edcih2q200910q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x |
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended June
30, 2009
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o |
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from
to
Commission
File Number 001-34015
EDCI HOLDINGS,
INC.
(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
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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11
East 44th
Street, New York, NY
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10017
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(646) 401-0084
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of Exchange Act. (Check
one):
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of Exchange Act)
The
number of shares outstanding of the Registrant’s common stock, par value $.02
per share, at July 27, 2009 was 6,703,436 shares.
EDCI
Holdings, Inc. and Subsidiaries
Part
I – Financial Information:
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Item
1. Financial Statements
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Page
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Report
Of Independent Auditors
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3
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Condensed
Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and
December 31, 2008
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4
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Condensed
Consolidated Statements of Operations for the three months ended June 30,
2009 and 2008 (Unaudited)
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5
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Condensed
Consolidated Statements of Operations for the six months ended June 30,
2009 and 2008 (Unaudited)
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6
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Condensed
Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for
the six months ended June 30, 2009 (Unaudited)
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7
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Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
2009 and 2008 (Unaudited)
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8
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Notes
to Condensed Consolidated Financial Statements (Unaudited)
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9
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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23
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Item 3.
Quantitative and Qualitative Disclosures about Market Risk
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30
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Item 4.
Controls and Procedures
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30
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Part
II – Other Information:
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Item 1.
Legal Proceedings
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31
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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31
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Item
4. Submission of Matters to a Vote of Security Holders
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31
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Item 6.
Exhibits
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31
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EX-15.1
LETTER REGARDING UNAUDITED FINANCIAL INFORMATION
EX-31.1
SECTION 302, CERTIFICATION OF THE CEO
EX-31.2
SECTION 302, CERTIFICATION OF THE CAO
EX-32.1
SECTION 906, CERTIFICATION OF THE CEO
EX-32.2
SECTION 906, CERTIFICATION OF THE CAO
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PART
I – FINANCIAL INFORMATION
ITEM
1. Financial Statements
Board of
Directors and Stockholders
EDCI
Holdings, Inc.
We have
reviewed the condensed consolidated balance sheet of EDCI Holdings, Inc. and
subsidiaries as of June 30, 2009, and the related condensed consolidated
statements of operations for the three and six month periods ended June 30, 2009
and 2008, the condensed consolidated statement of stockholders’ equity and
comprehensive loss for the six month period ended June 30, 2009, and the
condensed consolidated statements of cash flows for the six month periods ending
June 30, 2009 and 2008. These financial statements are the responsibility of the
Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion
Based on
our review, we are not aware of any material modifications that should be made
to the condensed consolidated financial statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
EDCI Holdings, Inc. and subsidiaries as of December 31, 2008, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the year then ended not presented herein and in our report dated March
27, 2009, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2008, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Ernst & Young LLP
Indianapolis,
Indiana
July 31,
2009
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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June
30,
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December
31,
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2009
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2008
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(unaudited)
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(In
thousands, except share data)
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$ 78,999
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$ 75,112
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Restricted
cash
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2,365
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7,258
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Accounts
receivable, net of allowances for doubtful accounts of
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$2,830
and $3,008 for June 30, 2009 and December 31, 2008,
respectively
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12,577
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19,129
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Current
portion of long-term receivable
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1,006
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599
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Inventories,
net
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4,282
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4,845
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Prepaid
expenses and other current assets
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10,883
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12,513
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Deferred
income taxes
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104
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105
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Assets
held for sale
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7,146
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7,154
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Current
assets, discontinued operations
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974
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8,691
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Total
Current Assets
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118,336
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135,406
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Restricted
cash
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24,833
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25,439
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Property,
plant and equipment, net
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18,368
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21,186
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Long-term
receivable
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2,516
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3,066
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Long-term
investments
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1,020
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1,020
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Deferred
income taxes
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1,774
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1,694
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Other
assets
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3,977
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4,739
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TOTAL
ASSETS
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$ 170,824
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$ 192,550
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
Liabilities:
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Accounts
payable
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$ 11,187
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$ 15,930
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Accrued
expenses and other liabilities
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30,144
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24,435
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Loans
from employees
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983
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1,142
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Current
portion of long-term debt
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7,442
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2,281
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Current
liabilities, discontinued operations
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2,851
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10,226
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Total
Current Liabilities
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52,607
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54,014
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Other
non-current liabilities
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4,125
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8,353
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Loans
from employees
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1,496
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2,490
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Long-term
debt
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1,826
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7,996
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Pension
and other defined benefit obligations
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34,194
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35,052
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Non-current
liabilities, discontinued operations
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-
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41
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Total
Liabilities
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94,248
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107,946
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Commitments
and contingencies
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Stockholders'
Equity:
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Preferred
stock, $.01 par value; authorized: 1,000,000 shares, no
shares
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issued
and outstanding
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-
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-
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Common
stock, $.02 par value; authorized: 15,000,000 shares
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June
30, 2009 -- 7,019,436 shares issued; December 31, 2008 -- 7,019,436 shares
issued
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140
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140
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Additional
paid in capital
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371,299
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371,091
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Accumulated
deficit
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(304,127)
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(294,988)
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Accumulated
other comprehensive income
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5,661
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4,583
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Treasury
stock at cost:
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June
30, 2009 -- 312,128 shares; December 31, 2008 -- 324,794
shares
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(1,512)
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(1,427)
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Total
EDCI Holdings, Inc. Stockholders' Equity
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71,461
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79,399
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Minority
interest in subsidiary company
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5,115
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5,205
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Total
Stockholders' Equity
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76,576
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84,604
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$ 170,824
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$ 192,550
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See
Notes to Condensed Consolidated Financial
Statements.
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EDCI
HOLDINGS, INC. AND SUBSIDIARIES
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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
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Three
Months Ended June 30,
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2009
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2008
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(In
thousands, except per share amounts)
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REVENUES:
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Product
