility was determined by using (i) the long-term volatility
(mean reversion), (ii) the midpoint of historical rolling 5.5 year
volatilities, (iii) the volatility of the most recent 5.5 year time
period, (iv) the volatility of the most recent one-year period,
(v) the implied volatility as seen in the open market place on May 17,
2007 and November 15, 2007, (mid point of fourth quarter), and (vi) the range
(min/max) of the implied volatility in the last 52 weeks. The
Company has not paid cash dividends since 1982 and does not anticipate
paying cash dividends in the foreseeable future. There were no stock option
grants in 2008.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(e)
Stock-Based Compensation Expense
On
January 1, 2006, the Company adopted SFAS No. 123R, which is a revision of
SFAS No. 123. SFAS No. 123R supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows.
SFAS No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the statement of operations based
on their
fair values. This pronouncement applies
to the Company's incentive stock plan, including stock options
and restricted stock units, and its employee stock purchase
plan.
The
Company elected the “modified prospective” method for its transition.
Under this method, the Company recognized compensation cost beginning
on January 1, 2006 (a) based on the requirements of SFAS No. 123R for
all share-based payments granted after that date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to that
date that were unvested.
The grant
of equity instruments in exchange for services is a non-cash item and,
therefore, is reflected as a reconciling item from net income (loss) to cash
flow from operations, when using the indirect method for presenting the
statement of cash flows. Prior to the adoption of SFAS No. 123R, the
Company presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the statement of cash
flows. SFAS No. 123R requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as financing cash flows.
During the year ended December 31, 2008, the Company did not
record any excess tax benefits or a corresponding increase to contributed
capital because it has NOL carry forwards, and the tax benefit will not be
recognized until the deduction is used to reduce current taxes
payable.
Both SFAS
No. 123 and SFAS No. 123R require measurement of fair value using an
option-pricing model. The Company uses the Black-Scholes-Merton model.
All awards granted prior to July 1, 2005 maintain their grant-date value as
calculated under SFAS No. 123. The future compensation cost for the portion of
these awards that are unvested (the service period continues after date of
adoption) will be based on their grant-date value adjusted for estimated
forfeitures. Prior to adopting SFAS No. 123R, the Comany adjusted the
pro forma expense for forfeitures only as they occurred. The pro forma expense
was allocated to the service period based on the accelerated attribution method,
and all the awards have graded service vesting. Under the new standard, we may
use a straight-line or accelerated attribution method and elected to use the
straight-line method for awards issued after January 1, 2006.
The
following table details the compensation expense for options, restricted stock
units and the employee stock purchase plan for each of the three years ended
December 31:
|
2008
|
|
2007
|
|
2006
|
Employee
Stock Purchase Plan
|
$ -
|
|
$ 1
|
|
$ 77
|
Stock
Options
|
64
|
|
349
|
|
748
|
Subtotal
of expense subsequent to the adoption of FAS123R
|
64
|
|
350
|
|
825
|
Restricted
Stock Units
|
100
|
|
95
|
|
60
|
Total
stock compensation expense
|
$ 164
|
|
$ 445
|
|
$ 885
|
No stock
compensation expense was capitalized as part of the cost of any asset during the
years ended December 31, 2008, 2007, and 2006.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
(f)
Stock-Based Compensation Activity
Activity
and price information regarding our incentive stock plan are summarized as
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Options
|
|
(In
000's)
|
|
Price
|
|
Term
|
|
Value
|
Outstanding,
December 31, 2007
|
|
143
|
|
$ 34.06
|
|
|
|
$ -
|
Granted
|
|
-
|
|
$
-
|
|
|
|
|
Exercised
|
|
-
|
|
$
-
|
|
|
|
$ -
|
Forfeited
|
|
-
|
|
$
-
|
|
|
|
$ -
|
Expired
|
|
(1)
|
|
$ 65.89
|
|
|
|
$ -
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2008
|
|
142
|
|
$ 33.91
|
|
3.7
years
|
|
$ -
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest at December 31, 2008
|
|
142
|
|
$ 33.91
|
|
3.7
years
|
|
$ -
|
Exercisable
at December 31, 2008
|
|
139
|
|
$ 34.37
|
|
3.6
years
|
|
$ -
|
The
weighted average grant-date fair value of options granted during the year ended
December 31, 2007 and 2006 was $8.63 and $15.60 per share,
respectively. The total intrinsic value of options exercised during the year
ended 2007 and 2006 was $1.0 million and $2.6 million,
respectively. The total grant date fair value of options vested
during 2008, 2007 and 2006 was $0.2 million, $0.8 million and $1.6 million,
respectively.
A summary
of the status of the Company’s RSUs (non-vested shares) as of December 31,
2008 and changes during the year ended December 31, 2008 is presented
below:
|
|
|
|
Weighted-Average
|
|
|
Shares
|
|
Grant-Date
|
Nonvested
Shares
|
|
(In
000's)
|
|
Fair
Value
|
Nonvested
at December 31, 2007
|
|
9
|
|
$ 23.70
|
Granted
|
|
27
|
|
$ 4.20
|
Vested
|
|
(4)
|
|
$ 25.01
|
Forfeited
|
|
-
|
|
$
-
|
Nonvested
at December 31, 2008
|
|
32
|
|
$ 7.12
|
As of
December 31, 2008, there was approximately $0.2 million of total
unrecognized compensation cost related to all share-based compensation
arrangements granted under the 1996 Plan. That cost is expected to be recognized
over a weighted-average period of approximately one year. The total fair value
of RSUs vested during the year ended December 31, 2008 was less than $0.1
million.
