edcih3q200910q.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 September 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 October 30, 2009 was 6,686,137 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 Registered Public Accounting Firm
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3
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Condensed
Consolidated Balance Sheets as of September 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 September
30, 2009 and 2008 (Unaudited)
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5
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Condensed
Consolidated Statements of Operations for the nine months ended September
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 nine months ended September 30, 2009 (Unaudited)
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7
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Condensed
Consolidated Statements of Cash Flows for the nine months ended September
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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21
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Item 3.
Quantitative and Qualitative Disclosures about Market Risk
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28
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Item 4.
Controls and Procedures
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28
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Part
II – Other Information:
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Item 1.
Legal Proceedings
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28
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Item
1A. Risk Factors
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28
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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32
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Item 6.
Exhibits
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34
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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 906, CERTIFICATION OF THE CEO
EX-32.1
SECTION 302, CERTIFICATION OF THE CAO
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 September 30, 2009, and the related condensed consolidated
statements of operations for the three and nine month periods ended September
30, 2009 and 2008, the condensed consolidated statement of stockholders’ equity
and comprehensive loss for the nine month period ended September 30, 2009, and
the condensed consolidated statements of cash flows for the nine month periods
ending September 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
October
30, 2009
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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September
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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$ 78,357
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$ 75,112
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Restricted
cash
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2,452
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7,258
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Accounts
receivable, net of allowances for doubtful accounts of
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$2,913
and $3,008 for September 30, 2009 and December 31, 2008,
respectively
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14,541
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19,129
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Current
portion of long-term receivable
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1,256
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599
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Inventories,
net
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6,424
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4,845
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Prepaid
expenses and other current assets
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13,065
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12,513
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Deferred
income taxes
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108
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105
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Assets
held for sale
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7,000
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7,154
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Current
assets, discontinued operations
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203
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8,691
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Total
Current Assets
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123,406
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135,406
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Restricted
cash
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25,396
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25,439
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Property,
plant and equipment, net
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17,763
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21,186
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Long-term
receivable
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2,276
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3,066
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Long-term
investments
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870
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1,020
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Deferred
income taxes
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1,507
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1,694
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Other
assets
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3,954
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4,739
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TOTAL
ASSETS
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$ 175,172
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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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$ 13,174
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$ 15,930
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Accrued
expenses and other liabilities
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32,139
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24,435
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Loans
from employees
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1,021
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1,142
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Current
portion of long-term debt
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7,467
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2,281
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Current
liabilities, discontinued operations
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2,049
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10,226
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Total
Current Liabilities
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55,850
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54,014
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Other
non-current liabilities
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3,936
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8,353
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Loans
from employees
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1,526
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2,490
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Long-term
debt
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1,928
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7,996
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Pension
and other defined benefit obligations
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35,677
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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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98,917
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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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September
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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371,338
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371,091
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Accumulated
deficit
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(305,027)
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(294,988)
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Accumulated
other comprehensive income
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6,350
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4,583
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Treasury
stock at cost:
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September
30, 2009 -- 333,299 shares; December 31, 2008 -- 324,794
shares
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(1,657)
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(1,427)
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Total
EDCI Holdings, Inc. Stockholders' Equity
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71,144
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79,399
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Noncontrolling
interest in subsidiary company
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5,111
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5,205
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Total
Stockholders' Equity
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76,255
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84,604
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$ 175,172
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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 September 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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$ 30,849
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$ 43,634
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Service
revenues
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11,933
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14,583
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Total
Revenues
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42,782
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58,217
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COST
OF REVENUES:
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Cost
of product revenues
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27,467
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37,888
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Cost
of service revenues
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8,340
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9,558
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Total
Cost of Revenues
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35,807
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47,446
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GROSS
PROFIT
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6,975
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10,771
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OPERATING
EXPENSES:
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Selling,
general and administrative expense
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7,526
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8,243
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Amortization
of intangible assets
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-
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1,598
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Total
Operating Expenses
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7,526
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9,841
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OPERATING
INCOME (LOSS)
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(551)
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930
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OTHER
INCOME (EXPENSE):
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Interest
income
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47
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846
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Interest
expense
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(161)
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(501)
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Gain
on currency swap, net
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-
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3,474
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Gain
(loss) on currency transaction, net
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50
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(1,371)
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Other
expense, net
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(32)
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|
(351)
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Total
Other Income (Expense)
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(96)
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2,097
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INCOME
(LOSS) FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES
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(647)
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3,027
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Income
tax provision
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722
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485
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INCOME
(LOSS) FROM CONTINUING OPERATIONS
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|
(1,369)
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2,542
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DISCONTINUED
OPERATIONS, NET OF TAX:
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INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
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56
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(1,491)
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GAIN
ON SALE OF EDC U.S. OPERATIONS
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409
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-
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NET
INCOME (LOSS)
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$ (904)
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1,051
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Noncontrolling
interest in subsidiary company
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(4)
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39
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NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
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$ (900)
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$ 1,012
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INCOME
(LOSS) PER WEIGHTED AVERAGE COMMON SHARE (1):
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Income
(loss) from continuing operations attributable to common
stockholders
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$ (0.20)
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$ 0.37
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Discontinued
operations attributable to common stockholders:
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Income
(loss) from discontinued operations attributable to common
stockholders
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|
0.01
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|
(0.22)
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Gain
on sale of EDC U.S. Operations
|
|
0.06
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|
-
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Net
income (loss) per weighted average common share
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|
$ (0.13)
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$ 0.15
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INCOME
(LOSS) PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
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Income
(loss) from continuing operations attributable to common
stockholders
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$ (0.20)
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$ 0.37
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Discontinued
operations attributable to common stockholders:
|
|
|
|
|
Income
(loss) from discontinued operations attributable to common
stockholders
|
|
0.01
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|
(0.22)
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Gain
on sale of EDC U.S. Operations
|
|
0.06
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|
-
|
Net
income (loss) per weighted average common share
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|
$ (0.13)
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|
$ 0.15
|
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|
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AMOUNTS
ATTRIBUTABLE TO EDCI HOLDINGS, INC. COMMON STOCKHOLDERS
|
|
|
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Income
(loss) from continuing operations
|
|
$ (1,359)
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|
$ 2,536
|
Income
(loss) from discontinued operations
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|
50
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|
(1,524)
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Gain
on sale of EDC U.S. Operations
|
|
409
|
|
-
|
Net
Income (Loss)
|
|
$ (900)
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|
$ 1,012
|
|
|
|
|
|
(1) Income
(loss) per weighted average common share amounts are rounded to the
nearest $.01; therefore, such rounding may
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|
|
impact
individual amounts presented.
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|
|
|
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See
Notes to Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
2009
|
|
2008
|
|
|
(In
thousands, except per share amounts)
|
REVENUES:
|
|
|
|
|
Product
revenues
|
|
$ 89,201
|
|
$ 128,475
|
Service
revenues
|
|
32,248
|
|
44,133
|
Total
Revenues
|
|
121,449
|
|
172,608
|
COST
OF REVENUES:
|
|
|
|
|
Cost
of product revenues
|
|
79,375
|
|
111,268
|
Cost
of service revenues
|
|
23,788
|
|
30,003
|
Total
Cost of Revenues
|
|
103,163
|
|
141,271
|
GROSS
PROFIT
|
|
18,286
|
|
31,337
|
OPERATING
EXPENSES:
|
|
|
|
|
Selling,
general and administrative expense
|
|
21,217
|
|
27,049
|
Severance
costs for UK facility closure
|
|
7,152
|
|
-
|
Amortization
of intangible assets
|
|
-
|
|
4,843
|
Total
Operating Expenses
|
|
28,369
|
|
31,892
|
OPERATING
LOSS
|
|
(10,083)
|
|
(555)
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Interest
income
|
|
310
|
|
2,893
|
Interest
expense
|
|
(569)
|
|
(1,759)
|
Gain
on currency swap, net
|
|
2,111
|
|
881
|
Gain
(loss) on currency transaction, net
|
|
537
|
|
(1,965)
|
Other
expense, net
|
|
(18)
|
|
(343)
|
Total
Other Income (Expense)
|
|
2,371
|
|
(293)
|
LOSS
FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES
|
|
(7,712)
|
|
(848)
|
Income
tax provision
|
|
414
|
|
853
|
LOSS
FROM CONTINUING OPERATIONS
|
|
(8,126)
|
|
(1,701)
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
(2,596)
|
|
(9,194)
|
GAIN
ON SALE OF EDC U.S. OPERATIONS
|
|
589
|
|
-
|
NET
LOSS
|
|
$ (10,133)
|
|
(10,895)
|
Noncontrolling
interest in subsidiary company
|
|
(94)
|
|
(203)
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$ (10,039)
|
|
$ (10,692)
|
LOSS
PER WEIGHTED AVERAGE COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
stockholders
|
|
$ (1.20)
|
|
$ (0.24)
|
Discontinued
operations attributable to common stockholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
stockholders
|
|
(0.38)
|
|
(1.31)
|
Gain
on sale of EDC U.S. Operations
|
|
0.08
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.50)
|
|
$ (1.55)
|
LOSS
PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
|
|
|
|
|
Loss
from continuing operations attributable to common
stockholders
|
|
$ (1.20)
|
|
$ (0.24)
|
Discontinued
operations attributable to common stockholders:
|
|
|
|
|
Loss
from discontinued operations attributable to common
stockholders
|
|
(0.38)
|
|
(1.31)
|
Gain
on sale of EDC U.S. Operations
|
|
0.08
|
|
-
|
Net
loss per weighted average common share
|
|
$ (1.50)
|
|
$ (1.55)
|
|
|
|
|
|
AMOUNTS
ATTRIBUTABLE TO EDCI HOLDINGS, INC. COMMON STOCKHOLDERS
|
|
|
|
|
Loss
from continuing operations
|
|
$ (8,078)
|
|
$ (1,641)
|
Loss
from discontinued operations
|
|
(2,550)
|
|
(9,051)
|
Gain
on sale of EDC U.S. Operations
|
|
589
|
|
-
|
Net
Loss
|
|
$ (10,039)
|
|
$ (10,692)
|
|
|
|
|
|
(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
|
|
|
|
|
Common Stock
|
Additional
|
Accumulated
|
Other Comprehensive
|
Treasury Stock
|
Noncontrolling
|
|
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
|
-
|
-
|
-
|
(10,133)
|
-
|
-
|
-
|
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
1,746
|
-
|
-
|
-
|
Post-retirement
and pension
|
|
|
|
|
|
|
|
|
benefit
obligation adjustment
|
-
|
-
|
-
|
-
|
(84)
|
-
|
-
|
-
|
Net
unrealized investment gains
|
-
|
-
|
-
|
-
|
105
|
-
|
-
|
-
|
Shares
issued for restricted stock awards
|
-
|
-
|
-
|
-
|
-
|
(11)
|
-
|
-
|
Stock
based compensation
|
-
|
-
|
247
|
-
|
-
|
(27)
|
-
|
-
|
Acquisition
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
46
|
(230)
|
-
|
Noncontrolling
interest in subsidiary company
|
-
|
-
|
-
|
94
|
-
|
-
|
-
|
(94)
|
Balances,
September 30, 2009
|
7,019
|
$ 140
|
$ 371,338
|
$ (305,027)
|
$ 6,350
|
333
|
$
(1,657)
|
$ 5,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements.