revenues
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$ 27,271
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$ 41,699
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Service
revenues
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10,145
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|
14,025
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Total
Revenues
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37,416
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55,724
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COST
OF REVENUES:
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|
|
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Cost
of product revenues
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23,935
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36,365
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Cost
of service revenues
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7,740
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9,896
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Total
Cost of Revenues
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31,675
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46,261
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GROSS
PROFIT
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5,741
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9,463
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OPERATING
EXPENSES:
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Selling,
general and administrative expense
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6,568
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9,346
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Severance
costs for UK facility closure
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7,152
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-
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Amortization
of intangible assets
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-
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1,658
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Total
Operating Expenses
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13,720
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11,004
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OPERATING
LOSS
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(7,979)
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(1,541)
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OTHER
INCOME (EXPENSE):
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|
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Interest
income
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46
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|
935
|
Interest
expense
|
|
(177)
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|
(621)
|
Gain
on currency swap, net
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|
-
|
|
32
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Gain
(loss) on currency transaction, net
|
|
518
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|
(33)
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Other
income (expense), net
|
|
3
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|
(4)
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Total
Other Income (Expense)
|
|
390
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|
309
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LOSS
FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES
|
|
(7,589)
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|
(1,232)
|
Income
tax benefit
|
|
(154)
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|
(115)
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LOSS
FROM CONTINUING OPERATIONS
|
|
(7,435)
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|
(1,117)
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
|
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LOSS
FROM DISCONTINUED OPERATIONS
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|
(1,290)
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|
(4,459)
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GAIN
ON SALE OF EDC U.S. OPERATIONS
|
|
52
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|
-
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NET
LOSS
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|
$ (8,673)
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|
(5,576)
|
Minority
interest income
|
|
(89)
|
|
(92)
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NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$ (8,584)
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|
$ (5,484)
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LOSS
PER WEIGHTED AVERAGE COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.10)
|
|
$ (0.16)
|
Discontinued
Operations Attributable to Common Shareholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
shareholders
|
|
(0.19)
|
|
(0.64)
|
Gain
on sale of EDC U.S. Operations
|
|
0.01
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.28)
|
|
$ (0.80)
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LOSS
PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.10)
|
|
$ (0.16)
|
Discontinued
Operations Attributable to Common Shareholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
shareholders
|
|
(0.19)
|
|
(0.64)
|
Gain
on sale of EDC U.S. Operations
|
|
0.01
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.28)
|
|
$ (0.80)
|
|
|
|
|
|
AMOUNTS
ATTRIBUTABLE TO EDCI HOLDINGS, INC. COMMON SHAREHOLDERS
|
|
|
|
|
Loss
from continuing operations
|
|
$ (7,363)
|
|
$ (1,111)
|
Loss
from discontinued operations
|
|
(1,273)
|
|
(4,373)
|
Gain
on sale of EDC U.S. Operations
|
|
52
|
|
-
|
Net
Loss
|
|
$ (8,584)
|
|
$ (5,484)
|
|
|
|
|
|
(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 Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
|
(In
thousands, except per share amounts)
|
REVENUES:
|
|
|
|
|
Product
revenues
|
|
$ 58,352
|
|
$ 84,841
|
Service
revenues
|
|
20,315
|
|
29,550
|
Total
Revenues
|
|
78,667
|
|
114,391
|
COST
OF REVENUES:
|
|
|
|
|
Cost
of product revenues
|
|
51,908
|
|
73,380
|
Cost
of service revenues
|
|
15,448
|
|
20,445
|
Total
Cost of Revenues
|
|
67,356
|
|
93,825
|
GROSS
PROFIT
|
|
11,311
|
|
20,566
|
OPERATING
EXPENSES:
|
|
|
|
|
Selling,
general and administrative expense
|
|
13,691
|
|
18,806
|
Severance
costs for UK facility closure
|
|
7,152
|
|
-
|
Amortization
of intangible assets
|
|
-
|
|
3,245
|
Total
Operating Expenses
|
|
20,843
|
|
22,051
|
OPERATING
LOSS
|
|
(9,532)
|
|
(1,485)
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Interest
income
|
|
263
|
|
2,047
|
Interest
expense
|
|
(408)
|
|
(1,258)
|
Gain
(loss) on currency swap, net
|
|
2,111
|
|
(2,593)
|
Loss
on currency transaction, net
|
|
487
|
|
(594)
|
Other
income (expense), net
|
|
14
|
|
8
|
Total
Other Income (Expense)
|
|
2,467
|
|
(2,390)
|
LOSS
FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES
|
|
(7,065)
|
|
(3,875)
|
Income
tax provision (benefit)
|
|
(308)
|
|
368
|
LOSS
FROM CONTINUING OPERATIONS
|
|
(6,757)
|
|
(4,243)
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
(2,652)
|
|
(7,703)
|
GAIN
ON SALE OF EDC U.S. OPERATIONS
|
|
180
|
|
-
|
NET
LOSS
|
|
$ (9,229)
|
|
(11,946)
|
Minority
interest income
|
|
(90)
|
|
(242)
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$ (9,139)
|
|
$ (11,704)
|
LOSS
PER WEIGHTED AVERAGE COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.00)
|
|
$ (0.60)
|
Discontinued
Operations Attributable to Common Shareholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
shareholders
|
|
(0.39)
|
|
(1.09)
|
Gain
on sale of EDC U.S. Operations
|
|
0.03
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.36)
|
|
$ (1.69)
|
LOSS
PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.00)
|
|
$ (0.60)
|
Discontinued
Operations Attributable to Common Shareholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
shareholders
|
|
(0.39)
|
|
(1.09)
|
Gain
on sale of EDC U.S. Operations
|
|
0.03
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.36)
|
|
$ (1.69)
|
|
|
|
|
|
AMOUNTS
ATTRIBUTABLE TO EDCI HOLDINGS, INC. COMMON SHAREHOLDERS
|
|
|
|
|
Loss
from continuing operations
|
|
$ (6,719)
|
|
$ (4,177)
|
Loss
from discontinued operations
|
|
(2,600)
|
|
(7,527)
|
Gain
on sale of EDC U.S. Operations
|
|
180
|
|
-
|
Net
Loss
|
|
$ (9,139)
|
|
$ (11,704)
|
|
|
|
|
|
(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 Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
AND
COMPREHENSIVE LOSS
|
(In
thousands)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
Common Stock
|
Additional
|
Accumulated
|
Comprehensive
|
Treasury Stock
|
Minority
|
|
Shares
|
$
|
Paid-in Capital
|
Deficit
|
Income
|
Shares
|
$
|
Interest
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2009
|
7,019
|
$ 140
|
$ 371,091
|
$ (294,988)
|
$ 4,583
|
325
|
$
(1,427)
|
$ 5,205
|
Net
loss
|
-
|
-
|
-
|
(9,229)
|
-
|
-
|
-
|
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
1,185
|
-
|
-
|
-
|
Post-retirement
and pension
|
|
|
|
|
|
|
|
|
benefit
obligation adjustment
|
-
|
-
|
-
|
-
|
(146)
|
-
|
-
|
-
|
Net
unrealized investment gains
|
-
|
-
|
-
|
-
|
39
|
-
|
-
|
-
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Shares
issued for restricted stock awards
|
|
|
|
|
|
|
|
stock
awards
|
-
|
-
|
-
|
-
|
-
|
(3)
|
-
|
-
|
Stock
based compensation
|
-
|
-
|
208
|
-
|
-
|
(27)
|
-
|
-
|
Acquisition
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
17
|
(85)
|
-
|
Minority
interest in subsidiary company
|
-
|
-
|
-
|
90
|
-
|
-
|
-
|
(90)
|
Balances,
June 30, 2009
|
7,019
|
$ 140
|
$ 371,299
|
$ (304,127)
|
$ 5,661
|
312
|
$
(1,512)
|
$ 5,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2008
|
|
(In
thousands) |
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss attributable to common shareholders
|
$ (9,139)
|
|
$ (11,704)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
Gain
on sale of EDC U.S. Operations
|
(180)
|
|
-
|
Depreciation
and amortization
|
3,269
|
|
11,986
|
Stock
compensation expense
|
208
|
|
79
|
(Gain)
loss on currency swap
|
(2,111)
|
|
2,593
|
Foreign
currency transaction (gain) loss
|
(487)
|
|
594
|
Severance
cost for UK facility closure
|
7,152
|
|
-
|
Gain
on adjustment to discontinued operations tax payable
|
(141)
|
|
(1,097)
|
Deferred
income tax provision
|
60
|
|
109
|
Non-cash
interest expense
|
246
|
|
669
|
Minority
interest income
|
(90)
|
|
(242)
|
Other
|
(377)
|
|
21
|
Changes
in operating assets and liabilities, net of effects of business
dispositions and acquisitions:
|
|
|
|
Restricted
cash
|
599
|
|
(243)
|
Accounts
receivable
|
12,864
|
|
7,583
|
Inventories
|
1,199
|
|
1,987
|
Prepaid
and other current assets
|
1,820
|
|
(584)
|
Long-term
receivables
|
123
|
|
310
|
Other
assets
|
970
|
|
(294)
|
Accounts
payable
|
(8,344)
|
|
(9,292)
|
Accrued
liabilities and income taxes payable
|
(6,877)
|
|
(8,592)
|
Other
liabilities
|
54
|
|
1,335
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
818
|
|
(4,782)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases
of property, plant and equipment
|
(536)
|
|
(1,846)
|
Cash
restricted under long-term borrowing agreement
|
4,770
|
|
-
|
Proceeds
from sale of equipment from U.S. operations
|
2,134
|
|
-
|
Purchase
of available-for-sale securities
|
-
|
|
(8,930)
|
Proceeds
from the sale of short-term securities
|
-
|
|
23,214
|
Settlement
of cross-currency swap
|
(2,093)
|
|
-
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
4,275
|
|
12,438
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Repayment
of employee loans
|
(1,041)
|
|
(1,277)
|
Repayment
of capital lease obligations
|
(68)
|
|
(237)
|
Proceeds
from revolving credit facility
|
-
|
|
7,500
|
Repayment
of long-term borrowing
|
(1,023)
|
|
(15,216)
|
Acquisitions
of treasury stock
|
(85)
|
|
(803)
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(2,217)
|
|
(10,033)
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
1,011
|
|
1,156
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
3,887
|
|
(1,221)
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
75,112
|
|
63,850
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ 78,999
|
|
$ 62,629
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
1.
|
Business
Liquidity and Continuing Operations
|
a.
Business
EDCI
Holdings, Inc. (“EDCIH” or the “Company”), is a 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
optical disc industry. The Company has one reportable business segment operated
by its 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”).
The
Company’s operations formerly included its Wireless Messaging (“Paging”)
business, which the Company began exiting in May 2001, and its Glenayre
Messaging (“Messaging”) business, substantially all of the assets of which were
sold in December 2006. Consequently, the operating results of the
Paging and Messaging segments are reported as discontinued operations in the
accompanying financial statements.
The
accompanying unaudited condensed consolidated financial statements are presented
in U.S. dollars in conformity with accounting principles generally accepted in
the United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The
Company believes all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The
results for the interim periods are not necessarily indicative of results for
the full year. These interim financial statements should be read in conjunction
with the Company’s consolidated financial statements and accompanying notes
included in its Annual Report on Form 10-K for the year ended December 31, 2008.
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 condensed consolidated accounts include 100% of the
assets and liabilities of the Company’s majority owned subsidiaries, and the
ownership interests of minority investors are recorded as minority interest. All
significant intercompany accounts and transactions are eliminated in
consolidation.
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 Company continues 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 its
core products due to digital downloads involving piracy. Several of
the Company’s international customers have been impacted by the threat of credit
insurers dropping coverage and thus increasing the risk of its continued
business with these parties.
On March
20, 2009, the Board of Directors of EDC approved a plan to consolidate the
European operations. As a result of this plan, EDC 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 11.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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.