(g)
Other
Applicable
German law restricts the Company's German subsidiaries from paying
dividends to the extent paying any such dividends would cause the net assets of
the applicable subsidiary to be less than its nominal share capital. The nominal
share capital of our German operating company subsidiary is €6 million. As
of December 31, 2008, the net assets, excluding intercompany accounts and
debt, of EDC’s European operation totaled €45.0 million.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
21.
|
Income
(Loss) per Common Share
|
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is computed on the basis of the weighted average number of shares
of common stock plus the effect of dilutive shares issuable upon the exercise of
outstanding stock options or other stock-based awards during the period using
the treasury stock method, if dilutive.
The
following table sets forth the computation of income (loss) per share
(1):
|
2008
|
|
2007
|
|
2006
|
Numerator:
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$ (12,865)
|
|
$ 2,167
|
|
$ 4,241
|
Loss
from discontinued operations, net of tax
|
(11,502)
|
|
(18,345)
|
|
(14,011)
|
Gain
on sale of Messaging business
|
-
|
|
1,044
|
|
6,127
|
Gain
on sale of U.S. operations
|
2,712
|
|
-
|
|
-
|
Income
(loss) before extraordinary item
|
$ (21,655)
|
|
$ (15,134)
|
|
$ (3,643)
|
Extraordinary
gain - net of tax
|
-
|
|
-
|
|
7,668
|
Net
income (loss)
|
$ (21,655)
|
|
$ (15,134)
|
|
$ 4,025
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator
for basic income (loss) per share - weighted average
shares
|
6,840
|
|
6,992
|
|
6,878
|
Effect
of dilutive securities: stock options
|
-
|
|
16
|
|
137
|
Denominator
for diluted income (loss) per share-adjusted weighted average shares and
assumed conversions
|
6,840
|
|
7,008
|
|
7,015
|
|
|
|
|
|
|
Income
(loss) per weighted average common share:
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$ (1.88)
|
|
$ 0.31
|
|
$ 0.62
|
Loss
from discontinued operations
|
(1.68)
|
|
(2.62)
|
|
(2.04)
|
Gain
on sale of Messaging business
|
-
|
|
0.15
|
|
0.89
|
Gain
on sale of U.S. operations
|
0.40
|
|
-
|
|
-
|
Extraordinary
gain
|
-
|
|
-
|
|
1.11
|
Income
(loss) per weighted average common share (2)
|
$ (3.17)
|
|
$ (2.16)
|
|
$ 0.59
|
|
|
|
|
|
|
Income
(loss) per diluted common share
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$ (1.88)
|
|
$ 0.31
|
|
$ 0.60
|
Loss
from discontinued operations
|
(1.68)
|
|
(2.62)
|
|
(2.00)
|
Gain
on sale of Messaging business
|
-
|
|
0.15
|
|
0.87
|
Gain
on sale of U.S. operations
|
0.40
|
|
-
|
|
-
|
Extraordinary
gain
|
-
|
|
-
|
|
1.09
|
Income
(loss) per weighted average common share (2)
|
$ (3.17)
|
|
$ (2.16)
|
|
$ 0.57
|
|
|
|
|
|
|
Dilutive
securities not included above due to anti-dilutive effect
|
2
|
|
-
|
|
-
|
Anti-dilutive
securities not included above: stock options
|
142
|
|
125
|
|
193
|
|
|
|
|
|
|
(1)
All share and per share amounts displayed in the above table reflect the
effect of the reorganization as
|
discussed
in Note 1.
|
|
|
|
|
|
(2)
Income (loss) per weighted average common share amounts are rounded to the
nearest $.01; therefore,
|
such
rounding may impact individual amounts presented.
|
|
|
|
|
|
There
were no dilutive shares issuable upon the exercise of outstanding stock options
or other stock-based awards
included
in the calculation of diluted loss per share for the years ended
December 31, 2007 and 2006, as their effect would be
anti-dilutive.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
22.
|
Commitments
and Contingencies
|
Litigation
In
addition to the legal proceedings discussed below, the Company is, from time to
time, involved in various disputes and legal actions related to our business
operations. While no assurance can be given regarding the outcome of these
matters, based on information currently available, the
Company believes that the resolution of these matters will not have a
material adverse effect on our financial position or results of our future
operations. However, because of the nature and inherent uncertainties of
litigation, should the outcome of these actions be unfavorable, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.
Arbitration Claim under the International
Distribution Agreement: On
February 27, 2009, EDC, at its election, provided notice to Universal
International Music B.V. (“UIM”) of its demand to
arbitrate certain allegations by UIM, which EDC believes lack any
merit, that EDC had triggered certain “Key Failures” (or defaults) as
defined in the International Distribution Agreement between EDC and UIM dated
May 31, 2005 (the “International Distribution Agreement”). UIM is
part of the Universal Music Group, which is EDC’s largest customer.
EDC’s demand to arbitrate was in response to a notice from UIM dated
February 19, 2009 alleging certain Key Failures related to EDC’s performance
levels in July through December of 2008. In connection with
the February 19, 2009 notice, UIM withdrew a prior Failure Notice issued on
December 11, 2008, which notice EDC had also objected to and which EDC and UIM
had been attempting to resolve in an amicable manner. However, the
February 19, 2009 notice from UIM purported to be a substitution and restatement
of many of the same underlying allegations set forth in the withdrawn December
11, 2008 notice and EDC determined that further attempts to resolve the matter
amicably would not be successful. Accordingly, EDC determined to proceed to
binding arbitration under the International Distribution
Agreement. At this time, both parties are in the process of selecting
arbitrators for the matter and no date for the arbitration has been
set.