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
|
|
(In
thousands)
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss attributable to common shareholders
|
$ (10,039)
|
|
$ (10,692)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
Gain
on sale of EDC U.S. Operations
|
(589)
|
|
-
|
Depreciation
and amortization
|
4,941
|
|
17,853
|
Stock
compensation expense
|
247
|
|
118
|
Gain
on currency swap
|
(2,111)
|
|
(881)
|
Foreign
currency transaction (gain) loss
|
(537)
|
|
1,965
|
Severance
cost for UK facility closure
|
6,725
|
|
-
|
Gain
on adjustment to discontinued operations tax payable
|
(205)
|
|
(1,169)
|
Deferred
income tax provision
|
318
|
|
(220)
|
Non-cash
interest expense
|
384
|
|
783
|
Noncontrolling
interest in subsidiary company
|
(94)
|
|
(203)
|
Other
|
(346)
|
|
114
|
Changes
in operating assets and liabilities, net of effects of business
dispositions:
|
|
|
|
Restricted
cash
|
971
|
|
(456)
|
Accounts
receivable
|
11,337
|
|
4,505
|
Inventories
|
(680)
|
|
(800)
|
Prepaid
and other current assets
|
762
|
|
(1,940)
|
Long-term
receivables
|
245
|
|
414
|
Other
assets
|
854
|
|
265
|
Accounts
payable
|
(6,914)
|
|
(830)
|
Accrued
liabilities and income taxes payable
|
(6,035)
|
|
(8,974)
|
Other
liabilities
|
519
|
|
1,985
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
(247)
|
|
1,837
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases
of property, plant and equipment
|
(1,017)
|
|
(2,375)
|
Cash
restricted under long-term borrowing agreement
|
4,770
|
|
-
|
Proceeds
from sale of equipment from U.S. operations
|
2,796
|
|
-
|
Purchase
of available-for-sale securities
|
-
|
|
(12,615)
|
Proceeds
from the sale of short-term securities
|
150
|
|
38,523
|
Settlement
of cross-currency swap
|
(2,093)
|
|
-
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
4,606
|
|
23,533
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Repayment
of employee loans
|
(1,041)
|
|
(1,277)
|
Repayment
of capital lease obligations
|
(68)
|
|
(362)
|
Proceeds
from revolving credit facility
|
-
|
|
7,500
|
Repayment
of long-term borrowing
|
(1,023)
|
|
(15,212)
|
Acquisitions
of treasury stock
|
(230)
|
|
(1,396)
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(2,362)
|
|
(10,747)
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
1,248
|
|
(879)
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
3,245
|
|
13,744
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
75,112
|
|
63,850
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ 78,357
|
|
$ 77,594
|
|
|
|
|
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.
On
September 9, 2009, the Company announced that its Board of Directors unanimously
approved recommending a dissolution process to EDCIH’s
stockholders. In this regard, on October 14, 2009, the Board of
Directors unanimously approved a Plan of Complete Liquidation and Dissolution
(the “Plan of Dissolution”), subject to stockholder approval. The
ultimate goal is to effect a distribution of the maximum amount of cash of EDCIH
to its stockholders while retaining sufficient reserves settle both known and
unknown liabilities in accordance with state law requirements. The
Plan of Dissolution provides for an orderly wind down of EDCIH’s business and
operations during a three-year statutory period under Delaware
law. If the dissolution is approved by the stockholders, EDCIH
expects to make an aggregate initial distribution of cash to its stockholders of
up to $30.0 million. EDCIH’s indirect ownership of 97.99% of the
membership units of EDC will be an asset of EDCIH that is subject to the Plan of
Dissolution. The Plan of Dissolution does not directly involve the
operating business, assets, liabilities or corporate existence of EDC and its
subsidiaries, however, subsequent to the stockholder ratification of the Plan of
Dissolution, EDCIH’s consolidated financials will be required to reflect the
value of EDC’s assets and liabilities under liquidation accounting. During
EDCIH’s three-year dissolution period, EDCIH will continue to seek value for its
investment in EDC by exploring strategic alternatives and seeking, as
appropriate, cash distributions, subject to repayment of EDC’s bank debt and
other legal requirements. If EDCIH continues to own any interest in EDC at the
end of the three year dissolution period, EDCIH anticipates transferring such
interests to a liquidating trust, for the benefit of the Company’s
stockholders.
If the
Plan of Dissolution is approved by EDCIH’s stockholders, EDCIH intends to file a
certificate of dissolution with the Delaware Secretary of State as soon as
reasonably practicable after receipt of the required revenue clearance
certificate from the Delaware Department of Finance. The dissolution
will be effective upon the effective date of the certificate of dissolution, or
upon any later date specified in the certificate of
dissolution. Thereafter, EDCIH will cease all business activities
except for those relating to winding up EDCIH’s business and affairs, including,
but not limited to, gradually settling and closing its business, prosecuting and
defending suits by or against EDCIH, seeking to convert EDCIH’s assets into cash
or cash equivalents, discharging or making provision for discharging EDCIH’s
known and unknown liabilities, making cash distributions to stockholders,
withdrawing from all jurisdictions in which EDCIH is qualified to do business,
and, if EDCIH is unable to convert any assets to cash or cash equivalents by the
end of the statutory three-year dissolution period, distributing EDCIH’s
remaining assets among its stockholders in-kind according to their interests or
placing them in a liquidating trust for the benefit of stockholders, and,
subject to statutory limitations, taking all other actions necessary to wind up
EDCIH’s business and affairs.
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
Company has evaluated the effect of subsequent events through October 30, 2009,
the issuance date of these financial statements.
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.
If
EDCIH’s stockholders approve the Plan of Dissolution, EDCIH, including EDC, will
change its basis of accounting on the date of approval from that of an operating
enterprise, which contemplates realization of assets and satisfaction of
liabilities in the normal course of business, to the liquidation basis of
accounting. Under the liquidation basis of accounting, assets are
stated at their estimated net realizable values and liabilities are stated at
their estimated settlement amounts. Recorded liabilities will include
the estimated expenses associated with carrying out the Plan of
Dissolution. The financial information presented in this Quarterly
Report on Form 10-Q does not include any adjustments necessary to reflect the
possible future effects on recoverability of the assets or settlement of
liabilities that may result from adoption of the Plan of Dissolution or EDCIH’s
potential to complete such plan in an orderly manner.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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 described above, 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.
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 income (loss) previously reported.
Inventories,
net at September 30, 2009 and December 31, 2008 consisted of:
|
|
|
|
|
September
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Raw
materials
|
$ 4,714
|
|
$ 3,859
|
Finished
goods
|
306
|
|
426
|
Work
in process
|
1,404
|
|
560
|
Total
|
$ 6,424
|
|
$ 4,845
|
At
September 30, 2009 and December 31, 2008, reserves were approximately $1.5
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 September 30, 2009 was $27.2
million, including $1.8 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 and from cash from operations.
