Entertainment Distribution Company

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Entertainment Distribution Company

825 Eighth Avenue
New York, New York 10019
U.S.A.
Telephone: (212) 333-8400
Web site: http://www.edcllc.com

Public Company
Incorporated: 1987 as N-W Group Inc.
Employees: 2,200
Sales: $348.53 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: EDCI
NAIC: 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Manufacturing; 334613 Magnetic and Optical Recording Media Manufacturing; 561910 Packaging and Labeling Services

20 YEARS OF MAKING PAGING AND MESSAGING DEVICES

MANUFACTURING AND DISTRIBUTING CDS AND DVDS: 2005-06

EDC IN 2007

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

20 YEARS OF MAKING PAGING AND MESSAGING DEVICES

The origins of EDC are diverse and rather obscure. During the late 1970s Nu-West Group Ltd. was Canada’s largest home builder, but this Calgary-based company was badly mauled by the 1981–82 recession. In 1987, with headquarters in New York City, it became Nu-West Group Inc. Four years later, controlled by an investment group called Cramer Rosenthal McGlynn, it was renamed N-W Group Inc. Little remained of its real estate holdings. It was majority owner of Houston-based Associated Pipeline Construction Co., and, with about $50 million in cash and large tax loss carry forwards in the United States (which reached $116 million in 1995), was shopping for a company in a different line of business. The acquisition it seized was the electronics manufacturing division of Glenayre Electronics Ltd. of Vancouver, which it purchased for about $112 million in cash and N-W stock. This division was described by a financial analyst as the crown jewel of Glenayre Electronics.

Glenayre, a subsidiary of TCG International, began its existence in 1945 as a manufacturer of power supplies for high school science supplies. Later it began making mobile telephones, pioneering in so-called rail-car radio: a Glenayre transmitter in the last railcar allowed the engineer to monitor brake pressure and other necessary data, thereby allowing railroad companies to do without a caboose. With the spread of cellular telephones in the early 1980s, Glenayre raised CAD 67 million and used the money to acquire the infrastructure needed for paging: base stations for transmitters sending out radio waves; switches, to route incoming calls to the transmitters, and communication links connecting base stations and switches. By the time N-W Group acquired this division, it was designing, manufacturing, and selling advanced wireless communications products and systems for radio paging, voice processing, computer assisted telephone messaging management, and radio telephone, mobile data, and transport communications. N-W Group subsequently changed its name to Glenayre Technologies Inc., which moved its headquarters from Canada to Charlotte, North Carolina, in 1989. The N-W-owned pipeline was sold in 1993.

By late 1996 Glenayre Technologies held a 55 percent share of the U.S. market for back office equipment used by paging companies, a market estimated at $600 million a year in the United States. It held an 80 percent share of paging switches and a 60 percent share of paging transmitters in the United States and 60 and 40 percent, respectively, worldwide. In reaching these figures, the company had out-hustled giant Motorola, Inc., even though Motorola had sold about 100 million pagers in use. Glenayre’s annual sales rose as high as $451.7 million.

Although there were more than 35 million paging subscribers in the United States, this messaging system was destined to be made obsolete by more advanced equipment such as cellular telephones and wireless e-mail. Glenayre lost money in 1998. It was still hanging on in 1999, when it unveiled a miniature two-way communications system that offered both paging and e-mail in a four ounce unit no bigger than a business card and only one inch thick. Besides sending and receiving messages to a pager or e-mail account, it also received voicemail and alerted the pager to the waiting message. Yet the company lost $128.5 million on revenue of $238.1 million in 1999.

More people in the United States were using cellphones than pagers by 1999, forcing paging companies to cut their prices. So hostile was the environment for paging companies that nine of the ten major paging carriers formed an alliance to promulgate cheap handheld computers using a new two-way wireless technology developed by Motorola. These units would be separate from a cellphone but could include e-mail, a small keyboard, a date book, and an address book, complete with a longer-life battery. By contrast, cellphones that included web services were a single unit but generally did not allow talking and web browsing at the same time, because the screen was usually pressed against the user’s cheek. Skytel Communications Inc., one of the paging carriers in the alliance, was offering such twoway service via units from both Motorola and Glenayre, and Glenayre was also developing chips for this technology under license from Motorola.

One weakness of two-way pagers was that most were only functional in major cities. Another was that they did not use popular operating systems. Glenayre made a modest profit in 2000 but lost even more money in 2001 than in 1999. It abandoned its paging and two-way messaging business that year and cut its workforce by 55 percent, or about 700 jobs. Corporate headquarters moved from Charlotte to Duluth, Georgia, north of Atlanta, where Glenayre had a voicemail division. Its focus was on making software and hardware for unified messaging systems by converting voicemail technology into systems that would bundle voicemail, e-mail, faxes, and other message media in a single device. Improved voice activation technology would allow speaker commands and speech recognition. The technology would be sold to telephone companies, which would then sell unified messaging systems to businesses. Wireless operators such as Leap Wireless International Inc., MetroPCS Inc., and Edge Wireless LLC, accounted for about 85 percent of Glenayre’s revenues.

COMPANY PERSPECTIVES

Entertainment Distribution Company provides supply chain services to the world’s best-known music, movies and gaming companies.

Working as a trusted partner to the entertainment industry, EDC’s vision is to remain at the forefront of next generation supply chain solutions, providing innovation and value to our customers.

