<PAGE>
EXHIBIT 2
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The accompanying consolidated
financial statements have been prepared by
management and approved by
Cinram's Board of Directors. 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 it produces
relevant
and reliable financial
information. 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. The Board appoints an audit committee
of
three non-management
Directors to review the consolidated financial
statements,
as well as the adequacy of
its internal controls, audit process and financial
reporting with management and
with the external auditors. The audit committee
reports to the Directors
prior to the approval of the audited consolidated
financial statements for
publication.
KPMG LLP, our independent
auditors appointed by shareholders at the last annual
meeting, have audited the
consolidated financial statements. Their report is
presented below.
/s/ Isidore Philosophe
/s/ Lewis Ritchie
ISIDORE PHILOSOPHE
LEWIS RITCHIE
Chief Executive Officer
Chief Financial Officer
March 1, 2005
AUDITORS' REPORT TO THE
SHAREHOLDERS
We have audited the
consolidated balance sheets of Cinram International Inc.
as
at December 31, 2004 and 2003
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,
2004
and 2003 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
March 1, 2005
COMMENTS BY AUDITORS FOR U.S.
READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States,
reporting standards for auditors require the addition of
an explanatory paragraph
(following the opinion paragraph) when there is a
change in accounting
principles that has a material effect on the
comparability
of the Company's consolidated
financial statements, such as the change in
accounting policy related to
stock-based compensation (note 1(k)). Our report to
the shareholders of Cinram
International Inc., dated March 1, 2005 is expressed
in accordance with Canadian
reporting standards which do not require a reference
to such changes in accounting
principles in the auditors' report when the change
is properly accounted for and
adequately disclosed in the consolidated financial
statements.
/s/ KPMG LLP
Chartered
Accountants
Toronto, Canada
March 1, 2005
<PAGE>
CONSOLIDATED BALANCE
SHEETS
(In thousands of U.S.
dollars)
<TABLE>
<CAPTION>
As at December 31
2004
2003
--------------------------------------------------------------
----------- -----------
<S>
<C>
<C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 41,789
$
253,823
Accounts receivable, net of
an allowance for doubtful
accounts of $12,511
(2003 - $13,569)
518,216
369,901
Income taxes recoverable
8,356
-
Inventories (NOTE 3)
56,861
44,606
Prepaid expenses
26,573
11,341
Future income taxes (NOTE
12)
22,872
21,933
----------- -----------
674,667
701,604
Capital assets (NOTE 4)
706,360
646,563
Goodwill (NOTE 5)
328,393
279,426
Intangible assets (NOTE 5)
315,247
376,393
Deferred financing fees (NOTE
6)
24,344
28,083
Other assets
36,218
22,488
Future income taxes (NOTE 12)
11,804
4,657
----------- -----------
$ 2,097,033 $ 2,059,214
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT
LIABILITIES
Accounts payable
$ 213,876
$
192,789
Accrued liabilities
377,323
375,293
Income taxes payable
-
2,131
Current portion of long-term
debt (NOTE 7)
71,509
95,417
Current portion of
obligations under capital leases(NOTE 8)
850
1,058
----------- -----------
663,558
666,688
Long-term debt (NOTE 7)
786,834
954,456
Obligations under capital
leases (NOTE 8)
4,603
5,911
Other long-term liabilities
62,778
17,227
Future income taxes (NOTE 12)
93,069
29,649
SHAREHOLDERS'
EQUITY
Capital stock (NOTE 9)
170,145
163,174
Contributed surplus
4,145
117
Retained earnings
240,367
172,564
Foreign currency translation
adjustment
71,534
49,428
----------- -----------
486,191
385,283
Lease commitments (NOTE
8)
----------- -----------
$ 2,097,033 $ 2,059,214
=========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
On behalf of the
Board
/s/ Isidore Philosophe
/s/ Lewis Ritchie
ISIDORE PHILOSOPHE
LEWIS RITCHIE
Director
Director
32 CINRAM ANNUAL REPORT
2004
<PAGE>
CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS
(In thousands of U.S.
