[CINRAM LOGO]
QUARTERLY REPORT
FIRST QUARTER 2004
CINRAM REPORTS STRONG FIRST QUARTER EARNINGS
(All figures in U.S. dollars unless otherwise indicated)
Cinram International Inc. reported consolidated revenue of $462.2 million for
the quarter ended March 31, 2004, up from $130.3 million in 2003. First quarter
earnings before interest and taxes (EBIT(1)) were $35.3 million, up from $11.8
million in the corresponding 2003 period, and net earnings increased to $15.0
million or $0.27 per share, from $7.3 million or $0.13 per share in 2003. This
is the first period that Cinram is reporting its results in U.S. dollars.
"Cinram enjoyed exceptional results in the first quarter driven by our
customers' strong release schedule," said Cinram chief executive officer Isidore
Philosophe. "We are now seeing the full effect of the Time Warner transaction
reflected in our results. Our strong performance in the first quarter confirms
that the acquisition has been very accretive to Cinram's earnings."
Cinram's first quarter DVD unit shipments increased by 471 percent from the
comparable period in 2003.
The Company also posted a 286 percent increase in earnings before interest,
income taxes and amortization (EBITA(2)) over 2003. EBITA for the first quarter
of 2004 reached $88.4 million -- principally driven by the contribution of the
Time Warner acquired businesses and a spike in demand for DVDs above typical
seasonality.
Cinram ended the quarter with a strong cash position of $229.9 million, while
its $150 million revolving credit line remained untapped. The Company continues
to maintain ample liquidity to make its debt repayments, meet planned capital
expenditure requirements and pursue additional business opportunities.
In the first quarter, Cinram invested $34.5 million in capital expenditures, up
from $7.2 million in the corresponding 2003 period, primarily to increase DVD
capacity and to enhance its distribution capabilities.
INDUSTRY SEGMENTS
DVD sales for the quarter were up 379 percent over last year, increasing to
$233.5 million from $48.7 million in 2003, and represented 51 percent of
Cinram's consolidated revenue compared with 37 percent in 2003. This increase in
sales relative to 2003 was principally fueled by an increase in demand for DVDs,
and the contribution of the acquired Time Warner businesses.
Industry experts continue to forecast healthy growth for DVD in 2004 and beyond.
Research firm Understanding and Solutions estimates that 2004 DVD output will
increase by 25 percent in North America and 30 percent in Western Europe over
2003.
VHS video cassette sales declined in the first quarter to $19.0 million from
$32.2 million in the corresponding 2003 quarter, accounting for four percent of
consolidated revenue, compared with 25 percent in the same period last year.
Cinram's CD sales increased to $67.4 million in the first quarter of 2004, up
from $ 24.3 million in 2003 as a result of the contribution of the acquired
businesses. CDs accounted for 15 percent of Cinram's consolidated revenue in
2004, down from 19 percent in the first quarter of 2003.
Printing, which is Cinram's new operating segment that comprises the results of
Ivy Hill Corporation, contributed revenue of $64.3 million to the first quarter
of 2004, and represented 14 percent of consolidated revenue.
The Other segment, which includes distribution, Giant Merchandising Inc. and
miscellaneous revenue, contributed revenue of $74.8 million in the first quarter
of 2004. First quarter distribution revenue was $30.6 million compared with
$12.3 million in 2003, due to the significant increase in the number of units
distributed.
First quarter results reflected a significant departure from Cinram's 2003
product mix, with DVDs becoming the dominant product and VHS video cassettes
representing a minor component of consolidated sales. Printing was also added to
the mix as a stand-alone segment, and Giant Merchandising was added to the Other
revenue segment. The Company believes that its first quarter results are
indicative of Cinram's revenue mix for 2004.
GEOGRAPHIC SEGMENTS
Revenue from North America increased by 269 percent to $381.6 million in the
first quarter of 2004, up from $103.5 million during the comparable period in
2003. The significant increase in revenue was attributable to an increase in DVD
and CD shipments, the addition of the printing and merchandising divisions of
the acquired businesses, and to lesser extent distribution revenue, and was
partially offset by lower VHS video cassette and audio cassette shipments
combined with lower selling prices.
In Europe, first quarter revenue increased to $80.6 million from $26.8 million
in 2003, largely due to the contribution of the European facility acquired from
Time Warner. This increase in revenue was also partially offset by lower VHS
video cassette sales.
OTHER FINANCIAL HIGHLIGHTS
Gross profit margins for the quarter expanded to 21 percent, up from 18 percent
in the corresponding 2003 period because of the higher proportion of DVDs in the
Company's overall product mix. Selling, general and administrative expenses as a
percentage of consolidated sales for the quarter decreased to 9.0 percent from
9.2 percent in the first quarter of 2003. Amortization increased to $53.0
million from $11.1 million in 2003, largely due to the acquired businesses and a
$19.6 million non-cash charge related to the amortization of the Time Warner
contracts and deferred financing fees. Interest expense for the quarter was also
higher at $13.4 million as a result of the debt incurred by the Company during
the fourth quarter of 2003 to fund the acquisition of the Time Warner
businesses.
