EXHIBIT 13.1
PORTIONS OF THE 1996 ANNUAL REPORT TO STOCKHOLDERS FOR THE
YEAR ENDED MARCH 31, 1996 EXPRESSLY INCORPORATED HEREIN BY REFERENCE
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA(1)
Predecessor Combined Company
Pro Forma
Twelve
Fiscal Year Six Months Months Six Months Fiscal Year
Ended Ended Ended Ended Ended Ended ENDED
(DOLLARS IN THOUSANDS, March 31, Sept. 30, March 31, March 31, March 31, March 31 MARCH 31,
EXCEPT PER SHARE DATA) 1992 1992 1993 1993 1994 1995 1996
OPERATING RESULTS:
Net sales $63,591 $32,138 $69,447 $37,309 $69,934 $85,827 $118,245
Gross profit 17,522 7,674 18,648 10,974 19,527 27,606 34,436
Operating income 6,112 947 6,888 5,941 8,107 15,412 21,447
Income (loss) before
extraordinary item 3,409 (16) 3,125 3,141 4,836 8,524 10,459
Extraordinary item(2) (890) (324) (2,952)
Net income (loss) 3,409 (16) 3,125 3,141 3,946 8,200 7,507
PRO FORMA OPERATING DATA(3):
Net income $ 8,196 $ 12,040
Earnings per share $ 0.36 $ 0.53
Weighted average
shares outstanding 22,743 22,799
FINANCIAL POSITION:
Total assets $55,541 $59,532 $79,995 $ 90,753
Total debt 18,144 18,043 63,909 26,131
Stockholders' equity (deficit) 17,206 19,339 (8,120) 43,066
Working capital 4,546 (1,415) 5,716 15,762
OTHER DATA:
Discs sold (units):
CD-Audio 43,009 20,392 47,211 26,819 54,378 58,766 61,748
CD-ROM 739 626 1,791 1,165 4,865 28,982 63,930
Total discs 43,748 21,018 49,002 27,984 59,243 87,748 125,678
(1) Set forth above is selected consolidated financial data of the Company for
the period October 1, 1992 (date of formation) to March 31, 1993 and for
the fiscal years ended March 31, 1994, 1995 and 1996. Also set forth above
is selected consolidated financial data of Nimbus Records Limited (the
"Predecessor") for the fiscal year ended March 31, 1992 and for the six
months ended September 30, 1992. The historical data of the Predecessor and
the Company are substantially comparable as the effects of purchase
accounting adjustments did not materially affect operating income; however,
interest expense is not comparable due to the use of different methods of
financing before and after the Company's acquisition of the Predecessor in
October 1992. The results of operations for the twelve months ended March
31, 1993 are presented on an unaudited basis combining the Company's
results of operations for the six months ended March 31, 1993 with the
results of the Predecessor for the six months ended September 30, 1992.
(2) In November 1993, the Company refinanced its outstanding debt and incurred
an extraordinary charge of $1,302 ($890 net of tax) on the debt
extinguishment. In March 1995, the Company refinanced its outstanding debt
and incurred an extraordinary charge of $515 ($324 net of tax) on the debt
extinguishment. In October 1995, the Company refinanced its outstanding
debt and incurred an extraordinary charge of $4,164 ($2,952 net of tax) on
the debt extinguishment.
(3) The pro forma net income gives effect to the Recapitalization, the Offering
and the Private Placement (each as defined in Notes 1 and 4 to the
Company's Consolidated Financial Statements). See Note 18 of the Company's
Notes to Consolidated Financial Statements.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Total discs sold increased 43.3% to 125.7 million units in fiscal
1996 from 87.7 million units in fiscal 1995. The increase was the result of a
120.3% increase in CD-ROM unit sales from 29.0 million discs in fiscal 1995 to
63.9 million discs in fiscal 1996, combined with a 5.1% increase in CD-Audio
unit sales from 58.7 million discs in fiscal 1995 to 61.7 million discs in
fiscal 1996. In the United States, CD-ROM volume increased 102.2% to 46.9
million discs in fiscal 1996 from 23.2 million discs in fiscal 1995. The
increase was primarily due to an additional 16.4 million discs manufactured at
the Company's Provo facility resulting from a vendor supply agreement with
Stream International, Inc. (the "Stream CD-ROM Agreement"). In fiscal 1996, the
United Kingdom CD-ROM volume increased 193.1% to 17.0 million discs from 5.8
million discs. CD-Audio volume increased in the United States by 7.5% to 28.7
million discs in fiscal 1996 while the United Kingdom experienced a 3.1%
increase in CD-Audio unit sales to 33.0 million. Net sales increased 37.8% to
$118.2 million in fiscal 1996 from $85.8 million in fiscal 1995. Approximately
$23.4 million of the sales increase in fiscal 1996 was due to the increase in
disc volume offset by a decrease in the average disc selling price from $0.98 in
fiscal 1995 to $0.87 in fiscal 1996. Both the CD-ROM and the CD-Audio markets
experienced a decline in average disc selling price in fiscal 1996 in response
to an increase in production capacity within the CD industry in both North
America and Europe. Discs manufactured under the Stream CD-ROM Agreement also
realized lower disc prices as, under the terms of the agreement, cost
efficiencies resulting from increased production volumes are reflected in the
disc sales price. The acquisition of substantially all of the assets of HLS
Duplication, Inc. ("HLS"), which now operates as Nimbus Software Services, Inc.
("NSS"), on August 31, 1995, contributed $8.7 million of turnkey and other
related service revenues in fiscal 1996.
GROSS PROFIT. Gross profit increased 24.6% to $34.4 million in fiscal 1996
from $27.6 million in fiscal 1995. The increase in gross profit was primarily
due to the higher unit volume and additional turnkey related service revenues
described above, reduced costs in the printing process and improved labor and
production efficiencies resulting from the higher unit volumes. Fiscal 1995
gross profit included a $2.3 million gain from settlements reached with
licensing companies for prior royalty obligations, while in fiscal 1996 the
Company recorded a gain of $1.7 million resulting from a settlement with one
licensing company regarding prior royalty obligations. Gross margin decreased to
29.1% in fiscal 1996 from 32.2% in fiscal 1995. The Company's gross margin was
unfavorably impacted by the additional revenues from the turnkey and collateral
related services of NSS which have a lower gross margin than CD replication
sales, as well as an increase in the cost of polycarbonate, a primary raw
material component. In addition, the mix of product sales toward CD-ROM
resulted in increased packaging, assembly and shipping costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 6.6% to $13.0 million in fiscal 1996 from
$12.2 million in fiscal 1995. The increase in selling, general and
administrative expenses in fiscal 1996 was due to higher administrative support,
insurance, travel and computer leasing costs associated with the increased level
of operations and the greater number of production facilities. The increased
selling, general and administrative expenses in fiscal 1996 includes a $0.5
million increase in the allowance for doubtful accounts, resulting, in part,
from the filing for bankruptcy by one of the Company's customers. Fiscal 1995
selling, general and administrative expenses included non-recurring charges of
$1.0 million associated with the termination of efforts to complete a business
acquisition and an offering of securities, $0.5 million for the settlement of
litigation, and $0.4 million of compensation expense related to accelerated
vesting of stock options. As a percentage of net sales, selling, general and
administrative expenses decreased to 11.0% in fiscal 1996 from 14.2% in fiscal
1995.