Under
the International Distribution Agreement, EDC has various service level
obligations it is required to maintain. Repeated failures to meet
those service level obligations can result in Key Failures. In its
February 27, 2009 notice, UIM alleged that EDC has incurred two Key
Failures. EDC believes neither of the Key Failures are
valid. Even if a Key Failure had been validly established by UIM, EDC
is provided with a contractual opportunity to cure such. However, as
EDC believes that no Key Failure has occurred, it has provided notice to UIM
that, despite its willingness to work with UIM to cure any valid Key Failure, it
is unable to do so with regard to an invalid Key Failure.
There
are various penalties for both cured and uncured Key
Failures. Depending on whether one or two Key Failures were found
valid by an arbitrator, and whether EDC was able to cure any such valid Key
Failures, EDC could face the following penalties: Upon each of the
first two uncured Key Failures occurring within a five-year period, UIM has the
right to source 30% of its distribution requirements under the International
Distribution Agreement and / or 30% of its manufacturing requirements
under the International Manufacturing Agreement between UIM and EDC dated May
31, 2005 (together with the International Distribution Agreement,
the "Supply Agreements") from a third party for a period of 12 months
or receive liquidated damages in the amount of $0.6 million as a
credit against its payments under such contract. In addition, based
upon the nature of the Key Failures alleged by UIM and the timeframes in which
they occurred, EDC would also face penalties for those two Key Failures – if
they are held to be valid – even if both Key Failures were cured. The
penalty in such an event, for both Key Failures combined, would be the right by
UIM to source 30% of its requirements under the Supply Agreements from a
third party for a period of 12 months or receive liquidated damages in the
amount of approximately $0.6 million as a credit against its payments under such
contract.
Upon
the occurrence of additional Key Failures (which UIM has not asserted),
additional penalties apply as follows. Upon the occurrence of three
Key Failures within a five year period of the same category, whether cured or
uncured, UIM has the right to either source 100% of its distribution
requirements under the International Distribution Agreement from a third party
for the remaining term of the contract, terminate such contract outright or
receive liquidated damages in the amount of $1.7 million as a credit against its
payments under such contract. Upon the occurrence of four Key
Failures within a five year period in any category, whether cured or uncured,
UIM has the right to either source 30% of its distribution requirements under
the Internation Distribution Agreement from a third party for a period of twelve
months, terminate such contract outright, or receive liquidated damages in the
amount of $0.6 million as a credit against payments under this contract. The
occurrence of five Key Failures within a five year period of any category,
whether cured or uncured, would provide UIM with the same damages three Key
Failures within a five year period of the same category.
As
described above, EDC believes that no Key Failures have occurred and intends to
vigorously defend its position in arbitration but at this early stage in
these matters, the EDC is not able to assess the likelihood of a favorable
outcome. If EDC is unsuccessful in arbitration,
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
the
alleged Key Failures could result in substantial liquidated damages or the loss
of volumes that, based on the high fixed cost nature of EDC’s distribution
operations, would have a material adverse effect on its
profitability. In addition, as described above, subsequent Key
Failures – even if cured – could result in even greater damages and the ultimate
right of UIM to terminate the International Distribution
Agreement.
Shareholder Derivative
Actions: On
September 6, 2006, Vladimir Gusinsky (“Gusinsky”), a Company
shareholder, commenced a derivative action (the “Gusinsky Action”) in the
Supreme Court of the State of New York, New York County,
against EDCI (as nominal defendant) and against certain of EDCI’s current and
former officers and directors as defendants. The complaint, as amended in
December 2006 and January 2007, purportedly on behalf of EDCI,
contained a variety of allegations relating to the backdating of certain stock
option grants. On January 26, 2007 and February 7, 2007, two additional
derivative actions were commenced in the United States District Court for the
Southern District of New York by two different Company shareholders, Larry L.
Stoll and Mark C. Neiswender, respectively (the “Subsequent Actions”). The
Subsequent Actions were identical to each other, and asserted the same claims as
those asserted in the Gusinsky Action regarding a subset of the same option
grants at issue in that action along with additional claims alleging violations
of federal securities laws.
A Special
Litigation Committee of the Board of Directors of EDCI, following an internal
investigation, concluded that there was no conclusive or compelling evidence
that any of the named defendants in the lawsuits breached the fiduciary duties
of care or loyalty, or acted in bad faith with respect to their obligations to
EDCI or its shareholders, and further concluded that it would not be in EDCI’s
best interest to pursue any claims with respect to these grants. EDCI also
restated certain financial statements as a result of this internal
investigation.
On
January 30, 2008, all parties to the Gusinsky Action and the Subsequent Actions
entered into an agreement to settle both actions. The agreement was
subject to the approval of the Court. Pursuant to the settlement
agreement, EDCI’s insurer agreed to pay plaintiffs’ counsel in the Gusinsky
Action and the Subsequent Actions for their fees and expenses, and to pay for
the costs of notifying the Company’s shareholders of the
settlement. EDCI also implemented certain changes to its Equity
Compensation Policy and adopted related reform policies. In exchange,
the plaintiffs in both the Gusinsky Action and the Subsequent Actions agreed to
dismiss their claims with prejudice, forego any appeals and release all the
defendants from all claims that were or could have been asserted in either
action and arise out of or are based upon or relate in any way to any of the
allegations set forth in the complaints. The papers in support of
preliminary approval of the settlement were filed in the Gusinsky Action on
January 31, 2008 and on April 30, 2008 the Court granted preliminary
approval of the settlement and scheduled a settlement hearing. On
September 17, 2008, the Court issued a final order approving the settlement, but
denying plaintiffs’ counsels’ application for fees and expenses. A
judgment to that effect was then entered by the Court on September 25,
2008.
On
October 23, 2008, plaintiffs in the Subsequent Actions moved for leave to
reinstate their appeal of the federal court’s dismissal of the Subsequent
Actions on the basis that the state court should not have approved the
settlement. On January 12, 2009, the federal court denied that
motion. The plaintiffs in the state court action have until July,
2009 to perfect their appeal under state law from that aspect of the state court
decision which denied their application for attorney's fees.
