As filed with the Securities and Exchange Commission on June 23, 2008

No. 333-151415

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

 

EDCI HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

825 8th Avenue, 23rd Floor

New York, NY 10019

(212) 333-8400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

JORDAN M. COPLAND

Interim Chief Executive Officer,

Chief Financial Officer, Secretary and Treasurer

825 8th Avenue, 23rd Floor

New York, NY 10019

(212) 333-8400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

ELIZABETH H. NOE, ESQ.

Paul Hastings Janofsky & Walker LLP

600 Peachtree St., Suite 2400

Atlanta, Georgia 30308

(404) 815-2400

 

Approximate date of commencement of proposed sale to the public:  Upon consummation of the reorganization described herein.

 

 

 

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file an amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION DATED JUNE 23, 2008

 

ENTERTAINMENT DISTRIBUTION COMPANY, INC.

825 8TH AVENUE, 23RD FLOOR

NEW YORK, NEW YORK 10019

 

June 30, 2008

 

Dear Stockholder:

 

On behalf of the board of directors and management of Entertainment Distribution Company, Inc., (“EDCI” or the “Company”), I cordially invite you to the Annual Meeting of Stockholders to be held on August 22, 2008 at the Courtyard by Marriott, 1856 Remount Road, Gastonia, North Carolina 28054 at 9:00 a.m. local time. At the Annual Meeting, you will be asked to:

 

 

As indicated above, in addition to the customary actions of electing the members of the Board of Directors of EDCI (the “Board of Directors” or the “Board”) and ratifying the appointment of our independent accountants, at this year’s Annual Meeting we are seeking stockholder approval of a transaction intended to protect the long-term value of our NOLs and thereby help maximize stockholder value. There are two principal reasons for proposing this transaction.

 

First, as we have previously disclosed, we have substantial NOLs. We consider these loss carryforwards to be an important part of our overall strategy because they can be used to reduce the amount of income tax we would be required to pay in the future on earnings from our business. Under United States tax laws, certain changes in the ownership of the Company’s stock could, over time, result in significant limitations being imposed on our ability to use these loss carryforwards — thereby reducing their long-term value to us. Because we consider these loss carryforwards to be important assets that can provide the Company with substantial value in the future, we feel it is important to protect our ability to use them. As announced on April 3, 2008, EDCI has adopted a rights plan to assist in protecting these loss carryforwards. We believe the Reorganization and the transfer restrictions that will be imposed thereby will be a more effective way to preserve this important asset. Therefore, if the Reorganization is approved, EDCI will terminate the rights plan upon the implementation of the Reorganization.

 

Second, as we have previously disclosed, on January 4, 2008, the Company received a letter from The NASDAQ Stock Market (“NASDAQ”) advising that for the previous 30 consecutive trading days, the bid price of the Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5). Shares of the Common Stock may be delisted from The NASDAQ Global Market if the price of the shares does not close above $1.00 for ten consecutive trading days before July 2, 2008, subject to an additional 180 day extension period if the Common Stock begins trading on The NASDAQ Capital Market instead of on The NASDAQ Global Market. In connection with the Reorganization, the Company intends to apply for listing of EDCI Holdings’ common stock on The NASDAQ Capital Market, which the Board of Directors believes is a more appropriate market

than The NASDAQ Global Market for the common stock of EDCI Holdings to trade. The Board of Directors believes that the proposed Reorganization would, among other things, better enable EDCI Holdings to maintain the listing of its common stock on The NASDAQ Capital Market. Therefore, in the Reorganization we are proposing to exchange shares of Common Stock for shares of EDCI Holdings’ common stock at a ratio of ten to one (the “Exchange Ratio”) with the primary goal of raising the per share trading price of EDCI Holdings’ common stock above the per share trading price of EDCI’s Common Stock. If the Reorganization is implemented, you will own fewer shares of EDCI Holdings’ common stock than you do of the Company’s Common Stock. Nevertheless, the shares that you do own will represent the same proportional ownership interest in EDCI Holdings as you have in the Company. You should not expect, however, that the market price for a share of EDCI Holdings’ common stock will necessarily increase in direct proportion to the Exchange Ratio. In connection with the Reorganization, the Company has applied for listing of the Common Stock on The NASDAQ Capital Market prior to the Reorganization in order to obtain the benefit of the additional 180 day compliance period.

 

To effect the Reorganization, we have formed two new subsidiaries — EDCI Holdings and EDC Merger Sub, Inc. (“EDC Merger Sub”). They are both Delaware corporations, like the Company. Under the terms of a short agreement, we would complete a merger between EDCI and EDC Merger Sub that would result in EDCI becoming a wholly owned subsidiary of EDCI Holdings. In the merger, each ten shares of your existing Common Stock would be exchanged for one share of EDCI Holdings’ common stock. (EDC Merger Sub would cease to exist following the merger.) In addition, the consolidated assets and liabilities of EDCI Holdings immediately after the merger would be the same as the consolidated assets and liabilities of the Company immediately prior to the merger. In addition to a detailed description of the proposed Reorganization, the attached proxy statement/prospectus also includes (on page 21) diagrams of the proposed transaction. Our Board of Directors, after discussing the situation with our outside professional advisors, decided to approve and recommend for your approval the Reorganization described in the attached proxy statement/prospectus. The Reorganization requires the approval of the holders of a majority of our outstanding shares of Common Stock, and, for this reason, we are sending the attached proxy statement/prospectus to you to solicit your support for the Reorganization.

 

If the Reorganization is approved and completed, the only changes you, our stockholders, are likely to notice are the following:

 

 

Immediately following the Reorganization, the only assets and liabilities of EDCI Holdings will be 100% of the stock of the Company. Therefore, as stockholders of EDCI Holdings, you will continue to own 100% of the Company — through your ownership of EDCI Holdings. The certificate of incorporation and the by-laws of EDCI Holdings will be virtually identical to the Company’s, except that they will now include the transfer restrictions described in detail in the attached proxy statement/prospectus and authorize EDCI Holdings to issue fewer shares of its common stock than EDCI is authorized to issue. The directors and executive officers of EDCI Holdings will be the same as the directors and executive officers of the Company. In addition, we will remain a publicly traded company, with EDCI Holdings’ common stock listed and traded on The

NASDAQ Capital Market under the symbol “EDCI” — the same symbol under which our Common Stock now trades on The NASDAQ Global Market.

 

We believe that the Reorganization is an important part of the Company’s future, and we hope you will agree to support it. The Company’s Board of Directors recommends that you vote FOR the Reorganization, FOR the election of the board’s nominees for directors, and FOR approval of Ernst & Young LLP as our independent accountants.

 

Before deciding how to vote, you should review the attached proxy statement/prospectus for a detailed explanation of the Reorganization, the transfer restrictions, and the implications of the Exchange Ratio. You should also review the appendices to the proxy statement/prospectus, which contain the complete terms and conditions of the Reorganization and the complete transfer restrictions, as well as our annual report to stockholders accompanying the attached proxy statement/prospectus.

 

Whether or not you plan to attend the Annual Meeting, please complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. If you attend the Annual Meeting, you may revoke your proxy and vote in person if you wish, even if you have previously returned your proxy card. Your prompt cooperation will be greatly appreciated.

 

Sincerely,

 

Clarke H. Bailey

Chairman of the Board

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved the common stock to be issued under this proxy statement/prospectus or has determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated June 23, 2008,

and is first being mailed to stockholders on or about June 30, 2008.

ENTERTAINMENT DISTRIBUTION COMPANY, INC.
825 8TH AVENUE, 23RD FLOOR
NEW YORK, NEW YORK 10019

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON AUGUST 22, 2008

 

The 2008 Annual Meeting of the Stockholders of Entertainment Distribution Company, Inc., a Delaware corporation (the “Company”), will be held at the Courtyard by Marriott, 1856 Remount Road, Gastonia, North Carolina 28054 on August 22, 2008 at 9:00 a.m., local time, for the following purposes:

 

 

The Board of Directors of the Company has approved and recommends that you vote “FOR” all of the proposals that are described in the attached proxy statement/prospectus.

 

The close of business on June 20, 2008 has been fixed as the record date for determination of stockholders entitled to notice of and to vote at the 2008 Annual Meeting and any adjournment(s) or postponement(s) thereof. A proxy statement/prospectus, a form of proxy, and the Company’s 2008 Annual Report are enclosed with this Notice.

 

A list of stockholders entitled to vote at the 2008 Annual Meeting will be open to the examination of any stockholder for any purpose relevant to the 2008 Annual Meeting, during ordinary business hours, for a period of 10 days prior to the 2008 Annual Meeting at the Company’s offices located at 825 8th Avenue, 23rd floor, New York, New York and will be available at the meeting for such purpose.

 

Please do not send any stock certificates to us at this time. If the Reorganization is completed, you will receive letters of transmittal and instructions regarding the exchange of your certificates of stock in the Company.

 

Stockholders are cordially invited to attend this meeting. Each stockholder, whether or not he or she expects to be present in person at the 2008 Annual Meeting, is requested to SIGN, DATE and RETURN THE ENCLOSED PROXY in the accompanying envelope as promptly as possible.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

 

Jordan M. Copland
Interim Chief Executive Officer,
Chief Financial Officer, Secretary and Treasurer

 

June 30, 2008

 

TABLE OF CONTENTS

 

 

Set forth below are some key questions and answers to provide you with more information about the annual meeting. These questions and answers are qualified in their entirety by reference to the more detailed information appearing elsewhere in or accompanying this proxy statement/prospectus. You are urged to review the entire proxy statement/prospectus and accompanying materials carefully.

 

In this proxy statement/prospectus, “EDCI,” the “Company,” “we” and “our” refer to Entertainment Distribution Company, Inc. and its consolidated subsidiaries (other than EDCI Holdings and EDC Merger Sub) and predecessors, “EDCI Holdings” refers to EDCI Holdings, Inc., the Company’s wholly owned subsidiary before the Reorganization and the parent company after the Reorganization, and “EDC Merger Sub” refers to EDC Merger Sub, Inc., the wholly owned subsidiary of EDCI Holdings before the Reorganization into which the Company will merge if the Reorganization is approved.

 

INTRODUCTION

 

 

 

 

 

 

 

 

 

THE REORGANIZATION

 

 

 

THE EXCHANGE RATIO

 

 

 

THE TRANSFER RESTRICTIONS

 

 

 

VOTING

 

 

 

 

SUMMARY

EDCI (see page 18)		The Company, through its majority owned subsidiary, is an industry leader in providing pre-recorded products and distribution services to the entertainment industry with operations serving the United States, central Europe and the United Kingdom. The Company’s principal place of business is at 825 8th Avenue, 23rd Floor, New York, New York 10019, telephone: (212) 333-8400.
EDCI Holdings (see page 18)		EDCI Holdings, Inc. is a Delaware corporation and wholly owned subsidiary of EDCI. EDCI Holdings was recently formed for the purpose of effecting the Reorganization. EDCI will be a wholly owned subsidiary of EDCI Holdings after the Reorganization.
EDC Merger Sub (see page 19)		EDC Merger Sub, Inc. is a Delaware corporation and a wholly owned subsidiary of EDCI Holdings. EDC Merger Sub was recently formed for the purpose of effecting the Reorganization and will cease to exist following the Reorganization.
Reasons for the Reorganization (see pages 28-34)		The Reorganization is intended to help EDCI preserve the long- term value of its net operating loss carryforwards, which can be used to reduce its future income tax liability. Under current tax laws, an ownership change could severely limit EDCI’s ability to use these tax benefits. As a result of the Reorganization, EDCI Holdings’ (the Company’s new parent) stock would be subject to transfer restrictions intended to decrease the risk that an ownership change would occur. While, as announced on April 3, 2008, EDCI has adopted a rights plan to assist in protecting these loss carryforwards, we believe the Reorganization and the transfer restrictions that will be imposed thereby will be a more effective way to preserve this important asset. Therefore, if the Reorganization is approved, EDCI will terminate the rights plan prior to the implementation of the Reorganization.
		Another primary objective of the Reorganization is to raise the per share trading price of the common stock of EDCI Holdings above the per share trading price of the Common Stock of EDCI. The Board of Directors believes that the Reorganization would, among other things, better enable EDCI Holdings to achieve and maintain the listing of its common stock on The NASDAQ Capital Market.
Reorganization (see pages 18-27)		As depicted in the diagrams on page 21, in the Reorganization, EDC Merger Sub will merge with and into EDCI, and EDCI will be the surviving corporation. As a result, EDCI will become a wholly owned subsidiary of EDCI Holdings.

		At the time of the Reorganization,
		• you will become a stockholder of EDCI Holdings, and each ten shares of your Common Stock will be automatically converted into the right to receive one share of common stock of EDCI Holdings (subject to the cash out of fractional shares);
		• each share of common stock of EDCI Holdings will be subject to the transfer restrictions, whether or not you vote in favor of the Reorganization;
		• each share of EDC Merger Sub common stock held by EDCI Holdings will be converted into one share of EDCI; and
		• each share of common stock of EDCI Holdings held by EDCI will be cancelled.
		After the Reorganization, outstanding options to purchase Common Stock will be exercisable only for common stock of EDCI Holdings.
		The relative powers, designations, preferences, rights and qualifications of EDCI Holdings’ common stock as in effect immediately prior to the Reorganization will be identical in all respects to the Common Stock, except for the transfer restrictions described below under the section entitled “Transfer Restrictions.”
		Completion of the Reorganization may be deferred by the Company’s Board of Directors or an authorized officer following the annual meeting if the Board of Directors or an authorized officer determines that deferral would be in the best interests of the Company and its stockholders.
		The Agreement and Plan of Reorganization, attached as Appendix A, may be terminated and the Reorganization abandoned prior to the filing of the certificate of merger, whether before or after approval by EDCI stockholders, if the Board of Directors determines that the Reorganization for any reason would not be in the best interests of EDCI and its stockholders.

		If the Reorganization is implemented, the number of issued and outstanding shares of common stock of EDCI Holdings will be 15,000,000 authorized and approximately 6,849,666 outstanding, as compared with 200,000,000 authorized shares and 68,496,658 outstanding shares of Common Stock of EDCI as of June 18, 2008.

