Attached files
1
EDCI Holdings, Inc. and
Subsidiaries
INDEX
Part I Page
Item 1.
Business..........................................................................................................................................................................................................3
Item 1A.
Risk...............................................................................................................................................................................................................6
Item 1B. Unresolved Staff
Comments......................................................................................................................................................................6
Item 2.
Properties.........................................................................................................................................................................................................6
Item 3. Legal
Proceedings..........................................................................................................................................................................................7
Part
II
Item 4.
[Reserved]........................................................................................................................................................................................................9
Item 5.
Market for Registrant’s Common Equity Related Stockholder Matters and
Issuer..............................................................................9
Purchases
of Equity Securities
Item 6.
Selected Financial
Data..................................................................................................................................................................................9
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations..........................................................10
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk............................................................................................................16
Item 8. Financial Statements
Report of Independent
Registered Public Accounting
Firm....................................................................................................................18
Consolidated Balance
Sheet as of December 31, 2009 and
2008..............................................................................................................19
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008.................................................................20
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss) for the
years
ended December 31,
2009 and
2008...............................................................................................................................................................21
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008................................................................22
Notes to Consolidated
Financial
Statements...............................................................................................................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure...........................................................46
Item 9A. Controls and Procedures including Report of Independent
Registered Public Accounting
Firm...................................................46
Item 9B. Other
Information..........................................................................................................................................................................................46
Part III
Item 10. Directors, Executive Officers and Corporate
Governance........................................................................................................................47
Item 11. Executive
Compensation................................................................................................................................................................................49
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters..........................................53
Item 13. Certain Relationships and Related Transactions, and Director
Independence.....................................................................................54
Item 14. Principal Accounting Fees and
Services.....................................................................................................................................................54
Part IV
Item 15.
Exhibits..............................................................................................................................................................................................................54
EX-21.1 SUBSIDIARIES OF ENTERTAINMENT DISTRIBUTION
COMPANY
EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
EX-31.1 SECTION 302, CERTIFICATION OF THE
CEO
EX-31.2 SECTION 906, CERTIFICATION OF THE
CEO
EX-32.1 SECTION 302, CERTIFICATION OF
THE CAO
EX-32.2 SECTION 906, CERTIFICATION OF
THE CAO
2
We, from
time to time, make “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements reflect the
expectations of management at the time such statements are made. The reader can
identify such forward-looking statements by the use of words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intend(s),” “potential,” “continue,” or the negative of such terms,
or other comparable terminology. Forward-looking statements also include the
assumptions underlying or relating to any of the foregoing
statements.
Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors. All forward-looking statements
included in this Report on Form 10-K are based on information available to us on
the date hereof. We assume no obligation to update any
forward-looking statements.
PART
I
ITEM
1. BUSINESS
Overview
As of
January 2010, EDCI Holdings, Inc. (“EDCI”) is a company engaged in a final Plan
of Complete Liquidation and Dissolution (“Plan of Dissolution”) that was
approved by EDCI’s shareholders at a Special Meeting held on January 7, 2010.
The following overview relates to EDCI’s operations in 2009, prior to the
approval of the Plan of Dissolution. In 2009, EDCI was 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 exists to enhance stockholder value by pursuing
acquisition opportunities while continuing to oversee its majority investment in
Entertainment Distribution Company, LLC (“EDC”), a business operating in the
manufacturing and distribution segment of the entertainment
industry. EDCI’s principal executive offices are located in New York
City at 11 East 44th
Street, Suite 1201, New York, New York, 10017 and its telephone number for
investor relations is (646)
401-0084. In this Form 10-K, the terms “we,” “us,” “our” and “the
Company” each refer to EDCI Holdings, Inc. and its wholly-owned and controlled
majority owned subsidiaries on a consolidated bases 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, and its direct and indirect
wholly-owned subsidiaries.
EDCI is
currently comprised of the following: First, EDCI, indirectly through certain
subsidiaries, owns 97.99% of the Limited Liability Company units of EDC, which
was formed through the acquisition of the U.S. and central European CD and DVD
manufacturing and distribution operations of Universal Music Group (“Universal”)
in May 2005. Additionally, EDCI has approximately $50.6 million of
cash and cash equivalents that is unencumbered by EDC and U.S. net operating
loss carry-forwards (“NOLs”) aggregating approximately $295.6 million that do
not begin to expire until 2019, which may potentially be used to offset future
taxable income.
During
2009 we had one reportable business segment operated by our majority owned
subsidiary, EDC. 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 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.
EDCI
acquired its interest in EDC at a time when it was already apparent that CD
volumes would decline over time and continue to be superseded, though at an
unknown rate, by digital (vs. physical) means of distribution. At
that time, industry forecast decline rates were generally in the mid-to-low
single digit range and we believed that at those decline levels it would be
possible to replace lost units and grow the overall profitability of EDC by
acquiring new customers, organically and through acquisitions, in both the core
CD business as well as in adjacent industries that had long-term growth
opportunities. EDC’s supply agreements with Universal also provided
for the “reversion” of certain units that Universal had outsourced to third
parties that would further protect EDC from industry declines in the initial
years of the contract. As a result, we believed the EDC business
would potentially take advantage of EDCI’s NOLs and remained focused on growing
the EDC business. In furtherance of that strategy, in July 2006,
EDC’s presence in the European market was expanded through the acquisition of
the largest CD manufacturing operation in the UK. This
acquisition allowed EDC to secure all of Universal’s UK CD manufacturing
business.
During
2007, physical music CD unit sales for the industry in the United States
declined 16% on a year over year basis. This severe decline rate
materially affected the near-term profitability of EDC’s U.S. business and also
limited the long-term potential benefit of utilizing EDCI’s NOLs. As
it became evident during 2007 that these levels of declines were not abating, we
determined that acquisitions by EDC, especially acquisitions requiring further
investments of EDCI’s cash in EDC, were no longer prudent. We
therefore began to explore a sale or other divestiture of the EDC business with
the expectation that after such a sale EDCI would then use its cash, NOLs and
any additional cash resulting from the sale of EDC for another acquisition that
would better utilize its NOLs.
When it
became evident in early 2008 that there were no acquirers of EDC on acceptable
terms, EDCI determined to concurrently explore acquisitions in alternative
industries using EDCI’s cash, while overseeing the EDC business, with a focus on
cash flow and continuing to explore strategic alternatives for EDC as they
become available.
Due to
the decline in physical music CD unit sales, on December 31, 2008, the Company
completed the sale of substantially all of the U.S. business of EDC to Sony DADC
U.S., Inc (“Sony DADC”) for $26.0 million in cash and certain other
consideration. Following the transaction, EDC continued to operate
and serve its international customers through its facilities in Hannover,
Germany and Blackburn, UK. All information related to EDC’s U.S.
operations is reflected as discontinued operations in this document, including
information from prior periods.
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
ceased substantially all of the operations presently conducted at its Blackburn
facility in the United Kingdom as of December 31, 2009, with the intention of
producing all of the manufacturing volume for Universal, its largest customer,
in EDC’s Hannover plant and plan to do so through the expiration of the
Universal manufacturing agreements in May 2015. However, Universal has objected
to EDC producing certain UK related volume at its Hannover plant and EDC has
submitted the matter for arbitration. See Note 21. Final
closure of the Blackburn facility is planned to occur prior to the next break
option under the Blackburn facility lease on June 18, 2010, notice for which was
given during the third quarter of 2009.
3
On
September 9, 2009, the Board of Directors unanimously approved recommending a
dissolution process to EDCI’s stockholders, and on October 14, 2009 approved the
final Plan of Dissolution of the Company. At a Special Meeting held
on January 7, 2010 the voluntary dissolution and liquidation of EDCI pursuant to
the Plan of Dissolution was approved by 99% of the stockholders voting in favor
of the Plan of Dissolution. Delaware law provides that a corporation
may dissolve upon the recommendation of the Board of Directors of the
corporation, followed by the approval of its stockholders. As the Plan of
Dissolution was approved by the requisite vote of our stockholders at the
Special Meeting, we filed a certificate of dissolution with the Delaware
Secretary of State in January 2010. The Plan of Dissolution provides
for the voluntary dissolution, liquidation and winding up of EDCI. As
of January 2010, we have ceased all of EDCI’s business activities except for
those relating to winding up EDCI’s business and affairs during a minimum
three-year period required under Delaware law, including, but not limited to,
gradually settling and closing its business, prosecuting and defending suits by
or against EDCI, seeking to convert EDCI’s assets into cash or cash equivalents,
discharging or making provision for discharging EDCI’s known and unknown
liabilities, making cash distributions to our stockholders, withdrawing from all
jurisdictions in which EDCI is qualified to do business and, if EDCI is unable
to convert any assets to cash or cash equivalents by the end of the three-year
period, distributing EDCI’s remaining assets in-kind among our stockholders
according to their interests or placing them in a liquidating trust for the
benefit of our stockholders, and, subject to statutory limitations, taking all
other actions necessary to wind up the Company’s business and
affairs. On February 1, 2010, EDCI made an initial dissolution cash
distribution of $3.12 per share of its common stock. In the
aggregate, approximately $21.0 million of EDCI’s cash was returned to
shareholders pursuant to this initial distribution.
EDCI’s
indirect ownership of 97.99% of the membership units of EDC is 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, beginning in January
2010, EDCI’s consolidated financials are 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 applicable legal
requirements. While EDC is currently examining
the possibility of making a dividend distribution from EDC's German subsidiaries
to EDC, such a dividend remains subject to the future operating performance of
EDC’s German subsidiaries and compliance with German law, and the distribution
of any cash from EDC to EDCI is subject to additional security obligations and
additional U.S. legal considerations. However, EDCI is unable to
provide any assurance that its efforts to seek value for its investment in EDC
will result in any additional proceeds. In particular, the
cooperation of Universal, EDC’s largest customer, is critical to any sale of
EDC’s German subsidiaries and based on negotiations with a potential
acquirer during the fourth quarter of 2009 and first quarter of 2010, EDC does
not believe Universal will cooperate with any such transaction. As a
result, any transaction involving the sale of EDC’s German
subsidiaries in the near term is unlikely. 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.
EDC
Business
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 remains not nearly as severe
as that experienced in the U.S. market, but continues to
accelerate. 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 ceased
substantially all of the operations presently conducted at its Blackburn
facility in the United Kingdom as of December 31, 2009 with the intention of
producing 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. However, Universal has objected to EDC
producing certain UK related volume at its Hannover plant and EDC has submitted
the matter for arbitration. See Note 21.
Products
EDC’s
products include pre-recorded CDs and DVDs and manufactured jewel boxes and
trays for the entertainment industry. Piracy and downloading of music
through web sites have caused CD volumes to decline. EDC expects that file
sharing and downloading, both legal and illegal, and portable personal digital
devices will continue to exert downward pressure on the demand for
CDs.
The
digital transfer and downloading of video files has also become more widespread
in large part due to improvement in the speed and quality with which video files
can be transferred and downloaded. As a result, file sharing and
downloading has exerted significant downward pressure on the demand for
DVDs.
Professional
Services
EDC
offers an array of professional services including:
Distribution
Services: product delivery to mass merchants’ regional distribution
centers and wholesalers. EDC provides direct to retail distribution in Europe
and is well positioned to deliver pre-recorded products throughout
Europe. The services provided are an integral part of EDC’s
customers’ supply chain.
Printed
Components and Packaging Services: purchase of printed components and
assembly of shelf ready packages. In response to customer demand for
more environmentally friendly packaging, EDC added the assembly of ECOPAK
products to its service line.
Value Added
Services: custodial responsibilities for inventory storage and control,
returns processing, fulfillment of promotional product, retail price stickering,
product quality evaluations, logistics advice, claims administration, data
interfaces and cash collections.
Assembly
Services: assembly of independently manufactured components
for distribution to retail outlets.
Markets,
Sales and Marketing
EDC
provides CD and DVD manufacturing and distribution services to entertainment
content providers in central Europe. EDC has sales personnel in Hannover,
Germany covering Germany, Austria and Switzerland and the Benelux
territories.
4
Competition
EDC’s
competitors include subsidiaries of media conglomerates that produce content
while others, like EDC, are purely manufacturers and/or
distributors. Competitors include:
Manufacturing
only: MPO, OK Media, DocData and CD-A.
Manufacturing and
Distribution: Arvato Digital Services, Cinram, Sony DADC/Sony
Entertainment Distribution, MPO Fiege and Optimal Media Production.
Competition
in the pre-recorded multimedia industry is intense and winning new customers, as
well as maintaining existing customers, is based on a combination of price,
capacity, quality and the level of service and support. EDC believes
that its competency in providing complete end-to-end manufacturing and
distribution supply chain services differentiates it from many of its
competitors. However, some of EDC’s competitors are larger and may
have more resources available to them to help them manage their business and
respond as the industry continues to experience a decline in
demand.
Service
and Support
EDC is an
integral part of its customers’ supply chain, managing and delivering products
to mass merchant regional distribution centers and wholesalers, including direct
to retail distribution. EDC coordinates the printed material and packaging
functions and ships shelf-ready packages worldwide on demand. EDC generally does
not own finished goods inventory. It provides custodial responsibilities for
inventory management, and storage of finished goods and component parts, product
quality evaluations, logistics advice, claims administration and data interfaces
for its customers.
Customers
EDC’s
major customers are Universal, Navteq and Activision Blizzard.
Universal:
EDC’s manufacturing and distribution agreements with Universal accounted
for approximately 84% and 73% of our 2009 and 2008 revenues, respectively. EDC
plans, manages and monitors the use of resources based on regular forecasts
provided by Universal. Because EDC is dependent on Universal for a significant
amount of its revenues, if market or other factors cause Universal to reduce or
postpone significant levels of current or expected purchase commitments for
EDC’s products, EDC’s operating results and financial condition may be adversely
affected. EDC is currently in arbitration with Universal on various
matters which could significantly impact future revenues from
Universal. See Note 21.
Other: All
other customers of EDC accounted for, in the aggregate, approximately 16% and
27% of our 2009 and 2008 revenues, respectively. EDC has a business development
and sales and marketing team focused on providing a high level of service to
Universal as well as attracting new customers in the music, video, audio book
and gaming markets.
International
Sales
EDC’s
international sales, which in 2009 originated in Germany and the UK, are
denominated in Euros and British pounds, respectively. See Note 22 to
the consolidated financial statements for information concerning revenues and
long-lived assets by geographic area.
Operations
Manufacturing:
EDC currently manufactures its products for the European market at its facility
in Hannover, Germany. EDC has an option to purchase the Hannover
facility, which it currently leases from Universal. EDC believes that this
facility is adequate for its current manufacturing needs.
Distribution:
EDC distributes products for the European market at its facility in
Hannover.
EDC
believes in setting high standards of quality throughout its operations. EDC’s
Hannover, Germany, facility is registeredGermany ISO 9001:2000 the international
standard for quality assurance and ISO 14001 for environmental management. EDC
believes that adhering to the stringent ISO 9001 and 14001 procedures not only
creates efficiency in operations, but also positions EDC to meet the exacting
standards required by its customers.
EDC is
also a member of the Content Delivery and Storage Association (CDSA) and fully
supports and complies with the worldwide CDSA Anti-Piracy program. This
compliance program ensures that EDC only provides services to those intellectual
property owners who have certified and documented ownership and proper use of
content, thus ensuring the legitimacy of customer products.
Raw
Materials and Components
EDC’s
principle raw materials are polystyrene used in the manufacture of jewel boxes
and trays (in Germany only) and polycarbonate used in the manufacture of CDs and
DVDs. EDC has a limited number of suppliers who are able to provide
raw materials. In Germany, EDC purchases polystyrene, polycarbonate and any
jewel boxes and trays, not internally manufactured, from several
suppliers. These inputs are crucial to the production of CDs and DVDs
and, while there are alternative suppliers of these products, it would be
disruptive to EDC’s production if any of its suppliers were unable to deliver
its product to EDC.
Proprietary
Technology
EDC has
non-exclusive DVD replication licensing agreements with MPEGLA, the 3-C and AC-3
Groups (both administered by Philips Electronics), the 6-C Group (administered
by Toshiba Corporation) and Discovision Associates.
Registered
Trademarks
EDC’s
trademarks and service marks are also valued corporate assets protected through
registrations in various foreign countries.
5
Government
Regulation
EDC’s
manufacturing and distribution operations are subject to a range of federal,
state, local and international laws and regulations relating to the environment.
These include laws and regulations that govern discharges into the air, water
and landfills and the handling and disposal of hazardous substances and
wastes. EDC does not anticipate any material effect on its capital
expenditures, earnings or competitive position in order to remain in compliance
with government regulations involving environmental matters.
Seasonality
EDC
typically manufactures and distributes approximately 53% to 58% of its annual
demand by volume in the second half of the calendar year due to seasonality in
the entertainment business. Variability is also experienced on a quarterly basis
with the lowest demand typically being experienced in the first calendar quarter
and with the highest demand occurring in the last calendar quarter. This
seasonality cycles year over year and is influenced by EDC’s customers’ product
release schedules.
Employees
At
December 31, 2009, EDC employed approximately 800 persons. In Germany,
approximately 43% of the workforce of 763 employees is unionized and all
employees, including exempt staff, which represents approximately 4% of the
total employees, are represented by a works council. Collective bargaining
agreements and works council agreements cover all labor relations. In
February 2008, EDC reached an agreement with the works council on an eight year
tariff agreement which runs through 2015.
At
December 31, 2009, EDC employed approximately 20 employees at its Blackburn, UK
location for the specific purpose of winding down the business affairs of that
operation and ensuring that the transition of business affairs from Blackburn to
EDC’s Hannover, Germany facility is completed. It is expected that
EDC will employ certain personnel at its Blackburn facility through June 2010 at
which point there will be no remaining business.
At
December 31, 2009, EDCI had a core corporate staff of 11 employees.
SEC
Filings
We make
available all annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports free of charge
through our Internet website at www.edcih.com as soon
as reasonably practicable after they are filed with, or furnished to, the
Securities and Exchange Commission. These reports are also available on the
Securities and Exchange Commission's Internet website at www.sec.gov.
Our code
of ethics is posted on our Internet website at www.edcih.com. You
can also receive a copy free of charge by sending an email request to
investor.relations@edcih.com or by sending a written request to our offices at
11 East 44th
Street, Suite 1201, New York, NY 10017, Attention: Investor
Relations.
ITEM
1A. RISK FACTORS.
Not
Applicable.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
The
following table sets forth certain information regarding EDCI’s principal
facilities used in its continuing operations:
|
Size
|
Owned
Or
|
Lease
|
||
|
Location
|
(Square
Feet)
|
Leased
|
Expiration
Date
|
Used
|
|
Blackburn,
Lancashire, UK (1)
|
148,869
|
Leased
|
2010
|
Manufacturing
facility and administrative offices for EDC UK information
services, finance and accounting.
|
|
Fishers,
Indiana, U.S.A.
|
2,600
|
Leased
|
2010
|
EDCI
and EDC information services and corporate accounting and
finance.
|
|
New
York, New York, U.S.A.
|
1,323
|
Leased
|
2011
|
EDCI
Corporate Headquarters
|
|
Hannover,
Germany
|
738,000
|
Leased
|
2015
|
Manufacturing
facility and full stocking warehouse and distribution center and
administrative offices for EDC central Europe information services,
finance and accounting.
|
(1) Final
closure of EDC’s UK manufacturing facility is planned to occur prior to the next
break option for the majority of the facility under the Blackburn lease on June
18, 2010, notice for which was given during the third quarter of
2009. The lease break option on a small portion of our leased
facility does not occur until September 2011.
In
addition to the properties above, EDC owns the idle manufacturing facility
located in Kings Mountain, North Carolina that was formerly used in EDC’s U.S.
manufacturing operations. We are taking steps towards selling the
facility in 2010 and thus, the facility is classified and recorded in assets
held for sale in the accompanying consolidated balance sheets and is valued at
its fair value at December 31, 2009.
6
ITEM
3. LEGAL PROCEEDINGS
In
addition to the legal proceedings discussed below, we are, from time to time,
involved in various disputes and legal actions related to our business
operations. While no assurance can be given regarding the outcome of these
matters, based on information currently available, we believe that the
resolution of these matters will not have a material adverse effect on our
financial position or results of our future operations.
Arbitration Claim under the
International Distribution Agreement. On
February 27, 2009, EDC, at its election, provided notice to Universal
International Music (“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 Universal,
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. 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, 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 and a hearing is scheduled for June 2010.
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 19, 2009
notice, UIM alleged that EDC had 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 generally provided with a
contractual opportunity to cure such, although as described below, 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
both held to be valid – even if both Key Failures were cured.
There are
various penalties for both cured and uncured Key Failures. Depending
on whether one or two Key Failures were found valid at arbitration, and whether
EDC were able to cure any such valid Key Failures, EDC could face the
following: 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 both 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. EDC expects that UIM's entire
contractually committed distribution and manufacturing volume under the Supply
Agreements will represent approximately 88% of EDC's total manufacturing and
distribution volume in 2010.
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, however, an amount
cannot be estimated at this time. EDC may also be successful in its claim that
no Key Failures have occurred, but the arbitration panel could reject EDC’s
interpretation of the underlying service levels as they are applicable to future
performance, increasing the risk of future potential Key Failures. 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 claimed 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 claimed that EDC 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 at that time did not elect to enforce that remedy but
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 stated 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 therefore submitted the matter to arbitration in August
2009. An arbitration panel has yet to be agreed to by the parties and
no date for the arbitration has been set.
7
In
subsequent correspondence related to this matter, UIM indicated that it would
begin to order 40% of its UK manufacturing requirements from third party
manufacturers in 2010, while maintaining its claim that EDC had forfeited its
right to continue to service 100% of those UK requirements. UIM also advanced
additional theories under which EDC's closure of the Blackburn facility and the
manufacture of UIM's UK volume out of EDC's Hannover facility would constitute a
breach of the Manufacturing Agreement - including that EDC would be unable to
meet its contractual service level obligations ("SLAs") for UIM UK requirements
manufactured out of Hannover - and EDC's actions constitute a material breach of
the Manufacturing Agreement entitling UIM to terminate the entire Manufacturing
Agreement. EDC responded that these additional theories also lacked merit, that
EDC could satisfy the SLAs and warned UIM of the legal consequences of breaching
the Manufacturing Agreement by procuring 40% of its UK requirements from third
parties. However, on January 14, 2010 EDC confirmed that UIM had begun to order
certain of its UK requirements from third parties.
In
consultation with counsel, EDC continues to believe UIM's claims and remedies
lack merit. In particular, the Manufacturing Agreement expressly provides that
EDC is only obliged to use its "commercially reasonable endeavors" to
manufacture the majority of UIM's UK requirements at its Blackburn facility, and
as previously disclosed in March 2009, at that time 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. Further, EDC believes it can meet all SLAs for UIM's UK
requirements manufactured from its Hannover facility and believes that certain
of the UK requirements ordered by UIM were in fact ordered from Austria, a
location that is geographically more distant from the UK than EDC’s Hannover
facility. However, if UIM were successful in its claims in arbitration EDC would
face material and adverse consequences. The loss of 40% of UIM's UK
requirements, based on the high fixed cost nature of EDC's manufacturing
operations, would have a material adverse effect on its profitability. If UIM
were to prevail in its new argument that EDC's breach provides UIM with the
right to terminate the entire Manufacturing Agreement and UIM so elected, EDC
would lose substantially all of its contractually committed manufacturing
business. EDC expects that UIM's entire contractually committed manufacturing
volume will represent approximately 75% of EDC's total manufacturing volume in
2010, that the UK requirements account for approximately 20% of EDC's total
manufacturing volume, and thus 40% of the UK requirements account for
approximately 8% of EDC's total manufacturing volume.
EDC
believes UIM has breached its obligations to EDC with regard to certain of its
UK requirements, and until resolved UIM will likely continue that breach by
procuring up to 40% of its UK requirements from third parties. EDC will seek to
recover those losses, other losses and punitive damages from UIM in arbitration.
However, UIM's actions will also force EDC to evaluate other cost-reduction
measures in Hannover to mitigate those damages in the short run.
EDC does
not believe UIM’s claim has merit and intends to vigorously defend and prosecute
its position in arbitration but at this early stage in these matters, EDC is not
able to assess the likelihood of a favorable outcome. However, if UIM
were successful in its claim and enforced its alleged remedy, EDC could suffer
loss of volumes that, based on the high fixed cost nature of EDC’s manufacturing
operations, would have a material adverse effect on its
profitability.
Shareholder Derivative Actions:
On September 6, 2006, Vladimir Gusinsky (“Gusinsky”), a Company
shareholder, commenced a derivative action (the “Gusinsky Action”) in the
Supreme Court of the State of New York, New York County,
against EDCI (as nominal defendant) and against certain of EDCI’s current and
former officers and directors as defendants. The complaint, as amended in
December 2006 and January 2007, purportedly on behalf of EDCI,
contained a variety of allegations relating to the backdating of certain stock
option grants. On January 26, 2007 and February 7, 2007, two additional
derivative actions were commenced in the United States District Court for the
Southern District of New York by two different Company shareholders, Larry L.
Stoll and Mark C. Neiswender, respectively (the “Subsequent Actions”). The
Subsequent Actions were identical to each other and asserted the same claims as
those asserted in the Gusinsky Action regarding a subset of the same option
grants at issue in that action along with additional claims alleging violations
of federal securities laws.
A Special
Litigation Committee of the Board of Directors of EDCI, following an internal
investigation, concluded that there was no conclusive or compelling evidence
that any of the named defendants in the lawsuits breached the fiduciary duties
of care or loyalty, or acted in bad faith with respect to their obligations to
EDCI or its shareholders, and further concluded that it would not be in EDCI’s
best interest to pursue any claims with respect to these grants. EDCI also
restated certain financial statements as a result of this internal
investigation.