Patent
Litigation: In March 2008, EDC was served as a defendant
in an action by Koninklijke Philips Electronics N. V. and U.S. Philips
Corporation, pending in the U. S. District Court for the Eastern District
of Texas, Beaumont Division, filed on January 18, 2008. This complaint was
dismissed without prejudice on April 30, 2008 and a substantially similar action
was filed in the U.S. District Court for the Southern District of New York (the
“NY Complaint”) on April 30, 2008. In the NY Complaint, plaintiffs
allege breach of contract for failure to pay royalties and patent infringement
and claim unspecified damages and, in addition to naming EDC and the Company,
have
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
named
James Caparro and Jordan Copland as defendants in their capacities as former
CEOs of EDC. EDC does not believe the complaint has merit, intends to
vigorously defend this action and believes it
has indemnification rights under certain contractual arrangements
covering a substantial portion of the alleged infringement but at this early
stage in the matter, EDC is not able to assess the likelihood of a favorable
outcome. The case is still pending and discovery and motion practice are
continuing. The most recent event is the Court's denial of plantiff's
motion for a summary judgement that EDC breached the contract. Pending before
the Court is a motion for a summary judgement by EDC that there is no patent
infringement. On February 19, 2009, oral arguments were held with regard to a
motion by the plaintiffs for summary judgment; no decision has been rendered to
date. In July 2008, Koninklijke Philips Electronics N.V.
filed a similar claim with the Brunswick Regional Court in Germany against a
subsidiary of EDC, demanding payment of approximately $1.8 million plus
interest. EDC has filed a defense and has received a
court summons for May 28, 2009 to appear before the Regional Court of
Hannover. EDC does not believe the case has merit, intends to
vigorously defend this action, and and believes it has indemnification rights
covering a substantial portion of the claim, but at this early stage in the
matter, EDC is not able to assess the likelihood of a favorable
outcome.
Operating
Lease Commitments
The
Company leases manufacturing, warehouse, and office facilities and
equipment under operating leases. Future minimum lease payments under operating
leases (with initial or remaining lease terms in excess of one year) related to
its continuing operations for calendar years subsequent to December 31, 2008 are
as follows:
2009
|
$ 6,433
|
2010
|
5,571
|
2011
|
5,234
|
2012
|
5,131
|
2013
|
5,007
|
Thereafter
|
6,674
|
Total
|
$ 34,050
|
The lease
for the facility in Germany escalates in 5% increments if the German Consumer
Price Index has increased 5% or greater and is non-cancelable. The principal
lease for our UK manufacturing facility includes a clause for rent escalation of
11% and an option to break the lease without penalty in June 2010. The
Company plans to exercise the option to break the lease in 2010 and has
excluded future payments beyond June 2010 in the above table. Contingent rentals
are estimated based on provisions in the lease and historical trends. Rent
expense included in continuing operations was approximately $7.1 million, $5.9
million and $5.0 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Minority
Shareholder Put Options
EDC’s
limited liability company agreement grants minority members put option rights
such that they can require EDC or Glenayre Electronics, Inc. to purchase the
minority member interest in EDC. The put options, which cover both the 2.2% of
EDC’s outstanding Common Units acquired by two key employees and EDC’s
outstanding profits interests, can be exercised during a 5 year period beginning
on the Put Trigger Date (as defined in the agreement) in the event EDC shall not
have consummated an initial public offering prior to the Put Trigger Date. The
Put Trigger Date is the earlier of May 31, 2015 or the date on or after May 31,
2013 on which the terms of all EDC’s manufacturing and distributions agreements
with Universal Music Group, are extended to a term ending on or after May 31,
2018. The purchase price for any member interest purchased as a result of the
put option is the Fair Market Value (as defined in the agreement) on the date of
the put notice.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Employee
Contracts
Certain
executives have contracts that generally provide benefits in the event of
termination or involuntary termination for “good reason” accompanied by a change
in control of EDCI or certain subsidiaries.
The
Company currently has one reportable segment: EDC. On December 31,
2008, the Company's EDC subsidiary sold its distribution operations
located in Fishers, Indiana, U.S. supply agreements with Universal Music Group,
all of the equipment located in our Fishers, Indiana distribution facility and
certain manufacturing equipment located in our Kings Mountain, North Carolina
facility, as well as transferred its U.S. customer relationships to Sony DADC.
All information related to the EDC U.S. operations, including prior period
information, is reflected as discontinued operations.
The
remaining EDC operations consist of central European and UK CD and
DVD manufacturing operations and central European distribution
operation. The Company has two product categories: product
representing the manufacturing of CDs and DVDs and services representing our
distribution of CDs and DVDs.
Universal
accounted for revenues of $174.3 million, $186.7 million and $171.9 million for
the years ended December 31, 2008, 2007 and 2006, respectively, which
are included in EDC revenues above and was the only customer to exceed 10%
of total revenues.
Geographic
Area
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
Revenues
|
|
|
|
Long-lived
|
|
Assets
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
United
States
|
$ -
|
|
$ -
|
|
$ -
|
|
$ 217
|
|
$ 560
|
United
Kingdom
|
65,866
|
|
67,957
|
|
39,585
|
|
996
|
|
1,456
|
Germany
|
164,810
|
|
176,102
|
|
161,230
|
|
19,973
|
|
61,236
|
Other
|
7,752
|
|
9,384
|
|
7,396
|
|
-
|
|
-
|
Consolidated
|
$ 238,428
|
|
$ 253,443
|
|
$ 208,211
|
|
$ 21,186
|
|
$ 63,252
|
Revenues
are reported in the above geographic areas based on product shipment destination
and service origination.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
24.
|
Other
Comprehensive Income (Loss)
|
The
accumulated balances related to each component of other comprehensive income
(loss) were as follows:
|
Foreign
Currency Translation
|
Unrealized
Losses on Investments
|
Post
Retirement and Pension Benefit Obligations
|
Accumulated
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
Beginning
balance at January 1, 2008
|
$ 6,683
|
|
$ (110)
|
|
$ 1,928
|
|
|
$ 8,501
|
Other
comprehensive income (loss)
|
(3,866)
|
|
(274)
|
|
222
|
|
|
(3,918)
|
Balance
at December 31, 2008
|
$ 2,817
|
|
$ (384)
|
|
$ 2,150
|
|
|
$ 4,583
|
The
amounts above are net of income taxes. Income taxes are not provided
for foreign currency translation.