OPERATING INCOME. Operating income increased 39.0% to $21.4 million in
fiscal 1996 from $15.4 in fiscal 1995. The increase in operating income
primarily reflects the higher unit volume described above. Operating income as a
percentage of net sales was 18.1% and 18.0% for fiscal years 1996 and 1995,
respectively.
INTEREST EXPENSE. Interest expense increased to $5.3 million in fiscal 1996
from $2.0 million in fiscal 1995 due to the increased borrowings in connection
with the Recapitalization (as defined in Note 1 to the Company's Consolidated
Financial Statements).
INCOME TAXES. Income tax expense increased to $5.6 million in fiscal 1996
from $5.0 million in fiscal 1995. The increase in income taxes was attributable
to an increase in income before taxes, which was partially offset by a decrease
in the Company's effective tax rate from 37.1% in fiscal 1995 to 35.0% in fiscal
1996. The decrease in the Company's effective tax rate resulted from favorable
tax adjustments arising from an examination by the Inland Revenue of tax returns
of the Company's United Kingdom subsidiary.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. Total discs sold increased 48.1% to 87.7 million units in fiscal
1995 from 59.2 million in fiscal 1994. This increase was primarily due to a
354.5% increase in United States CD-ROM volume (excluding Stream) to 15.0
million discs in fiscal 1995 from 3.3 million discs in fiscal 1994, a 286.7%
increase in the United Kingdom CD-ROM volume to 5.8 million discs in fiscal 1995
from 1.5 million discs in fiscal 1994, the addition of 8.2 million discs
resulting from the Stream CD-ROM Agreement, and an 8.4% and 7.6% increase in CD-
Audio unit sales in the United States and United Kingdom, respectively. Net
sales increased 22.7% to $85.8 million in fiscal 1995 from $69.9 million in
fiscal 1994 due to favorable pricing provided by the Stream CD-ROM Agreement
combined with additional CD-ROM and CD-Audio disc volumes, offset by a decrease
in the average disc selling price from $1.18 in fiscal 1994 to $0.98 in fiscal
1995. Both the CD-ROM market and the CD-Audio market experienced a decline in
average disc selling price, with much of the decline in CD-ROM disc selling
prices resulting from the sale of unpackaged discs as part of many equipment
manufacturers' strategy to bundle discs with the sales of CD-ROM drives.
GROSS PROFIT. Gross profit increased 41.5% to $27.6 million in fiscal 1995
from $19.5 million in fiscal 1994. This increase was attributable to decreases
in raw material prices, continued gains in labor productivity, automation of
quality testing and the reversal of $2.3 million of accrued royalties to reflect
a settlement reached with licensors of technology regarding prior royalty
obligations. These gains were partially offset by $1.2 million of start-up costs
for the Company's Provo facility. Gross margin improved to 32.2% in fiscal 1995
from 27.9% in fiscal 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 7.0% to $12.2 million in fiscal 1995 from
$11.4 million in fiscal 1994. As a percentage of net sales, selling, general and
administrative expenses decreased to 14.2% in fiscal 1995 from 16.3% in fiscal
1994. Fiscal 1995 selling, general and administrative expenses reflect
non-recurring charges of $1.0 million for the write-off of costs associated with
the termination of efforts to complete a business acquisition and an offering of
securities, $0.5 million for settlement of litigation, $0.2 million of
compensation expense due to the accelerated vesting of stock options
specifically in connection with the Recapitalization, as well as an additional
$0.2 million in stock option compensation expense. Fiscal 1994 selling, general
and administrative expenses include a one-time expense of $1.3 million relating
to the accrual of payments to be made under a technical services agreement with
former stockholders of the Company. Excluding these unusual charges incurred in
each year, the increase in selling, general and administrative expenses was less
than 2% from fiscal 1994 to fiscal 1995.
OPERATING INCOME. Operating income increased 90.1% to $15.4 million in
fiscal 1995 from $8.1 million in fiscal 1994. The increase in operating income
was the result of the higher unit sales and improved gross profit margins
described above. Operating income as a percentage of net sales improved to 18.0%
in fiscal 1995 from 11.6% in fiscal 1994.
INTEREST EXPENSE. Interest expense increased to $2.0 million in fiscal 1995
from $1.7 million in fiscal 1994. The increase in interest expense was due to
higher interest rates as well as increased borrowings in connection with the
start-up of the Company's Provo facility.
INCOME TAXES. Income taxes increased to $5.0 million in fiscal 1995 from
$1.6 million in fiscal 1994. The increase in income taxes was attributable to a
significant increase in income before taxes and a change in the Company's
effective tax rate from 25.2% in fiscal 1994 to 37.1% in fiscal 1995. In fiscal
1994, the Company recorded the benefit of acquired foreign net operating losses
and benefited from favorable tax adjustments by the Company's United Kingdom
subsidiary resulting from an examination of its tax returns by the Inland
Revenue. The effective income tax rate for fiscal 1995 was higher than the
federal statutory rate due to state income taxes and the Company's inability to
utilize certain foreign tax credits in determining United States taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its liquidity needs through cash
flows from operations and various borrowing arrangements. Principal liquidity
needs have included capital expenditures and debt repayment.
Operating activities provided net cash of $11.9 million in fiscal 1996.
Working capital was $15.8 million at March 31, 1996, compared to $5.7 million at
March 31, 1995. Accounts receivable increased $6.6 million due to higher sales
volumes and inventories increased $0.4 million to support the increased level of
sales. Accounts payable and accrued expenses decreased $4.8 million in fiscal
1995, largely reflecting the resolution of past royalty obligations.