On
January 30, 2008, all parties to the Gusinsky Action and the Subsequent Actions
entered into an agreement to settle both actions. The agreement was
subject to the approval of the Court. Pursuant to the settlement
agreement, EDCI’s insurer agreed to pay plaintiffs’ counsel in the Gusinsky
Action and the Subsequent Actions for their fees and expenses, and to pay for
the costs of notifying the Company’s shareholders of the
settlement. EDCI also implemented certain changes to its Equity
Compensation Policy and adopted related reform policies. In exchange,
the plaintiffs in both the Gusinsky Action and the Subsequent Actions agreed to
dismiss their claims with prejudice, forego any appeals and release all the
defendants from all claims that were or could have been asserted in either
action and arise out of or are based upon or relate in any way to any of the
allegations set forth in the complaints. The papers in support of
preliminary approval of the settlement were filed in the Gusinsky Action on
January 31, 2008 and on April 30, 2008 the Court granted preliminary
approval of the settlement and scheduled a settlement hearing. On
September 17, 2008, the Court issued a final order approving the settlement, but
denying plaintiffs’ counsels’ application for fees and expenses. A
judgment to that effect was then entered by the Court on September 25,
2008.
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 agreed not to oppose any such application for attorney’s
fees. On December 17, 2009, the Court approved the plaintiffs’ appeal
and awarded the requested attorney’s fees, which fees were paid by EDCI’s
insurer in accordance with the previous settlement agreement. EDCI
had further sought reimbursement for the insurable portions of certain fees
incurred related to this matter from its insurer, including through the
initiation of litigation in 2009. On February 8, 2010, EDCI settled
all related claims with its insurer for a payment to EDCI of $1.5
million.
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. In 2009, the Court denied 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 by
EDC. The Court has stayed the motion for summary judgment pending a
decision on claim construction, a hearing for which was held in December,
2009. On January 22, 2010, the Court dismissed the action against the
individual defendants, Messrs. Caparro and Copland. 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.
8
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. In November
2009, EDC and Koninklijke Philips Electronics N.V. reached a settlement of the
dispute in which the full amount of the claim was agreed to be paid. EDC was
fully indemnified for the claim under the Manufacturing Agreement with UIM and
as such incurred no cost as a result of the settlement.
Michael W. Klinger
Litigation. On April 17, 2009, EDCI,
EDC and Entertainment Distribution Company (USA) LLC (a wholly-owned subsidiary
of EDC) (“EDC USA”) (collectively, the “EDC Companies”) filed suit against
Michael W. Klinger, the former Executive Vice President and Chief Financial
Officer of EDCI, in the United States District Court for the Southern District
of New York (the “Klinger New York Complaint”). The complaint related
to events surrounding Mr. Klinger’s termination of employment from EDCI,
including certain disputed severance payments authorized by Mr.
Klinger. The Klinger New York Complaint sought a declaratory judgment
regarding the nature of Mr. Klinger’s termination of employment, recovery for
losses suffered by EDCI et. al. in connection with Mr. Klinger’s approval of the
severance payments, and other fees and costs. On April 23, 2009, Mr.
Klinger filed a Charge of Discrimination against the EDC Companies with the
Equal Employment Opportunity Commission (“EEOC”) alleging age discrimination and
retaliation (the “EEOC Complaint”). On May 8, 2009, Mr. Klinger also
filed a complaint against the EDC Companies and Mr. Robert L. Chapman, Jr., then
CEO of EDCI and EDC, in the United States District Court for the Southern
District of Indiana (the “Klinger Indiana Counter-Suit”), which included claims
under the Age Discrimination in Employment Act and COBRA and other claims for
breach of fiduciary duties. The Klinger Indiana Counter-Suit sought
damages for breach of Mr. Klinger’s employment agreement, certain statutory
damages for unpaid wages and compensation due to Mr. Klinger, damages for
alleged defamation, and related costs and fees. On December 16, 2009,
the Board of Directors, Mr. Chapman, and Mr. Klinger reached a settlement of all
legal disputes existing between them. As a result, the EDC Companies withdrew
their notice of termination for cause, retroactive to April 13, 2009, the date
of Mr. Klinger’s separation from employment, and Mr. Klinger withdrew his notice
of resignation for good reason. The EDC Companies have accepted Mr. Klinger's
voluntary resignation effective December 17, 2009 and settled all disputes for
approximately $0.3 million.
PART
II
ITEM 4. [Reserved]
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
EDCI’s
common stock trades on the NASDAQ Capital Market under the symbol "EDCI." The
table below sets forth the inter-day high and low sale prices for the common
stock on the NASDAQ Capital Market for the periods indicated. All per share
amounts reflect the effect of the reorganization as described in Note 1 in the
consolidated financial statements.
|
Price
Range of
|
||||
|
Common
Stock
|
||||
|
High
|
Low
|
|||
|
Year
Ended December 31, 2009
|
||||
|
First
Quarter
|
$ 4.84
|
$ 3.61
|
||
|
Second
Quarter
|
$ 5.50
|
$ 4.16
|
||
|
Third
Quarter
|
$ 6.39
|
$ 4.76
|
||
|
Fourth
Quarter
|
$ 6.45
|
$ 5.46
|
||
|
Year
Ended December 31, 2008
|
||||
|
First
Quarter
|
$ 7.40
|
$ 4.60
|
||
|
Second
Quarter
|
$ 5.80
|
$ 3.90
|
||
|
Third
Quarter
|
$ 5.90
|
$ 3.30
|
||
|
Fourth
Quarter
|
$ 4.96
|
$ 2.17
|
||
At March
1, 2010 there were approximately 1,268 holders of record of EDCIH’s common
stock.
On
February 1, 2010, EDCI made an initial dissolution cash distribution of $3.12
per share on common stock outstanding as of January 20, 2010. In
aggregate, approximately $21.0 million of EDCI’s cash was returned to
shareholders.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2009, with respect to
EDCI’s shares of common stock that may be issued under EDCI’s existing equity
compensation plan, which has been approved by the stockholders. EDCI
currently does not have any equity compensation plans related to our publicly
traded common stock that have not been approved by stockholders. Pursuant to the
terms of the Incentive Plan under which options and RSU’s are granted, the
Compensation Committee of the Board of Directors is authorized to and has
approved the suspension new grants of options and RSUs effective upon
stockholder approval of the Plan of Dissolution.
|
EQUITY
COMPENSATION PLAN INFORMATION
|
||||||||||
|
Plan
Category
|
Number
of Common
Shares
to be Issued
Upon
Exercise of
Outstanding
Options
|
Weighted
Average
Exercise
Price
of
Outstanding
Options
|
Number
of Common Shares
Remaining
Available for Future
Issuance
Under Equity Compensation
Plans
(Excluding Common Shares
Reflected
in Column (a))
|
|||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plan approved by stockholders
|
137,053
|
$
|
31.32
|
873.227
|
||||||
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable
9
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") is intended to provide a reader of our financial statements with a
narrative from the perspective of our management on our financial condition,
results of operations, liquidity and certain other factors that may affect our
future results. Our MD&A is presented in seven sections:
• Overview and Key
Events
• Results of
Operations
• Financial Condition and
Liquidity
• Outlook
• Critical Accounting Policies and
Estimates
• Recently Issued Accounting
Pronouncements
• Other
Our
MD&A should be read in conjunction with the Consolidated Financial
Statements and related Notes included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Overview
and Key Events
We have
one reportable business segment operated by our majority owned subsidiary,
EDC. EDC provides pre-recorded products and distribution services to
the entertainment industry with operations serving central Europe and the
UK. EDC was formed by the acquisition of the U.S. and central
European CD and DVD manufacturing and distribution operations from Universal in
May 2005. As part of the transaction, EDC entered into supply
agreements with Universal with initial terms of 10 years under which it became
the exclusive manufacturer and distributor for Universal’s CD and DVD
manufacturing requirements and distribution requirements for the U.S. and
central Europe. In July 2006, EDC’s presence in the European market was expanded
when it acquired a CD manufacturing operation in Blackburn, UK
(“Blackburn”).
We
announced on October 31, 2008, and closed on December 31, 2008, the sale of
substantially all of the U.S. business of EDC to Sony DADC for $26.0 million in
cash subject to certain post-closing adjustments. The specific assets
transferred were: EDC’s distribution operations located in Fishers, Indiana;
EDC’s U.S. supply agreements with Universal; all of the equipment located in
EDC’s Fishers, Indiana distribution facility and certain manufacturing equipment
located in EDC’s Kings Mountain, North Carolina facility; and the transfer of
certain other of EDC’s U.S. customer relationships. EDC no longer
operates manufacturing and distribution facilities in North
America. The sale agreement included customary representations and
warranties accompanied by certain indemnification rights. Substantially
all of EDC's assets are pledged as collateral to secure those indemnification
rights for a period of at least three years following the closing of the
transaction. EDC agreed to provide certain transition services to
Sony following the closing. The required production service process
was completed at the end of February 2009. Following the transaction,
EDC continued to operate and serve its international customers through its
facilities in Hannover, Germany and Blackburn, UK. All information
related to EDC’s U.S. operations is reflected as discontinued operations in this
document, including information from prior periods.
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”). EDC implemented the Consolidation 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 the Blackburn operation 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 the Blackburn facility, management determined and EDC’s Board of
Directors confirmed that it was no longer commercially reasonable to continue
operating the Blackburn manufacturing facility. As a result of the
Consolidation, EDC ceased substantially all of the operations previously
conducted at its Blackburn facility in the United Kingdom as of December 31,
2009 with the intention of producing 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. However, Universal has
objected to EDC continuing to produce certain UK related volume at its Hannover
plant and we have submitted the matter for arbitration. See Note
21. Final closure of the Blackburn facility is planned to occur prior
to the next break option under the Blackburn facility lease on June 18, 2010,
notice for which was given during the third quarter of 2009.
On
September 9, 2009, our Board of Directors unanimously approved recommending a
dissolution process to EDCI’s stockholders, and on October 14, 2009 approved the
final Plan of Dissolution. At a Special Meeting held on January 7, 2010 the
stockholders of EDCI approved the voluntary dissolution and liquidation of EDCI
pursuant to the Plan of Dissolution. Delaware law provides that a corporation
may dissolve upon the recommendation of the Board of Directors of the
corporation, followed by the approval of its stockholders. As the Plan of
Dissolution was approved by the requisite vote of our stockholders at the
Special Meeting, we filed a certificate of dissolution with the Delaware
Secretary of State in January 2010.
The Plan
of Dissolution provides for the voluntary dissolution, liquidation and winding
up of EDCI. As of January 2010, we have ceased all of EDCI’s business
activities except for those relating to winding up EDCI’s business and affairs
during a minimum three-year period required under Delaware law, including, but
not limited to, gradually settling and closing its business, prosecuting and
defending suits by or against EDCI, seeking to convert EDCI’s assets into cash
or cash equivalents, discharging or making provision for discharging EDCI’s
known and unknown liabilities, making cash distributions to our stockholders,
withdrawing from all jurisdictions in which EDCI is qualified to do business
and, if EDCI is unable to convert any assets to cash or cash equivalents by the
end of the three-year period, distributing EDCI’s remaining assets in-kind among
our stockholders according to their interests or placing them in a liquidating
trust for the benefit of our stockholders, and, subject to statutory
limitations, taking all other actions necessary to wind up the Company’s
business and affairs. On February 1, 2010, EDCI made an initial
dissolution cash distribution of $3.12 per share of its common
stock. In aggregate, approximately $21.0 million of EDCI’s cash was
returned to shareholders.
EDCI’s
indirect ownership of 97.99% of the membership units of EDC is 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, beginning in January
2010, EDCI’s consolidated financials are 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 applicable legal requirements. While EDC is
currently examining the possibility of making a dividend distribution from EDC's
German subsidiaries to EDC, such a dividend remains subject to the future
operating performance of EDC’s German subsidiaries and compliance with German
law, and the distribution of any cash from EDC to EDCI is subject to additional
security obligations and additional U.S. legal considerations.
However, EDCI is unable to provide any assurance that its efforts to seek value for its investment in EDC will result in any additional proceeds. In particular, the cooperation of Universal, EDC’s largest customer, is critical to any sale of EDC’s German subsidiaries and based on negotiations with a potential acquirer during the fourth quarter of 2009 and first quarter of 2010, EDC does not believe Universal will cooperate with any such transaction. As a result, any transaction involving the sale of EDC’s German subsidiaries in the near term is unlikely. 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.
10
However, EDCI is unable to provide any assurance that its efforts to seek value for its investment in EDC will result in any additional proceeds. In particular, the cooperation of Universal, EDC’s largest customer, is critical to any sale of EDC’s German subsidiaries and based on negotiations with a potential acquirer during the fourth quarter of 2009 and first quarter of 2010, EDC does not believe Universal will cooperate with any such transaction. As a result, any transaction involving the sale of EDC’s German subsidiaries in the near term is unlikely. 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.
Results
of Operations
Revenues
for 2009 and 2008 were $187.9 million and $238.4 million, respectively. The
components of the revenue decline from 2008 to 2009 were as follows: $31.3
million due to a decline in volumes primarily at our UK operations, $11.3
million due to the impact of unfavorable exchange rate fluctuations and $7.9
million due to deteriorating prices and product mix. The results for
2009 included a loss from continuing operations of $0.1 million compared to a
loss from continuing operations of $13.2 million in 2008. The 2009 period
included a charge of $7.1 million related to severance costs for the UK facility
closure and the 2008 period included a charge of $26.4 million for the
impairment of long-lived assets.
Year
Ended December 31, 2009 compared to Year Ended December 31,
2008
Revenues.
Revenues for 2009 were $187.9 million compared to $238.4 million for
2008. The following table illustrates the components of changes in
revenue when comparing 2008 to 2009 by revenue line.
|
2008
|
Volume
|
Price/Mix
|
Exchange
Rate
|
2009
|
||||||
|
Product
Revenues
|
$ 181.1
|
$ (26.5)
|
$ (9.8)
|
$ (9.1)
|
$ 135.7
|
|||||
|
Service
Revenues
|
57.3
|
(4.8)
|
1.9
|
(2.2)
|
52.2
|
|||||
|
Total
Revenue
|
$ 238.4
|
$ (31.3)
|
$ (7.9)
|
$ (11.3)
|
$ 187.9
|
|||||
Product Revenues. Product
revenues were $135.7 million in 2009 compared to $181.1 million in
2008. The decrease is due to volume declines, primarily at our UK
operations, deteriorated pricing and unfavorable exchange rate fluctuations from
the devaluing of the Euro and Pound. Our central European operations were
negatively impacted by deteriorated pricing and lower pass through costs in
addition to unfavorable exchange rate fluctuations, offset slightly by higher
volumes. Revenues of our UK operations in 2009 decreased compared to
2008 primarily due to lower volumes, which included the impact of the loss of
certain customer accounts including certain customer accounts with unfavorable
pricing and excessive credit risk, unfavorable exchange rate fluctuations and
deteriorating pricing.
Service
Revenues. Service revenues were $52.2 million in 2009 compared
to $57.3 million in 2008. We experienced a decrease in volumes in
2009 compared to 2008 primarily due to the loss of a significant customer,
revenues for which were included in 2008, and unfavorable exchange rate
fluctuations, offset slightly by improved pricing.
Gross Profit on
Product Revenues and Service Revenues. Gross profits were $36.0 million,
or 19.2% of revenues, during 2009 compared to $47.9 million, or 20.1% of
revenues, during 2008. The following table shows the elements impacting gross
profit when comparing 2008 to 2009 by revenue line.
|
2008
|
Volume
|
Cost/Mix
|
Exchange
Rate
|
2009
|
|||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
||||||
|
Product
Revenues
|
$
29.4
|
16.2%
|
$ (8.1)
|
-1.1%
|
$ (0.6)
|
-0.1%
|
$ (0.3)
|
0.0%
|
$
20.4
|
15.0%
|
|||||
|
Service
Revenues
|
18.5
|
32.3%
|
(2.9)
|
-2.4%
|
0.5
|
0.4%
|
(0.5)
|
-0.4%
|
15.6
|
29.9%
|
|||||
|
Total
Gross Profit
|
$
47.9
|
20.1%
|
$
(11.0)
|
-0.9%
|
$ (0.1)
|
0.1%
|
$ (0.8)
|
-0.1%
|
$
36.0
|
19.2%
|
|||||
Product Revenues. Gross
profit on product revenues was $20.4 million, or 15.0% of product revenues, in
2009 compared to $29.4 million, or 16.2% of product revenues, in
2008. Gross profit of our UK operations decreased as a result of
volume declines, partially offset by cost savings efforts. Gross
profit in our central European operations decreased in 2009 compared to 2008
primarily due to deteriorating special projects, DVD and third party customer
pricing.
Service Revenues. Gross
profit on service revenues was $15.6 million, or 29.9% of service revenues, in
2009 compared to $18.5 million, or 32.3% of service revenues, in 2008. Gross
profit on service revenues declined in 2009 compared to 2008 primarily due to
revenue 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 $27.9 million
in 2009 compared to $32.2 million in 2008. The decrease is primarily due to
exchange rate fluctuations, lower professional fees and a decrease in
compensation expense and severance costs.
Severance Costs
for UK Facility Closure. We recorded
restructuring expense of $7.1 million in 2009 related to severance charges
incurred in connection with the consolidation of our Blackburn, UK and Hannover,
Germany operations.
Impairment of
Long-Lived Assets. We recorded an impairment of long-lived assets of
$26.4 million in 2008 related to the decline in value of intangible assets
related to our central European operations, Universal manufacturing and
distribution service supply agreements and third party customer supply and
relationship agreements.
Amortization of
Intangible Assets. There was no
amortization expense in 2009 compared to $6.2 million in 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.
11
Other
Income (Expenses)
Interest
Income. Interest income in 2009 was $0.5 million compared to
$3.4 million in 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 in interest income
reflects management’s conservative approach in managing the investment of cash
in 2009 whereby cash preservation was prioritized over income
generation.
Interest
Expense. Interest expense in 2009 was $0.8 million compared to
$2.2 million in 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 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 2009.
Gain on Currency Swap, net.
We recorded a gain on our currency swap of $2.1 million in 2009 and a
gain of $1.5 million in 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. The gain in 2008 reflects the adjustment in the
valuation of the currency swap from the decline of the Euro against the U.S.
Dollar during 2008.
Gain (Loss) on Currency Transaction,
net. We recorded a gain of $0.5 million in 2009 compared to a loss of
$3.2 million in 2008 on intercompany transactions among EDC’s U.S. and
international operations denominated in their local currency.
Other Income (Expense),
net. We recorded income of $0.6 million in 2009 compared to
loss of $0.4 million in 2008. The income in 2009 is primarily due to
$1.0 million for an additional insurance settlement receivable for the
reimbursement of costs previously incurred related to stock options litigation,
partially offset by $0.4 million in realized loss on investments associated with
the termination of our deferred compensation plan during 2009. The
loss in 2008 is primarily due to a realized loss on the sale of investments of
$0.3 million and an impairment charge of $0.1 million related to the write down
of certain investments to fair value.
Income Taxes. We
recorded income tax expense of $4.1 million in 2009 compared to income tax
benefit of $4.6 million in 2008. Our
central European operations generated higher taxable income in 2009 compared to
2008. The benefit recorded in 2008 reflects the tax effected impact
of the write down of certain intangible assets at our central European
operations. Additionally, we continue to maintain a full valuation
allowance on our net U.S. deferred tax assets.
Discontinued
Operations and Gain (Loss) on Sale
Our
discontinued operations include the results of EDC’s U.S. operations of which
certain assets were sold on December 31, 2008, the Messaging business of which
substantially all of the assets were sold on December 31, 2006, the
international Messaging business, the assets of which were sold during 2007 and
the Paging business which we began exiting in May 2001. We recorded a loss from
discontinued operations of $2.6 million and $11.8 million for the years ended
December 31, 2009 and 2008, respectively.
We also
recorded a loss of less than $0.1 million in 2009 and a gain of $2.7 million in
2008 related to the sale of the U.S. EDC operations.
For a
more detailed discussion of the results of these discontinued operations and
gains on the sale of these businesses see Note 3 included in Item 7, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Financial
Condition and Liquidity
Overview
At
December 31, 2009, we had cash and cash equivalents totaling $78.1 million, of
which $50.6 million was cash held by the EDCI and $27.5 was cash held at EDC. At
December 31, 2009, the principal sources of liquidity were our unrestricted cash
and cash equivalents. On February 1, 2010, EDCI made an initial
dissolution cash distribution of $3.12 per share on common stock
outstanding. In the aggregate, approximately $21.0 million of EDCI’s
cash was returned to shareholders pursuant to this initial
distribution.
At
December 31, 2009, EDCI had investments of $0.9 million in one auction-rate
security. Due to the uncertainty surrounding the liquidation of this
investment, this security has been classified as long-term on our consolidated
balance sheet at December 31, 2009.
EDC
expects to use its cash and cash equivalents for working capital and other
general corporate purposes in addition to payments of debt
obligations. EDCI plans to use its cash and cash equivalents in
connection with the Plan of Dissolution. We believe that the
liquidity position of each of EDCI and EDC is adequate to fund their operating
needs and to provide EDC with flexibility to respond to further changes in its
business environment. The challenges of the present business environment and
disagreements with its primary customer 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. In addition, EDCI does not
guarantee any of the liabilities of EDC.
Derivative
Activities
EDC
entered into a cross currency rate swap agreement with a commercial bank on May
31, 2005. The objective of this swap agreement was to manage foreign
currency exposure arising from EDC’s intercompany loan to its German subsidiary
and is therefore, for purposes other than trading. In January 2009,
the U.S. dollar strengthened versus the Euro and EDC was able to settle the
currency swap obligation for $2.1 million on January 23, 2009.
Cash
Flows
Operating Activities. Cash
provided by operating activities in 2009 was $7.0 million compared to $8.3
million in 2008. The positive cash flows from operating activities in
2009 were primarily due to $1.7 million in income (adjusted for non-cash items),
changes in long term assets and other liabilities of $2.6 million, working
capital changes of $1.7 million and changes in restricted cash of $0.9
million. The working capital changes in 2009 were primarily driven by
decreases in accounts receivable of $9.3 million, $5.6 million for prepaid
expenses and other current assets and $1.9 million for inventories, offset by
decreases of $8.6 million in accrued liabilities and income taxes payable and
$6.5 million in accounts payable. Income (adjusted for non-cash
items) declined to $1.7 million in 2009 from income (adjusted for non-cash
items) of $17.3 million for 2008 primarily due to lower sales volume during 2009
and certain restructuring charges incurred related to the closure of our EDC UK
operations.
12
Working
capital changes in 2009 included the following:
|
·
|
A
decrease of $9.3 million in accounts receivable in 2009. 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 the end of 2008 and the decrease in
sales volumes in 2009 compared to 2008, including the wind down of our UK
operations.
|
|
·
|
A decrease of $5.6
million in prepaid and other current assets in 2009. The
decrease in 2009 was primarily due to a decrease of approximately
$2.9 million in billings related to certain pass through costs in Germany,
$1.8 million for the wind down of our now discontinued U.S. operations,
the collection of a tax refund of approximately $0.8 million at our UK
operations and the recognition of prepaid items throughout
2009.
|
|
·
|
A
decrease of $1.9 million in inventory in 2009. The decrease in
2009 primarily relates to the sale of remaining inventory of our now
discontinued U.S. operations and the wind down of our now ceased UK
operations.
|
|
·
|
A
decrease of $8.6 million in accrued liabilities and income taxes payable
in 2009. The decrease in 2009 reflects the settlement of
approximately $5.6 million in liabilities related to our discontinued U.S.
operations, $2.2 million in reduced liabilities in our central European
operations primarily from lower severance and royalty accruals and $1.5
million in reduced liabilities for our UK operation, which ceased
operations at the end of 2009.
|
|
·
|
A
decrease of $6.5 million in accounts payable in 2009.
The decrease in 2009 reflects the payment of accounts payable balances
related to our discontinued U.S. operations, which were outstanding at the
end of 2008, and lower purchasing levels associated with the wind down of
our UK operations.
|
Investing Activities.
Investing activities in 2009 included the release of $5.4 million of
funds that were escrowed related to our long term borrowing agreement in the
Senior Secured Credit Facility that we repaid in 2009 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. Also during 2009, we had
capital expenditures of $1.5 million and proceeds from the sale of certain
auction-rate securities of $0.2 million. Additionally, on January 23,
2009, we paid $2.1 million to settle our cross currency swap.
Financing Activities. During
2009, we made payments of $8.6 million under our long-term debt and capital
lease obligations and $1.0 million under our employee loan
agreements. Included in the aforementioned $8.6 million of long-term
and capital lease payments, is EDC’s payment in full of all remaining balances
outstanding, approximately $7.1 million including interest, related to
its Senior Secured Credit Facility with Wachovia Bank, National Association
and ING Capital, LLC (the “Lenders”) and Wachovia Bank as administrative agent
(the “Agent”). Commensurate with the final payoff of $7.1 million, EDC
terminated all existing lending facilities with the Lenders and the
Agent. Also, we paid $0.2 million during 2009 to repurchase shares of our
common stock.
Capital
Expenditures
Capital
expenditures amounted to approximately $1.5 million in 2009 and are anticipated
to be approximately $2.9 million in 2010. Anticipated expenditures in 2010 are
primarily targeted for normal equipment and facility maintenance, replacement
and upgrades and efficiency improvements.
Income
Tax Matters
Our
recent cash outlays for income taxes have been limited primarily to foreign
income taxes paid by EDC. At December 31, 2009, EDCI had U.S. and international
net operating loss carryforwards (“NOLs”) aggregating approximately $366.4
million, which may be used to offset certain future taxable income and reduce
federal and international income taxes. The amount of EDCI’s NOLs and
the percentage of EDCI’s share base that has changed hands has not been audited
by the IRS or others.
These
NOLs begin to expire in 2010 as noted in the table below.
|
Unrestricted U.S.
|
Restricted U.S.
|
Canada
|
Total
|
|
|
2010
|
$ -
|
5.9
|
46.0
|
$ 51.9
|
|
2011
|
-
|
9.0
|
-
|
9.0
|
|
2012
|
-
|
9.4
|
-
|
9.4
|
|
2015
|
-
|
-
|
0.3
|
0.3
|
|
2019
|
43.2
|
-
|
-
|
43.2
|
|
2020
|
50.6
|
-
|
-
|
50.6
|
|
2021
|
65.0
|
-
|
-
|
65.0
|
|
2022
|
13.4
|
-
|
-
|
13.4
|
|
2023
|
20.8
|
-
|
-
|
20.8
|
|
2024
|
48.4
|
-
|
-
|
48.4
|
|
2025
|
2.0
|
-
|
-
|
2.0
|
|
2026
|
29.0
|
-
|
0.2
|
29.2
|
|
2027
|
12.8
|
-
|
-
|
12.8
|
|
2028
|
-
|
-
|
-
|
|
|
2029
|
10.4
|
-
|
-
|
10.4
|
|
TOTAL
|
$ 295.6
|
$ 24.3
|
$ 46.5
|
$ 366.4
|
EDCI also
has restricted U.S. NOL's of $24.3 million, which relate to losses incurred by
former messaging subsidiaries before they were acquired by EDCI and can only be
utilized by each subsidiary generating taxable income. EDCI has
discontinued operations in those subsidiaries, so it does not expect those
losses will be utilized before they expire. EDCI also has $46.5 million of
Canadian NOLs. The Canadian NOL's were generated by EDCI's Messaging
business and can only be utilized if the company generates taxable income in
Canada before their expiration. At this time, the company has no business
activity in Canada to generate income needed to utilize the NOL's and it is
expected that those NOL's will expire without being utilized.