25.
|
Interim
Financial Data – Unaudited
|
|
Quarters
Ended
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31(2)
|
2008
(1)
|
|
|
|
|
|
|
|
Total
revenues
|
$ 58,667
|
|
$ 55,724
|
|
$ 58,217
|
|
$ 65,820
|
Gross
profit
|
11,103
|
|
9,463
|
|
10,771
|
|
16,612
|
Income
(loss) from continuing operations
|
(3,065)
|
|
(1,112)
|
|
2,470
|
|
(11,158)
|
Income
(loss) from continuing operations per
|
|
|
|
|
|
|
|
weighted
average common share
|
(0.44)
|
|
(0.16)
|
|
0.39
|
|
(1.67)
|
Income
(loss) from continuing operations per common share–assuming
dilution
|
(0.44)
|
|
(0.16)
|
|
0.39
|
|
(1.67)
|
Net
income (loss)
|
(6,220)
|
|
(5,484)
|
|
1,012
|
|
(10,963)
|
2007
|
|
|
|
|
|
|
|
Total
revenues
|
$ 53,876
|
|
$ 50,903
|
|
$ 62,078
|
|
$ 86,586
|
Gross
profit
|
8,471
|
|
8,073
|
|
12,345
|
|
20,822
|
Income
(loss) from continuing operations
|
(3,703)
|
|
(1,463)
|
|
1,775
|
|
5,558
|
Income
(loss) from continuing operations per weighted average common
share
|
(0.53)
|
|
(0.21)
|
|
0.26
|
|
0.79
|
Income
(loss) from continuing operations per common share–assuming
dilution
|
(0.53)
|
|
(0.21)
|
|
0.26
|
|
0.79
|
Net
income (loss)
|
(5,931)
|
|
(4,082)
|
|
254
|
|
(5,375)
|
Income
(loss) per weighted average common share amounts is rounded to the nearest $.01;
therefore, such rounding may impact individual amounts presented.
(1) Due
to the sale of substantially all of the assets of the EDC U.S. operations on
December 31, 2008, the results of the EDC U.S. operations have been
reclassified from continuing operations to discontinued operations for all
periods presented.
(2) Net
loss for the quarter ended December 31, 2008, includes an impairment of
long-lived assets of $26.4 million associated with the write down of the
carrying value of certain intangible and fixed assets related to the
Company's central European operations.
Blackburn
– Hannover Consolidation
On March
20, 2009, the Board of Directors of the Company approved a plan to
consolidate EDC’s Blackburn, UK and Hannover, Germany manufacturing volumes
within the Hannover facility (the “Consolidation”). As a result of
the Consolidation, EDC intends to cease by year-end 2009 substantially all
operations presently conducted at its Blackburn facility in the United Kingdom,
and resultantly produce all of the manufacturing volume for Universal, its
largest customer, in EDC’s Hannover plant through the expiration of the
Universal manufacturing agreements in May, 2015.
Blackburn
closure costs currently are forecast at approximately $9-10 million, comprised
primarily of severance costs for approximately 300 employees, costs associated
with exiting Blackburn’s existing leases and costs associated with relocating
equipment, parts and inventory from Blackburn to Hannover. Closure
costs will be financed out of existing cash in the United Kingdom with
additional financial and other support from the German. EDC Germany has
entered into an agreement to provide financial support of up to £5.0 million to EDC
Blackburn to insure that EDC Blackburn does not fall into insolvency due to over
indebtedness or illiquidity resulting from the planned closure of the Blackburn
facility.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Consummation
of the consolidation transaction will require the consent of the lenders
pursuant to EDC’s Senior Secured Credit Facility.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s “disclosure
controls and procedures” (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15 of the
Exchange Act. It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the system are met. Based on that evaluation, the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2008.
Management’s Annual Report on
Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act. The Company’s internal control system was designed to
provide reasonable assurance regarding the reliability of the Company’s
financial reporting and the preparation of the Company’s consolidated financial
statements for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
As of the
end of the period covered by this report, management, including the Company’s
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of
December 31, 2008.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the temporary rules of the Securities and Exchange Commission that
permit the Company to provide only Management’s report in this annual
report.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
Changes in Internal Control Over
Financial Reporting
During
the fourth quarter of 2008, there were no changes in the Company’s internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART III
This information is omitted from this report pursuant to
General Instruction G. (3) of Form 10-K as the Company intends to file with the
Commission its definitive Proxy Statement for its 2009 Annual
Meeting of Stockholders (the “Proxy Statement”)
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
not later than 120 days after December 31, 2008.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information relating to the Company’s directors
required by this Item is found in the Proxy Statement under “Proposal One — Election of
Directors” and is incorporated into this
Item by reference.
The information relating to the Audit Committee of
the Board of Directors required by this
Item is found in the Proxy Statement under “Committees of the Board of Directors —Audit
Committee” and is incorporated into this
Item by reference.
The information relating to the Company’s executive
officers required by this Item is found in
the Proxy Statement under “Executive
Officers of the Registrant” and is
incorporated into this Item by reference.
