NEW YORK, Jan. 15 /PRNewswire-FirstCall/ -- EDCI Holdings, Inc. (Nasdaq: EDCI) ("the Company" or "EDCI"), today announced the following developments.
EDCI Plan of Dissolution.
On January 14, 2010, EDCI's Board of Directors met to determine the timing and method for the initial distribution of proceeds to its shareholders in accordance with the previously approved Plan of Dissolution. At that meeting, the Board of Directors determined to revise the aggregate proceeds for the initial dissolution distribution and contemplated tender offer slightly higher to a new total of $31 million. Of this new total, the Company's Board of Directors approved an initial dissolution distribution payment of $21 million, or approximately $3.12 per share of EDCI's common stock. The Company's Board of Directors has fixed January 20, 2010, as the record date for determining stockholders entitled to participate in the initial dissolution distribution. The initial dissolution distribution will be paid on February 1, 2010 and the Company's common stock will trade ex-dissolution distribution commencing on February 2, 2010.
As previously announced, the Company's Board of Directors has been considering using a portion of the proceeds available for the initial distribution to effect a tender offer. Such an approach would afford additional flexibility to stockholders who prefer a fixed amount of cash and immediate recognition of any tax-losses to so elect, for a portion of their shares. The Company's Board of Directors determined that such a tender should be initiated in an amount of up to $10 million. The total of up to $10 million would be reduced pro rata if the result of the tender would put EDCI's net operating losses at risk, as EDCI believe it is prudent to continue to protect those tax-loss carryforwards at this time. Any amount not successfully tendered would be subsequently distributed as a dissolution distribution payment. However, the Board of Directors deemed it advisable to delay the contemplated tender offer related to EDCI's common stock given that EDCI's majority owned subsidiary Entertainment Distribution Company, LLC ("EDC") is currently in discussions with a potential buyer of its Entertainment Distribution Company GmbH ("EDC GmbH") subsidiary and certain related assets and entities (the "German EDC Business"). The Company is not able to predict with any certainty the outcome of those discussions at this time and notes that the consummation of such transaction is subject to many risks and uncertainties and EDC can provide no assurances that such a transaction will be consummated on the terms currently contemplated or at all. In particular the cooperation of Universal Music Group ("UMG"), EDC's largest customer, is critical to any transaction, and EDC cannot provide any assurance UMG will so cooperate. The Company believes a sale of the German EDC Business on the terms currently being discussed would represent the best outcome for all of EDC's constituencies, including its unionized workforce of approximately 700 employees and UMG. EDCI believes the new owner plans to invest in and grow the German EDC Business by expanding its distribution capabilities. EDCI does not intend to update stockholders on this matter until a time at which a more certain outcome exists.
UMG's Opposition to EDC's Blackburn – Hannover Consolidation.
As previously disclosed, on July 23, 2009, Universal International Music B.V. ("UIM"), an affiliate of UMG, provided notice 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 and service UIM's remaining UK requirements from Hannover. As a result, UIM claimed that EDC forfeited its right to continue to service 100% of UIM's UK manufacturing requirements, and UIM was entitled to sub-contract the entirety of such volume to a UK-located third party of its choice, although UIM indicated it would not enforce that remedy but reserved the right to do so. EDC strongly rejected UIM's assertions and subsequently referred the matter to arbitration seeking: (i) a declaration that there is no breach by EDC of the Manufacturing Agreement as a result of the Blackburn – Hannover Consolidation and (ii) 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.
In subsequent correspondence related to the arbitration of 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 UIM has further indicated that in arbitration it will argue 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, 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 and intends to continue to vigorously defend and pursue this matter in arbitration. 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. 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.
As UIM has now breached its obligations to EDC with regard to certain of its UK requirements, EDC believes it is likely that UIM will 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..
About EDCI Holdings, Inc.
EDCI Holdings, Inc. (Nasdaq: EDCI) is a multi-national company, headquartered in New York, that is seeking to enhance shareholder value by pursuing acquisition opportunities. EDCI is the holding company of Entertainment Distribution Company, Inc., which is the majority shareholder of Entertainment Distribution Company, LLC ("EDC"), a European provider of supply chain services to the optical disc market. EDC serves every aspect of the manufacturing and distribution process and is one of the largest providers in the industry. EDC's clients include some of the world's best-known music, movies and gaming companies. EDC's operations include manufacturing and distribution facilities in Hannover, Germany. For more information, please visit www.edcih.com.
Cautionary Statement About Forward Looking Statements
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties concerning EDCI's proposed Plan of Dissolution. Actual results may differ materially from the results predicted. More information about these and other important factors that could affect our business and financial results is included in the "Risk Factors" section of our quarterly report on Form 10-Q we filed with the Securities and Exchange Commission ("SEC") on October 30, 2009 and the proxy statement we filed with the SEC on November 16, 2009.
Web site: www.edcih.com
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