13
Outlook
EDCI
Pursuant
to the Plan of Dissolution, as of January 2010, we have ceased all of EDCI’s
business activities except for those relating to winding up EDCI’s business and
affairs during a minimum three-year period required under Delaware law,
including, but not limited to, gradually settling and closing its business,
prosecuting and defending suits by or against EDCI, seeking to convert EDCI’s
assets into cash or cash equivalents, discharging or making provision for
discharging EDCI’s known and unknown liabilities, making cash distributions to
our stockholders, withdrawing from all jurisdictions in which EDCI is qualified
to do business and, if EDCI is unable to convert any assets to cash or cash
equivalents by the end of the three-year period, distributing EDCI’s remaining
assets in-kind among our stockholders according to their interests or placing
them in a liquidating trust for the benefit of our stockholders, and, subject to
statutory limitations, taking all other actions necessary to wind up the EDCI’s
business and affairs.
EDCI’s
indirect ownership of 97.99% of the membership units of EDC is 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, however, beginning in January 2010, EDCI’s consolidated
financial statements are 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 applicable legal requirements. While EDC is currently
examining the possibility of making a dividend distribution from EDC's German
subsidiaries to EDC, such a dividend remains subject to the future operating
performance of EDC’s German subsidiaries and compliance with German law,
and the distribution of any cash from EDC to EDCI is subject to additional
security obligations and additional U.S. legal considerations. However, EDCI is
unable to provide any assurance that its efforts to seek value for its
investment in EDC will result in any additional proceeds. In
particular, the cooperation of Universal, EDC’s largest customer, is critical to
any sale of EDC’s German subsidiaries and based on negotiations with a
potential acquirer during the fourth quarter of 2009 and first quarter of 2010,
EDC does not believe Universal will cooperate with any such
transaction. As a result, any transaction involving the sale of
EDC’s German subsidiaries in the near term is unlikely. 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.
On
February 1, 2010, EDCI made an initial dissolution cash distribution of $3.12
per share of its common stock. In the aggregate, approximately $21.0
million of EDCI’s cash was returned to shareholders pursuant to the Plan of
Dissolution. EDCI is also contemplating the implementation of a
tender offer using up to $10 million of EDCI’s cash, proceeds for which were
reserved for in the amounts approved by the EDCI Board of Directors and
subsequently approved in a near unanimous basis by EDCI’s shareholders under the
Plan of Dissolution.
EDC
The
difficult operating environment and economic trends that began in 2008 continued
in 2009 and are anticipated to continue in 2010. Having completed the
sale and wind down of EDC’s U.S. operations and the Blackburn-Hannover
consolidation, the sole EDC focus has shifted to maximizing the profitability at
its remaining international operations in Hannover, Germany. While
the Blackburn-Hannover Consolidation will improve profitability at our remaining
Hannover facility, we anticipate decline rates of CD and DVD volumes in Europe
in the 10-15% range for 2010. As in 2009, EDC will continue its
cost-savings initiatives and plan to right size operating capacity in 2010 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. As a result of the Consolidation, EDC ceased substantially
all of the operations presently conducted at its Blackburn facility in the
United Kingdom as of December 31, 2009 with the intention of producing 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. However, Universal has objected to EDC continuing to produces certain UK
related volume and we are in arbitration with regard to this disputed
volume. See Note 21. However, Universal has objected to
EDC producing certain UK related volume at its EDC Hannover plant and EDC has
submitted the matter for arbitration. See Note 21. 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.
EDC
implemented the Consolidation 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 its Blackburn
operation 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 are ultimately expected to total approximately $9 million, which
is in line with previously disclosed estimates. Closure costs are
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
UK and approximately $6.0 million of closure costs were paid in
2009. After completion of the Consolidation, the Company plans to
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 comparable to what it would have been without the Consolidation,
resulting in an original estimated payback of the closure costs within 2.5
years. However, Universal has objected to EDC continuing to produce certain UK
related volume and we are in arbitration with regard to the disputed volume. See
Note 21.
EDC
ceased all Blackburn operations as of December 31, 2009, after completion of the
high-volume “peak” manufacturing period, to limit any potential customer
disruption. Final closure of the Blackburn facility 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.
14
Critical
Accounting Policies and Estimates
General. Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates. We believe the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of the
Company’s consolidated financial statements.
Revenue
Recognition. Our revenue consists of pre-recorded entertainment product
revenues and distribution service revenues earned from the fulfillment of
services. We recognize revenue when a signed contract exists, the fee is fixed
and determinable, delivery terms are met, and collection of the resulting
receivable is probable. Service revenue is recognized as services are performed.
For certain components, including printed materials, we may act as an agent for
the customer, and the customer reimburses us for any incurred costs plus a
handling fee. The reimbursement for the costs is reported as a reduction to
expense and the handling fees are recognized as revenue. Shipping and handling
costs that are reimbursed by customers for invoice charges such as postage,
freight packing and small order surcharges are recorded as revenue and cost of
revenue.
Inventory. Inventories are
valued using a first in, first out method and are stated at the lower of cost or
market. Generally, EDC does not own a significant amount of finished goods and
component parts produced by it. Consequently, reserves relate
primarily to raw materials. Our
inventories at December 31, 2009 were $3.7 million, net of reserves of $1.3
million.
Impairment of
Long-Lived Assets. We review the recoverability of long-lived assets,
including property, plant and equipment and intangible assets with finite lives
when events or changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. The assessment of possible impairment
is based on our ability to recover the carrying value of the asset from the
expected future cash flows of the related operations. To the extent that the
asset is not recoverable, we measure the impairment based on the projected
discounted cash flows of the asset over the remaining useful life. The
measurement of impairment requires us to make estimates of these cash flows
related to long-lived assets, as well as other fair value
determinations.
Negative
operating conditions encountered in 2008 and the loss of a significant
distribution customer at EDC’s central European operation indicated that the
carrying value of EDC’s central European operation’s Universal manufacturing and
distribution supply agreement, one of EDC’s third party distribution agreements,
and third party customer relationship agreement intangible assets would not be
recovered from the cash flows related to operations of these assets. We made
certain assumptions when estimating future cash flows to be generated from these
assets including decline in future sales volumes, pricing, and costs saving
initiatives in support of the assets. As a result of our analysis, we
recorded an impairment of EDC’s assets of $26.4 million in 2008.
Pension, Early
Retirement and Long-term Service Awards. Our Pension,
Early Retirement and Long-term Service Awards cover employees of EDC’s German
operation. The benefit costs and obligations for these plans are actuarially
calculated based on various assumptions including discount rates, salary growth
rates and other factors. The discount rate assumption is based on current
investment yields on high quality fixed income investments. The salary growth
assumptions include long-term actual experience and expectations for future
growth. The differences between actual experience and the assumptions are
accumulated and amortized over the estimated future working life of the plan
participants. See Note 18 to the consolidated financial statements for specific
assumption values.
Post-retirement
Health Care Benefit. We have a plan
for post-retirement health care benefits covering a limited number of employees
and retirees. The post-retirement benefit costs and obligations for this plan
are actuarially calculated based on various assumptions. These assumptions
relate to discount rates, medical cost trend rates and other factors. The
discount rate assumption is based on current investment yields on high quality
fixed income investments. The salary growth assumptions include long-term actual
experience and expectations for future growth. The medical cost trend
assumptions are based on historical cost data, the near-term outlook and an
assessment of likely long-term trends. The differences between actual experience
and the assumptions are accumulated and amortized over the estimated future
working life of the plan participants. See Note 19 to the consolidated financial
statements for specific assumption values.
We
believe our pension and retiree medical plan assumptions are appropriate based
on the above factors. If the health-care-cost trend rates were to
change by one percentage point each future year, the aggregate of the service
cost and the interest cost components of the 2009 annual expense would change by
an amount less than $0.1 million. If the 2009 discount rate for
pension plan and post-retirement health care benefit plan were changed by a
quarter percentage point, loss before income taxes would change by an amount
less than $0.1 million.
Taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns.
Our
operations involve uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent
upon many factors, including negotiations with taxing authorities in various
jurisdictions and resolution of disputes arising from federal, state, and
international tax audits. We recognize potential liabilities and record tax
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. We adjust these reserves in light of changing
facts and circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax liabilities. If our
estimate of tax liabilities proves to be less than the ultimate assessment, an
additional charge to expense would result. If payment of these amounts
ultimately proves to be less than the recorded amounts, the reversal of the
liabilities would result in tax benefits being recognized in the period when we
determine the liabilities are no longer necessary.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued The FASB
Accounting Standards CodificationTM (the
“Codification”). The Codification becomes the single official source
of authoritative, nongovernmental U.S. generally accepted accounting principles
(GAAP). The Codification did not change GAAP but reorganizes the
literature and did not have any impact on our financial position, results of
operations, or cash flows.
In
May 2009, the FASB issued guidance that sets forth: (1) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in financial statements, (2) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements and (3) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date.
15
On
January 1, 2009, the Company adopted FASB guidance, 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 was required. The Company reclassified $5.3 million and
$5.2 million of minority interest in subsidiary company to stockholders’ equity
on the consolidated balance sheet as of December 31, 2009 and 2008,
respectively.
Other
Leases
EDC
leases manufacturing, warehouse, and office facilities and equipment under
operating leases. The office leases generally include provisions for rent
escalation of 3% or less and hold over options to continue occupancy without
renewal. The lease for EDC’s facility in Germany escalates in 5% increments if
the German Consumer Price Index has increased 5% or greater. Contingent rentals
are estimated based on provisions in the lease and historical trends. The
principal lease for EDC’s UK manufacturing facility includes an option to break
the lease without penalty in 2010, which EDC exercised during the third quarter
of 2009.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements including special purpose
entities.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
Applicable
16
ITEM
8. FINANCIAL STATEMENTS
Our
consolidated financial statements, which include our wholly owned and controlled
majority owned subsidiaries as of December 31, 2009 and 2008 and for each of the
two years in the period ended December 31, 2009, as well as the report of
independent auditors thereon, are set forth on the following pages. The index to
such financial statements is set forth below.
INDEX
TO FINANCIAL STATEMENTS
Page
Financial Statments:
Report of Independent Registered
Public Accounting
Firm..............................................................................................................................18
Consolidated Balance Sheets at
December 31, 2009 and
2008...........................................................................................................................19
Consolidated Statements of
Operations for the years ended December 31, 2009 and
2008..........................................................................20
Consolidated Statements of
Stockholders' Equity and Comprehensive Income (Loss) for the years
ended December 31, 2009 and
2008........................................................................................................................................................................21
Consolidated Statements of Cash
Flows for the years ended December 31, 2009 and
2008.........................................................................22
Notes to Consolidated Financial
Statements........................................................................................................................................................23
All other
schedules are omitted because they are not applicable or not
required.
17
REPORT
OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
EDCI
Holdings, Inc.
We have
audited the accompanying consolidated balance sheets of EDCI Holdings, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss)
and cash flows for each of the two years in the period ended December 31,
2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of EDCI Holdings, Inc.
and subsidiaries at December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the financial statements, EDCI Holdings, Inc. and
subsidiaries have retrospectively applied certain reclassification adjustments
upon adoption of a new accounting pronouncement for noncontrolling
interests.
As
described in Note 1 to the consolidated financial statements, the stockholders
of the Company approved a Plan of Dissolution in January 2010. As a result of
this approval, the Company will change its basis of accounting from the
going-concern basis to a liquidation basis.
/s/ Ernst
& Young LLP
Indianapolis,
Indiana
March 4,
2010
18
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||
|
December
31,
|
December
31,
|
|||
|
2009
|
2008
|
|||
|
(In
thousands, except share data)
|
||||
|
ASSETS
|
||||
|
Current
Assets:
|
||||
|
Cash
and cash equivalents
|
$ 78,093
|
$ 75,112
|
||
|
Restricted
cash
|
23,492
|
7,258
|
||
|
Accounts
receivable, net of allowances for doubtful accounts of
|
||||
|
$2,853
and $3,008 for December 31, 2009 and 2008, respectively
|
16,446
|
19,129
|
||
|
Current
portion of long-term receivable
|
770
|
599
|
||
|
Inventories,
net
|
3,668
|
4,845
|
||
|
Prepaid
expenses and other current assets
|
7,941
|
12,513
|
||
|
Deferred
income taxes
|
27
|
105
|
||
|
Assets
held for sale
|
6,400
|
7,154
|
||
|
Current
assets, discontinued operations
|
208
|
8,691
|
||
|
Total
Current Assets
|
137,045
|
135,406
|
||
|
Restricted
cash
|
3,314
|
25,439
|
||
|
Property,
plant and equipment, net
|
16,429
|
21,186
|
||
|
Long-term
receivable
|
1,670
|
3,066
|
||
|
Long
term investments
|
870
|
1,020
|
||
|
Deferred
income taxes
|
1,895
|
1,694
|
||
|
Other
assets
|
3,011
|
4,739
|
||
|
TOTAL
ASSETS
|
$ 164,234
|
$ 192,550
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
Current
Liabilities:
|
||||
|
Accounts
payable
|
$ 13,447
|
$ 15,930
|
||
|
Accrued
expenses and other liabilities
|
22,496
|
24,435
|
||
|
Income
taxes payable
|
553
|
-
|
||
|
Loans
from employees
|
976
|
1,142
|
||
|
Current
portion of long-term debt
|
437
|
2,281
|
||
|
Current
liabilities, discontinued operations
|
1,584
|
10,226
|
||
|
Total
Current Liabilities
|
39,493
|
54,014
|
||
|
Other
non-current liabilities
|
3,592
|
8,353
|
||
|
Loans
from employees
|
1,610
|
2,490
|
||
|
Long-term
debt
|
1,488
|
7,996
|
||
|
Pension
and other defined benefit obligations
|
34,096
|
35,052
|
||
|
Deferred
income taxes
|
287
|
-
|
||
|
Non-current
liabilities, discontinued operations
|
-
|
41
|
||
|
Total
Liabilities
|
80,566
|
107,946
|
||
|
Commitments
and contingencies
|
||||
|
Stockholders'
Equity:
|
||||
|
Preferred
stock, $.01 par value; authorized: 1,000,000 shares, no
shares
|
||||
|
issued
and outstanding
|
-
|
-
|
||
|
Common
stock, $.02 par value; authorized: 15,000,000 shares
|
||||
|
7,019,436
shares issued 2009 and 2008
|
140
|
140
|
||
|
Additional
paid in capital
|
371,373
|
371,091
|
||
|
Accumulated
deficit
|
(297,835)
|
(294,988)
|
||
|
Accumulated
other comprehensive income
|
6,376
|
4,583
|
||
|
Treasury
stock at cost:
|
||||
|
2009
-- 333,299 shares; 2008 -- 324,794 shares
|
(1,657)
|
(1,427)
|
||
|
Total
EDCI Holdings, Inc. Stockholders' Equity
|
78,397
|
79,399
|
||
|
Noncontrolling
interest in subsidiary company
|
5,271
|
5,205
|
||
|
Total
Stockholders' Equity
|
83,668
|
84,604
|
||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 164,234
|
$ 192,550
|
||
|
See
Notes to Consolidated Financial
Statements.
|
||||
19
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||
|
Year
Ended December 31,
|
||||
|
2009
|
2008
|
|||
|
(In
thousands, except per share amounts)
|
||||
|
REVENUES:
|
||||
|
Product
revenues
|
$ 135,715
|
$ 181,159
|
||
|
Service
revenues
|
52,161
|
57,269
|
||
|
Total
Revenues
|
187,876
|
238,428
|
||
|
COST
OF REVENUES:
|
||||
|
Cost
of product revenues
|
115,306
|
151,722
|
||
|
Cost
of service revenues
|
36,555
|
38,757
|
||
|
Total
Cost of Revenues
|
151,861
|
190,479
|
||
|
GROSS
PROFIT
|
36,015
|
47,949
|
||
|
OPERATING
EXPENSES:
|
||||
|
Selling,
general and administrative expense
|
27,856
|
32,180
|
||
|
Severance
costs for UK facility closure
|
7,110
|
-
|
||
|
Impairment
of long-lived assets
|
-
|
26,354
|
||
|
Amortization
of intangible assets
|
-
|
6,242
|
||
|
Total
Operating Expenses
|
34,966
|
64,776
|
||
|
OPERATING
INCOME (LOSS)
|
1,049
|
(16,827)
|
||
|
OTHER
INCOME (EXPENSE):
|
||||
|
Interest
income
|
522
|
3,447
|
||
|
Interest
expense
|
(791)
|
(2,225)
|
||
|
Gain
on currency swap, net
|
2,111
|
1,462
|
||
|
Gain
(loss) on currency transactions, net
|
469
|
(3,233)
|
||
|
Other
income (expense), net
|
648
|
(440)
|
||
|
Total
Other Income (Expense)
|
2,959
|
(989)
|
||
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
4,008
|
(17,816)
|
||
|
Income
tax provision (benefit)
|
4,147
|
(4,643)
|
||
|
LOSS
FROM CONTINUING OPERATIONS
|
(139)
|
(13,173)
|
||
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
||||
|
LOSS
FROM DISCONTINUED OPERATIONS
|
(2,621)
|
(11,760)
|
||
|
GAIN
(LOSS) ON SALE OF EDC U.S. OPERATIONS
|
(21)
|
2,712
|
||
|
NET
LOSS
|
$ (2,781)
|
$ (22,221)
|
||
|
Net
income (loss) attributable to noncontrolling interest in subsidiary
company
|
66
|
(566)
|
||
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$ (2,847)
|
$ (21,655)
|
||
|
LOSS
PER WEIGHTED AVERAGE COMMON SHARE (1):
|
||||
|
Loss
from continuing operations attributable to common
stockholders
|
$ (0.02)
|
$ (1.86)
|
||
|
Discontinued
operations attributable to common stockholders:
|
||||
|
Loss
from discontinued operations attributable to common
stockholders
|
(0.40)
|
(1.71)
|
||
|
Gain
on sale of EDC U.S. Operations
|
-
|
0.40
|
||
|
Net
loss per weighted average common share
|
$ (0.42)
|
$ (3.17)
|
||
|
LOSS
PER WEIGHTED AVERAGE DILUTED COMMON SHARE (1):
|
||||
|
Loss
from continuing operations attributable to common
stockholders
|
$ (0.02)
|
$ (1.86)
|
||
|
Discontinued
operations attributable to common stockholders:
|
||||
|
Loss
from discontinued operations attributable to common
stockholders
|
(0.40)
|
(1.71)
|
||
|
Gain
on sale of EDC U.S. Operations
|
-
|
0.40
|
||
|
Net
loss per weighted average common share
|
$ (0.42)
|
$ (3.17)
|
||
|
AMOUNTS
ATTRIBUTABLE TO EDCI HOLDINGS, INC. COMMON STOCKHOLDERS
|
||||
|
Loss
from continuing operations
|
(141)
|
(12,690)
|
||
|
Loss
from discontinued operations
|
(2,685)
|
(11,677)
|
||
|
Gain
(loss) on sale of EDC U.S. Operations
|
(21)
|
2,712
|
||
|
Net
Loss
|
$ (2,847)
|
$ (21,655)
|
||
|
(1) Income
(loss) per weighted average common share amounts are rounded to the
nearest $.01; therefore, such rounding may
|
||||
|
impact
individual amounts presented.
|
||||
|
See
Notes to Consolidated Financial
Statements.
|
||||
20
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
|||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|||||||||
|
AND
COMPREHENSIVE INCOME (LOSS)
|
|||||||||
|
(In
thousands)
|
|||||||||
|
Accumulated Other
|
|||||||||
|
Common Stock
|
Additional
|
Accumulated
|
Comprehensive
|
Treasury Stock
|
Noncontrolling
|
||||
|
Shares
|
Amount
|
Paid-in Capital
|
Deficit
|
Income (Loss)
|
Shares
|
Amount
|
Interest
|
Total
|
|
|
Balances,
December 31, 2007
|
7,016
|
$ 140
|
$ 370,928
|
$ (273,333)
|
$ 8,501
|
-
|
$ -
|
$ 5,771
|
$112,007
|
|
Net
loss
|
-
|
-
|
-
|
(21,655)
|
-
|
-
|
-
|
(566)
|
(22,221)
|
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
(3,866)
|
-
|
-
|
-
|
(3,866)
|
|
Post-retirement
and pension benefit
|
|
||||||||
|
obligation
adjustment, net of
|
|
||||||||
|
income
tax of $83
|
-
|
-
|
-
|
-
|
222
|
-
|
-
|
-
|
222
|
|
Net
unrealized investment losses
|
-
|
-
|
-
|
-
|
(274)
|
-
|
-
|
-
|
(274)
|
|
Restricted
stock awards
|
|
||||||||
|
compensation
|
3
|
-
|
100
|
-
|
-
|
-
|
-
|
-
|
|
|
Stock
based compensation
|
-
|
-
|
63
|
-
|
-
|
-
|
-
|
-
|
63
|
|
Acquisition
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
(325)
|
(1,427)
|
-
|
(1,427)
|
|
Balances,
December 31, 2008
|
7,019
|
$ 140
|
$ 371,091
|
$ (294,988)
|
$ 4,583
|
(325)
|
$
(1,427)
|
$ 5,205
|
$ 84,604
|
|
Net
loss
|
-
|
-
|
-
|
(2,847)
|
-
|
-
|
-
|
66
|
(2,781)
|
|
Foreign
currency translation
|
-
|
-
|
-
|
-
|
934
|
-
|
-
|
-
|
934
|
|
Post-retirement
and pension benefit
|
|
||||||||
|
obligation
adjustment, net of
|
|
||||||||
|
income
tax of $168
|
-
|
-
|
-
|
-
|
475
|
-
|
-
|
-
|
475
|
|
Net
unrealized investment gains
|
-
|
-
|
-
|
-
|
384
|
-
|
-
|
-
|
384
|
|
Restricted
stock awards
|
|||||||||
|
compensation
|
-
|
-
|
93
|
-
|
-
|
11
|
-
|
-
|
93
|
|
Stock
based compensation
|
-
|
-
|
189
|
-
|
-
|
27
|
-
|
-
|
189
|
|
Acquisition
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
(46)
|
(230)
|
-
|
(230)
|
|
Balances,
December 31, 2009
|
7,019
|
$ 140
|
$ 371,373
|
$ (297,835)
|
$ 6,376
|
(333)
|
$
(1,657)
|
$ 5,271
|
$ 83,668
|
|
See
Notes to Consolidated Financial
Statements.
|
|||||||||
21
|
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
||||
|
Year
Ended December 31,
|
||||
|
2009
|
2008
|
|||
|
(In
thousands)
|
||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||
|
Net
loss attributable to common shareholders
|
$ (2,847)
|
$ (21,655)
|
||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||
|
(Gain)
loss on sale of U.S. operations
|
21
|
(2,712)
|
||
|
Depreciation
and amortization
|
6,389
|
22,970
|
||
|
Impairment
of long-lived assets
|
-
|
26,354
|
||
|
Stock
compensation expense
|
282
|
163
|
||
|
Bad
debt (recovery) expense
|
(95)
|
829
|
||
|
Gain
on currency swap
|
(2,111)
|
(1,462)
|
||
|
Foreign
currency transaction (gain) loss
|
(469)
|
3,233
|
||
|
Gain
on adjustment to discontinued operations tax
payable
|
(130)
|
(1,499)
|
||
|
Deferred
income tax (benefit) expense
|
106
|
(9,495)
|
||
|
Non-cash
interest expense
|
798
|
912
|
||
|
Noncontrolling
interest in subsidiary company
|
66
|
(566)
|
||
|
Gain
on curtailment of postretirement benefit plan
|
(393)
|
-
|
||
|
Other
|
72
|
204
|
||
|
Changes
in operating assets and liabilities, net of effects of business
dispositions and acquisitions:
|
||||
|
Restricted
cash
|
949
|
(530)
|
||
|
Accounts
receivable
|
9,280
|
5,645
|
||
|
Inventories
|
1,893
|
1,866
|
||
|
Prepaid
and other current assets
|
5,608
|
1,999
|
||
|
Long-term
receivables
|
357
|
512
|
||
|
Other
assets
|
1,196
|
810
|
||
|
Accounts
payable
|
(6,476)
|
(11,141)
|
||
|
Accrued
liabilities and income taxes payable
|
(8,567)
|
(9,991)
|
||
|
Other
liabilities
|
1,094
|
1,879
|
||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
7,023
|
8,325
|
||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||
|
Purchases
of property, plant and equipment
|
(1,478)
|
(2,964)
|
||
|
Proceeds
from sale of U.S. operations
|
2,796
|
26,000
|
||
|
Cash
restricted under long-term borrowing agreement
|
5,400
|
(5,400)
|
||
|
Purchase
of available for sale securities
|
-
|
(12,615)
|
||
|
Proceeds
from sale of available for sale securities
|
150
|
41,087
|
||
|
Settlement
of cross currency swap
|
(2,093)
|
-
|
||
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
4,775
|
46,108
|
||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||
|
Repayment
of employee loans
|
(1,041)
|
(1,281)
|
||
|
Repayment
of capital lease obligations
|
(534)
|
(537)
|
||
|
Proceeds
from long term debt
|
-
|
6,799
|
||
|
Repayment
of long-term borrowing
|
(8,023)
|
(43,549)
|
||
|
Acquisitions
of treasury stock
|
(230)
|
(1,427)
|
||
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(9,828)
|
(39,995)
|
||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
1,011
|
(3,176)
|
||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
2,981
|
11,262
|
||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
75,112
|
63,850
|
||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ 78,093
|
$ 75,112
|
||
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||
|
Cash
transactions:
|
||||
|
Cash
paid during period for interest
|
$ 413
|
$ 2,700
|
||
|
Net
cash paid (refunded) during period for income taxes
|
$ (65)
|
$ 10,539
|
||
|
Non
cash transactions:
|
||||
|
Pension
and post-retirement benefit obligation adjustment
|
$ 643
|
$ 305
|
||
|
See
Notes to Consolidated Financial
Statements.
|
||||
22
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
1.
|
Business
Liquidity and Continuing Operations
|
a.