Certain
items in the prior year consolidated financial statements have been reclassified
to conform to the current presentation. Such reclassifications have
had no effect on net loss previously reported.
Inventories,
net at June 30, 2009 and December 31, 2008 consisted of:
|
June
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Raw
materials
|
$ 3,457
|
|
$ 3,859
|
Finished
goods
|
269
|
|
426
|
Work
in process
|
556
|
|
560
|
Total
|
$ 4,282
|
|
$ 4,845
|
At June
30, 2009 and December 31, 2008, reserves were approximately $1.3 million and
$1.0 million, respectively.
5.
|
Cash
and Cash Equivalents
|
Restricted
Cash
EDC
Central European Operation
Restricted
cash of EDC’s central European operation at June 30, 2009 was $26.6 million,
including $1.7 million classified as current. The restricted cash is 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 the 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 June 30, 2009 was $0.6 million. As part
of the Sony Sale, EDC’s Senior Secured Credit Facility was amended to include
provisions which required a portion of the proceeds from the Sony Sale to be
held in escrow in the name of the administrative agent for use in the wind-down
of certain U.S. operations or prepayment of loans under the terms of the Seventh
Amendment to the credit agreement.
Concentration
of Credit Risk
The
Company maintains cash balances in various banks. At times, the amounts of cash
held in certain bank accounts may exceed the amount that the Federal Deposit
Insurance Corporation (“FDIC”) insures.
EDC
entered into a cross-currency rate swap agreement with a commercial bank on May
31, 2005. EDC’s objective is to manage foreign currency exposure arising from
its intercompany loan to its German subsidiary, acquired in May of 2005 and is
therefore for purposes other than trading. The loan is denominated in Euros and
repayment is due on demand, or by May 31, 2010. In accordance with
SFAS No. 52, Foreign Currency
Translation, and SFAS 133, the currency swap does not qualify for hedge
accounting and, as a result, EDC reports the foreign currency exchange gains or
losses attributable to changes in the U.S.$/€ exchange rate on the currency swap
in earnings. 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. In the six months ended June 30, 2009, EDC recorded
a gain of $2.1 million in the accompanying condensed consolidated statements of
operations related to the settlement of the swap.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
7.
|
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 June 30, 2009, according to the valuation techniques it
used to determine their fair values.
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
June
30,
|
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Description
|
|
2009
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$ 1,020
|
|
|
|
|
|
$ 1,020
|
Deferred
Comp Trust Plan
|
|
546
|
|
546
|
|
|
|
|
Total
|
|
$ 1,566
|
|
$ 546
|
|
$ -
|
|
$ 1,020
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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
|
|
$ 1,020
|
|
Purchases,
sales and settlements, net
|
|
-
|
|
Total
gains or losses (realized/unrealized)
|
|
|
|
included
in earnings
|
|
-
|
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 classifies them as Level 1, except as otherwise noted. At June
30, 2009, the Company’s investments consisted of auction-rate securities. Its
investments in auction-rate securities are classified as Level 3 as quoted
prices were unavailable. Due to limited market information, the Company
utilized a discounted cash flow (“DCF”) model to derive an estimate of fair
value at June 30, 2009. 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. The
Company’s 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 it to obtain pricing
information on an ongoing basis.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis
The
effective date of SFAS No. 157 related to disclosure of fair value of
nonfinancial assets was deferred under FSP No. 157-2 until January 1,
2009. 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. The Company had no significant measurements
of non-financial assets or liabilities at fair value during the six months ended
June 30, 2009 that were affected by the deferral.
|
June
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Senior
Secured Credit Facility
|
$ 7,000
|
|
$ 8,000
|
Payable
to Universal - undiscounted
|
2,739
|
|
2,749
|
Capital
Lease
|
-
|
|
74
|
Employee
Loans
|
2,479
|
|
3,632
|
Subtotal
|
12,218
|
|
14,455
|
Less:
Unamortized Discount
|
(471)
|
|
(546)
|
Total
Debt
|
$ 11,747
|
|
$ 13,909
|
Less:
Current Portion
|
(8,425)
|
|
(3,423)
|
Total
Long Term Debt
|
$ 3,322
|
|
$ 10,486
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
EDC has a
Senior Secured Credit Facility with Wachovia Bank, National Association, as
agent, for an aggregate principal amount of $9.5 million, consisting of a term
facility of $7.0 million and a revolving credit facility of up to €2.0 million
(subject to a maximum $2.5 million based on prevailing interest rates). There
were no outstanding borrowings under the revolving credit facility at June 30,
2009. Substantially all of EDC’s assets are pledged as collateral to
secure obligations under the Senior Secured Credit Facility.
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 Company’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 us. The weighted average
interest rate on the term loan was 3.22% at June 30, 2009. In
addition to interest, EDC pays a commitment fee of 0.5% per annum on the average
daily unused amount. Scheduled payments under the term loan are due
as follows: $1.6 million due on December 31 2009, $1.9 million due on June 30,
2010, and $3.5 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’
leverage, minimum interest coverage and maximum senior secured leverage as
defined therein. As previously noted, the Company’s plan to
consolidate its Blackburn and Hannover facilities operations requires lender
consent. As of June 30, 2009 we have not obtained such consent but have taken
certain steps to proceed with the consolidated plan as we continue to negotiate
with the lenders. As such, we have classified the entire $7.0 million
outstanding under the term loan as current on the condensed consolidated balance
sheet as of June 30, 2009.
On
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (“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.
During
the six months ended June 30, 2009, the amount of gross unrecognized tax
benefits was reduced by $0.1 million primarily due to the expiration of certain
statutes of limitation. Of the unrecognized tax benefits recorded as
of June 30, 2009, it is anticipated that over the next 12 months, various
tax-related statutes of limitation will expire which will cause a
$2.6 million reduction in the unrecognized tax benefits, consisting of
$1.7 million in taxes and $0.9 million in accrued interest and
penalties. These unrecognized tax benefits relate 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, the
Company was notified by the Internal Revenue Service of the intent to audit the
Company’s 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
10.
|
Employee
Benefit Plans
|
Net
post-retirement benefit costs consisted of the following
components:
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30
|
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
|
$ 202
|
|
$ 234
|
|
$ 382
|
|
$ 469
|
Interest
cost on APBO
|
|
|
400
|
|
423
|
|
771
|
|
848
|
Amortization
of prior service costs
|
|
2
|
|
(4)
|
|
6
|
|
(9)
|
Amortization
of prior service costs due to curtailment
|
|
(248)
|
|
-
|
|
(248)
|
|
-
|
Curtailment
gain
|
|
|
(280)
|
|
-
|
|
(280)
|
|
-
|
Amortization
of actuarial loss
|
|
-
|
|
1
|
|
1
|
|
3
|
|
|
|
|
$ 76
|
|
$ 654
|
|
$ 632
|
|
$ 1,311
|
The
Company provides certain former employees with limited health care benefits
under a post-retirement healthcare benefit plan. During 2009, the
Company provided notice to several former employees that the Company was
exercising its right to terminate their retiree benefits and thus their coverage
had been effectively terminated. Accordingly, the Company recorded a
curtailment adjustment of $0.5 million in the six months ended June 30,
2009.
11.
|
UK
Facility Closure and Germany
Restructuring
|
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 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. Consummation of the Consolidation transaction
requires the consent of the lenders pursuant to EDC’s credit
facility. We are currently in negotiations to obtain the consent of
the lenders in regards to the Consolidation transaction but have yet to reach an
agreement amicable to both parties.
Blackburn
closure costs currently are forecast at approximately $9-10 million, comprised
primarily of $7.2 million in severance costs for approximately 270 employees,
costs associated with exiting Blackburn’s capital leases and costs associated
with relocating equipment, parts and inventory from Blackburn to Hannover of
$2.5 million. During the second quarter of 2009, the employees at
EDC’s Blackburn facility were given their formal notices of termination, which
obligated the Company to pay approximately $7.2 million in severance to the
employees of Blackburn between July 2009 and June 2010. The amount
owed related to prior service; therefore the Company recorded an accrual and
related charge for these estimated severance obligations in the second quarter
of 2009. Closure costs will be financed out of existing cash in the
United Kingdom with additional financial and other support from the German
operations. 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.
During
2009, the Company implemented a plan to streamline its manufacturing operations
in Blackburn, UK in order to reflect industry change and to reduce its cost base
accordingly. As part of this plan, the Company offered a voluntary
exit program to employees in selected areas. As a result of these
actions, the Company has recorded severance charges of approximately $0.7
million into cost of revenues in the period ended June 30, 2009, all of which
remains accrued in the accompanying consolidated balance sheets.