Capital expenditures were $10.1 million for fiscal 1996. Capital
expenditures in fiscal 1996 are related to the expansion of manufacturing
capacity and administrative facilities in the United Kingdom, as well as
expanding the manufacturing capacity of the Provo facility. The Company
increased Provo's capacity to ten press lines by entering into operating leases
with General Electric Capital Corporation for $4.9 million of equipment and by
purchasing $1.1 million of equipment. On August 31, 1995, the Company acquired a
west coast production facility by purchasing substantially all of the assets of
HLS for approximately $5.15 million in cash and the assumption of certain
liabilities.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
On October 30, 1995, the Company completed its initial public offering with
the sale of 6,350,000 shares of common stock and 500,000 shares of common stock
in a concurrent private placement that generated net cash proceeds of $43.7
million. Contemporaneously with the completion of the public offering, the
Company entered into an amended and restated credit agreement (the "New Credit
Agreement") with The Chase Manhattan Bank, N.A., as agent and one or more
lenders. Borrowings under the New Credit Agreement, along with the proceeds of
the public offering and cash generated from operations, enabled the Company to
reduce its long-term debt and to purchase property and equipment.
During fiscal 1997, the Company anticipates the need for approximately $25
million in cash for capital expenditures to expand its compact disc production
capacity, install full DVD manufacturing capability, and upgrade its worldwide
MIS system. The Company believes that these capital expenditures, working
capital requirements, and any future acquisitions will be financed through a
combination of funds provided by operating activities and availability under the
New Credit Agreement.
At March 31, 1996, outstanding borrowings under the New Credit Agreement
were $26.1 million and the remaining availability under the revolving credit
facility was $23.25 million.
The Company has entered into interest rate swap agreements to protect
against fluctuations in its variable rate term debt for initial notational
amounts of $5 million and approximately $20 million (denominated in pounds
sterling). The interest rate caps ensure that the Company will not pay interest
rates higher than 7.0% on $5 million and not higher than 9.5% on $20 million of
its term debt outstanding at March 31, 1996.
SEASONALITY AND QUARTERLY INFORMATION
The Company's sales are seasonal, with peak sales activity normally
occurring in the third fiscal quarter as retail chains increase inventory before
the holiday season. As a result, operating income is typically higher in the
third fiscal quarter as fixed operating costs are spread over generally higher
sales volume. In addition, in order to provide for capacity demands, long lead
time production equipment is typically ordered for delivery during the first
fiscal quarter and, to a lesser extent, the second fiscal quarter. Equipment
installations generally result in some level of production inefficiency which
may have a negative impact on margins. The effect on margins may be amplified
when equipment is installed in the lower sales volume first and second quarters.
Further, pricing and unit volumes can impact comparative quarterly financial
results either positively or negatively in a manner that may not necessarily be
indicative of a full year's results.
ACCOUNTING STANDARDS CHANGE
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 requires a fair value based method of accounting for
stock based compensation, and provides an option to the Company to either
recognize compensation expense for employee stock based compensation or to
provide pro forma earnings information as if such compensation cost had been
recognized. The Company has not yet determined the various assumptions that will
be used in the fair value calculations, the method of adoption nor the impact
this statement will have on its financial statements.
CONTINGENCIES
On March 18, 1996, the Company received notification from the United States
Environmental Protection Agency ("EPA") alleging that the Company is a
Potentially Responsible Party ("PRP") for the cleanup of surface water
contamination at the Cherokee Oil Company Site (the "Site") in Charlotte, North
Carolina which was used by the Company for the disposal of certain byproducts of
its manufacturing processes. Subsequently, the U.S. Department of Justice
notified the Company that it intends to seek recovery of the approximately $6
million environmental cleanup cost incurred at the Site from the Company and 46
other PRPs each of which is considered to be jointly and severally liable. The
Company does not yet know its potential share of the cleanup costs, the
allocation of which is typically based on the amount of product disposed at the
Site. Many of the PRPs are larger than the Company and appear to have
substantial resources. Management of the Company believes that the ultimate
settlement of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 3,593 $ 2,318
Accounts and notes receivable-trade, less allowances
for doubtful accounts of $2,014 and $1,989 26,121 19,533
Inventories 2,177 1,743
Prepaid expenses 729 1,508
Deferred income taxes 1,766 2,600
Total current assets 34,386 27,702
Property, plant, and equipment, net 50,809 48,650
Other assets and intangibles 5,558 3,643
$ 90,753 $ 79,995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 6,437 8,507
Current portion of long-term debt 1,463 1,000
Accrued expenses and other liabilities 7,297 10,006
Income taxes payable 3,427 2,473
Total current liabilities 18,624 21,986
Long-term debt 24,668 62,909
Deferred income taxes 4,395 3,220
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, no shares issued or outstanding
Common stock, $0.01 par value, 60,000,000 shares
authorized, 38,973,173 shares issued; 20,829,962 and
13,804,962 shares outstanding 390 390
Paid-in capital 66,734 41,275
Retained earnings 22,794 15,287
Cumulative foreign currency translation adjustments 241 220
90,159 57,172
Treasury stock, at cost, 18,143,211 and 25,168,211 shares (47,093) (65,292)
Total stockholders' equity (deficit) 43,066 (8,120)
$ 90,753 $ 79,995
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
Net Sales $118,245 $85,827 $69,934
Cost of goods sold 83,809 58,221 50,407
Gross profit 34,436 27,606 19,527
Selling, general and administrative expenses 12,989 12,194 11,420
Operating income 21,447 15,412 8,107
Interest expense 5,305 1,983 1,663
Other (income) expense, net 41 (121) (17)
Income before income taxes and extraordinary item 16,101 13,550 6,461
Provision for income taxes 5,642 5,026 1,625
Income before extraordinary item 10,459 8,524 4,836
Extraordinary item-extinguishment of debt
(less income tax benefit of $1,213, $191 and $412) (2,952) (324) (890)
Net income $ 7,507 $ 8,200 $ 3,946