Business
EDCI
Holdings, Inc. (“EDCI” or the “Company”), 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 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, EDCI’s Board of Directors unanimously approved recommending a
dissolution process to EDCI’s stockholders, and on October 14, 2009 approved the
final Plan of Complete Liquidation and Dissolution (“Plan of
Dissolution”). At a Special Meeting held on January 7, 2010 the
stockholders of EDCI approved the voluntary dissolution and liquidation of EDCI
pursuant to the Plan of Dissolution. Delaware law provides that a corporation
may dissolve upon the recommendation of the Board of Directors of the
corporation, followed by the approval of its stockholders. As the Plan of
Dissolution was approved by the requisite vote of our stockholders at the
Special Meeting, we filed a certificate of dissolution with the Delaware
Secretary of State in January 2010.
The Plan
of Dissolution provides for the voluntary dissolution, liquidation and winding
up of EDCI. As of January 2010, we have ceased all of
EDCI’s business activities except for those relating to winding up EDCI’s
business and affairs during a minimum three-year period required under Delaware
law, including, but not limited to, gradually settling and closing its business,
prosecuting and defending suits by or against EDCI, seeking to convert EDCI’s
assets into cash or cash equivalents, discharging or making provision for
discharging EDCI’s known and unknown liabilities, making cash distributions to
our stockholders, withdrawing from all jurisdictions in which EDCI is qualified
to do business and, if EDCI is unable to convert any assets to cash or cash
equivalents by the end of the three-year period, distributing EDCI’s remaining
assets in-kind among our stockholders according to their interests or placing
them in a liquidating trust for the benefit of our stockholders, and, subject to
statutory limitations, taking all other actions necessary to wind up the
Company’s business and affairs.
EDCI’s
indirect ownership of 97.99% of the membership units of EDC is 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, beginning in January
2010, EDCI’s consolidated financials are required to reflect the value of EDC’s
assets and liabilities under liquidation accounting (see footnote 2a). 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 applicable legal requirements. While
EDC is currently examining the possibility of making a dividend distribution
from EDC's German subsidiaries to EDC, such a dividend remains subject to the
future operating performance of EDC’s German subsidiaries and compliance with
German law, and the distribution of any cash from EDC to EDCI is subject to
additional security obligations and additional U.S. legal considerations.
However, EDCI is unable to provide any assurance that its efforts to seek value
for its investment in EDC will result in any additional proceeds. In
particular, the cooperation of Universal, EDC’s largest customer, is critical to
any sale of EDC’s European business and based on negotiations with a potential
acquirer during the fourth quarter of 2009 and first quarter of 2010, EDC does
not believe Universal will cooperate with any such transaction. As a
result, any transaction involving the sale of EDC’s European business in the
near term is unlikely. 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.
On
February 1, 2010, pursuant to the previously noted EDCI Plan of Dissolution,
EDCI made an initial dissolution distribution of $3.12 per share of its common
stock. In aggregate, approximately $21.0 million of EDCI’s cash was
returned to its shareholders.
b.
Liquidity and Continuing Operations
Sale of EDC’s U.S. Operations -
The Company announced on October 31, 2008, and closed on December 31,
2008, the sale of substantially all of the U.S. business of EDC to Sony DADC
U.S., Inc (“Sony DADC”) for $26.0 million in cash and certain other
consideration. The specific assets transferred were: EDC’s
distribution operations located in Fishers, Indiana; EDC’s U.S. supply
agreements with Universal; all of the equipment located in EDC’s Fishers,
Indiana distribution facility; certain manufacturing equipment located in EDC’s
Kings Mountain, North Carolina facility; and the transfer of certain other of
EDC’s U.S. customer relationships. EDC no longer operates
manufacturing and distribution facilities in North America. EDC agreed to
provide certain transition services to Sony following the
closing. The required production service process was completed at the
end of February 2009.
Following
the transaction, the Company continued 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
physical CD’s. Several of the Company’s international customers have
been impacted by the threat of credit insurers dropping coverage and thus
increasing the risk of our continued business with these parties. In
addition, the Company also faces the continuing burden of legacy pension and
other post-retirement benefit plans related to its EDC
subsidiaries.
On March
20, 2009, the Board of Directors of the Company approved a plan to consolidate
the European operations. As a result of this plan, the Company ceased all
operations presently conducted at its Blackburn facility in the United Kingdom
as of December 31, 2009 with the intention of producing all of the future
manufacturing volume for Universal, its largest customer, in EDC’s Hannover
plant through the expiration of the Universal manufacturing agreements in May
2015. However, Universal has objected to EDC producing certain UK
related volume at its EDC Hannover plant and EDC has submitted the matter for
arbitration. See Note 21. EDC also relocated certain
equipment and related assets from Blackburn to Hannover. See Note
15.
23
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
2.
|
Summary
of Significant Accounting Policies
|
a.
Basis of Presentation
The
consolidated financial statements of EDCI are presented in U.S. dollars in
conformity with accounting principles generally accepted in the United States.
The financial statements include the accounts of EDCI and its wholly-owned, as
well as its controlled majority-owned, subsidiaries and have been prepared from
records maintained by EDCI and its subsidiaries in their respective countries of
operation. The consolidated accounts include 100% of assets and
liabilities of its majority owned subsidiaries, and the ownership interests of
noncontrolling investors are recorded as noncontrolling interest. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Pursuant
to the approval of the Plan of Dissolution in January 2010, EDCI, including EDC,
will change its basis of accounting 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. A statement of net
assets in liquidation and a statement of changes in net assets are the principal
financial statements presented under 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 these financial
statements 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 EDCI’s potential to
complete such plan in an orderly manner.
b.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
c.
Cash Equivalents
The
Company maintains cash and cash equivalents with various financial institutions.
These financial institutions are large diversified entities. The Company
classifies investments with maturities of three months or less when purchased as
cash equivalents. At times the amounts of cash held in certain bank
accounts may exceed the amount that the Federal Deposit Insurance Corporation
(“FDIC”) insures.
d.
Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents, trade accounts and notes
receivable, investments and other current and long-term liabilities approximates
their respective fair values.
The use
of derivative instruments is limited to non-trading purposes. The estimated fair
values of derivative instruments are calculated based on market rates. These
values represent the estimated amounts the Company would receive or pay to
terminate agreements, taking into consideration current market rates and the
current credit-worthiness of the counterparties. The derivatives held
by the Company do not qualify for hedge accounting and, accordingly, it records
the gains and losses from the derivative instruments in earnings.
e.
Accounts Receivable, Net
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company calculates a reserve based on the aging of
receivables and either increases or decreases the estimate of doubtful accounts
accordingly. Additional allowances may be required if one or more of
its customers’ financial condition deteriorates, resulting in an impairment of
their ability to make payments. Such allowances, if any, would be recorded in
the period the impairment is identified. The Company recorded an
insignificant amount of bad debt expense in 2009 and bad debt expense of $0.6
million in 2008 related to its continuing operations. Write offs of
accounts receivable were less than $0.1 million in both 2009 and
2008.
Accounts
receivable at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Trade
receivables
|
$ 19,299
|
$ 22,137
|
|
|
Less:
allowances for doubtful accounts
|
(2,853)
|
(3,008)
|
|
|
$ 16,446
|
$ 19,129
|
f.
Inventories
Inventories
are valued using a first in, first out method and are stated at the lower of
cost or market. EDC’s inventories are comprised of raw materials,
work in process and finished goods components. The raw materials
inventory includes polystyrene used in production of jewel cases and trays
production in central Europe; polycarbonate for the production of CDs and DVDs
and packaging components including pallets, corrugated cardboard, jewel boxes
and trays. Generally, we do not own a significant amount of finished
goods. Finished goods include CDs and DVDs not yet
shipped.
Inventories,
net of reserves, at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Raw
materials
|
$ 2,948
|
$ 3,859
|
|
|
Finished
goods
|
153
|
426
|
|
|
Work
in process
|
567
|
560
|
|
|
Total
|
$ 3,668
|
$ 4,845
|
At
December 31, 2009 and 2008, reserves were approximately $1.3 million and $1.0
million, respectively.
24
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
g.
Property, Plant and Equipment
Property,
plant and equipment are stated at cost. Assets obtained through capital leases
are capitalized and amortized over the shorter of the lease term or the
estimated useful life of the assets. Leasehold improvements are amortized over
their estimated useful lives not to exceed the life of the lease. Depreciation
is computed principally using the straight-line method based on the estimated
useful lives of the related assets (buildings, 20-40 years; furniture, fixtures
and equipment, 3-20 years; software and computer equipment, 3-5 years).
Depreciation includes amortization on assets recorded under a capital
lease.
Property,
plant and equipment at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Buildings
and improvements
|
$ 497
|
$ 486
|
|
|
Equipment
|
49,607
|
48,000
|
|
|
50,104
|
48,486
|
||
|
Less:
Accumulated depreciation
|
(33,675)
|
(27,300)
|
|
|
$ 16,429
|
$ 21,186
|
Depreciation
expense in continuing operations was $6.3 million and $7.8 million for the years
ended December 31, 2009 and 2008, respectively.
h.
Impairment of Long-Lived Assets
The
Company reviews the recoverability of long-lived assets, including property,
plant and equipment and intangible assets with finite lives when events or
changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based on
its ability to recover the carrying value of the asset from the expected future
cash flows of the related operations. To the extent that the asset is not
recoverable, the Company measures the impairment based on the projected
discounted cash flows of the asset over the remaining useful life. The
measurement of impairment requires the Company to make estimates of these cash
flows related to long-lived assets, as well as other fair value
determinations.
Negative
operating conditions encountered in 2008, anticipated declines in future sales
volumes and the loss of a significant distribution customer at the Company’s
European operation indicated that the carrying value of its European operation’s
Universal manufacturing and distribution supply agreement, one of its third
party distribution agreements, and third party customer relationship agreement
intangible assets would not be recovered from the cash flows related to
operations of the agreements. The Company made certain assumptions when
estimating future cash flows to be generated from the assets including decline
in future sales volumes, pricing, and costs saving initiatives in support of the
intangible assets. As a result of its analysis, the Company recorded
an impairment of intangible assets of $26.4 million in 2008.
i.
Foreign Currency Translation
The
financial statements of the Company’s foreign subsidiaries whose functional
currency is the local currency are accounted for and have been translated into
U.S. dollars. Foreign currency transaction gains and losses resulting
from the subsidiary’s foreign currency denominated assets and liabilities were a
$0.5 million gain in 2009 and a $3.2 million loss in 2008. Assets and
liabilities have been translated using the exchange rate in effect at the
balance sheet date. Revenues and expenses have been translated using a
weighted-average exchange rate for the period. The resulting gains and losses on
currency translations are included as foreign currency translation in the
consolidated statement of stockholders’ equity and comprehensive income
(loss).
j.
Revenue Recognition
The
Company’s revenue consists of pre-recorded entertainment product sales and
distribution service revenue earned from the fulfillment of services. The
Company recognizes revenue when a signed contract exists, the fee is fixed and
determinable, delivery terms are met, and collection of the resulting receivable
is probable. Service revenue is recognized as services are performed. For
certain components, including printed materials, the Company may act as an agent
for the customer, and the customer reimburses it for any incurred costs plus a
handling fee. The reimbursement for the costs is reported as a reduction to
expense and the handling fees are recognized as revenue. Shipping and handling
costs that are reimbursed by customers for invoice charges such as postage,
freight packing and small order surcharges are recorded as revenue and cost of
revenue.
k.
Stock-Based Compensation
The
Company accounts for stock-based compensation utilizing the modified prospective
method. This requires the recognition of stock-based compensation
expense in the consolidated financial statements for awards of equity
instruments to employees and non-employee directors based on the grant-date fair
value of those awards. The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting period. The modified prospective method applies to
all awards granted or modified after the date of adoption. The
benefits of tax deductions in excess of recognized compensation expense are
required to be reported as a financing cash flow, rather than as an operating
cash flow as prescribed under the prior accounting rules. This requirement
reduces net operating cash flow and increases net financing cash flows in
periods after adoption. Total cash flow remains unchanged from what would have
been reported under the prior accounting rules.
l.
Income Taxes
The
Company accounts for income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. A minimum recognition threshold for the tax position is
required to be met before being recognized in the financial
statements.
25
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
m.
Income (Loss) Per Common Share
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive shares issuable upon the exercise of
outstanding stock options or other stock-based awards during the period using
the treasury stock method. See Note 20.
n.
Impact of Recently Issued Accounting Standards
In June
2009, the FASB issued The FASB
Accounting Standards CodificationTM (the
“Codification”). The Codification becomes the single official source
of authoritative, nongovernmental U.S. generally accepted accounting principles
(GAAP). The Codification did not change GAAP but reorganizes the
literature and did not have any impact on our financial position, results of
operations, or cash flows.
In
May 2009, the FASB issued guidance that sets forth: (1) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in financial statements, (2) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements and (3) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date.
On
January 1, 2009 the Company adopted FASB guidance, 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 was required. The Company reclassified $5.3 million and
$5.2 million of minority interest in subsidiary company to stockholders’ equity
on the consolidated balance sheet as of December 31, 2009 and 2008,
respectively.
|
3.
|
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, 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 2009. The $26.0 million purchase
price was 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, which we do not expect to
receive based on current estimates in regards to the target criteria. The
Agreement includes customary representations and warranties accompanied by
certain indemnification rights. Substantially all of EDC's assets are
pledged as collateral to secure those indemnification rights for a period of at
least three years following the closing of the transaction
At
December 31, 2008, the Company’s Kings Mountain, North Carolina facility (“Kings
Mountain 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. During the fourth quarter of 2009, the Company
obtained an updated appraisal of its Kings Mountain Facility and accordingly
wrote down the value by $0.6 million to $6.4 million as of December 31,
2009.
At
December 31, 2009 and December 31, 2008, the Company recorded a gain on the Sony
Sale as follows:
|
December
31, 2008
|
Adjustments
|
December
31, 2009
|
|||||
|
Assets
Sold or Held for Sale and Liabilities Assumed
|
|||||||
|
Accounts
receivable
|
$ (381)
|
$ -
|
$ (381)
|
||||
|
Inventory
|
(820)
|
-
|
(820)
|
||||
|
Other
current assets
|
(198)
|
-
|
(198)
|
||||
|
Fixed
assets
|
(7,532)
|
(600)
|
(8,132)
|
||||
|
Intangible
assets
|
(6,368)
|
-
|
(6,368)
|
||||
|
Accounts
payable
|
163
|
-
|
163
|
||||
|
Accrued
liabilities
|
878
|
-
|
878
|
||||
|
$ (14,258)
|
$ (600)
|
$ (14,858)
|
|||||
|
Other
expenses
|
(10,488)
|
-
|
(10,488)
|
||||
|
Transaction
costs
|
(600)
|
-
|
(600)
|
||||
|
$ 25,346
|
$ 600
|
$ 25,946
|
|||||
|
Additional
proceeds
|
28,058
|
579
|
28,637
|
||||
|
Gain
on sale
|
$ 2,712
|
$ (21)
|
$ 2,691
|
||||
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 December 31, 2009 and 2008.
Other
expenses primarily includes $7.6 million for the impairment of property, plant
and equipment not acquired by Sony DADC which was held for sale at December 31,
2008, severance costs of $0.9 million and the write off of $1.9 million of
inventory and other assets related to the Kings Mountain facility.
26
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
Severance
charges were recorded over the employees’ service period. The Company recorded
severance charges amounting to $0.9 million for the year ended December 31,
2008. During 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 2009. Additionally, during
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:
|
Year
Ended December 31,
|
|||
|
2009
|
2008
|
||
|
Net
sales
|
$ -
|
$ 104,802
|
|
|
Loss
from discontinued operations:
|
|||
|
Loss
from operations before income taxes
|
(3,178)
|
(13,394)
|
|
|
Provision
for income taxes
|
-
|
-
|
|
|
Loss
from operations
|
$ (3,178)
|
$ (13,394)
|
|
|
Gain
(loss) on disposal before income taxes
|
(21)
|
2,712
|
|
|
Provision
for income taxes
|
-
|
-
|
|
|
Gain
(loss) on disposal of discontinued operations
|
(21)
|
2,712
|
|
|
Loss
from discontinued operations
|
$ (3,199)
|
$ (10,682)
|
|
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. Interest expense was allocated to the
discontinued EDC U.S. Operations based on debt incurred to finance its
acquisition and its working capital needs, including the Universal loan. In
total the Company allocated less than $0.1 million and $1.6 million of interest
expense from continuing operations to discontinued operations in 2009 and 2008,
respectively. There is no cumulative benefit for income taxes
recorded due to the uncertainty about the Company’s ability to utilize the net
operating losses.
The
classes of assets and liabilities included as part of the sale of the Company’s
EDC U.S. operations are reported as discontinued operations on the Company’s
consolidated balance sheet as follows:
|
December
31,
|
|||
|
2009
|
2008
|
||
|
Current
Assets
|
|||
|
Accounts
receivable
|
$ -
|
$ 5,093
|
|
|
Inventory
|
-
|
515
|
|
|
Prepaid
and other current assets
|
123
|
3,082
|
|
|
$ 123
|
$ 8,690
|
||
|
Current
Liabilities
|
|||
|
Accounts
payable
|
$ 1
|
$ 3,268
|
|
|
Accrued
employee wages and benefits
|
-
|
1,651
|
|
|
Accrued
income and other taxes
|
-
|
2
|
|
|
Accrued
other
|
1,415
|
4,759
|
|
|
$ 1,416
|
$ 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 consolidated statements
of operations. Additionally, the Company reported all of the
remaining Messaging and Paging segment assets at their estimated net realizable
value in the consolidated balance sheet as of December 31, 2009 and
2008.
Results
for discontinued operations consist of the following:
|
Year
Ended December 31,
|
|||
|
2009
|
2008
|
||
|
Income
from operations before income taxes
|
$ 334
|
$ 143
|
|
|
Benefit
for income taxes
|
(223)
|
(1,491)
|
|
|
Income
from operations
|
$ 557
|
|
$ 1,634
|
|
Gain
on disposal before income taxes
|
-
|
-
|
|
|
Provision
for income taxes
|
-
|
-
|
|
|
Gain
on disposal of discontinued operations
|
-
|
-
|
|
|
Income
from discontinued operations
|
$ 557
|
$ 1,634
|
|
The year
ended December 31, 2009 and 2008 included benefits of $0.2 million and $1.5
million, respectively, for expiration of tax-related statutes of limitation,
offset by additional interest and the impact of foreign currency movements on
tax contingencies.
27
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
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 $0.1 million for a tax receivable and $0.2
million and $0.5 million for accrued taxes at December 31, 2009 and 2008,
respectively.
|
4.
|
Investments
|
Based on
the Company’s plan to market and sell these instruments, the Company classifies
auction-rate securities (as discussed below) as available-for-sale and carries
them at fair market value. Changes in the fair value are included in
accumulated other comprehensive income in the accompanying consolidated
financial statements, except for auction-rate securities as described
below.
In
accordance with the Company’s investment policy, it has invested in securities
with issuers who have high-quality credit and limit the amount of investment
exposure to any one issuer. The Company seeks to preserve principal and minimize
exposure to interest-rate fluctuations by limiting default risk, market risk,
and reinvestment risk. During 2008, the Company liquidated the majority of its
investments portfolio and directed the proceeds into cash and cash
equivalents. The Company recorded losses on sales of investments of
$0.3 million in 2008, which are included in other income (expense) in the
accompanying consolidated statements of operations. During 2008, the
Company reclassified less than $0.1 million of unrealized losses on investments
out of accumulated other comprehensive income into earnings for the period using
the specific identification method.
Auction-rate
securities represent interests in collateralized debt obligations with
high-quality credit ratings, the majority of which are collateralized by bonds
and other financial instruments. Liquidity for these auction-rate
securities is typically provided by an auction process that resets the
applicable interest rate at pre-determined intervals, usually every 7, 28, 35 or
90 days.
In
mid-February 2008, auctions began to fail due to insufficient buyers, as
the amount of securities submitted for sale in auctions exceeded the aggregate
amount of the bids. For each failed auction, the interest rate on the
security moves to a maximum rate specified for each security, and generally
resets at a level
higher than specified short-term interest rate
benchmarks. However, during 2008, the Company was able to sell $8.8
million in auction-rate securities at par. At December 31, 2009, the
Company held one auction-rate security valued at $0.9 million.
The
Company evaluates the fair value of its auction-rate securities portfolio for
impairment at each reporting period. The Company performed its evaluation of
investments as of December 31, 2009 and concluded that the carrying value of the
investment approximated its fair value and thus no impairment was considered
necessary. The estimated fair values could change significantly based on future
market conditions. The Company will continue to assess the fair value of its
auction-rate security for substantive changes in relevant market conditions,
changes in financial condition or other changes that may alter its estimates
described above. The Company may be required to record future impairment charges
to earnings if it determines that its investment portfolio has incurred a
further permanent decline in fair value. Because of the Company’s
inability to liquidate these securities in the near term, it has classified its
auction rate securities to long-term investments.
|
5.
|
Risks
and Uncertainties
|
Concentrations
of Credit Risk
Financial
instruments potentially subjecting the Company to concentrations of credit risk
consist of temporary cash investments and trade accounts receivable. The Company
places its temporary cash investments and currency swaps with large diversified
entities with operations throughout the U.S. and Germany. The Company is exposed
to credit-related losses in the event of non-performance by the parties in these
contracts. See Note 8.
The
Company’s primary customer is Universal, which individually accounted for
approximately 84% and 73% of EDC’s total 2009 and 2008 revenue, respectively.
Outstanding accounts receivable due from Universal were $8.4 million and $7.8
million at December 31, 2009 and 2008, respectively. The Company
believes that its reserves for bad debt are adequate considering its
concentrations of credit risk.
Concentrations
of Suppliers
EDC’s
principle raw materials are polystyrene used in the manufacture of jewel boxes
and trays and polycarbonate used in the manufacture of CDs and
DVDs. EDC has a limited number of suppliers who are able to provide
raw materials. EDC purchases polystyrene, polycarbonate and any jewel
boxes and trays, not internally manufactured, from several suppliers. These
inputs are crucial to the production of CDs and DVDs and while there are
alternative suppliers of products, it would be disruptive to EDC’s production if
any of its suppliers were unable to deliver their product to EDC.
Workforce
Subject to Collective Bargaining Agreements
At
December 31, 2009, EDC employed approximately 800 persons. In Germany,
approximately 43% of the workforce of 763 employees is unionized and all
employees, including exempt staff, which represents approximately 4% of the
total employees, are represented by a works council. Collective bargaining
agreements and works council agreements cover all labor relations. In
February 2008, EDC reached an agreement with the works council on an eight year
tariff agreement which runs through 2015.
At
December 31, 2009, EDC employed approximately 20 employees at its Blackburn, UK
location for the specific purpose of winding down the business affairs of that
operation and ensuring that the transition of business affairs from Blackburn to
EDC’s Hannover, Germany facility is completed. It is expected that
EDC will employ certain personnel at its Blackburn facility through June 2010 at
which point there will be no remaining business.
At
December 31, 2009, EDCI had a core corporate staff of 11 employees.
28
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
6.
|
EDC
LLC Agreement - Profits Interests and Noncontrolling Interest in
Subsidiary Company
|
EDC
Profits Interests
Upon the
completion of the acquisition of the U.S. and central European CD and DVD
manufacturing and distribution operations from Universal, EDC issued profits
interests to certain key employees, Universal, and the Company’s financial
advisor, that will entitle these parties to up to 30% of EDC’s distributed
profits after it has received a return of its equity capital contribution and
certain internal rate of return hurdles and other profitability conditions have
been met. No payments were required from these parties to acquire the profits
interests. These profits interests do not carry any voting
rights.
The
estimated fair value of the profits interests at the date of grant represents
the present value of estimated future cash flows to those profits interests. The
fair value of the profits interests granted to Universal and the financial
advisor are included in the acquisition costs of EDC. The profits interests
issued to members of management were accounted for as compensation expense, are
included in selling, general and administrative expenses in the consolidated
statements of operations and are being amortized over the vesting schedule of
one-third immediately upon grant and two-thirds ratably in each of the two years
after grant. The Company did not incur compensation expense related to profit
interests in the twelve months ended December 31, 2009 or 2008 as they vested
fully in 2007. Profits interests of $2.9 million are included with
noncontrolling interest in subsidiary company in the Company’s consolidated
balance sheets.
Noncontrolling
Interest in Subsidiary Company
As part
of the May 31, 2005 acquisition of EDC, the Company sold 772 Class A units of
EDC (representing 2.2% of EDC’s outstanding units) to two key employees at the
fair value of $1,000 per unit upon which such Class A units were automatically
converted into Class B units. The Class A and Class B units carry equivalent
economic rights. During 2006, in association with the Blackburn acquisition, the
Company purchased additional Class A units and increased its holdings by
$8,151,000 and one of the key employees, pursuant to rights under the EDC
Agreement, purchased additional Class B units and increased his holdings by
$99,000. As a result of these investments, the Company has 97.99% of
the Class A and Class B units of EDC. Further, as a result of these
investments, the Level One, Two and Three Threshold Amounts and Level One, Two
and Three Pro Rata Percentages applicable to distributions pursuant to Section
3.1 of the EDC LLC Agreement were automatically adjusted. As a result
of these adjustments, upon a board approved distribution pursuant to Section
3.1(b) of the EDC LLC Agreement, the following order and priorities would
apply: (i) for distributions up to $43.25 million, 100% of such
distributions would be apportioned pro rata to the holders of Class A and Class
B units; (ii) for distributions above $43.25 million and up to $68.99 million,
84.02% of such distributions would be apportioned pro rata to the holders of
Class A and Class B units, and 15.98% would be apportioned pro rata to the
holders of Tier 1 Profits Interests; (iii) for distributions above $68.99
million and up to $96.78 million, 77.8% of such distributions would be
apportioned pro rata to the holders of Class A and Class B units, 14.8% of such
distributions would be apportioned pro rata to the holders of Tier 1 Profits
Interests and 7.4% of such distributions would be apportioned pro rata to the
holders of Tier 2 Profits Interests; and (iv) for distributions above $96.78
million, 72.44% of such distributions would be apportioned pro rata to the
holders of Class A and Class B units, 13.78% of such distributions would be
apportioned pro rata to the holders of Tier 1 Profits
Interests, 6.89% of such distributions would be apportioned pro rata
to the holders of Tier 2 Profits Interests and 6.89% of such distributions would
be apportioned pro rata to the holders of Tier 3 Profits
Interests. In all events, if, after receipt of all distributions
above, holders of Class A and Class B Units have not received an amount equal to
their aggregate contributions plus an amount equal to a return of 20%,
compounded annually (the “IRR Hurdle”), then only distributions pursuant to (ii)
shall be made until satisfaction of the IRR Hurdle, after which distributions
pursuant to (iii) and (iv) shall resume.