During
2008, the Company implemented a plan to reduce staffing at its combined
manufacturing and distribution operations in Hannover, Germany. In
total, the plan resulted in the reduction of the Company’s Germany employment by
approximately 5%, predominately in its distribution operations. As a
result of these actions, the Company recorded additional severance charges of
approximately $0.2 million into cost of revenues during the six
months ended June 30, 2009. The Company made payments of $0.9 million
related to the plan and as of June 30, 2009, $0.5 million is recorded in accrued
expenses and other liabilities in the accompanying condensed consolidated
balance sheets.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
12.
|
Noncontrolling
Interests
|
On
January 1, 2009 the Company adopted 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. As required by SFAS No. 160, the
Company reclassified $5.1 million and $5.2 million of minority interest in
subsidiary company to stockholders’ equity on the condensed consolidated balance
sheet as of June 30, 2009 and December 31, 2008, respectively.
13.
|
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 received approximately $1.5 million for equipment sold to Sony
DADC pursuant to the Agreement and $0.6 million for inventory acquired during
the first six months of 2009. 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 $7.0 million and reclassified as held for
sale in the accompanying consolidated balance sheet.
At June
30, 2009 and December 31, 2008, the Company recorded a gain on the Sony Sale as
follows:
|
|
|
December
31, 2008
|
|
Adjustments
|
|
June
30, 2009
|
Assets
Sold and Liabilities Assumed
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ (381)
|
|
$ -
|
|
$ (381)
|
|
Inventory
|
|
(820)
|
|
-
|
|
(820)
|
|
Other
current assets
|
|
(198)
|
|
-
|
|
(198)
|
|
Fixed
assets
|
|
(7,532)
|
|
-
|
|
(7,532)
|
|
Intangible
assets
|
|
(6,368)
|
|
-
|
|
(6,368)
|
|
Accounts
payable
|
|
163
|
|
-
|
|
163
|
|
Accrued
liabilities
|
|
878
|
|
-
|
|
878
|
|
|
|
$ (14,258)
|
|
$ -
|
|
$ (14,258)
|
Other
expenses
|
|
(10,488)
|
|
-
|
|
(10,488)
|
Transaction
costs
|
|
(600)
|
|
-
|
|
(600)
|
|
|
|
$ 25,346
|
|
$ -
|
|
$ 25,346
|
Proceeds
|
|
28,058
|
|
180
|
|
28,238
|
Gain
on sale
|
|
$ 2,712
|
|
$ 180
|
|
$ 2,892
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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 the remaining
EDC U.S. operations assets at their net realizable value in the consolidated
balance sheet as of June 30, 2009 and December 31, 2008.
Severance
charges are being recorded over the employees’ service period. The Company
recorded severance charges amounting to $0.9 million for the year ended December
31, 2008. During the six months ended June 30, 2009, the Company
recorded $0.8 million in severance related costs related to its exit
plan. The Company paid out approximately $1.7 million in severance in
the six months ended June 30, 2009.
Results
for the EDC U.S. Operations consist of the following:
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
sales
|
$ -
|
|
$ 23,692
|
|
$ -
|
|
$ 48,155
|
Loss
from discontinued operations:
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
(1,032)
|
|
(4,314)
|
|
(2,759)
|
|
(8,725)
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Loss
from operations
|
$ (1,032)
|
|
$ (4,314)
|
|
$ (2,759)
|
|
$ (8,725)
|
Gain
on disposal before income taxes
|
52
|
|
-
|
|
180
|
|
-
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
52
|
|
-
|
|
180
|
|
-
|
Loss
from discontinued operations
|
$ (980)
|
|
$ (4,314)
|
|
$ (2,579)
|
|
$ (8,725)
|
The loss
from discontinued operations consists of operating losses for the Company’s EDC
U.S. operations. Certain estimates and assumptions were made in
determining the net realizable value related to the discontinued assets and
operating results noted above. There is no provision or benefit for
income taxes recorded due to the uncertainty about the Company’s ability to
utilize NOLs.
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:
|
June
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Current
Assets
|
|
|
|
Accounts
receivable
|
$ 77
|
|
$ 5,093
|
Inventory
|
-
|
|
515
|
Prepaid
and other current assets
|
896
|
|
3,082
|
|
$ 973
|
|
$ 8,690
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable
|
$ 143
|
|
$ 3,268
|
Accrued
employee wages and benefits
|
-
|
|
1,651
|
Accrued
income and other taxes
|
117
|
|
2
|
Accrued
other
|
2,030
|
|
4,759
|
|
$ 2,290
|
|
$ 9,680
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
Other
|
-
|
|
41
|
|
$ -
|
|
$ 41
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
(b)
Messaging and
Paging
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, we reported all of the
remaining Messaging and Paging segment assets at their estimated net realizable
value in the condensed consolidated balance sheet as of June 30, 2009 and
December 31, 2008.
Results
for discontinued operations consist of the following:
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
sales
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations:
|
|
|
|
|
|
|
|
Income
(loss) from operations before income taxes
|
(37)
|
|
(34)
|
|
(34)
|
|
(66)
|
Benefit
for income taxes
|
221
|
|
111
|
|
(141)
|
|
(1,088)
|
Income
from operations
|
$ (258)
|
|
$ (145)
|
|
$ 107
|
|
$ 1,022
|
|
|
|
|
|
|
|
|
Gain
on disposal before income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
-
|
|
-
|
|
-
|
|
-
|
Income
from discontinued operations
|
$ (258)
|
|
$ (145)
|
|
$ 107
|
|
$ 1,022
|
The
income from discontinued operations consists of operating losses incurred in the
Messaging and Paging segments. The six month periods ended June 30, 2009 and
2008 include credits of $0.1 million and $1.1 million, respectively, for
expiration of tax-related statutes of limitation, offset by additional interest
and the impact of foreign currency movements on tax contingencies.
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 $0.6 million and $0.5 million for accrued taxes
and other liabilities at June 30, 2009 and December 31, 2008,
respectively.
The
Company has only one reportable segment, EDC, which consists of its optical disc
manufacturing and distribution operations. EDC has two product
categories: product representing the manufacturing of optical discs and services
representing the distribution of optical discs. The interim
results are not necessarily indicative of estimated results for a full fiscal
year. The first half of each calendar year is typically the lowest
point in the revenue cycle for the Company's business.
Universal
accounted for revenues of $30.3 million and $62.3 million, or 80.9% and 80.4% of
total revenues for the three and six months ended June 30, 2009, respectively,
and $39.3 million and $82.3 million, or 70.6% and 72.0% of total revenues for
the three and six months ended June 30, 2008, respectively, and was the only
customer to exceed 10% of total revenues.
Geographic
Area
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30
|
|
Six
Months Ended June 30,
|
|
Revenues
|
|
Revenues
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
United
Kingdom
|
7,337
|
|
14,191
|
|
16,166
|
|
28,773
|
Germany
|
28,519
|
|
39,059
|
|
59,499
|
|
81,735
|
Other
|
1,560
|
|
2,474
|
|
3,002
|
|
3,883
|
Consolidated
|
$ 37,416
|
|
$ 55,724
|
|
$ 78,667
|
|
$ 114,391
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
Revenues
are reported in the above geographic areas based on product shipment destination
and service origination.
Comprehensive
loss is comprised of net loss, gains (losses) resulting from currency
translations of foreign entities, unrealized investment gains (losses) for the
Company’s deferred compensation trust and adjustments to the post retirement and
pension benefit obligation. Comprehensive loss consists of
the following:
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
Loss
|
$ (8,673)
|
|
$ (5,576)
|
|
$ (9,229)
|
|
$ (11,946)
|
Foreign
currency translation
|
2,566
|
|
3
|
|
1,185
|
|
3,574
|
Post-retirement
and pension benefit obligation
|
(146)
|
|
(3)
|
|
(146)
|
|
(6)
|
Net
unrealized investment gains (losses)
|
111
|
|
(28)
|
|
39
|
|
(26)
|
Comprehensive
Loss
|
$ (6,142)
|
|
$ (5,604)
|
|
$ (8,151)
|
|
$ (8,404)
|
16.