EDC
U.S. Operation
Restricted
cash relating to EDC’s U.S. operation at September 30, 2009 was $0.6
million. As part of the Sony Sale, EDC’s Senior Secured Credit
Facility was amended to include provisions which required a portion of the
proceeds from the Sony Sale to be held in escrow in the name of the
administrative agent for use in the wind-down of certain U.S. operations or
prepayment of loans under the terms of the Seventh Amendment to the credit
agreement.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
Concentration
of Credit Risk
The
Company maintains cash balances in various banks. At times, the amounts of cash
held in certain bank accounts may exceed the amount that the Federal Deposit
Insurance Corporation (“FDIC”) insures.
EDC
entered into a cross-currency rate swap agreement with a commercial bank on May
31, 2005. EDC’s objective is to manage foreign currency exposure arising from
its intercompany loan to its German subsidiary acquired in May of 2005 and is
therefore, for purposes other than trading. The loan is denominated in Euros and
repayment is due on demand, or by May 31, 2010. In accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 830 – Foreign Currency Matters and FASB ASC 815 – Derivatives and
Hedging, the currency swap does not qualify for hedge accounting and, as a
result, EDC reports the foreign currency exchange gains or losses attributable
to changes in the U.S.$/€ 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 nine months ended September 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.
7.
|
Fair
Value Measurements
|
The
Company’s financial instruments are measured and recorded in accordance with
FASB ASC 820 – Fair Value Measurements and Disclosures, which defines fair
value, establishes a framework for measuring fair value and expands disclosure
requirements about fair value measurements. FASB ASC 820 – Fair Value
Measurements and Disclosures defines fair value as the price that would be
received from selling 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.
FASB ASC
820 requires disclosure regarding the manner in which fair value is determined
for assets and liabilities and establishes a three-tiered value hierarchy into
which these assets and liabilities must be grouped, based upon significant
levels of inputs as follows:
Level 1 — Unadjusted quoted
prices (observable inputs) that are available in active markets for 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
Company’s financial instruments consist of cash equivalents, accounts
receivable, notes receivable, long-term debt and other long-term
obligations. For cash equivalents, accounts receivable, notes
receivable and other long-term obligations, the carrying amounts approximate
fair values.
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 September 30, 2009, according to the valuation
techniques it used to determine their fair values.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted
Prices in Active
|
|
Significant
Other
|
|
Significant
Unobservable
|
|
|
September
30,
|
|
Markets
for Identical Assets
|
|
Observable
Inputs
|
|
Inputs
|
Description
|
|
2009
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$ 870
|
|
|
|
|
|
$ 870
|
Deferred
Comp Trust Plan
|
|
602
|
|
602
|
|
|
|
|
Total
|
|
$ 1,472
|
|
$ 602
|
|
$ -
|
|
$ 870
|
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
|
|
(150)
|
|
Total
gains or losses (realized/unrealized)
|
|
|
|
included
in earnings
|
|
-
|
Ending
Balance
|
|
$ 870
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Auction-Rate
Securities. At September 30, 2009, the Company’s investments
consisted of one auction-rate security. Its investment in the auction-rate
security is 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 September 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.
|
September
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Senior
Secured Credit Facility
|
$ 7,000
|
|
$ 8,000
|
Payable
to Universal - undiscounted
|
2,845
|
|
2,749
|
Capital
Lease
|
-
|
|
74
|
Employee
Loans
|
2,547
|
|
3,632
|
Subtotal
|
12,392
|
|
14,455
|
Less:
Unamortized Discount
|
(450)
|
|
(546)
|
Total
Debt
|
$ 11,942
|
|
$ 13,909
|
Less:
Current Portion
|
(8,488)
|
|
(3,423)
|
Total
Long Term Debt
|
$ 3,454
|
|
$ 10,486
|
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 September
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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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 the Company. The weighted
average interest rate on the term loan was 2.60% at September 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 September 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. At this stage in the negotiations, EDC is not able
to predict if an agreement amicable to both parties will be
reached. 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 September 30, 2009.
On
January 1, 2007, the Company adopted the provisions of FASB ASC 740 – Income
Taxes. 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 FASB ASC 740 – Income Taxes did not differ
from the net assets recognized before adoption and, therefore, the Company did
not record an adjustment related to the adoption of the standard.
During
the nine months ended September 30, 2009, the amount of gross unrecognized tax
benefits was reduced by $0.2 million primarily due to the expiration of certain
statutes of limitation, which offset the impact of additional interest and
exchange rate fluctuations. Of the unrecognized tax benefits recorded
as of September 30, 2009, it is anticipated that over the next 12 months
various tax-related statutes of limitation will expire which will cause a
$2.5 million reduction in the unrecognized tax benefits, consisting of
$1.5 million in taxes and $1.0 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.
10.
|
Employee
Benefit Plans
|
Net
post-retirement benefit costs consisted of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
|
$ 212
|
|
$ 215
|
|
$ 595
|
|
$ 684
|
Interest
cost on APBO
|
|
|
425
|
|
387
|
|
1,170
|
|
1,235
|
Amortization
of prior service costs
|
|
3
|
|
(5)
|
|
10
|
|
(14)
|
Amortization
of prior service costs due to curtailment
|
|
-
|
|
-
|
|
(248)
|
|
-
|
Curtailment
gain
|
|
|
-
|
|
-
|
|
(280)
|
|
-
|
Amortization
of actuarial loss
|
|
-
|
|
4
|
|
-
|
|
7
|
|
|
|
|
$ 640
|
|
$ 601
|
|
$ 1,247
|
|
$ 1,912
|
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 an
adjustment of $0.5 million related to a curtailment gain and amortization of
prior service costs in the nine months ended September 30, 2009.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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. Further, Universal International
Music B.V. (“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. See Note 17.
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 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
obligates the Company to pay approximately $7.2 million in severance to the
employees of Blackburn between July 2009 and June 2010. The amount
owed relates to prior service; therefore the Company recorded an accrual and
related charge for these estimated severance obligations in the second quarter
of 2009, included in severance costs for UK facility closure in the condensed
consolidated statement of operations. In the third quarter of 2009,
EDC gave notice to the landlord of its Blackburn facility of its intention to
exercise its lease-break option on the facility. As such, costs
associated with the lease break penalty and remaining lease payments on the
lease totaling approximately $0.7 million were recorded into cost of sales.
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
the third quarter of 2009, the Company made severance payments of $0.5 million
related to plan and as of September 30, 2009, $6.7 million is recorded in
accrued expenses and other liabilities in the accompanying condensed
consolidated balance sheets.
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 recorded severance charges of approximately $0.7 million
into cost of revenues in the period ended September 30, 2009. The
Company made payments of $0.7 million related to the plan through September 30,
2009, and thus no amount remains accrued in the accompanying consolidated
balance sheet.
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 $0.3 million into cost of revenues during the nine months ended
September 30, 2009. The Company made payments of $1.0 million as of September
30, 2009, $0.4 million is recorded in accrued expenses and other liabilities in
the accompanying condensed consolidated balance sheets.
12.
|
Noncontrolling
Interests
|
On
January 1, 2009 the Company adopted FASB ASC 810 – Consolidations, which
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. Retroactive adoption of the presentation and disclosure
requirements for existing minority interests is required. As required
by FASB ASC 810 – Consolidations, 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 September 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 nine 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. We do not expect to receive any significant consideration related
to the transferred operations. 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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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
September 30, 2009 and December 31, 2008, the Company recorded a gain on the
Sony Sale as follows:
|
|
|
December
31, 2008
|
|
Adjustments
|
|
September
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
|
|
589
|
|
28,647
|
Gain
on sale
|
|
$ 2,712
|
|
$ 589
|
|
$ 3,301
|
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 September 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 nine months ended September 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 nine months ended September 30, 2009. Additionally, during the
nine months ended September 30, 2009, the Company recorded gains of $0.6 million
related to the sale of the remaining equipment of our discontinued U.S.
operations.
Results
for the EDC U.S. Operations consist of the following:
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
sales
|
$ -
|
|
$ 29,594
|
|
$ -
|
|
$ 77,749
|
Loss
from discontinued operations:
|
|
|
|
|
|
|
|
Loss
from operations before income taxes
|
(126)
|
|
(1,638)
|
|
(2,885)
|
|
(10,363)
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Loss
from operations
|
$ (126)
|
|
$ (1,638)
|
|
$ (2,885)
|
|
$ (10,363)
|
Gain
on disposal before income taxes
|
409
|
|
-
|
|
589
|
|
-
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
409
|
|
-
|
|
589
|
|
-
|
Gain
(loss) from discontinued operations
|
$ 283
|
|
$ (1,638)
|
|
$ (2,296)
|
|
$ (10,363)
|
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 cumulative benefit for
income taxes recorded due to the uncertainty about the Company’s ability to
utilize the net operating losses.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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:
|
September
30,
|
|
December
31,
|
|
2009
|
|
2008
|
Current
Assets
|
|
|
|
Accounts
receivable
|
$ -
|
|
$ 5,093
|
Inventory
|
-
|
|
515
|
Prepaid
and other current assets
|
202
|
|
3,082
|
|
$ 202
|
|
$ 8,690
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable
|
$ 13
|
|
$ 3,268
|
Accrued
employee wages and benefits
|
-
|
|
1,651
|
Accrued
income and other taxes
|
122
|
|
2
|
Accrued
other
|
1,515
|
|
4,759
|
|
$ 1,650
|
|
$ 9,680
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
Other
|
-
|
|
41
|
|
$ -
|
|
$ 41
|
(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 September 30, 2009 and
December 31, 2008.