dollars, except per share amounts)
<TABLE>
<CAPTION>
Years
ended December 31
2004
2003
-----------------------------------------------------------------------
----------- ---------
<S>
<C>
<C>
Revenue
$ 2,026,638 $ 826,893
Cost of goods sold
1,615,542
655,374
----------- ---------
Gross profit
411,096
171,519
Selling, general and
administrative expenses
177,372
68,883
Amortization of intangible
assets and deferred financing fees
(NOTES 5 and 6)
73,038
11,449
Unusual items (NOTE 11)
(1,713)
2,726
----------- ---------
Earnings before the
undernoted
162,399
88,461
Interest on long-term debt
51,642
13,264
Other interest
1,460
479
Investment income
(2,436)
(3,583)
----------- ---------
Earnings before income taxes
111,733
78,301
Income taxes (NOTE
12):
Current
24,555
10,107
Future
11,354
15,174
-----------
---------
35,909
25,281
----------- ---------
Net earnings
75,824
53,020
Retained earnings, beginning
of year
172,564
124,340
Effect of a change in
accounting policy related to stock-based
compensation (NOTE 1(k))
(2,759)
-
Dividends declared
(5,262)
(4,796)
----------- ---------
Retained earnings, end of
year
$ 240,367
$
172,564
=========== =========
Earnings per
share:
Basic
$ 1.34
$
0.95
Diluted
1.32
0.94
=========== =========
Weighted average number of
shares outstanding (in thousands) (NOTE 10):
Basic
56,589
55,628
Diluted
57,514
56,612
=========== =========
</TABLE>
See accompanying notes to
consolidated financial statements.
CINRAM ANNUAL REPORT 2004 33
<PAGE>
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands of U.S.
dollars)
<TABLE>
<CAPTION>
Years ended December 31
2004
2003
----------------------------------------------------------------------
----
----
<S>
<C>
<C>
Cash provided by (used
in):
OPERATIONS
Net earnings
$ 75,824 $
53,020
Items not involving
cash:
Amortization
219,735
75,156
Future income
taxes
11,354
15,174
Stock-based
compensation
1,269
-
Gain on
disposition of capital assets
(2,330)
(146)
Unrealized foreign exchange
loss (gain)
(5,391)
1,599
Change in non-cash operating
working capital (NOTE 16)
(171,061)
213,849
--------
----------
129,400
358,652
FINANCING
Increase in long-term debt
48,000
1,025,000
Repayment of long-term debt
(239,530)
(9,225)
Deferred financing fees
(2,250)
(28,627)
Decrease in obligations
under capital leases
(1,885)
(630)
Issuance of common shares
6,971
6,230
Change in other long-term
liabilities
10,931
45
Dividends paid
(5,262)
(4,796)
-------- ----------
(183,025)
987,997
INVESTMENTS
Acquisition, net of cash
acquired of $1,437 (NOTE 2)
-
(1,149,052)
Transaction costs relating
to Time Warner acquired businesses
(890)
-
Purchase of capital assets
(145,704)
(80,226)
Proceeds on disposition of
capital assets
4,015
960
Decrease (increase) in other
assets
(12,523)
3,020
--------
----------
(155,102)
(1,225,298)
Foreign exchange gain (loss)
on cash held in foreign currencies
(3,307)
28,485
--------
----------
Increase (decrease) in cash
and cash equivalents
(212,034)
149,836
Cash and cash equivalents,
beginning of year
253,823
103,987
--------
----------
Cash and cash equivalents,
end of year
$ 41,789 $
253,823
========
==========
Supplemental cash flow
information:
Interest paid
$ 52,540 $
8,954
Income taxes paid
35,455
17,193
========
==========
</TABLE>
See accompanying notes to
consolidated financial statements.
34 CINRAM ANNUAL REPORTS
2004
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of U.S.
dollars, except common shares and per share information)
Years ended December 31, 2004
and 2003
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, and have been prepared in accordance with
Canadian
generally accepted accounting principles (GAAP) and, except
as
outlined in NOTE 19, are, in all material respects, in
accordance
with United States GAAP. The results of subsidiaries acquired
are
consolidated from the date of acquisition. All intercompany
balances
and transactions have been eliminated on consolidation.
The Company has historically prepared its consolidated
financial
statements in Canadian dollars. Beginning with the first quarter
of
2004, the Company changed its reporting currency to U.S. dollars
to
provide the financial statement users with more relevant
information. The Company used the current rate method to
translate
the
consolidated Canadian dollar results into U.S. dollars for
both
the current and prior years. Under the current rate method,
the
assets and liabilities are translated into U.S. dollars at the
rate
of exchange in effect at the balance sheet date; revenue
and
expenses as well as cash flow items are translated at
weighted
average rates for the year. Any resulting exchange gain or loss
is
charged or credited to the foreign currency translation
adjustment
account included as a separate component of shareholders'
equity.
The functional currencies of the Company and each of its
subsidiaries remained unchanged. The functional currency of
the
Company is
the Canadian dollar. The Company's operations in the
United States, the United Kingdom, France, Germany and Mexico
are
considered to be self-sustaining. Assets and liabilities
are
translated using year-end exchange rates and revenue and
expenses
are translated at average exchange rates. Exchange gains and
losses
arising from the translation of the financial statements
of
self-sustaining foreign operations are deferred in the
foreign
currency translation adjustment account included as a
separate
component of shareholders' equity. The Company's borrowings,
as
outlined in NOTE 7, are denominated in U.S. dollars and the
majority
represent a hedge of the Company's net investment in its
U.S.
operations. The Company formally assesses the hedge's
effectiveness
at the beginning of each quarter.