|
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 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 loss per share
(1):
|
|
Three
Months Ended June 30
|
|
Six
Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (7,363)
|
|
$ (1,111)
|
|
$ (6,719)
|
|
$ (4,177)
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(1,273)
|
|
(4,373)
|
|
(2,600)
|
|
(7,527)
|
Gain
on sale of EDC U.S. Operations
|
|
52
|
|
-
|
|
180
|
|
-
|
Net
loss attributable to common shareholders
|
|
$ (8,584)
|
|
$ (5,484)
|
|
$ (9,139)
|
|
$ (11,704)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator
for basic loss per share - weighted average shares
|
|
6,710
|
|
6,862
|
|
6,706
|
|
6,935
|
Effect
of dilutive securities: restricted stock awards
|
|
-
|
|
-
|
|
-
|
|
-
|
Denominator
for diluted loss per share-adjusted weighted average shares and assumed
conversions
|
6,710
|
|
6,862
|
|
6,706
|
|
6,935
|
|
|
|
|
|
|
|
|
|
Loss
per weighted average common share (2):
|
|
|
|
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.10)
|
|
$ (0.16)
|
|
$ (1.00)
|
|
$ (0.60)
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(0.19)
|
|
(0.64)
|
|
(0.39)
|
|
(1.09)
|
Gain
on sale of EDC U.S. Operations
|
|
0.01
|
|
-
|
|
0.03
|
|
-
|
Loss
attributable to common shareholders
|
|
$ (1.28)
|
|
$ (0.80)
|
|
$ (1.36)
|
|
$ (1.69)
|
|
|
|
|
|
|
|
|
|
Loss
per weighted average common share (2):
|
|
|
|
|
|
|
|
|
Loss
from continuing operations attributable to common
shareholders
|
|
$ (1.10)
|
|
$ (0.16)
|
|
$ (1.00)
|
|
$ (0.60)
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(0.19)
|
|
(0.64)
|
|
(0.39)
|
|
(1.09)
|
Gain
on sale of EDC U.S. Operations
|
|
0.01
|
|
-
|
|
0.03
|
|
-
|
Loss
attributable to common shareholders
|
|
$ (1.28)
|
|
$ (0.80)
|
|
$ (1.36)
|
|
$ (1.69)
|
|
|
|
|
|
|
|
|
|
Dilutive
securities not included above due to anti-dilutive effect
|
|
4
|
|
-
|
|
2
|
|
-
|
Anti-dilutive
securities not included above: stock options
|
|
136
|
|
141
|
|
136
|
|
141
|
|
|
|
|
|
|
|
|
|
(1) All
shares and per share amounts displayed in the above table reflect the
effect of the reorganization
|
|
|
|
|
as
disclosed in the Company's Annual Report on 10-K for the year ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Income
(loss) per weighted average common share amounts are rounded to the
nearest $.01; therefore,
|
|
|
|
|
such
rounding may impact individual amounts presented.
|
|
|
|
|
|
|
|
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
There
were no 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
three and six months ended June 30, 2009 and June 30, 2008, as their effect
would be anti-dilutive.
17.
|
Commitments
and Contingencies
|
Litigation
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. Each of EDC and UIM have completed the appointment of
their designated arbitrator and those two arbitrators are in the process of
mutually agreeing to the third arbitrator who will also be the presiding
arbitrator for the matter. 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
uncured 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, 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, 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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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, 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 results of operations and cash flows. 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.
Anticipatory Breach of Manufacturing
and Related Service Agreement Claim. On
July 23, 2009, UIM provided notice to EDC of its claim that EDC was in
anticipatory breach of the Manufacturing and Related Services Agreement between
EDC and UIM dated May 31st, 2005,
as amended (the “Manufacturing Agreement”) by taking steps to close EDC’s
Blackburn facility. UIM claims that the maintenance by EDC of a
facility in the United Kingdom to service UIM’s UK manufacturing requirements is
a “fundamental implied term of the Manufacturing Agreement.” As a
result, UIM claims that EDC has forfeited its right to continue to service 100%
of UIM’s UK manufacturing requirements, and UIM is entitled to sub-contract the
entirety of such volume to a UK - located third party of its
choice. UIM’s UK manufacturing requirements accounted for
approximately 18% of EDC’s manufacturing volume in the first six months of
2009. UIM has not yet elected to enforce that remedy but has reserved
the right to do so by written notice. On July 28, 2009, EDC sent
written notice to UIM forcefully refuting its claims and also asserting that UIM
is attempting to imply a term into the Manufacturing Agreement that has been
expressly dealt with in amendments to the agreement providing that EDC “will use
its commercially reasonable endeavors to manufacture the majority of [UIM’s]
Manufacturing Requirements for the UK at the Blackburn Facility.” As
previously disclosed in March 2009, management of EDC determined and EDC’s Board
of Directors confirmed that it was no longer commercially reasonable to continue
operating the Blackburn manufacturing facility. EDC also asserted in
its July 28, 2009 response that UIM’s claims in its July 23, 2009 letter
constitute a gross violation of the covenant of good faith and fair dealing
implied into the Manufacturing Agreement. EDC further provided notice
to UIM that if UIM did not withdraw its claims in the July 23, 2009 notice
within seven days of EDC’s July 28, 2009 response, it would refer this matter to
arbitration seeking a declaration that there is no breach by EDC of the
Manufacturing Agreement as a result of the Blackburn – Hannover Consolidation
and seeking damages for the losses incurred by EDC as a direct result of the
July 23, 2009 letter and the continued breaches by UIM of the implied covenant
of good faith and fair dealing. EDC does not believe UIM’s claim has
merit and intends to vigorously defend and prosecute this matter if UIM does not
withdraw its claims. However, if UIM were successful in its claim and
enforced its alleged remedy, EDC could suffer loss of volumes that, based on the
high fixed cost nature of EDC’s manufacturing operations, would have a material
adverse effect on its profitability.
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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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. On July 13, 2009, the plaintiffs appealed under state law
solely from that aspect of the state court decision that denied their
application for attorney's fees. Pursuant to the settlement, EDCI’s
insurer has already agreed to pay plaintiffs’ attorney’s fees in the amount
requested in the July 13, 2009 appeal, subject to approval by the Court, and
EDCI has agreed not to oppose any such application for attorney’s
fees. Accordingly, neither EDCI or EDCI’s insurer will be opposing
the appeal.
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
plaintiffs’ motion for a summary judgment that EDC breached the
contract. Pending before the Court is a motion for summary judgment
that there is no patent infringement. The Court has stayed the motion
for summary judgment pending a hearing on claim construction tentatively
scheduled for early November, 2009. 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 August 2009 to appear before the Regional Court of
Hannover. EDC is currently in negotiations with Philips to agree
to a settlement of the claim. At this early stage in the matter, EDC
is not able to assess the likelihood of a favorable outcome.
Michael W. Klinger
Litigation. On April 17, 2009,
EDCIH, EDC and Entertainment Distribution Company (USA) LLC (a wholly-owned
subsidiary of EDC) (“EDC USA”) filed suit against Michael W. Klinger, the former
Executive Vice President and Chief Financial Officer (“CFO”) of EDCIH, in the
United States District Court for the Southern District of New York (the “Klinger
New York Complaint”). The complaint alleges that after Mr.
Klinger repudiated an amicable separation agreement and asserted his right to
terminate his employment with Good Reason (as defined in Mr. Klinger’s October
3, 2008 employment agreement) and that EDCIH’s Board terminated Mr. Klinger’s
employment with Cause under his employment agreement as a result of Mr.
Klinger’s approval of certain unauthorized severance payments to employees and
other specific deficiencies in his work performance. The Klinger New
York Complaint seeks: a) a declaratory judgment that the circumstances of the
termination of Mr. Klinger’s employment constitute Cause under his employment
agreement, or, in the alternative, that Mr. Klinger resigned without Good
Reason, as a result of which EDCIH may terminate Mr. Klinger’s employment b with
Cause; b) recovery for the loss suffered by EDCIH et. al. in connection with Mr.
Klinger’s approval of the unauthorized severance payments; c) attorney’s fees
and related costs and d) such other relief as the Court deems
appropriate. On May 11, 2009, Mr. Klinger filed a Motion to Dismiss
for lack of jurisdiction and/or improper venue or, in the alternative to
transfer the case to the United States District Court for the Southern District
of Indiana, the venue where Mr. Klinger instituted the Klinger Indiana
Counter-Suit (described below). EDCI et. al. have opposed Mr.
Klinger’s motion, which is still pending. EDCIH et. al. intend to
vigorously prosecute this action, but at this early stage in the matter, EDCIH
is not able to assess the likelihood of a favorable outcome.
On April
23, 2009, Mr. Klinger filed a Charge of Discrimination against EDCIH, EDCI, EDC
and EDC USA with the Equal Employment Opportunity Commission (“EEOC”) alleging
that he was the victim of age discrimination and retaliation (the “EEOC
Complaint”). On May 6, 2009, EDCIH et. al. submitted a statement of
position in rebuttal of the EEOC Complaint and the parties are currently
awaiting a decision by the EEOC. EDCIH et. al do not believe the EEOC
Complaint has merit and intend to vigorously defend this action, but at this
early stage in the matter, EDCIH is not able to assess the likelihood of a
favorable outcome.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
On May 8,
2009, Mr. Klinger also filed a complaint against EDCIH, EDCI, EDC, EDC USA and
Mr. Robert L. Chapman, Jr., then CEO of EDCIH and EDC, in the United States
District Court for the Southern District of Indiana (the “Klinger Indiana
Counter-Suit”). The Klinger Indiana Counter-Suit seeks: i)
compensatory damages for breach of Mr. Klinger’s employment agreement; ii)
damages, including liquidated damages and attorney fees under certain Indiana
statutes resulting from any unpaid wages and compensation due and payable to
Klinger upon his termination; (iii) damages for defamation Klinger alleges
resulted from statements made in various public SEC filings of the Company and
(iv) related costs and fees. The Klinger Indiana Counter-Suit also
indicates Mr. Klinger’s intention to add claims under the Age Discrimination in
Employment Act following receipt of a Notice of Right to Sue in connection with
the EEOC Complaint. All defendants in the Klinger Indiana
Counter-Suit have moved to stay the case until the motion currently pending with
respect to the Klinger New York Complaint is decided. Klinger has
opposed that motion and the issue is awaiting decision by the Indiana
court. EDCIH et. al do not believe the Klinger Indiana Counter-Suit
has merit and intend to vigorously defend this action, but at this early stage
in the matter, EDCIH is not able to assess the likelihood of a favorable
outcome.