For the first quarter of 2004, the weighted average number of shares outstanding
was 56.2 million compared with 55.2 million in the first quarter of 2003.
FIRST QUARTER BUSINESS DEVELOPMENT HIGHLIGHTS
On March 1, 2004, Cinram announced an exclusive, multi-year agreement with
Metro-Goldwyn-Mayer Studios for DVD and VHS manufacturing and distribution in
North America.
Also during the first quarter, Cinram signed a new, exclusive, multi-year
manufacturing agreement with EMI Music in the United States. The Company will
replicate CDs and DVDs for EMI in its existing Richmond, Indiana, facility
starting in the third quarter of 2004.
2
DIVIDEND
Cinram's Board of Directors has declared a quarterly dividend of C$0.03 per
share, payable on June 30, 2004, to the shareholders of record at the close of
business on June 15, 2004.
2004 GUIDANCE
Cinram re-iterates its revenue and EBITA(2) guidance of $1.8 to $2.0 billion and
$390 to $410 million respectively for the full year in 2004. Cinram will not be
providing quarterly financial guidance because of the seasonality of its
business.
"While we benefited from considerable upside in the first quarter of 2004 due to
changes in the timing of our customers' release schedules, we expect second
quarter volumes to revert to a more normalized seasonality," concluded
Philosophe.
Certain statements included in this quarterly report constitute "forward looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or results of the multimedia
duplication/replication industry, to be materially different from any future
results, performance or achievements expressed or implied by such forward
looking statements. Such factors include, among others, the following: general
economic and business conditions, which will, among other things, impact the
demand for the Company's products and services; multimedia
duplication/replication industry conditions and capacity; the ability of the
Company to implement its business strategy; the Company's ability to retain
major customers; the Company's ability to invest successfully in new
technologies; the effective integration of the Time Warner businesses; and other
factors which are described in the Company's filings with the securities
commissions.
RECONCILIATION OF EBITA TO NET EARNINGS
(unaudited, in thousands of U.S. dollars)
Three months ended March 31 2004 2003
- ---------------------------- ----------------- -------------------
EBITA(2) $ 88,367 $ 22,883
----------------- -------------------
Amortization $ 33,400 $ 11,100
Amortization of intangible
fees and deferred financing
fees $ 19,632 -
----------------- -------------------
EBIT(1) $ 35,335 $ 11,783
----------------- -------------------
Interest expense $ 13,427 $ 735
Investment income $ (152) $ (702)
Income taxes $ 7,088 $ 4,453
----------------- -------------------
NET EARNINGS $ 14,972 $ 7,297
----------------- -------------------
(1)EBIT is defined herein as earnings before interest expense, investment income
and income taxes, and is a standard measure that is commonly reported and widely
used in the industry to assist in understanding and comparing operating results.
EBIT is not a defined term under generally accepted accounting principles
(GAAP). Accordingly, this measure should not be considered as a substitute or
alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as
found in the table above.
(2) EBITA is defined herein as earnings before interest expense, investment
income, income taxes and amortization, and is a standard measure that is
commonly reported and widely used in the industry to assist in understanding and
comparing operating results. EBITA is not a defined term under generally
accepted accounting principles (GAAP). Accordingly, this measure should not be
considered as a substitute or alternative for net earnings or cash flow, in each
case as determined in accordance with GAAP. See reconciliation of EBITA to net
earnings under GAAP as found in the table above.
3
2004 MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS INTERIM MANAGEMENT DISCUSSION AND ANALYSIS ("MD&A") SHOULD BE READ IN
CONJUNCTION WITH THE MD&A IN THE COMPANY'S ANNUAL REPORT FOR THE YEAR ENDED
DECEMBER 31, 2003. EXTERNAL ECONOMIC AND INDUSTRY FACTORS REMAIN SUBSTANTIALLY
UNCHANGED, UNLESS OTHERWISE STATED.
OVERVIEW
The Company has historically prepared its consolidated financial statements in
Canadian dollars. Beginning with the first quarter of 2004, the Company changed
its reporting currency to U.S. dollars to provide the financial statement users
with more relevant information. The Company used the current rate method to
translate the consolidated Canadian dollar results into U.S. dollars for both
the current and prior year. Under the current rate method, the consolidated
assets and liabilities are translated into U.S. dollars at the rate of exchange
in effect at the balance sheet date, revenue and expenses as well as cash flow
items are translated at weighted average rates for the period. Any resulting
exchange gain or loss is charged or credited to the "foreign currency
translation adjustment" account included as a separate component of
shareholders' equity.