MANUFACTURING AND DISTRIBUTING CDS AND DVDS: 2005-06

As late as 2005, Glenayre was still in the business of network based messaging and communication systems and software for applications including voice messaging, multimedia messaging, and other enhanced telephony services. Its customers were communications service providers worldwide, including wireless and fixed network carriers and broadband and cable service providers to individual subscribers. Glenayre’s products and applications were being packaged and delivered under the Versera brand name. The company had regional offices for marketing in Brazil, England, Hong Kong, the Netherlands, South Africa, and the United Arab Emirates.

In that year, though, Glenayre set out to become a very different company, when it acquired the CD and DVD manufacturing and distribution operations in the United States and Germany of Universal Music Group. Glenayre paid about $122 million for these assets, which had accounted for estimated annual revenue of $290 million. The properties consisted, in the United States, of manufacturing operations in Grover, North Carolina, a main distribution facility in Fishers, Indiana, and satellite warehouses in Reno, Nevada, and Wilkes-Barre, Pennsylvania, plus manufacturing and distribution facilities in Hanover, Germany, which were serving most of central Europe. The new business line was providing Universal Music Group with about 80 percent of its CD and DVD requirements and also carried ten-year contracts with Universal. This acquisition became a division of Glenayre named Entertainment Distribution Company, LLC. Glenayre, in 2006, acquired Deluxe Global Media Services Blackburn Limited, a subsidiary of The Rank Group PLC. This purchase gave EDC a British CD manufacturing facility in Blackburn, England. EDC became the remaining segment of Glenayre on the last day of 2006, when the company sold substantially all of the assets comprising the messaging business for $25 million. It changed its name to Entertainment Distribution Company in 2007.

EDC IN 2007

With the elimination of wireless communications, EDC was a one segment business heavily dependent on Universal Music Group, which accounted for about 87 percent of its 2006 revenues. Under ten-year supply agreements with Universal, EDC became the exclusive manufacturer and distributor for Universal’s CD and DVD manufacturing and distribution requirements for the United States and central Europe. It was leasing the Hanover manufacturing and distribution facility from Universal, with an option to buy it. The acquisition of Deluxe Global Media Services and its Blackburn manufacturing facility, also leased, made it the largest CD replicator in Great Britain. Universal Music Group was its largest customer there, too. The acquisition also allowed EDC to secure all of Universal’s British CD manufacturing business, a portion of which was scheduled to revert to EDC in 2007 as part of an international supply agreement between EDC and Universal.

Some 60 percent of EDC’s revenues of $348.53 million in 2006 came from outside the United States. Products accounted for 77 percent of sales and services for 23 percent. The company’s four distribution centers made it well positioned to deliver prerecorded products throughout North America, Europe, and the rest of the world to mass merchants and wholesalers. Value-added services consisted of custodial responsibilities for inventory storage and control, returns processing, fulfillment of promotional products, retail price stickering, product quality evaluations, logistics advice, claims administration, and data interfaces.

EDC was seeking to make manufacturing and/or distribution services agreements with existing or new customers and the acquisition of physical assets from competitors. It expected the CD to remain, in the foreseeable future, the standard format for the recorded music industry, although piracy and illegal downloading of such music through web sites had caused CD volumes to decline in prior years. With regard to digital video, the company recognized that the digital transfer and downloading of video files would likely become more widespread as technologies and delivery systems improved. Nevertheless, it believed that the DVD format would continue to be a growth product and was evaluating a number of initiatives to enter the DVD distribution supply chain.

KEY DATES

1992:: N-W Group Inc. acquires a division of Glenayre Electronics Ltd.
1996:: Now Glenayre Technologies, it is a leader in devices for paging companies.
2001:: The company abandons the paging and two-way messaging businesses.
2005:: Glenayre enters the business of manufacturing and distributing CDs and DVDs.
2006:: This is the last year for Glenayre’s wireless communications systems and software.

EDC believed that there was a role for the company in the emerging market of digital back office services, similar to many of the existing services it was providing on the physical side to connect content owners and consumers. These services would involve the preparation, management, and distribution of digital assets. The company had identified several possible core back office digital music service partnerships, or, at the right price, acquisition opportunities. A Morgan Joseph & Co. Inc. brokerage report in 2007 noted that EDC’s business in the United States continued to decline because of a drop in physical music sales throughout the industry, but that the firm’s business abroad was strong. It added 32 new customers in the first quarter of 2007, including a significant DVD customer based in the United States.

With the disposal of Glenayre’s wireless communications business, James Caparro, head of the EDC division and a veteran music industry executive, became president and chief executive officer of what was renamed Entertainment Distribution Company. Caparro had previously tried to buy Warner Music Group’s manufacturing, distribution, and packaging companies. Headquarters were in New York City. The company’s long-term debt was $67.78 million at the end of 2006. State of Wisconsin Investment Board was the largest shareholder in early 2007, with 9.66 percent of the common stock. Robert L. Chapman and his Chapman Capital L.L.C. held an almost equal number of shares.

Robert Halasz

PRINCIPAL SUBSIDIARIES

Entertainment Distribution Company, LLC; Entertainment Distribution Company (USA), LLC; Entertainment Distribution Company GMBH (Germany); Entertainment Distribution Company Netherlands Holdings Company B.V.; Entertainment Distribution Holding GMBH (Germany).