Net income-Pro forma for the Offering (Note 18) $ 12,040 $ 8,196
Earnings per share-Pro forma for the Offering (Note 18) $ 0.53 $ 0.36
Weighted average shares outstanding 22,799 22,743
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Cumulative Notes
Foreign Receivable for
Number of shares Currency Purchases of
(DOLLARS IN THOUSANDS, Common Treasury Common Paid-in Translation Common Retained Treasury
EXCEPT PER SHARE DATA) Stock Stock Stock Capital Adjustments Stock Earnings Stock
Balances,
April 1, 1993 29,199,058 $291 $ 15,239 $ (379) $ (1,086) $ 3,141
Stock repurchased
and canceled (3,503,874) (34) (2,761) 931
Collections on
notes from
stockholders 155
Net income 3,946
Foreign currency
translation
adjustments (104)
Balances,
March 31, 1994 25,695,184 - 257 12,478 (483) - 7,087 -
Issuance of
common stock 286,128 3 997
Issuance of com-
mon stock in
recapitalization 10,817,847 108 27,192
Issuance of
warrants 1,750
Exercise of
stock options
(including
income tax
benefit of
$1,190) 2,174,014 22 3,104
Repurchase of
common stock (25,168,211) $ (63,515)
Fees and expenses
related to
recapitalization (4,246) (1,777)
Net income 8,200
Foreign currency
translation
adjustments 703
Balances,
March 31, 1995 38,973,173 (25,168,211) 390 41,275 220 - 15,287 (65,292)
Stock issued in
connection
with initial
public offering
and private
placement 6,850,000 25,911 17,745
Exercise of
warrants 175,000 (452) 454
Net income 7,507
Foreign currency
translation
adjustments 21
BALANCES,
MARCH 31, 1996 38,973,173 (18,143,211) $390 $ 66,734 $ 241 - $22,794 $ (47,093)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
Cash flows from operating activities:
Net income $ 7,507 $ 8,200 $ 3,946
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item 2,047 324 890
Depreciation and amortization 7,938 6,217 4,877
Net loss (gain) on sale of equipment and other
assets 361 19 (321)
Deferred income taxes 2,922 796 162
Gain on settlement of royalty obligation (1,744) (2,300)
Write-off of public offering and acquisition costs 1,005
Noncash compensation expense for stock options 628 337
Other, net (56) 70 25
Change in operating assets and liabilities, net of
acquisition:
Accounts receivable-trade (5,694) (3,156) 830
Inventories 31 (116) 83
Prepaid expenses 891 (1,063) 158
Accounts payable (1,206) 5,373 953
Accrued expenses (1,132) (1,164) 1,384
Net cash provided by operating activities 11,865 14,833 13,324
Cash flows from investing activities:
Purchases of property , plant and equipment (10,087) (17,017) (13,154)
Acquisition of business, net of cash acquired (4,850)
Proceeds from sale of equipment and other assets 64 108 475
(Payment) refund of costs related to proposed
acquisition 112 (459)
Expenditures for computer software (929) (130)
Other investing activities (548)
Net cash used in investing activities (16,350) (16,797) (13,268)
Cash flows from financing activities:
Proceeds of debt 2,357 66,993 15,011
Repayment of debt (37,000) (21,612) (18,828)
Revolving credit borrowings, net (1,991) (109) 3,850
Issuance (repurchase) of common stock 44,886 24,055 (1,863)
Proceeds from issuance of warrants 1,750
Proceeds from exercise of stock options 1,168
Purchase of treasury stock (65,292)
Payment of financing fees (1,140) (3,686) (1,009)
Payment of costs related to initial public offering (1,230) (281) (415)
Collection on note for sale of common stock 155
Net cash provided by financing activities 5,882 2,986 (3,099)
Effect of exchange rate changes on cash (122) 59 (41)
Net increase (decrease) in cash 1,275 1,081 (3,084)
Cash and cash equivalents, beginning of year 2,318 1,237 4,321
Cash and cash equivalents, end of year $ 3,593 $ 2,318 $ 1,237
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND PRINCIPLES
OF CONSOLIDATION:
Nimbus CD International, Inc. was organized in October 1992 to acquire
certain companies which operate manufacturing facilities in the U.S. and the
U.K. (collectively, the "Company"). The Company is a manufacturer of compact
discs ("CDs") which are used primarily for the playback of pre-recorded music
("CD-Audio") and the distribution of digitally recorded information, including
data, text, video, audio and other interactive applications ("CD-ROM").
On March 31, 1995, certain affiliates of McCown De Leeuw & Co. ("MDC") and
Behrman Capital, L.P. ("Behrman") replaced affiliates of DLJ Merchant Banking,
Inc. ("DLJMB") as the Company's majority stockholders through a series of
transactions (the "Recapitalization"). MDC and Behrman acquired 10,698,970
shares of the Company's common stock for an aggregate purchase price of $27,000
and another investor acquired 118,876 shares of common stock for $300. The
Company refinanced its then-outstanding debt incurring an extraordinary charge
of $515 ($324 net of tax) related to the write-off of deferred financing costs,
and borrowed an additional $41,091. The Company also received $1,750 from the
issuance of warrants to purchase 693,453 shares of its common stock for $0.01
per share. The proceeds from the issuance of common stock, warrants and
additional debt were used by the Company to acquire 22,333,768 shares of its
common stock held by DLJMB and 2,834,436 shares of common stock from certain
members of management and other stockholders for an aggregate cost of $65,292,
including related fees and expenses. The Recapitalization was accounted for as a
treasury stock transaction with no step up in the basis of the Company's assets.
The Company's deficiency in consolidated stockholders' equity was due to the
amount of treasury shares purchased in the Recapitalization.
The consolidated financial statements present the operating results and
financial position of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at average monthly
rates during the period. Foreign currency translation adjustments are reflected
as a separate component of stockholders' equity. The gains and losses from
foreign currency transactions, not material in amount, are reflected in
operations.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
a. Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
b. Cash and cash equivalents: Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three
months or less.
c. Foreign exchange contracts and hedging instruments: The Company enters into
foreign exchange contracts to hedge exposures related to foreign currency
transactions. Gains and losses on these contracts are recognized in the same
period in which gains or losses from the transaction being hedged are
recorded.
d. Inventories: Inventories are valued at the lower of cost or market, with cost
for raw materials determined using the first-in, first-out method and cost
for work-in-process and finished goods determined using the average cost
method.
e. Property, plant and equipment: Property, plant and equipment are stated at
cost. The costs of significant improvements are capitalized. Maintenance and
repairs are expensed as incurred. Depreciation is charged to operations over
the estimated useful lives of the assets using the straight-line method.
