MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by
management and approved by the Board of Directors of the Company. Management is
responsible for the information and representations contained in these financial
statements and in other sections of this Annual Report.
The Company maintains appropriate processes to ensure that relevant and reliable
financial information is produced. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
Canada. The significant accounting policies, which management believes are
appropriate for the Company, are described in Note 1 to the consolidated
financial statements.
The Board of Directors is responsible for reviewing and approving the
consolidated financial statements and overseeing management's performance of its
financial reporting responsibilities. An Audit Committee of three non-management
Directors is appointed by the Board.
The Audit Committee reviews the consolidated financial statements, adequacy of
internal controls, audit process and financial reporting with management and
with the external auditors. The Audit Committee reports to the Board of
Directors prior to the approval of the audited consolidated financial statements
for publication.
KPMG LLP, the Company's external auditors, who are appointed by the
shareholders, audited the consolidated financial statements in accordance with
Canadian generally accepted auditing standards to enable them to express to the
shareholders their opinion on the consolidated financial statements.
/s/ LEWIS RITCHIE
LEWIS RITCHIE
Chief Financial Officer
February 20, 2004
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Cinram International Inc. as
at December 31, 2003, and 2002 and the consolidated statements of earnings and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003, and 2002 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
/s/ KPMG LLP
CHARTERED ACCOUNTANTS
Toronto, Canada
February 20, 2004
36 CINRAM 2003 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
Years ended December 31
2003 2002
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 328,218 $ 164,216
Accounts receivable 478,319 223,385
Inventories (Note 3) 57,680 63,063
Prepaid expenses 14,665 11,137
Future income taxes (Note 12) 28,361 8,905
----------- ------------
907,243 470,706
Capital assets (Note 4) 827,057 298,345
Assets under capital leases (Note 4) 9,014 13,300
Goodwill (Note 5) 361,326 6,789
Intangible assets (Note 5) 486,714 -
Deferred financing fees (Note 6) 36,314 -
Other assets 29,079 40,553
Future income taxes (Note 12) 6,022 -
----------- ------------
$ 2,662,769 $ 829,693
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 249,296 $ 90,684
Accrued liabilities 485,292 166,780
Income taxes payable 2,756 13,602
Current portion of long-term debt (Note 7) 123,384 11,977
Current portion of obligations under capital leases (Note 8) 1,368 1,569
----------- ------------
862,096 284,612
Long-term debt (Note 7) 1,234,206 42,012
Obligations under capital leases (Note 8) 7,643 16,318
Other long-term liabilities 22,276 -
Future income taxes (Note 12) 38,338 26,581
SHAREHOLDERS' EQUITY:
Capital stock (Note 9) 248,892 240,408
Contributed surplus 182 182
Retained earnings 260,955 193,734
Foreign currency translation adjustment (11,819) 25,846
----------- ------------
498,210 460,170
Lease commitments (Note 8)
----------- ------------
$ 2,662,769 $ 829,693
=========== ============
See accompanying notes to consolidated financial statements.
On behalf of the Board:
- -s- Isidore Philosophe -s- Lewis Ritchie
- ---------------------- -----------------
ISIDORE PHILOSOPHE LEWIS RITCHIE
Director Director
CINRAM 2003 ANNUAL REPORT 37
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31
2003 2002
----------- -----------
Revenue $ 1,152,631 $ 878,679
Cost of goods sold 913,545 718,485
----------- -----------
Gross profit 239,086 160,194
Selling, general and administrative expenses 96,018 80,969
Amortization of intangible assets and deferred financing fees (Notes 5 and 6) 15,959 -
Unusual items (Note 11) 3,800 2,276
----------- -----------
Earnings before the undernoted 123,309 76,949
Interest on long-term debt 18,489 3,580
Interest on capital leases 570 979
Other interest 97 634
Investment income (4,994) (4,538)
----------- -----------
Earnings before income taxes 109,147 76,294
Income taxes (Note 12):
Current 14,089 12,839
Future 21,152 8,984
----------- -----------
35,241 21,823
----------- -----------
Net earnings 73,906 54,471
Retained earnings, beginning of year 193,734 143,670
Dividends declared (6,685) (4,407)
----------- -----------
Retained earnings, end of year $ 260,955 $ 193,734
=========== ===========
Earnings per share:
Basic $ 1.33 $ 0.99
Diluted 1.31 0.98
=========== ===========
Weighted average number of shares outstanding (in thousands) (Note 10):
Basic 55,628 55,054
Diluted 56,612 55,335
=========== ===========
See accompanying notes to consolidated financial statements.
38 CINRAM 2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
Years ended December 31
2003 2002
----------- -----------
Cash provided by (used in):
OPERATIONS:
Net earnings $ 73,906 $ 54,471
Items not involving cash:
Amortization 104,762 75,043
Write-down of carrying value of capital assets - 4,604
Future income taxes 21,152 9,085
Gain on disposition of capital assets (203) (79)
Unrealized foreign exchange loss 2,229 4,453
Change in non-cash operating working capital (Note 16) 335,320 4,733
----------- -----------
537,166 152,310
FINANCING:
Decrease in bank operating loans - (8,517)
Increase in long-term debt 1,338,856 22,057
Repayment of long-term debt (12,859) (9,055)
Deferred financing fees (37,393) -
Decrease in obligations under capital leases (880) (1,522)
Issuance of common shares 8,484 1,943
Change in other long-term liabilities 63 -
Dividends paid (6,685) (4,407)
----------- -----------
1,289,586 499
INVESTMENTS:
Acquisition, net of cash acquired of $1,843 (Note 2) (1,535,778) -
Purchase of capital assets (111,830) (69,309)
Proceeds on disposition of capital assets 1,339 6,237
Decrease (increase) in other assets 4,210 (19,915)
----------- -----------
(1,642,059) (82,987)
Foreign exchange gain (loss) on cash held in foreign currencies (20,691) 2,515
----------- -----------
Increase in cash and cash equivalents 164,002 72,337
Cash and cash equivalents, beginning of year 164,216 91,879
----------- -----------
Cash and cash equivalents, end of year $ 328,218 $ 164,216
=========== ===========
Supplemental cash flow information:
Interest paid $ 12,481 $ 5,759
Income taxes paid 23,966 13,254
=========== ===========
See accompanying notes to consolidated financial statements.
CINRAM 2003 ANNUAL REPORT 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: These consolidated financial statements include
the accounts of Cinram International Inc. (the "Company") and its
wholly owned subsidiaries. The results of subsidiaries acquired during
the year have been consolidated from the date of acquisition. The
accounts of the joint venture have been consolidated in the financial
statements on a proportionate basis. All intercompany balances and
transactions have been eliminated on consolidation.
B) REVENUE RECOGNITION: Revenue is comprised of product sales and service
revenue earned from fulfillment services. Revenue from product sales
is recognized when title to the goods is transferred to customers, the
selling price is fixed and determinable and collectibility is
reasonably assured. Volume rebates are recorded as a reduction of
revenue at the time of shipment. Contractual payments to acquire sales
contracts are amortized against revenue over the term of the contract.