Results for the first quarter of 2004 include the first full quarter of results
from the acquisition of Time Warner Inc.'s CD and DVD manufacturing,
distribution, printing, and screen-printing entertainment merchandising
businesses, completed on October 24, 2003. Net earnings increased to $15.0
million in the first quarter of 2004, from $7.3 million in the corresponding
2003 period, as a result of earnings generated from the acquired entities and an
increase in DVD unit shipments across all regions.
REVENUE
Revenue for the first quarter of 2004 increased 255% to $462.2 million, from
$130.3 million in 2003. While the acquisition contributed to the increase in
first quarter revenue over last year, the Company has made significant progress
in integrating the businesses and balancing production requirements across its
facilities since the close of the acquisition. This makes it difficult to
compare the periods on a pre-acquisition basis. Total multimedia units shipped
increased by 239% during the first quarter of 2004, due to a significant
increase in DVD and CD unit shipments, partially offset by unit declines for VHS
video cassettes.
INDUSTRY SEGMENTS
HOME VIDEO
In the first quarter of 2004, revenue from the Home Video
replication/duplication segment increased to $252.5 million from $80.9 million
in the comparable 2003 period. The growth in demand for DVDs during the first
quarter of 2004 was offset by a decline in VHS video cassette revenue, combined
with lower selling prices. This segment accounted for 55% of consolidated
revenue in 2004, down from 62% in the prior year.
DVD revenue increased 379% to $233.5 million from $48.7 million in the first
quarter of 2003, reflecting increased revenue generated from the acquired
entities combined with increased consumer demand for this product across all
geographic regions. DVD revenue represented 51% of consolidated revenue in the
first quarter of 2004, up from 38% in the first quarter of 2003.
VHS video cassette revenue decreased by 41% to $19.0 million in the first
quarter of 2004, down from $32.2 million in the prior year, reflecting a
decrease in both unit shipments and selling prices. VHS video cassette revenue
represented 4% of consolidated revenue for the first quarter of 2004, down from
25% in the first quarter of 2003.
AUDIO/ROM
Revenue from Cinram's Audio/ROM segment, consisting of audio CDs, CD-ROMs and
audio cassettes, increased by 166% and totaled $70.6 million in the first
quarter of 2004, increasing from $26.5 million in the prior year comparable
period, as a result of increased unit shipments from the acquired facilities in
North America and Europe. This segment accounted for 15% of consolidated
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2004 MANAGEMENT'S DISCUSSION AND ANALYSIS
revenue in the first quarter of 2004, down from 20% in the first quarter of
2003, as the Company's product mix shifted towards the Home Video segment.
Audio CD revenue increased 189% to $57.5 million in the first quarter of 2004
from $19.9 million in the prior year comparable period due to increased unit
shipments. CD revenue represented 12% of consolidated revenue in the first
quarter of 2004, down from 15% in the first quarter of 2003.
CD-ROM revenue increased 125% to $9.9 million, up from $4.4 million in the first
quarter of 2003, driven by an increase in unit shipments from the acquired Time
Warner businesses in North America and Europe, and organic growth in France.
CD-ROM revenue represented 2% of consolidated revenue for the first quarter of
2004, down from 3% in the first quarter of 2003.
Audio cassette revenue increased 45% to $3.2 million in the first quarter of
2004, up from $2.2 million in the prior year period. Audio cassette revenue
represented 1% of consolidated revenue for the quarter, down from 2% in the
first quarter of 2003.
PRINTING
In the first quarter of 2004, revenue from the Printing segment generated by Ivy
Hill Corporation was $64.3 million, or 14% of consolidated revenue. Since these
facilities were acquired on October 24, 2003, and did not operate in this
segment previous to the acquisition, there is no comparative revenue figure for
the prior year period.
OTHER
Distribution and fulfillment services revenue (included in Other segment)
increased to $30.6 million in the first quarter of 2004, up from $12.3 million
in the first quarter of 2003. These services continue to be a key driver of
business, as well as a major influence in the Company's ability to secure
significant new contracts. Distribution and fulfillment services revenue
represented 7% of consolidated revenue in the first quarter of 2004, down from
9% in the first quarter of 2003. As a percentage of consolidated revenue, the
relative weight of distribution revenue has declined as a result of the
significant increase in the Company's Home Video segment.
Merchandising revenue generated from Giant Merchandising (also included in Other
segment) was $33.7 million, or 7% of consolidated revenue. Since this entity was
acquired on October 24, 2003, and Cinram did not operate in this business
previous to the acquisition, there is no comparative revenue figure for the
prior year period.
Other non-core business revenue remained consistent with prior year decreasing
marginally to $10.5 million in the first quarter of 2004, down from $10.6
million in the first quarter of 2003. Other revenue represented 2% of
consolidated revenue for the quarter down from 8% in the first quarter of 2003.