Depreciable lives are as follows:
Years
Buildings 40
Leasehold improvements 5-12
Machinery and equipment 5-12
When properties are sold or retired, their cost and the related
accumulated depreciation are eliminated from the accounts and the gain or
loss is reflected in operations.
f. Income taxes: The Company provides for deferred income taxes based on the
liability method of accounting for income taxes. Deferred tax liabilities and
assets are determined based on the difference between financial statement
carrying amounts and the tax basis of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
g. Other Assets and Intangibles: The excess purchase price over the fair value
of identifiable net assets acquired is allocated to goodwill and amortized
over 15 years. Goodwill of $2,787 is presented net of accumulated
amortization of $96 as of March 31, 1996. Purchased software including
related implementation costs are capitalized in other assets and amortized
over its estimated useful life.
h. Impairment of Long-Lived Assets: Beginning in fiscal 1996, the review for
the possible impairment of long-lived tangible and intangible assets is
performed in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." For assets to be held and used in
operations, this standard requires that, whenever events indicate that an
asset may be impaired, the entity estimate the future undiscounted cash
flows expected to result from the use of the asset and its eventual
disposition. Assets are grouped for this purpose at the lowest level for
which there are identifiable and independent cash flows. If the sum of these
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of the impairment loss is based
on the estimated fair value of the asset. At March 31, 1996, the Company
believes that there was no impairment of its tangible and intangible
noncurrent assets.
3. ACQUISITION:
On August 31, 1995, the Company acquired substantially all of the assets of
HLS Duplication, Inc. ("HLS") for a purchase price of approximately $5.15
million in cash plus the assumption of certain specified liabilities. The
acquisition is being accounted for as a purchase for financial reporting
purposes. The results of the acquired entity, which are not material in relation
to the Company, have been included in the consolidated financial results since
the date of acquisition. The assets acquired and liabilities assumed were as
follows:
Fair value of assets acquired $ 3,360
Goodwill 2,883
Liabilities assumed (1,093)
$ 5,150
Cash acquired (300)
Cash paid for acquisition, net $ 4,850
4. INITIAL PUBLIC OFFERING:
On October 30, 1995, the Company completed its initial public offering with
the sale of 6,350,000 shares of common stock at an offering price of $7 per
share (the "Offering").
Contemporaneously with the Offering, Behrman Capital, L.P., purchased
500,000 shares of common stock of the Company in a private placement transaction
(the "Private Placement") at a price per share equal to the initial public
offering price less the underwriting discount.
The net proceeds to the Company from the Offering and the Private Placement,
after deducting underwriting discounts, commissions and expenses payable by the
Company, were $43.7 million. The Company used $41.7 million of the net proceeds
to reduce outstanding indebtedness and $2.0 million for general corporate
purposes.
The Company incurred an extraordinary charge of $4,164 ($2,952 net of tax)
in the third quarter of fiscal 1996 related to the write-off of deferred
financing costs and the costs of terminating interest rate swap agreements in
connection with the repayment of debt with the proceeds from the Offering and
the Private Placement and borrowings under the amended and restated credit
agreement. Such charge has not been reflected in the pro forma net income and
per share data.
5. INVENTORIES:
Inventories at year-end consisted of the following:
1996 1995
Raw materials $ 1,849 $ 1,323
Work-in-process 263 299
Finished goods 65 121
$ 2,177 $ 1,743
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at year-end consisted of the following:
1996 1995
Land, buildings and improvements $ 18,652 $ 16,447
Machinery and equipment 46,986 41,786
Construction in progress 1,549 1,143
67,187 59,376
Less accumulated depreciation (16,378) (10,726)
Net property, plant and equipment $ 50,809 $ 48,650
Depreciation expense amounted to $7,256, $5,974 and $4,789 for fiscal years
1996, 1995 and 1994, respectively.
7. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities at year-end consisted of the
following:
1996 1995
Royalty obligations $ 2,753 $ 5,627
Taxes payable, other than income taxes 1,237 1,853
Employee compensation and benefits 1,863 1,663
Other items 1,444 863
$ 7,297 $10,006
8. DEBT:
Long-term debt at year-end consisted of the following:
1996 1995
Variable rate term loan (effective interest
rate of 7.9% at March 31, 1996),
payable in quarterly installments of
varying amounts commencing in
December , 1996 with the final
maturity in September, 2000 $24,381
Variable rate revolving loans (effective
interest rate of 7.1% at March 31, 1996) 1,750
Variable rate term loan (effective interest
rate of 9.1% at March 31, 1995) payable
in quarterly installments of varying
amounts commencing in December, 1996
with final maturity in March, 2000 $35,168
Variable rate term loan (effective interest
rate of 9.4% at March 31, 1995) payable
in quarterly installments of $250 com-
mencing in June, 1995 with the balance
due at maturity in March, 2002 25,000
Variable rate revolving loans
(effective interest rate of 9.2%
at March 31, 1995) 3,741
Totals 26,131 63,909
Less current maturities 1,463 1,000
$24,668 $62,909
On October 30, 1995, the Company entered into an amended and restated credit
agreement (the "New Credit Agreement") with The Chase Manhattan Bank, N.A., as
agent and one or more other lenders. The New Credit Agreement provides for the
Company's ongoing working capital and capital expenditure needs. The New Credit
Agreement provides for a term loan of $25.0 million and a revolving credit
facility, the aggregate principal amount of which shall not exceed $25.0 million
outstanding at any time. A portion of the revolving loan commitment may be
utilized for letters of credit, a swingline facility and an overdraft facility.
The New Credit Agreement has a dual currency option, which permits the Company
to borrow in U.S. dollars or pounds sterling. Loans under the revolving credit
facility may be borrowed, repaid and reborrowed, subject to a schedule of
mandatory repayments and commitment reductions. This transaction resulted in the
write-off of $3,260 in deferred loan fees and the capitalization of $911 in new
loan costs.
The New Credit Agreement requires a commitment fee of .375% on the unused
portion of the available line of credit amount. Interest is payable in arrears
for optionally selected interest periods, with interest payable not to exceed a
three-month period. The weighted average interest rate on outstanding borrowings
at March 31, 1996 was 7.9%.
The New Credit Agreement provides for the prepayment of principal based on
the Company's cash flow (as defined) or upon the occurrence of certain specified
events. The scheduled annual principal payments, after fiscal 1997 are $4,876 in
1998, $7,217 in 1999, $7,217 in 2000, and $3,608 in 2001.Interest paid on the
outstanding debt during fiscal years 1996, 1995 and 1994 was $4,721, $1,882 and
$1,748, respectively. No interest was capitalized during fiscal years 1996, 1995
and 1994. The recorded value of the Company's long-term debt at March 31, 1996
approximates its fair value.
The Company has entered into interest rate swap agreements to protect
against fluctuations in its variable rate term debt through September 30, 1998,
as required by the New Credit Agreement. The Company purchased interest rate
caps for initial notional amounts of $5,000 and approximately $20,000
(denominated in pounds sterling), each declining over the term of the related
borrowings. The cost of these agreements was approximately $308 and is being
amortized over the terms of the agreements.