Services revenue is recognized as services are performed.
C) INVENTORIES: Raw materials are stated at the lower of cost, on a
first-in, first-out basis, and replacement cost. Finished goods and
work in process are stated at the lower of cost and net realizable
value. Cost includes materials and an application of relevant
manufacturing labour and overhead.
D) CAPITAL ASSETS: Capital assets are recorded at cost and are amortized
over their estimated useful lives. Cost represents acquisition or
construction costs, including preparation, installation and testing
charges incurred with respect to capital assets until they are ready
for commercial production. Major renewals and improvements are
capitalized, while maintenance and repairs are charged to operations
as incurred. Gains or losses arising from the disposition of capital
assets are reflected in net earnings.
Capital assets are amortized on a straight-line basis, commencing when
the asset is entered into use. Estimated useful lives for the
principal asset categories are as follows:
Buildings 20 - 40 years
Machinery and equipment 3 - 13 years
Computer equipment 3 - 5 years
Furniture 5 years
Leasehold improvements Over term of lease
E) GOODWILL AND INTANGIBLE ASSETS:
(i) Goodwill: Goodwill is the residual amount that results when the
purchase price of an acquired business exceeds the sum of the
amounts allocated to the tangible and intangible assets acquired,
less liabilities assumed, based on their fair values. When the
Company enters into a business combination, the purchase method
of accounting is used. Goodwill is assigned as of the date of the
business combination to reporting units that are expected to
benefit from the business combination.
Goodwill is not amortized but instead is tested for impairment
annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test is
carried out in two steps. In the first step, the carrying amount
of the reporting unit, including goodwill, is compared with its
fair value. When the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered
to be impaired and the second step of the impairment test is
unnecessary. The second step is carried out when the carrying
amount of a reporting unit exceeds its fair value, in which case,
the implied fair value of the reporting unit's goodwill,
determined in the same manner as the value of goodwill is
determined in business combination, is compared with its carrying
amount to measure the amount of the impairment loss, if any.
40 CINRAM 2003 ANNUAL REPORT
(ii) Intangible assets: Intangible assets acquired in a business
combination are recorded at their fair values and all intangible
assets are tested for impairment annually or more frequently when
events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Intangible assets with
determinable lives are amortized over their estimated useful
lives and are tested for impairment as described in note 1(f).
F) IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: The Company reviews
capital and intangible assets (long-lived assets) for impairment on an
annual basis or whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable in accordance with the
new accounting standards of The Canadian Institute of Chartered
Accountants' ("CICA") Handbook Section 3063, "Impairment or Disposal
of Long-Lived Assets," and revised Section 3475, "Disposal of
Long-Lived Assets and Discontinued Operations," which the Company
adopted effective January 1, 2003. Absent any triggering factors
during the year, the Company conducts its long-lived asset assessment
in the fourth quarter to correspond with its planning cycle. Under the
new standards, assets must be classified as either held-for-use or
available-for-sale. An impairment loss is recognized when the carrying
amount of an asset that is held and used exceeds the projected
undiscounted future net cash flows expected from its use and disposal,
and is measured as the amount by which the carrying amount of the
asset exceeds its fair value, which is measured by discounted cash
flows when quoted market prices are not available. For assets
available-for-sale, an impairment loss is recognized when the carrying
amount exceeds the fair value less costs to sell. Prior to January 1,
2003, the Company assessed and measured impairment by comparing the
carrying amount to the undiscounted future cash flows the long-lived
assets were expected to generate.
G) PENSION BENEFITS: The Company accrues its obligations under employee
benefit plans and the related costs, net of plan assets. The cost of
pensions earned by employees is actuarially determined using the
projected benefit method pro-rated on service, and management's best
estimate of expected plan investment performance, salary escalation,
compensation levels at time of retirement, and retirement ages of
employees. Changes in these assumptions could impact future pension
expense. For the purpose of calculating the expected return on plan
assets, assets are valued at fair value. Actuarial gains or losses are
amortized over the average remaining service period of active
employees. Pension assets are recorded as other assets while pension
liabilities are recorded as accrued pension benefits within other
long-term liabilities.
H) DEFERRED FINANCING FEES: Fees relating to long-term debt are deferred
and amortized over the term of the related debt or debt facilities to
which they relate.
I) FOREIGN CURRENCY TRANSLATION: Transactions in foreign currencies are
translated into Canadian dollars at the exchange rate in effect on the
transaction date. Monetary items expressed in foreign currencies are
translated into Canadian dollars at the exchange rates in effect at
the consolidated balance sheet date. The resulting exchange gains and
losses are included in the determination of net earnings for the year.
For self-sustaining foreign operations, all assets and liabilities are
translated into Canadian dollars using year-end exchange rates and
revenue and expenses are translated at average exchange rates. Gains
and losses arising from the translation of the financial statements of
self-sustaining foreign operations are deferred and included as a
separate component of shareholders' equity. The Company's borrowings
as outlined in Note 7 are denominated in U.S. dollars and represent a
hedge of the Company's net investment in its U.S. operations. The
Company formally assesses the hedge's effectiveness at the end of each
quarter.
J) RESEARCH AND DEVELOPMENT COSTS: Development costs relating to specific
projects that in the Company's view have a clearly defined future
market are deferred and amortized based on production. All other
research and other developments costs, net of investment tax credits,
are charged to earnings in the year in which they are incurred.
CINRAM 2003 ANNUAL REPORT 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
K) CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investment instruments with a maturity of three months or less at the
time of purchase to be cash equivalents.
L) STOCK-BASED COMPENSATION: The Company has a stock option plan for
employees, officers and directors. All stock options issued under this
plan have an exercise price equal to the fair market value of the
underlying common shares on the date of grant. As a result, the
Company records no compensation expense on the grant of options to the
Company's employees under the plan. The Company discloses the pro
forma effect of accounting for these awards under the fair value-based
method (Note 9(d)).
The Company accounts for all stock-based payments to non-employees and
employee awards that are direct awards of stock, call for settlement
in cash or other assets, or are stock appreciation rights that call
for settlement by the issuance of equity instruments using the fair
value-based method.
M) INCOME TAXES: The Company follows the asset and liability method of
accounting for income taxes. Under the asset and liability method,
future income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Future income tax assets
and liabilities are measured using enacted or substantively enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on future income
tax assets and liabilities of a change in tax rates is recognized in
income in the year that includes the enactment or substantive
enactment date. Future income tax assets are recognized and if
realization is not considered "more likely than not", a valuation
allowance is provided.
N) EARNINGS PER SHARE: Basic earnings per share is calculated by dividing
the earnings available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted earnings
per share is calculated using the treasury stock method, which assumes
that all stock options with exercise prices below the market prices
are exercised with the proceeds used to purchase common shares of the
Company at the average market price during the year.