The information relating to certain filing obligations
of directors and executive officers required by this Item is found in the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting
Compliance” and is incorporated into this
Item by reference.
The Company has a code of ethics that applies to its
directors and executive officers. The code is available on the Company’s website at
http://www.edcllc.com.
ITEM 11. EXECUTIVE COMPENSATION
The information on executive and director compensation
and compensation committee matters required by this Item is found in the Proxy
Statement under “Committees of the Board
of Directors – Compensation and
Plan Administration Committee” and
“-Compensation Committee Interlocks and
Insider Participation,” “Executive Compensation” and “Director
Compensation” and is incorporated into this
Item by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT," "
The information regarding grants under all equity
compensation plans required by this Item is found in Part II, Item 5, of this
Form 10-K and is incorporated in this Item by reference.
The information
regarding security ownership of beneficial owners and management of the Company
required by this Item is found in the Proxy Statement under “Security Ownership of Certain Beneficial Owners and
Management” and is incorporated by
reference into this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS; AND DIRECTOR INDEPENDENCE
The information required by this Item is found in the
Proxy Statement under “Committees of the
Board of Directors” and “Certain Relationships and Related
Transactions” and is incorporated by reference into this
Item.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The information required by this Item is found in the
Proxy Statement under “Proposal Two:
Independent Registered Public Accounting Firm – Audit and
Non-Audit Fees” and is incorporated into this Item by
reference.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a) Documents Filed As Part of This Annual Report on
Form 10-K:
1.
|
Financial Statements: See the Financial Statements included in Item
8.
|
The exhibits filed as part of this Annual Report on Form
10-K are identified in the Exhibit Index, which Exhibit Index specifically
identifies those exhibits that describe or evidence all management contracts and
compensation plans or arrangements required
to be filed as exhibits to this Report. Such Exhibit Index is incorporated
herein by reference.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 31, 2009.
EDCI HOLDINGS,
INC.
By /s/ Robert L. Chapman,
Jr.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 31, 2009:
/s/ Robert L. Chapman, Jr.
Robert
L. Chapman, Jr.
Chief
Executive Officer
/s/ Michael W.
Klinger
Michael
W. Klinger
Executive
Vice President
And
Chief Financial Officer
|
/s/ Clarke H. Bailey
Clarke
H. Bailey
Director
and Chairman
/s/ Ramon D. Ardizzone
Ramon
D. Ardizzone
Director
/s/ Donald S. Bates
Donald
S. Bates
Director
/s/ Cliff O. Bickell
Cliff
O. Bickell
Director
/s/ Peter W. Gilson
Peter
W. Gilson
Director
/s/ Horace H. Sibley
Horace
H. Sibley
Director
/s/ Howard W. Speaks,
Jr.
Howard
W. Speaks, Jr.
Director
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
INDEX
TO EXHIBITS
Exhibit
Number Exhibit
Description
2.1
|
Asset
Purchase Agreement dated May 9, 2005, by and among Entertainment
Distribution Company (USA), LLC, UMG Manufacturing & Logistics, Inc.
and Universal Music & Video Distribution Corp.
was filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed May 10, 2005 and is incorporated herein by
reference.
|
|
|
2.2
|
Share
Purchase Agreement dated May 9, 2005, by and among Blitz 05-107 GmbH (in
future named: Entertainment Distribution GmbH), Universal Manufacturing
& Logistics GmbH and Universal Music GmbH was filed as Exhibit 2.2 to
the Registrant’s Current Report on Form 8-K filed May 10, 2005 and is
incorporated herein by reference.
|
|
|
3.1
|
Composite
Certificate of Incorporation of Glenayre reflecting the Certificate of
Amendment filed December 8, 1995 was filed as Exhibit 3.1 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
1995 and is incorporated herein by reference.
|
|
|
3.2
|
Restated
by-laws of Glenayre effective June 7, 1990, as amended September 21, 1994
was filed as Exhibit 3.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 and is incorporated herein by
reference.
|
|
|
3.3
|
Certificate
of Ownership and Merger of Entertainment Distribution Company Merger Sub,
Inc. into Glenayre Technologies, Inc. dated May 10, 2007 was filed May 10,
2007 as Exhibit 3.1 to the Registrant’s current report on Form 8-K and is
incorporated herein by reference.
|
|
|
3.4
|
Certificate
of Elimination which eliminated the certificate of designation with
respect to the Series A Junior Participating Preferred Stock dated
September 17, 2007 was filed September 18, 2007 as Exhibit 3.1 to the
Registrant’s current report on Form 8-K and is incorporated herein by
reference.
|
|
|
10.1
|
Glenayre
Long-Term Incentive Plan, as amended and restated effective May 26, 1994,
was filed as Exhibit 4 to the Registrant’s Form S-8 filed June 16, 1994
and is incorporated herein by reference. *
|
|
|
10.2
|
Services
Agreement dated February 15, 1999 between the Company and Ramon D.