The interest rate caps ensure that the Company will not pay interest at
rates higher than 7.0% on $5,000, and not higher than 9.5% on $20,000 of its
term debt outstanding at March 31, 1996. These interest rate agreements did not
have any material effect on the Company's interest expense for the year ended
March 31, 1996.
The estimated fair value of the Company's interest rate swap agreements
which hedge outstanding borrowings was an asset of $1,011 as of March 31, 1996.
Substantially all of the Company's tangible and intangible assets are
pledged as collateral for borrowings under the New Credit Agreement. The New
Credit Agreement subjects the Company to certain restrictions and covenants,
including limitations on the incurrence of additional debt, capital
expenditures, asset sales and the maintenance of certain financial ratios. The
New Credit Agreement restricts the payment of dividends on the Company's common
stock, and at March 31, 1996, none of the Company's retained earnings was
available for the payment of such dividends.
On November 23, 1993, the Company refinanced its original acquisition debt.
This transaction resulted in the write-off of $1,302 ($890 net of tax) in
deferred loan and other fees.
9. INCOME TAXES:
The components of income before income taxes and extraordinary items were
as follows:
1996 1995 1994
Domestic $ 8,162 $ 6,764 $1,957
Foreign 7,939 6,786 4,504
Income before income taxes
and extraordinary items $ 16,101 $ 13,550 $6,461
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
The provision for income taxes consisted of the following:
1996 1995 1994
Current
Federal $1,057 $2,039 $ 344
State 156 178 56
Foreign 2,492 2,013 1,063
Total current 3,705 4,230 1,463
Deferred:
Federal 1,733 164 337
State 296 25
Foreign (92) 607 (175)
Total deferred 1,937 796 162
Total income tax expense $5,642 $5,026 $1,625
The principal reasons for the differences between the federal statutory
income tax rate and the Company's effective income tax rate on income before
extraordinary item were as follows:
1996 1995 1994
Federal statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes
resulting from:
State taxes, net of federal
tax effect 1.9 1.0 0.6
U.S. tax attributable to
deemed repatriation of
foreign subsidiary earnings
(net of foreign tax credit) 0.7 0.8 7.1
Difference between U.S.
federal statutory rate and
foreign effective rates,
primarily attributable
in 1996 and 1994 to
examinations by foreign
tax authorities (1.9) 2.3 (9.9)
Release of valuation
allowance (5.1) (9.0)
Other 0.3 4.1 2.4
Effective tax rate 35.0% 37.1% 25.2%
Cash payments for income taxes were $1,275, $1,855 and $1,747 for fiscal
years 1996, 1995 and 1994, respectively. The components of the net deferred tax
assets and liabilities as of March 31, 1996 were as follows:
Domestic Foreign Total
Deferred tax assets:
Accrued royalties $ 276 $ 276
Accounts receivable $ 401 401
Other accrued liabilities 425 425 850
Net operating loss
carryforward 2,115 2,115
Deferred tax asset 2,941 701 3,642
Deferred tax liabilities:
Property, plant and
equipment (5,254) (1,017) (6,271)
Deferred tax liability (5,254) (1,017) (6,271)
Net deferred tax liability $ (2,313) $ (316) $ (2,629)
The components of the net deferred tax assets and liabilities as of March
31, 1995 were as follows:
Domestic Foreign Total
Deferred tax assets:
Accrued royalties $ 1,099 $ 99 $ 1,198
Accounts receivable 445 445
Other accrued liabilities 473 243 716
Net operating loss
carryforward 2,355 2,355
Deferred tax asset 4,372 342 4,714
Deferred tax liabilities:
Property, plant and
equipment (4,561) (774) (5,335)
Deferred tax liability (4,561) (774) (5,335)
Net deferred tax liability $ (189) $ (432) $ (621)
At March 31, 1996, the Company had net operating loss carryforwards for U.S.
tax return purposes of approximately $5,641, which expire in the years 2003
through 2008. Due to certain ownership changes as of October 1, 1992, the use of
these net operating losses is limited to approximately $640 per year.
A current income tax provision has been recognized on all of the unremitted
earnings of the Company's foreign subsidiaries (approximately $5,900 at March
31, 1996). The taxes on these foreign earnings have been offset, in part, by
foreign tax credits.
10. COMMITMENTS AND CONTINGENCIES:
a. ROYALTIES: The Company is party to various licensing agreements for
technology associated with its product and the related manufacturing process
under which the Company is obligated to pay royalties ranging from $.019 to
$.048 per disc sold. Royalty expense incurred under these agreements amounted to
$9,037, $6,258 and $3,831 for fiscal years 1996, 1995 and 1994, respectively.
During fiscal 1996, the Company reached a settlement with one licensing company
and reduced its accrued liability for this and certain other prior royalties by
$2,049. During fiscal 1995, the Company reached settlements with certain
licensing companies for prior-year royalties, recognizing a gain of $2,294. The
Company believes that its accrued expenses adequately provide for royalties
payable to patent holders for proprietary technology.
b. OPERATING LEASES: The Company leases manufacturing facilities, warehouse
space, equipment and other property under various agreements which expire from
1996 through 2011. Aggregate rent expense for these leases amounted to $1,678,
$494 and $331 for fiscal years 1996, 1995 and 1994, respectively.
At March 31, 1996, future obligations under operating lease agreements were
as follows:
Fiscal Year Ending March 31, Amount
1997 $2,424
1998 2,273
1999 1,670
2000 1,516
2001 790
Thereafter 205
$8,878
c. MANAGEMENT INFORMATION SYSTEM UPGRADE: During fiscal 1996, the Company
entered into agreements with software developers to acquire software products to
upgrade its worldwide management information system. The Company has also
entered into agreements with consulting firms to assist in the implementation of
the system upgrade. At March 31, 1996, commitments for software and consulting
fees related to the installation and implementation of its MIS upgrade amounted
to approximately $1,250.
d. CAPITAL EXPENDITURES: At March 31, 1996, commitments for capital expenditures
amounted to approximately $1,284.
e. LITIGATION AND RELATED MATTERS: On March 18, 1996, the Company received
notification from the United States Environmental Protection Agency ("EPA")
alleging that the Company is a Potentially Responsible Party ("PRP") for the
cleanup of surface water contamination at the Cherokee Oil Company Site (the
"Site") in Charlotte, North Carolina which was used by the Company for the
disposal of certain byproducts of its manufacturing processes. Subsequently, the
U.S. Department of Justice notified the Company that it intends to seek recovery
of the approximately $6 million environmental cleanup cost incurred at the Site
from the Company and 46 other PRPs each of which is considered jointly and
severally liable. The Company does not yet know its potential share of the
cleanup costs, the allocation of which is typically based on the amount of
product disposed at the Site. Many of the PRPs are larger than the Company and
appear to have substantial resources. Management of the Company believes that
the ultimate settlement of this matter will not have a material adverse effect
on the Company's financial position or results of operations.