		The number of outstanding shares of EDCI Holdings will be less than the number of outstanding EDCI shares, but the aggregate economic interests represented by these shares will remain the same as they are today. You should not expect, however, that the market price for a share of EDCI Holdings’ common stock will necessarily be the same as the market price of Common Stock before the Reorganization multiplied by the Exchange Ratio.
Management of EDCI Holdings (see pages 22-23)		Immediately after the Reorganization, the executive officers of EDCI Holdings will be the same persons who currently serve as officers of EDCI and the directors of EDCI Holdings will be the directors who are elected at the annual meeting together with the

		continuing directors of EDCI. There will be no change in the compensation or benefits of the directors or executive officers of EDCI as a result of the Reorganization. They will continue to receive the same aggregate compensation and benefits as they presently receive from EDCI (unless and until such compensation and benefits are changed at some future time by the board of directors of EDCI Holdings).
Listing of EDCI Holdings’ common stock (see page 20)		After the Reorganization, EDCI’s Common Stock will be delisted and cease to trade, and EDCI Holdings’ common stock will be listed for trading on The NASDAQ Capital Market under the symbol “EDCI” — the same symbol under which the Common Stock now trades on The NASDAQ Global Market.
Conditions to the Reorganization (see page 23)		The Reorganization is subject to the satisfaction of the following conditions:
		• approval by the vote of the holders of a majority of the Company’s issued and outstanding Common Stock;
		• receipt of an opinion from counsel with respect to the enforceability of the transfer restrictions under Delaware law;
		• EDCI Holdings’ common stock having been approved for listing by The NASDAQ Capital Market; and
		• obtaining any other consents, approvals or authorizations deemed necessary or appropriate.
Effective Time (see page 23)		The Reorganization will become effective immediately upon the filing of a certificate of merger with the Secretary of State of Delaware (or at such later time that may be specified in the certificate of merger), which the Company expects to occur promptly following approval of the Reorganization at the annual meeting.
Transfer Restrictions (see pages 29-34)		Subject to certain exceptions described elsewhere in this proxy statement/prospectus, the transfer restrictions will prohibit, without prior approval of EDCI Holdings’ board of directors, the direct or indirect sale, transfer, or disposition of any stock of EDCI Holdings (as defined by section 382 of the Internal Revenue Code) by any 5% holder or to any holder:
		• who beneficially owns directly or through attribution 5% or more of such stock (subject to the exceptions for pre-existing 5% stockholders described below);
		• who, upon the direct or indirect sale, transfer, disposition, purchase or acquisition of any of such stock, would beneficially own directly or through attribution 5% or more of such stock; or
		• if the effect of transfer would create a new public group under the Internal Revenue Code.
		Any transfer that violates the transfer restrictions will be void as of the date of the purported transfer, and the purported transferee will not be recognized as the owner of the stock. Any stockholder who knowingly violates the transfer restrictions will be liable for any and all damages suffered by EDCI Holdings as a result of the violation.

		The transfer restrictions will include the right to require a proposed transferee to provide all information reasonably requested regarding such person’s ownership of common stock of EDCI Holdings.
		Pre-existing 5% stockholders will be permitted to dispose of shares of common stock of EDCI Holdings received in the Reorganization so long as the disposition would not:
		• increase the ownership of stock by any person (other than a public group) to 5% or more of the stock of EDCI Holdings or
		• increase the ownership of stock owned by any person (other than a public group) which owns 5% or more of the stock of EDCI Holdings prior to such attempted transfer.
		These permitted transfers include transfers to a public group even though the public group becomes a new public group and is treated as a 5% stockholder under section 382.
		In addition, certain pre-existing 5% stockholders will be permitted to acquire additional shares of common stock of EDCI Holdings representing up to one-half of 1% of the outstanding shares of EDCI Holdings’ common stock immediately following the Reorganization (and taking into account in calculating the number of additional shares acquired, any shares exchanged in the Reorganization for shares of common stock of EDCI acquired by such pre-existing 5% stockholder on or after April 2, 2008).
		The transfer restrictions will remain in effect until EDCI Holdings’ board of directors determines that the NOLs are no longer available to reduce the Company’s future income tax liability, which should be the earlier of full usage of the loss carryforwards or their expiration. The Company estimates that the latest date of expiration of the NOLs is currently 2027.
		In addition, following a change in law, in certain circumstances EDCI Holdings’ board of directors will have the authority to eliminate, or modify certain terms of, the transfer restrictions.
		As soon as practicable after the completion of the Reorganization, EDCI Holdings will send to the Company’s stockholders a letter of transmittal for use in exchanging Common Stock for EDCI Holdings’ common stock.
		Each certificate of EDCI Holdings’ common stock issued in the Reorganization will bear a legend that indicates that subsequent transfers of EDCI Holdings’ common stock will be subject to the transfer restrictions.

		As of June 18, 2008, the Company’s directors and executive officers beneficially owned 11,275,278 shares of the Company’s outstanding Common Stock, representing approximately 16.16% of the outstanding votes of Common Stock. The vote of holders of a majority of the shares of EDCI’s Common Stock outstanding on the record date is required to approve the Reorganization.

Tax Consequences (see pages 25-26)		The Company’s stockholders will recognize neither gain nor loss for federal income tax purposes as a result of the Reorganization.

		However, you should consult your own tax adviser to determine the specific tax consequences of the Reorganization to you.
Accounting Consequences (see page 26)		The consolidated assets, liabilities, stockholders’ equity and income of EDCI Holdings immediately after the Reorganization will be the same as those of EDCI immediately prior to the Reorganization.
Rule 144 and Section 13(d) of the Exchange Act (see page 27)		Sales under Rule 144 of common stock of EDCI Holdings received in the Reorganization will not be any different than sales of Common Stock under Rule 144, except that the average weekly reported volume of trading in Common Stock may not be taken into account by holders of common stock of EDCI Holdings for purposes of Rule 144(e)(1) and (2).
		EDCI’s prior reports will be taken into account in determining EDCI Holdings’ compliance with the current public information requirements of Rule 144(c)(1). In addition, for purposes of resales by affiliates of EDCI under Rule 145, you will be able to tack on to the common stock of EDCI Holdings the period of time during which you held Common Stock for purposes of Rule 144(d).
		Stockholders of EDCI who have filed statements on Schedule 13D or Schedule 13G reporting beneficial ownership of Common Stock of EDCI will not be required to make additional or amended filings of such statements as a result of the Reorganization.
Exchange of Certificates and the Reorganization (see page 24)		At the effective time of the Reorganization, certificates representing the Common Stock will no longer entitle you to any rights with respect to EDCI’s Common Stock, and each certificate will be deemed to evidence the shares of common stock of EDCI Holdings. The Company’s transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates. Holders of Common Stock will be asked to surrender to the Company’s transfer agent certificates representing Common Stock in exchange for certificates representing EDCI Holdings’ common stock in accordance with the procedures set forth in a letter of transmittal that will be delivered to the Company’s stockholders. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATES AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL REQUESTED TO DO SO.
Interests of Directors and Executive Officers (see page 27)		Certain of the Company’s executive officers and directors own the Common Stock and/or options to purchase shares of the Common Stock and, to that extent, their interest in the Reorganization is the same as that of the other holders of the Common Stock.
Risk Factors (see pages 34-35)		There are risks and uncertainties related to the Reorganization that you should carefully consider in deciding how to vote on the Reorganization. If any of these risks occur, the Company’s business and the value of the Common Stock could be materially adversely affected.
Appraisal Rights (see page 24)		Under Delaware law, the Company’s stockholders do not have appraisal rights with respect to the Reorganization.

Expenses (see page 27)		All expenses related to the Reorganization will be paid by the Company whether or not the Reorganization is approved by the Company’s stockholders.
Vote Required (see page 23)		The affirmative vote of the holders of a majority of the Company’s issued and outstanding shares of Common Stock is required to approve the Reorganization.
Recommendation (see page 35)		The Board of Directors of EDCI recommends you vote “FOR” the approval of the Reorganization.
		Please vote your shares as soon as possible so that your shares may be represented at the annual meeting. You may vote by signing and dating your proxy card and mailing it in the enclosed return envelope, or you may vote in person at the annual meeting.

 

This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Directors of Entertainment Distribution Company, Inc. (“EDCI” or the “Company”) of proxies for use at the 2008 Annual Meeting of Stockholders to be held at the Courtyard by Marriott, 1856 Remount Road, Gastonia, North Carolina 28054 on August 22, 2008 at 9:00 a.m., local time, and any adjournment(s) or postponement(s) thereof.

 

This Proxy Statement/Prospectus, the Notice of the 2008 Annual Meeting and the form of proxy were first mailed to stockholders on or about June 30, 2008. The Company’s principal executive offices are located at 825 8th Avenue, 23rd floor, New York, New York.

 

Proposals to be Considered

 

At the annual meeting, the Company will ask its stockholders to:

 

 

The Company’s Board of Directors is not aware of any other matters to be presented at the annual meeting. If any other matters should properly come before the annual meeting or any adjournments or postponements of the annual meeting, the persons named as proxies in the enclosed proxy card will vote the proxies in accordance with their best judgment. If necessary to solicit additional proxies, the Company may ask its stockholders to vote upon the adjournment or postponement of the annual meeting.

 

Recommendation of the Board of Directors

 

The Board of Directors has approved the agreement and plan of reorganization and recommends that the stockholders vote “FOR” the approval and adoption of the agreement and the Reorganization, “FOR” the election of the Board of Directors’ nominees for director and “FOR” ratification of the selection by the Board of Directors of Ernst & Young LLP as the Company’s independent public accountants for the 2008 fiscal year. Each director has advised the Company that he plans to vote all of his shares of Common Stock in favor of the Reorganization.

 

This Proxy Solicitation

 

Any stockholder giving a proxy for the 2008 Annual Meeting may revoke it at any time prior to the voting thereof by giving written notice of revocation to the Chairman or the Secretary of the Company, by filing a later-dated proxy with either of them prior to the commencement of the 2008 Annual Meeting, or by voting in person at the 2008 Annual Meeting. Proxies and notices of revocation should be mailed or delivered to Entertainment Distribution Company, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, New York 11717 for receipt by Broadridge no later than two business days prior to the 2008 Annual Meeting, or should be deposited with the Chairman or the Secretary of the Company immediately prior to the commencement of the 2008 Annual Meeting.

 

Solicitation of proxies is being made primarily by mail; however, there may also be further solicitation in person and by telephone at nominal cost by directors, officers, employees and agents of the Company, who will receive no additional compensation therefore. The Company will bear all costs of soliciting proxies

including charges made by brokers and other persons holding stock in their names or in the names of nominees for reasonable expenses incurred in sending proxy materials to beneficial owners and obtaining their proxies.

 

Voting Your Shares

 

You may vote your shares at the annual meeting either in person or by proxy. To vote in person, you must attend the annual meeting and obtain and submit a ballot. Ballots for voting in person will be available at the annual meeting. To vote by proxy, you must complete and return the enclosed proxy card in time to be received by the Company before the annual meeting. By completing and returning the proxy card, you will be directing the persons designated on the proxy card to vote your shares at the annual meeting in accordance with the instructions you give on the proxy card.

 

Stockholders who hold shares registered in the name of a broker or other nominee may generally only vote pursuant to the instructions given to them by their broker or other nominee. If you hold shares registered in the name of a broker or other nominee, generally the nominee may only vote your shares as you direct the nominee, pursuant to the instructions given to you by the nominee. However, if the nominee has not timely received your directions, the nominee may vote on matters for which it has discretionary voting authority. Brokers will not have discretionary voting authority to vote on the Reorganization. Brokers will have discretionary voting authority to vote on Proposal Two and Proposal Three. If a nominee cannot vote on a matter because it does not have discretionary voting authority, this is a “broker non-vote” on that matter. In order to vote their shares by attending the annual meeting, as opposed to directing their broker or nominee to vote their shares, stockholders who hold shares registered in the name of a broker or other nominee generally must bring to the annual meeting a legal proxy from the broker or nominee authorizing them to vote the shares.

 

Quorum

 

One-third of the total outstanding shares of Common Stock will constitute a quorum at the meeting. Abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum for the transaction of business.

 

Approval Required

 

As of June 20, 2008, the record date for the determination of stockholders of the Company entitled to notice of and to vote at the 2008 Annual Meeting, the Company had 68,447,958 shares of common stock, $0.02 par value (“Common Stock”), outstanding and entitled to vote. Each holder of Common Stock at the close of business on June 20, 2008 will be entitled to one vote for each share held of record.

 

Proposal One

 

The affirmative vote of the holders of a majority of the shares of the Common Stock outstanding as of the record date is required to approve the Reorganization.

 

Abstentions and broker non-votes will have the same effect as votes against the Reorganization. In addition, the failure of a stockholder to return a proxy or to vote in person or to direct its broker or other nominee to vote its shares will have the effect of a vote against the Reorganization. Brokers holding shares for beneficial owners cannot vote on the Reorganization without the owners’ specific instructions. Accordingly, stockholders are encouraged to return the enclosed proxy card marked to indicate their grant of a proxy or to follow the instructions for voting provided by their broker or other nominee.

 

Proposal Two

 

The two nominees for director receiving a plurality of the votes cast at the meeting will be elected as directors to serve until the expiration of their terms or until their successors have been duly elected or qualified. If you do not vote “FOR” a particular nominee or you indicate “WITHHELD” on your proxy card,

your vote will neither be counted for or against the nominee. Abstentions and broker non-votes will not affect the outcome of this proposal.

 

Proposal Three

 

Ernst & Young LLP will be ratified as the Company’s independent accountant for the 2008 fiscal year if a majority of shares represented at the annual meeting and eligible to vote on the matter consent to the proposal. If you do not vote “FOR” the appointment of Ernst & Young LLP or you indicate “WITHHELD” on your proxy card, your vote will count against the proposal.

 

Broker non-votes will not affect the outcome of this proposal because the shares will not be considered eligible to vote on this proposal. Abstentions will be treated as a vote against the proposal.

 

Listed in the following table are the beneficial owners known to the Company as of June 18, 2008, of more than 5% of the outstanding Common Stock. In addition, this table includes the number of shares of Common Stock beneficially owned by each director and each of the executive officers 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 the beneficial owners is Entertainment Distribution Company, Inc., 825 8th Avenue, 23rd floor, New York, New York 10019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Jordan M. Copland; age 46; Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since December 2006; Interim Chief Executive Officer of the Company and Chief Executive Officer of Entertainment Distribution Company, LLC, a majority owned subsidiary of the Company (“EDC”) since November 2007; Executive Vice President of Strategic Development and Chief Financial Officer of GSI Commerce, Inc. from February, 2000 to November 2006; Senior Vice President and Chief Financial Officer of Virgin Entertainment Group, Inc. from March 1999 to February 2000; various financial and executive positions within Disney Consumer Products, a division of The Walt Disney Company from October 1990 to March 1999.

