Toolex International N.V.

Derun 4315
5500 AD Veldhoven
The Netherlands
(31) 40 2581581
Fax:(31) 40 2541985
Web site: http://www.toolex.com

Public Company
Incorporated: 1997
Employees: 453
Sales: NLG 400.9 million (US$200 million) (1997)
Stock Exchanges: Amsterdam NASDAQ
Ticker Symbol: TLXAF
SICs: 3559 Special Industry Machinery, Not Elsewhere Classified; 6719 Holding Companies, Not Elsewhere Classified

The merger/takeover of The Netherlands’ ODME by Sweden’s Toolex Alpha in October 1997 created Toolex International N.V., the premier manufacturer and distributor of optical disc production systems in the world. The optical disc market includes compact discs, CD-ROMs, CD-Rs (recordables) and CD-RWs (rewritables); in the late 1990s the optical disc market expanded to include the new digital versatile disc (DVD) format and its recordable and rewritable forms (DVD-R, DVD-RAM). Both ODME and Toolex Alpha had been leaders in complementary optical disc segments; their merger into Toolex International forms an industry leader offering a full range of optical disc manufacturing and peripheral equipment, including its own full-scale, turnkey disc processing machinery and component process equipment for integration into third-party production systems.

Prior to the takeover of privately held ODME, the smaller Sweden-based Toolex Alpha had been listed publicly on the Amsterdam and NASDAQ stock exchanges. Toolex International retains these public listings, but has as its headquarters the former ODME site in Veldhoven, The Netherlands. Former ODME chief Lambert Dielesen is Toolex International’s president and CEO. In 1997 Toolex International posted pro-forma revenues of NLG 400.9 million and net profits of NLG 40.3 million.

Recording Revolutions in the 1980s

For lovers of vinyl records, 1984 was a bad year. It was that year that a new recording format was introduced—the optical disc, most popularly known for the compact disc recording format. More than a new recording material, the compact disc presented the first digital recording medium for the consumer market. The compact disc technology involved converting analog sound to digital information—Is and Os—which could then be stored on the disc using specially formulated dyes and other coating materials. A laser was then used to read this information, feeding it to a compact disc player’s DAC (digital-to-analog converter) to produce sound waves.

The digital medium added a number of advantages, not least of which was the possibility to reproduce an infinite number of copies of a recording with no loss to the quality of the recording. With analog technology, a copy remained inferior to the original “master” recording, while the copying process also was likely to introduce additional noise and potential distortion to the sound quality. Although many audio purists would complain about a resulting lack of warmth offered by compact disc recording, the new digital recording technology represented a breakthrough in many areas and would ultimately lead the way to transforming music itself.

Developed primarily by Philips and Sony, compact disc technology was slow to be embraced by a consumer public that proved reluctant to convert their existing home stereo systems—and their library of recordings—to the new and more expensive compact disc. The success of the compact disc also depended on the willingness of other members of the recording industry to support the format. An early adopter of the technology was Toolex Alpha, based in Sweden.

Toolex Alpha already had accumulated more than 20 years of experience providing equipment for the recording industry. The company’s specialty was the machines needed to produce the final recorded product. Under director of research and development, Curt Lindell, Toolex Alpha made an early mark on the recording industry when it developed an automatic press for manufacturing LPs (long-playing records) in the 1970s. In the early 1980s Lindell was instrumental in leading Toolex Alpha into the digital era. Among the first to adopt the optical disc format and to begin producing support equipment for the new technology, Toolex Alpha would provide an important industry breakthrough with the introduction of the first injection-molding machine adapted to the production of compact discs and later optical disc formats. Lindell and Toolex Alpha also were responsible for shifting the industry from primarily separate production systems to the smaller, inline production systems that would become an industry standard in the 1990s.

The rise of the compact disc recording format began in earnest in the late 1980s, spurred in part by the steady decreases in the prices of consumer CD players. Many new companies appeared during the 1980s to join the optical disc manufacturing industry. Among them was The Netherlands’ OD&ME (for Optical Disc and Manufacturing Equipment; later ODME), established in Veldhoven in 1987. ODME started out as a single product company, manufacturing the monoliner, an integrated compact disc production system. The small private company would grow substantially in 1991, however, when ODME bought up ODM, the optical disc mastering equipment manufacturing subsidiary held by Philips and Du Pont. ODM’s specialty had been in mastering, that is, in the preparing of the master recording—typically called a glass master—from which copies are produced. ODM added its master production equipment to ODME’s product range. The addition also added more than twice the number of employees to ODME’s payroll, a process that proved less than smooth, as the merging firms realized a clash of cultures.