Results
for discontinued operations consist of the following:
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
sales
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations:
|
|
|
|
|
|
|
|
Income
(Loss) from operations before income taxes
|
118
|
|
71
|
|
84
|
|
5
|
Benefit
for income taxes
|
(64)
|
|
(76)
|
|
(205)
|
|
(1,164)
|
Income
from operations
|
$ 182
|
|
$ 147
|
|
$ 289
|
|
$ 1,169
|
|
|
|
|
|
|
|
|
Gain
on disposal before income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Provision
for income taxes
|
-
|
|
-
|
|
-
|
|
-
|
Gain
on disposal of discontinued operations
|
-
|
|
-
|
|
-
|
|
-
|
Income
from discontinued operations
|
$ 182
|
|
$ 147
|
|
$ 289
|
|
$ 1,169
|
The
income from discontinued operations consists of operating losses incurred in the
Messaging and Paging segments. The nine month periods ended September 30, 2009
and 2008 include credits of $0.2 million and $1.2 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 $0.4 million and $0.5 million for accrued taxes
and other liabilities at September 30, 2009 and December 31, 2008,
respectively.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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 $35.5 million and $98.8 million, or 83.1% and 81.4% of
total revenues, for the three and nine months ended September 30, 2009,
respectively, and $41.8 million and $124.1 million, or 71.8% and 71.9% of total
revenues, for the three and nine months ended September 30, 2008, respectively,
and was the only customer to exceed 10% of total revenues.
Geographic
Area
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues
|
|
|
|
Revenues
|
|
|
United
Kingdom
|
6,227
|
|
15,562
|
|
22,393
|
|
44,335
|
Germany
|
35,066
|
|
41,079
|
|
94,565
|
|
122,814
|
Other
|
1,489
|
|
1,576
|
|
4,491
|
|
5,459
|
Consolidated
|
$ 42,782
|
|
$ 58,217
|
|
$ 121,449
|
|
$ 172,608
|
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 income consists of
the following:
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
income (loss)
|
$ (904)
|
|
$ 1,051
|
|
$ (10,133)
|
|
$ (10,895)
|
Foreign
currency translation
|
561
|
|
(3,984)
|
|
1,746
|
|
(410)
|
Post-retirement
and pension benefit obligation
|
62
|
|
(1)
|
|
(84)
|
|
(7)
|
Net
unrealized investment gains (losses)
|
66
|
|
(213)
|
|
105
|
|
(239)
|
Comprehensive
Loss
|
$ (215)
|
|
$ (3,147)
|
|
$ (8,366)
|
|
$ (11,551)
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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 September 30,
|
Nine
Months Ended September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Numerator:
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations attributable to common
shareholders
|
$ (1,359)
|
|
$ 2,536
|
|
$ (8,078)
|
|
$ (1,641)
|
Income
(loss) from discontinued operations, net of tax attributable to common
shareholders
|
50
|
|
(1,524)
|
|
(2,550)
|
|
(9,051)
|
Gain
on sale of EDC U.S. Operations
|
|
409
|
|
-
|
|
589
|
|
-
|
Net
income (loss) attributable to common shareholders
|
|
$ (900)
|
|
$ 1,012
|
|
$ (10,039)
|
|
$ (10,692)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator
for basic income (loss) per share - weighted average
shares
|
6,702
|
|
6,797
|
|
6,704
|
|
6,889
|
Effect
of dilutive securities: restricted stock awards
|
|
-
|
|
2
|
|
-
|
|
-
|
Denominator
for diluted income (loss) per share-adjusted weighted average shares and
assumed conversions
|
6,702
|
|
6,799
|
|
6,704
|
|
6,889
|
|
|
|
|
|
|
|
|
|
Income
(loss) per weighted average common share (2):
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations attributable to common
shareholders
|
$ (0.20)
|
|
$ 0.37
|
|
$ (1.20)
|
|
$ (0.24)
|
Income
(loss) from discontinued operations, net of tax attributable to common
shareholders
|
0.01
|
|
(0.22)
|
|
(0.38)
|
|
(1.31)
|
Gain
on sale of EDC U.S. Operations
|
|
0.06
|
|
-
|
|
0.08
|
|
-
|
Income
(loss) attributable to common shareholders
|
|
$ (0.13)
|
|
$ 0.15
|
|
$ (1.50)
|
|
$ (1.55)
|
|
|
|
|
|
|
|
|
|
Income
(loss) per weighted average diluted common share (2):
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations attributable to common
shareholders
|
$ (0.20)
|
|
$ 0.37
|
|
$ (1.20)
|
|
$ (0.24)
|
Income
(loss) from discontinued operations, net of tax attributable to common
shareholders
|
0.01
|
|
(0.22)
|
|
(0.38)
|
|
(1.31)
|
Gain
on sale of EDC U.S. Operations
|
|
0.06
|
|
-
|
|
0.08
|
|
-
|
Income
(loss) attributable to common shareholders
|
|
$ (0.13)
|
|
$ 0.15
|
|
$ (1.50)
|
|
$ (1.55)
|
|
|
|
|
|
|
|
|
|
Dilutive
securities not included above due anti-dilutive effect as a result of the
net loss position
|
8
|
|
-
|
|
3
|
|
1
|
Anti-dilutive
securities not included above: stock options
|
|
139
|
|
140
|
|
142
|
|
140
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2009 and September 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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
Arbitration Claim under the
International Distribution Agreement. On
February 27, 2009, EDC, at its election, provided notice to 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 as amended (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. EDC and UIM have agreed to the three-member
arbitration panel and the arbitration panel is in the process of establishing a
schedule for the proceeding. 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.
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 17% of EDC’s manufacturing volume in the first nine 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. UIM did not withdraw its claims, and
EDC has therefore submitted the matter to arbitration, and have invited UIM to
agree that the same arbitration panel be appointed to deal with this arbitration
claim and with the pending arbitration related to the International Distribution
Agreement. 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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
Shareholder Derivative Actions:
On September 6, 2006, Vladimir Gusinsky (“Gusinsky”), a Company
shareholder, commenced a derivative action (the “Gusinsky Action”) in the
Supreme Court of the State of New York, New York County,
against EDCI (as nominal defendant) and against certain of EDCI’s current and
former officers and directors as defendants. The complaint, as amended in
December 2006 and January 2007, purportedly on behalf of EDCI,
contained a variety of allegations relating to the backdating of certain stock
option grants. On January 26, 2007 and February 7, 2007, two additional
derivative actions were commenced in the United States District Court for the
Southern District of New York by two different Company shareholders, Larry L.
Stoll and Mark C. Neiswender, respectively (the “Subsequent Actions”). The
Subsequent Actions were identical to each other and asserted the same claims as
those asserted in the Gusinsky Action regarding a subset of the same option
grants at issue in that action along with additional claims alleging violations
of federal securities laws.
A Special
Litigation Committee of the Board of Directors of EDCI, following an internal
investigation, concluded that there was no conclusive or compelling evidence
that any of the named defendants in the lawsuits breached the fiduciary duties
of care or loyalty, or acted in bad faith with respect to their obligations to
EDCI or its shareholders, and further concluded that it would not be in EDCI’s
best interest to pursue any claims with respect to these grants. EDCI also
restated certain financial statements as a result of this internal
investigation.
On
January 30, 2008, all parties to the Gusinsky Action and the Subsequent Actions
entered into an agreement to settle both actions. The agreement was
subject to the approval of the Court. Pursuant to the settlement
agreement, EDCI’s insurer agreed to pay plaintiffs’ counsel in the Gusinsky
Action and the Subsequent Actions for their fees and expenses, and to pay for
the costs of notifying the Company’s shareholders of the
settlement. EDCI also implemented certain changes to its Equity
Compensation Policy and adopted related reform policies. In exchange,
the plaintiffs in both the Gusinsky Action and the Subsequent Actions agreed to
dismiss their claims with prejudice, forego any appeals and release all the
defendants from all claims that were or could have been asserted in either
action and arise out of or are based upon or relate in any way to any of the
allegations set forth in the complaints. The papers in support of
preliminary approval of the settlement were filed in the Gusinsky Action on
January 31, 2008 and on April 30, 2008 the Court granted preliminary
approval of the settlement and scheduled a settlement hearing. On
September 17, 2008, the Court issued a final order approving the settlement, but
denying plaintiffs’ counsels’ application for fees and expenses. A
judgment to that effect was then entered by the Court on September 25,
2008.