 

Matthew K. Behrent; age 37; Executive Vice President, Corporate Development of the Company and EDC 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 2006; Associate at Credit Suisse First Boston from June 2000 until January 2003; Associate at Cleary Gottlieb Steen & Hamilton from June 1998 until May 2000.

 

Thomas Costabile; age 54; President of EDC since November 2007; Executive Vice President and Chief Operating Officer of EDC from May 2005 until November 2007; President of Warner Elektra Atlantic Manufacturing from 2002 to 2004; Senior Vice President of Operations for Sony Music from 1994 to 2002.

 

Roger J. Morgan; age 44; Executive Vice President International Operations of EDC 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.

 

The Parties

 

Entertainment Distribution Company, Inc.  

 

EDCI, through its majority owned subsidiary, EDC, is an industry leader in providing pre-recorded products and distribution services to the entertainment industry with operations serving the United States (“U.S.”), central Europe and the United Kingdom (“UK”). EDC was formed by the acquisition of the U.S. and central European CD and DVD manufacturing and distribution operations from Universal Music Group (“Universal”) in May 2005. As part of the transaction, EDC entered into supply agreements with Universal with initial terms of 10 years under which the Company 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 EDC acquired a CD manufacturing operation in Blackburn, UK (“Blackburn”). Blackburn is the largest CD replicator in the UK. Its customer base includes Universal Music Group, its largest customer, as well as Ministry of Sound, Union Square Music, Demon Music Group and Warner Music Group. This acquisition also allowed EDC to secure all of Universal’s UK CD manufacturing business, a portion of which was scheduled to revert to EDC in 2007 as part of EDC’s international supply agreement with Universal.

 

Together these two acquisitions comprise EDC’s operations. The results of the our U.S., central European and UK operations have been included in the consolidated financial statements since their applicable acquisition dates.

 

Evolving retail trends have caused entertainment content owners to seek out opportunities to lower their costs and to shorten their supply chain. Our core competencies are CD and DVD replication and logistic services, and EDC is well positioned to participate in this supply chain evolution. As an independent service provider, with the world’s largest music company as its primary customer, EDC is pursuing opportunities to increase revenue by providing a wide range of physical manufacturing, distribution and value added services to entertainment content owners and their customers. These opportunities consist of manufacturing and/or distribution services agreements with existing or new customers. In evaluating these opportunities, the Company will consider the continued downward pressure on pre-recorded entertainment product pricing and the interest from the third party market for CD and DVD production and distribution services. The Company is also focused on implementing various strategic operational initiatives to increase capabilities and capacity and reduce costs over time. With respect to sales and business development, EDC continues to win competitive bids for new business due to our outstanding reputation in the industry and our ability to offer a complete supply chain solution as well as individual manufacturing and distribution services. This new business should help partially offset the industry declines, which are impacting our customer base. EDC is also monitoring the consolidation of smaller and independent labels as the decline in the physical market continues to affect this market segment.

 

After exploring numerous strategic opportunities for the EDC business in 2007, the Company has determined that a potential transaction is unlikely to happen at this time. However, the Company is continuing to explore strategic options and conversations remain ongoing with several parties. In addition, the Company is also examining business opportunities outside EDC’s industry to take advantage of our unrestricted NOLs and corporate cash and expects this process to accelerate in 2008.

 

EDCI Holdings

 

EDCI Holdings is a newly formed and wholly owned subsidiary of EDCI. EDCI Holdings was formed for the purpose of effecting the Reorganization. EDCI Holdings has no operating history and nominal assets, liabilities and capitalization. After the Reorganization, EDCI will be a wholly owned subsidiary of EDCI Holdings.

EDC Merger Sub

 

EDC Merger Sub is a newly formed and wholly owned subsidiary of EDCI Holdings. EDC Merger Sub was formed for the purpose of effecting the Reorganization. EDC Merger Sub has no operating history and nominal assets, liabilities and capitalization and will cease to exist after the Reorganization.

 

See the diagrams on page 21 for a depiction of the pre- and post-Reorganization relationship of these parties.

 

The principal place of business of each of EDCI, EDCI Holdings and EDC Merger Sub is located at 825 8th Avenue, 23rd Floor, New York, New York 10019, telephone: (212) 333-8400.

 

Agreement and Plan of Reorganization

 

As depicted in the diagrams on page 21, pursuant to the terms of the agreement and plan of reorganization:

 

Reorganization

 

 

Conversion of Shares

 

 

Certificate of Incorporation and By-laws

 

 

 

The relative powers, designations, preferences, rights and qualifications of the common stock of EDCI Holdings, as in effect immediately after the Reorganization, will be substantially equivalent in all material respects to the Common Stock of EDCI, except that the common stock of EDCI Holdings will be subject to the transfer restrictions.

 

After the Reorganization, the certificate of incorporation and by-laws of EDCI will be changed to reflect the fact that EDCI will be a wholly owned subsidiary of EDCI Holdings and will no longer be a publicly traded company.

 

Listing of EDCI Holdings’ common stock

 

The common stock of EDCI Holdings will be approved for listing on The NASDAQ Capital Market prior to the completion of the Reorganization. After the Reorganization, the common stock of EDCI Holdings will be listed for trading on The NASDAQ Capital Market under the symbol “EDCI” — the same symbol under which the Common Stock now trades on The NASDAQ Global Market.

 

After the Reorganization, EDCI’s Common Stock will be delisted and cease to trade on The NASDAQ Global Market.

Structure Charts

 

Depicted below are diagrams describing the Reorganization.

 

 

See pages 18-35 for a description of the Reorganization.

Certificate of Incorporation and By-laws

 

The following is a summary of the material differences between EDCI Holdings’ certificate of incorporation and by-laws to be in effect immediately after the Reorganization, on the one hand, and EDCI’s certificate of incorporation and by-laws, on the other. The full text of EDCI Holdings’ certificate of incorporation and by-laws to be in effect immediately after the reorganization is attached as Appendices B and C, respectively, to this proxy statement/prospectus, and any discussion of EDCI Holdings’ certificate of incorporation and by-laws contained in this proxy statement/prospectus, including the discussion below, is qualified in its entirety by reference to the complete text of each of them.

 

The certificate of incorporation of EDCI Holdings is identical to EDCI’s certificate of incorporation, with the following exceptions:

 

 

The by-laws of EDCI Holdings will be identical to EDCI’s by-laws as in effect immediately before the Reorganization, with the following exceptions:

 

 

Effect of the Reorganization on Stockholders

 

After the Reorganization, the shares of common stock of EDCI Holdings will have the same voting rights and rights to dividends and distributions and will be identical in all other respects to the Common Stock now authorized. Each stockholder’s percentage ownership of EDCI Holdings’ common stock will not be altered except for the effect of eliminating fractional shares. The common stock of EDCI Holdings issued pursuant to the Reorganization will remain fully paid and non-assessable. The Reorganization is not intended as, and will not have the effect of, a “going private transaction” covered by Rule 13e-3 under the Securities Exchange Act of 1934. Following the Reorganization, EDCI Holdings will continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934.

 

Board of Directors and Management

 

Immediately after the Reorganization, the board of directors of EDCI Holdings will consist of the same eight individuals who comprise the Company’s Board of Directors immediately before completion of the Reorganization (i.e., the two directors elected at the annual meeting and the six directors remaining in office),

with their respective terms of office as directors of EDCI Holdings expiring when their respective terms of office as directors of EDCI would have expired.

 

Immediately after the Reorganization, the board of directors of EDCI Holdings will have committees identical to the committees currently established by the Company’s Board of Directors, which, after the Reorganization, will have the same members as the current comparable committees of the EDCI Board of Directors. Each committee of EDCI Holdings will have a charter that is identical to such committee’s charter prior to the Reorganization.

 

The individuals who are executive officers of EDCI immediately before the completion of the Reorganization will be the only executive officers of EDCI Holdings immediately following the Reorganization, holding corresponding offices.

 

Although no determination has yet been made as to the allocation of the compensation of the present directors and executive officers of EDCI as between their service for EDCI Holdings and their service (if any) for EDCI following the Reorganization, the aggregate compensation and benefits of those individuals will not increase as a result of the Reorganization. They will continue to receive the same aggregate compensation and benefits as they presently receive from EDCI (unless and until such compensation and benefits are changed at some future time by the board of directors of EDCI Holdings).

 

Conditions to the Reorganization

 

The consummation of the Reorganization is subject to the satisfaction or waiver of the following conditions:

 

 

 

 

If the stockholders of EDCI do not approve the Reorganization, EDCI will continue to operate without the transfer restrictions, and EDCI Holdings and EDC Merger Sub will be dissolved. In addition, if the Reorganization is not approved, the rights plan adopted by EDCI on April 2, 2008 will remain in place, provided that the rights plan will terminate if (i) it has not been submitted for approval and approved by the requisite number of the Company’s stockholders on or before April 2, 2009 or (ii) it is submitted for the approval and not approved by the requisite number of the Company’s stockholders.

 

Deferral and Abandonment

 

Completion of the Reorganization may be deferred by the Company’s Board of Directors or any authorized officer following the annual meeting if the Board of Directors or an authorized officer determines that deferral would be in the best interests of EDCI and its stockholders. The Reorganization agreement may be terminated and the Reorganization abandoned prior to the filing of the certificate of merger with the Secretary of State of Delaware, whether before or after approval by the stockholders, if the Board of Directors determines that consummation of the Reorganization would not, for any reason, be in the best interests of EDCI and its stockholders.

 

Effective Time

 

The Reorganization will become effective immediately upon the filing of a certificate of merger with the Secretary of State of Delaware (or at such later time that may be specified in the certificate of merger). The Company expects that the certificate of merger will be filed and the Reorganization will be effective promptly following approval by the stockholders at the annual meeting.

Appraisal Rights

 

No holder of Common Stock will have appraisal rights in connection with the Reorganization because Common Stock is listed on The NASDAQ Global Market and the common stock of EDCI Holdings will be listed on The NASDAQ Capital Market following the Reorganization.

 

Exchange of Stock Certificates

 

The Company’s transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates. Holders of Common Stock will be asked to surrender to the Company’s transfer agent certificates representing Common Stock in exchange for certificates representing EDCI Holdings’ common stock, in accordance with the procedures set forth in a letter of transmittal that will be delivered to the Company’s stockholders. As soon as practicable after the Reorganization, the Company’s transfer agent will mail to each holder of record of certificates representing Common Stock a letter of transmittal and instructions for use in effecting the surrender of Common Stock in exchange for certificates representing EDCI Holdings’ common stock. Upon proper surrender of a certificate of Common Stock for exchange and cancellation to the Company’s transfer agent, together with a properly completed letter of transmittal, the holder of certificates representing Common Stock will be entitled to receive in exchange therefor a certificate representing a number of shares of EDCI Holdings’ common stock equal to one-tenth the number of shares of Common Stock represented by the surrendered certificate (subject to the cash out of fractional shares).

 

Each certificate of EDCI Holdings’ common stock issued in the Reorganization will bear a legend that indicates that subsequent transfers of EDCI Holdings’ common stock will be subject to the transfer restrictions, including the requirements for the forced sale of such stock under certain circumstances as described under the heading “Transfer Restrictions — Summary of Transfer Restrictions.”

 

Restrictions on Dividends and Distributions

 

Stockholders who fail to exchange their Common Stock certificates by surrendering such certificates, together with a properly completed letter of transmittal, to the Company’s transfer agent will not receive certificates representing their EDCI Holdings common stock. Any dividends declared or distributions made on shares of EDCI Holdings’ common stock which such holders have a right to receive will be retained by EDCI Holdings until such holders surrender their Common Stock certificates in exchange for EDCI Holdings’ common stock certificates or until paid to a public official pursuant to applicable abandoned property, escheat or similar laws. No interest will accrue or be payable with respect to any dividends or distributions retained on unissued shares of common stock of EDCI Holdings. In no event will the Company’s transfer agent, EDCI or EDCI Holdings be liable to any holder of Common Stock for dividends or distributions on shares of EDCI Holdings’ common stock delivered in good faith to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

After the effective time of the Reorganization, there shall be no transfers on the stock transfer books of EDCI of the shares of Common Stock that were issued and outstanding immediately prior to the effective time. If, after the effective time, certificates representing shares of Common Stock are presented for transfer, no transfer shall be effected on the stock transfer books of EDCI Holdings with respect to such shares and no certificate shall be issued representing the shares of EDCI Holdings’ common stock for which such shares of Common Stock of EDCI are exchanged unless and until the certificate representing such shares of Common Stock is delivered to the Company’s transfer agent together with a properly completed letter of transmittal (or such other documents as are satisfactory to EDCI Holdings and the Company’s transfer agent in their sole discretion). In addition, it will be a condition to the issuance of any certificate for any shares of EDCI Holdings’ common stock in a name other than the name in which the surrendered Common Stock certificate is registered that the person requesting the issuance of such certificate either pay to the Company’s transfer agent any transfer or other taxes required by reason of the issuance of a certificate of EDCI Holdings’ common stock in a name other than the registered holder of the certificate surrendered or establish to the satisfaction of the Company’s transfer agent that such tax has been paid or is not applicable.

Certain Federal Income Tax Consequences

 

The following is a summary of certain U.S. federal income tax consequences relating to the Reorganization as of the date hereof. Except where noted, this summary deals only with a stockholder who holds their Common Stock as a capital asset. This summary is qualified in its entirety by reference to, and is based upon, laws, regulations, rulings and decisions now in effect, all of which are subject to change, which changes may or may not be retroactive.

 

For purposes of this summary, a “U.S. holder” means a beneficial owner of Common Stock who is any of the following for U.S. federal income tax purposes: (i) a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (1) its administration is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all of its substantial decisions, or (2) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. A non-U.S. holder of Common Stock is a stockholder who is not a U.S. holder.

 

This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings, and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income tax considerations different from those summarized below.