18.
|
New
Accounting Pronouncements
|
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No.
162. SFAS no. 168 provides for the FASB Accounting Standards
CodificationTM (the
“Codification”) to become the single official source of authoritative,
nongovernmental U.S. generally accepted accounting principles
(GAAP). The Codification did not change GAAP but reorganizes the
literature. SFAS no. 168 is effective for interim and annual periods
ending after September 15, 2009, the quarter ending September 30, 2009 for the
Company. We are currently evaluating the potential impact of the
adoption of SFAS No. 168 on our consolidated financial statements.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS
No. 165 sets forth: (1) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in financial statements,
(2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company has
evaluated the period beginning June 30, 2009 through July 31, 2009,
the date its financial statements were issued, and concluded there were no
events or transactions occurring during this period that required recognition or
disclosure in its financial statements.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
These
forward-looking statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that are difficult to predict. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors including those set forth in
Part I, Item 1A — Risk Factors of the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008, which factors are
specifically incorporated herein by this reference. All forward-looking
statements included in this quarterly report on Form 10-Q are based on
information available to us on the date hereof. We assume no obligation to
update any forward-looking statements and do not intend to do so.
Overview
EDCI
Holdings, Inc. (“EDCIH”) is a 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 optical disc manufacturing and distribution
segment of the entertainment industry. EDCIH’s principal executive offices are
located in New York City at 11 East 44th Street,
Suite 1201, New York, New York, 10017. In this Form 10-Q, 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.
EDC
provides 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.
EDC’s
core competencies are CD and DVD replication and logistic services, a market in
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 U.S. market. 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. 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. Consummation
of the Consolidation transaction requires the consent of the lenders pursuant to
EDC’s credit facility. We are currently in negotiations to obtain the
consent of the lenders to proceed with the Consolidation transaction but have
yet to reach an agreement. We have elected to commence consolidation
activities as we continue negotiations with the bank.
Results
of Continuing Operations
Three
months ended June 30, 2009 compared to the three months ended June 30,
2008
Revenues.
Revenues for the second quarter of 2009 were $37.4 million compared to $55.7
million for the second quarter of 2008. The following table
illustrates the components of changes in our revenue when comparing the second
quarter of 2008 to the second quarter of 2009 by revenue line.
(in
millions)
|
June
30, 2008
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 41.7
|
|
$ (7.9)
|
|
$ (1.5)
|
|
$ (5.0)
|
|
$ 27.3
|
Service
Revenues
|
14.0
|
|
(2.6)
|
|
0.2
|
|
(1.5)
|
|
10.1
|
Total
Revenue
|
$ 55.7
|
|
$ (10.5)
|
|
$ (1.3)
|
|
$ (6.5)
|
|
$ 37.4
|
Product Revenues. Product
revenues were $27.3 million in the second quarter of 2009 compared to $41.7
million in the second quarter of 2008. The decrease is primarily due
to volume declines and unfavorable exchange rate fluctuations from the devaluing
of the Euro and Pound. Our central European operations were negatively impacted
by lower revenue from our primary customer including lower pass-through cost
revenues and unfavorable exchange rate fluctuations. Revenues of our
UK operations in the second quarter of 2009 decreased compared to the second
quarter of 2008 primarily due to lower volumes, which included the impact of
our loss of certain customer accounts due to uneconomical pricing
and excessive credit risk, and unfavorable exchange rate fluctuations offset by
slightly improved pricing.
Service Revenues. Service
revenues were $10.1 million in the second quarter of 2009 compared to $14.0
million in the second quarter of 2008. Our central European
operations experienced a decrease in volumes in the second quarter of 2009
compared to the same period of 2008 primarily due to the loss of a significant
customer, revenues for which were included in the second quarter 2008, and
unfavorable exchange rate fluctuations.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were 15.2% of
revenues during the second quarter of 2009 compared to 17.1% of revenues in the
second quarter of 2008. The following table shows the elements
impacting our gross profit when comparing the second quarter of 2008 to the
second quarter of 2009 by revenue line.
(in
millions)
|
June
30, 2008
|
|
Volume
|
|
Cost/Mix
|
|
Exchange
Rate
|
|
June
30, 2009
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 5.3
|
12.7%
|
|
$
(2.5)
|
-0.8%
|
|
$ 1.1
|
0.4%
|
|
$
(0.6)
|
-0.2%
|
|
$ 3.3
|
12.1%
|
Service
Revenues
|
4.2
|
30.0%
|
|
(1.6)
|
-5.5%
|
|
0.1
|
0.3%
|
|
(0.3)
|
-1.0%
|
|
2.4
|
23.8%
|
Total
Gross Profit
|
$ 9.5
|
17.1%
|
|
$
(4.1)
|
-2.1%
|
|
$ 1.2
|
0.5%
|
|
$
(0.9)
|
-0.4%
|
|
$ 5.7
|
15.2%
|
Product Revenues. Gross
profit on product revenues was $3.3 million, or 12.1% of product revenues, in
the second quarter of 2009 compared to $5.3 million, or 12.7% of product
revenues, in the second quarter of 2008. Gross profit of our UK
operations decreased as a result of volume declines and unfavorable exchange
rate fluctuations offset by improved pricing. Gross profit in our
central European operations decreased in the second quarter of 2009 compared to
the second quarter of 2008 primarily due to lower volumes, deteriorating special
projects pricing and unfavorable exchange rate fluctuations.
Service Revenues. Gross
profit on service revenues was $2.4 million, or 23.8% of service revenues, in
the second quarter of 2009 compared to $4.2 million, or 30.0% of service
revenues, in the second quarter of 2008. Our central European operations gross
profit on service revenues declined in the second quarter of 2009 compared to
the second quarter of 2008 primarily due to volume declines, which included the
loss of a significant customer for which high margins were received and
unfavorable exchange rate impact.
Selling, General
and Administrative Expense (SG&A). SG&A expense was $6.6 million
in the second quarter of 2009 compared to $9.3 million in the second quarter of
2008. The decrease is primarily due to exchange rate fluctuations, a
decrease in compensation expense, and a credit from the reduction of our
post-retirement benefit obligation.
Severance Costs
for UK Facility Closure. We recorded
expense of $7.2 million in the second quarter of 2009 related to severance
charges incurred in connection with the planned consolidation of our Blackburn,
UK and Hannover, Germany operations.
Amortization of
Intangible Assets. There was no
amortization expense in the second quarter of 2009 compared to $1.7 million in
the second quarter of 2008. During the fourth quarter of 2008, the
Company conducted an impairment analysis of its intangible assets, which
resulted in a complete write-off of the Company’s central European intangible
assets.
Other
Income (Expenses)
Interest
Income. Interest income in the second quarter of 2009 was less
than $0.1 million compared to $0.9 million in the second quarter of
2008. Our 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 significantly lower
interest rates based on our very conservative investment policy during the
second quarter of 2009.
Interest
Expense. Interest expense in the second quarter of 2009 was
$0.2 million compared to $0.6 million in the second quarter of
2008. Our interest expense includes interest on our term debt and
revolving credit facility, amortization of debt issuance costs, 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. The
decrease was primarily due to a combination of lower outstanding balances and
lower interest rates on our debt and reduced amortization of interest on our
rebate obligations with Universal during the second quarter of
2009.
Gain (Loss) on Currency Swap, net.
There was no gain on currency swap in the second quarter of 2009 compared
to a gain of less than $0.1 million in the second quarter of 2008. In
January 2009, the Euro weakened against the U.S. dollar and we were able to
settle the cross currency swap for $2.1 million.
Gain (Loss) on Currency Transaction,
net. We recorded a gain of $0.5 million in the second quarter of 2009
compared to a loss of less than $0.1 million in the second quarter of 2008 on
intercompany transactions with our international operations denominated in their
local currency.
Income
Taxes. We
recorded an income tax benefit of $0.2 million in the second quarter of 2009
compared to a benefit of $0.1 million in the second quarter of 2008. Taxable
income from our central European operations was lower in the second quarter of
2009 than in the second quarter of 2008. No tax benefit has been
provided for losses in the UK or U.S. We currently maintain a
valuation allowance against our net UK deferred tax assets due to projected
future pretax losses. Additionally, we continue to maintain a full
valuation allowance on our net 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.