O) USE OF ESTIMATES: The preparation of financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the year. Significant
estimates are used in determining, but not limited to, the valuation
of intangible assets and goodwill, provisions for sales allowances,
royalty provisions, the allowance for doubtful accounts, inventory
valuation, income tax valuation allowances, restructuring costs, the
useful lives of all depreciable assets and the recoverability of
capital assets and long-lived assets. Actual results could differ from
those estimates.
P) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
(i) Stock-based compensation: In 2003, the CICA amended Handbook
Section 3870, "Stock-based Compensation and Other Stock-based
Payments," to require the recording of compensation expense on
the granting of all stock-based compensation awards, including
stock options to employees, calculated using the fair value
method. The Company adopted this standard on January 1, 2004. The
cumulative effect of the change on prior periods related to stock
options granted on or after January 1, 2002, amounted to $4.0
million and will be charged against opening retained earnings in
2004, with the offset credited to contributed surplus. Based on
stock options outstanding at December 31, 2003, the Company will
record a stock-based compensation expense of $1.7 million in
2004.
42 CINRAM 2003 ANNUAL REPORT
(ii) Revenue recognition: In December 2003, the Emerging Issues
Committee released EIC-141, "Revenue Recognition," and EIC-142,
"Revenue Arrangements with Multiple Deliverables," which are
effective on a prospective basis for the Company's 2004 fiscal
year. EIC-141 incorporates the principles and guidance under U.S.
generally accepted accounting principles ("GAAP") and EIC-142
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue
generating activities. The adoption of this standard will not
have an impact on the consolidated financial statements.
(iii) Hedging relationships: The CICA issued Accounting Guideline 13,
"Hedging Relationships" ("AcG-13"), which establishes criteria
for hedge accounting effective on a prospective basis for the
Company's 2004 fiscal year. The Company has reviewed the
requirements of AcG-13 and has determined that its current hedges
qualify for hedge accounting under the new guideline.
(iv) Asset retirement obligations: In March 2003, the CICA issued
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, development or normal
operation. This standard is effective on a retroactive basis with
restatement as of January 1, 2004. The Company has obligations
with respect to retirement of leasehold improvements at the
maturity of facility leases, and is currently assessing the
impact of implementing this standard.
(v) Generally accepted accounting principles: In July 2003, the CICA
issued Handbook Section 1100, "Generally Accepted Accounting
Principles." This section establishes standards for financial
reporting in accordance with Canadian GAAP. It describes what
constitutes Canadian GAAP and its sources. This section also
provides guidance on sources to consult when selecting accounting
policies and determining appropriate disclosures when the primary
sources of Canadian GAAP are silent. This standard is effective
for the Company's 2004 fiscal year. The adoption of this standard
will not have an impact on the consolidated financial statements.
(vi) Liabilities and equity: In November 2003, the CICA approved
amendments to Handbook Section 3860, "Financial Instruments -
Presentation and Disclosure," to require obligations that may be
settled, at the issuer's option, by a variable number of the
issuer's own equity instruments to be presented as liabilities.
Thus securities issued by an enterprise that give the issuer
unrestricted rights to settle the principal amount in cash or in
the equivalent value of its own equity instruments will no longer
be presented as equity.
The CICA concluded that not all such obligations establish the
type of relationship that exists between an entity and its
owners, but rather they convey more of a debtor/creditor
relationship because they require the issuer to convey a fixed
amount of value to the holder that does not vary with changes in
the fair value of the instruments. Therefore, these instruments
should be presented as liabilities. The standard will be
effective for the Company's 2005 fiscal year on a retroactive
basis. The adoption of this standard will not have an impact on
the consolidated financial statements.
(vii) Consolidation of variable interest entities: In June 2003, the
CICA issued Accounting Guideline 15, "Consolidation of Variable
Interest Entities" ("VIEs"). VIEs are entities that have
insufficient equity and/or their equity investors lack one or
more specified essential characteristics of a controlling
financial interest. The guideline provides specific guidance for
determining when an entity is a VIE and who, if anyone, should
consolidate the VIE. The guideline is effective on a prospective
basis for the Company's 2005 fiscal year. The adoption of this
standard will not have an impact on the consolidated financial
statements.
CINRAM 2003 ANNUAL REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
2. ACQUISITION OF TIME WARNER INC. BUSINESSES
On October 24, 2003, the Company acquired Time Warner Inc.'s DVD and CD
manufacturing and physical distribution businesses, together with certain
related printing and apparel businesses, in the U.S. and Europe for total cash
consideration of $1,522,036 (US$1,165,240) plus acquisition costs of $15,585.
The acquisition has been accounted for using the purchase method and,
accordingly, the results of operations of the businesses acquired have been
included in the consolidated financial statements since the acquisition date.
The Company has not yet completed the allocation of the purchase price for the
acquisition. The preliminary allocation of the purchase price, based on
independent appraisals and management's estimates is as follows:
Current assets, including cash of $1,843 $ 415,643
Capital assets 546,266
Future tax assets 31,009
Intangible assets 506,675
Goodwill 352,403
-------------
1,851,996
Current liabilities (292,394)
Other non-current liabilities (21,981)
-------------
Total cash purchase consideration $ 1,537,621
=============
Intangible assets totalling $503,802 were assigned to customer supply agreements
with Time Warner Inc. and will be amortized over the six-year period of the
agreement. Intangible assets totalling $2,873 were assigned to certain
cross-licensing agreements and will be amortized over a period of one year.
3. INVENTORIES
2003 2002
--------- ---------
Raw materials $ 42,471 $ 36,391
Work in process 10,772 3,534
Finished goods 4,437 23,138
--------- ---------
$ 57,680 $ 63,063
========= =========
44 CINRAM 2003 ANNUAL REPORT
4. CAPITAL ASSETS
2003
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
----------- ------------ ---------
Land $ 28,767 $ - $ 28,767
Buildings 161,323 11,937 149,386
Machinery and equipment 857,327 299,897 557,430
Computer equipment 20,160 11,355 8,805
Furniture 24,779 18,447 6,332
Leasehold improvements 40,468 24,147 16,321
Construction in progress 60,016 - 60,016
----------- ---------- ---------
$ 1,192,840 $ 365,783 $ 827,057
=========== ========== =========
2002
Accumulated Net book
Cost amortization value
-------- ------------- --------
Land $ 7,340 $ - $ 7,340
Buildings 81,295 12,250 69,045
Machinery and equipment 477,530 279,744 197,786
Computer equipment 12,740 10,874 1,866
Furniture 23,529 20,362 3,167
Leasehold improvements 33,993 20,244 13,749
Construction in progress 5,392 - 5,392
-------- ------------- --------
$641,819 $ 343,474 $298,345
======== ============= ========
Amortization expense for the above noted capital assets for the year ended
December 31, 2003 amounted to $87,325 (2002 - $73,112).