 

This summary does not represent a detailed description of the U.S. federal income tax consequences to a stockholder in light of his, her or its particular circumstances. In addition, it does not represent a description of the U.S. federal income tax consequences to a stockholder who is subject to special treatment under the U.S. federal income tax laws and does not address the tax considerations applicable to stockholders who may be subject to special tax rules, such as: partnerships; financial institutions; insurance companies; real estate investment trusts; regulated investment companies; grantor trusts; tax-exempt organizations; dealers or traders in securities or currencies; stockholders who hold Common Stock as part of a position in a straddle or as part of a hedging, conversion or integrated transaction for U.S. federal income tax purposes or U.S. holders that have a functional currency other than the U.S. dollar; stockholders who actually or constructively own 10 percent or more of the Company’s voting stock; or a non-U.S. holder who is a U.S. expatriate, “controlled foreign corporation” or “passive foreign investment company.”

 

Moreover, this description does not address the U.S. federal estate and gift tax, alternative minimum tax or other tax consequences of the Reorganization.

 

If any entity classified as a partnership for U.S. federal income tax purposes holds Common Stock, the tax treatment of an owner of such entity will generally depend on the status of the owner and the activities of the entity.

 

Each stockholder should consult his, her or its own tax advisers concerning the particular U.S. federal tax consequences of the Reorganization, as well as the consequences arising under the laws of any other taxing jurisdiction, including any state, local or foreign income tax consequences.

 

To ensure compliance with Treasury Department Circular 230, each stockholder is hereby notified that: (a) any discussion of U.S. federal tax issues in this proxy statement/prospectus is not intended or written to be used, and cannot be used, by such holder for the purpose of avoiding penalties that may be imposed on such holder under the Code; (b) any such discussion has been included by the Company in furtherance of the Reorganization on the terms described herein; and (c) each such holder should seek advice based on its particular circumstances from an independent tax advisor.

 

As a result of the Reorganization, for federal income tax purposes, holders of Common Stock will: (1) recognize no gain or loss upon the receipt of common stock of EDCI Holdings in exchange for their Common Stock; (2) have an initial tax basis in the common stock of EDCI Holdings received that is the same as their adjusted tax basis in Common Stock exchanged therefor; and (3) have a holding period for federal

income tax purposes for common stock of EDCI Holdings that includes their holding period for their Common Stock exchanged therefor.

 

In addition, (a) EDCI, EDCI Holdings and EDC Merger Sub will not, for federal income tax purposes, recognize any taxable gain or loss as a result of the Reorganization and (b) the Reorganization and the adoption of the transfer restrictions will not, for federal income tax purposes, impair the ability of EDCI Holdings, EDCI and other members of their affiliated group which file consolidated income tax returns to utilize the net operating loss carryforwards.

 

U.S. Holders.  Generally, the Reorganization will not result in the recognition of gain or loss by a U.S. holder for U.S. federal income tax purposes (except to the extent of cash received in lieu of a fractional share). The aggregate adjusted basis of shares of EDCI Holdings’ common stock will be the same as the aggregate adjusted basis of the Common Stock exchanged for such shares of EDCI Holdings’ common stock, reduced by the amount of the adjusted basis of any Common Stock exchanged for such shares of EDCI Holdings’ common stock that is allocated to the fractional share for which cash is received. The holding period of the new, post-Reorganization shares of EDCI Holdings’ common stock resulting from implementation of the Reorganization will include a U.S. holder’s holding periods for the pre-Reorganization Common Stock. A stockholder who receives cash in lieu of a fractional share of EDCI Holdings’ common stock generally will recognize taxable gain or loss equal to the difference, if any, between the amount of cash received and the portion of the stockholder’s aggregate adjusted tax basis in the shares of old Common Stock allocated to the fractional share. If the shares of Common Stock allocated to the fractional shares were held by the stockholder as capital assets, the gain or loss resulting from the payment of cash in lieu of the issuance of a fractional share will be taxed as a capital gain or loss. Such capital gain or loss will be short term if the pre-Reorganization shares were held for one year or less and long term if held more than one year.

 

Non U.S. Holders.  A non-U.S. holder of the Common Stock generally will not be subject to U.S. federal income tax with respect to any gain recognized as a result of cash received in lieu of a fractional share in connection with the Reorganization; provided, however, that gain will be subject to tax if (i) the gain is effectively connected with a trade or business of the non-U.S. holder in the U.S. (in which case, for a non-U.S. holder that is a foreign corporation, the branch profits tax may also apply), and, where a tax treaty applies, is attributable to a U.S. permanent establishment of the non-U.S. holder, (ii) the gain is recognized by a non-U.S. holder who is present in the United States for 183 or more days in the taxable year of the Reorganization and certain other conditions are met, or (iii) the Company is or has been a “U.S. real property holding corporation” for U.S. federal income tax purposes. The Company believes it currently is not and it does not anticipate becoming a “U.S. real property holding corporation” for U.S. federal income tax purposes.

 

Information Reporting and Backup Withholding.  Payment of cash in lieu of fractional shares within the United States or conducted through certain U.S. related financial intermediaries is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is not a U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. holder) or the stockholder otherwise establishes an exemption. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such stockholder’s U.S. federal income tax liability provided the required information is furnished to the Internal Revenue Service.

 

Accounting Consequences

 

The consolidated assets and liabilities of EDCI Holdings will be recorded at the historical cost of EDCI as reflected on the consolidated financial statements of EDCI immediately prior to the Reorganization. Accordingly, the consolidated financial statements of EDCI Holdings immediately following the Reorganization will be the same as the consolidated financial statements of EDCI immediately prior to the Reorganization. For this reason, pro forma and comparative financial information regarding EDCI Holdings and its consolidated subsidiaries giving effect to the Reorganization have not been included in this proxy statement/prospectus. Similarly, no selected historical pro forma and other financial data have been included in this proxy statement/prospectus because the Reorganization will have no effect on EDCI’s historical consolidated financial statements.

Interests of Directors and Executive Officers in the Reorganization

 

Many of the Company’s directors and executive officers own Common Stock and/or options to purchase shares of Common Stock, and to that extent their interest in the Reorganization is the same as the interest in the Reorganization of the Company’s stockholders generally.

 

As of June 18, 2008, the Company’s directors and executive officers beneficially owned 11,275,278 shares of the Company’s outstanding Common Stock, representing approximately 16.16% of the outstanding shares of Common Stock. Each director and executive officer has advised the Company that he plans to vote all of his shares of Common Stock in favor of the Reorganization. The vote of holders of a majority of the shares of EDCI’s Common Stock outstanding on the record date is required to approve the Reorganization.

 

Transfer of Securities Under Rule 144 and Section 13(d) of the Exchange Act

 

Sales under Rule 144 of common stock of EDCI Holdings received in the Reorganization will not be any different than sales of Common Stock under Rule 144, except that the average weekly reported volume of trading in Common Stock may not be taken into account by holders of common stock of EDCI Holdings for purposes of Rule 144(e)(1)(ii) and (iii) and 144(e)(2) (with respect to Rule 144(e)(1)(ii) and (iii)). After the common stock of EDCI Holdings has traded for four calendar weeks after the effective time of the Reorganization, sales under Rule 144(e)(1)(ii) and (iii) and Rule 144(e)(2) (with respect to Rule 144(e)(1)(ii) and (iii)) will be permitted.

 

In determining EDCI Holdings’ compliance with the current public information requirements of Rule 144(c)(1), EDCI’s prior reports will be taken into account. In addition, for purposes of Rule 144(d) and resales by affiliates of EDCI under Rule 145, the holding period for EDCI Holdings’ common stock received in the Reorganization will commence on the date of acquisition of EDCI’s Common Stock.

 

Stockholders of EDCI who have filed statements on Schedule 13D or Schedule 13G reporting beneficial ownership of Common Stock of EDCI will not be required to make additional or amended filings of such statements as a result of the Reorganization.

 

Fractional Shares

 

EDCI Holdings will not issue fractional certificates for post-Reorganization shares in connection with the Reorganization. In lieu of issuing fractional shares, EDCI Holdings may either (i) directly pay each stockholder who would otherwise have been entitled to a fraction of a share an amount in cash equal to the closing sale price of the Common Stock, as quoted by the NASDAQ on the Effective Date, multiplied by the fractional share amount, or (ii) make arrangements with EDCI Holdings’ transfer agent or exchange agent to aggregate all fractional shares otherwise issuable in the Reorganization and sell these whole shares as soon as possible after the Effective Date at then prevailing market prices on the open market on behalf of those holders, and then pay each such holder his, her or its pro rata portion of the sales proceeds.

 

Expenses

 

All expenses related to the Reorganization, including fees and expenses of the Company’s attorneys and accountants and expenses and costs of preparing, mailing and soliciting proxies pursuant to this proxy statement/prospectus, will be paid by the Company whether or not the Reorganization is approved by the Company’s stockholders.

 

If the Reorganization is implemented, the number of issued and outstanding shares of common stock of EDCI Holdings as compared to the number of outstanding shares of Common Stock immediately prior to the Reorganization will be reduced in accordance with the ten to one Exchange Ratio. The total number of authorized shares of common stock of EDCI Holdings will be 15,000,000, as contrasted with 200,000,000 authorized shares of EDCI. We are reducing the number of authorized shares to bring that number closer to the number of shares of common stock that will be issued after the Reorganization, which should reduce our franchise tax obligations. The par value per share of the Common Stock will not change.

 

Reasons for Fixing the Exchange Ratio at Ten for One

 

EDCI’s Common Stock is currently listed on The NASDAQ Global Market. As we have previously disclosed, on January 4, 2008, the Company received a letter from NASDAQ advising that for the previous 30 consecutive trading days, the bid price of the Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5). Shares of the Common Stock may be delisted from The NASDAQ Global Market if the price of the shares does not close above $1.00 for ten consecutive trading days before July 2, 2008, subject to an additional 180 day extension described below. Therefore, in the Reorganization we are proposing to exchange shares of Common Stock for shares of EDCI Holdings’ common stock at the ten to one Exchange Ratio with the primary goal of raising the per share trading price of EDCI Holdings’ common stock above the per share trading price of EDCI’s Common Stock.

 

The NASDAQ letter also stated that if, at any time before July 2, 2008, the bid price of the Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the NASDAQ staff will provide the Company with written notification that it has achieved compliance with the minimum bid price requirement. If the Company does not regain compliance with the minimum bid price requirement by July 2, 2008, the NASDAQ staff will provide the Company with written notification that the Common Stock will be delisted from The NASDAQ Global Market. At that time, the Company may appeal the delisting determination to a NASDAQ Listing Qualifications Panel pursuant to applicable NASDAQ rules. Alternatively, NASDAQ Marketplace Rule 4450(i) may permit the Company to transfer the Common Stock to The NASDAQ Capital Market if the Common Stock satisfies all criteria, other than compliance with the minimum bid price requirement, for initial inclusion on such market. In the event of such a transfer, the NASDAQ Marketplace Rules provide that the Company will be afforded an additional 180 calendar days to comply with the minimum bid price requirement while listed on The NASDAQ Capital Market.

 

The Board of Directors believes that The NASDAQ Capital Market is a more appropriate market than The NASDAQ Global Market for the trading of common stock of EDCI Holdings. Accordingly, in connection with the Reorganization, the Company intends to apply for listing of EDCI Holdings’ common stock on The NASDAQ Capital Market as a successor to the Company. In addition, in connection with the Reorganization, the Company has applied for listing of the Common Stock on The NASDAQ Capital Market prior to the Reorganization in order to obtain the benefit of the additional 180 day compliance period.

 

If a delisting from The NASDAQ Global Market were to occur, the Common Stock might be eligible for listing on The NASDAQ Capital Market as described above. If a delisting from The NASDAQ Capital Market were to occur, the Common Stock would then trade on the OTC Bulletin Board or in the “pink sheets.” The OTC Bulletin Board and the “pink sheets” are generally considered to be less efficient than, and not as broad as, The NASDAQ Capital Market or The NASDAQ Global Market.

 

The closing sale price of the Common Stock on June 18, 2008 was $0.49 per share. The Board of Directors has considered the potential harm to the Company of a delisting from The NASDAQ Global Market and believes that fixing the Exchange Ratio at ten for one is necessary to help EDCI Holdings gain compliance with The NASDAQ Capital Market’s minimum bid price listing standard and maintain its listing on The NASDAQ Capital Market.

Material Effects of Fixing the Exchange Ratio at Ten for One

 

The Reorganization will affect all stockholders of the Company uniformly and will not affect any stockholder’s percentage ownership interests or proportionate voting power, except to the extent that the Reorganization results in any of the stockholders owning a fractional share. In lieu of issuing fractional shares, EDCI Holdings may either (i) directly pay each stockholder who would otherwise have been entitled to a fraction of a share an amount in cash equal to the closing sale price of the Common Stock, as quoted by the NASDAQ on the Effective Date, multiplied by the fractional share amount, or (ii) make arrangements with EDCI Holdings’ transfer agent or exchange agent to aggregate all fractional shares otherwise issuable in the Reorganization and sell these whole shares as soon as possible after the Effective Date at the prevailing market prices on the open market on behalf of those holders, and then pay each such holder his, her or its pro rata portion of the sale proceeds.

 

The par value of EDCI Holdings’ common stock is the same as the par value of EDCI’s Common Stock. As a result, on the effective date of the Reorganization, the stated capital on EDCI Holdings’ balance sheet attributable to the Common Stock will be reduced to one-tenth of its present amount and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. The per share net income or loss and net book value of the Common Stock will be retroactively increased for each period because there will be fewer shares of EDCI Holdings’ common stock outstanding.

 

The Reorganization may result in some stockholders owning “odd-lots” of less than 100 shares of Common Stock. Brokerage commissions and other costs of transactions in odd-lots are generally higher than the costs of transactions in “round-lots” of even multiples of 100 shares.

 

Introduction

 

As of December 31, 2007, the Company had unrestricted U.S. net operating losses, or NOLs, totaling approximately $277.7 million that the Company can carry forward as potential tax deductions until they expire between 2019 and 2027. If the Reorganization is approved, EDCI Holdings will be able to carry forward and utilize the Company’s NOLs to the same extent as the Company is able prior to the Reorganization.

 

NOLs benefit the Company by offsetting U.S. federal taxable income dollar-for-dollar by the amount of the NOLs, thereby reducing or eliminating the Company’s U.S. federal corporate income tax (other than the U.S. federal alternative minimum tax) on such income. The maximum U.S. federal corporate income tax rate is currently 35%. However, assuming that the Company can fully use its NOLs to reduce the Company’s U.S. federal corporate income tax, the Company expects to be subject to the U.S. federal alternative minimum tax, which would result in 10% of the Company’s alternative minimum taxable income being subject to the 20% alternative minimum tax.