On
October 23, 2008, plaintiffs in the Subsequent Actions moved for leave to
reinstate their appeal of the federal court’s dismissal of the Subsequent
Actions on the basis that the state court should not have approved the
settlement. On January 12, 2009, the federal court denied that
motion. 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 nor EDCI’s insurer will be opposing
the appeal. EDCI is currently seeking to be reimbursed for the insurable
portions of certain fees incurred related to this matter.
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 deferred until November 2009 to appear before the Regional Court
of Hannover. At the request of UIM, EDC is currently in
negotiations with Philips to agree to a settlement of the claim. At
this stage in the matter, EDC is not able to assess the likelihood of a
favorable outcome. EDC does, however, have indemnification rights under the
Manufacturing Agreement with UIM for substantially all the disputed
amount.
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 was filed after Mr. Klinger
repudiated an amicable separation and asserted his right to terminate his
employment with Good Reason (as defined in Mr. Klinger’s October 3, 2008
employment agreement) and 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 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.
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
(Unaudited)
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. In October 2009, Mr. Klinger
received a Notice of Right to Sue permitting him to pursue his charge of
discrimination directly against EDCIH et. al., but the EEOC did not otherwise
render any judgment on the merits of Klinger’s case. 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.
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
indicated Mr. Klinger’s intention to add claims under the Age Discrimination in
Employment Act (“ADEA”) following receipt of a Notice of Right to Sue in
connection with the EEOC Complaint. Mr. Klinger has now amended his
complaint to add claims under the ADEA, and has also added claims related to
alleged breaches by EDCIH et. al. of their notice obligations under the COBRA
health benefit continuation statutes and alleged breaches by EDCIH et. al.’s of
their fiduciary duties to provide Mr. Klinger with paperwork related to his
right to convert or port his life insurance policies following his termination
of employment. All defendants in the Klinger Indiana Counter-Suit moved to stay
the case until the motion currently pending with respect to the Klinger New York
Complaint is decided. The Indiana Court denied the motion to stay and
permitted discovery to commence, but further noted that if the New York courts
deny Mr. Klinger’s motion to dismiss or transfer that case, the Indiana Court
will revisit the stay issue as well as address any other Indiana motions based
on the pendency of a related action in another district. 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. The Company adopted SFAS No. 168 during the third quarter
of 2009 and included references to the ASC within the consolidated 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 described under the
heading “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on
Form 10-Q, and Part I, Item 1A 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 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.
On
September 9, 2009, the Company announced that its Board of Directors unanimously
approved recommending a dissolution process to EDCIH’s
stockholders. In this regard, on October 14, 2009, the Board of
Directors unanimously approved a Plan of Complete Liquidation and Dissolution
(the “Plan of Dissolution”), subject to stockholder approval. The
ultimate goal is to effect a distribution of the maximum amount of cash of EDCIH
to its stockholders while retaining sufficient reserves to settle both known and
unknown liabilities in accordance with state law requirements. The
Plan of Dissolution provides for an orderly wind down of EDCIH’s business and
operations during a three-year statutory period under Delaware
law. If the dissolution is approved by the stockholders, EDCIH
expects to make an aggregate initial distribution of cash to its stockholders of
up to $30.0 million. EDCI’s indirect ownership of 97.99% of the
membership units of EDC will be an asset of EDCI that is subject to the Plan of
Dissolution. The Plan of Dissolution does not directly involve the
operating business, assets, liabilities or corporate existence of EDC and its
subsidiaries, however, subsequent to the stockholder ratification of the Plan of
Dissolution, EDCI’s consolidated financials will be required to reflect the
value of EDC’s assets and liabilities under liquidation accounting, During
EDCI’s three-year dissolution period, EDCI will continue to seek value for its
investment in EDC by exploring strategic alternatives and seeking, as
appropriate, cash distributions, subject to repayment of EDC’s bank debt and
other legal requirements. If EDCI continues to own any interest in EDC at the
end of the three year dissolution period, EDCI anticipates transferring such
interests to a liquidating trust, for the benefit of our
stockholders.
If the Plan of
Dissolution is approved by EDCIH’s stockholders, EDCIH intends to file a
certificate of dissolution with the Delaware Secretary of State as soon as
reasonably practicable after receipt of the required revenue clearance
certificate from the Delaware Department of Finance. The dissolution
will be effective upon the effective date of the certificate of dissolution, or
upon any later date specified in the certificate of
dissolution. Thereafter, EDCIH will cease all business activities
except for those relating to winding up EDCIH’s business and affairs, including,
but not limited to, gradually settling and closing its business, prosecuting and
defending suits by or against EDCIH, seeking to convert EDCIH’s assets into cash
or cash equivalents, discharging or making provision for discharging EDCIH’s
known and unknown liabilities, making cash distributions to stockholders,
withdrawing from all jurisdictions in which EDCIH is qualified to do business,
and, if EDCIH is unable to convert any assets to cash or cash equivalents by the
end of the statutory three-year dissolution period, distributing EDCIH’s
remaining assets among its stockholders in-kind according to their interests or
placing them in a liquidating trust for the benefit of stockholders, and,
subject to statutory limitations, taking all other actions necessary to wind up
EDCIH’s business and affairs.
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 wider 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, but is
accelerating. 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.
If our
stockholders do not approve the Plan of Dissolution, our Board of Directors will
explore what, if any, alternatives are available for the future of
EDCIH. Possible alternatives include continuing our efforts to
identify an attractive acquisition in alternative industries using EDCIH’s cash
while continuing to oversee the EDC business with a focus on cash flow and
continuing to explore strategic alternatives for EDC as they become available,
or seeking voluntary dissolution at a later time and with diminished
assets. If our stockholders do not approve the Plan of Dissolution,
we expect that our cash resources will continue to diminish, potentially at a
higher rate as EDCIH would need to augment its current staff to execute and
integrate an acquisition. Alternatively, EDCIH could continue to
pursue certain courses of action to reduce expenses and minimize cash
burn.
Results
of Continuing Operations
Three
months ended September 30, 2009 compared to the three months ended September 30,
2008
Revenues.
Revenues for the third quarter of 2009 were $42.8 million compared to $58.2
million for the third quarter of 2008. The following table
illustrates the components of changes in our revenue when comparing the third
quarter of 2008 to the third quarter of 2009 by revenue line.
|
September
30, 2008
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 43.6
|
|
$ (7.9)
|
|
$ (2.7)
|
|
$ (2.1)
|
|
$ 30.9
|
Service
Revenues
|
14.6
|
|
(2.0)
|
|
(0.1)
|
|
(0.6)
|
|
11.9
|
Total
Revenue
|
$ 58.2
|
|
$ (9.9)
|
|
$ (2.8)
|
|
$ (2.7)
|
|
$ 42.8
|
Product Revenues. Product
revenues were $30.9 million in the third quarter of 2009 compared to $43.6
million in the third quarter of 2008. The decrease is due to volume
declines, primarily related to our UK operations, deteriorating pricing 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. Overall volume declines for our central
European operations were 2% when comparing the third quarter of 2009 to the same
period of 2008. Revenues of our UK operations in the third quarter of
2009 decreased compared to the third quarter of 2008 primarily due to lower
volumes, which included the impact of the loss of certain customer accounts due
the announced closure of the Blackburn facility and our decision to forgo
certain customer accounts with uneconomical pricing and excessive credit risk,
and unfavorable exchange rate fluctuations, as well as slightly deteriorating
pricing.
Service Revenues. Service
revenues were $11.9 million in the third quarter of 2009 compared to $14.6
million in the third quarter of 2008. Our central European operations
experienced a decrease in volumes in the third 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 third quarter 2008, and unfavorable
exchange rate fluctuations.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were 16.3% of
revenues during the third quarter of 2009 compared to 18.5% of revenues in the
third quarter of 2008. The following table shows the elements
impacting our gross profit when comparing the third quarter of 2008 to the third
quarter of 2009 by revenue line.
|
September
30, 2008
|
|
Volume
|
|
Cost/Mix
|
|
Exchange
Rate
|
|
September
30, 2009
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 5.8
|
13.2%
|
|
$
(2.4)
|
-2.1%
|
|
$ -
|
0.0%
|
|
$ -
|
0.0%
|
|
$ 3.4
|
11.0%
|
Service
Revenues
|
5.0
|
34.5%
|
|
(1.2)
|
-3.9%
|
|
-
|
0.0%
|
|
(0.2)
|
-0.6%
|
|
3.6
|
30.1%
|
Total
Gross Profit
|
$
10.8
|
18.5%
|
|
$
(3.6)
|
-2.0%
|
|
$ -
|
0.0%
|
|
$
(0.2)
|
-0.1%
|
|
$ 7.0
|
16.3%
|
Product Revenues. Gross
profit on product revenues was $3.4 million, or 11.0% of product revenues, in
the third quarter of 2009 compared to $5.8 million, or 13.2% of product
revenues, in the third quarter of 2008. Gross profit of our UK
operations decreased as a result of volume declines offset by improved
pricing. Gross profit in our central European operations decreased in
the third quarter of 2009 compared to the third quarter of 2008 primarily due to
lower volumes and deteriorating special projects pricing.