Assets under capital leases:
2003
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ ----------
Land $ 1,316 $ - $ 1,316
Buildings 17,979 10,729 7,250
Machinery and equipment 2,576 2,128 448
---------- ---------- ----------
$ 21,871 $ 12,857 $ 9,014
========== ========== ==========
2002
Accumulated Net book
Cost amortization value
---------- ------------- ----------
Land $ 3,606 $ - $ 3,606
Buildings 24,717 15,023 9,694
Machinery and equipment 4,891 4,891 -
---------- ------------- ----------
$ 33,214 $ 19,914 $ 13,300
========== ============= ==========
CINRAM 2003 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
The assets under capital leases are being amortized on a straight-line basis
over their anticipated economic life which is 20 years for buildings, four years
for machinery and equipment and three years for computer equipment. Amortization
expense for assets under capital lease for the year ended December 31, 2003,
amounted to $1,478 (2002 - $1,931).
5. GOODWILL AND INTANGIBLE ASSETS
A) GOODWILL:
Effect of
December 31, Goodwill foreign DECEMBER 31,
2002 acquired exchange 2003
----------- -------- -------- ------------
Goodwill $ 6,789 $352,403 $ 2,134 $ 361,326
=========== ======== ======== ============
On October 24, 2003, the Company acquired the assets of Time Warner
Inc.'s DVD and CD manufacturing and physical distribution businesses,
together with certain related printing and apparel businesses, in the
U.S. and Europe. This transaction had the impact of increasing
goodwill by $352,403 (Note 2).
During the fourth quarter of 2003, the Company performed its annual
goodwill impairment test. The fair values of the reporting units were
estimated using discounted cash flows. Revenue and expense projections
used in determining the fair value of the reporting units were based
on management estimates, including estimates of current and future
industry conditions.
B) INTANGIBLE ASSETS:
Effect of
Accumulated foreign Net book
Cost amortization exchange value
----------- ------------ --------- --------
Customer supply agreements $ 503,802 $ 14,387 $ (5,053) $484,362
Cross-licensing agreements 2,873 493 (28) 2,352
----------- ------------ --------- --------
$ 506,675 $ 14,880 $ (5,081) $486,714
=========== ============ ========= ========
Amortization of intangible assets for the year ended December 31,
2003, amounted to $14,880 (2002 - nil).
Customer supply agreements and cross-licensing agreements have been
acquired as part of the acquisition of certain of the assets of Time
Warner Inc. (Note 2). Customer supply agreements are being amortized
on a straight-line basis over a period of six years, which represents
the exclusive term in which the Company will manufacture, print,
package and physically distribute DVDs and CDs for Warner Home Video
and Warner Music Group in North America and Europe, and for New Line
Home Entertainment Inc. in North America. Cross-licensing agreements
are being amortized over a period of one year.
6. DEFERRED FINANCING FEES:
In connection with the credit agreement entered into in October 2003 (Note 7),
the Company incurred $37,393 of financing fees.
Amortization of deferred financing fees for the year ended December 31, 2003
amounted to $1,079 (2002 - nil).
46 CINRAM 2003 ANNUAL REPORT
7. LONG-TERM DEBT
CREDIT AGREEMENT: In October 2003, the Company entered into a credit agreement
with a syndicate of lenders to provide the Company with credit facilities of up
to US$1,175,000. The facilities are comprised of term loans of US$1,025,000 (as
outlined below) and a revolving credit facility of US$150,000. Amounts
outstanding under the facilities are secured by all of the assets of the
Company. The revolving credit facility bears interest at the London InterBank
Offered Rate (LIBOR) plus 300 basis points. No amounts were drawn on the
revolving credit facility as at December 31, 2003. The terms of the credit
agreement require the Company to comply with certain financial and other
covenants over the term. As at December 31, 2003, the Company was in compliance
with all the terms of its credit agreement. Amounts outstanding under the
facilities are shown in the table below:
2003 2002
---------- ----------
Credit agreement:
Term loan A, US$250,000 (a) $ 323,275 $ -
Term loan B, US$675,000 (b) 872,843 -
Term loan C, US$98,270 (c) 127,073 -
---------- ----------
1,323,191 -
Other long-term debt:
US$26,603 (2002 - US$33,976) (d) 34,399 53,656
Other - 333
---------- ----------
1,357,590 53,989
Less current portion 123,384 11,977
---------- ----------
$1,234,206 $ 42,012
========== ==========
(a) Term loan A for US$250,000 due September 30, 2007, with quarterly
principal repayments commencing on March 31, 2004. Interest on the
loan is payable at LIBOR plus 300 basis points.
(b) Term loan B for US$675,000 due September 30, 2009, with quarterly
principal repayments commencing on March 31, 2004. Interest on the
loan is payable at LIBOR plus 375 basis points.
(c) Term loan C for US$100,000 due March 31, 2010, with a lump sum
repayment on maturity. In November 2003, the Company made a mandatory
repayment of US$1,730 upon the exercise of certain warrants (Note
9(b)). Interest on the loan is payable at LIBOR plus 575 basis points.
The credit agreement requires the Company to enter into an interest protection
arrangement by July 18, 2004, for a minimum term of three years for at least 50%
of the term loan amounts outstanding. The weighted average interest rate on the
credit facility for the year ended December 31, 2003, was 6%.
(d) Asset-backed financing: In December 2001 and June 2002, the Company
entered into asset-backed financing due December 31, 2006, with
blended monthly principal and interest repayment over a five-year
period, secured by certain capital assets, bearing interest between
6.85% and 7.33%.
Future minimum repayments of long-term debt are as follows:
2004 $ 123,384
2005 98,278
2006 165,108
2007 177,800
2008 129,310
2009 and thereafter 663,710
-------------
$ 1,357,590
=============
CINRAM 2003 ANNUAL REPORT 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
8. LEASES
Future minimum rental commitments for all non-cancelable operating and capital
leases as at December 31, 2003 are as follows:
Capital Operating Total
--------- --------- -------
2004 $ 1,931 $ 16,424 $18,355
2005 1,887 8,095 9,982
2006 2,175 6,413 8,588
2007 1,056 5,802 6,858
2008 781 4,722 5,503
2009 and thereafter 3,535 1,012 4,547
--------- --------- -------
11,365 $ 42,468 $53,833
========= =======
Less interest (average rate of 7%) 2,354
---------
9,011
Less current portion 1,368
---------
$ 7,643
=========
Operating lease expense for the year ended December 31, 2003, amounted to $9,494
(2002 - $7,944).
9. CAPITAL STOCK
A) AUTHORIZED: The authorized capital stock of the Company consists of an
unlimited number of common shares and an unlimited number of
preference shares. The preference shares are non-voting and are
entitled to dividends as and when declared by the Board of Directors.
B) ISSUED AND OUTSTANDING:
Capital stock issued and outstanding at December 31, 2003, and 2002
includes the following:
Common
shares Warrants Amount
---------- ---------- --------
Balance outstanding, December 31, 2001 54,836,726 1,700,000 $238,465
Options exercised during 2002 360,165 - 1,943
---------- ---------- --------
Balance outstanding, December 31, 2002 55,196,891 1,700,000 240,408
Warrants expired - (1,500,000) -
Warrants exercised 200,000 (200,000) 3,000
Options exercised during 2003 678,401 - 5,484
---------- ---------- --------
Balance outstanding, December 31, 2003 56,075,292 - $248,892
========== ========== ========
C) STOCK-BASED COMPENSATION PLAN: At December 31, 2003, the Company had
one stock-based compensation plan pursuant to which the Company may
grant options to employees, officers and directors of the Company for
up to 4,000,000 common shares. The Company has the ability to issue an
additional 29,501 options at December 31, 2003. The exercise price of
each option equals the market price of the Company's stock on the date
of the grant; an option's maximum term is 10 years. The options
vesting periods range from three years to five years.