 

The benefit of the NOLs to the Company can be reduced or eliminated under section 382 of the Code if the Company experiences an “ownership change,” as defined in section 382 of the Code and described in more detail below. An ownership change can occur through one or more acquisitions of the Company’s stock, whether occurring contemporaneously or pursuant to a single plan, by which stockholders or groups of stockholders, each of whom owns or is deemed to own directly or indirectly at least 5% of the Company’s stock, increase their ownership of the Company’s stock by more than 50 percentage points within a three-year period.

 

While the Company implemented a rights plan on April 2, 2008 to assist in protecting the NOLs, the Company currently does not have the ability to completely restrict transactions that could result in an ownership change. The Company’s Board of Directors believes the best interests of EDCI and its stockholders will be served by adopting provisions that are designed to restrict direct and indirect transfers of the Company’s stock if such transfers will affect the percentage of stock that is treated as owned by a 5% stockholder. In order to implement these transfer restrictions, the Company must consummate the

Reorganization so that the transfer restrictions can be included in the certificate of incorporation of EDCI Holdings. This proxy statement/prospectus refers to these provisions as the “transfer restrictions.”

 

As of March 31, 2008, the Company does not believe that it has experienced an ownership change, but calculating whether an ownership change has occurred is subject to inherent uncertainty. This uncertainty results from the complexity and ambiguity of the section 382 provisions, as well as limitations on the knowledge that any publicly traded company can have about the ownership of and transactions in its securities.

 

The transfer restrictions will be included as Article Thirteenth in the certificate of incorporation of EDCI Holdings. Stockholders are urged to read carefully the accompanying Appendix B, which sets forth the complete text of the certificate of incorporation of EDCI Holdings that will be in effect after the Reorganization.

 

Limitations on use of NOLs

 

The benefit of the NOLs to the Company can be reduced or eliminated under section 382 of the Code if the Company experiences an “ownership change,” as defined in section 382. Generally, an ownership change can occur through one or more acquisitions, whether occurring contemporaneously or pursuant to a single plan, by which one or more stockholders, each of whom owns or is deemed to own directly or indirectly 5% or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percentage points over the lowest percentage of stock owned by such stockholders (with the lowest percentage measured separately for each stockholder) at any time during the preceding three-year period. The amount of the increase in the percentage of stock ownership of each 5% stockholder is computed separately, and each such increase is then added together with any other such increases to determine whether an ownership change has occurred. For this purpose, all holders who own less than 5% of a corporation’s stock are generally treated together as one 5% stockholder (although in some circumstances these smaller holders may be counted as two or more separate stockholders, with each being a “public group” and a separate 5% stockholder, for purposes of section 382 of the Code). Transactions in the public markets among stockholders owning less than 5% of the equity securities generally do not affect the calculation of an ownership change (but can if a corporation has more than one public group). In addition, certain constructive ownership rules, which generally attribute ownership of stock owned by estates, trusts, corporations, partnerships or other entities to the ultimate indirect individual owner thereof, or to related individuals, are applied in determining the level of stock ownership of a particular stockholder. Special rules can result in the treatment of options (including warrants) or other similar interests as having been exercised if such treatment would result in an ownership change. All percentage determinations are based on the fair market value of a corporation’s stock.

 

For example, if a single investor acquired 50.1% of the Company’s stock in a three-year period, a change of ownership would occur. Similarly, if ten persons, none of whom owned the Company’s stock, each acquired slightly over 5% of the Company’s stock within a three-year period (so that such persons owned, in the aggregate, more than 50%), an ownership change would occur.

 

If the Company were to experience an ownership change, then the amount of taxable income in any year (or portion of a year) subsequent to the ownership change that could be offset by NOLs from periods prior to such ownership change could not exceed the product obtained by multiplying (i) the aggregate value of the Company’s stock immediately prior to the ownership change (with certain adjustments) by (ii) the then applicable federal long-term tax exempt rate (this resulting product is referred to as the section 382 limitation). If the Company experiences an ownership change for tax purposes, the section 382 limitation would be reduced to zero in the event the Company was deemed to fail to continue the business enterprise that the Company engaged in before the ownership change for the two-year period following the ownership change. Any portion of the annual section 382 limitation amount not utilized in any year may be carried forward and increase the available section 382 limitation amount for the succeeding tax year. Thus, an ownership change could significantly reduce or eliminate the annual utilization of the Company’s NOLs and cause a substantial portion or all of such NOLs to expire prior to their use.

Summary of Transfer Restrictions

 

The following is a summary of the proposed transfer restrictions. This summary is qualified in its entirety by reference to the full text of the proposed transfer restrictions, which is contained in Article Thirteenth of the certificate of incorporation of EDCI Holdings and set forth in the accompanying Appendix B. Stockholders are urged to read in their entirety the transfer restrictions set forth in the accompanying Appendix B.

 

Prohibited Transfers.  Subject to certain exceptions pertaining to existing 5% stockholders (described below), the transfer restrictions generally will restrict any direct or indirect transfer (such as transfers of stock of EDCI Holdings that result from the transfer of interests in other entities that own stock of EDCI Holdings) if the effect would be to:

 

1. increase the direct or indirect ownership of EDCI Holdings stock by any person (or public group) from less than 5% to 5% or more of the stock of EDCI Holdings;

 

2. increase the percentage of EDCI Holdings stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of the stock of EDCI Holdings; or

 

3. create a new public group.

 

Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of stock would by attribution cause another person (or public group) to exceed such threshold. Complicated rules of constructive ownership, aggregation, segregation, combination and other stock ownership rules prescribed by the Code (and related regulations) will apply in determining whether a person or group of persons constitute a 5% stockholder under section 382 and whether less than 5% stockholders will be treated as one or more “public groups,” each of which is a 5% stockholder under section 382.

 

For purposes of determining the existence and identity of, and the amount of stock owned by, any stockholder, EDCI Holdings will be entitled to rely conclusively on (a) the existence or absence of filings with the SEC of Schedules 13D and 13G (or any similar SEC filings) as of any date and (b) EDCI Holdings’ actual knowledge of the ownership of its stock. The transfer restrictions will include the right to require a proposed transferee, as a condition to registration of a transfer of stock, to provide all information reasonably requested regarding such person’s direct and indirect ownership of EDCI Holdings’ stock. The transfer restrictions may result in the delay or refusal of certain requested transfers of EDCI Holdings’ common stock.

 

As a result of these rules, the transfer restrictions could result in prohibiting ownership (thus requiring dispositions) of stock of EDCI Holdings as a result of a change in the relationship between two or more persons or entities, or of a transfer of an interest in an entity other than EDCI Holdings, such as an interest in an entity that, directly or indirectly, owns stock of EDCI Holdings. The transfer restrictions will also apply to proscribe the creation or transfer of certain “options” (which are broadly defined by section 382) in respect of EDCI Holdings stock to the extent that, in certain circumstances, creation, transfer or exercise of the option would result in a proscribed level of ownership.

 

Treatment of Pre-existing 5% Stockholders.  The transfer restrictions will contain exceptions permitting certain otherwise prohibited transfers by pre-existing 5% stockholders. Pre-existing 5% stockholders are:

 

 

Pre-existing 5% stockholders will receive the following different treatment under the transfer restrictions.

 

In contrast to the treatment of persons who become “5-percent stockholders” (as defined in section 382) after the Reorganization, who will be prohibited from disposing of any shares of EDCI Holdings’ common stock without the express consent of EDCI Holdings’ board of directors, a direct or indirect transfer

of shares of common stock of EDCI Holdings by (but not to) a pre-existing 5% stockholder will be permitted so long as such a transfer would not:

 

 

These permitted transfers by pre-existing 5% stockholders include transfers to a public group even though the public group becomes a new public group as a result of such transfer and is treated as a 5% stockholder under section 382. In addition, the transferred shares must have been received in exchange for shares of Common Stock already owned by such pre-existing 5% stockholder in the Reorganization.

 

Pre-existing 5% stockholders will also be able to acquire additional shares of common stock of EDCI Holdings representing up to one-half of 1% of the outstanding shares of EDCI Holdings’ common stock immediately following the Reorganization (and taking into account in calculating the number of additional shares acquired, any shares exchanged in the Reorganization for shares of common stock of EDCI acquired by such pre-existing 5% stockholder on or after April 2, 2008).

 

These provisions will not permit pre-existing 5% stockholders to increase their ownership of common stock of EDCI Holdings without specific approval of the board of directors of EDCI Holdings, except for acquisitions and transfers by pre-existing 5% stockholders as described above, but they will permit pre-existing 5% stockholders to dispose of shares of EDCI Holdings received in exchange for shares of Common Stock already owned by them prior to the Reorganization, subject to the conditions above.

 

Consequences of Prohibited Transfers.  Upon adoption of the transfer restrictions, any direct or indirect transfer attempted in violation of the restrictions would be void as of the date of the purported transfer as to the purported transferee (or, in the case of an indirect transfer, the ownership of the direct owner of EDCI Holdings’ stock would terminate simultaneously with the transfer), and the purported transferee (or in the case of any indirect transfer, the direct owner) would not be recognized as the owner of the shares owned in violation of the restrictions for any purpose, including for purposes of voting and receiving dividends or other distributions in respect of such stock, or in the case of options, receiving stock in respect of their exercise. In this proxy statement/prospectus, stock acquired in violation of the transfer restrictions is referred to as “excess stock.”

 

In addition to the purported transfer being void as of the date of the purported transfer, upon demand, the purported transferee must transfer the excess stock to EDCI Holdings’ agent along with any dividends or other distributions paid with respect to such excess stock. EDCI Holdings’ agent is required to sell such excess stock in an arms’ length transaction (or series of transactions) that would not constitute a violation under the transfer restrictions. The net proceeds of the sale, together with any other distributions with respect to such excess stock received by EDCI Holdings’ agent, after deduction of all costs incurred by the agent, will be distributed first to the purported transferee in an amount, if any, equal to the cost (or in the case of gift, inheritance or similar transfer, the fair market value of the excess stock on the date of the violative transfer) incurred by the purported transferee to acquire such excess stock, and the balance of the proceeds, if any, will be distributed to a charitable beneficiary. If the excess stock is sold by the purported transferee, such person will be treated as having sold the excess stock on behalf of the agent, and will be required to remit all proceeds to EDCI Holdings’ agent (except to the extent EDCI Holdings grants written permission to the purported transferee to retain an amount not to exceed the amount such person otherwise would have been entitled to retain had EDCI Holdings’ agent sold such shares).

 

Any stockholder who knowingly violates the transfer restrictions will be liable for any and all damages suffered by EDCI Holdings as a result of such violation, including damages resulting from a reduction in or elimination of the ability to utilize the NOLs and any professional fees incurred in connection with addressing such violation.

With respect to any transfer of stock which does not involve a transfer of “securities” of EDCI Holdings within the meaning of the Delaware General Corporation Law but which would cause any 5% stockholder to violate the transfer restrictions, the following procedure will apply in lieu of those described above. In such case, no such 5% stockholder shall be required to dispose of any interest that is not a security of EDCI Holdings, but such 5% stockholder and/or any person whose ownership of securities of EDCI Holdings is attributed to such 5% stockholder will be deemed to have disposed of (and will be required to dispose of) sufficient securities, simultaneously with the transfer, to cause such 5% stockholder not to be in violation of the transfer restrictions, and such securities will be treated as excess stock to be disposed of through the agent under the provisions summarized above, with the maximum amount payable to such 5% stockholder or such other person that was the direct holder of such excess stock from the proceeds of sale by the agent being the fair market value of such excess stock at the time of the prohibited transfer.

 

Modification and Waiver of Transfer Restrictions.  The board of directors of EDCI Holdings will have the discretion to approve a transfer of stock that would otherwise violate the transfer restrictions. If the board of directors of EDCI Holdings decides to permit a transfer that would otherwise violate the transfer restrictions, that transfer or later transfers may result in an ownership change that could limit the Company’s use of the NOLs. As a condition to granting an exemption from the transfer restrictions, the Board of Directors may require an opinion of counsel (the cost of which will be borne by the transferor and/or the transferee) that the transfer will not result in a limitation on the use of the NOLs under section 382.

 

In addition, in the event of a change in law, the board of directors of EDCI Holdings will be authorized to eliminate the transfer restrictions, modify the applicable allowable percentage ownership interest (now 5%) or modify any of the terms and conditions of the transfer restrictions, provided that the board of directors of EDCI Holdings concludes in writing that such change is reasonably necessary or advisable to preserve the NOLs or that the continuation of the affected terms and conditions of the transfer restrictions is no longer reasonably necessary for such purpose. The board of directors of EDCI Holdings’ determination in such circumstances must be based upon a written opinion of tax counsel. Written notice of any such determination will be provided to stockholders.

 

The board of directors of EDCI Holdings may establish, modify, amend or rescind by-laws, regulations and procedures for purposes of determining whether any transfer of stock of EDCI Holdings would jeopardize EDCI Holdings’ ability to preserve and use the NOLs.

 

Expiration of Transfer Restrictions

 

The transfer restrictions will remain in effect until the board of directors of EDCI Holdings determines that the NOLs are no longer available to reduce EDCI Holdings’ future income tax liability, which should be the earlier of full usage of the NOLs or their expiration. The current estimated latest date of expiration of the NOLs is 2027. The board of directors of EDCI Holdings is permitted to accelerate or extend the expiration date of the transfer restrictions in the event of a change in the law.

 

Reasons for Transfer Restrictions

 

The purpose of the transfer restrictions is solely to help preserve the long-term value of the Company’s accumulated net operating loss carryforwards. The proposed transfer restrictions are designed to prohibit certain transfers of the Company’s stock in excess of amounts that, because of provisions of the Code, could inhibit the Company’s ability to use the Company’s NOLs to reduce future income tax liability.

 

The transfer restrictions may have anti-takeover effects because they will restrict the ability of a person or group from accumulating an aggregate of 5% or more of stock of EDCI Holdings and the ability of persons or groups now owning 5% or more of stock of EDCI Holdings from acquiring additional stock. The transfer restrictions are not in response to any effort to accumulate the Common Stock or to obtain control of EDCI. The Company’s Board of Directors considers the transfer restrictions to be reasonable and in the best interests of EDCI and its stockholders because the transfer restrictions reduce certain of the risks related to the Company’s future use of the NOLs. In the opinion of the Company’s Board of Directors, the fundamental importance to the Company’s stockholders of maintaining the availability of the NOLs is a more significant

consideration than the indirect “anti-takeover” effect the transfer restrictions may have or the cost and expense of preparing this proxy statement/prospectus, soliciting proxies in favor of the Reorganization and holding the annual meeting.