GEOGRAPHIC SEGMENTS
NORTH AMERICA
North American revenue increased 269% to $381.6 million in the first quarter of
2004, up from $103.5 million in the first quarter of 2003. The significant
increase in revenue was attributable to an increase in DVD and CD shipments, the
addition of the printing and merchandising divisions of the acquired businesses,
and to a lesser extent distribution revenue, and was partially offset by lower
VHS video cassette and audio cassette shipments combined with lower selling
prices.
DVD revenue increased 310% to $192.4 million from $46.9 million in the prior
year. The increase was principally fueled by an increase in demand for DVDs, and
the contribution of the acquired Time Warner businesses. North American DVD
revenue represented 42% of consolidated revenue in the first quarter of 2004, up
from 36% in the first quarter of 2003.
VHS videocassette revenue decreased 19% to $14.3 million down from $17.7 million
in the prior year. The decrease was attributable to declining unit shipments and
selling prices. First quarter results
5
2004 MANAGEMENT'S DISCUSSION AND ANALYSIS
reflected a significant departure from Cinram's 2003 product mix, with DVDs
becoming the dominant product and VHS video cassettes representing a minor
component of consolidated revenue. As such, North American VHS video cassette
revenue represented 3% of consolidated revenue in the first quarter of 2004,
down from 14% in the first quarter of 2003.
Audio CD, and CD-Rom revenue increased 165% to $43.7 million up from $16.5
million in the prior year, as a result of the increase in unit shipments from
the acquired businesses. North American Audio CD and CD-ROM revenue represented
9% of consolidated revenue in the first quarter of 2004, down from 13% in the
first quarter of 2003.
Audio cassette revenue increased 23% to $2.7 million up from $2.2 million in the
prior year.
Distribution revenue increased 142% to $23.0 million up from $9.5 million in the
prior year, due to the significant increase in the number of units distributed
from the acquired businesses.
Printing revenue, which is Cinram's new operating segment, contributed revenue
of $64.3 million during the first quarter of 2004, and represented 14% of
consolidated revenue. As the entity was acquired on October 24, 2003, there is
no comparative revenue figure for the prior year period.
Merchandising revenue generated $33.7 million, or 7% of consolidated revenue in
the first quarter of 2004. As the entity was acquired on October 24, 2003, there
is no comparative revenue figure for the prior year period.
Other non-core business revenue decreased to $7.5 million in the first quarter
of 2004, down from $10.7 million in the first quarter of 2003. Other revenue
represented 2% of consolidated revenue for the quarter down from 8% in the first
quarter of 2003.
Overall, North American revenue represents 83% of consolidated revenue in the
first quarter of 2004, up from 79% in the first quarter of 2003.
EUROPE
In Europe, revenue increased 201% to $80.6 million in the first quarter of 2004,
up from $26.8 million in the prior year comparable period, as a result of
revenue generated by the acquired European Time Warner facility.
DVD revenue increased by over 2,000% to $41.1 million up from $1.7 million in
the prior year. Consistent with North America, the increase was largely
attributable to the contribution of the European facility acquired from Time
Warner, coupled with increased in consumer demand for DVDs. European DVD revenue
represented 9% of consolidated revenue in the first quarter of 2004, up from 1%
in the first quarter of 2003.
VHS videocassette revenue decreased 61% to $4.7 million down from $12.0 million
in the prior year. The decline is mainly due to the decreasing unit shipments
and selling prices in Europe, and the closure of the Company's VHS video
cassette facility in France in late 2003. Consequently, European VHS video
cassette revenue represented 1% of consolidated revenue in the first quarter of
2004, down from 9% in the first quarter of 2003.
Audio CD, and CD-Rom revenue increased 204% to $23.7 million up from $7.8
million in the prior year, as a result of the increase in unit shipments from
the acquired facility in Europe. European Audio CD and CD-ROM revenue
represented 5% of consolidated revenue in the first quarter of 2004, down from
6% in the first quarter of 2003.
Distribution revenue increased 172% to $7.6 million up from $2.8 million in the
prior year, due to the significant increase in the number of units distributed
by the acquired facility in Europe.
6
2004 MANAGEMENT'S DISCUSSION AND ANALYSIS
Other non-core business revenue increased to $2.9 million in the first quarter
of 2004, up from $2.5 million in the first quarter of 2003. Other revenue
represented 1% of consolidated revenue for the quarter down from 2% in the
first quarter of 2003.
Overall, European revenue represented 17% of the consolidated revenue, down from
21% in the prior year, as the increase in North American revenue was
proportionately higher than the revenue increase in Europe.
GROSS PROFIT
Gross profit was $96.6 million for the 2004 first quarter, compared with $23.8
million in the prior year comparable period. As a percentage of sales, gross
profit increased to 21.0%, compared with 18.2% in the prior year. Gross profit
margins increased as a result of the continued shift in product mix towards
DVDs, which provide higher margins on a per unit basis.