48 CINRAM 2003 ANNUAL REPORT
A summary of the status of the Company's employee stock option plan as at
December 31, 2003 and 2002 and changes during the years ended on those dates is
presented below:
2003 2002
WEIGHTED Weighted
AVERAGE average
SHARES EXERCISE PRICE Shares exercise price
--------- -------------- --------- --------------
Outstanding, beginning of year 2,756,340 $ 9.04 2,600,002 $ 8.35
Granted 478,000 11.25 692,000 10.20
Exercised (678,401) 8.08 (360,165) 5.39
Forfeited (28,000) 12.69 (175,497) 10.95
--------- -------------- --------- --------------
Outstanding, end of year 2,527,939 9.67 2,756,340 9.04
========= ============== ========= ==============
Options exercisable, end of year 1,455,339 $ 11.83 1,578,840 $ 12.12
========= ============== ========= ==============
The following summarizes information about the employee stock options at
December 31, 2003:
Options outstanding Options exercisable
-----------------------------------------------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Options contractual exercise Options exercise
exercise price outstanding life (years) price exercisable price
- -------------- ----------- ------------ -------- ----------- --------
$ 2.74 - $ 4.00 113,838 2.4 $ 2.74 20,338 $ 2.74
$ 4.00 - $ 6.00 175,000 0.5 4.63 175,000 4.63
$ 6.00 - $ 8.00 160,000 1.2 6.88 160,000 6.88
$ 8.00 - $10.00 125,500 6.2 8.10 125,500 8.10
$10.00 - $15.00 1,284,101 4.0 10.84 305,001 10.98
$15.00 - $20.00 453,000 3.0 17.13 453,000 17.13
$20.00 - $22.00 216,500 4.5 22.00 216,500 22.00
--------- --- -------- --------- --------
$ 2.74 - $22.00 2,527,939 3.5 9.67 1,455,339 11.83
========= === ======== ========= ========
D) STOCK-BASED COMPENSATION: For stock options granted to employees on or
after January 1, 2002, had the Company determined compensation expense
based on the "fair value" method at the grant date of such stock
option awards, consistent with the method prescribed under CICA
Handbook Section 3870, the Company's net earnings for the year and
earnings per share would have been reported as the pro forma amounts
indicated below:
2003 2002
--------- ---------
Net earnings, as reported $ 73,906 $ 54,471
Stock-based compensation expense 2,796 1,185
--------- ---------
Pro forma net earnings $ 71,110 $ 53,286
========= =========
Basic earnings per share, as reported $ 1.33 $ 0.99
Effect of stock-based compensation expense 0.05 0.02
--------- ---------
Pro forma basic earnings per share $ 1.28 $ 0.97
========= =========
Diluted earnings per share, as reported $ 1.31 $ 0.98
Effect of stock-based compensation expense 0.05 0.02
--------- ---------
Pro forma diluted earnings per share $ 1.26 $ 0.96
========= =========
CINRAM 2003 ANNUAL REPORT 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
The weighted average estimated fair value at the date of the grant for
options granted during the year ended December 31, 2003, was $5.56 per
share (2002 - $5.28).
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing with the following
assumption:
2003 2002
---- ----
Risk-free interest rate 4.0% 4.0%
Dividend yield 1.0% 0.768%
Volatility factor of the future expected market price of common share 57% 60%
Weighted average expected life of the options 5 YEARS 5 years
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.
10. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share have been calculated using the weighted
average and maximum dilutive number of shares outstanding during the year, which
amounted to 55,628,006 (2002 - 55,053,741) and 56,611,737 (2002 - 55,334,605),
respectively.
The following table sets forth the computation of diluted earnings per share:
2003 2002
---------- --------
Numerator:
Earnings available to common shareholders $ 73,906 $ 54,471
========== ========
Denominator (shares in thousands):
Weighted average shares outstanding 55,628 55,054
Effect of dilutive securities:
Employee stock options 984 281
---------- --------
Adjusted weighted average shares and assumed conversions 56,612 55,335
========== ========
Stock options to purchase 216,500 common shares (2002 - 1,673,000 stock options
and 1,700,000 warrants) were outstanding but were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of the common shares for the year.
11. UNUSUAL ITEMS
2003 2002
-------- ---------
Provision for restructuring (i), (iii) $ 3,800 $ (2,328)
Write-down of carrying value of capital assets (ii) - 4,604
-------- ---------
$ 3,800 $ 2,276
======== =========
50 CINRAM 2003 ANNUAL REPORT
2003:
(i) During 2003, management closed a VHS duplication facility located in
France. Management began to formulate an exit plan in April 2003
concurrent with management's discussions with the employee works
council, which was concluded in July 2003. The exit plan was finalized
in November 2003 and termination notices were given shortly thereafter
to all 102 employees. The duplication facility ceased production on
December 17, 2003, resulting in the incurrence of severance and other
employee-related costs, lease cancellation and idle facility costs,
asset write-downs, and certain other exit costs. The Company expects
to complete the closure of the facility by the end of 2004, except for
certain lease obligations.
The following table details the activity of the accrued restructuring
liability and related charges:
BALANCE,
Cash DECEMBER 31,
Provision payments 2003
--------- -------- ------------
Type of cost:
Severance and other employee-related costs $ 3,066 $ (222) $ 2,844
Lease cancellation and idle facilities 308 (10) 298
Other exit costs 162 (106) 56
--------- -------- ------------
3,536 $ (338) $ 3,198
======== ============
Asset write-downs 264
---------
$ 3,800
=========
2002:
(ii) During 2002, as part of the Company's restructuring efforts in
Europe, management negotiated an agreement to sell the shares of
Cinram Nederland B.V. As part of this transaction, management reviewed
the carrying value of its capital assets in the Netherlands, resulting
in the write-down of capital assets to their net recoverable amount.
(iii) As a result of the above noted transaction, management also
determined that certain restructuring provisions recorded in prior
periods were no longer necessary as the headcount reductions which
were anticipated and provided for did not materialize.