 

You should carefully consider the risk factors described below as well as other information provided to you in this proxy statement/prospectus in deciding how to vote on the Reorganization. If any of the following risk factors actually occur, the Company’s business and the value of its Common Stock could be materially adversely affected. You should also consider the other information contained in or incorporated by reference into this proxy statement/prospectus, particularly the Company’s Annual Report, which accompanies this proxy statement/prospectus and was filed with the SEC on March 14, 2008 (and subsequently amended on April 25, 2008).

 

Risks Related to the Reorganization and Transfer Restrictions

 

The imposition of transfer restrictions may cause the market price of EDCI Holdings’ stock to decline.

 

If the Reorganization is approved and completed, you will receive shares of common stock of EDCI Holdings as the parent company of EDCI after the Reorganization. These shares will be subject to the transfer restrictions described in this proxy statement/prospectus. These transfer restrictions currently do not apply to the Common Stock. It is possible that the transfer restrictions will have an adverse effect on the liquidity and market price of EDCI Holdings’ common stock. Because of the implementation of the transfer restrictions, the Company cannot assure you that the market price of the shares of EDCI Holdings’ common stock will be comparable to the market price of the Common Stock multiplied by the Exchange Ratio of ten for one. If the transfer restrictions are approved, they will remain in effect until such time as the board of directors of EDCI Holdings determines that they are no longer necessary, which should be the earlier of full usage of the NOLs or their expiration. The latest date of expiration of the NOLs is currently estimated to be 2027.

 

The transfer restrictions may impede or discourage efforts by a third party to acquire EDCI Holdings, even if doing so would benefit EDCI Holdings’ stockholders.

 

Although the transfer restrictions are designed as a protective measure to preserve the NOLs, the transfer restrictions may have the effect of impeding or discouraging a merger, tender offer or proxy contest, even if such a transaction may be favorable to the interests of some or all of the stockholders of EDCI Holdings. This effect might prevent stockholders from realizing an opportunity to sell all or a portion of their shares of common stock of EDCI Holdings at a premium above market prices. In addition, the transfer restrictions may delay the assumption of control by a holder of a large block of the common stock of EDCI Holdings and the removal of incumbent directors and management, even if such removal may be beneficial to some or all of the stockholders of EDCI Holdings.

 

The transfer restrictions may not be enforceable, and an ownership change may occur with the result that the ability to use the NOLs could be severely limited.

 

The transfer restrictions could be challenged, and a court could refuse to enforce them. It also is possible that the tax authorities (including the IRS) could take the position that the transfer restrictions were not effective and did not protect the company from an ownership change for tax purposes. Furthermore, transactions permitted under the transfer restrictions, such as transfers by pre-existing 5% stockholders, could trigger an ownership change for purposes of section 382 and result in limitations on EDCI Holdings ability to use the NOLs in the future.

 

Shares of common stock of EDCI Holdings could be delisted from NASDAQ.

 

The market price per share of the common stock of EDCI Holdings after the Reorganization may not rise in proportion to the reduction in the number of shares of Common Stock outstanding resulting from the

Reorganization. The market price per share of common stock of EDCI Holdings may not remain in excess of the $1.00 minimum bid price as required by The NASDAQ Capital Market, or EDCI Holdings may not otherwise meet the additional requirements for continued listing on The NASDAQ Capital Market. The market price of the common stock of EDCI Holdings will also be based on EDCI Holdings’ performance and other factors, some of which are unrelated to the number of shares outstanding.

 

Risks Related to the EDCI Holdings’ Future use of NOLs

 

Future legislation may result in EDCI Holdings being unable to realize the tax benefits of the NOLs.

 

It is possible that legislation or regulations will be adopted that would limit EDCI Holdings’ ability to use the tax benefits associated with the NOLs. However, the Company is not aware of any proposed changes in the tax laws or regulations that would materially impact the ability of EDCI Holdings to use the NOLs.

 

EDCI Holdings may not be able to make use of the existing tax benefits of the NOLs because EDCI Holdings may not generate taxable income.

 

The use of the NOLs is subject to uncertainty because it is dependent upon the amount of taxable income and capital gains generated by EDCI Holdings. The Company has not consistently generated taxable income on an annual basis, and there can be no assurance that EDCI Holdings will have sufficient taxable income or capital gains in future years to use the NOLs before they expire.

 

The IRS could challenge the amount of the NOLs or claim the Company or EDCI Holdings experienced an ownership change, which could reduce the amount of NOLs that EDCI Holdings can use.

 

The amount of the NOLs has not been audited or otherwise validated by the IRS. The IRS could challenge the amount of the NOLs, which could result in an increase in the liability of EDCI Holdings in the future for income taxes. In addition, calculating whether an ownership change has occurred is subject to uncertainty, both because of the complexity and ambiguity of section 382 and because of limitations on a publicly traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the Company cannot assure you that a governmental authority will not claim that the Company or EDCI Holdings experienced an ownership change and attempt to reduce or eliminate the benefit of the NOLs even though the stock of EDCI Holdings is subject to the transfer restrictions.

 

The Company’s business could be adversely affected if the Reorganization is not approved.

 

While the Company recently implemented a rights plan to assist in protecting the Company’s NOLs, which creates a deterrent to transfers that could impact the NOLs, there are no restrictions in place that completely prohibit transfers of the Common Stock that would jeopardize the NOLs. If the Reorganization is not approved, the Company will not have the ability to completely prohibit such transfers. As a result, an ownership change could occur. An ownership change could severely limit the Company’s ability to use the NOLs. The Company’s ability to use the NOLs to reduce its future liability to pay federal income tax is an important aspect of its business strategy.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL ONE.

 

The total number of directors on the Company’s Board of Directors is eight. Pursuant to the Company’s certificate of incorporation and by-laws, the Board of Directors is divided into three classes each consisting, as nearly as may be possible, of one-third of the total number of directors, for terms of three years. At the 2008 Annual Meeting, two Class III Directors are to be elected. As proposed and recommended by the Governance and Nominating Committee, the Board of Directors has nominated Ramon D. Ardizzone and Cliff O. Bickell each of whom is currently serving as a director of the Company, for election as Class III Directors to serve for three-year terms expiring at the Annual Meeting of Stockholders in 2011, and until their respective successors shall have been elected and qualified.

 

The Board of Directors recommends a vote FOR all of the nominees. Each of the nominees has indicated his willingness to serve if elected, and the Board of Directors has no reason to believe that any nominee will be unavailable. In the event that a vacancy arises among such nominees by death or any other reason prior to the 2008 Annual Meeting, the proxy may be voted for a substitute nominee or nominees designated by the Board of Directors.

 

Biographical information follows for each person nominated and each person whose term as a director will continue after the 2008 Annual Meeting.

 

 

 

 

In connection with Mr. Chapman’s appointment to the Board of Directors, the Company and the Stockholders entered into a stockholders agreement dated November 5, 2007 (the “Stockholders Agreement”). The Stockholders Agreement provides for Mr. Chapman’s appointment to the Board of Directors and obligates the Company to nominate a designee selected in accordance with the Stockholders Agreement, recommend the designee for election to the Board of Directors and solicit proxies in his/her favor, in each case, until the termination date of the Stockholders Agreement. Upon the termination of the Stockholders Agreement, the Stockholders’ designee shall resign from the Board of Directors. In addition, until the termination date of the Stockholders Agreement, the Stockholders will vote (a) in favor of director nominees recommended by the Board of Directors, (b) in accordance with the recommendation of the Board of Directors on certain stockholder proposals and (c) in their discretion with respect to all other proposals.

 

The Stockholders Agreement also provides that until the termination date, the Stockholders will not, among other things, (a) solicit proxies or submit any proposal for consideration at any meeting of the stockholders of the Company, (b) engage in, or form or participate in a group which proposed to take, any of the activities prohibited by paragraphs (a) through (j) of Item 4 of Schedule 13D promulgated by the Securities and Exchange Commission, provided that the Stockholders shall not be restricted from buying or selling the Company’s voting securities as long as the aggregate beneficial ownership of the Stockholders (1) does not exceed 20% of the total outstanding voting securities of the Company and (2) is not less than 5% of the total outstanding voting securities of the Company (a “Schedule 13D Transaction”).

 

The Stockholders Agreement will terminate upon the earliest to occur of one of the following: (a) the date of the annual stockholder meeting of the Company to be held during 2009; (b) if there is no longer a

Chapman Designee on the Board of Directors; (c) the first date on which (i) a Stockholder engages in any of the activities prohibited by the Stockholders Agreement (following a three business day cure period), (ii) a Stockholder engages in a Schedule 13D Transaction, or (iii) the filing of certain amendments to the Schedule 13D previously filed by certain of the Stockholders; (d) if the Stockholders own less than 5% of the total outstanding voting securities of the Company or own more than 20% of the total outstanding voting securities of the Company; or (e) the first date on which (i) the Company is no longer required to file periodic reports with the Securities and Exchange Commission or (ii) any person or group of related persons (within the meaning of Section 13(d) of the Exchange Act) shall become the beneficial owner of shares representing more than 50% of the aggregate ordinary voting power represented by the Company’s issued and outstanding voting stock; provided that in the case of the termination events described in clauses (c), (d) and (e) above, termination shall occur only after an affirmative determination by the Board of Directors.

 

The Board of Directors met 10 times during 2007. The Board of Directors operates under the terms of a charter, a copy of which is available on the Company’s website at www.edcllc.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: Donald S. Bates, Cliff O. Bickell, Peter W. Gilson, Robert L. Chapman, Jr., Horace H. Sibley and Howard W. Speaks, Jr. The independent directors met in executive session 6 times during 2007.

 

The Board of Directors has standing Audit, Governance and Nominating, and Compensation and Plan Administration Committees. Each of these committees operates under the terms of a charter, a copy of which is available on the Company’s website at www.edcllc.com under the headings “Investor Center” and “Corporate Governance.” The Board of Directors also appointed a Special Litigation Committee during 2007, which was an ad hoc committee formed to address issues related to previously announced stock option litigation. The functions and membership of the Audit, Governance and Nominating and Compensation and Plan Administration Committees are set forth below.

 

Each member of the Board of Directors attended 90% or more of the aggregate number of meetings of the Board of Directors and the meetings of all committees of the Board of Directors on which he served during 2007.

 

Audit Committee

 

Cliff O. Bickell, Donald S. Bates, and Horace H. Sibley currently serve on the Audit Committee. The Audit Committee met 13 times during 2007. 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.

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. The Audit Committee’s role includes a particular focus on the qualitative aspects of financial reporting to stockholders and on the Company’s processes and procedures for the management of business and financial risks. The function of the Audit Committee is to provide assistance to the Board of Directors in fulfilling its responsibility to stockholders, potential stockholders and the investment community in monitoring:

 

 

A full description of the Audit Committee’s primary responsibilities, operating principles, and relationship with the internal auditor and the independent registered public accounting firm is contained in the Audit Committee Charter, a copy of which is available on the Company’s website at www.edcllc.com under the headings “Investor Center” and “Corporate Governance.”

 

Governance and Nominating Committee

 

Horace H. Sibley, Cliff O. Bickell, and Peter W. Gilson currently serve on the Governance and Nominating Committee. All of the members of the Governance and Nominating Committee are independent directors within the meaning of applicable NASDAQ listing standards. The Governance and Nominating Committee met four times during 2007. The Governance and Nominating Committee’s functions include assisting the Board of Directors in ensuring that it is appropriately constituted to meet its fiduciary obligations to the stockholders and the Company by developing and implementing policies and processes regarding corporate governance matters, by assessing Board of Directors membership needs, and by proposing director candidates to the Board of Directors. The Governance and Nominating Committee is also responsible for reviewing and recommending action to the Board of Directors concerning related party transactions or relationships involving a possible conflict of interest between the Company and either a director or a senior executive officer.

 

In identifying potential director candidates, the Governance and Nominating Committee seeks input from other members of the Board of Directors and executive officers and also considers recommendations by employees, community leaders, business contacts, third-party search firms and any other sources deemed appropriate by the Governance and Nominating Committee. The Governance and Nominating Committee will also consider director candidates recommended by stockholders to stand for election at the Annual Meeting of Stockholders, so long as such recommendations are submitted in accordance with the procedures described below.

 

The Governance and Nominating Committee has not set specific, minimum qualifications that must be met by a director candidate. Rather, in evaluating candidates for recommendation to the Board of Directors, the Governance and Nominating Committee considers the following factors, in addition to any other factors that it deems appropriate:

 

 

 

Qualified candidates are selected for recommendation to the Board of Directors by majority vote of the Governance and Nominating Committee. The Board of Directors, taking into consideration the recommendations of the Governance and Nominating Committee, is responsible for filling vacancies and selecting nominees for election as directors at the Annual Meeting of Stockholders, with the primary emphasis on the guidelines set forth above.

 

Stockholders who wish to recommend director candidates for consideration by the Governance and Nominating Committee may do so by mailing a written recommendation to Chairman, Governance and Nominating Committee, c/o Secretary, Entertainment Distribution Company, Inc., 825 8th Avenue, 23rd floor, New York, New York 10019. Such recommendation must include the following information:

 

 

Recommendations by stockholders for director candidates to be considered by the Governance and Nominating Committee must be submitted not later than the 120th calendar day before the date the Company’s proxy statement was released to stockholders in connection with the previous year’s annual meeting. The submission of a recommendation by a stockholder in compliance with these procedures will not guarantee the selection of the stockholder’s candidate or the inclusion of the candidate in the Company’s proxy statement.

 

The by-laws of the Company also provide that nominations of persons for election to the Board of Directors may be made at any Annual Meeting of Stockholders by any stockholder entitled to vote on such election. Such nominations must be submitted to the Secretary of the Company in accordance with the procedures specified in Section IX of Article II of the Company’s by-laws as described under “PROPOSALS OF STOCKHOLDERS” below. The Company’s by-laws require the presiding officer of the Annual Meeting of Stockholders to refuse to acknowledge the nomination of any person that is not submitted in compliance with such procedures.