The
Company has recorded net income (loss) attributable to noncontrolling interest
in subsidiary company of $0.1 million and ($0.6) million in 2009 and 2008,
respectively. If EDC does not undergo an initial public offering
prior to the earlier of (1) May 31, 2015 or (2) the date on or after May 31,
2013 on which the terms of all EDC’s manufacturing and distribution agreements
with Universal shall have been extended to a term ending on or after May 31,
2018, holders of Class B units and profits interests would have the right for a
five-year period beginning on such date to sell their interests to the Company
at fair value.
|
7.
|
Cash
and Cash Equivalents
|
Restricted
Cash
EDC
Central European Operation
Restricted
cash of EDC’s central European operation at December 31, 2009 was $26.8 million,
including $23.5 million classified as current. 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. A portion of the restricted cash is being
held in escrow to fund employee related obligations. On June 1, 2010, the
restrictions encumbering approximately $22.3 million of the restricted cash
expire and the cash will be released to EDC. We are currently
evaluating all options in regards to the future usage of the portion of the
restricted cash that will be released from escrow on June 1, 2010.
EDC
U.S. Operation
There was
no restricted cash relating to EDC’s U.S. operation at December 31,
2009. 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. During 2009,
EDC used the $5.4 million of proceeds in conjunction with wind down costs
associated with the EDC U.S. operations and to pay off debt.
|
8.
|
Currency
Rate Swap
|
EDC
entered into a cross-currency rate swap agreement with a commercial bank on May
31, 2005. EDC’s objective was to manage foreign currency exposure arising from
its intercompany loan to its German subsidiary acquired in May of 2005 and is
therefore, for purposes other than trading. The loan is denominated in Euros and
repayment is due on demand or by May 31, 2010. 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. During 2009,
EDC recorded a gain of $2.1 million in the accompanying consolidated statements
of operations related to the settlement of the swap.
29
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share
Amounts)
|
9.
|
Fair
Value Measurements
|
Fair
value is defined 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.
The
manner in which fair value is determined for assets and liabilities includes 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 that are available in active markets for the identical assets or
liabilities at the measurement date.
Level 2 — Other observable
inputs available at the measurement date, other than quoted prices included in
Level 1, either directly or indirectly, including:
|
·
|
Quoted
prices for similar assets or liabilities in active
markets;
|
|
·
|
Quoted
prices for identical or similar assets in non-active
markets;
|
|
·
|
Inputs
other than quoted prices that are observable for the asset or liability;
and
|
|
·
|
Inputs
that are derived principally from or corroborated by other observable
market data.
|
|
|
|
Level 3 — Unobservable inputs
that cannot be corroborated by observable market data and reflect the use of
significant management judgment. These values are generally determined
using pricing models for which the assumptions utilize management’s estimates of
market participant assumptions.
Assets
and Liabilities that are Measured at Fair Value on a Recurring
Basis
The fair
value hierarchy requires the use of observable market data when available.
In instances in which the inputs used to measure fair value fall into different
levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the significance of a
particular item to the fair value measurement in its entirety requires judgment,
including the consideration of inputs specific to the asset or
liability.
The
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 December 31, 2009, according to the valuation techniques
it used to determine their fair values.
|
Fair
Value Measurements at Reporting Date Using
|
||||||||
|
Quoted
Prices in
|
||||||||
|
Active
Markets for
|
Significant
Other
|
Significant
Unobservable
|
||||||
|
December
31,
|
Identical
Assets
|
Observable
Inputs
|
Inputs
|
|||||
|
Description
|
2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||
|
Assets
|
||||||||
|
Auction-Rate
Security
|
$ 870
|
$ -
|
$ -
|
$ 870
|
||||
|
Total
|
$ 870
|
$ -
|
$ -
|
$ 870
|
||||
The
following tables 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 December 31, 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 December 31, 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.
30
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
10.
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expenses and other current assets related to the Company’s continuing operations
at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Prepaid
expenses
|
$ 947
|
$ 2,539
|
|
|
Recoverable
value added taxes
|
1,213
|
1,927
|
|
|
Other
customer receivables and pass-through costs
|
5,661
|
7,479
|
|
|
Other
current assets
|
120
|
568
|
|
|
$ 7,941
|
$ 12,513
|
|
11.
|
Long-term
Receivable
|
The
current and noncurrent portions of the long-term receivable are as follows for
the years ended December 31:
|
2009
|
2008
|
||
|
Current
portion of long-term receivable
|
$ 770
|
$ 599
|
|
|
Non-current
portion of long-term receivable
|
1,670
|
3,066
|
|
|
$ 2,440
|
$ 3,665
|
Under the
terms of the share purchase agreement relating to the acquisition of Universal’s
central European operations, Universal is required to reimburse EDC relating to
the liabilities net of accounts receivable and other receivables assumed by EDC
at the acquisition date. Amounts not paid or received in future periods for
these assumed liabilities and receivables, with the exception of the pension
obligations, will be adjusted through the receivable. The balances at
December 31, 2009 and 2008 relate to the long-term service award plan. See Note
18.
|
12.
|
Other
Assets
|
Other
assets at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Equipment
spare parts
|
$ 3,011
|
$ 3,471
|
|
|
Deferred
compensation trust plan
|
-
|
503
|
|
|
Deferred
debt issuance costs
|
-
|
765
|
|
|
$ 3,011
|
$ 4,739
|
The
deferred compensation relates to the value of investments from compensation
deferred by director level and above employees, which were paid out in 2009 when
the deferred compensation plan was terminated. See Note 18. The deferred debt
issuance costs are costs incurred related to our Senior Security Credit
Facility, which were written off to interest expense in the consolidated
statement of operations when the facility was terminated in December 2009. See
Note 16.
|
13.
|
Accrued
and Other Liabilities
|
Accrued
liabilities at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Accrued
salaries and benefits
|
$ 4,619
|
$ 4,943
|
|
|
Accrued
pension and other benefit obligations
|
3,133
|
2,337
|
|
|
Accrued
vacation
|
638
|
738
|
|
|
Accrued
VAT and other taxes
|
3,363
|
3,534
|
|
|
Accrued
royalty expense
|
1,190
|
2,796
|
|
|
Accrued
professional services
|
1,022
|
1,206
|
|
|
Other
current liabilities
|
8,531
|
8,881
|
|
|
$ 22,496
|
$ 24,435
|
|
14.
|
Other
Liabilities
|
Other
liabilities at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Other
liabilities
|
$ -
|
$ 177
|
|
|
Deferred
compensation
|
-
|
503
|
|
|
Unrealized
loss on currency swap
|
-
|
4,180
|
|
|
Tax
contingency accrual
|
3,592
|
3,493
|
|
|
$ 3,592
|
$ 8,353
|
The loss
on currency swap related to a five year currency swap arrangement under which
EDC was obligated, but settled in January 2009. See Note 8. Finally,
the deferred compensation accrual relates to amounts deferred by director level
and above employees, which were paid out in 2009 when the deferred compensation
plan was terminated. See Note 18.
31
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
15.
|
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
ceased substantially all of the operations presently conducted at its Blackburn
facility in the United Kingdom as of December 31, 2009 with the intention
producing all of the future manufacturing volume for Universal, its largest
customer, in EDC’s Hannover plant through the expiration of the Universal
manufacturing agreements in May 2015. However, Universal has objected
to EDC producing certain UK related volume at its EDC Hannover plant and EDC has
submitted the matter for arbitration. See Note 21.
Blackburn
closure costs currently are forecast at approximately $9-10 million, comprised
primarily of $7.1 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 $2.0
million. During the second quarter of 2009, the employees at EDC’s
Blackburn facility were given their formal notices of termination, which
obligated the Company to pay approximately $7.1 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 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 UK. 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. Currently, EDC Blackburn does not anticipate needing any
financial support from our German operations. During 2009, Blackburn
made severance payments of $5.9 million related to the Consolidation plan and as
of December 31, 2009, $1.2 million is recorded in accrued expenses and other
liabilities in the accompanying consolidated balance sheets. During
February 2010, EDC Blackburn reached an agreement with its landlord to settle
all remaining lease liabilities and site remediation costs for $0.9 million,
which is recorded in accrued expenses and other liabilities on the accompanying
consolidated balance sheets.
Also
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 2009. The Company made payments of
$0.7 million related to the plan through December 31, 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 and $1.5 million into cost of revenues in the years
ended December 31, 2009 and 2008, respectively. The Company made payments of
$1.3 million and $0.3 million as of December 31, 2009 and 2008, respectively.
$0.2 million is recorded in accrued expenses and other liabilities in the
accompanying consolidated balance sheets as of December 31, 2009.
|
16.
|
Long-Term
Debt
|
Long-term
debt at December 31, 2009 and 2008 consisted of:
|
2009
|
2008
|
||
|
Senior
Secured Credit Facility
|
$ -
|
$ 8,000
|
|
|
Payable
to Universal - undiscounted
|
2,329
|
2,749
|
|
|
Capital
Lease
|
-
|
74
|
|
|
Employee
Loans
|
2,586
|
3,632
|
|
|
Subtotal
|
4,915
|
14,455
|
|
|
Less:
Unamortized Discount
|
(404)
|
(546)
|
|
|
Total
Debt
|
$ 4,511
|
$ 13,909
|
|
|
Less:
Current Portion
|
(1,413)
|
(3,423)
|
|
|
Total
Long Term Debt
|
$ 3,098
|
$ 10,486
|
Total
scheduled principal payments for all long-term debt are as
follows:
|
Total
|
|
|
2010
|
$ 1,442
|
|
2011
|
1,301
|
|
2012
|
1,240
|
|
2013
|
466
|
|
2014
|
466
|
|
Total
|
$ 4,915
|
Senior
Secured Credit Facility
During
2009, EDC was party to a Senior Secured Credit Facility with Wachovia Bank,
National Association and ING Capital, LLC as lenders (the “Lenders”) and
Wachovia as administrative agent (the “Agent”), for an aggregate principal
amount of $10.5 million, consisting of a term facility of $8.0 million, and a
revolving credit facility of up to €2.0 million (subject to a maximum $2.5
million based on prevailing interest rates). Substantially all of EDC’s assets
were 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.
32
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
On
December 23, 2009, EDC paid in full all remaining balances outstanding related
to its Senior Secured Credit Facility. Commensurate with the final
payoff of $7.1 million, EDC terminated all existing lending facilities with the
Lenders and the Agent.
Universal
Under the
terms of the supply contracts entered into as part of the transaction, EDC is
obligated to pay to Universal deferred acquisition payments with a net present
value using a discount rate of 6.52% which totaled approximately $39.8 million
at acquisition, using the May 2005 Euro to U.S. dollar exchange rate of 1.2474.
At December 31, 2009 the obligation to Universal decreased to $2.3 million due
to $0.5 million in principal payments and changes in the Euro to U.S. dollar
exchange rates offset by $0.2 million of accretion for imputed
interest. Scheduled payments of $0.5 million are due on December 31
for the next five years, ending in 2014.
Capital
Lease
During
2006, EDC entered into a lease for a piece of production related equipment in
its central European facility. The lease expires June 30, 2010, at
which time title to the equipment will be transferred to EDC at no
cost.
Employee
Loans
Employees
of EDC’s German operations participate in a government regulated employee
savings plan whereby a portion of their earnings are held by us in savings
accounts and are therefore treated as loans to us. These loans are for six-year
terms and are signed annually in January. The loans, including all accumulated
interest, are paid at the end of the term. Interest rates are determined prior
to the loans being assigned and remain constant for the six-year period. In
addition to interest, each participant receives a grant of approximately €0.1
million ($0.2 million), which is included in the employee loan balance. The
value of the loans outstanding at December 31, 2009 and 2008 totaled $2.6
million and $3.6 million, respectively. Accumulated interest was $0.5
million and $0.7 million with interest rates ranging from 3.9% to 4.8% and 3.9%
to 5.3% for the years ended December 31, 2009 and 2008,
respectively. Funds for these loans are held in escrow as restricted
cash. See Note 8. These loans are 100% guaranteed by several different banks and
are not convertible. Under certain hardship conditions the employee loan may be
paid out early. The employee savings plan is closed to new
entrants.
|
17.
|
Income
Taxes
|
The
Company’s income tax provision (benefit) for continuing operations consist of
the following:
|
2009
|
2008
|
||
|
Current
provision:
|
|||
|
Federal
|
$ -
|
$ -
|
|
|
Foreign
|
4,041
|
4,852
|
|
|
State
and local
|
-
|
-
|
|
|
Total
current
|
4,041
|
4,852
|
|
|
Deferred:
|
|||
|
Federal
|
3,482
|
(566)
|
|
|
Foreign
|
(1,956)
|
(9,638)
|
|
|
State
and local
|
104
|
(272)
|
|
|
Adjustment
to valuation allowance
|
(1,524)
|
981
|
|
|
Total
deferred
|
106
|
(9,495)
|
|
|
Total
provision (benefit)
|
$ 4,147
|
$ (4,643)
|
The
sources of income (loss) from continuing operations before income taxes are
presented as follows:
|
2009
|
2008
|
||
|
United
States
|
$ 540
|
$ (3,819)
|
|
|
Foreign
|
3,468
|
(13,997)
|
|
|
$ 4,008
|
$ (17,816)
|
The
consolidated income tax provision (benefit) from continuing operations was
different from the amount computed using the U.S. statutory income tax rate for
the following reasons:
|
2009
|
2008
|
||
|
Income
tax provision at Federal U.S. statutory rate
|
$ 1,403
|
$ (6,237)
|
|
|
Increase
(decrease) in valuation allowance
|
(1,524)
|
981
|
|
|
Deferred
taxes on earnings of foreign subsidiary per APB 23
|
287
|
675
|
|
|
Tax
on dividend
|
2,832
|
-
|
|
|
Reserve
contingency
|
218
|
34
|
|
|
Foreign
tax impact
|
2
|
29
|
|
|
State
taxes
|
67
|
(177)
|
|
|
Permanent
differences
|
337
|
235
|
|
|
Other
non-deductibles
|
525
|
(183)
|
|
|
Income
tax provision (benefit)
|
$ 4,147
|
$ (4,643)
|
33
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
The tax
effect of temporary differences and net operating loss carryforwards (“NOLs”)
related to continuing and discontinued operations that gave rise to the
Company’s deferred tax assets and liabilities at December 31, 2009 and 2008 are
as follows:
|
2009
|
2008
|
||
|
Deferred
Tax Assets:
|
|||
|
U.S.
net operating loss carry forwards
|
$ 112,015
|
$ 110,693
|
|
|
State
net operating loss carry forwards
|
1,567
|
2,981
|
|
|
Canada
net operating loss carry forwards
|
11,629
|
11,752
|
|
|
UK
net operating loss carryforwards
|
1,425
|
-
|
|
|
Other
tax carry forwards
|
12,012
|
11,446
|
|
|
Property
and equipment
|
756
|
2,844
|
|
|
Other
|
5,750
|
9,070
|
|
|
145,154
|
148,786
|
||
|
Less:
Valuation allowance
|
(143,088)
|
(146,300)
|
|
|
Net
Deferred Tax Assets
|
2,066
|
2,486
|
|
|
Deferred
Tax Liabilities:
|
|||
|
Other
|
(431)
|
(687)
|
|
|
Deferred
asset, net
|
$ 1,635
|
$ 1,799
|
During
2009, the valuation allowance decreased by $3.2 million due to decreases of $5.2
million in book/tax differences, $1.0 million from a tax rate change in Canada
and $0.5 million from tax credit expirations, offset by increases of $1.9
million as a result of the Canadian exchange rate changes and
increases in net operating loss carryforwards of $1.8 million.
The
Company has U.S. NOLs of $320 million, state NOLs of $33 million, and Canada
NOLs of $46 million. These NOLs begin to expire in 2010, 2018, and
2010, respectively. Of the $320 million of U.S. NOLs, $24 million are
subject to restrictions under the Internal Revenue Code of 1986, as
amended. The Company also has other tax carry forwards, a portion
which begins to expire in 2010. Its other tax carry forwards include
research and development tax credits, alternative minimum tax credits, state tax
credits, charitable contributions, foreign investment tax credits and U.S. and
foreign capital losses. The alternative minimum tax credit, state tax
credits and foreign capital losses do not expire. However, the other
credits and charitable contributions will expire beginning in 2010.
Historically,
the Company has considered that any undistributed earnings of its foreign
subsidiaries were permanently reinvested with any dividend payments being
included in U.S. earnings in the year the dividend is
distributed. The Company’s foreign subsidiaries made dividend
distributions of $17.0 million in 2008 and $8.6 million in 2009. As a
result of the indirect impact on the foreign subsidiaries of the approved EDCI
Plan of Dissolution, the Company can no longer consider the undistributed
earnings of its foreign subsidiaries as permanently reinvested. As a
result, the Company has calculated the tax impact as if the undistributed
earnings as of December 31, 2009 were distributed in 2010. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to minimal withholding taxes payable to the various
foreign countries, however, the dividends would be subject to U.S. income taxes
to the extend NOL carryovers and foreign tax credits cannot offset alternative
minimum taxable income and taxes. Accordingly, we have recorded a
deferred tax payable of $0.3 million for alternative minimum tax that would be
incurred if all potentially distributable earnings of foreign subsidiaries were
repatriated to the U.S. in 2010.
As of
December 31, 2009, $1.3 million of tax benefits related to the exercise of stock
options have not been recorded. These tax benefits cannot be
recognized until a current tax benefit is realized. Upon recognition,
the $1.3 million will be recorded through additional paid in
capital. As of December 31, 2009, the Company has recognized tax
benefits of approximately $7.7 million from the exercise of stock
options. These benefits are currently offset with a valuation
allowance that, when reversed, will be recorded through additional paid in
capital.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
2009
|
2008
|
||
|
Balance
at the beginning of the year
|
$ 3,631
|
$ 9,423
|
|
|
Additions
based on tax positions related to current year
|
69
|
-
|
|
|
Additions
for tax positions of prior years
|
125
|
138
|
|
|
Reductions
for tax positions of prior years
|
(739)
|
(4,806)
|
|
|
Statute
of limitations expirations
|
(423)
|
(690)
|
|
|
Foreign
currency adjustments
|
190
|
(434)
|
|
|
Balance
at the end of the year
|
$ 2,853
|
$ 3,631
|
The total
amount of unrecognized tax benefits that would, if recognized, affect the
effective income tax rate was approximately $2.4 million as of December 31, 2009
and 2008.
The above
amounts for tax positions of prior years have been classified as reductions of
the related deferred tax asset in the accompanying balance sheet.
The
Company also recognizes accrued interest expense and penalties related to the
unrecognized tax benefits as additional income tax expense, which is consistent
with prior periods. The total amount of accrued interest and penalties was
approximately $1.2 million and $1.0 million as of December 31, 2009 and 2008,
respectively.
FASB ASC
740 permits the Company to prospectively change its accounting policy as to
where penalties and interest on tax liabilities are classified on the
consolidated statements of income. Effective January 1, 2007, the Company
confirmed its accounting policy to continue to classify penalties and interest
on tax liabilities in “provision for income taxes” on the consolidated
statements of income consistent with prior period
classifications.
34
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share
Amounts)
Of the
unrecognized tax benefits noted above, it is anticipated that over the next 12
months various tax-related statutes of limitations will expire effecting a $2.6
million reduction in the unrecognized tax benefits, consisting of $1.6 million
in taxes and $1.0 million in accrued interest and penalties on these
balances. The nature of these uncertainties relates primarily to
transfer pricing. All of these uncertainties relate to discontinued
operations.
The
Company and its subsidiaries are subject to U.S. federal income tax as well as
income tax in multiple state and foreign jurisdictions. On February 6, 2008, 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.
|
18.
|
Employee
Benefit Plans
|
The
Company recognizes the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in the statement of financial
position, the measurement of a plan’s assets and its obligations that determine
its funded status as of the end of the employer’s fiscal year, and the
recognition of changes in that funded status through comprehensive income in the
year in which the changes occur.
(a)
Post-retirement Health Care Benefits
The
Company provides certain U.S. employees of its former Messaging business with
certain health care benefits upon retirement assuming the employees met minimum
age and service requirements as of the date of disposition of the Messaging
business. The Company’s policy is to fund benefits as they become due.
Consequently, the plan has no assets. For non-funded plans, the expected
employer contributions equal the benefit payments. The plan is closed
to new participants.
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 year ended December 31,
2009.
The
actuarial present value of accumulated post-retirement benefit obligations at
December 31, 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Retirees
|
$ 445
|
$ 860
|
||||||
|
Fully
eligible plan participants
|
-
|
-
|
||||||
|
Other
active plan participants
|
-
|
-
|
||||||
|
Accumulated
post-retirement benefit obligation
|
445
|
860
|
||||||
|
Unrecognized
loss
|
(11)
|
(149)
|
||||||
|
Unrecognized
prior service cost
|
121
|
382
|
||||||
|
Accumulated
other comprehensive income
|
(110)
|
(233)
|
||||||
|
Post-retirement
benefit liability recognized in balance sheet
|
$ 445
|
$ 860
|
||||||
The
change in Accumulated Post-retirement Benefit Obligation (“APBO”) from year to
year is as follows:
|
2009
|
2008
|
|||||||
|
APBO
at the beginning of the year
|
$ 860
|
$ 918
|
||||||
|
Interest
cost
|
26
|
53
|
||||||
|
Plan
participants' contributions
|
-
|
22
|
||||||
|
Curtailments
of Active Participants
|
(422)
|
-
|
||||||
|
Actuarial
gain (loss)
|
4
|
(44)
|
||||||
|
Benefits
paid
|
(23)
|
(89)
|
||||||
|
APBO
at end of the year
|
$ 445
|
$ 860
|
||||||
Net
post-retirement benefit costs for the years ended December 31, 2009 and 2008
consist of the following components:
|
2009
|
2008
|
||||||
|
Interest
cost on APBO
|
$ 26
|
$ 53
|
|||||
|
Amortization
of prior service costs
|
(261)
|
(19)
|
|||||
|
Adjustment
for curtailment gain
|
(280)
|
-
|
|||||
|
Amortization
of actuarial loss
|
-
|
10
|
|||||
|
$ (515)
|
$ 44
|
||||||
The assumed discount rates utilized to value end of year APBO for
2009 and 2008 were 5.3% and 6.3%, respectively. The assumed discount rates
utilized to value net periodic post retirement benefit cost for 2009 and 2008
were 6.3% and 6.2%, respectively. The
assumed health care trend rate in measuring the accumulated post-retirement
benefit obligation as of
35
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
December
31, 2009 was varied between non-Medicare and Medicare eligible retirees. The
2009 trend rate is 9.0%, decreasing to 4.5% in 2015, after which it remains
constant. A one percentage point increase in the assumed health care cost trend
rate for each year would increase the accumulated post-retirement benefit
obligation as of December 31, 2009 by approximately 3.1% and the 2009 aggregate
interest and service cost by approximately 2.7%. A one percentage point decrease
in the assumed health care cost trend rate for each year would decrease the
accumulated post-retirement benefit obligation as of December 31, 2009 by
approximately 2.7% and the 2009 aggregate interest and service cost by
approximately 2.4%.
The
estimated employer benefits paid are as follows:
|
2010
|
$ 44
|
|
2011
|
44
|
|
2012
|
43
|
|
2013
|
42
|
|
2014
|
41
|
|
Succeeding
five years
|
186
|
(b)
Defined Contribution Plans
The
Company maintains, for substantially all of its full-time U.S. employees,
401(k)-retirement savings plans, which are defined contribution plans. The
Company also sponsors additional retirement defined contribution plans for
certain non-U.S. employees. Under these plans, the employees may contribute a
certain percentage of their compensation and the Company matches a portion of
the employees' contribution. The Company’s contributions for continuing
operations under these plans amounted to approximately $0.1 million for the
years ended December 31, 2009 and 2008, respectively.
(c)
Pension Plans
As a
result of the May 31, 2005 acquisition of EDC, the Company assumed the
obligations of various defined benefit plans. Employees and managing directors
of EDC’s operations in Germany participate in the pension plans. These benefits
are based on pay, years of service and age. The plans are not funded and
therefore have no plan assets. These pension plans are closed to new
entrants.