From time to time, the Company is involved in litigation that it considers
to be in the normal course of business. Certain parties have alleged that the
Company is liable for its manufacturing discs from data provided by its
customers that contain copyrighted material not belonging to such customers. A
customer of the Company has asserted that certain discs manufactured by the
Company in excess of the quantity ordered by the customer had not been destroyed
in accordance with contractual arrangements. Two former employees of the Company
have asserted claims alleging wrongful discharge; a settlement was reached with
one former employee during fiscal 1995. The Company is not presently involved in
any legal proceedings which the Company expects individually or in the aggregate
to have a material adverse effect on its financial condition or results of
operations.
f. STOCK WARRANTS: At March 31, 1996, 518,453 shares of the Company's
common stock were reserved for issuance upon exercise of outstanding stock
warrants which expire in 2005 and are exercisable at a price of $.01 per share.
During fiscal 1996, 175,000 warrants were exercised by the warrantholder.
11. STOCK OPTION PLANS:
The Company has adopted the Nimbus CD International, Inc. 1995 Stock Option
and Stock Award Plan (the "Nimbus Plan") which provides for grants to officers
and key employees of stock options, stock appreciation rights, restricted stock
awards or common stock in lieu of bonuses. Under the terms of the Nimbus Plan,
2,715,449 shares of the Company's non-voting common stock were authorized to be
issued. Awards and their terms are authorized by the Compensation Committee of
the Company's Board of Directors.
In October 1995, the Company adopted the Nimbus CD International, Inc. 1995
Stock Option Plan for Non-employee Members of the Company's Board of Directors
(the "Directors Plan"). An aggregate of 50,000 shares of common stock has been
reserved for issuance thereunder. On October 30, 1995, the Company awarded
options to the Company's only independent director to purchase 10,000 shares of
common stock at the initial public offering price.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
The exercise price of options granted under the Nimbus Plan and the
Directors Plan is the fair market value of the Company's common stock at the
dates of grant. All options expire 10 years from the date of grant and vest over
periods of up to 10 years with earlier vesting upon the attainment of certain
performance measurements or upon the occurrence of certain other events.
No restricted stock awards have been made under the Nimbus Plan. Non-
qualified stock options to purchase 477,958 shares of common stock were granted
in exchange for options granted under previous Company option plans. On April 3,
1995, the Company awarded qualified options to purchase 1,163,865 shares of non-
voting common stock. These options will vest ratably over five years from the
date of grant. On May 31, 1995, the Company awarded qualified options to
purchase 451,258 shares of non-voting common stock. These options will vest if
the Company meets certain performance measurements or six years from the date of
grant.
At March 31, 1996, 40,000 common shares were available for future grant
under the Directors Plan and 664,578 common shares were available for future
grant under the Nimbus Plan.
The following is a summary of the activity in the Company's stock option
plans for fiscal years 1996, 1995 and 1994:
Number of Option Price
Stock Options Per Share
Outstanding, April 1, 1993 2,571,592 $ 0.53
Granted 75,210 1.06
Canceled (15,136) 0.53
Outstanding, March 31, 1994 2,631,666 0.53 to 1.06
Granted 37,605 1.06
Canceled (17,298) 0.53 to 1.06
Exercised (2,174,015) 0.53 to 1.06
Outstanding, March 31, 1995 477,958 0.53 to 1.06
Granted 1,625,123 2.52 to 7.00
Canceled (42,210) 2.52
Outstanding March 31, 1996 2,060,871 0.53 to 7.00
Exercisable:
March 31, 1994 1,252,348 0.53 to 1.06
March 31, 1995 477,958 0.53 to 1.06
March 31, 1996 747,874 0.53 to 2.52
12. RELATED-PARTY TRANSACTIONS:
On October 1, 1992, the Company entered into a Technical Services Agreement
with a company owned by certain former stockholders of the Company. Pursuant to
this agreement, the Company made annual payments of approximately $740 for
technical support services. In September 1993, the Company reacquired its common
stock held by these stockholders for an aggregate consideration of $2,795,
including cancellation of $931 of notes receivable from the stockholders.
Because these persons no longer had any equity interest in the Company,
management believed that little future benefit would arise under the Technical
Services Agreement. Accordingly, during fiscal 1994, the Company recorded a
$1,315 charge for the remaining future payments to be made under this agreement.
During fiscal 1995, the Company negotiated a settlement with the former stock-
holders to terminate this agreement. This settlement resulted in a gain of $140
during fiscal 1995.
Sales to a business owned by former stockholders of the Company amounted to
$437 for fiscal 1996, $450 for fiscal 1995 and $486 for fiscal 1994.
On May 4, 1994, the Company made an interest-bearing advance of $155 to a
stockholder, due on demand after February 1, 1995. This note was collected on
March 31, 1995.
During fiscal 1995, the Company paid to McCown De Leeuw & Co., Behrman
Capital L.P., and Donaldson, Lufkin & Jenrette Securities Corporation Merchant
Banking, Inc. approximately $5.7 million in transaction costs related to the
Recapitalization. Approximately $4.0 million of the costs was recorded as a
reduction of paid-in-capital and $1.5 million was recorded as an addition to
treasury stock. The remaining transaction costs were charged to expense.
13.EMPLOYEE BENEFIT PLANS:
The Company has adopted a 401(k) savings and investment plan which covers
substantially all U.S. employees. Contributions to the plan are at the
discretion of the Company. The expense recognized for the plan amounted to $343,
$296 and $214 for fiscal years 1996, 1995 and 1994, respectively.
The Company has adopted a defined contribution retirement plan which covers
substantially all U.K. employees. Contributions to the plan are at the
discretion of the Company. The expense recognized for the plan amounted to $413,
$395 and $346 for fiscal years 1996, 1995 and 1994, respectively.
14. GEOGRAPHIC SEGMENT INFORMATION:
A summary of the Company's operations by geographic area for fiscal years 1996,
1995 and 1994 is as follows:
1996 1995 1994
NET OPERATING Net Operating Net Operating
SALES INCOME ASSETS Sales Income Assets Sales Income Assets
United States $ 71,654 $10,793 $57,925 $48,663 $ 8,319 $52,171 $35,738 $2,790 $36,253
United Kingdom 46,919 10,698 32,828 37,466 7,141 27,824 34,805 5,339 23,279
Inter-area sales (328) (44) (302) (48) (609) (22)
$118,245 $21,447 $90,753 $85,827 $15,412 $79,995 $69,934 $8,107 $59,532
Inter-area sales represented shipments of CDs and equipment between
geographic locations. Inter-area sales were made at prices which approximate
cost and have been eliminated from consolidated net sales.