12. INCOME TAXES
Income tax expense varies from the amount that would be computed by applying the
basic combined federal and provincial rate as follows:
2003 2002
------------------ ------------------
Basic rate applied to pretax earnings $ 39,948 36.6 % $ 29,449 38.6 %
Increase (decrease) in taxes resulting from:
Manufacturing and processing reduction (965) (0.9)% (1,522) (2.0)%
Losses in foreign subsidiaries not tax-effected 1,132 1.0 % 484 0.6 %
Losses utilized in the current period to reduce taxable
income not previously recognized (577) (0.5)% (1,883) (2.5)%
Tax rates in other jurisdictions (4,004) (3.7)% (4,844) (6.3)%
Other items (293) (0.2)% 139 0.2 %
--------- ---- --------- ----
$ 35,241 32.3 % $ 21,823 28.6 %
========= ==== ========= ====
CINRAM 2003 ANNUAL REPORT 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
The tax effects of temporary differences that give rise to significant portions
of the future tax assets and future tax liabilities at December 31, 2003, and
2002 are presented below:
2003 2002
----------- ----------
Future tax assets:
Non-capital income tax loss carryforwards $ 11,519 $ 8,005
Capital loss carryforwards 4,183 3,714
Accruals not deductible in the current period 23,738 9,903
Capital assets - difference in net book value and undepreciated capital costs 13,351 1,748
Goodwill and intangible assets 277 493
----------- ----------
53,068 23,863
Less valuation allowance 18,685 14,958
----------- ----------
34,383 8,905
Future tax liabilities:
Capital assets - difference in net book value and undepreciated capital costs (33,185) (26,581)
Goodwill and intangible assets (5,153) -
----------- ----------
(38,338) (26,581)
----------- ----------
Net future tax liabilities $ (3,955) $ (17,676)
=========== ==========
At December 31, 2003, the Company has non-capital loss carryforwards in Europe.
No benefit has been established in relation to these losses as it is not more
likely than not that the Company will be able to utilize these losses in the
future.
The income tax losses in Europe expiring in the years ending December 31 are as
follows:
2005 $ 2,350
2009 and thereafter 31,051
---------
$ 33,401
=========
13. CONTINGENT LIABILITIES
The Company is involved in various legal actions that are normal to the
Company's business in the opinion of the Company, any resulting liability is not
expected to have a material adverse effect on the Company's financial position
or its results.
14. RELATED PARTY TRANSACTIONS
The Company entered into the following related party transactions:
(a) In September 2003, the Company purchased premises from three companies
owned by certain shareholders of the Company and their families for
$7,400, representing the fair market value of the land and building
based on independent appraisals on the date of acquisition. These
premises were purchased to allow the Company to complete consolidation
and capacity expansion plans.
Prior to the purchase of the land and building, the Company leased
these premises on a month-to-month basis at an exchange amount as
agreed to by the parties. Lease costs for 2003 up to the purchase of
the premises were $570 (2002 - $760).
(b) During 2003, the Company paid the following amounts to related
parties: $3,177 (2002 - $534) to a law firm including $3,000 for
acquisition related work, where one of Cinram's Directors and one of
Cinram's Officers are each partners, and $250 (2002 - $188) to a
Director for consulting services.
52 CINRAM 2003 ANNUAL REPORT
15. PENSION AND NON-PENSION EMPLOYMENT BENEFIT PLANS
As part of the Time Warner Inc. acquisition (Note 2), the Company assumed
contributory and non-contributory defined benefit pension plans that cover
certain of its newly acquired workforce in the U.S. and Germany.
The plan assets and the benefit obligations were transferred over to the Company
on October 24, 2003.
UNITED STATES:
Certain non-union and union employees participate in the pre-tax defined
contribution plan (the "401(k) Plan"). The Company's contributions under the
401(k) Plan are based upon a Company's 401(k) Plan expense amounted to $850 for
the year ended December 31, 2003 (2002 - $6001).
Certain union employees of the Company also participate in the Cinram Music
Union Pension Plan (the "Music Union Plan"). Pension benefits under the Music
Union Plan are based on formulas that reflect the employees' years of service
multiplied by a specified dollar amount negotiated in collective bargaining.
The most recent actuarial valuations were completed on January 1, 2003.
GERMANY:
The Company's defined benefit pension plans cover certain existing and former
employees who have signed specific agreements related to pension benefits,
including members of senior and middle management. The pension plan
contributions are based on German tax law requirements and therefore the plans
remain essentially unfunded.
The Company has an early retirement agreement with its employee works council as
part of a labour contract whereby eligible employees are able to receive certain
benefits during a period of reduced work prior to attaining standard retirement
age and German State pension benefits. A total liability of approximately $1,046
has been accrued for as of December 31, 2003.
The Company's German subsidiary also has an agreement with its employee works
council as part of a labour contract whereby employees receive years of service
awards upon reaching their 10 and 25-year service anniversaries. Employment and
income taxes associated with this award are paid by the Company and a total
liability of approximately $2,313 has been accrued for as of December 31, 2003.
The most recent actuarial valuations were completed on December 31, 2003.
The estimated present value of the benefit obligation and the estimated market
value of the net assets available to provide for the defined benefits at
December 31 are as follows:
United States Germany Total
------------- ------------ ----------
Plan assets, at fair value $ 6,022 $ - $ 6,022
Benefit obligations (7,091) (21,700) (28,791)
-------- ------------ ----------
Deficiency of plan assets over benefit obligation (1,069) (21,700) (22,769)
Unrecognized actuarial gain - (336) (336)
-------- ------------ ----------
Net amount recognized $ (1,069) $ (22,036) $ (23,105)
======== ============ ==========
CINRAM 2003 ANNUAL REPORT 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
Pension fund assets consist primarily of fixed income and equity securities,
valued at market value. The following information is provided on pension fund
assets:
United States Germany Total
------------- ------- -----
Fair value of plan assets as of October 24, 2003 $ 6,035 $ - $ 6,035
Actual return on plan assets 147 - 147
Actual benefits paid (160) - (160)
------------- ------- -------
FAIR VALUE OF PLAN ASSETS AS OF DECEMBER 31, 2003 $ 6,022 $ - $ 6,022
============= ======= =======
Benefit obligations are outlined below:
United States Germany Total
------------- ------- -----
Benefit obligations as of October 24, 2003 $ 7,133 $22,049 $29,182
Service cost 47 37 84
Interest cost 71 207 278
Actual benefits paid (160) (257) (417)
Actuarial gain - (336) (336)
------------- ------- -------
BENEFIT OBLIGATIONS AS OF DECEMBER 31, 2003 $ 7,091 $21,700 $28,791
============= ======= =======
Net plan expense is outlined below:
United States Germany Total
------------- ------- -----
Components of net periodic cost from
October 24, 2003 to December 31, 2003:
Service cost $ 47 $ 37 $ 84
Interest cost 71 207 278
Expected return on plan assets (78) - (78)
------------- ------- -------
Net periodic benefit cost $ 40 $ 244 $ 284
============= ======= =======
Actuarial assumptions:
United States Germany
------------- -------
Weighted-average actuarial assumptions used to determine net cost:
Discount rate for accrued benefit obligations 6.25% 5.25%
Rate of compensation increase 4.50% 3.50%
Expected return on plan assets 8% -
16. CHANGE IN NON-CASH OPERATING WORKING CAPITAL
2003 2002
-------- ---------
Decrease in accounts receivable $ 37,500 $ 21,443
Decrease (increase) in inventories 76,499 (24,305)
Decrease (increase) in prepaid expenses 10,835 (2,806)
Increase in accounts payable and accrued liabilities 219,871 7,004
Increase (decrease) in income taxes payable (9,385) 3,397
-------- ---------
$335,320 $ 4,733
======== =========
54 CINRAM 2003 ANNUAL REPORT
17. SEGMENTED INFORMATION
The Company has three reportable business segments, being Audio/ROM
replication/duplication, Home Video replication/duplication and Printing.