Ardizzone was filed as Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the Quarter ended March 31, 1999 and is incorporated
herein by reference. *
|
|
|
10.3
|
Glenayre
Electronics, Inc. Deferred Compensation Plan was filed as exhibit 10.19 to
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 1996 and is incorporated herein by reference. *
|
|
|
10.4
|
Glenayre
1996 Incentive Stock Plan, as amended, was filed as Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 and is incorporated herein by reference. *
|
|
|
10.5
|
Glenayre
Employee Stock Purchase Plan, as amended, was filed as Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 and is incorporated herein by reference. *
|
|
|
10.6
|
Form
of Stock Option Agreement for Registrant’s 1996 Incentive Stock Plan, as
amended, was filed as Exhibit 10.6 to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2004 and is incorporated herein
by reference. *
|
|
|
10.7
|
Glenayre
Technologies, Inc. Incentive Plan dated March 8, 2005 was filed as Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed March 11, 2005
and is incorporated herein by reference. *
|
|
|
10.8
|
Credit
Agreement dated May 31, 2005 among Entertainment Distribution Company,
LLC, Entertainment Distribution Company (USA), LLC, Wachovia Bank,
National Association and Glenayre Electronics, Inc. was filed as Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed June 3, 2005 and
is incorporated herein by
reference.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
10.9
|
Cash
Collateral Agreement dated May 31, 2005 between Wachovia Bank, National
Association and Glenayre Electronics, Inc. was filed as Exhibit 10.2 to
the Registrant’s Current Report on Form 8-K filed June 3, 2005 and is
incorporated herein by reference.
|
|
|
10.10
|
Limited
Liability Company Agreement of Entertainment Distribution Company, LLC was
filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
June 3, 2005 and is incorporated herein by reference.
|
|
|
10.11
|
Employment
Agreement dated May 9, 2005 between Glenayre Electronics, Inc. and James
Caparro was filed as Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K filed June 3, 2005 and is incorporated herein by reference.
*
|
|
|
10.12
|
Employment
Agreement dated May 9, 2005 between Glenayre Electronics, Inc. and Thomas
Costabile was filed as Exhibit 10.5 to the Registrant’s Current Report on
Form 8-K filed June 3, 2005 and is incorporated herein by reference.
*
|
|
|
10.13
|
Letter
agreement among Glenayre Electronics, Inc., James Caparro and Thomas
Costabile dated May 31, 2005 was filed as Exhibit 10.6 to the Registrant’s
Current Report on Form 8-K filed June 3, 2005 and is incorporated herein
by reference. *
|
|
|
10.14
|
U.S.
CD Manufacturing and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.7 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
|
10.15
|
U.S.
HDFD Manufacturing and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.8 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
|
10.16
|
Manufacturing
and Related Services Agreement dated as of May 31, 2005 between Universal
Manufacturing & Logistics GmbH and Universal International Music, B.V.
was filed as Exhibit 10.9 to the Registrant’s Current Report on Form 8-K
filed June 3, 2005 and is incorporated herein by reference.
**
|
|
|
10.17
|
U.S.
Distribution and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.10 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
|
10.18
|
Distribution
and Related Services Agreement dated as of May 31, 2005 between Universal
Manufacturing & Logistics GmbH and Universal International Music, B.V.
was filed as Exhibit 10.11 to the Registrant’s Current Report on Form 8-K
filed June 3, 2005 and is incorporated herein by reference.
**
|
|
|
10.19
|
Service
Contract among Glenayre Electronics, Inc., Glenayre Electronics (UK) Ltd.
And Roger Morgan was filed as Exhibit 10.2 to the Registant's Current
Report on Form 8-K filed July 22, 2005 and is incorporated herein by
reference. * Summary of Non-officer Director Compensation
Program was filed as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed December 16, 2005 and is incorporated herein by
reference.
|
|
|
10.20
|
Summary
of Non-officer Director Compensation Program was filed as Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed December 16, 2005 and is
incorporated herein by reference.
|
|
|
10.21
|
Letter
Agreement between Entertainment Distribution Company, LLC and John V.
Madison dated December 15, 2005 was filed as Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed December 16, 2005 and is
incorporated herein by reference. *
|
|
|
10.22
|
The
second Amendment to the Credit Agreement dated May 20, 2006 by and among
Entertainment Distribution Company, LLC and Wachovia Bank, National
Association was filed as Exhibit 10.1 to the Registrant's current report
on Form 8-K dated June 21, 2006 and is incorporated herein by
reference.
|
|
|
10.23
|
Glenayre
1996 Incentive Stock Plan, as amended effective May 23, 2006 was filed as
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006 and is incorporated herein by
reference.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
10.24
|
Share
Purchase Agreement dated July 21, 2006, by and among DGMS Blackburn
Holdings Limited, EDC UK Holdings Limited, Entertainment Distribution
Company, LLC, Glenayre Electronics, Inc. and Rank Leisure Holdings Limited
was filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2006 and is incorporated herein by
reference.
|
|
|
10.25
|
Amendment
dated November 6, 2006 among James Caparro, Glenayre Technologies, Inc.
and Glenayre Electronics, Inc. to that certain letter agreement dated May
9, 2005 was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated November 3, 2006 and is incorporated herein by reference.
*
|
|
|
10.26
|
Asset
Purchase Agreement dated December 14, 2006 by and among Glenayre
Technologies, Inc., Glenayre Electronics, Inc., IP Unity Peach, Inc. and
IP Unity was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated December 31, 2006 and is incorporated herein by
reference.
|
|
|
10.27
|
The
third amendment to the Credit Agreement dated May 31, 2007 by
and among Entertainment Distribution Company, LLC and Wachovia Bank,
National Association was filed as Exhibit 10.1 to the Registrant's current
report on Form 8-K dated May 31, 2007 and is incorporated herein by
reference.
|
|
|
10.28
|
Mutual
Separation Agreement dated November 5, 2007 by and among James Caparro,
Entertainment Distribution Company, Inc., Glenayre
Electronics, Inc. and Entertainment Distribution Company LLC. was filed as
Exhibit 10.1 to the Registrant's current report on Form 8-K dated November
5, 2007 and is incorporated herein by reference. *
|
|
|
10.29
|
Stockholders
Agreement dated November 5, 2007 among Entertainment Distribution Company
Inc., Robert L. Chapman, Jr., Chap-Cap Activist Partners Master Fund,
Ltd., Chap-Cap Partners II Master Fund, Ltd. and Chapman Capital LLC was
filed as Exhibit 10.1 to the Registrant's current report on Form 8-K dated
November 5, 2007 and is incorporated herein by
reference.