Service Revenues. Gross
profit on service revenues was $3.6 million, or 30.1% of service revenues, in
the third quarter of 2009 compared to $5.0 million, or 34.5% of service
revenues, in the third quarter of 2008. Our central European operations gross
profit on service revenues declined in the third quarter of 2009 compared to the
third 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 $7.5 million
in the third quarter of 2009 compared to $8.2 million in the third quarter of
2008. The decrease is primarily due to exchange rate fluctuations, a
decrease in compensation expense and lower professional fees.
Amortization of
Intangible Assets. There was no
amortization expense in the third quarter of 2009 compared to $1.6 million in
the third quarter of 2008. During the fourth quarter of 2008, the
Company conducted an impairment analysis of its intangible assets, which
resulted in the full impairment of the Company’s central European intangible
assets.
Other
Income (Expenses)
Interest
Income. Interest income in the third quarter of 2009 was less
than $0.1 million compared to $0.8 million in the third 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 investment policy during the third quarter of
2009.
Interest
Expense. Interest expense in the third quarter of 2009 was
$0.2 million compared to $0.5 million in the third 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 third quarter of 2009.
Gain (Loss) on Currency Swap, net.
There was no gain on currency swap in the third quarter of 2009 compared
to a gain of $3.5 million in the third 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 less than $0.1 million in the third quarter of
2009 compared to a loss of $1.4 million in the third quarter of 2008 on
intercompany transactions with our international operations denominated in their
local currency.
Income
Taxes. We
recorded income tax expense of $0.7 million and $0.5 million in the third
quarter ended 2009 and 2008, respectively. 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.
Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008
Revenues.
Revenues for the nine months ended September 30, 2009 were $121.5 million
compared to $172.6 million for the nine months ended September 30,
2008. The following table illustrates the components of changes in
our revenue when comparing the nine months ended September 30, 2008 to the nine
months ended September 30, 2009 by revenue line.
|
|
September
30, 2008
|
|
Volume
|
|
Price/Mix
|
|
Exchange
Rate
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$ 128.5
|
|
$ (19.6)
|
|
$ (5.9)
|
|
$ (13.8)
|
|
$ 89.2
|
Service
Revenues
|
44.1
|
|
(8.0)
|
|
(0.1)
|
|
(3.7)
|
|
32.3
|
Total
Revenue
|
$ 172.6
|
|
$ (27.6)
|
|
$ (6.0)
|
|
$ (17.5)
|
|
$ 121.5
|
Product Revenues. Product
revenues were $89.2 million in the nine months ended September 30, 2009 compared
to $128.5 million in the nine months ended September 30, 2008. The
decrease is due to volume declines, primarily at our UK operations, 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. Overall volume declines for our central
European operations were 5% when comparing the first nine months of 2009 to the
same period in 2008. Revenues of our UK operations in the nine months
ended September 30, 2009 decreased compared to the nine months ended September
30, 2009 primarily due to lower volumes, which included the impact of the loss
of certain customer accounts due the announced closure of the Blackburn
facility, our decision to forgo certain customer accounts with uneconomical
pricing and excessive credit risk and unfavorable exchange rate fluctuations,
slightly offset by improved pricing.
Service Revenues. Service
revenues were $32.3 million in the nine months ended September 30, 2009 compared
to $44.1 million in the nine months ended September 30, 2008. Our
central European operations experienced a decrease in volumes in the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008
primarily due to the loss of a significant customer, revenues for which were
included in the nine months ended September 30, 2008, and unfavorable exchange
rate fluctuations.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were 15.1% of
revenues during the nine months ended September 30, 2009 compared to 18.2% of
revenues in the nine months ended September 30, 2008. The following
table shows the elements impacting our gross profit when comparing the nine
months ended September 30, 2008 to the nine months ended September 30, 2009 by
revenue line.
|
|
September
30, 2008
|
|
Volume
|
|
Cost/Mix
|
|
Exchange
Rate
|
|
September
30, 2009
|
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues
|
$
17.2
|
13.4%
|
|
$ (6.3)
|
-2.0%
|
|
$ 0.1
|
0.0%
|
|
$ (1.2)
|
-0.4%
|
|
$ 9.8
|
11.0%
|
Service
Revenues
|
14.1
|
32.0%
|
|
(4.9)
|
-5.0%
|
|
0.2
|
0.2%
|
|
(0.9)
|
-0.9%
|
|
8.5
|
26.2%
|
Total
Gross Profit
|
$
31.3
|
18.2%
|
|
$
(11.2)
|
-2.7%
|
|
$ 0.3
|
0.1%
|
|
$ (2.1)
|
-0.5%
|
|
$
18.3
|
15.1%
|
Product Revenues. Gross
profit on product revenues was $9.8 million, or 11.0% of product revenues, in
the nine months ended September 30, 2009 compared to $17.2 million, or 13.4% of
product revenues, in the nine months ended September 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 nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008 primarily due to deteriorating special projects pricing,
lower volumes and unfavorable exchange rate fluctuations.
Service Revenues. Gross
profit on service revenues was $8.5 million, or 26.2% of service revenues, in
the nine months ended September 30, 2009 compared to $14.1 million, or 32.0% of
service revenues, in the nine months ended September 30, 2008. Our central
European operations gross profit on service revenues declined in the nine months
ended September 30, 2009 compared to the nine months ended September 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 $21.2 million
in the nine months ended September 30, 2009 compared to $27.1 million in the
nine months ended September 30, 2008. The decrease is primarily due
to exchange rate fluctuations, lower professional fees, 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
restructuring expense of $7.2 million in the nine months ended September 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 nine months ended September 30, 2009 compared to
$4.8 million in the nine months ended September 30, 2008. During the
fourth quarter of 2008, the Company conducted an impairment analysis of its
intangible assets, which resulted in the full impairment of the Company’s
central European intangible assets.
Other
Income (Expenses)
Interest
Income. Interest income in the nine months ended September
30, 2009
was $0.3 million compared to $2.9 million in the nine months ended September
30, 2008. Our
interest income is primarily derived from income earned on excess cash held in
interest-bearing money market accounts, treasury bills and
investments. The decrease reflects significantly lower interest rates
based on our investment policy during the nine months ended September 30,
2009.
Interest
Expense. Interest expense in the nine months ended September
30, 2009 was $0.6 million compared to $1.8 million in the nine months ended
September 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 nine months ended September 30,
2009.
Gain (Loss) on Currency Swap, net.
We recorded a gain on our currency swap of $2.1 million in the nine
months ended September 30, 2009 compared to a gain of $0.9 million in the nine
months ended September 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 nine months ended
September 30, 2009 compared to a loss of $2.0 million in the nine months ended
September 30, 2008 on intercompany transactions with our international
operations denominated in their local currency.
Income
Taxes. We
recorded income tax expense of $0.4 million and $0.9 million in the nine months
ended September 30, 2009 and 2008, respectively. Taxable income from operations
was lower in the nine months ended September 30, 2009 than in the nine months
ended September 30, 2008 resulting in lower expense. 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
September 30, 2009, we had cash and cash equivalents totaling $78.4 million of
which $50.9 million was cash held by EDCI and $27.5 million was cash held at
EDC. At September 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
September 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
September 30, 2009, EDCI had investments of $0.9 million in one auction-rate
security. Due to the uncertainty surrounding the liquidation of the investment,
this investment has been classified as long-term on our consolidated balance
sheet at September 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. If the plan is approved, EDCI
plans to use its cash and cash equivalents in connection with the
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
used in operating activities in the nine months ended September 30, 2009 was
$0.3 million compared to cash provided by operating activities of $1.8 million
in the nine months ended September 30, 2008. The negative cash flows
from operating activities in the 2009 period were primarily due to $1.3 million
in losses (adjusted for non-cash items) and working capital changes of $1.5
million, offset by changes in long term assets and other liabilities and changes
in restricted cash of $1.6 million and $1.0 million,
respectively. The working capital changes in the nine months ended
September 30, 2009 were primarily driven by decreases in accounts receivable of
$11.3 million, offset by decreases in accounts payable of $6.9 million and
accrued liabilities and income taxes payable of $6.0 million. Loss
(adjusted for non-cash items) declined to $1.3 million in 2009 from income
(adjusted for non-cash items) of $7.7 million for the nine months ended
September 30, 2008 primarily due to lower sales volume in the nine months ended
September 30, 2009.
Working
capital changes in the nine months ended September 30, 2009 included, without
limitation:
●
|
A
decrease of $11.3 million in accounts receivable in the nine months ended
September 30, 2009 compared to a decrease of $4.5 million in the nine
months ended September 30, 2008.