Amortization expense from capital assets increased to $33.4 million in the first
quarter of 2004, compared with $11.1 million in the prior year period, driven by
increased amortization associated with the acquired entities, combined with the
increase in capital expenditures over the past year.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $41.6 million, up from
$12.0 million in the prior year, resulting from expenses incurred at the
acquired entities. As a percentage of consolidated revenue, selling, general and
administrative expenses decreased to 9.0% in the first quarter of 2004, compared
with 9.2% in the prior year period.
INTEREST EXPENSE
Interest expense increased to $13.4 million in the first quarter of 2004,
compared with $0.7 million in 2003, due to the $1,025 million of debt incurred
to finance the acquisition of certain assets from Time Warner Inc. The Company's
average interest rate on its long-term debt for the quarter was approximately
5.2%. The Company paid interest at a variable rate for the entire quarter.
INVESTMENT INCOME
Investment income decreased to $0.2 million in the first quarter of 2004,
compared with $0.7 million in the first quarter of 2003, due to lower interest
rates earned on cash balances.
INCOME TAXES
The Company's effective tax rate for the first quarter of 2004 was 32.1 %,
compared with an effective rate of 37.9% in the comparable prior year quarter.
The Company benefited from a lower effective tax rate in the first quarter as a
result of lower tax rates in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, the Company's net debt position, consisting of cash and
cash equivalents less long-term debt, was a liability of $796 million,
consistent with the balance at December 31, 2003, as the decrease in the cash
balance was in line with the amount of principal debt repayments.
The Company's working capital position was $43.2 million at the end of the first
quarter of 2004, up from $34.9 million as at December 31, 2003. Earnings before
interest expense, investment income and income taxes (EBIT*) was $35.3 million
during the first quarter of 2004, compared with $11.8 million in the first
quarter of 2003.
During the first quarter of 2004, Cinram invested $34.5 million in capital
assets, mainly to increase DVD capacity in North America and Europe.
RISKS AND UNCERTAINTIES
The risks and uncertainties faced by the Company are substantially the same as
those disclosed in the MD&A section of its 2003 Annual Report.
7
2004 MANAGEMENT'S DISCUSSION AND ANALYSIS
Reconciliation of EBITA to net earnings:
(unaudited, in thousands of U.S. dollars)
Three months ended March 31 2003 2004
------- -------
EBITA(2) $88,367 $22,883
------- -------
Amortization of capital assets $33,400 $11,100
Amortization of intangible assets and
deferred financing fees $19,632 -
------- -------
EBIT(1) $35,335 $11,783
------- -------
Interest expense $13,427 $ 735
Investment income $ (152) $ (702)
Income taxes $ 7,088 $ 4,453
------- -------
NET EARNINGS $14,972 $ 7,297
------- -------
(1)EBIT is defined herein as earnings before interest expense, investment income
and income taxes, and is a standard measure that is commonly reported and widely
used in the industry to assist in understanding and comparing operating results.
EBIT is not a defined term under generally accepted accounting principles
(GAAP). Accordingly, this measure should not be considered as a substitute or
alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as
found in the table above.
(2) EBITA is defined herein as earnings before interest expense, investment
income, income taxes and amortization, and is a standard measure that is
commonly reported and widely used in the industry to assist in understanding and
comparing operating results. EBITA is not a defined term under generally
accepted accounting principles (GAAP). Accordingly, this measure should not be
considered as a substitute or alternative for net earnings or cash flow, in each
case as determined in accordance with GAAP. See reconciliation of EBITA to net
earnings under GAAP as found in the table above.
8
[CINRAM LOGO]
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands of U.S. dollars, except per share amounts)
March 31, 2004 and December 31, 2003 2004 2003
- ------------------------------------------------------- ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 229,943 $ 253,823
Accounts receivable 371,637 369,901
Inventories 48,322 44,606
Prepaid expenses 18,057 11,341
Future income taxes 21,735 21,933
---------- ----------
689,694 701,604
Capital assets 645,710 639,593
Assets under capital lease 5,655 6,970
Goodwill 282,104 279,426
Intangible assets 355,669 376,393
Deferred financing fees 26,103 28,083
Other assets 17,278 22,488
Future income taxes 4,483 4,657
---------- ----------
$2,026,696 $2,059,214
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 170,492 $ 192,790
Accrued liabilities 373,934 375,293
Income taxes payable 7,746 2,131
Current portion of long-term debt 93,635 95,417
Current portion of obligations under capital leases 668 1,058
---------- ----------
646,475 666,689
Long-term debt 932,437 954,456
Obligations under capital leases 4,935 5,911
Other long-term liabilities 16,560 17,227
Future income taxes 29,542 29,648
SHAREHOLDERS' EQUITY:
Capital stock (Note 2) 168,323 163,174
Contributed surplus (Note 1(ii)) 3,197 117
Retained earnings 183,501 172,564
Foreign currency translation adjustment 41,726 49,428
---------- ----------
396,747 385,283
---------- ----------
$2,026,696 $2,059,214
========== ==========
See accompanying notes to consolidated financial statements.