Gaining the Lead in the 1990s

Nevertheless, the merger enabled ODME to continue to expand its range of products. In 1992 it introduced a new production system, the miniliner, that offered small capacity production runs, not only to smaller producers, but also to major manufacturers seeking to supplement production capacity during seasonal and other demand peaks. The addition of ODM was instrumental in ODME’s growth: by the mid-1990s ODME had captured world leadership of the mastering equipment market, with 40 percent, and a strong position in the disc reproduction market, equaling Toolex Alpha’s 25 percent. Toolex Alpha, meanwhile, had carved out a leadership position in optical disc fabrication, extending its injection molding system and introducing new replication systems.

Both ODME and Toolex Alpha would benefit from the introduction, in 1991, of a new optical disc-based product, the CD-ROM (read-only memory). Capable of containing a variety of data, including audio, video, and other data formats, the CD-ROM was adapted perfectly to the growing computer industry. Indeed, by the mid-1990s, as prices of CD-ROM readers dropped rapidly, the CD-ROM would become an important driver for the entire computer industry, creating a new surge in demand among the consumer public eager to join the “multimedia” revolution.

Meanwhile, new optical disc formats were under development. Whereas the compact disc and the CD-ROM were both read-only, that is, they could not be used for consumer recording purposes, the optical disc industry was preparing three new recording optical disc formats. The first to arrive was the CD-R format, which permitted a disc to be recording a single time. The original CD recorders were priced in the thousands of dollars, but a subsequent plunge in prices would prove remarkable—less than three years after their introduction, the cost of a consumer CD-R system would drop below $200. By then, the CD-R was joined by the next optical disc revolution, the CD-RW, or rewritable compact disc. This new format permitted multiple recordings to a single disc—up to 1,000 times or more. Introduced in 1996, the price drop of the new CD-RW consumer systems would be still more dizzying: by 1998 entry-level CD-RW systems were priced at less than $300.

ODME continued to build its market leadership in private, enjoying not only the steady growth in compact disc demand, but also the rapid rise in CD-ROM, CD-R, and CD-RW formats, each of which could be produced with adaptations to existing optical disc manufacturing systems. The smaller Toolex Alpha, also performing strongly, chose to ride the growth of the optical disc industry into a different direction: a listing as a public company. In 1996 Toolex Alpha placed its stock on the United States’ NASDAQ stock exchange and, at the same time, on the Amsterdam stock exchange. The company chose the Dutch exchange over the Swedish exchange for the former’s greater exposure on the worldwide market.

Mid-Decade Woes

Toolex Alpha would quickly experience the downside of its public exposure. After a successful introduction and share prices at a respectable NLG 40 (approximately $20), Toolex Alpha’s market fortunes would dwindle rapidly. Toolex Alpha had failed to meet a deadline for delivery to a number of customers in the Far East; these customers suspended their orders, forcing the company to take a loss of some SK 27.6 million (approximately US$3 million). At the same time, the company, faced by rising marketing and sales costs, was finding its profits further pressured. By October 1996 the company announced lower revenue and earnings projections. The company’s stock tumbled, dropping by more than half its value. The company also came under suspicion for insider trading activities on the Dutch stock exchange, further hurting the reputation of the company and its stock.

Company Perspectives:

To build on its position as the world’s leading supplier of equipment and systems for the production of optical discs, Toolex International has developed a business strategy based on close customer relationships and sustained investment in research and development.

The timing of Toolex Alpha’s troubles was especially poor as the industry began gearing up for the introduction of what promised to be the next revolution in optical disc technology: the DVD, or digital versatile disc. A DVD was capable of storing from four gigabytes to as much as 11 gigabytes of data, compared with the roughly 600 megabytes of an ordinary compact disc. The increase in storage capacity opened a new realm of possibilities, not only in audio data—offering the potential of adding information such as Dolby surround sound coding—but also, and especially, in video. A single DVD was capable of storing an entire full-length feature film, providing far higher image and sound quality than a videocassette, while also presenting the possibility of including such data as multiple language soundtracks, multiple versions of a film, subtitling language choices, etc.