The overall decrease in accounts receivable 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 nine months ended September 30, 2009
compared to the nine months ended September 30, 2008,
including the wind down of our UK
operations.
|
●
|
A
decrease of $6.9 million in accounts payable in the nine months ended
September 30, 2009
compared to a decrease of $0.8 million in the nine months ended September
30, 2008.
The nine months ended September 30, 2009
reflects the payment of accounts payable balances related to our now
discontinued U.S. operations, which were outstanding at year
end, lower purchasing levels in our continuing operations as volumes
have declined and the wind down of our UK
operations.
|
●
|
A
decrease of $6.0 million in accrued liabilities and income taxes payable
in the nine months ended September 30, 2009 compared to a decrease of $9.0
million in the nine months ended September 30, 2008. The
decrease in the 2009 period reflects the settlement of approximately $5.0
million in liabilities related to our now discontinued U.S. operations.
|
Investing Activities.
Investing activities in the nine months ended September 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 $2.8 million in proceeds related to the sale of the remaining
equipment of our EDC U.S. operations. During the nine months ended
September 30, 2009, we also had capital expenditures of $1.0
million. Additionally, on January 23, 2009, we paid $2.1 million to
settle our cross currency swap.
Financing Activities. During
the nine months ended September 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 $0.2 million during the nine
months ended September 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 September
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 September 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 September 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. At this stage in the negotiations, EDC is
not able to predict if an agreement amicable to both parties will be
reached. 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 September 30, 2009.
Capital
Expenditures
Capital
expenditures amounted to approximately $1.0 million in the nine months ended
September 30, 2009 and are anticipated to be approximately $1.0 million for the
remaining three months of 2009. Anticipated expenditures in 2009
primarily relate to expansion costs related to the Blackburn – Hannover
consolidation, normal equipment and facility, replacement and upgrades and
efficiency improvements.
Outlook
EDC
The
difficult operating environment and economic trends that EDC saw in 2008
continued in the first nine months 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 without 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 up
to 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, notice for
which was given during the third quarter of 2009. 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 nine months ended September 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 nine months ended September 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 September 30, 2009.
During
the quarter ended September 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
1A. RISK FACTORS
Our
results of operations and financial condition are subject to numerous risks and
uncertainties as described in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, which was filed with the Securities and
Exchange Commission on March 31, 2009. You should carefully consider
those risk factors, together with all of the other information included in this
Quarterly Report on Form 10-Q. Additional considerations not
presently known to us or that we currently believe are immaterial may also
impair our business operations. If any such risks actually occur, our
business, financial condition, or operating results could be materially and
adversely affected.
Risks
Related to the Plan of Dissolution
The
amount we distribute to our stockholders pursuant to the Plan of Dissolution may
be substantially less than the amount we currently estimate if the amounts of
our liabilities, other obligations and expenses are higher than we currently
anticipate.
The
amount of cash ultimately distributed to stockholders pursuant to the Plan of
Dissolution depends on the amount of our liabilities, obligations and expenses
and the amount we generate from the sale of our remaining non-cash assets and
intellectual property. We have attempted to estimate reasonable reserves for
such liabilities, obligations, and expenses. However, those estimates may be
inaccurate. If any of the estimates are inaccurate, the amount we distribute to
our stockholders may be substantially less than the amount we currently
estimate. Factors that could impact our estimates include the
following:
●
|
We
have made estimates regarding the expense of personnel required and other
operating expenses (including board expenses, legal, accounting and other
professional fees) necessary to dissolve and liquidate EDCIH. Our actual
expenses could vary significantly and depend on the timing and manner of
the sale of our non-cash assets, the satisfaction of any contingent or
conditional claims and liabilities, the timing of and ability to limit
public company expenses, and EDC’s ability to continue to support its
allocation of shared expenses, among other factors. As a result, we may
incur additional expenses above our current estimates, which could
substantially reduce funds available for distribution to our stockholders;
and
|
●
|
We
have made estimates regarding the appropriate reserves required to satisfy
all current, contingent or conditional claims and liabilities, including
unknown claims that are likely to arise or to become known to EDCIH within
10 years after the effective date of our dissolution (the “Effective
Date”). It is extremely difficult to anticipate our reserve for currently
unknown liabilities. Our actual costs of defending and resolving any
asserted claims (and the amount and nature of future claims) could vary
significantly from those estimates, which could substantially reduce funds
available for distribution to our stockholders and potentially result in
liabilities to our stockholders up to the amount of liquidating
distributions received by such stockholders. For a discussion
of those liabilities, please see “Risk Factors- If the amount of
our contingency reserve is insufficient to satisfy the aggregate amount of
our liabilities and other obligations, each stockholder may be liable to
our creditors for the amount of liquidating distributions received by such
stockholder under the Plan of Dissolution, which could also have adverse
tax consequences.”
|
We
may continue to incur the expenses of complying with public company reporting
requirements.
Whether
or not the Plan of Dissolution is approved, we have an obligation to continue to
comply with the applicable reporting requirements of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), even though compliance with such
reporting requirements may be economically burdensome and of minimal value to
our stockholders. If the Plan of Dissolution is approved by our stockholders, in
order to curtail expenses, we intend to seek relief from the SEC to suspend our
reporting obligations under the Exchange Act at the end of the second quarter of
2010, and ultimately to terminate the registration of our common stock and its
listing on NASDAQ. EDCIH plans to remain publicly traded (and subject to SEC
reporting requirements) through the first half of 2010 to permit continued
trading in EDCIH’s shares through the date of the initial liquidating
distribution and the contemplated tender offer that may be implemented by
EDCIH. We anticipate that, if granted such relief, we would continue
to file current reports on Form 8-K to disclose material events relating to
our dissolution and liquidation along with any other reports that the SEC might
require.
To the
extent that we are unable to suspend our obligation to file periodic reports
with the SEC, we will be obligated to continue complying with the applicable
reporting requirements of the Exchange Act and, as a result, will be required to
continue to incur the expenses associated with these reporting requirements,
which will reduce the cash available for distribution to our stockholders.
Accordingly, EDCIH intends to make reserves for such an event in estimating the
range of estimated liquidating distributions. These expenses include, among
others, those costs relating to:
●
|
the
preparation, review, filing and dissemination of SEC
filings;
|
●
|
maintenance
of effective internal controls over financial reporting;
and
|
●
|
audits
and reviews conducted by our independent registered public
accountants.
|
If we are
unable to suspend our obligation to file periodic reports with the SEC, we may
consider other transactions, including going private through a reverse stock
split transaction, to further reduce public costs, which would require
additional stockholder approval, add further costs and require cashing-out a
number of our smaller stockholders.
We will
not be eligible to continue to be listed on NASDAQ if we cease full reporting
with the SEC. Furthermore, our ability to continue our listing on NASDAQ is
subject to various on-going listing requirements we must continue to
meet. If we cannot continue to meet these requirements during
dissolution, we will be forced to delist from NASDAQ. Although we may thereafter
qualify to have our shares of common stock quoted on another over-the-counter
service (such as the Pink Sheets or Over-the-Counter Bulletin Board), it is
likely that the liquidity of our shares will be substantially reduced, and you
may not be able to sell your shares if you desire to do so.
EDC’s
ability to pay its portion of certain overhead costs it shares with EDCIH
depends on the continued viability of physical manufacturing and distribution of
music as well as success in pending arbitration claims against UMG.
We share
certain overhead costs with EDC, including allocations for officers and other
personnel who provide services to both EDC and EDCIH and audit and compliance
costs. If EDC were unable to pay its share of these costs, EDCIH
would be required to bear these costs at its sole expense, which would
materially increase its annual cash burn. EDC’s ability to continue to pays its
share of these costs is dependent on both the continued viability of physical
manufacturing and distribution of music as well as success in its pending
arbitration claims against certain subsidiaries of UMG. Accordingly,
EDCIH intends to make reserves for such an event in estimating the range of
estimated liquidating distributions.
Alternative
distribution channels and methods, both authorized and unauthorized, for
delivering music have eroded and are expected to continue to erode the volume of
sales and pricing of products and services. Because EDC’s business has high
fixed costs, EDC has limited ability to reduce costs in response to unit
declines. The growth of these alternatives is driven by advances in
technology that allow for the transfer and downloading of music and video files
from the Internet. The proliferation of this copying, use and distribution of
such files is supported by the increasing availability and decreasing price of
new technologies, such as personal video recorders, CD and DVD burners, portable
MP3 music and video players, widespread access to the Internet, and the
increasing number of peer-to-peer digital distribution services that facilitate
file transfers and downloading. EDC expects that file sharing and downloading,
both legally and illegally, the introduction of new optical formats and portable
personal digital devices will continue to exert downward pressure on the demand
for CDs. As a result, file sharing and downloading has also exerted significant
downward pressure on the demand for DVDs. In addition, EDC’s business faces
pressure from the emerging distribution alternatives, like video on demand and
personal digital video recorders. As substantially all of EDC’s revenues are
derived from the sale of CDs and to a lesser extent DVDs, increased file
sharing, downloading and piracy or the growth of other alternative distribution
channels and methods, could materially adversely affect EDC’s business,
financial condition and results of operations.