The rates
assumed in the actuarial calculations for the Company’s pension plans as of
their respective measurement dates were as follows:
|
December 31, 2009
|
December 31, 2008
|
|||||
|
Discount
rate
|
5.50%
|
5.70%
|
||||
|
Rate
of Compensation increase
|
2.00%
|
2.50%
|
||||
|
Rate
of post-retirement pension increase
|
2.00%
|
2.30%
|
||||
The
following table shows the collective actuarial results for the defined benefit
pension plans of EDC’s central European operations.
|
December 31, 2009
|
December 31, 2008
|
|||||
|
Change
in Projected Benefit Obligations:
|
||||||
|
Projected
benefit obligation, January 1
|
$ 28,439
|
$ 28,061
|
||||
|
Service
cost
|
851
|
837
|
||||
|
Interest
cost
|
1,628
|
1,462
|
||||
|
Benefits
paid
|
(632)
|
(445)
|
||||
|
Foreign
exchange translation
|
476
|
(1,204)
|
||||
|
Actuarial
gain
|
(545)
|
(272)
|
||||
|
Projected
benefit obligation, December 31
|
$ 30,217
|
$ 28,439
|
||||
|
Funded
Status:
|
||||||
|
Funded
status at end of year
|
$ (30,217)
|
$ (28,439)
|
||||
|
Unrecognized
net gain
|
(3,640)
|
(3,073)
|
||||
|
Net
amount recognized
|
$ (33,857)
|
$ (31,512)
|
||||
|
Amounts
included in the Consolidated Balance Sheet
|
||||||
|
Accrued
benefit short-term liability
|
$ (854)
|
$ (716)
|
||||
|
Accrued
benefit long-term liability
|
(29,363)
|
(27,723)
|
||||
|
Accumulated
other comprehensive income
|
(3,640)
|
(3,073)
|
||||
|
Net
amount recognized
|
$ (33,857)
|
$ (31,512)
|
||||
|
Additional
Information:
|
||||||
|
Projected
benefit obligation
|
$ 30,217
|
$ 28,439
|
||||
|
Accumulated
benefit obligation
|
$ 27,356
|
$ 25,394
|
||||
|
Components
of net periodic pension cost:
|
||||||
|
Service
cost
|
$ 851
|
$ 837
|
||||
|
Interest
cost
|
1,628
|
1,462
|
||||
|
Amortization
of net actuarial gain
|
(29)
|
(27)
|
||||
|
Net
periodic pension cost
|
$ 2,450
|
$ 2,272
|
||||
36
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
The
following table shows the expected future benefits to be paid:
|
2010
|
$ 854
|
|||
|
2011
|
893
|
|||
|
2012
|
944
|
|||
|
2013
|
957
|
|||
|
2014
|
1,354
|
|||
|
Succeeding
5 Years
|
9,271
|
The
Company also has a pension plan which covers two retired former
employees. The Company has accrued approximately $0.4 million related
to the pension plan. The expected future benefits to be paid are
approximately $0.2 million spread evenly over 2010-2014 and $0.2 million for the
succeeding five years.
(d)
Long-term Service Award Plan
The
Company maintains a Long-Term Service Awards program, a defined benefit plan,
for qualified employees in its German operations. Under the
German plan, qualified employees receive a lump sum service gratuity (“Jubilee”)
payment once they have reached certain number of years of service. The Jubilee
payment is determined based on 1/12th of
the employee’s annual salary. The projected benefit obligation at
December 31, 2009 was $3.1 million. The projected service cost as of January 1,
2010 for fiscal year 2010 amounts to approximately $0.1 million.
The rates
assumed in the actuarial calculations for the Company’s long term service award
program at December 31, 2009 are as follows:
|
Interest
rate
|
5.50%
|
|||
|
Salary
increase
|
2.00%
|
|||
|
Fluctuation
rate
|
1.00%
|
until
age 49
|
The
following table shows the expected future benefits to be paid assuming full
vesting of participant benefits.
|
2010
|
$ 956
|
|
|
2011
|
625
|
|
|
2012
|
222
|
|
|
2013
|
223
|
|
|
2014
|
274
|
|
|
Succeeding
5 Years
|
1,542
|
Included
in the $3.8 million future benefits to be paid under the Long-term Service Award
Plan is $2.4 million related to the long-term receivable. See Note
11.
(e) Deferred
Compensation Plan
The
Company previously maintained a deferred compensation plan to which employees at
the director level and above were allowed to defer receipt of part or all of
their compensation. Generally, amounts deferred were invested in the
same manner as the participant’s investments in the Company’s 401(k) plan or
equally among certain specified mutual funds if the participant did not
participate in the 401(k) plan.
An asset,
representing the fair market value of the deferrals, and a corresponding
liability, representing our obligation to the employee, was recorded in the
accompanying consolidated balance sheets. During November 2009 the
Company terminated the plan and paid out all funds held in the plan to the
appropriate participants. Accordingly, there is no asset or liability
recorded in the accompanying balance sheet as of December 31,
2009. As of December 31, 2008, $0.5 million was included in other
assets and other non-current liabilities, respectively.
(f)
Early Retirement and Post-employment Programs
In
Germany, Altersteilzeit (“ATZ”) is an early retirement program established by
law, and is designed to create an incentive for employees, within a certain age
group, to transition from (full or part-time) employment into retirement before
their legal retirement age. The German government provides a subsidy to
employers taking advantage of this legislation for bonuses paid to the employee
and the additional contributions paid into the German government pension scheme
under an ATZ arrangement for a maximum of six years. To receive this subsidy, an
employer must meet certain criteria established by the German
government.
The
Company accrues for ATZ based on current and future contracts.
The rates
assumed by the Company in the actuarial calculations for the ATZ at December 31,
2009 are as follows:
|
Interest
rate
|
5.50%
|
||
|
Salary
increase
|
2.00%
|
||
|
Fluctuation
rate
|
0.00%
|
At
December 31, 2009, the accrual for ATZ was $2.6 million. The
projected benefit obligation at December 31, 2009 was $2.6
million.
37
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
The
following table shows the expected future benefits to be paid assuming full
vesting of participant benefits. The accrual included in the Company’s
consolidated financial statements, however represents an amount based upon
expected plan participation.
|
2010
|
$ 1,212
|
|
|
2011
|
1,295
|
|
|
2012
|
1,240
|
|
|
2013
|
775
|
|
|
2014
|
376
|
|
|
Succeeding
5 Years
|
21
|
|
19.
|
Stockholders’
Equity and Stock-Based Compensation
|
|
(a)
|
Share
Repurchase Program
|
On May
26, 2009, the Board of Directors of the Company announced the extension of the
original plan approved in June 2008 to repurchase up to 1 million shares of
common stock of the Company over the next 12 months. The repurchase
program will be funded using the Company’s available cash. Pursuant
to the repurchase program, the Company intends to purchase shares of its common
stock from time to time on the open market or in negotiated transactions as
market and business conditions warrant, in compliance with securities laws and
other legal requirements, and taking into consideration any potential impact its
NOL Carryforward position under Section 382 of the Internal Revenue
Code. The repurchase program may be suspended or discontinued at any
time. Since the announcement of the plan, the Company has acquired
approximately 0.2 million shares of its common stock for a total purchase price
of approximately $1.0 million under the approved
plan. Separately, in the first quarter of 2008, the Company
acquired, in a privately negotiated transaction with a non-affiliate,
approximately 0.2 million shares of its common stock for a total purchase price
of $0.7 million.
|
(b)
|
Equity
Compensation Plans
|
The
Company grants or has granted stock options and other stock-based awards under
the following equity compensation plans:
Incentive Stock
Plans. The Company maintains an incentive stock option plan
(the “1996 Plan”) that was approved by the stockholders, is administered by the
Compensation and Plan Administration Committee of the Board of Directors (the
“Compensation Committee”) and is used to promote the long-term financial
interests and growth of EDCI. At December 31, 2009, the Company is
authorized to grant up to 1,485,000 shares of its common stock for issuance
in connection with the grant of stock options, stock appreciation rights,
restricted stock and performance shares under the 1996
Plan. Participation under the 1996 Plan is limited to non-officer
directors, key employees and other key persons. Options are generally
granted with an exercise price equal to the market price of its stock at the
date of grant, generally vest based on three years of continuous service and
have 10-year contractual terms. Generally, one-third of the options granted vest
on each of the first, second and third anniversaries of the grant.
The 1996
Plan also provides for the grant of restricted stock units (“RSUs”) to
non-officer directors on an annual basis. RSUs are intended to align the
interest of directors and stockholders in enhancing the value of its common
stock and to encourage such directors to remain with and to devote their best
efforts to EDCI. Beginning in January 2006, non-officer
directors received annual grants of RSUs with an increased value of
$18,000. Effective November 5, 2007, the Board agreed to implement a
10% reduction in the value of the annual restricted stock awards granted to
non-officer directors. Beginning in January 2009, the value of annual
restricted stock awards granted to non-officer directors was increased to
$18,000.
(d)
Grant-Date Fair Value
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award. The fair values of options granted were calculated using
the following estimated weighted-average assumptions:
|
2009
|
2008
|
||
|
Options
granted (in thousands)
|
15
|
-
|
|
|
Weighted-average
exercise price stock options
|
$5.04
|
-
|
|
|
Weighted-average
grant date fair-value stock options
|
$3.67
|
-
|
|
|
Assumptions:
|
|||
|
Weighted-average
expected volatility
|
1.00
|
-
|
|
|
Weighted-average
expected term (in years)
|
5.50
|
-
|
|
|
Risk-free
interest rate
|
1.9%
to 2.7%
|
-
|
|
|
Expected
dividend yield
|
0.0%
|
-
|
In
general, the expected life in years was based on the weighted average of
historical grants assuming that outstanding options are exercised at the
midpoint of the future remaining term, adjusted for current demographics. The
risk free interest rate was the U.S. Treasury five-year spot rate on the date of
grant. There were no stock option grants in 2008.
(e)
Stock-Based Compensation Expense
The
Company recognizes share-based payments to employees, including grants of
employee stock options in the statement of operations based on their fair
values. This pronouncement applies to its incentive stock plan, including stock
options and restricted stock units, and its employee stock purchase
plan.
The
Company elected the “modified prospective” method for its transition. Under this
method, the Company recognized compensation cost beginning on January 1,
2006 (a) for all share-based payments granted after that date and (b) for all
awards granted to employees prior to that date that were
unvested.
38
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
The grant
of equity instruments in exchange for services is a non-cash item and,
therefore, is reflected as a reconciling item from net income (loss) to cash
flow from operations, when using the indirect method for presenting the
statement of cash flows. The cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) are classified as financing cash flows.
During the year ended December 31, 2009, the Company did not record any
excess tax benefits or a corresponding increase to contributed capital because
it has NOL carry forwards, and the tax benefit will not be recognized until the
deduction is used to reduce current taxes payable.
The
Company uses the Black-Scholes-Merton model to calculate fair value of options.
All awards granted prior to July 1, 2005 maintain their grant-date value as
calculated under the previous method. The future compensation cost for the
portion of these awards that are unvested (the service period continues after
date of adoption) will be based on their grant-date value adjusted for estimated
forfeitures. The Company uses a straight-line or accelerated attribution method
and elected to use the straight-line method for awards issued after
January 1, 2006.
Restricted
stock compensation represents stock issued to the Company’s former Chief
Executive Officer as part of his employment agreement dated January 2, 2009
(“the CEO Agreement”). Pursuant to the CEO Agreement, $18,750
of his monthly salary was paid through the issuance and delivery of shares of
common stock of the Company issued in a valid private placement under federal
securities laws. The number of shares issued for each monthly payment was
calculated by dividing $18,750 by the average daily closing price of the
Company’s common stock on the Nasdaq Stock Market during the calendar month
immediately preceding the calendar monthly period in which issuance and delivery
was made. During his six month tenure, our former Chief Executive
Officer was granted 26,453 shares pursuant to the CEO Agreement.
The
following table details the compensation expense for options and restricted
stock and the employee stock purchase plan for each of the two years ended
December 31:
|
2009
|
2008
|
||
|
Stock
Options
|
77
|
63
|
|
|
Restricted
Stock Units
|
93
|
100
|
|
|
Restricted
Stock Compensation
|
112
|
-
|
|
|
Total
stock compensation expense
|
$ 282
|
$ 163
|
No stock
compensation expense was capitalized as part of the cost of any asset during the
years ended December 31, 2009 and 2008.
(f)
Stock-Based Compensation Activity
Activity
and price information regarding its incentive stock plan are summarized as
follows:
|
Weighted
|
||||||||
|
Weighted
|
Average
|
|||||||
|
Average
|
Remaining
|
Aggregate
|
||||||
|
Shares
|
Exercise
|
Contractual
|
Intrinsic
|
|||||
|
Options
|
(In
000's)
|
Price
|
Term
|
Value
|
||||
|
Outstanding,
December 31, 2008
|
142
|
$ 33.91
|
$ -
|
|||||
|
Granted
|
15
|
$ 5.04
|
$ -
|
|||||
|
Exercised
|
-
|
$ -
|
$ -
|
|||||
|
Forfeited
|
-
|
$ -
|
$ -
|
|||||
|
Expired
|
(20)
|
$ 31.30
|
$ -
|
|||||
|
Outstanding,
December 31, 2009
|
137
|
$ 31.32
|
5.1
years
|
$ -
|
||||
|
Vested
at December 31, 2009
|
137
|
$ 31.32
|
5.1
years
|
$ -
|
||||
|
Exercisable
at December 31, 2009
|
130
|
$ 32.92
|
4.8
years
|
$ -
|
The
weighted average grant-date fair value of options granted during the year ended
December 31, 2009 was $5.04 per share. The total grant date fair value of
options vested during 2009 and 2008 was less than $0.1 million and $0.2 million,
respectively. On January 8, 2010, the day immediately following
shareholder ratification of the Plan of Dissolution, the vesting schedule of all
unvested options was accelerated and all options became fully vested and
exercisable.
A summary
of the status of the Company’s RSUs (non-vested shares) as of December 31,
2009 and changes during the year ended December 31, 2009 is presented
below:
|
Weighted-Average
|
||||
|
Shares
|
Grant-Date
|
|||
|
Nonvested
Shares
|
(In
000's)
|
Fair
Value
|
||
|
Nonvested
at December 31, 2008
|
32
|
$ 7.12
|
||
|
Granted
|
18
|
$ 4.92
|
||
|
Vested
|
(11)
|
$ 10.23
|
||
|
Forfeited
|
(10)
|
$ 4.91
|
||
|
Nonvested
at December 31, 2009
|
29
|
$ 5.38
|
39
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
As of
December 31, 2009, there was approximately $0.1 million of total
unrecognized compensation cost related to all share-based compensation
arrangements granted under the 1996 Plan. That cost is expected to be recognized
over a weighted-average period of approximately one year. The total fair value
of RSUs vested during the year ended December 31, 2009 was $0.1
million. On January 8, 2010, the day immediately following
shareholder ratification of the Plan of Dissolution, the vesting schedule of all
unvested restricted stock units was accelerated and all restricted units vested
into shares of the Company’s common stock.
(g)
Other
Applicable
German law restricts its German subsidiaries from paying dividends to the extent
paying any such dividends would cause the net assets of the applicable
subsidiary to be less than its nominal share capital. The nominal share capital
of its German operating company subsidiary is €6 million at
12/31/2009.
|
20.
|
Income
(Loss) per Common Share
|
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive shares issuable upon the exercise of
outstanding stock options or other stock-based awards during the period using
the treasury stock method, if dilutive.
The
following table sets forth the computation of income (loss) per share
(1):
|
2009
|
2008
|
||
|
Numerator:
|
|||
|
Loss
from continuing operations attributable to common
shareholders
|
$ (141)
|
$ (12,690)
|
|
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(2,685)
|
(11,677)
|
|
|
Gain
(loss) on sale of EDC U.S. Operations
|
(21)
|
2,712
|
|
|
Net
loss attributable to common shareholders
|
$ (2,847)
|
$ (21,655)
|
|
|
Denominator:
|
|||
|
Denominator
for basic income (loss) per share - weighted average
shares
|
6,699
|
6,840
|
|
|
Effect
of dilutive securities
|
-
|
-
|
|
|
Denominator
for diluted income (loss) per share-adjusted weighted average shares and
assumed conversions
|
6,699
|
6,840
|
|
|
Income
(loss) per weighted average common share (2):
|
|||
|
Loss
from continuing operations attributable to common
shareholders
|
$ (0.02)
|
$ (1.86)
|
|
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(0.40)
|
(1.71)
|
|
|
Gain
on sale of EDC U.S. Operations
|
-
|
0.40
|
|
|
Loss
attributable to common shareholders
|
$ (0.42)
|
$ (3.17)
|
|
|
Income
(loss) per weighted average diluted common share (2):
|
|||
|
Loss
from continuing operations attributable to common
shareholders
|
$ (0.02)
|
$ (1.86)
|
|
|
Loss
from discontinued operations, net of tax attributable to common
shareholders
|
(0.40)
|
(1.71)
|
|
|
Gain
on sale of EDC U.S. Operations
|
-
|
0.40
|
|
|
Loss
attributable to common shareholders
|
$ (0.42)
|
$ (3.17)
|
|
|
Dilutive
securities not included above due anti-dilutive effect as a result of the
net loss position
|
5
|
2
|
|
|
Anti-dilutive
securities not included above: stock options
|
129
|
142
|
|
|
(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 dilutive shares issuable upon the exercise of outstanding stock options
or other stock-based awards included in the calculation of diluted loss per
share for the years ended December 31, 2009 and 2008, respectively, as
their effect would be anti-dilutive.
|
21.
|
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.
40
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
Arbitration Claim under the
International Distribution Agreement. On
February 27, 2009, EDC, at its election, provided notice to Universal
International Music (“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 Universal,
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. 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, 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 and a hearing is scheduled for June 2010.
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 19, 2009
notice, UIM alleged that EDC had 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 generally provided with a
contractual opportunity to cure such, although as described below, 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
both held to be valid – even if both Key Failures were cured.
There are
various penalties for both cured and uncured Key Failures. Depending
on whether one or two Key Failures were found valid at arbitration, and whether
EDC were able to cure any such valid Key Failures, EDC could face the
following: 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 both 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. EDC expects that UIM's entire
contractually committed distribution and manufacturing volume under the Supply
Agreements will represent approximately 88% of EDC's total manufacturing and
distribution volume in 2010.
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 $1.9 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, however, an amount
cannot be estimated at this time. EDC may also be successful in its claim that
no Key Failures have occurred, but the arbitration panel could reject EDC’s
interpretation of the underlying service levels as they are applicable to future
performance, increasing the risk of future potential Key Failures. 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 claimed 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 claimed that EDC 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 at that time did not elect to enforce that remedy but
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 stated 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 therefore submitted the matter to arbitration in August
2009. An arbitration panel has yet to be agreed to by the parties and
no date for the arbitration has been set.
In
subsequent correspondence related to this matter, UIM indicated that it would
begin to order 40% of its UK manufacturing requirements from third party
manufacturers in 2010, while maintaining its claim that EDC had forfeited its
right to continue to service 100% of those UK requirements. UIM also advanced
additional theories under which EDC's closure of the Blackburn facility and the
manufacture of UIM's UK volume out of EDC's Hannover facility would constitute a
breach of the Manufacturing Agreement - including that EDC would be unable to
meet its contractual service level obligations ("SLAs") for UIM UK requirements
manufactured out of Hannover - and EDC's actions constitute a material breach of
the Manufacturing Agreement entitling UIM to terminate the entire Manufacturing
Agreement. EDC responded that these additional theories also lacked merit, that
EDC could satisfy the SLAs and warned UIM of the legal consequences of breaching
the Manufacturing Agreement by procuring 40% of its UK requirements from third
parties. However, on January 14, 2010 EDC confirmed that UIM had begun to order
certain of its UK requirements from third parties.
41
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
In
consultation with counsel, EDC continues to believe UIM's claims and remedies
lack merit. In particular, the Manufacturing Agreement expressly provides that
EDC is only obliged to use its "commercially reasonable endeavors" to
manufacture the majority of UIM's UK requirements at its Blackburn facility, and
as previously disclosed in March 2009, at that time 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. Further, EDC believes it can meet all SLAs for UIM's UK
requirements manufactured from its Hannover facility and believes that certain
of the UK requirements ordered by UIM were in fact ordered from Austria, a
location that is geographically more distant from the UK than EDC’s Hannover
facility. However,
if UIM were successful in its claims in arbitration EDC would face material and
adverse consequences. The loss of 40% of UIM's UK requirements, based on the
high fixed cost nature of EDC's manufacturing operations, would have a material
adverse effect on its profitability. If UIM were to prevail in its new argument
that EDC's breach provides UIM with the right to terminate the entire
Manufacturing Agreement and UIM so elected, EDC would lose substantially all of
its contractually committed manufacturing business. EDC expects that UIM's
entire contractually committed manufacturing volume will represent approximately
75% of EDC's total manufacturing volume in 2010, that the UK requirements
account for approximately 20% of EDC's total manufacturing volume, and thus 40%
of the UK requirements account for approximately 8% of EDC's total manufacturing
volume.
EDC
believes UIM has breached its obligations to EDC with regard to certain of its
UK requirements, and until resolved UIM will likely continue that breach by
procuring up to 40% of its UK requirements from third parties. EDC will seek to
recover those losses, other losses and punitive damages from UIM in arbitration.
However, UIM's actions will also force EDC to evaluate other cost-reduction
measures in Hannover to mitigate those damages in the short run.
EDC does
not believe UIM’s claim has merit and intends to vigorously defend and prosecute
its position in arbitration but at this early stage in these matters, EDC is not
able to assess the likelihood of a favorable outcome. However, if UIM
were successful in its claim and enforced its alleged remedy, EDC could suffer
loss of volumes that, based on the high fixed cost nature of EDC’s manufacturing
operations, would have a material adverse effect on its
profitability.
Shareholder Derivative Actions:
On September 6, 2006, Vladimir Gusinsky (“Gusinsky”), a Company
shareholder, commenced a derivative action (the “Gusinsky Action”) in the
Supreme Court of the State of New York, New York County,
against EDCI (as nominal defendant) and against certain of EDCI’s current and
former officers and directors as defendants. The complaint, as amended in
December 2006 and January 2007, purportedly on behalf of EDCI,
contained a variety of allegations relating to the backdating of certain stock
option grants. On January 26, 2007 and February 7, 2007, two additional
derivative actions were commenced in the United States District Court for the
Southern District of New York by two different Company shareholders, Larry L.
Stoll and Mark C. Neiswender, respectively (the “Subsequent Actions”). The
Subsequent Actions were identical to each other and asserted the same claims as
those asserted in the Gusinsky Action regarding a subset of the same option
grants at issue in that action along with additional claims alleging violations
of federal securities laws.
A Special
Litigation Committee of the Board of Directors of EDCI, following an internal
investigation, concluded that there was no conclusive or compelling evidence
that any of the named defendants in the lawsuits breached the fiduciary duties
of care or loyalty, or acted in bad faith with respect to their obligations to
EDCI or its shareholders, and further concluded that it would not be in EDCI’s
best interest to pursue any claims with respect to these grants. EDCI also
restated certain financial statements as a result of this internal
investigation.
On
January 30, 2008, all parties to the Gusinsky Action and the Subsequent Actions
entered into an agreement to settle both actions. The agreement was
subject to the approval of the Court. Pursuant to the settlement
agreement, EDCI’s insurer agreed to pay plaintiffs’ counsel in the Gusinsky
Action and the Subsequent Actions for their fees and expenses, and to pay for
the costs of notifying the Company’s shareholders of the
settlement. EDCI also implemented certain changes to its Equity
Compensation Policy and adopted related reform policies. In exchange,
the plaintiffs in both the Gusinsky Action and the Subsequent Actions agreed to
dismiss their claims with prejudice, forego any appeals and release all the
defendants from all claims that were or could have been asserted in either
action and arise out of or are based upon or relate in any way to any of the
allegations set forth in the complaints. The papers in support of
preliminary approval of the settlement were filed in the Gusinsky Action on
January 31, 2008 and on April 30, 2008 the Court granted preliminary
approval of the settlement and scheduled a settlement hearing. On
September 17, 2008, the Court issued a final order approving the settlement, but
denying plaintiffs’ counsels’ application for fees and expenses. A
judgment to that effect was then entered by the Court on September 25,
2008.
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 agreed not to oppose any such application for attorney’s
fees. On December 17, 2009, the Court approved the plaintiffs’ appeal
and awarded the requested attorney’s fees, which fees were paid by EDCI’s
insurer in accordance with the previous settlement agreement. EDCI
had further sought reimbursement for the insurable portions of certain fees
incurred related to this matter from its insurer, including through the
initiation of litigation in 2009. On February 8, 2010, EDCI settled
all related claims with its insurer for a payment to EDCI of $1.5
million.
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. In 2009, the Court denied 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 by
EDC. The Court has stayed the motion for summary judgment pending a
decision on claim construction, a hearing for which was held in December
2009.
42
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
On January 22, 2010, the Court dismissed the action against the
individual defendants, Messrs. Caparro and Copland. 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.
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. In November
2009, EDC and Koninklijke Philips Electronics N.V. reached a settlement of the
dispute in which the full amount of the claim was agreed to be paid. EDC was
fully indemnified for the claim under the Manufacturing Agreement with UIM and
as such incurred no cost as a result of the settlement.
Michael W. Klinger
Litigation. On April 17, 2009, EDCI,
EDC and Entertainment Distribution Company (USA) LLC (a wholly-owned subsidiary
of EDC) (“EDC USA”) (collectively, the “EDC Companies”) filed suit against
Michael W. Klinger, the former Executive Vice President and Chief Financial
Officer of EDCI, in the United States District Court for the Southern District
of New York (the “Klinger New York Complaint”). The complaint related
to events surrounding Mr. Klinger’s termination of employment from EDCI,
including certain disputed severance payments authorized by Mr.
Klinger. The Klinger New York Complaint sought a declaratory judgment
regarding the nature of Mr. Klinger’s termination of employment, recovery for
losses suffered by EDCI et. al. in connection with Mr. Klinger’s approval of the
severance payments, and other fees and costs. On April 23, 2009, Mr.
Klinger filed a Charge of Discrimination against the EDC Companies with the
Equal Employment Opportunity Commission (“EEOC”) alleging age discrimination and
retaliation (the “EEOC Complaint”). On May 8, 2009, Mr. Klinger also
filed a complaint against the EDC Companies and Mr. Robert L. Chapman, Jr., then
CEO of EDCI and EDC, in the United States District Court for the Southern
District of Indiana (the “Klinger Indiana Counter-Suit”), which included claims
under the Age Discrimination in Employment Act and COBRA and other claims for
breach of fiduciary duties. The Klinger Indiana Counter-Suit sought
damages for breach of Mr. Klinger’s employment agreement, certain statutory
damages for unpaid wages and compensation due to Mr. Klinger, damages for
alleged defamation, and related costs and fees. On December 16, 2009,
the Board of Directors, Mr. Chapman, and Mr. Klinger reached a settlement of all
legal disputes existing between them. As a result, the EDC Companies withdrew
their notice of termination for cause, retroactive to April 13, 2009, the date
of Mr. Klinger’s separation from employment, and Mr. Klinger withdrew his notice
of resignation for good reason. The EDC Companies have accepted Mr. Klinger's
voluntary resignation effective December 17, 2009 and settled all disputes for
approximately $0.3 million.