The Home Video replication/duplication segment manufactures video cassettes and
DVDs. The Audio/ROM replication/duplication segment manufactures audio
cassettes, CDs and CD-ROMs. 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.
In 2003, the Company was dependent on two customers for approximately 30% and
19%, respectively, of consolidated revenue from the two main business segments.
At December 31, 2003, these customers represented approximately 21% and 28%,
respectively, of consolidated accounts receivable.
In 2002, the Company was dependent on two customers for approximately 37% and
15%, respectively, of consolidated revenue from the two main business segments.
At December 31, 2002, these customers represented approximately 39% and 19%,
respectively, of consolidated accounts receivable.
(a) Industry segments:
2003
HOME VIDEO AUDIO/ROM
REPLICATION/ REPLICATION/
DUPLICATION DUPLICATION PRINTING OTHER TOTAL
------------ ------------ -------- -------- ----------
Revenue from external customers $ 690,416 $ 240,566 $ 64,993 $156,656 $1,152,631
Earnings before interest expense,
investment income, unusual items
and income taxes 103,311 12,174 7,695 3,929 127,109
Total assets 1,634,326 596,038 285,960 146,445 2,662,769
Amortization of capital assets and
assets under capital leases 60,878 19,192 1,669 7,064 88,803
Amortization of intangible assets 12,774 149 1,957 - 14,880
Capital expenditures 97,589 2,701 1,937 9,603 111,830
Additions to goodwill and intangible assets 736,737 8,591 113,750 - 859,078
2002
Home Video Audio/ROM
replication/ replication/
duplication duplication Other Total
------------ ------------- ------- --------
Revenue from external customers $ 539,218 $ 241,261 $98,200 $878,679
Earnings before interest expense, investment
income, unusual items and income taxes 61,994 15,016 2,215 79,225
Total assets 509,157 227,811 92,725 829,693
Amortization of capital assets and assets under
capital leases 46,051 20,605 8,387 75,043
Capital expenditures 43,686 7,919 17,704 69,309
CINRAM 2003 ANNUAL REPORT 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Canadian dollars, except per share and per share amounts)
(b) Revenue from external customers is comprised of the following:
2003 2002
---------- --------
DVD $ 538,633 $245,332
VHS 151,783 293,886
Audio CD/CD-ROM 226,321 207,497
Audio cassette 14,245 33,764
Printing 64,993 -
Distribution 99,390 72,204
Merchandising 28,324 -
Other 28,942 25,996
---------- --------
$1,152,631 $878,679
========== ========
(c) Geographic segments:
UNITED 2003
CANADA STATES FRANCE GERMANY OTHER TOTAL
-------- ---------- -------- -------- ------- ----------
Revenue from external
customers $181,578 $ 693,701 $116,705 $100,618 $60,029 $1,152,631
Capital assets,
assets under capital
leases, goodwill and
intangible assets 95,920 1,352,184 38,525 185,766 11,716 1,684,111
-------- ---------- -------- -------- ------- ----------
United 2002
Canada States France Other Total
-------- ---------- -------- -------- --------
Revenue from
external customers $167,596 $ 452,723 $137,587 $120,773 $878,679
Capital assets,
assets under capital
leases and goodwill 71,439 198,120 35,409 13,466 318,434
18. FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their fair values because of the
short-term maturity of these financial instruments. The carrying values of
long-term debt and obligations under capital leases which have variable interest
rates based on market rates approximate the fair values of those financial
instruments. The fair values of the under capital leases were based on the
amount of future cash flows associated with each instrument discounted using
borrowing rates currently available for similar debt instruments of similar
maturity. The aggregate fair value of the Company's total long-term debt and
obligations under capital
Book value Fair value
---------- ----------
2003 $ 43,410 $ 46,873
2002 71,876 74,108
56 CINRAM 2003 ANNUAL REPORT
19. JOINT VENTURES
The Company's proportionate share of the assets, liabilities and results of
operations of joint ventures as at and for the years ended December 31, 2003,
and 2002, recorded in the consolidated financial statements of the Company, is
as follows:
2003 2002
-------- -------
Current assets $ 7,366 $10,748
Long-term assets 781 1,674
Current liabilities 3,398 4,484
Net sales 18,940 20,841
Earnings before interest expense, investment income, unusual items and income taxes 480 1,729
Net earnings 130 1,012
Cash provided by (used in) operations, financing and investments (excluding
non-cash activities) of joint ventures was as follows:
2003 2002
-------- --------
Cash provided by (used in):
Operations $ 1,684 $ 529
Investments (233) (1,748)
CINRAM 2003 ANNUAL REPORT 57
11-YEAR FINANCIAL SUMMARY
(In thousands of Canadian dollars, except per share data)
2003 2002 2001 2000
--------- ------- ------- -------
INCOME STATEMENT
Revenue 1,152,631 878,679 831,723 652,281
Sales growth in % 31% 6% 28% 1%
Cost of sales 913,545 718,485 710,680 548,703
Gross profit before amortization 343,848 235,237 187,898 161,338
Gross profit % before amortization 30% 27% 23% 25%
Amortization 104,762 75,043 66,855 57,760
Gross profit 239,086 160,194 121,043 103,578
Gross profit as a % of sales 21% 18% 15% 16%
Selling, general and administrative expenses 96,018 80,969 81,208 80,376
Selling, general and administrative
expenses as a % of net sales 8% 9% 10% 12%
Goodwill amortization - - 2,074 5,063
Research and development expenses - - 99 1,700
Unusual items 3,800 2,276 (3,980) 51,676
EBITA* (earnings before interest,
taxes and amortization) 228,071 151,992 108,497 22,523
EBITA* % 20% 17% 13% 3%
EBIT (earnings before interest and taxes) 123,309 76,949 41,642 (35,237)
EBIT* % 11% 9% 5% (5)%
Interest expense 19,156 5,193 9,642 18,192
Investment income 4,994 4,538 4,404 16,671
Write-down of marketable securities - - - -
Income tax expense 35,241 21,823 12,691 (8,647)
Net earnings 73,906 54,471 23,713 (28,111)
Basic EPS** 1.33 0.99 0.43 (0.51)
Diluted EPS** 1.31 0.98 0.43 (0.51)
* EBITA is defined herein as earnings before amortization, interest expense,
investment income, and income taxes. EBIT is defined herein as earnings
before interest expense, investment income and income taxes. Both of these
are standard measures that are commonly reported and widely used in the
industry to assist in understanding and comparing operating results. EBITA
and EBIT are not defined terms under generally accepted accounting
principle (GAAP). Accordingly, these measures should not be considered
substitutes or alternatives for net earnings or cash flow, in each case as
determined in accordance with GAAP.