9
[CINRAM LOGO]
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(unaudited, in thousands of U.S. dollars, except per share amounts)
Three months ended March 31 2004 2003
- --------------------------------------------------------------- --------- --------
Revenue $ 462,237 $130,261
Cost of goods sold 365,631 106,451
--------- --------
Gross profit 96,606 23,810
Selling, general and administrative expenses 41,639 12,027
Amortization of intangible assets and deferred financing fees 19,632 -
--------- --------
Earnings before the undernoted 35,335 11,783
Interest on long-term debt 12,903 596
Interest on capital leases 90 102
Other interest 434 37
Investment income (152) (702)
--------- --------
Earnings before income taxes 22,060 11,750
--------- --------
Income taxes 7,088 4,453
--------- --------
Net earnings 14,972 7,297
--------- --------
Retained earnings, beginning of period 172,564 124,340
Effect of a change in accounting policy related to stock based
compensation (Note 1 (ii)) (2,759) -
Dividends declared (1,276) (1,106)
--------- --------
Retained earnings, end of period $ 183,501 $130,531
========= ========
Earnings per share (Note 4):
Basic $ 0.27 $ 0.13
Diluted $ 0.26 $ 0.13
========= ========
Weighted average number of shares outstanding (Note 4):
Basic (in thousands) 56,152 55,197
Diluted (in thousands) 57,393 55,567
========= ========
See accompanying notes to consolidated financial statements.
10
[CINRAM LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands of U.S. dollars)
Three months ended March 31 2004 2003
- --------------------------------------------------------------- --------- ---------
Cash provided by (used in):
OPERATIONS:
Net earnings $ 14,972 $ 7,297
Items not involving cash:
Amortization 53,032 11,100
Non cash stock based compensation 321 -
Loss (Gain) on disposition of capital assets 149 (145)
Unrealized foreign exchange gain (985) (4,760)
Change in non-cash operating working capital (Note 5) (37,840) 7,855
--------- ---------
29,649 21,347
FINANCING:
Repayment of long-term debt (23,802) (1,982)
Decrease in obligations under capital leases (1,134) (189)
Issuance of common shares 5,149 -
Change in other long-term liabilities (611) -
Dividends paid (1,277) (1,106)
--------- ---------
(21,675) (3,277)
INVESTMENTS:
Transaction costs relating to Time Warner acquired businesses (890) -
Purchase of capital assets (34,547) (7,249)
Proceeds on disposition of capital assets 1,103 255
Decrease in other assets 4,975 6,733
--------- ---------
(29,359) (261)
Foreign exchange (loss) gain on cash held in foreign currencies (2,495) 2,930
--------- ---------
(Decrease) increase in cash and cash equivalents (23,880) 20,739
Cash and cash equivalents, beginning of period 253,823 103,987
--------- ---------
Cash and cash equivalents, end of period $ 229,943 $ 124,726
========= =========
Supplemental cash flow information:
Interest paid $ 15,832 $ 626
Income taxes paid 1,703 5,535
========= =========
See accompanying notes to consolidated financial statements.
11
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Three months ended March 31, 2004 and 2003
(unaudited, stated in thousands of U.S. dollars, except common shares and per
share information)
1. SIGNIFICANT ACCOUNTING POLICIES:
These unaudited interim consolidated financial statements do not contain all
disclosures required by Canadian generally accepted accounting principles (GAAP)
for annual financial statements, and accordingly, these unaudited interim
consolidated financial statements should be read in conjunction with the most
recently prepared annual audited consolidated financial statements for the year
ended December 31, 2003.
The unaudited interim consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary to present fairly the
financial position of Cinram International Inc. (the "Company") as of March 31,
2004, and the results of operations and cash flows for the three months then
ended.
The Company's business follows a seasonal pattern, whereby pre-recorded
multimedia sales are traditionally higher in the third and fourth quarter than
in other quarterly periods due to consumer holiday buying patterns. As a result,
a disproportionate portion of total revenues is typically earned in the third
and fourth quarter. The business seasonality results in performance for the
first quarter ended March 31, 2004, which is not necessarily indicative of
performance for the balance of the year.
The unaudited interim consolidated financial statements have been prepared in
accordance with Canadian GAAP and are based upon accounting principles
consistent with those used and described in note 1 to the December 31, 2003
audited consolidated financial statements, except as follows:
i. CHANGE IN REPORTING CURRENCY:
The Company has historically prepared its consolidated financial
statements in Canadian dollars. Beginning with the first quarter of
2004, the Company changed its reporting currency to U.S. dollars to
provide the financial statement users with more relevant information.