Operating
Lease Commitments
The
Company leases manufacturing, warehouse, and office facilities and equipment
under operating leases. Future minimum lease payments under operating leases
(with initial or remaining lease terms in excess of one year) related to its
continuing operations for calendar years subsequent to December 31, 2009 are as
follows:
|
2010
|
$ 6,722
|
|
2011
|
5,386
|
|
2012
|
5,283
|
|
2013
|
5,154
|
|
2014
|
5,134
|
|
Thereafter
|
2,155
|
|
Total
|
$ 29,834
|
The lease
for the facility in Germany escalates in 5% increments if the German Consumer
Price Index has increased 5% or greater and is non-cancelable. The principal
lease for its UK manufacturing facility includes a clause for rent escalation of
11% and an option to break the lease without penalty in June 2010. The Company
has exercised the option to break the lease in 2010 and have excluded future
payments beyond June 2010 in the above table. Contingent rentals are estimated
based on provisions in the lease and historical trends. Rent expense included in
continuing operations was approximately $7.6 million and $7.1 million for the
years ended December 31, 2009 and 2008, respectively.
Minority
Shareholder Put Options
EDC’s
limited liability company agreement grants minority members put option rights
such that they can require EDC or EDCI to purchase the minority member interest
in EDC. The put options, which cover both the 2.2% of EDC’s outstanding Common
Units acquired by two key employees and EDC’s outstanding profits interests, can
be exercised during a 5 year period beginning on the Put Trigger Date (as
defined in the agreement) in the event EDC shall not have consummated an initial
public offering prior to the Put Trigger Date. The Put Trigger Date is the
earlier of May 31, 2015 or the date on or after May 31, 2013 on which the terms
of all EDC’s manufacturing and distributions agreements with Universal, are
extended to a term ending on or after May 31, 2018. The purchase price for any
member interest purchased as a result of the put option is the Fair Market Value
(as defined in the agreement) on the date of the put notice.
|
22.
|
Segment
Reporting
|
The
Company currently has one reportable segment: EDC. On December 31, 2008, the
Company’s EDC subsidiary sold its distribution operations located in Fishers,
Indiana, U.S. supply agreements with Universal, all of the equipment located in
its Fishers, Indiana distribution facility and certain manufacturing equipment
located in the Company’s Kings Mountain, North Carolina facility, as well as
transferred its U.S. customer relationships to Sony DADC. All information
related to the EDC U.S. operations, including prior period information, is
reflected as discontinued operations.
The
remaining EDC operations consist of the Company’s central European and UK CD and
DVD manufacturing operations and its central European distribution operation.
The UK operations are included in continuing operations for financial statement
presentation purposes as a significant portion of the volumes previously
produced by our UK operations were transferred to our Central European
operations as part of the Consolidation plan. See Note 15. The
Company has two product categories: product representing the manufacturing of
CDs and DVDs and services representing its distribution of CDs and
DVDs.
Universal
accounted for revenues of $157.7 million and $174.3 million for the years ended
December 31, 2009 and 2008, respectively, is included in EDC revenues above and
was the only customer to exceed 10% of total revenues.
43
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
Geographic
Area
|
Year
Ended December 31,
|
|||||||
|
Revenues
|
Long-lived
Assets
|
||||||
|
2009
|
2008
|
2009
|
2008
|
||||
|
United
States
|
$ -
|
$ -
|
$ 58
|
$ 217
|
|||
|
United
Kingdom
|
30,978
|
65,866
|
757
|
996
|
|||
|
Germany
|
150,018
|
164,810
|
15,614
|
19,973
|
|||
|
Other
|
6,880
|
7,752
|
-
|
-
|
|||
|
Consolidated
|
$ 187,876
|
$ 238,428
|
$ 16,429
|
$ 21,186
|
|||
Revenues
are reported in the above geographic areas based on product shipment destination
and service origination.
|
23.
|
Other
Comprehensive Income (Loss)
|
The
accumulated balances related to each component of other comprehensive income
(loss) were as follows:
|
Foreign
|
Unrealized
|
Post
Retirement
|
Accumulated
Other
|
||||
|
Currency
|
Losses
on
|
and
Pension
|
Comprehensive
|
||||
|
Translation
|
Investments
|
Benefit
Obligations
|
Income
|
||||
|
Beginning
balance at January 1, 2009
|
$ 2,817
|
$ (384)
|
$ 2,150
|
$ 4,583
|
|||
|
Other
comprehensive income
|
934
|
384
|
475
|
1,793
|
|||
|
Balance
at December 31, 2009
|
$ 3,751
|
$ -
|
$ 2,625
|
$ 6,376
|
The
amounts above are net of income taxes. Income taxes are not provided
for foreign currency translation.
44
EDCI
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
Amounts in Thousands Except per Share Amounts)
|
24.
|
Interim
Financial Data – Unaudited
|
|
Quarters
Ended
|
|||||||
|
March
31
|
June
30 (2)
|
September
30
|
December
31 (3)
|
||||
|
2009
(1)
|
|||||||
|
Total
revenues
|
$ 41,251
|
$ 37,416
|
$ 42,782
|
$ 66,427
|
|||
|
Gross
profit
|
5,570
|
5,741
|
6,975
|
17,729
|
|||
|
Income
(loss) from continuing operations attributable to common
shareholders (4)
|
644
|
(7,363)
|
(1,359)
|
7,937
|
|||
|
Income
(loss) from continuing operations per weighted average common
share (4)
|
0.10
|
(1.10)
|
(0.20)
|
1.18
|
|||
|
Income
(loss) from continuing operations per common share–assuming
dilution
|
0.10
|
(1.10)
|
(0.20)
|
1.18
|
|||
|
Net
income (loss)
|
(555)
|
(8,584)
|
(900)
|
7,192
|
|||
|
2008
|
|||||||
|
Total
revenues
|
$ 58,667
|
$ 55,724
|
$ 58,217
|
$ 65,820
|
|||
|
Gross
profit
|
11,103
|
9,463
|
10,771
|
16,612
|
|||
|
Income
(loss) from continuing operations attributable to common
shareholders (4)
|
(3,066)
|
(1,111)
|
2,536
|
(11,049)
|
|||
|
Income
(loss) from continuing operations per weighted average common
share (4)
|
(0.44)
|
(0.16)
|
0.37
|
(1.65)
|
|||
|
Income
(loss) from continuing operations per common share–assuming
dilution
|
(0.44)
|
(0.16)
|
0.37
|
(1.65)
|
|||
|
Net
income (loss)
|
(6,220)
|
(5,484)
|
1,012
|
(10,963)
|
|||
Income
(loss) per weighted average common share amounts is rounded to the nearest $.01;
therefore, such rounding may impact individual amounts presented.
|
|
(1) Due
to the sale of substantially all of the assets of the EDC U.S. operations
on December 31, 2008, the results of the EDC U.S. operations have
been reclassified from continuing operations to discontinued operations
for all periods presented.
|
|
|
(2) Net
loss for the quarter ended June 30, 2009, includes a $7.2 million charge
for severance costs related to the closure of our UK
facility.
|
|
|
(3) Net
loss for the quarter ended December 31, 2008, includes an impairment of
long-lived assets of $26.4 million associated with the write down of the
carrying value of certain intangible and fixed assets related to its
central European operations.
|
|
|
(4) Per
share amounts are calculated using weighted average shares by quarter,
therefore the sum of these amounts may not agree to annual per share
amounts, which are calculated using annual weighted average
shares.
|
45
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Accounting Officer, of
the effectiveness of the design and operation of the Company’s “disclosure
controls and procedures” (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15 of the
Exchange Act. It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the system are met. Based on that evaluation, the
Company’s management, including the Chief Executive Officer and Chief Accounting
Officer, concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2009.
Management’s Annual Report on
Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act. The Company’s internal control system was designed to
provide reasonable assurance regarding the reliability of the Company’s
financial reporting and the preparation of the Company’s consolidated financial
statements for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
As of the
end of the period covered by this report, management, including the Company’s
Chief Executive Officer and Chief Accounting Officer, conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of
December 31, 2009.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the temporary rules of the Securities and Exchange Commission that
permit the Company to provide only Management’s report in this annual
report.
Changes in Internal Control Over
Financial Reporting
During
the fourth quarter of 2009, there were no changes in the Company’s internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION
At a
Special Meeting of Stockholders held on January 7, 2010, the Company’s
stockholders voted on a proposal to approve the voluntary dissolution and
liquidation of EDCI pursuant to the Plan of Dissolution. The
Company’s stockholders approved the proposal by the following
votes:
|
Number of
Votes
|
||
|
For
|
Against
|
Abstain
|
|
4,412,006
|
34,859
|
3,148
|
46
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Presented
below is information about each person who currently serves as an executive
officer of EDCI, the director nominees to be considered at the 2010 annual
stockholders’ meeting, and the directors continuing in office. None
of the individuals listed below is related to each other, whether by blood,
marriage, or adoption. No executive officer, director, or director
nominee was selected pursuant to any arrangements or understandings between such
individual and any other person.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Clarke H. Bailey; age 55;
Chief Executive Officer of the Company since July 2009; Director of the Company
since December 1990; Interim Chief Executive Officer of the Company from
September 2008 to January 2009; Chief Executive Officer of the Company from
October 2003 to November 2006; Chairman of the Company since October 1999; Vice
Chairman of the Company from November 1992 to June 1996; Chief Executive Officer
of the Company from December 1990 to March 1994; Acting Chief Executive Officer
of the Company from May 1994 to December 1994; Director of Iron Mountain
Incorporated
Matthew K. Behrent; age 39; Executive Vice
President, Corporate Development of the Company and EDC, LLC since November
2007; Senior Vice President & Chief Acquisitions Officer of the Company
from July 2005 to November 2007; Vice President of Revolution Partners from
March 2004 until June 2005; Associate at Credit Suisse First Boston from June
2000 until January 2003; Associate at Cleary Gottlieb Steen & Hamilton
from June 1998 until May 2000; Director of Tengasco Inc.
Roger J. Morgan; age 45; Executive Vice
President International Operations of EDC, LLC since June 2005; Head of
Operations Universal Manufacturing & Logistics International from
January 2005 to May 2005; Chief Financial Officer of Universal
Manufacturing & Logistics International from July 1999 to December
2004.
BOARD
OF DIRECTORS OF THE REGISTRANT
The Board
of Directors (the “Board”) of the Company is responsible for ensuring that its
members have the requisite skills, experience and business acumen to evaluate
business situations and make critical decisions on behalf of the Company and its
shareholders. To help ensure the Board meets its
responsibility, the Board has assigned the Governance and Nominating Committee
the task of administering the skill evaluations of directors and director
candidates. All candidates for director positions are
carefully screened initially by the Governance and Nominating Committee and its
agents through a series of background checks, interviews and reference follow
ups. Detailed reviews and diligence are performed before
candidates are proposed for nomination to the full Board and
shareholders.
The
Governance and Nominating Committee conducts an annual evaluation of all
directors based on 23 criteria including financial literacy, international
business experience, industry knowledge and merger and acquisition experience,
amongst other skills. The results are then discussed with
the full Board and any skill gaps are identified and addressed through
appropriate means. Ample opportunity is given to discuss the
individual and collective skills of directors as well as the performance of
committees and the entire Board
The
biographies of each of the directors below contains information regarding the
person’s service as a director, business experience, director positions held
currently or at any time during the last five years, and the experiences,
qualifications, attributes or skills that caused the Governance and Nominating
Committee and the Board to determine that the person should serve as a director
for the Company beginning in 2010.
DIRECTOR
CONTINUING IN OFFICE AS CLASS II DIRECTOR UNTIL THE
2010 ANNUAL MEETING
Horace H. Sibley; age 70; Director
of the Company since August 1997; Partner with the law firm of King and Spalding
from 1973 to December 2001. Mr. Sibley has an extensive legal
background and provides expertise in the areas of corporate governance and
strategic planning. Mr. Sibley currently serves as chairman of the
Governance and Nominating Committee of the Board.
DIRECTORS
CONTINUING IN OFFICE AS CLASS III DIRECTORS UNTIL THE
2011 ANNUAL MEETING
Ramon D. Ardizzone; age 72; Director of the
Company since November 1992; Vice Chairman of the Company since May 2001;
Chairman of the Company from June 1996 to September 1999; President and Chief
Executive Officer of the Company from December 1998 to June 1999; President of
the Company from December 1994 to June 1996; Chief Executive Officer of the
Company from May 1995 through December 1996; Acting Chief Executive Officer of
the Company from December 1994 to May 1995; Chief Operating Officer of the
Company from June 1994 to December 1994; Acting Chief Operating Officer of the
Company from May 1994 to June 1994; Executive Vice President of the Company from
November 1992 to December 1994; Executive Vice President of the Company in
charge of Sales and Marketing from November 1992 to May 1994. Mr. Ardizzone has
extensive executive experience in corporate finance and strategic planning,
international operations, and sales and marketing.
Cliff O. Bickell; age 65; Director of the
Company since October 2004; Acting President, Scientific Games, Inc. Printed
Parts Division from January 2008; Full-time and part-time consultant to
Scientific Games, Inc. from January 2007 to December 2007; President, Scientific
Games, Inc. Printed Products Division from September 2000 to December 2006; Vice
President, Chief Financial Officer and Treasurer of Scientific Games, Inc. from
January 1995 to August 2000; Vice President, Chief Financial Officer, and
Treasurer of Paragon Trade Brands, Inc. from May 1992 to January
1995. Mr. Bickell has extensive executive experience in corporate
finance and accounting, strategic planning, and operations. Mr.
Bickell currently serves as Lead Director, Chairman of the Audit Committee of
the Board and has been designated as the Audit Committee financial
expert.
47
DIRECTORS
CONTINUING IN OFFICE AS CLASS I DIRECTORS UNTIL THE 2012 ANNUAL
MEETING
Clarke H. Bailey; age 55; Director of the
Company since December 1990; Interim Chief Executive Officer of the Company from
September 2008 to January 2009; Chief Executive Officer of the Company from
October 2003 to November 2006; Chairman of the Company since October 1999; Vice
Chairman of the Company from November 1992 to June 1996; Chief Executive Officer
of the Company from December 1990 to March 1994; Acting Chief Executive Officer
of the Company from May 1994 to December 1994; Director of Iron Mountain
Incorporated. Formerly a director of ACT Teleconferencing,
Inc. Mr. Bailey has extensive executive experience in strategic
planning, mergers and acquisitions, international operations, corporate
governance and demonstrated strong leadership skills during his tenure as
Chairman of the Board.
Peter W. Gilson; age 70; Director of the
Company since March 1997; Chairman of the Board of Directors of Swiss Army
Brands, Inc. from May 1998 to August 2002; Chairman of the Executive Committee
of Swiss Army Brands, Inc. from 1998 to May 2002; President, Chief Executive
Officer and Director of Physician Support Systems, Inc. from 1991 to December
1997. Mr. Gilson has extensive executive experience in corporate
development, strategic planning, and public company executive
compensation. Mr. Gilson currently serves as the Chairman of the
Compensation Committee of the Board.
David A. Sandberg; age 37; Director of the
Company since June 2009; Managing
member, founder, and portfolio manager of Red Oak Partners, LLC, a NY-based
hedge fund advisor, since its March 2003 inception. Previously, Mr. Sandberg
co-managed JH Whitney & Co.'s Green River Fund; Director of SMTC Corp.;
Chairman of Asure Software, Inc.; Mr. Sandberg has extensive experience
in corporate finance and public company strategic planning.
AUDIT
COMMITTEE
Our Board
of Directors has established a separately-designated Audit
Committee. The current members of the Audit Committee are Cliff O.
Bickell, David A. Sandberg, and Ramon D. Ardizzone. The Audit Committee met 9
times during 2009. All of the members of the Audit Committee are independent
directors within the meaning of applicable NASDAQ listing standards. The Board
of Directors has determined that Mr. Bickell is an “audit committee
financial expert” within the meaning of the regulations of the Securities and
Exchange Commission.
CODE
OF ETHICS
The
Company has adopted a Code of Ethics (the “Code of Ethics”) which applies
to all directors, officers and employees. A copy of the Code of
Ethics is posted on the Company’s website at www.edcih.com under
the headings “Investor Center” and “Corporate Governance” The Company
intends to make any disclosures regarding amendments to, or waivers from, the
Code of Ethics required under Form 8-K by posting such information on the
Company’s website www.edcih.com.
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that
directors and officers of the Company and persons who beneficially own more than
10% of the Common Stock file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of the Common Stock of the Company. Directors, officers and greater
than 10% beneficial owners are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the
Company’s knowledge, based solely on review of the copies of such reports, and
amendments thereto, furnished to the Company and written representations that no
other reports were required during 2009, all reports required by Section 16(a)
to be filed by its directors, officers and greater than 10% beneficial owners
were filed on a timely basis.
48
ITEM
11. EXECUTIVE COMPENSATION
The
following table presents information for compensation earned by, awarded to, or
paid to the Company’s Named Executive Officers for our fiscal years ended
December 31, 2009 and 2008. As part of EDCI’s overall efforts to
reduce costs and minimize EDCI’s cash burn, on July 1, 2009, Mr. Bailey and Mr.
Behrent agreed to reduce their salaries by 33%, respectively.
|
Name
and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock
Awards ($)
(1)
|
Non-Equity
Incentive Plan Compensation ($)
|
All
Other Compensation ($)
|
Total ($)
|
||||||||
|
Clarke
H. Bailey
|
2009
|
303,077
|
50,000
|
-
|
-
|
16,648
(2)
|
369,725
|
||||||||
|
Chief
Executive Officer
|
2008
|
277,500
|
-
|
-
|
-
|
11,648
(2)
|
289,148
|
||||||||
|
Matthew
K. Behrent
|
2009
|
227,500
|
-
|
-
|
-
|
26,378
(2)
|
253,878
|
||||||||
|
Executive
Vice President,
|
2008
|
260,000
|
260,000
|
(3)
|
-
|
-
|
9,365
(2)
|
529,365
|
|||||||
|
Corporate
Development
|
|||||||||||||||
|
Roger
Morgan (4)
|
2009
|
234,795
|
-
|
-
|
(5)
|
-
|
71,702
(6)
|
306,497
|
|||||||
|
Executive
Vice President
|
2008
|
278,277
|
-
|
-
|
(5)
|
-
|
84,980
(7)
|
363,257
|
|||||||
|
International
Operations of EDC
|
|||||||||||||||
|
Robert
L. Chapman, Jr. (8)
|
2009
|
112,500
|
-
|
112,500
|
(9)
|
-
|
-
|
225,000
|
|||||||
|
Former
Chief Executive Officer
|
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||
|
(1)
|
Amounts
in this column reflect stock compensation awarded to Mr. Chapman in
accordance with his employment agreement dated January 2,
2009. See “Employment and Severance Agreements” for additional
information.
|
|
(2)
|
Consists
of payments for a car allowance, matching contributions paid to a defined
contribution plan and disability insurance
premiums.
|
|
(3)
|
Represents
bonus paid in connection with retention contracts between the Company and
the respective employees.
|
|
(4)
|
Mr.
Morgan is based in the United Kingdom and is paid in pounds
sterling. Mr. Morgan’s compensation is reported in U.S. dollars
based upon the prevailing average exchange rate from pounds sterling to
U.S. dollars during 2009 of $1.5653 per
pound.
|
|
(5)
|
Mr. Morgan
holds 375 units of profits interests, all of which are fully vested,
in the Company’s subsidiary EDC,
LLC.
|
|
(6)
|
Consists
of payments of $23,480 for a car allowance, social club dues and a $46,959
contribution made to Mr. Morgan’s personal retirement
plan.
|
|
(7)
|
Consists
of payments of $27,828 for a car allowance, social club dues and a $55,655
contribution made to Mr. Morgan’s personal retirement
plan.
|
|
(8)
|
Mr.
Chapman served as the Company’s Chief Executive Officer until July 2009
when Mr. Bailey was named Chief Executive
Officer.
|
|
(9)
|
See
Mr. Chapman's employment agreement description below for assumptions made
in the valuation of these stock
awards.
|
49
Option
Exercises and Stock Vested
No stock
options were exercised by the named executive officers during fiscal
2009. Other than the shares of restricted stock issued to Robert L.
Chapman, Jr. as noted below, no shares of restricted stock were outstanding or
vested with respect to any named executive officers during fiscal
2009. The EDCI shares issued to Mr. Chapman vested fully upon
issuance and were not subject to forfeiture for any reason and it was determined
that the shares may only be transferred pursuant to an exemption from
registration under federal securities law. The number of EDCI shares
issued and delivered was calculated by dividing $18,750 by the average daily
closing price of EDCI Shares on the Nasdaq Stock Market during the calendar
month immediately preceding the calendar monthly period in which issuance and
delivery was made. See Mr. Chapman’s employment agreement description
below for further details of the stock awards.
Non-Qualified
Deferred Compensation
None of
the named executive officers deferred any portion of their salary under the
Non-Qualified Deferred Compensation Plan in 2009.
Employment and Severance
Agreements
Bailey Employment
Agreement. On July 2, 2009, in conjunction with the
resignation of Robert L. Chapman, Jr, as noted below, Clarke H. Bailey was
appointed to the position of Chief Executive Officer of the
Company. Mr. Bailey continued in his position as Non-Executive
Chairman of the Board of Directors as well. As a result of his new
role, on July 2, 2009, the Board of Directors of the Company approved new
compensation for Clarke H. Bailey consisting of an annual base salary of
$300,000 and a car allowance of $700 per month.
It was
further determined that Mr. Bailey would be eligible to participate in the
Company’s annual bonus plan and receive discretionary bonus awards as determined
by the Board of Directors of the Company in its sole discretion from time to
time and is allowed to participate in all retirement plans, life, medical/dental
insurance plans and disability insurance plans of the Company, to the extent
eligible. Mr. Bailey or the Company can terminate his arrangement at
any time upon two weeks’ notice.
Chapman Employment
Agreement. On January 2, 2009, the Board of Directors of the
Company appointed Robert L. Chapman Jr., as Chief Executive
Officer. In conjunction with the appointment of Mr. Chapman to the
position of Chief Executive Office, the Company and Mr. Chapman entered into a
letter agreement (the “Chapman Employment Agreement”), dated January 2, 2009, to
confirm certain terms of Mr. Chapman’s employment with the
Company. Pursuant to the Chapman Employment Agreement, Mr. Chapman
received $38,750 per month, or $450,000 annually, (the “Base Salary”), $18,750
of which was paid in cash in bi-weekly installments (the “Cash Portion of Base
Salary”) and $18,750 of which was paid monthly through the issuance and
delivery, within five days of the second bi-weekly payment of the Cash Portion
of Base Salary each calendar month, of shares of common stock of the Company
(“EDCI Shares”), issued in a valid private placement under federal securities
laws (the “Stock Portion of Base Salary”). The Stock Portion of Base Salary
vested fully upon issuance and was not subject to forfeiture for any reason, but
such shares may only be transferred pursuant to an exemption from registration
under federal securities law. The number of EDCI Shares issued and
delivered for each monthly payment of the Stock Portion of Base Salary was
calculated by dividing $18,750 by the average daily closing price of EDCI Shares
on the Nasdaq Stock Market during the calendar month immediately preceding the
calendar monthly period in which issuance and delivery was
made. Mr. Chapman was eligible to participate in the Company’s
bonus plans and was eligible to receive discretionary bonus awards as the Board
of Directors determined in its sole discretion from time to time. No such
bonuses were paid to Mr. Chapman during his tenure as CEO of the
Company. Mr. Chapman was not eligible to participate in any
retirement, life, medical/dental insurance or disability insurance plans
maintained by the Company during his tenure as CEO. Mr. Chapman’s
employment agreement had a term of a minimum of six months from July 2, 2009
(the “Effective Date”). If Mr. Chapman’s position as CEO of the
Company had been terminated by the Company prior to the six month anniversary of
the Effective Date for any reason, including with or without cause, the Company
would have paid Mr. Chapman, within one week of termination of such services, in
one cash lump sum and one issuance and delivery of EDCI Shares, the remainder of
Mr. Chapman’s Base Salary (both the Cash Portion of Base Salary and the Stock
Portion of Base Salary) through such six month anniversary date in accordance
with the payment provisions provided above. The number of EDCI Shares that would
have been delivered for Mr. Chapman’s final payment would have been calculated
by dividing the full calendar month and prorated/partial calendar monthly sums
of all remaining $18,750 monthly EDCI Shares payments by the average daily
closing price of EDCI Shares on the Nasdaq Stock Market, or other primary market
(e.g., Pink Sheets) should EDCI Shares have ceased to trade on the Nasdaq Stock
Market, during the calendar month immediately preceding the calendar month in
which Mr. Chapman’s position had been terminated. If EDCI Shares
would not have traded on any particular business day during which the Nasdaq
Stock Market had been open for trading, the closing price of EDCI Shares on the
most recent, prior trading day on which EDCI Shares traded would have been used
for that current day’s pricing in performing the monthly average calculation
described above. Following the six month anniversary of the Effective
Date (July 2, 2009), Mr. Chapman’s position with the Company became that of
an at-will employee, and thus following July 2, 2009, Mr. Chapman’s
employment with the Company and his agreement was eligible to be terminated at
any time by the Company or Mr. Chapman. Effective July 2, 2009, Mr.
Chapman resigned as Chief Executive Officer of EDCI.
Behrent Employment
Agreement. On July 1, 2009, the Company and Mathew K. Behrent,
the Company's Executive Vice President, Corporate Development and Legal Counsel,
mutually agreed to an amended and restated employment agreement (the "Behrent
Employment Agreement"). The amended agreement provided for a
reduction in Mr. Behrent's base salary from $260,000 to $175,000 and eliminated
certain severance payments payable upon a termination of Mr. Behrent's
employment without cause or with good reason following a change of control of
the Company. The amendment did not alter any other terms of Mr.
Behrent's prior employment agreement.
Mr.
Behrent is also eligible to participate in the Company’s annual bonus plan and
receive discretionary bonus awards as determined by the Board of Directors of
the Company in its sole discretion from time to time and is allowed to
participate in all retirement plans, life, medical/dental insurance plans and
disability insurance plans of the Company, to the extent
eligible. Mr. Behrent also receives a car allowance of $700 per month
pursuant to the terms of the Behrent Employment Agreement. Pursuant
to a severance policy adopted in conjunction with the Plan of Dissolution
covering Mr. Behrent and three other employees of EDCI (not including Mr.