|
|
|
10.30
|
Fourth
Amendment to Credit Agreement dated as of December 20, 2007, by and among
Entertainment Distribution Company, LLC, as borrower, the guarantors party
thereto, the lenders party thereto and Wachovia Bank, National
Association, as administrative agent was filed as Exhibit 10.1 to the
Registrant's current report on Form 8-K dated December 20, 2007 and is
incorporated herein by reference.
|
|
|
10.31
|
Letter
Agreement between Matthew K. Behrent and Entertainment Distribution
Company, Inc. dated December 27, 2007 was filed as Exhibit 10.1 to the
Registrant's current report on Form 8-K dated December 20, 2007 and is
incorporated herein by reference.
|
|
|
10.32
|
Amended
and Restated Letter Agreement between Jordan M. Copland and Entertainment
Distribution Company, Inc. dated December 27, 2007 was filed as Exhibit
10.1 to the Registrant's current report on Form 8-K dated December 20,
2007 and is incorporated herein by reference. *
|
|
|
10.33
|
Letter
Agreement among Thomas Costabile, Entertainment Distribution Company, LLC
and Entertainment Distribution Company, Inc. dated December 27, 2007 was
filed as Exhibit 10.1 to the Registrant's current report on Form 8-K dated
December 20, 2007 and is incorporated herein by reference.
*
|
|
|
10.34
|
Fifth
Amendment to Credit Agreement dated March 4, 2008, by and among
Entertainment Distribution Company, LLC, as borrower, the guarantors party
thereto, the lenders party thereto and Wachovia Bank, National
Association, as administrative agent was filed as Exhibit 10.1 to the
Registrants' current report on Form 8-K dated March 5, 2008 and is
incorporated by reference.
|
|
|
10.35
|
Sixth
Amendment to Credit Agreement dated May 30, 2008, by and among
Entertainment Distribution Company, LLC, as borrower, the guarantors party
thereto, the lenders party thereto and Wachovia Bank, National
Association, as administrative agent was filed as Exhibit 10.1 to the
Registrants' current report on Form 8-K dated May 21, 2008 and is
incorporated herein by reference.
|
|
|
10.36
|
Amended
and Restated Letter Agreement between Matthew K. Behrent and Entertainment
Distribution Company, Inc. dated August 25, 2008 was filed as Exhibit 10.1
to the Registrant's current report on Form 8-K dated August 26, 2008 and
is incorporated herein by reference. *
|
|
|
10.37
|
Amended
and Restated Letter Agreement between Jordan M. Copland and Entertainment
Distribution Company, Inc. dated August 25, 2008 was filed as Exhibit 10.2
to the Registrant's current report on Form 8-K dated August 26, 2008 and
is incorporated herein by reference.
*
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tabular
Amounts in Thousands Except per Share Amounts)
10.38
|
Letter
Agreement among Michael W. Klinger and EDCI Holdings, Inc. dated October
3, 2008 was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated October 3, 2008 and is incorporated herein by reference.
*
|
|
|
10.39
|
Letter
Agreement between Clarke H. Bailey and EDCI Holdings, Inc. dated October
27, 2008 was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated October 27, 2008 and is incorporated herein by reference.
*
|
|
|
10.40
|
Asset
Purchase Agreement by and among Sony DADC US Inc., Entertainment
Distribution Company (USA), LLC and Entertainment Distribution Company,
LLC dated October 31, 2008 was filed as Exhibit 10.1 to the Registrant's
current report on Form 8-K dated November 3, 2008 and is incorporated
herein by reference.
|
|
|
10.41
|
Seventh
Amendment to Credit Agreement dated as of October 31, 2008, by and among
Entertainment Distribution Company, LLC, as borrower, Glenayre
Electronics, Inc., the guarantors party thereto, the lenders party thereto
and Wachovia Bank, National Association, as administrative agent was filed
as Exhibit 10.2 to the Registrant's current report on Form 8-K dated
November 3, 2008 and is incorporated herein by
reference.
|
|
|
10.42
|
Letter
Agreement between Robert L. Chapman, Jr. and EDCI Holdings, Inc. dated
January 2, 2009 was filed as Exhibit 10.1 to the Registrant's current
report on Form 8-K dated January 6, 2009 and is incorporated herein by
reference. *
|
|
|
10.43
|
Eighth
Amendment to Credit Agreement dated as of December 30, 2008 by and among
Entertainment Distribution Company, LLC as borrower, Glenayre Electronics,
Inc., the guarantors party thereto, the lenders party thereto and Wachovia
Bank, National Association, as administrative agent was filed as Exhibit
10.2 to the Registrant's current report on Form 8-K dated January 6, 2009
and is incorporated herein by reference.
|
|
|
10.44
|
Mutual
Separation Agreement dated February 9, 2009 made and entered into by and
between Entertainment Distribution Company, LLC, Glenayre Electronics,
Inc. ("Company"), and Thomas Costabile ("Employee") was filed as Exhibit
99.1 to the Registrant's current report on Form 8-K dated February 10,
2009 and is incorporated herein by reference. *
|
|
|
21.1
|
Subsidiaries
of the Company is filed herewith.
|
|
|
23.1
|
Consent
of Ernst & Young LLP is filed herewith.
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Chief Financial Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.1
|
Mutual
Separation Agreement between John V. Madison and Entertainment
Distribution Company, LLC effective December 1,
2007.
|
*
Management Contract
**
|
Portions
of this document are confidential and have been omitted and filed
separately with the Securities and Exchange Commission in connection with
a request for confidential treatment of such omitted material in
accordance with Rule 24b-2 under the Securities and Exchange Act of
1934.
|