The Company used the current rate method to translate the consolidated
Canadian dollar results into U.S. dollars for both the current and
prior period. Under the current rate method, the consolidated assets
and liabilities are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date, revenue and expenses as
well as cash flow items are translated at weighted average rates for
the period. Any resulting exchange gain or loss is charged or credited
to the "foreign currency translation adjustment" account included as a
separate component of shareholders' equity.
The functional currencies of the Company and each of its subsidiaries
remained unchanged. The Company's operations in the United States, the
United Kingdom, France, Germany, and Mexico are considered to be
self-sustaining. Assets and liabilities are translated using
period-end exchange rates and revenue and expenses are translated at
average exchange rates. Exchange gains and losses arising from the
translation of the financial statements of self-sustaining foreign
operations are deferred in the "foreign currency translation
adjustment" account included as a separate component of shareholders'
equity.
ii. STOCK-BASED COMPENSATION:
Effective January 1, 2004, the Company adopted the revised Canadian
Institute of Chartered Accountants (CICA) Handbook Section 3870,
"Stock Based Compensation," which requires that a fair value method of
accounting be applied to all stock-based compensation payments to both
employees and non-employees. In accordance with the transitional
provisions of Section 3870, prior periods have not been restated,
instead, an adjustment has been made to
12
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Three months ended March 31, 2004 and 2003
(unaudited, stated in thousands of U.S. dollars, except common shares and per
share information)
the opening balance of retained earnings of the current period to
reflect the cumulative effect of the change on prior periods related
to stock options granted on or after January 1, 2002. There were no
options granted during the three months ended March 31, 2004, and the
weighted average estimated fair value for options granted during 2003
was C$5.56 per share.
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing model with the
following assumptions:
Three months ended March 31, 2003
---------------------------------
Risk-free interest rate 4%
Dividend yield 1.0%
Volatility factor of the future expected market price
of common shares 57%
Weighted average expected life of the options 5 Years
=================================
The estimated fair value of the options is amortized to expense over
the options' vesting period on a straight-line basis.
a. Compensation expense for the three months ended March 31,
2004, was $321 (March 31, 2003 - NIL) relating to the fair
value of options granted in 2003 and 2002. The offset to the
stock based compensation expense has been credited to
contributed surplus.
b. Option grants after January 1, 2002 - The cumulative effect
of the change on prior periods related to stock options
granted on or after January 1, 2002, amounted to $2,759 and
has been charged against opening retained earnings in 2004,
with the offset credited to contributed surplus.
During the three months ended March 31, 2003, had the Company
determined compensation expense based on the fair values at grant
dates of the stock options consistent with the fair value method, the
Company's earnings, and earnings per share would have been reported as
the pro forma amounts indicated below.
Three months ended March 31, 2003
---------------------------------
Net earnings, as reported $ 7,297
Stock-based compensation expense 367
---------------------------------
Pro forma net earnings $ 6,930
=================================
Basic earnings per share, as reported $ 0.13
Effect of stock-based compensation expense 0.01
---------------------------------
Pro forma basic earnings per share $ 0.12
=================================
Diluted earnings per share, as reported $ 0.13
Effect of stock-based compensation expense 0.01
---------------------------------
Pro forma diluted earnings per share $ 0.12
=================================
13
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Three months ended March 31, 2004 and 2003
(unaudited, stated in thousands of U.S. dollars, except common shares and per
share information)
iii. ASSET RETIREMENT OBLIGATIONS:
Effective January 1, 2004, the Company retroactively adopted CICA
Handbook Section 3110, "Asset Retirement Obligations," which
establishes standards for the recognition, measurement and disclosure
of liabilities for asset retirement obligations and the associated
retirement costs. This section applies to legal obligations associated
with the retirement of tangible long-lived assets that results from
their acquisition, lease construction, development or normal
operation.
As at January 1, 2004, the Company has recorded a liability of $2,886
for the estimated present value of the costs of retiring leasehold
improvements at the maturity of the facility leases and recorded
deferred asset retirement costs of $2,886. The following table details
the changes in the leasehold retirement liability.
January 1, 2004 $2,886
Accretion charges recorded in cost of sales 43
March 31, 2004 $2,929
The adjustment to leasehold improvements in respect of asset
retirement costs is amortized into income over the remaining life of
the leases, on a straight-line basis. For the three months ended March
31, 2004, the Company recorded an amortization expense of $198 in cost
of sales.
The impact of this new accounting standard was not material for 2003.