 

Compensation and Plan Administration Committee

 

Howard W. Speaks, Jr., Donald S. Bates and Peter W. Gilson currently serve on the Compensation and Plan Administration Committee. All of the members of the Compensation and Plan Administration Committee are independent directors within the meaning of applicable NASDAQ listing standards. The Compensation and Plan Administration Committee met 13 times during 2007. The function of the Compensation and Plan Administration Committee is to develop and review all compensation philosophies and practices and to review and approve all bonus and incentive programs, as well as all compensation and benefits for executive officers. The Compensation and Plan Administration Committee is also responsible for reviewing, overseeing and

making recommendations to the Board of Directors on the Company’s incentive stock plans, employee stock purchase plan and 401(k) plan and for reviewing and recommending to the Board of Directors compensation and benefits for the Board of Directors. The charter of the Compensation and Plan Administration Committee does not provide for the delegation by the committee of its duties to any other committee or executive officers of the Company. Regarding most compensation matters, including executive and director compensation, Company management provides recommendations to the Compensation and Plan Administration Committee, which are considered by the committee in the discharge of its duties. The charter of the Compensation and Plan Administration Committee is posted on the Company’s website at www.edcllc.com under the headings “Investor Center” and “Corporate Governance.”

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation and Plan Administration Committee has ever been an officer or employee of the Company. During 2007, no executive officer of the Company served as a director or member of the compensation committee (or other committee performing similar functions) of any other entity of which a member of the Board of Directors of the Company was an executive officer. During 2007, no director or member of the Compensation and Plan Administration Committee served as an executive officer of any other entity of which an executive officer of the Company served as a member the Board of Directors or compensation committee.

 

The following table provides the compensation earned by the Company’s non-employee directors during the year ended December 31, 2007. Clarke H. Bailey, the non-executive Chairman of the Board of the Company, is not included in the Director Compensation table because he is an employee of the Company. He does not receive compensation under the non-employee director compensation plan described below. However, in his position as non-executive Chairman of the Company he received a salary of $320,000 during fiscal year 2007 and received other compensation of $9,000 comprised of matching contributions paid to a defined contribution plan.

 

 

 

 

Compensation Discussion and Analysis

 

Overview

 

The following Compensation Discussion and Analysis reviews the Company’s and Compensation and Plan Administration Committee’s (the “Committee”) executive compensation program, policies and decisions with respect to the Company’s executive officers listed in the Summary Compensation Table below (the “named executive officers”). For fiscal year 2007, the named executive officers consisted of:

 

 

Executive Compensation Philosophy and Objectives

 

Philosophy:  The Compensation philosophy of the Company is to structure the Company’s various compensation programs in a way that assists the Company in attracting and retaining a talented employee group and senior management team as well as a Board of Directors. The Company’s compensation programs must also consider the returns generated to its shareholders. The Company strives for internal compensation equity among employees and differentiates based on factors including seniority, experience, performance, and value to the Company, all within the fabric of the performance of the Company’s Common Stock and operations as a whole.

 

Compensation Objectives:  The Committee bases its executive compensation programs on the same objectives that guide the Company in establishing all of its compensation programs:

 

 

 

Use of Market Data and Compensation Consultant:  In 2006, the Company relied on outside independent consultants to collect, analyze and provide comparable market data. Other than as described below, the Company did not rely on outside independent consultants in 2007.

 

In 2007, the Committee retained Greg Flores, a compensation consultant with experience in the entertainment industry, to assist it in establishing certain retention bonuses for key executive officers. See “Retention Bonuses” and “Employment and Severance Agreements” below for more detail regarding the retention bonuses. Mr. Flores reported directly to the Committee. He has performed no other work for the Company and has no relationship with any of the Company’s officers or directors. In addition, the Committee consulted informally, but without retaining, Pearl Meyer & Partners to provide input on compensation and bonus issues, as well as the technical aspects of executive pay programs. Pearl Meyer & Partners has provided compensation consulting services to the Committee in prior years.

 

The Committee’s Processes

 

The Committee has established a number of processes to assist it in ensuring that the Company’s executive compensation programs are achieving its objectives. Among those are:

 

 

In addition to the processes described above, the compensation of those of the Company’s executive officers who joined the Company in connection with the EDC acquisition was structured as part of the terms of the EDC acquisition through the negotiation of employment agreements and other arrangements relating to ownership of the EDC subsidiary, certain of which were revised in 2007 as further described below. While the Committee’s compensation objectives and processes were taken into account during these negotiations, the overall goals of the acquisition and post-closing integration of the EDC business with the Company’s existing operations were taken into consideration as well.

 

Changes relating to Executive Officers During 2007

 

In November 2007, the Company announced that James Caparro, then President and Chief Executive Officer of the Company, had transitioned from the position of President and Chief Executive Officer to the newly created position of Non-Executive Chairman of EDC. Mr. Caparro continued to serve as Non-Executive Chairman of EDC for the remainder of fiscal 2007 and through March 2008. In connection with this transition, Mr. Caparro and the Company entered into a mutual separation agreement that provided for payment to Mr. Caparro of eight semi-monthly payments of $31,250, a single payment of $62,500 on or before March 15, 2008 and a lump sum payment of $687,500 in January 2008, and payment of certain accrued benefits and continued health care coverage through October 31, 2008.

 

In connection with Mr. Caparro’s transition, Jordan M. Copland was appointed to the position of Interim Chief Executive Officer of the Company and Chief Executive Officer of EDC. Mr. Copland continued in his positions as Chief Financial Officer, Treasurer and Secretary of the Company as well. Thomas Costabile was promoted by the Company to the position of President of EDC, also continuing in his current position as Chief Operating Officer of EDC. Finally, Matthew K. Behrent was promoted to the position of Executive Vice President, Corporate Development. No changes were made to the terms of employment of Messrs. Copland, Costabile and Behrent in November 2007. Following these changes, in December 2007, (1) Mr. Copland’s employment agreement was amended, (2) the Company entered into an employment agreement with Mr. Behrent and (3) the Company and EDC entered into an agreement with Mr. Costabile supplementing his original employment agreement dated May 9, 2005.

 

The Committee approved the employment agreement for Mr. Behrent to confirm certain terms of his continued employment, including his new title and duties, to provide for his relinquishment of any contractual right to receive stock options upon future acquisitions or dispositions, to provide certain severance and change in control protections to him consistent with terms negotiated with other executive officers and to provide for a retention bonus as described below. Taking into account the Company’s review of strategic alternatives for the EDC business in 2007 which could result in a change in control transaction, the Committee believed it appropriate to provide Mr. Behrent with full severance and change in control provisions as well as a retention bonus, to ensure that he remains with the Company through any such strategic transaction. Similarly, Mr. Copland’s agreement was amended to address certain inadvertent errors made in his original agreement in the definitional provisions, and to conform certain provisions, including those regarding termination, severance and a retention bonus, to the provisions included in Mr. Behrent’s employment agreement. Finally, the Company provided Mr. Costabile with a supplement to his original employment agreement to reflect his additional role as President of EDC and to provide him with a retention bonus.

 

Effective December 1, 2007, John V. Madison and EDC entered into a mutual separation agreement which provided that Mr. Madison’s last day of employment as Executive Vice President, Business Development, Sales and Marketing of EDC was January 11, 2008. In addition, the agreement provided for a lump sum payment of $125,000 and continued health care costs through November 1, 2008.

 

See “Employment and Severance Agreements” starting on page 55 for further detail regarding the terms of these agreements and the retention bonuses described below.

Retention Bonuses

 

The employment agreement and amended agreements entered into with Messrs. Behrent and Copland during fiscal 2007 provide for the payment of a retention bonus to each executive if they remain with the Company through September 1, 2008 or, in the case of a change in control occurring prior to September 1, 2008, remain employed by the Company or any successor to the Company for a ninety-day period following such change in control or September 1, 2008, whichever comes first. The amended employment agreement entered into with Mr. Costabile during fiscal 2007 provides for the payment of a retention bonus if Mr. Costabile remains with the Company through November 1, 2008 or, in the case of a change in control occurring prior to November 1, 2008, remains employed by the Company or any successor to the Company for a ninety-day period following such change in control or November 1, 2008, whichever comes first. The Committee, with the assistance of Greg Flores, an outside compensation consultant, structured the retention bonuses to help ensure that these executives, who are critical to the continued operation of the Company, remain employed during the Board’s review of strategic alternatives. In order for any such effort to be successful, existing management must be actively involved in both the continued operation of the business and in the strategic alternative analysis. The retention bonus provides added incentive for these executives to stay actively involved.

 

Components of Executive Compensation for 2007

 

For 2007, the compensation of the named executive officers contained the same primary components as were provided to other levels of management — base salary and cash bonus award potential.

 

The following is a discussion of the Committee’s considerations in establishing each of the compensation components for the named executive officers in 2007.

 

Base Salary

 

Base salary is the guaranteed element of a named executive officers’ annual cash compensation. The value of base salary reflects the named executive officers’ long-term performance, skill set and the market value of that skill set. In reviewing base salaries for 2007, the Committee considered the following factors:

 

 

Cash Incentive Bonuses

 

The Company has historically maintained a cash incentive bonus program tied to Company financial performance in order to better align employees’ performance with the Company’s performance for the current year. Cash incentive bonuses for all management employees worldwide are determined by the Committee in light of such performance. Recognizing that the Company is in a declining and challenging market, it remains management’s responsibility to help establish and meet Company goals approved by the Board. For fiscal 2007, after evaluating the declining market and overall business environment, the Committee elected not to

implement the approved performance-based executive bonus plan for the year, but maintained discretion to pay bonuses for individual performance.

 

At the end of fiscal 2007, the Committee reviewed the overall performance of all named executive officers and elected not to pay any cash incentive bonuses.

 

Equity Incentives — EDC Profits Interests

 

Upon the completion of the 2005 acquisition of the U.S. and central European CD and DVD manufacturing and distribution operations from Universal Music Group, EDC issued profits interests units to certain executives, including Messrs Caparro, Costabile, and Morgan. Half of these units are Tier 1 Profits Interests, one quarter are Tier 2 Profits Interests and one quarter are Tier 3 Profits Interests, and the total amount of all profits interests are similarly allocated among the tiers. Holders of the profits interests as a group are entitled to up to 27.56% of certain distributions made by EDC, which distributions are subject to the Board of Directors’ discretion and other conditions. The profits interests are designed to work like options, and they vest over a two-year period or upon a change in control of EDC. Employment agreements and the profits interests granted to management of EDC were negotiated as part of the negotiation of the acquisition of EDC. The profits interest structure was used instead of stock options because at the time of the acquisition, a limited liability company could not grant options without tax risks. EDC was structured as a limited liability company to maximize the utilization of the Company’s tax loss carryforwards. As such, the profits interest structure was created to incentivise management in lieu of stock options.

 

As a consequence of the profit interest structure, Messrs Caparro, Costabile and Morgan have not been issued any stock options or restricted stock in the Company. See “Outstanding Equity Awards and Fiscal Year End” below for additional information regarding the EDC profits interests and units held by Messrs Caparro, Costabile and Morgan.

 

Equity Incentives — Stock Options

 

Stock options align employee incentives with stockholders because options have value only if the stock price increases over time. The Company’s 10-year options, granted at the market price on the date of grant, help focus employees on long-term growth. In addition, options are intended to help retain key employees because they typically vest over time (usually three years) and, if not exercised, are forfeited if the employee leaves the Company. The three-year vesting also helps keep employees focused on long-term performance. The Company does not reprice options; likewise, if the stock price declines after the grant date, the Company does not replace options.

 

Each year, the Committee reviews key employees’ overall compensation, including the grant of stock options. Due to the Company’s decision to explore strategic alternatives, the steep decline in the price of the Company’s Common Stock and taking into account the other retention mechanisms in place, no option grants were made to any employees, including the named executive officers, during 2007.

 

Mr. Behrent was contractually entitled to grants of stock options upon certain acquisition or divestiture transactions pursuant to an agreement entered into in 2005. Mr. Bailey, the non-executive Chairman of the Board of the Company has a similar agreement in place as Mr. Behrent. Specifically, Mr. Behrent was entitled to receive options to purchase one share per $333.33 in transaction value (or the equivalent of 30,000 stock options for every $10 million of transaction value) subject to an aggregate cap of 150,000 options. Such options were granted upon disclosure of either the signing or closing of the transaction, whichever occurred first, and were priced based on the closing stock price on the trading day immediately preceding the date of such announcement, i.e., the pre-announcement price. In 2006, Mr. Behrent received options pursuant to these agreements. In 2007, in connection with the negotiation of his employment agreement, Mr. Behrent agreed to the relinquishment of the existing right to receive options upon future acquisitions or dispositions. Further, Mr. Behrent subsequently agreed to the cancellation of all outstanding stock options held by him. Mr. Copland also agreed to the cancellation of all stock options held by him in connection with the amendment of his employment agreement during 2007. The stock options cancelled had exercise prices that were significantly above the market price of the Common Stock at the time of cancellation. No separate consideration was paid

for their cancellation. Cancellation allowed the Company to eliminate the compensation expense related to these options.

 

Employee and Post-Employment Benefits

 

The Company offers core employee benefits coverage in order to:

 

 

The benefits available are the same for all U.S. employees and executive officers and include medical and dental coverage, short-term and long-term disability coverage (provided that certain long-term disability benefits are provided only to executive officers at the Company’s expense), and life insurance. In addition, the Company’s 401(k) Plan provides a reasonable level of retirement income reflecting employees’ careers with the Company. All U.S. employees, including executive officers, are eligible to participate in these plans. The cost of both employee and post-employment benefits is partially borne by the employee, including each executive officer.

 

Deferred Compensation Program

 

The Company maintains a deferred compensation plan pursuant to which certain employees may defer receipt of part or all of their cash compensation. The program allows eligible employees to save for retirement in a tax-effective way at minimal cost to the Company. None of the named executive officers deferred any portion of their salary under the deferred compensation plan in 2007.

 

Severance Benefits

 

Severance benefits are provided from time to time to executive officers as a result of negotiations of their employment agreements. The Committee does not have a standard program applicable to all executives, but has negotiated severance or other enhanced benefits for named executive officers upon termination of their employment without cause, for good reason, or due to termination for a period of time subsequent to a change in control. Such arrangements are negotiated from time to time in an effort to provide appropriate incentives to executives joining the Company and are negotiated based on the Committee’s understanding of standard market practice in the entertainment or distribution industry, or, for prior arrangements, other relevant industries and terms available to other executives of the Company. Further, with respect to payments due to termination subsequent to a change in control, the Committee believes such arrangements are appropriate in that they protect income for executives who would likely be involved in due diligence decisions regarding and/or successful implementation of merger and acquisition activity and who are at risk for job loss if a takeover occurs. The Board of Directors believes that it is in the best interest of the Company and its stockholders to maintain such agreements in order for the Board to be able to receive and rely upon the executive’s advice and counsel as to the best interests of the Company and its stockholders without concern that the executive might be distracted or influenced by the personal uncertainties and risks created by merger and/or acquisition proposals or threats. The terms of these arrangements were approved by the Board of Directors as reasonable termination compensation for the named executive officers in order to encourage management to remain with the Company and to continue to devote full attention to the Company’s business during any potential change in control activity. In addition, severance agreements for Mr. Caparro and Mr. Costabile were negotiated as part of the negotiation of the acquisition of EDC.