15.SUPPLEMENTAL INCOME STATEMENT INFORMATION:
The Company incurred $696 of costs in connection with its registration
statement for an attempted public offering in the spring of 1994, which costs
had been deferred and reflected in other assets. These costs were charged to
expense as of December 31, 1994.
During the attempted public offering, the Company had entered into
agreements to acquire the operations of CD Plant Manufacturing AB, located in
Sweden. The acquisition was contingent on the completion of an initial public
offering of the Company's common stock by no later than June 1, 1994. When the
Company was not able to complete the offering by the indicated date, the
acquisition was not consummated. The cancellation resulted in a $309 write-off
of accumulated acquisitions costs as of June 30, 1994.
16.OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK:
The Company enters into foreign exchange contracts to hedge foreign currency
transactions and to protect it from risk due to exchange rate movements because
gains and losses on these contracts offset gains and losses on the transactions
being hedged. The Company does not engage in speculation. At March 31, 1996, the
Company was not party to any foreign exchange contracts.
The Company's customer base is primarily American and European recording and
software companies. One customer operating under a vendor supply agreement
accounted for 17% of fiscal year 1996 net sales. No other customers represented
more than 10% of consolidated sales for fiscal years 1996, 1995 or 1994. The
Company performs credit evaluations of its customers and maintains reserves for
credit losses. The provision for doubtful accounts amounted to $1,268, $514 and
$1,141 for the fiscal years 1996, 1995 and 1994, respectively.
17. STOCK SPLIT:
On October 16, 1995, the Company's board of directors approved an increase
in the authorized shares of the Company's common stock to 60 million shares and
a 3.76049-for-1 stock split which was distributed on October 18, 1995. All
shares and per share amounts have been adjusted to reflect such stock split.
18.PRO FORMA EARNINGS PER SHARE:
The pro forma net income gives effect to the Recapitalization, the Offering
and the Private Placement, and pro forma earnings per share are computed based
on the total number of shares of common stock issued and outstanding at March
31, 1996 and 1995, as adjusted for the 3.76049-for-1 stock split that became
effective prior to the Offering and the Private Placement and for the following
assumptions as if each had occurred on April 1, 1994: (i) the assumed exercise
of warrants and stock options outstanding during each year, determined by the
treasury stock method using the public offering price of $7.00 per share for
options and warrants granted within one year prior to the Offering and the
Private Placement and the average market price for options and warrants
outstanding in periods after the Offering; (ii) the net additional debt incurred
in the Recapitalization, at an average interest rate of 9.2%, resulting in
additional interest expense of $2,512 ($1,557 net of tax) for the fiscal year
ended March 31, 1995; (iii) the issuance by the Company of 6,350,000 shares of
common stock in the Offering and 500,000 shares in the Private Placement; (iv)
the application by the Company of the net proceeds of the Offering to repay
$41.7 million of outstanding debt; and (v) an assumed average outstanding
borrowing of $28,300 at an average interest rate of 9.2%, resulting in a
reduction of historical interest expense of $2,551 ($1,582 net of tax) for the
fiscal year ended March 31, 1996, and $1,983 ($1,229 net of tax) for the fiscal
year ended March 31, 1995.
Historical earning per share data has been omitted as the historical
capitalization of the Company prior to the Recapitalization and the Offerings is
not indicative of its capital structure following such events.
NIMBUS CD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
19. ACCOUNTING STANDARDS CHANGES:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 requires a fair value based method of accounting for
stock based compensation, and provides an option to the Company to either
recognize compensation expense for employee stock based compensation or provide
pro forma earnings information as if such compensation cost had been recognized.
The Company has not yet determined the various assumptions that will be used in
the fair value calculations, the method of adoption nor the impact this
statement will have on its financial statements.
20. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for fiscal years 1996 and 1995
follows:
DOLLARS IN THOUSANDS, Three Months Ended
EXCEPT PER SHARE DATA 6/30 9/30 12/31 3/31
1996
Discs sold 21,680 33,228 37,531 33,239
Net sales $21,307 $30,545 $36,645 $29,748
Gross profit 7,212 8,982 9,880 8,362
Operating income 3,529 6,072 7,213 4,633
Income before
extraordinary item 994 2,808 3,980 2,677
Net income $ 994 $ 2,808 $ 1,028 $ 2,677
Net income-pro forma
for the Offering $ 1,655 $ 3,451 $ 4,257 $ 2,677
Earnings per share:
Pro forma for the Offering $ 0.07 $ 0.15 $ 0.19 $ 0.12
DOLLARS IN THOUSANDS, Three Months Ended
EXCEPT PER SHARE DATA 6/30 9/30 12/31 3/31
1995
Discs sold 16,792 18,548 29,865 22,543
Net sales $17,044 $18,912 $27,493 $22,378
Gross profit 5,185 6,100 8,674 7,647
Operating income 2,337 3,793 5,753 3,529
Income before
extraordinary item 1,254 2,142 3,654 1,474
Net income $ 1,254 $ 2,142 $ 3,654 $ 1,150
Net income-pro forma
for the Offering $ 1,184 $ 2,009 $ 3,599 $ 1,404
Earnings per share:
Pro forma for the Offering $ 0.05 $ 0.09 $ 0.16 $ 0.06
REPORT OF INDEPENDENT
ACCOUNTANTS
The Stockholders and Directors
Nimbus CD International, Inc.:
We have audited the accompanying consolidated balance sheets of Nimbus CD
International, Inc. and its subsidiaries (the "Company") as of March 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nimbus CD
International, Inc. and its subsidiaries as of March 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Richmond, Virginia
May 23, 1996
COMMON STOCK INFORMATION
The Company's common stock commenced trading on the Nasdaq National Market on
October 26, 1995 under the symbol NMBS. Prior to that date, there was no
established public trading market for the common stock.
Set forth are the daily high and low sales prices for the Company's common
stock for the period indicated, as reported by MicroQuote II. The current quoted
price of the stock is listed daily in The Wall Street Journal in the National
Association of Securities Dealers Automated Quotation System (Nasdaq). As of
June 6, 1996, there were 104 shareholders of record. The Company has not paid
any dividends on its common stock.
Quarter Ended
Fiscal 1996 12/31 3/31
High $ 9 3/4 $ 9 1/8
Low 7 6 1/2