2. CAPITAL STOCK:
The following table summarizes information on capital stock and stock options at
March 31, 2004:
Outstanding Exercisable
----------- -----------
Common shares 56,518,656 -
Common share stock options 2,084,575 1,011,975
3. PENSION AND NON-PENSION EMPLOYMENT BENEFIT PLANS:
For the three months ended March 31 2004, the Company's 401 (k) plan expense
amounted to $2,331 (March 31, 2003 - $128), and the pension expense related to
the Company's defined benefit plans amounted to $977 (March 31, 2003 - NIL).
14
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Three months ended March 31, 2004 and 2003
(unaudited, stated in thousands of U.S. dollars, except common shares and per
share information)
4. EARNINGS PER SHARE:
The reconciliation of the numerator and denominator for the calculation of basic
and diluted earnings per share is as follows:
Three months ended March 31
2004 2003
-------- ----
Earnings available to common shareholders $ 14,972 $ 7,297
BASIC EARNINGS PER SHARE
Weighted average number of shares outstanding (000's) 56,152 55,197
Basic earnings per share $ 0.27 $ 0.13
DILUTED EARNINGS PER SHARE
Weighted average number of shares outstanding (000's) 56,152 55,197
Dilutive effect of stock options and warrants 1,241 370
-------- -------
Adjusted weighted average number of shares outstanding (000's) 57,393 55,567
Diluted earnings per share $ 0.26 $ 0.13
======== =======
5. CONSOLIDATED STATEMENTS OF CASH FLOWS:
The change in non-cash working capital items is comprised of the following:
Three months ended March 31
2004 2003
-------- -------
(Increase) decrease in accounts receivable $ (4,226) $ 13,409
(Increase) decrease in inventories (4,127) 15,018
(Increase) in prepaid expenses (6,797) (4,160)
(Decrease) in accounts payable and accrued liabilities (28,432) (15,314)
Increase (decrease) in income taxes payable 5,742 (1,098)
-------- --------
$(37,840) $ 7,855
======== ========
6. SEGMENTED INFORMATION:
The Company's reportable business segments are: Home Video
replication/duplication, Audio/ROM replication/duplication and Printing.
The Home Video replication/duplication segment manufactures DVDs and VHS video
cassettes. The Audio/ROM replication/ duplication segment manufactures CDs and
CD-ROMs, and audio cassettes. The Printing segment provides design, printing and
packaging services. The other segment includes distribution services and
merchandising sales.
The accounting policies of the segments are the same as those described in the
significant accounting policies. The Company evaluates segment performance based
on earnings before interest expense, investment income, unusual items and income
taxes.
15
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Three months ended March 31, 2004 and 2003
(unaudited, stated in thousands of U.S. dollars, except common shares and per
share information)
Three months ended March 31, 2004
Home Video Audio/ROM
replication/ replication/
Industry segments: duplication duplication Printing Other Total
- ------------------ ------------ ------------ -------- ------- ---------
REVENUE FROM EXTERNAL
CUSTOMERS $ 252,527 $ 70,642 $ 64,309 $ 74,759 $ 462,237
EARNINGS BEFORE INTEREST
EXPENSE, INVESTMENT
INCOME, AND INCOME
TAXES 24,614 6,885 7,412 (3,576) 35,335
TOTAL ASSETS 1,231,383 449,085 228,861 117,367 2,026,696
AMORTIZATION OF CAPITAL
ASSETS AND ASSETS UNDER
CAPITAL LEASES 22,522 6,673 1,965 2,240 33,400
AMORTIZATION OF INTANGIBLE
ASSETS 15,169 153 2,186 - 17,508
CAPITAL EXPENDITURES 28,248 1,444 721 4,134 34,547
ADDITIONS TO GOODWILL AND
INTANGIBLE ASSETS 767 9 114 - 890
============ ============ ======== ======== ==========
Three months ended March 31, 2003
Home Video Audio/ROM
replication/ replication/
Industry segments: duplication duplication Other Total
- ------------------ ------------ ------------ ------- --------
REVENUE FROM EXTERNAL CUSTOMERS $ 80,875 $ 26,545 $22,841 $130,261
EARNINGS BEFORE INTEREST EXPENSE,
INVESTMENT INCOME, AND INCOME TAXES 10,583 852 348 11,783
TOTAL ASSETS 320,868 105,310 90,626 516,804
AMORTIZATION OF CAPITAL ASSETS 7,129 2,809 1,162 11,100
CAPITAL EXPENDITURES 7,120 22 107 7,249
============ ============ ======= ========
Revenue from external customers is comprised of the following:
2004 2003
-------- ---------
DVD $233,479 $ 48,656
VMS 19,048 32,219
AUDIO CD/CD-ROM 67,353 24,298
AUDIO CASSETTE 3,289 2,247
PRINTING 64,309 -
DISTRIBUTION 30,553 12,281
MERCHANDISING 33,720 -
OTHER 10,486 10,560
-------- ---------
$462,237 $ 130,261
======== =========
16