DVD presented other advantages: the discs themselves were the same size as compact discs, meaning that production systems could be adapted or extended to produce all of the various optical disc formats, without the need to replace an entire production line. For the consumer, DVD readers promised backwards compatibility with existing audio CDs and with CD-ROMs. Introduced in 1996, DVD would build momentum, as the industry worked out standards, and as consumers awaited the building of an extensive DVD-based film library and less expensive DVD readers.

For Toolex Alpha and ODME, as with the rest of the optical disc industry, the need to expand into the DVD arena—particularly with the arrival of recordable and rewritable DVDs expected for 1999—was clear. The cost of research and development of new systems designs, however, presented a possible stumbling block. At the same time, the economic crisis striking the Asian economies was slowing demand for existing systems, reducing revenue flow. Both Toolex Alpha and ODME sought a means for expanding their product lines toward a full service solution, without driving up the research and development costs to supplement their existing systems.

In July 1997 Toolex Alpha and ODME announced the takeover of the larger ODME by the smaller Toolex Alpha. The fact that ODME, at roughly $150 million in revenues, was twice as large as Toolex Alpha raised a few eyebrows. As the merger progressed, however, it became clear that the two companies had performed somewhat of a “reverse takeover.” While the new company adopted the name of Toolex International, its headquarters were moved to the former ODME’s Veldhoven offices. The former ODME president was named head of Toolex International—indeed, ODME executives would quickly fill the principal executive and director positions at Toolex International. Meanwhile, the newly merged company continued trading under the Toolex name.

As details of the merger became clear, the industry responded positively to the formation of what became the industry’s largest independent supplier of optical disc production systems. The products of both companies were seen as strongly complementary, while the company’s pooled research and development resources gave the company a strengthened position to meet the coming DVD revolution.

Following the merger, Toolex International’s operations were organized into five production divisions: Mastering; Prerecorded Replication Systems; Recordable and Rewritable Replication Systems; and Peripherals, including pre-mastering, electroplating, physical testing, and injection molding systems, and both Toolex and third-party consumable products. A sixth business unit formed the company’s Sales division, operating a network of sales and service offices in more than 15 countries.

By mid-1998 the merger appeared to be a success. Toolex International’s revenues were running well ahead of the formerly separate companies’ revenues, as 1997 sales for the merged operations reached NLG 401 million, some 14 percent more than the companies’ separate 1996 sales. This growth came despite the collapse of many of the Asian economies in late 1997 and 1998.

Looking Forward

In February 1998 Toolex International moved to expand its product line still further, with the acquisition of the Laser Optics Division (LOD) of Del Mar Avionics, of Irvine, California. This acquisition brought LOD’s patented, low-cost production systems into the Toolex International product family. A second acquisition made at the same time, of the company’s former Hong Kong distributor, Special Zone Limited, represented the company’s push to increase its Far East sales presence in the face of the economic crisis there. Toward the end of 1998 the company also was preparing to expand its direct sales presence in the Japanese and Chinese markets. In June 1998, in addition, the company’s new TREX division, grouping the company’s Recordable and Rewritable Replication Systems, introduced a next-generation CD-R design, dubbed SAN CD-R. This new production method was expected to provide significant cost reduction for recordable CD production—and was likely to be a new boost for this growing market.

Principal Subsidiaries

Toolex Alpha AB (Sweden); ODME International BV (Netherlands); Apex Systems Inc. (U.S.A.); Toolex, Inc. (U.S.A.); Media Morphics BV (Netherlands); ContTec GmbH (Germany); ODME Consumables (BV).

Further Reading

Frost, Tim, “Putting a New Spin on the Recordable Compact Disc,” One to One, June 1998, p. 67.

“It Takes Two’lex,” One to One, November 1997, p. 5.

Paulussen, Chris, “Toolex marktleider in CD-productiesystemen,” Eindhovens Dagblad, February 11, 1998, p. 9.

Scholtes, Peter, “ODME grijpt bij Toolex de macht,” Eindhovens Dagblad, September 30, 1997, p. 9.

“Toolex Alpha,” Tape-Disc Business, September 1997, p. 150.

—M. L. Cohen