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EDCI Holdings Inc. (OTCPK:EDCI) was the holding company and parent of Entertainment Distribution Company, Inc., which had a majority investment in Entertainment Distribution Company, LLC (EDC). EDC operated in the manufacturing and distribution segment of the entertainment industry focusing on pre-recorded CDs and DVDs and manufactured jewel boxes and trays for the entertainment industry.

Due to the strong decline of CD and DVD sales, EDCI is now engaged in a final plan of complete liquidation and dissolution.

The good news is that there's an opportunity for investors because of its strong balance sheet.

Before beginning, you should know that this is the first time I've invested in something like this so I have a very small position because for me it's a learning experience. If there's some aspect I've missed in my analysis, please let me know. I'd love to learn more.

Balance Sheet Analysis

Let's start with EDCI's current assets.

As of March 31st, 2010, they totaled $137M, made up primarily of cash. $78M of the cash is freely available and $23M is currently restricted. Of the restricted cash, $20.7M will be released on June 1st, 2010, bringing the total of usable cash to $98.7M.

Accounts receivable is currently valued at $17.2M, net of bad debts. Since EDCI is liquidating out of choice rather than due to a crisis, a fair value for accounts receivable would be 90% of that so let's put it down as $15.4M.

The book value of inventory is $3.6M. It's difficult to estimate a fair value for this inventory as it is very possible due to the nature of the business that it may be fully utilized once EDCI's doors close. However, to be conservative, let's discount the inventory by 50%, valuing it at $1.8M.

There is also property for sale priced at $6.4M and has been for sale since the second quarter of 2009. Considering it has been on the market for a while, I want to be cautious and value it at 75% of its stated value, $4.8M.

Not including prepaid expenses and deferred income taxes, the liquidation value of EDCI's current assets is $120.7M.

In terms of its long term assets, I've chosen not to assess them because the valuation using current assets gives me a comfortable margin of safety, anything on top of that will be icing on the cake.

By taking the liquidation value of EDCI's current assets minus its total liabilities, which sit at $80.5M, we arrive at a liquidation value for EDCI of $40.2M. This is great because if the liquidation achieves this value, we'll get a 77.8% return on our investment.

The next step would be to consider cash flow. However, this is not possible as EDCI has not filed cash flow statements for Q1 2010.

This does make the water a little murky but we do have a large margin of safety, without including long term assets. If we were to cut that margin in half, we would still be more than comfortable.

Nevertheless, there is one main risk factor: EDCI's hope to effect a reverse stock split. The reason for this is to bring the number of shareholders down to 300 so that EDCI can avoid the cost implications of being a publicly traded company. Shareholders will have the right to vote against this measure. To be perfectly honest, I'm not sure exactly how to react to this or take this into account in my analysis. Feedback would be helpful!

Note: This is just my opinion. I'm not a professional in the financial world. Please conduct your own due diligence in any decisions to purchase, sell, or otherwise trade any stocks.

Disclosure: Author holds a long position in OTCPK:EDCI

Source: EDCI Holdings: No Fire Sale Here