Six
months ended June 30, 2009 compared to the six months ended June 30,
2008
Revenues.
Revenues for the six months ended June 30, 2009 were $78.7 million compared to
$114.4 million for the six months ended June 30, 2008. The following
table illustrates the components of changes in our revenue when comparing the
six months ended June 30, 2008 to the six months ended June 30, 2009 by revenue
line.
|
|
June
30, 2008
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 84.8
|
|
$ (12.0)
|
|
$ (2.6)
|
|
$ (11.8)
|
|
$ 58.4
|
Service
Revenues
|
29.6
|
|
(6.0)
|
|
(0.2)
|
|
(3.1)
|
|
20.3
|
Total
Revenue
|
$ 114.4
|
|
$ (18.0)
|
|
$ (2.8)
|
|
$ (14.9)
|
|
$ 78.7
|
Product Revenues. Product
revenues were $58.4 million in the six months ended June 30, 2009 compared to
$84.8 million in the six months ended June 30, 2008. The decrease is
primarily due to volume declines and unfavorable exchange rate fluctuations from
the devaluing of the Euro and Pound. Our central European operations were
negatively impacted by unfavorable exchange rate fluctuations and lower revenue
from our primary customer including lower pass-through cost
revenues. Revenues of our UK operations in the six months ended June
30, 2009 decreased compared to the six months ended June 30, 2008 primarily due
to volume declines, which included the impact of our loss of certain
customer accounts due to uneconomical pricing and excessive credit
risk, and unfavorable exchange rate fluctuations slightly offset by improved
pricing.
Service Revenues. Service
revenues were $20.3 million in the six months ended June 30, 2009 compared to
$29.6 million in the six months ended June 30, 2008. Our central
European operations experienced a decrease in volumes in the six months ended
June 30, 2009 compared to the six months ended June 30, 2008 primarily due to
the loss of a significant customer, revenues for which were included in the six
months ended June 30, 2008, and unfavorable exchange rate
fluctuations.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were 14.4% of
revenues during the six months ended June 30, 2009 compared to 18.0% of revenues
in the six months ended June 30, 2008. The following table shows the
elements impacting our gross profit when comparing the six months ended June 30,
2008 to the six months ended June 30, 2009 by revenue line.
|
|
June
30, 2008
|
|
Volume
|
|
Cost/Mix
|
|
Exchange
Rate
|
|
June
30, 2009
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$
11.5
|
13.6%
|
|
$
(3.9)
|
-2.0%
|
|
$ -
|
0.0%
|
|
$ (1.2)
|
-0.6%
|
|
$ 6.4
|
11.0%
|
Service
Revenues
|
9.1
|
30.7%
|
|
(3.7)
|
-5.8%
|
|
0.2
|
0.3%
|
|
(0.7)
|
-1.1%
|
|
4.9
|
24.1%
|
Total
Gross Profit
|
$
20.6
|
18.0%
|
|
$
(7.6)
|
-3.0%
|
|
$ 0.2
|
0.1%
|
|
$ (1.9)
|
-0.7%
|
|
$
11.3
|
14.4%
|
Product Revenues. Gross
profit on product revenues was $6.4 million, or 11.0% of product revenues, in
the six months ended June 30, 2009 compared to $11.5 million, or 13.6% of
product revenues, in the six months ended June 30, 2008. Gross profit
of our UK operations decreased as a result of volume declines and unfavorable
exchange rate fluctuations, partially offset by cost savings
efforts. Gross profit in our central European operations decreased in
the six months ended June 30, 2009 compared to the six months ended June 30,
2008 primarily due to deteriorating special projects pricing, lower volumes and
unfavorable exchange rate fluctuations.
Service Revenues. Gross
profit on service revenues was $4.9 million, or 24.1% of service revenues, in
the six months ended June 30, 2009 compared to $9.1 million, or 30.7% of service
revenues, in the six months ended June 30, 2008. Our central European operations
gross profit on service revenues declined in the six months ended June 30, 2009
compared to the six months ended June 30, 2008 primarily due to volume declines,
which included the loss of a significant customer for which high margins were
received and unfavorable exchange rate impact.
Selling, General
and Administrative Expense (SG&A). SG&A expense was $13.7 million
in the six months ended June 30, 2009 compared to $18.8 million in the six
months ended June 30, 2008. The decrease is primarily due to exchange
rate fluctuations, lower professional fees, a decrease in compensation and a
credit from the reduction of our post-retirement benefit
obligation.
Severance Costs
for UK Facility Closure. We recorded
restructuring expense of $7.2 million in the six months ended June 30, 2009
related to severance charges incurred in connection with the planned
consolidation of our Blackburn, UK and Hannover, Germany
operations.
Amortization of
Intangible Assets. There was no
amortization expense in the six months ended June 30, 2009 compared to $3.2
million in the six months ended June 30, 2008. During the fourth
quarter of 2008, the Company conducted an impairment analysis of its intangible
assets, which resulted in a complete write-off of the Company’s central European
intangible assets.
Other
Income (Expenses)
Interest
Income. Interest income in the six months ended June 30, 2009
was $0.3 million compared to $2.0 million in the six months ended June 30, 2008. Our
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 significantly lower interest rates
based on our very conservative investment policy during the six months ended
June 30, 2009.
Interest
Expense. Interest expense in the six months ended June 30,
2009 was $0.4 million compared to $1.3 million in the six months ended June 30,
2008. Our interest expense includes interest on our term debt and
revolving credit facility, amortization of debt issuance costs, 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. The
decrease was primarily due to a combination of lower outstanding balances and
lower interest rates on our debt and reduced amortization of interest on our
rebate obligations with Universal during the six months ended June 30,
2009.
Gain (Loss) on Currency Swap, net.
We recorded a gain on our currency swap of $2.1 million in the six months
ended June 30, 2009
compared to a loss of $2.6 million in the six months ended June 30, 2008. In
January 2009, the Euro weakened against the U.S. dollar and we were able to
settle the cross currency swap for $2.1 million. The swap was recorded at its
fair value of $4.2 million at the time of the settlement and thus a gain of $2.1
million was recognized on the transaction.
Gain (Loss) on Currency Transaction,
net. We recorded a gain of $0.5 million in the six months ended June
30, 2009 compared to
a loss of $0.6 million in the six months ended June 30, 2008 on intercompany
transactions with our international operations denominated in their local
currency.
Income
Taxes. We
recorded an income tax benefit of $0.3 million in the six months ended June
30, 2009 compared to
expense of $0.4 million in the six months ended June 30, 2008. Taxable income from
our central European operations was lower in the six months ended June 30, 2009 than in the six
months ended June 30, 2008. No tax
benefit has been provided for losses in the UK or U.S. We currently
maintain a valuation allowance against our net UK deferred tax assets due to
projected future pretax losses. Additionally, we continue to maintain
a full valuation allowance on our net 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.
Financial
Condition and Liquidity
Overview
At June
30, 2009, we had cash and cash equivalents totaling $79.0 million of which $51.4
million was cash held by EDCI and $27.6 million was cash held at
EDC. At June 30, 2009, the principal sources of liquidity were our
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.
EDCI’s
investment policy permits investment in other highly-rated instruments,
including: obligations of the U.S. government or U.S. government sponsored
enterprises; Bankers’ 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-grade funds that are traded on a recognized stock exchange,
subject to authorization from CEO of EDCI. No amounts have been
invested in such securities since the amendment.
At June
30, 2009, EDCI had investments of $1.0 million in auction-rate securities. Due
to the uncertainty surrounding the liquidation of the investments, these
investments have been classified as long-term on our consolidated balance sheet
at June 30, 2009.
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 the pursuit of its strategic alternatives,
which may include an acquisition or some recapitalization of EDCI’s cash to its
shareholders. We believe that the liquidity position of each of 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 was to manage foreign
currency exposure arising from EDC’s intercompany loan to its German subsidiary,
and is therefore for purposes other than trading. 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 the six months ended June 30, 2009 was $0.8
million compared to cash used in operating activities of $4.8 million in the six
months ended June 30, 2008. The positive cash flows from operating
activities in the 2009 period were primarily due to working capital changes of
$0.7 million, changes in other assets of $1.0 million and changes in restricted
cash of $0.6 million offset by $1.6 million in losses (adjusted for non-cash
items). The working capital changes in the six months ended June 30,
2009 were primarily driven by decreases in accounts receivable, inventory and
prepaid and other current assets of $12.9 million, $1.2 million and $1.8
million, respectively, offset by decreases in accounts payable of $8.3 million
and accrued liabilities and income taxes payable of $6.9
million. Loss (adjusted for non-cash items) declined to $1.6 million
in 2009 from income (adjusted for non-cash items) of $3.0 million for the six
months ended June 30, 2008 primarily due to lower sales volume in the six months
ended June 30, 2009.