 

Upon Mr. Caparro’s transition from his positions of Chief Executive Officer and President of the Company, the Company entered into a mutual separation agreement with him providing for the payment to Mr. Caparro of eight semi-monthly payments of $31,250, a single payment of $62,500 on or before March 15, 2008 and a lump sum payment of $687,500 in January 2008, and payment of certain accrued benefits and continued health care coverage. The mutual separation agreement with respect to Mr. Madison’s termination of employment provided for a lump sum payment of $125,000 and continued health care coverage. These mutual

separation agreements replaced the provisions of these named executive officers’ original employment agreements that provided for payments upon termination.

 

See “Employment and Severance Agreements” below for a detailed description of these negotiated severance benefits and separation payments.

 

Accounting and Tax Considerations

 

In connection with the negotiation of compensation arrangements and the structuring of the Company’s compensation packages, the Committee takes into account the accounting and tax impact to the Company of the various structures under consideration. The Committee also considers the application of the Internal Revenue Code’s disallowance of corporate deductions for annual compensation in excess of $1 million paid to certain executive officers of publicly held corporations, i.e. Section 162(m), when structuring compensation levels and forms of compensation. While this cap would be applicable to the Company’s named executive officers, their nonexempt compensation levels for 2007 were below this cap. When appropriate, the Committee intends to use performance based compensation within the meaning of 162(m) to avoid any limit on deductibility.

 

Section 409A of the Internal Revenue Code is a relatively new federal tax provision. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, the executive would be subject to adverse tax treatment, including accelerated income recognition (in the first year that benefits are no longer subject to a substantial risk of forfeiture) and a 20% penalty tax pursuant to Section 409A. The Internal Revenue Service has extended the transition relief period for amending plans to comply with Section 409A through December 31, 2008. The Company is continuing to evaluate the impact of Section 409A on its various compensation and benefits plans, programs and arrangements. It will modify them as a result of that evaluation to the extent necessary to comply with Section 409A. All compensation agreements entered into or modified during 2007 were structured to comply with Section 409A.

 

Compensation Committee Report

 

The Compensation and Plan Administration Committee (“we” or “the committee”) evaluates and establishes compensation for executive officers and oversees the deferred compensation plan, the Company’s stock plans, and other management incentive, benefit and perquisite programs. Management has the primary responsibility for the Company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the Compensation Discussion and Analysis found on pages 45-51 of this proxy statement/prospectus and are satisfied that it fairly and completely represents the philosophy, intent, and actions of the committee with regard to the named executive officers. We recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement/prospectus for filing with the Securities and Exchange Commission.

 

Compensation and Plan Administration Committee
Howard W. Speaks, Jr. (Chairman)
Donald S. Bates
Peter W. Gilson

Summary Compensation Table

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

None of the named executive officers held any outstanding equity awards relating to the securities of the Company at the end of fiscal 2007. In 2007, Mr. Copland and Mr. Behrent agreed to the cancellation of all outstanding stock options held by each of them. The stock options cancelled had exercise prices that were significantly above the market price of the Common Stock at the time of cancellation. No separate consideration was paid for their cancellation. Cancellation allowed the Company to eliminate the compensation expense related to these options.

 

Mr. Caparro holds 5,971 units of profits interests, all of which are fully vested, in the Company’s subsidiary EDC, which represent 36.28% of the total profits interests in EDC. These profits interests were awarded to him as compensation in a prior fiscal year. Mr. Caparro also owns 521 Class B Units of EDC, which were purchased by Mr. Caparro in connection with the EDC acquisition in May 2005 and EDC’s acquisition of Deluxe Global Media Services Blackburn Limited in July 2006. Mr. Costabile holds 2,985 units of profits interests, all of which are fully vested, in the Company’s subsidiary EDC, which represent 18.14% of the total profits interests in EDC. These profits interests were awarded to him as compensation in a prior fiscal year. Mr. Costabile also owns 350 Class B Units of EDC, which were purchased by Mr. Costabile in connection with the EDC acquisition in May 2005. Mr. Morgan holds 375 units of profits interests, all of which are fully vested, in the Company’s subsidiary EDC, which represent 2.28% of the total profits interests in EDC. These profits interests were awarded to him as compensation in a prior fiscal year. Refer to “Equity Incentives — EDC Profits Interests” in the Compensation Discussion and Analysis for additional information about the profits interests and Class B Units.

 

Option Exercises and Stock Vested

 

No stock options were exercised by the named executive officers during fiscal 2007 and no shares of restricted stock vested with respect to any named executive officers during fiscal 2007.

 

Non-Qualified Deferred Compensation

 

None of the named executive officers deferred any portion of their salary under the Non-Qualified Deferred Compensation Plan in 2007.

Employment and Severance Agreements

 

Caparro Separation Agreement.  On November 5, 2007, the Company and Mr. Caparro entered into a mutual separation agreement (the “Separation Agreement”). The Separation Agreement provided for Mr. Caparro’s transition from the position of Chief Executive Officer of the Company to a newly created position of Non-Executive Chairman of EDC, to serve in such position through March 2008. Mr. Caparro’s last day of employment as President and Chief Executive Officer of the Company and EDC was November 5, 2007. In his role as Non-Executive Chairman of EDC, Mr. Caparro helped manage the transition process, played an active advisory role in the management of customer relationships and assisted in the evaluation of strategic alternatives for EDC.

 

Under the Separation Agreement, Mr. Caparro received (a) eight semi-monthly payments of salary of $31,250 commencing in November 2007, (b) a single payment of $62,500 on or before March 15, 2008 and (c) a lump sum payment of $687,500 in January 2008 (collectively, the “Installment Payments”). Mr. Caparro is entitled to receive all accrued and vested benefits owed to him under the Company’s 401(k) and deferred compensation plans in accordance with such plans. Mr. Caparro and any of his dependent family members currently participating in the Company’s health and welfare plan or other health insurance program (the “Health Insurance Program”) are entitled to continue to participate in the Health Insurance Program at the Company’s expense until October 31, 2008, or in the alternative, the Company will pay the cost of continued participation pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 through such date.

 

The Separation Agreement superseded the terms of Mr. Caparro’s Employment Agreement, entered into on May 9, 2005, other than provisions relating to confidential information, non-competition and non-solicitation and ownership of intellectual property. Under Mr. Caparro’s employment agreement, which was in effect during much of fiscal 2007, Mr. Caparro received an annual base salary of $750,000 and up to $20,000 per year for social club fees. The Separation Agreement did not modify or alter any agreements relating to Mr. Caparro’s ownership of profits interest or units of EDC.

 

Copland Employment Agreement.  The Company is party to an employment agreement with Mr. Copland, dated December 18, 2006 and amended on December 27, 2007 (as amended, the “Copland Agreement”), which specifies the terms under which Mr. Copland serves as Executive Vice President and Chief Financial Officer of the Company. Mr. Copland also currently serves as Interim Chief Executive Officer, Treasurer and Secretary of the Company. Under the Copland Agreement, Mr. Copland’s annual base salary is $325,000, which is subject to annual review. The Copland Agreement provides for a monthly car allowance of $700. In addition, the Copland Agreement provides for a “retention bonus” in an amount equal to Mr. Copland’s base salary, payable in a lump sum, if he remains employed by the Company through September 1, 2008 or, if a change in control occurs prior to September 1, 2008, and he remains employed by the Company or any successor to the Company following the change in control through the 90-day anniversary of such change in control.

 

In the event that Mr. Copland’s employment is terminated by the Company without cause or by Mr. Copland with good reason, Mr. Copland is entitled to receive: (i) a lump sum severance payment equal to his then current base salary, unless termination has occurred for good reason as a result of the sale of the assets or equity of EDC and he has received a “retention bonus”, (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year and then participating in the annual bonus plan, a pro-rated annual bonus, payable in accordance with the Company’s normal practices at the end of such bonus year, (v) any other compensation payments or benefits which have accrued and are payable, and (vi) medical and dental coverage for Mr. Copland and his dependents for 12 months.

 

If Mr. Copland’s employment is terminated within three years after a change in control of the Company (see below for definition of change in control), for any reason other than for cause, Mr. Copland is entitled to receive: (i) a lump sum severance payment equal to 250% of his base salary at the time of termination (or if greater, his base salary prior to the change in control), provided that, if Mr. Copland has received a “retention bonus” payment in the calendar year in which such severance benefit becomes payable, the amount of the severance benefit will be reduced by the amount of such “retention bonus” and if the termination constitutes

resignation for good reason as a result of the sale of the assets or equity of EDC, the severance payment will be equal to 100% of Mr. Copland’s base salary, (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year and he is then participating in the Company’s annual bonus plan, a pro-rated annual bonus, payable in accordance with the Company’s normal practices at the end of such bonus year, (v) any other compensation payments or benefits which have accrued and are payable and (vi) medical and dental coverage for Mr. Copland and his dependents for 12 months.

 

The following table provides the estimated value of the benefits that Mr. Copland would have received had his employment been terminated on the last business day of 2007 under the scenarios described below or had a change in control of either the Company or EDC occurred on the last business day of 2007. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Costabile Employment Agreement.  On May 9, 2005, the Company and Mr. Costabile entered into an employment agreement, which was supplemented by a letter agreement dated December 27, 2007 (as supplemented, the “Costabile Agreement”). The Costabile Agreement specifies the terms under which Mr. Costabile serves as President and Chief Operating Officer of EDC. The Costabile Agreement sets Mr. Costabile’s annual base salary as $450,000, subject to annual review, and provides that he is entitled to receive up to $10,000 per year for social club fees. He is also eligible to participate in the Executive Bonus Plan for EDC pursuant to which Mr. Costabile may earn a bonus of up to 100% of his base salary if EDC performs at 100% of the target established by EDC’s Board. Pursuant to the Costabile Employment Agreement, Mr. Costabile was paid a $200,000 signing bonus, the after-tax proceeds of which he used to purchase Class B Units of EDC during 2005. In addition, under the Costabile Agreement Mr. Costabile was required to invest an additional $200,000 to purchase Class B Units of EDC, which he purchased during 2005. The Costabile Agreement also provides for the payment to Mr. Costabile of a “retention bonus” of $100,000, payable in a lump sum if he remains employed by EDC through November 1, 2008, or, if a change in control as defined in the Costabile Supplement occurs prior to November 1, 2008 (see below for definition of change in control), he remains employed by EDC or any successor to EDC following such change in control through the 90-day anniversary of such change in control.

 

Under the Costabile Agreement, Mr. Costabile received profits interests in EDC, which represent the right to receive EDC’s distributed profits after the Company has received a return of its equity capital contribution and certain internal rate of return hurdles and other profitability conditions have been met. One-third of the profits interests vested during each of 2005, 2006 and 2007.

 

If Mr. Costabile’s employment is terminated by the Company without cause or by Mr. Costabile for good reason, Mr. Costabile is entitled to receive (i) an amount equal to twice his base salary at the time of termination plus the amount of his bonus under the Executive Bonus Plan for the prior fiscal year, payable in

24 equal monthly installments, and (ii) continued medical benefits for Mr. Costabile and his dependents for a period of 12 months following termination.

 

The following table provides the estimated value of the benefits that Mr. Costabile would have received had his employment been terminated on the last business day of 2007 under the scenarios described below or had a change in control of either the Company or EDC occurred on the last business day of 2007. The table does not include benefits that are generally available to all salaried employees.

 

 

 

 

Behrent Employment Agreement.  On December 27, 2007, the Company and Mr. Behrent entered into a letter agreement (the “Behrent Agreement”) providing the terms and conditions of his continued employment as Executive Vice President, Corporate Development of the Company. The Behrent Agreement replaced the Severance Agreement entered into between Mr. Behrent and the Company on August 26, 2005. Under the Behrent Agreement, Mr. Behrent’s annual base salary is $260,000, which is subject to annual review. The Behrent Agreement provides for a monthly car allowance of $700. In addition, the Behrent Agreement provides for a “retention bonus” in amount equal to his base salary payable in a lump sum if he remains employed by the Company through September 1, 2008 or, in the event a change in control occurs prior to September 1, 2008, he remains employed by the Company or any successor to the Company following the change in control, through the ninety day anniversary of the change in control.

 

In the event that Mr. Behrent’s employment is terminated by the Company without cause or by Mr. Behrent with good reason, Mr. Behrent is entitled to receive: (i) a lump sum severance payment equal to his then current base salary, (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year and then participating in the annual bonus plan, a pro-rated annual bonus, payable in accordance with the Company’s normal practices at the end of such bonus year, (v) any other compensation payments or benefits which have accrued and are payable, and (vi) medical and dental coverage for Mr. Behrent and his dependents for 12 months.

 

If Mr. Behrent’s employment is terminated within three years after a change in control of the Company (see below for definition of change in control), for any reason other than for cause, Mr. Behrent is entitled to receive: (i) a lump sum severance payment equal to 250% of his base salary at the time of termination (or if greater, his base salary prior to the change in control), provided that, if Mr. Behrent has received a “retention bonus” payment in the calendar year in which such severance benefit becomes payable, the amount of the severance benefit will be reduced by the amount of such “retention bonus”, (ii) his accrued but unpaid base salary, (iii) his accrued but unpaid vacation pay, (iv) if he was employed with the Company for at least six months of the bonus year and he is then participating in the Company’s annual bonus plan, a pro-rated annual

bonus, payable in accordance with the Company’s normal practices at the end of such bonus year, (v) any other compensation payments or benefits which have accrued and are payable and (vi) medical and dental coverage for Mr. Behrent and his dependents for 12 months.

 

The following table provides the estimated value of the benefits that Mr. Behrent would have received had his employment been terminated on the last business day of 2007 under the scenarios described below or had a change in control of either the Company or EDC occurred on the last business day of 2007. The table does not include benefits that are generally available to all salaried employees.