EDC has
initiated two arbitration proceedings against Universal International Music B.V.
(“UIM”), a subsidiary of UMG, in response to claims by UIM that EDC’s German
subsidiary has breached certain terms of the manufacturing and distribution
agreements between that entity and UIM. EDC believes that the
underlying breaches alleged by UIM have not 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 breaches could result in substantial
liquidated damages or the loss of sales volume 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.
If
the amount of our contingency reserve is insufficient to satisfy the aggregate
amount of our liabilities and other obligations, each stockholder may be liable
to our creditors for the amount of liquidating distributions received by such
stockholders under the Plan of Dissolution, which could also have adverse tax
consequences.
After the
Effective Date, our corporate existence will continue, but we will not be able
to carry on any business except for the purpose of winding up the business and
affairs of EDCIH. Following the Effective Date, we will pay or make reasonable
provision to pay all claims and obligations, including all contingent,
conditional or un-matured contractual or statutory claims, known to us,
including unknown claims that are likely to arise or to become known to EDCIH
within 10 years after the Effective Date. We also may obtain and maintain
insurance coverage or establish and set aside a reasonable amount of cash or
other assets as a contingency reserve to satisfy claims against and obligations
of EDCIH. In the event that the amount of the contingency reserve, insurance and
other measures calculated to provide for the satisfaction of liabilities and
claims of the Company are insufficient to satisfy the aggregate amount
ultimately found payable in respect of our liabilities, each stockholder could
be required to repay some or all of the amounts distributed to such stockholder
under the Plan of Dissolution. This obligation is pro rata based upon amounts
actually received. In such event, a stockholder could be required to return some
or all amounts received as distributions pursuant to the Plan of
Dissolution.
Moreover,
for U.S. federal income tax purposes, payments made by a stockholder in
satisfaction of our liabilities not covered by the cash or other assets in our
contingency reserve or otherwise satisfied through insurance or other reasonable
means generally would produce a capital loss for such stockholder in the year
the liabilities are paid. The deductibility of any such capital loss generally
would be subject to limitations under the Internal Revenue Code of 1986, as
amended, or the Code.
Liquidating
distributions to our stockholders could be delayed or diminished.
All or a
portion of any distributions to our stockholders could be delayed or diminished,
depending on many factors, including, without limitation:
● if a
creditor or other third party seeks an injunction against the making of
distributions to our stockholders on the ground that the amounts to be
distributed are needed to provide for the satisfaction of our liabilities or
other obligations;
● if we become
a party to lawsuits or other claims asserted by or against us, including any
claims or litigation arising in connection with our decision to liquidate and
dissolve;
● if we are
unable to sell our remaining non-cash assets or if such sales take longer than
expected;
● if we are
unable to resolve claims with creditors or other third parties, or if such
resolutions take longer than expected; or
● if the
issuance of the revenue clearance certificate required to file our certificate
of dissolution with the Delaware Secretary of State is
delayed.
In
addition, under the Delaware General Corporation Law (“DGCL”), claims and
demands may be asserted against us at any time during the three years following
the Effective Date. Accordingly, our Board of Directors may obtain and maintain
insurance coverage or establish and set aside a reasonable amount of cash or
other assets as a contingency reserve to satisfy claims against and obligations
of EDCIH that may arise during the three-year period following the Effective
Date. As a result of these factors, we may retain for distribution at a later
date, some or all of the estimated amounts that we expect to distribute to
stockholders.
Stockholders
will lose the opportunity to capitalize on potential growth opportunities from
the continuation of our business.
Although
our Board of Directors believes that the Plan of Dissolution is more likely to
result in greater returns to stockholders than if we continued as a stand-alone
entity or pursued other alternatives, if the Plan of Dissolution is approved,
stockholders will lose the opportunity to participate in future growth
opportunities that may have arisen if we were to continue to pursue our
strategic plan and consummate an attractive acquisition that could utilize our
NOLs. Upon the return of substantially all of EDCIH’s cash to
stockholders, EDCIH will be unlikely to realize any future value from its NOLs.
It is possible that these opportunities could have proved to be more valuable
than the liquidating distributions our stockholders would receive pursuant to
the Plan of Dissolution.
Stockholders
may not be able to recognize a loss for U.S. federal income tax purposes until
they receive a final distribution from us.
As a
result of our dissolution and liquidation, for U.S. federal income tax purposes,
our stockholders generally will recognize gain or loss equal to the difference
between (i) the sum of the amount of cash and the fair market value (at the
time of distribution) of property, if any, distributed to them, and
(ii) their tax basis for their shares of our common stock. Liquidating
distributions pursuant to the Plan of Dissolution may occur at various times and
in more than one tax year. Any loss generally will be recognized by a
stockholder only when the stockholder receives our final liquidating
distribution to stockholders, and then only if the aggregate value of all
liquidating distributions with respect to a share is less than the stockholder's
tax basis for that share. Stockholders are urged to consult their own tax
advisors as to the specific tax consequences to them of our dissolution and
liquidation pursuant to the Plan of Dissolution.
We
intend to close our stock transfer books in the near future, and thereafter it
generally will not be possible for stockholders to change record ownership of
our stock.
As
described above, EDCIH plans to seek relief from certain continued SEC reporting
requirements. However, the SEC typically conditions approval of such
limited reporting on, among other factors, the complete cessation of trading in
the registrant’s shares. Accordingly, EDCIH plans to remain publicly
traded and subject to SEC reporting requirements through the first half of 2010
to permit continued trading in EDCIH’s shares through the initial distribution
and any tender offer that may be implemented, and thereafter, the Board will
direct that our stock transfer books be closed and recording of transfers of
common stock be discontinued. At such time as the Board of Directors
determines to close our stock transfer books, certificates representing shares
of our common stock will not be assignable or transferable on our books except
by will, intestate succession or operation of law, and we will not issue any new
stock certificates, other than replacement certificates. In addition, we
anticipate that we will request that our common stock be delisted from the
NASDAQ Capital Market and that trading will be suspended at the same time the
SEC approves the termination of our reporting obligations.
Further
stockholder approval will not be required in connection with the implementation
of the Plan of Dissolution, including for the sale of all or substantially all
of our non-cash assets as contemplated in the Plan of Dissolution.
The
approval of the Plan of Dissolution by our stockholders also will authorize,
without further stockholder action, our Board of Directors to do and perform, or
to cause our officers to do and perform, any and all acts and to make, execute,
deliver or adopt any and all agreements, resolutions, conveyances, certificates
and other documents of every kind that our Board of Directors deems necessary,
appropriate or desirable, in the absolute discretion of the Board of Directors,
to implement the Plan of Dissolution and the transactions contemplated thereby,
including, without limitation, all filings or acts required by any state or
federal law or regulation to wind up its affairs. Accordingly, depending on the
timing of a stockholder vote on the Plan of Dissolution, we may dispose of our
investment in EDC and any and all of our other remaining non-cash assets without
further stockholder approval. As a result, our Board of Directors may authorize
actions in implementing the Plan of Dissolution, including the terms and prices
for the sale of EDC and our other remaining non-cash assets, with which our
stockholders may not agree.
Our
Board of Directors may revoke implementation of the Plan of Dissolution even if
it is approved by our stockholders, and stockholders can revoke the Plan of
Dissolution through a subsequent vote.
Even if
our stockholders approve the Plan of Dissolution, if for any reason our Board of
Directors determines that such action would be in our best interests and the
best interests of our stockholders, our Board of Directors may, in its sole
discretion and without requiring further stockholder approval, revoke the Plan
of Dissolution, and all action contemplated there under, to the extent permitted
by the DGCL. In addition, the Plan of Dissolution may also be revoked by
subsequent stockholder approval, to the extent permitted by the
DGCL. A revocation of the Plan of Dissolution would result in our
stockholders not receiving any further liquidating distributions pursuant to the
Plan of Dissolution. In the event that there are no current year or accumulated
earnings and profits in the years in which dissolution distribution payments
were made, there would be no change in the tax treatment of such dissolution
distributions. If there were current year earnings or profits, in
those years, such dissolution distributions could be treated as a taxable
dividend to the stockholder.
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 September 30, 2009:
|
Total
number
|
Average
price
|
Total
number of shares
|
Maximum
number of shares that
|
|
of
shares
|
paid
per
|
purchased
as part of publicly
|
may
yet be purchased under the
|
Period
|
purchased
|
share
|
announced
plans or programs
|
plans
or programs
|
July
1 through July 31
|
3,872
|
$ 5.04
|
3,872
|
804,405
|
August
1 through August 31
|
14,415
|
$ 5.04
|
14,415
|
789,990
|
September
1 through September 30
|
10,600
|
$ 4.99
|
10,600
|
779,390
|
Total
|
28,887
|
$ 5.02
|
28,887
|
779,390
|
ITEM
6. EXHIBITS
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:
October 30, 2009
By /s/ Clarke H. Bailey
Chief
Executive Officer
By /s/ Michael D. Nixon
Chief
Accounting Officer
(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 Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification
of Chief Accounting Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 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.
|
34