Working
capital changes in the six months ended June 30, 2009 included, without
limitation:
●
|
A
decrease of $12.9 million in accounts receivable in the six months ended
June 30, 2009 compared to a decrease of $7.6 million in the six months
ended June 30, 2008.
The overall decrease in AR reflects the collection of significant accounts
receivable balances related to our now discontinued U.S. operations, which
were outstanding at year end and the decrease in sales volumes in the six
months ended June 30, 2009
compared to the six months ended June 30, 2008.
|
●
|
A
decrease of $8.3 million in accounts payable in the six months ended June
30, 2009
compared to a decrease of $9.3 million in the six months ended June
30, 2008.
The six months ended June 30, 2009
reflects the payment of accounts payable balances related to our now
discontinued U.S. operations, which were outstanding at year end and lower
purchasing levels in our continuing operations as volumes have declined as
well as the timing of when payments were made compared to the six months
ended June 30, 2008.
|
●
|
A
decrease of $6.9 million in accrued liabilities and income taxes payable
in the six months ended June 30, 2009 compared to a decrease of $8.6
million in the six months ended June 30, 2008. The decrease in
the 2009 period reflects the settlement of approximately $4.3 million in
liabilities related to our now discontinued U.S. operations and a decrease
in VAT accruals in the UK.
|
●
|
A
decrease of $1.8 million in prepaid expenses and other current assets in
the six months ended June 30, 2009
compared to an increase of $0.6 million in the six months ended June
30, 2008.
The decrease in the six months ended June 30, 2009
was driven primarily by the collection of a tax refund of approximately
$0.8 million in the UK, which was recorded as a receivable at the end of
2008 and a decrease of approximately $2.3 million for billings related to
pass through costs in Germany offset by approximately $1.5 million in
prepayments for income taxes in Germany. The six months ended June
30, 2008
included $4.8 million in prepayments for income taxes in Germany and the
UK.
|
●
|
A
decrease of $1.2 million in inventories in the six months ended June
30, 2009
compared to a decrease of $2.0 million in the six months ended June
30, 2008.
The decrease in both periods reflects the usage of seasonally high raw
material inventories and lower purchases during the period at all
locations.
|
Investing Activities.
Investing activities in the six months ended June 30, 2009 included the
release of $4.8 million of funds that were escrowed and used to pay costs
directly related to the discontinued EDC U.S. operations and collection of
approximately $2.1 million in proceeds related to the sale of certain EDC U.S.
operations assets to Sony DADC, Inc. Also during the six months ended
June 30, 2009, we had capital expenditures of $0.5 million. Additionally,
on January 23, 2009, we paid $2.1 million to settle our cross currency
swap.
Financing Activities. During
the six months ended June 30, 2009, we made payments of $1.1 million under our
long-term debt and capital lease obligations and $1.0 million under our employee
loan agreements. Also, we paid $0.1 million during the six months
ended June 30, 2009 to repurchase shares of our common stock.
EDC has a
Senior Secured Credit Facility with Wachovia Bank, National Association, as
agent, for an aggregate principal amount of $9.5 million, consisting of a term
facility of $7.0 million, and a revolving credit facility of up to €2.0 million
(subject to a maximum $2.5 million based on prevailing interest rates). There
were no outstanding borrowings under the revolving credit facility at June 30,
2009. Substantially all of EDC’s assets are pledged as collateral to
secure obligations under the Senior Secured Credit Facility.
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 us. The weighted average
interest rate on outstanding debt was 3.46% at June 30, 2009. In
addition to interest, EDC pays a commitment fee of 0.5% per annum on the average
daily unused amount. Scheduled payments under the term loan are due
as follows: $1.6
million due on December 31 2009, $1.9 million due on June 30, 2010, and $3.5
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’
leverage, minimum interest coverage and maximum senior secured leverage as
defined therein. As previously noted, the Company’s plan to
consolidate its Blackburn and Hannover facilities operations requires lender
consent. As of June 30, 2009 we have not obtained such consent but have taken
certain steps to proceed with the consolidated plan as we continue to negotiate
with the lenders. As such, we have classified the entire $7.0 million
outstanding under the term loan as current on the condensed consolidated balance
sheet as of June 30, 2009.
Capital
Expenditures
Capital
expenditures amounted to approximately $0.5 million in the six months ended June
30, 2009 and are anticipated to be approximately $2.9 million for the remaining
six months of 2009. Anticipated expenditures in 2009 primarily relate
to expansion costs related to the Blackburn – Hannover consolidation, normal
equipment and facility maintenance, replacement and upgrades and efficiency
improvements.
Outlook
EDC
The
difficult operating environment and economic trends that EDC saw in 2008
continued in the first half of 2009. With the sale and wind down of
EDC’s U.S. operations, the sole EDC focus is on maximizing its historically
profitable international operations. Industry estimates for decline
rates of CD and DVD volumes in Europe 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 substantially all of the 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 an analysis that
was based in part on a particular customer communicating 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 continuing to operate in Blackburn, management determined and
EDC’s Board of Directors confirmed that it was no longer 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
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.
Blackburn
closure costs currently are forecast at approximately $9-10 million, comprised
primarily of severance costs for approximately 270 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 EDC German
operations. After completion of the Consolidation, the Company will
continue to manufacture the Universal volume in Hannover that was
previously manufactured in Blackburn withouth any significant increase
in Hannover's fixed costs. As a result, 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 plans
to substantially cease Blackburn 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 is planned to occur prior to
the next break option under the Blackburn lease on June 18,
2010. Consummation of the consolidation transaction requires the
consent of the lenders pursuant to EDC’s credit facility. We are
currently in negotiations to obtain the consent of the lenders to proceed with
the Consolidation transaction but have yet to reach an agreement amicable to
both parties. We have elected to commence consolidation activities as
we continue negotiations with the bank.
Critical
Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our condensed 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.
In
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, we discussed the critical accounting policies that affect the
more significant judgments and estimates used in the preparation of the
Company’s consolidated financial statements. We believe that there have been no
significant changes to such critical accounting policies and estimates during
the six months ended June 30, 2009.
ITEM
3. 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 have not
entered into financial investments for speculation or trading purposes. Our
exposure to market risk was discussed in the Quantitative and Qualitative
Disclosures About Market Risk section of our Annual Report on Form 10-K
for the year ended December 31, 2008. There have been no material
changes to such exposure during the six months ended June 30, 2009.
ITEM
4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Accounting Officer, of the effectiveness of
the design and operation of our “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, our management, including our Chief Executive
Officer, concluded that our disclosure controls and procedures were effective as
of June 30, 2009.
During
the quarter ended June 30, 2009, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
See Note
17 to the unaudited condensed consolidated financial statements in Part I,
Item 1, which discusses material pending legal proceedings to which the
Company or its subsidiaries is party and is incorporated herein by
reference.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
The
following table reports information regarding repurchases by the Company of its
common stock in each month of the quarter ended June 30, 2009:
Period
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
Maximum
number of shares that may yet be purchased under the plans or
programs
|
April
1 through April 30
|
-
|
$ -
|
-
|
825,256
|
May
1 through May 31
|
-
|
$ -
|
-
|
825,256
|
June
1 through June 30
|
16,979
|
$ 5.01
|
16,979
|
808,277
|
Total
|
16,979
|
$ 5.01
|
16,979
|
808,277
|
ITEM
4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At our
Annual Meeting of Stockholders held on May 19, 2009, the following matters were
submitted to a vote of our stockholders of the Company and the results were as
follows:
|
|
|
|
|
(i)
|
|
The
election of the two directors each to serve a three-year term expiring
2012:
|
|
|
|
|
|
Nominees
|
|
Shares
Voted in Favor
|
|
|
Shares
Withheld
|
|
|
Clarke
H. Bailey
|
|
|
5,380,522
|
|
|
|
630,396
|
|
|
Peter
W. Gilson
|
|
|
5,064,805
|
|
|
|
946,113
|
|
|
|
(ii)
|
|
The
proposal to approve the appointment of Ernst & Young LLP as
independent auditors of the Company was approved by a vote of 5,603,531 in
favor, 396,073 against and 11,313
abstaining.
|
The
exhibits required to be filed as a part of this quarterly report on Form 10-Q
are listed in the accompanying Exhibit Index which is hereby incorporated
by reference.
SIGNATURES
Pursuant
to the requirements 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.
EDCI HOLDINGS,
INC.
Date:
July 31, 2009
By /s/ Clarke H. Bailey
(Principal Financial
Officer)
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
EXHIBIT
INDEX
Exhibit
Number Description
3.1
|
|
Composite
Certificate of Incorporation of the Registrant 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 the Registrant 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.
|
|
|
|
|
|
|
15.1
|
|
Letter
regarding unaudited financial information.
|
|
|
|
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 Accounting Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
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.
|
|
|
|
32.2
|
|
Certification
of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|