** Per share data based on 3 for 1 stock split July 1987, 2 for 1 stock split
June 1993 and 2 for 1 stock split February 1998
58 CINRAM 2003 ANNUAL REPORT
1999 1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
INCOME STATEMENT
Revenue 645,539 642,714 513,260 340,718 270,081 144,771 113,519
Sales growth in % 0% 25% 51% 26% 87% 28% 32%
Cost of sales 481,337 487,076 389,279 256,111 205,549 103,902 84,984
Gross profit before amortization 222,777 213,815 165,606 103,234 81,371 50,308 38,586
Gross profit % before amortization 35% 33% 32% 30% 30% 35% 34%
Amortization 58,575 58,177 41,625 18,627 16,839 9,439 10,051
Gross profit 164,202 155,638 123,981 84,607 64,532 40,869 28,535
Gross profit as a % of sales 25% 24% 24% 25% 24% 28% 25%
Selling, general and administrative expenses 71,804 74,222 58,213 33,444 28,296 18,036 10,035
Selling, general and administrative
expenses as a % of net sales 11% 12% 12% 10% 11% 12% 9%
Goodwill amortization 8,746 5,185 2,928 1,257 765
Research and development expenses 1,565 4,490 2,003 2,303 1,953 1,958 1,827
Unusual items 30,551
EBITA* (earnings before interest,
taxes and amortization) 110,111 129,918 102,462 66,230 50,357 30,314 26,724
EBITA* % 17% 20% 20% 19% 19% 21% 24%
EBIT (earnings before interest and taxes) 51,536 71,741 60,837 47,603 33,518 20,875 16,673
EBIT* % 8% 11% 12% 14% 12% 14% 15%
Interest expense 16,026 16,489 8,738 3,095 2,120 - -
Investment income 16,753 17,450 10,374 3,931 3,742 2,309 1,788
Write-down of marketable securities 3,320 6,150
Income tax expense 29,599 24,249 20,339 17,248 12,149 5,187 4,941
Net earnings 19,344 42,303 42,134 31,191 22,991 17,997 13,520
Basic EPS** 0.33 0.71 0.74 0.65 0.51 0.41 0.31
Diluted EPS** 0.32 0.70 0.73 0.63 0.49 0.40 0.31
CINRAM 2003 ANNUAL REPORT 59
11-YEAR COMPARATIVE BALANCE SHEET
11 years ending December 31, 2003 (in thousands of Canadian dollars)
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
BALANCE SHEET
Current ratio 1.05 1.65 1.45 1.30 1.61 1.61 2.65 3.14 1.49 2.32 2.55
Debt to equity ratio* 4.34 0.80 0.84 1.11 1.04 0.98 1.01 0.37 0.85 0.42 0.37
Debt to assets ratio* 0.81 0.45 0.46 0.53 0.51 0.49 0.50 0.27 0.46 0.29 0.27
Equity to assets ratio 0.19 0.55 0.54 0.47 0.49 0.51 0.50 0.73 0.54 0.71 0.73
Accounts receivable turnover** 3 4 4 3 4 5 5 5 6 7 8
Days sales in
accounts receivable** 111 97 103 107 86 80 75 78 63 50 43
Inventory turnover*** 15 14 17 13 12 12 13 11 13 13 12
Days sales in inventory*** 24 26 21 27 31 31 29 32 27 28 30
Asset turnover**** 0.64 1.07 1.13 0.87 0.78 0.79 0.71 0.73 1.09 1.06 1.04
Return on equity***** 15% 13% 6% n/a 5% 10% 12% 13% 19% 20% 18%
Return on total assets****** 4% 7% 3% n/a 2% 5% 7% 9% 12% 14% 13%
* consists of current and long-term liabilities including future income taxes
** two year average accounts receivable
*** two year average inventory
**** total assets excluding intangible assets
***** two year average equity
****** two year average total assets
SUMMARY OF QUARTERLY RESULTS
Years ended December 31
(in thousands of Canadian dollars, except per share data)
Earnings per share
Sales Net Earnings Basic Diluted
QUARTER 2003 2002 2003 2002 2003 2002 2003 2002
---------- -------- ------- ------- ------ ----- ----- -----
First $ 195,106 $181,433 $10,930 $ 3,985 $ 0.20 $0.07 $0.20 $0.07
Second $ 192,188 $171,570 $11,630 $ 7,575 $ 0.21 $0.14 $0.21 $0.14
Third $ 203,529 $224,726 $19,123 $14,843 $ 0.34 $0.27 $0.33 $0.27
Fourth $ 561,808 $300,950 $32,223 $28,068 $ 0.58 $0.51 $0.57 $0.50
---------- -------- ------- ------- ------ ----- ----- -----
Year $1,152,631 $878,679 $73,906 $54,471 $ 1.33 $0.99 $1.31 $0.98
========== ======== ======= ======= ====== ===== ===== =====
60 CINRAM 2003 ANNUAL REPORT
TRADING OF COMMON SHARES: CRW
Years ended December 31 Quarter High Low Closing Volume
------- -------- -------- -------- ------
2003 FIRST $ 11.25 $ 8.36 $ 11.00 12,988
SECOND $ 16.85 $ 10.80 $ 16.43 21,626
THIRD $ 29.60 $ 15.51 $ 24.95 38,905
FOURTH $ 28.59 $ 25.34 $ 28.35 21,488
------- -------- -------- -------- ------
YEAR $ 29.60 $ 8.36 $ 28.35 95,006
------- -------- -------- -------- ------
2002 First $ 8.45 $ 4.62 $ 7.95 23,505
Second $ 11.25 $ 7.52 $ 10.35 14,313
Third $ 10.20 $ 6.10 $ 7.00 12,570
Fourth $ 10.29 $ 5.31 $ 9.89 15,989
------- -------- -------- -------- ------
Year $ 11.25 $ 4.62 $ 9.89 66,377
------- -------- -------- -------- ------
2001 First $ 3.50 $ 2.00 $ 2.75 7,836
Second $ 4.75 $ 2.50 $ 4.25 6,773
Third $ 4.55 $ 3.50 $ 3.79 4,793
Fourth $ 5.15 $ 3.06 $ 4.60 8,364
------- -------- -------- -------- ------
Year $ 5.15 $ 2.00 $ 4.60 27,765
------- -------- -------- -------- ------
2000* First $ 11.30 $ 7.55 $ 7.55 11,583
Second $ 10.80 $ 7.50 $ 9.40 15,807
Third $ 9.75 $ 4.85 $ 5.75 10,318
Fourth $ 6.05 $ 2.56 $ 2.85 15,051
------- -------- -------- -------- ------
Year $ 11.30 $ 2.56 $ 2.85 52,759
------- -------- -------- -------- ------
1999* Year $ 21.50 $ 8.65 $ 11.75 45,406
------- -------- -------- -------- ------
*TSX and Nasdaq
COMMON SHARES
(weighted average number of shares outstanding at December 31, 2003)
Basic 55,628,006
Diluted 56,611,737
CINRAM 2003 ANNUAL REPORT 61