Bailey) who are involved in the Plan of Dissolution, Mr. Behrent will be
eligible to receive severance equal to 26 weeks of his annual salary upon
termination without cause.
50
Morgan Employment
Agreement. On December 16, 2009, the Company and Roger J.
Morgan, the Executive Vice President of International Operations of EDC, LLC
since 2005, mutually agreed to an extension of the employment of Mr. Morgan
(“the Morgan Contract Extension”) from February 1, 2010 through June 30,
2010. Mr. Morgan’s previous contract was set to terminate on January
31, 2010. The Morgan Contract Extension provides for an annual base
salary of £150,000, which was the same as Mr. Morgan’s salary in the prior
contract. Further, the Morgan Contract Extension entitled Mr. Morgan
to social club dues of £2,084 during the five month contract extension period
and £1,250 per month car allowance. The Company also agreed to make a
distribution equivalent to 20% of Mr. Morgan’s total salary for the five month
employment period to a personal and recognized pension arrangement established
by Mr. Morgan. These benefits are also substantially the same as in
Mr. Morgan’s prior contract.
Outstanding
Equity Awards at Fiscal Year-End
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Option
Exercise Price ($)
|
Date
Options Fully Vested
|
Option
Expiration Date
|
||||||
|
Clarke
H. Bailey
|
20,000
|
—
|
25.00
|
6/7/2007
|
6/7/2014
|
||||||
|
30,000
|
—
|
23.00
|
6/30/2007
|
6/30/2014
|
|||||||
|
2,533
|
—
|
25.00
|
7/21/2009
|
7/21/2016
|
|||||||
|
7,500
|
—
|
23.00
|
12/14/2009
|
12/14/2016
|
|||||||
|
Robert
L. Chapman, Jr.
|
3,000
|
—
|
7.20
|
12/10/2009
|
12/10/2017
|
||||||
The
Company maintains an incentive stock option plan (the “1996 Plan”) that was
approved by the stockholders, is administered by the Compensation and Plan
Administration Committee of the Board of Directors (the “Compensation
Committee”) and is used to promote the long-term financial interests and growth
of EDCI. Participation under the 1996 Plan is limited to non-officer
directors, key employees and other key persons. Options are generally
granted with an exercise price equal to the market price of its stock at the
date of grant, generally vest based on three years of continuous service and
have 10-year contractual terms. Generally, one-third of the options granted vest
on each of the first, second and third anniversaries of the
grant. Pursuant to the terms of the Incentive Plan under which
options and RSU’s are granted, the Compensation Committee of the Board of
Directors is authorized to and has approved the suspension new grants of options
and RSUs effective upon stockholder approval of the Plan of
Dissolution.
The
following table provides the compensation earned by the Company’s non-employee
directors during the year ended December 31, 2009. Clarke H. Bailey,
the Company’s Chairman and Chief Executive Officer, is not included in the
Director Compensation table because he is an employee of the Company (see the
Summary Compensation Table above). Mr. Bailey does not receive
compensation under the non-employee director compensation plan described
below.
51
Director
Compensation
|
Name
|
Fees
Earned ($)(1)
|
Stock
Awards ($)(2)
|
Option
Awards ($)(3)
|
Total ($)
|
|||||
|
Ramon
D. Ardizzone
|
39,000
|
18,000
|
17,910
|
74,910
|
|||||
|
Donald
S. Bates (4)
|
18,205
|
—
|
13,500
|
31,705
|
|||||
|
Cliff
O. Bickell
|
51,480
|
18,000
|
—
|
69,480
|
|||||
|
Peter
W. Gilson
|
41,913
|
18,000
|
13,500
|
73,413
|
|||||
|
David
A. Sandberg
|
22,813
|
—
|
15,210
|
38,023
|
|||||
|
Horace
H. Sibley
|
37,000
|
18,000
|
15,480
|
70,480
|
|||||
|
Howard
W. Speaks, Jr. (5)
|
19,695
|
—
|
—
|
19,695
|
|||||
|
(1)
|
For
2009 non-employee directors earned the following fees: an annual fee of
$20,000 plus $1,500 for attendance at in-person meetings and $500 for
attendance at meetings via telephonic conference call; no annual fee for
Executive Committee participation; an annual fee of $8,000 for Audit
Committee participation; an annual fee of $5,000 for Compensation and Plan
Administration Committee participation; an annual fee of $3,000 for
Governance and Nominating Committee participation; an annual fee of $8,000
for the Audit Committee chair position; $5,000 for the Compensation and
Plan Administration Committee chair position; $3,000 for the Governance
and Nominating Committee chair position; and an annual fee of $4,000 for
service as the lead independent director. Annual fees are paid ratably on
a quarterly basis. Meeting fees are also paid on a quarterly
basis.
|
|
(2)
|
At
the 2009 Annual Meeting of Stockholders, each director in the table above,
received a number of restricted stock units equal to $18,000 divided by
$4.92, the fair market value of the Common Stock on the last trading day
immediately preceding the 2009 Annual Meeting of Stockholders. See
Note 19 for a discussion of the assumptions underlying the valuation
of equity awards. At the end of 2009, the aggregate number of outstanding
restricted stock units held by each director in the table above was:
Mr. Ardizzone 6,524, Mr. Bates 2,866, Mr. Bickell 6,524,
Mr. Gilson 6,524, Mr. Sandberg 0, Mr. Sibley 6,524 and
Mr. Speaks 6,524.
|
|
(3)
|
In
accordance with resolutions passed by the Board, each non-employee
director receives automatic formula-based awards of stock options to
purchase 3,000 shares of the Common Stock upon initial appointment to the
Board of Directors and on each third anniversary
thereof. During 2009, 3,000 options were granted to Mr.
Ardizzone, Mr. Bates, Mr. Gilson, Mr. Sandberg and Mr.
Sibley. At the end of 2009, the aggregate number of outstanding
stock options held by each director in the table above was:
Mr. Ardizzone 12,000, Mr. Bates 12,000, Mr. Bickell 6,000,
Mr. Chapman 3,000, Mr. Gilson 12,000, Mr. Sandberg 3,000,
Mr. Sibley 12,000 and Mr. Speaks
9,000.
|
|
(4)
|
Mr.
Bates served as a director until his resignation in May
2009.
|
(5) Mr.
Speaks served as a director until his resignation in June 2009.
52
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Listed in
the following table are the beneficial owners known to the Company as of March
1, 2010 of more than 5% of the outstanding shares of the Company’s common
stock. In addition, this table includes the number of shares of
common stock beneficially owned by each director and executive officer of the
Company listed in the Summary Compensation Table, and the number of shares owned
by directors and executive officers as a group. Except as noted
below, the address of each beneficial owner is EDCI Holdings, Inc., 11 E. 44th
Street, Suite 1201, New York, New York 10017.
|
Name
of Beneficial Owner
|
Number
of Shares Beneficially Owned
|
Percent
of Class
|
|||
|
Clarke
H. Bailey
|
96,311
|
(1)
|
1.43
|
||
|
Matthew
K. Behrent
|
2,000
|
||||
|
Roger
J. Morgan
|
-
|
||||
|
Ramon
D. Ardizzone
|
26,074
|
(2)
|
|||
|
Cliff
O. Bickell
|
25,735
|
(3)
|
|||
|
Peter
W. Gilson
|
27,997
|
(4)
|
|||
|
Horace
H. Sibley
|
26,477
|
(5)
|
|||
|
David
Sandberg (8)
|
282,986
|
4.20
|
|||
|
All
directors and executive officers as a group
(10 persons)
|
487,580
|
(6)
|
7.24
|
||
|
Robert
L. Chapman, Jr. et al (9)
|
936,433
|
(7)
|
13.91
|
||
|
Dimensional
Fund Advisors, Inc. (10)
|
336,767
|
5.00
|
|||
|
*
|
Less
than 1%.
|
||||
|
(1)
|
Includes
70 shares held by Mr. Bailey’s son and 60,053 shares that
may be acquired at or within 60 days of March 1, 2010, pursuant to
the exercise of options.
|
|
(2)
|
Includes
6,000 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(3)
|
Includes
6,000 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(4)
|
Includes
9,000 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(5)
|
Includes
9,000 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(6)
|
Includes
90,053 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(7)
|
Includes
3,000 shares that may be acquired at or within 60 days of March
1, 2010 pursuant to the exercise of
options.
|
|
(8)
|
Red
Oak Partners, LLC ("ROP") serves as the general partner of The Red Oak
Fund, LP, a Delaware limited partnership (the "Fund"), the direct owner of
the subject securities. David Sandberg is the managing member of ROP and
the Fund's portfolio manager. ROP serves as a general partner
of Pinnacle Partners, LLC, a Colorado limited liability limited company
("Pinnacle Partners"). Pinnacle Partners manages Pinnacle Fund, LLLP, a
Colorado limited liability limited partnership ("Pinnacle Fund"), the
direct owner of the subject securities. ROP is the investment
advisor to Bear Market Opportunity Fund, L.P., the direct owner of the
subject securities, and exercises investment control over the subject
securities. David Sandberg is the managing member of ROP and is the
portfolio manager of the Bear Market Opportunity Fund,
L.P. Each Reporting Person disclaims beneficial ownership of
all securities reported herein, except to the extent of their pecuniary
interest therein, if any, and this report shall not be deemed an admission
that such Reporting Person is the beneficial owner of the shares for
purposes of Section 16 of the Securities and Exchange Act of 1934 or for
any other purpose.
|
|
(9)
|
Robert
L. Chapman, Jr., Chap-Cap Activist Partners Master Fund, Ltd., Chap-Cap
Partners II Master Fund, Ltd., and Chapman Capital L.L.C. jointly
report beneficial ownership of certain shares of Common Stock. Chap-Cap
Activist Partners Master Fund, Ltd. has shared voting power and sole
dispositive power over 459,651 shares, Chap-Cap Partners II
Master Fund, Ltd. has shared voting power and sole dispositive power over
331,887 shares, Chapman Capital L.L.C. has shared voting and dispositive
power over 791,538 shares and Mr. Chapman has shared voting and
dispositive power over 791,538 shares and sole voting and dispositive
power over 81,765 shares (which includes the options referenced in
footnote 9 above). Mr. Chapman’s and the reporting entities’ address
is 1007 N. Sepulveda Blvd. #129, Manhattan Beach, CA
90267.
|
|
(10)
|
The
address of Dimensional Fund Advisors, Inc. (“DFA”) is 1299 Ocean
Avenue, 11th Floor, Santa Monica, CA 90401. This information is based on
the Schedule 13G filed by DFA on February 9, 2009. Such shares
are owned by certain investment companies, commingled group trusts and
accounts with respect to which DFA acts as an investment advisor or
manager. DFA disclaims beneficial ownership of all such
shares.
|
For a
disclosure of the Company’s securities authorized for issuance under the
Company’s equity compensation plans, see Part II, Item 5 of this Annual
Report on Form 10-K under the caption “Equity Compensation Plan Information,”
which is incorporated by reference herein.
53
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR
INDEPENDENCE
On
December 16, 2009, the EDC Companies and Robert L. Chapman, Jr.
entered into a settlement agreement and general mutual release with Michael W.
Klinger, the former Executive Vice President and Chief Financial Officer of
EDCI, which resulted in the settlement of all legal disputes existing
between the parties in connection with Mr. Klinger's previously disclosed
separation of employment from EDCI. Pursuant to the settlement
agreement, the EDC Companies withdrew their notice of termination for
cause, retroactive to April 13, 2009, the date of Mr. Klinger’s separation from
employment, and Mr. Klinger withdrew his notice of resignation for good
reason. The EDC Companies accepted Mr. Klinger’s voluntary
resignation effective December 17, 2009, agreed to pay a settlement
payment for the benefit of Mr. Klinger in the amount of approximately $0.3
million, and agreed to reinstate certain life insurance and disability
benefits to Mr. Klinger. For the complete terms of the
settlement agreement, see Exhibit 99.1 to the registrant's current report on
Form 8-K filed with the SEC on December 17, 2009, which is incorporated by
reference herein.
COMMITTEES
OF THE BOARD OF DIRECTORS
The Board
of Directors met 15 times during 2009. The Board of Directors operates under the
terms of a charter, a copy of which is available on the Company’s website
at
www.edcih.com under the headings “Investor Center” and “Corporate
Governance.” The full Board of Directors has determined that the following
directors are independent under the standards set forth in the Board of
Directors charter and the listing standards of NASDAQ: Ramon D.
Ardizzone, Peter W. Gilson, David A. Sandberg and Horace H. Sibley. The
independent directors met in executive session 3 times during 2009.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
following table presents fees for professional audit services rendered by Ernst
& Young LLP for the audit of the Company’s annual financial statements for
the years ended December 31, 2009 and December 31, 2008 and fees billed for
other services rendered by Ernst & Young LLP during those
periods.
|
2009
|
2008
|
|
|
Audit
Fees (1)
|
$
540,000
|
$
1,187,000
|
|
Audit-Related
Fees (2)
|
1,500
|
1,500
|
|
Tax
Fees (3)
|
75,000
|
100,000
|
|
All
Other Fees
|
-
|
-
|
|
$
616,500
|
$
1,288,500
|
|
|
|
(1)
|
Audit
Fees consist of the aggregate fees billed for professional services
rendered for the audit of the Company’s annual consolidated financial
statements, for the reviews of the financial statements included in the
Company’s Quarterly Reports on Form
10-Q.
|
|
(2)
|
Audit
Related Fees consist of the aggregate fees billed for assurance and
related services that are reasonably related to the performance of the
audit or review of the Company’s consolidated financial statements and are
not reported under “Audit Fees.” These fees principally
included fees for services rendered in connection with statutory audit of
subsidiaries, mergers and acquisition services, and other accounting
advisory services.
|
|
(3)
|
Tax
services provided by Ernst & Young LLP principally included review of
and consultation regarding the Company’s federal, state and foreign tax
returns and tax planning.
|
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents Filed As Part of This Annual Report on Form 10-K:
1. Financial
Statements: See the Financial Statements included in Item
8.
2. Exhibits
The
exhibits filed as part of this Annual Report on Form 10-K are identified in the
Exhibit Index, which Exhibit Index specifically identifies those exhibits that
describe or evidence all management contracts and compensation plans or
arrangements required to be filed as exhibits to this Report. Such Exhibit
Index is incorporated herein by reference.
54
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 5, 2009.
EDCI HOLDINGS,
INC.
By /s/ Clarke
H. Bailey
|
|
Clarke
H. Bailey
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 5, 2009:
|
/s/ Clarke H. Bailey
Clarke
H. Bailey
Chief
Executive Officer
/s/ Michael D. Nixon
Michael
D. Nixon
Chief
Accounting Officer
|
/s/ Clarke H. Bailey
Clarke
H. Bailey
Director
and Chairman
/s/ Ramon D. Ardizzone
Ramon
D. Ardizzone
Director
/s/ Cliff O. Bickell
Cliff
O. Bickell
Director
/s/ Peter W. Gilson
Peter
W. Gilson
Director
/s/ David A. Sandberg
David
A. Sandberg
Director
/s/ Horace H. Sibley
Horace
H. Sibley
Director
|
55
INDEX
TO EXHIBITS
Exhibit
Number Exhibit
Description
|
2.1
|
Asset
Purchase Agreement dated May 9, 2005, by and among Entertainment
Distribution Company (USA), LLC, UMG Manufacturing & Logistics, Inc.
and Universal Music & Video Distribution Corp. was filed as Exhibit
2.1 to the Registrant’s Current Report on Form 8-K filed May 10, 2005 and
is incorporated herein by
reference.
|
|
2.2
|
Share
Purchase Agreement dated May 9, 2005, by and among Blitz 05-107 GmbH (in
future named: Entertainment Distribution GmbH), Universal Manufacturing
& Logistics GmbH and Universal Music GmbH was filed as Exhibit 2.2 to
the Registrant’s Current Report on Form 8-K filed May 10, 2005 and is
incorporated herein by reference.
|
|
3.2
|
Certificate
of Ownership and Merger of Entertainment Distribution Company Merger Sub,
Inc. into Glenayre Technologies, Inc. dated May 10, 2007 was filed May 10,
2007 as Exhibit 3.1 to the Registrant’s current report on Form 8-K and is
incorporated herein by reference.
|
|
3.3
|
Certificate
of Elimination which eliminated the certificate of designation with
respect to the Series A Junior Participating Preferred Stock dated
September 17, 2007 was filed September 18, 2007 as Exhibit 3.1 to the
Registrant’s current report on Form 8-K and is incorporated herein by
reference.
|
|
10.1
|
Glenayre
Long-Term Incentive Plan, as amended and restated effective May 26, 1994,
was filed as Exhibit 4 to the Registrant’s Form S-8 filed June 16, 1994
and is incorporated herein by reference.
*
|
|
10.2
|
Credit
Agreement dated May 31, 2005 among Entertainment Distribution Company,
LLC, Entertainment Distribution Company (USA), LLC, Wachovia Bank,
National Association and Glenayre Electronics, Inc. was filed as Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed June 3, 2005 and
is incorporated herein by
reference.
|
|
10.3
|
Cash
Collateral Agreement dated May 31, 2005 between Wachovia Bank, National
Association and Glenayre Electronics, Inc. was filed as Exhibit 10.2 to
the Registrant’s Current Report on Form 8-K filed June 3, 2005 and is
incorporated herein by reference.
|
|
10.4
|
Second
Amendment to Credit Agreement dated May 20, 2006 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Wachovia Bank, National Association, and ING Capital,
LLC was filed as Exhibit 10.1 to the Registrant’s current report on Form
8-K dated June 22, 2006 and is incorporated herein by
reference.
|
|
10.5
|
Third
Amendment to Credit Agreement dated May 31, 2007 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Wachovia Bank, National Association, and ING Capital,
LLC was filed as Exhibit 10.1 to the Registrant’s current report on Form
8-K dated May 31, 2007 and is incorporated herein by
reference.
|
|
10.6
|
Fourth
Amendment to Credit Agreement dated December 20, 2007 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Wachovia Bank, National Association, and ING Capital,
LLC was filed as Exhibit 10.1 to the Registrant’s current report on Form
8-K dated December 28, 2007 and is incorporated herein by
reference.
|
|
10.7
|
Fifth
Amendment to Credit Agreement dated March 4, 2008 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Wachovia Bank, National Association, and ING Capital,
LLC was filed as Exhibit 10.1 to the Registrant’s current report on Form
8-K dated March 5, 2008 and is incorporated herein by
reference.
|
|
10.8
|
Sixth
Amendment to Credit Agreement dated May 20, 2008 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Wachovia Bank, National Association, and ING Capital,
LLC was filed as Exhibit 10.1 to the Registrant’s current report on Form
8-K dated May 21, 2008 and is incorporated herein by
reference.
|
|
10.9
|
Seventh
Amendment to Credit Agreement dated October 31, 2008 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Glenayre Electronics, Inc., Wachovia Bank, National
Association, and ING Capital, LLC was filed as Exhibit 10.2 to the
Registrant’s current report on Form 8-K dated November 3, 2008 and is
incorporated herein by
reference.
|
|
10.10
|
Eighth
Amendment to Credit Agreement dated December 30, 2008 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Glenayre Electronics, Inc., Wachovia Bank, National
Association, and ING Capital, LLC was filed as Exhibit 10.2 to the
Registrant’s current report on Form 8-K dated January 6, 2009 and is
incorporated herein by reference.
|
|
10.11
|
Ninth
Amendment to Credit Agreement dated March 27, 2009 by and among
Entertainment Distribution Company, LLC, Entertainment Distribution
Company (USA), LLC, Glenayre Electronics, Inc., Wachovia Bank, National
Association, and ING Capital, LLC was filed as Exhibit 10.1 to the
Registrant’s current report on Form 8-K dated April 2, 2009 and is
incorporated herein by
reference.
|
56
|
10.12
|
Limited
Liability Company Agreement of Entertainment Distribution Company, LLC was
filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
June 3, 2005 and is incorporated herein by
reference.
|
|
10.13
|
Employment
Agreement dated May 9, 2005 between Glenayre Electronics, Inc. and Thomas
Costabile was filed as Exhibit 10.5 to the Registrant’s current report on
Form 8-K filed June 3, 2005 and is incorporated herein by
reference.
|
|
10.14
|
Letter
Agreement among Glenayre Electronics, Inc., James Capparo and Thomas
Costabile dated May 31, 2005 was filed as Exhibit 10.6 to the Registrant’s
current report on Form 8-K filed June 3, 2005 and is incorporated herein
by reference.
|
|
10.15
|
Confidential
Separation Agreement and General Release of Claims dated February 9, 2009
between Entertainment Distribution Company, LLC and Thomas Costabile was
filed as Exhibit 99.1 to the Registrant’s current report on Form 8-K filed
February 10, 2009 and is incorporated herein by
reference.
|
|
10.16
|
U.S.
CD Manufacturing and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.7 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
10.17
|
U.S.
HDFD Manufacturing and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.8 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
10.18
|
Manufacturing
and Related Services Agreement dated as of May 31, 2005 between Universal
Manufacturing & Logistics GmbH and Universal International Music, B.V.
was filed as Exhibit 10.9 to the Registrant’s Current Report on Form 8-K
filed June 3, 2005 and is incorporated herein by reference.
**
|
|
10.19
|
U.S.
Distribution and Related Services Agreement dated as of May 31, 2005
between Entertainment Distribution Company (USA), LLC and UMG Recordings,
Inc. was filed as Exhibit 10.10 to the Registrant’s Current Report on Form
8-K filed June 3, 2005 and is incorporated herein by reference.
**
|
|
10.20
|
Distribution
and Related Services Agreement dated as of May 31, 2005 between Universal
Manufacturing & Logistics GmbH and Universal International Music, B.V.
was filed as Exhibit 10.11 to the Registrant’s Current Report on Form 8-K
filed June 3, 2005 and is incorporated herein by reference.
**
|
|
10.21
|
Service
Contract among Glenayre Electronics, Inc., Glenayre Electronics (UK) Ltd.
And Roger Morgan was filed as Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed July 22, 2005 and is incorporated herein by
reference. *
|
|
10.22
|
Summary
of Non-officer Director Compensation Program was filed as Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed December 16, 2005 and is
incorporated herein by reference.
|
|
10.23
|
Letter
Agreement between Entertainment Distribution Company, LLC and John V.
Madison
dated December 15,
2005 was filed as Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed December 16, 2005 and is incorporated herein by reference.
*
|
|
10.24
|
Glenayre
1996 Incentive Stock Plan, as amended effective May 23, 2006 was filed as
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006 and is incorporated herein by
reference.
|
|
10.25
|
Share
Purchase Agreement dated July 21, 2006, by and among DGMS Blackburn
Holdings Limited, EDC UK Holdings Limited, Entertainment Distribution
Company, LLC, Glenayre Electronics, Inc. and Rank Leisure Holdings Limited
was filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2006 and is incorporated herein by
reference.
|
|
10.26
|
Asset
Purchase Agreement dated December 14, 2006 by and among Glenayre
Technologies, Inc., Glenayre Electronics, Inc., IP Unity Peach, Inc. and
IP Unity was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated December 31, 2006 and is incorporated herein by
reference.
|
|
10.27
|
Stockholders
Agreement dated November 5, 2007 among Entertainment Distribution Company
Inc., Robert L. Chapman, Jr., Chap-Cap Activist Partners Master Fund,
Ltd., Chap-Cap Partners II Master Fund, Ltd. and Chapman Capital LLC was
filed as Exhibit 10.1 to the Registrant's current report on Form 8-K dated
November 5, 2007 and is incorporated herein by
reference.
|
|
10.28
|
Amended
and Restated Employment Letter Agreement dated July 1, 2009 between
Matthew K. Behrent and Entertainment Distribution Company, Inc. was filed
as Exhibit 99.1 to the Registrant’s current report on Form 8-K dated July
7, 2009 and is incorporated herein by
reference.*
|
|
10.29
|
Letter
Agreement among Michael W. Klinger and EDCI Holdings, Inc. dated October
3, 2008 was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated October 3, 2008 and is incorporated herein by reference.
*
|
57
|
10.30
|
Settlement
Agreement and General Mutual Release dated December 16, 2009 by and among
Michael W. Klinger, EDCI Holdings, Inc., Entertainment Distribution
Company, Inc., Entertainment Distribution Company, LLC, Entertainment
Distribution Company (USA), LLC, and Robert L. Chapman, Jr. was filed as
Exhibit 99.1 to the Registrant’s current report on Form 8-K dated December
17, 2009 and is incorporated herein by
reference.*
|
|
10.31
|
Letter
Agreement between Clarke H. Bailey and EDCI Holdings, Inc. dated October
27, 2008 was filed as Exhibit 10.1 to the Registrant's current report on
Form 8-K dated October 27, 2008 and is incorporated herein by reference.
*
|
|
10.32
|
Asset
Purchase Agreement by and among Sony DADC US Inc., Entertainment
Distribution Company (USA), LLC and Entertainment Distribution Company,
LLC dated October 31, 2008 was filed as Exhibit 10.1 to the Registrant's
current report on Form 8-K dated November 3, 2008 and is incorporated
herein by reference.
|
|
10.33
|
Letter
Agreement between Robert L. Chapman, Jr. and EDCI Holdings, Inc. dated
January 2, 2009 was filed as Exhibit 10.1 to the Registrant's current
report on Form 8-K dated January 6, 2009 and is incorporated herein by
reference. *
|
|
10.34
|
Mutual
Separation Agreement dated February 9, 2009 made and entered into by and
between Entertainment Distribution Company, LLC, Glenayre Electronics,
Inc., and Thomas Costabile was filed as Exhibit 99.1 to the Registrant's
current report on Form 8-K dated February 10, 2009 and is incorporated
herein by reference. *
|
|
10.35
|
Service
Contract for Managing Director dated January 7, 2010 between John
Fitzgerald and Entertainment Distribution Company GmbH was filed as
Exhibit 99.1 to the Registrant’s current report on Form 8-K dated January
8, 2010 and is incorporated herein by
reference.
|
21.1 Subsidiaries
of the Company is filed herewith.
23.1 Consent
of Ernst & Young LLP is filed herewith.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a – 14(a)/15d – 14(a),
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Management Contract
|
**
|
Portions
of this document are confidential and have been omitted and filed
separately with the Securities and Exchange Commission in connection with
a request for confidential treatment of such omitted material in
accordance with Rule 24b-2 under the Securities and Exchange Act of
1934.
|
58