Certain 2003 comparative figures have been reclassified to
conform
with the financial statement presentation adopted in
2004.
(b)
REVENUE
RECOGNITION
Revenue is comprised of product sales and service revenue
earned
from fulfillment services. Revenue from product sales is
recognized
upon shipment since title to the goods is transferred to
customers,
persuasive evidence of an arrangement exists, 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.
CINRAM ANNUAL REPORT 2004 35
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of U.S.
dollars, except common shares and per share information)
Years ended December 31, 2004
and 2003
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:
<TABLE>
<S>
<C>
Buildings
20 - 40 years
Machinery and equipment
3 - 13 years
Computer equipment
3 - 5 years
Furniture
5 years
Leasehold improvements
Over term of lease
</TABLE>
(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,
in the same manner that value of goodwill is determined
in a business combination, is compared with its carrying
amount to
measure the amount of the impairment loss, if
any.
(ii) INTANGIBLE
ASSETS
Intangible assets acquired in a business combination are
recorded at their fair values less accumulated
amortization. Amortization is provided on a
straight-line basis as follows:
<TABLE>
<S>
<C>
Customer supply agreements
6 years
Cross-licensing
agreements
1 year
</TABLE>
(f)
IMPAIRMENT OF
LONG-LIVED ASSETS
The Company reviews capital and intangible assets
(long-lived
assets) for impairment annually or more frequently if events
or
changes in circumstances indicate that the carrying amount may
not
be recoverable. 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. If the sum
of
undiscounted future cash flows expected to result from the use
and
disposition of a group of assets is less than its carrying
amount,
it is considered impaired. An impairment loss is measured as
the
amount by which the carrying amount of a group of assets exceeds
its
fair value.
At December 31, 2004 and 2003, no impairments in the carrying
value
of these assets existed.
(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 prorated 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
accrued
liabilities and other long-term liabilities.
36 CINRAM ANNUAL REPORT
2004
<PAGE>
(h)
ASSET RETIREMENT
OBLIGATIONS
Effective January 1, 2004, the Company retroactively adopted
the
Canadian Institute of Chartered Accountants' (CICA)
Handbook
Section 3110, "Asset Retirement Obligations" (Section 3110),
which
establishes standards for the recognition, measurement
and
disclosure of liabilities for asset retirement obligations and
the
associated retirement costs. Section 3110 applies to
legal
obligations associated with the retirement of tangible
long-lived
assets that result from their acquisition, lease,
construction,
development or normal operation. The Company records the
present
value of the estimated fair value of a liability for an
asset
retirement obligation in the year in which it is incurred and when
a
reasonable estimate of fair value can be made. The fair value of
a
liability for an asset retirement obligation is the amount at
which
that liability could be settled in a current transaction
between
willing parties, that is, other than in a forced
liquidation
transaction. The Company subsequently allocates the asset
retirement
cost to expense using a systematic and rational method over
the
asset's useful life, and records the accretion of the liability as
a
charge to the statement of earnings.
As at January 1, 2004, the Company recorded a liability of
$2,886
for the estimated present value of the costs of retiring
leasehold
improvements at the maturity of the facility leases and
recorded
deferred asset retirement costs of $2,886. The following
table
details the changes in the leasehold retirement
liability:
<TABLE>
<S>
<C>
January 1, 2004
$2,886
Accretion charges
177
------
December 31, 2004
$3,063
======
</TABLE>
The adjustment to leasehold improvements in respect of
asset
retirement costs is amortized into income on a straight-line
basis
over the remaining life of the leases. For the year ended
December
31, 2004, the Company recorded amortization expense of $543 in
cost
of sales. The impact of this new accounting standard was
not
material for 2003.
(i)
DEFERRED
FINANCING FEES
The costs of obtaining bank and other debt financings are
deferred
and amortized on a straight-line basis over the term of the
related
debt or debt facilities to which they relate.
(j)
DERIVATIVE
FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized to reduce
interest
rate risk on the Company's debt. The Company does not enter
into
financial instruments for trading or speculative
purposes.
The Company's policy is to formally designate each
derivative
financial instrument as a hedge of a specifically identified
debt
instrument. The Company believes the derivative
financial
instruments are effective as hedges, both at inception and over
the
term of the instrument; as the term to maturity, the
(notional)
principal amount and the interest rate basis in the instruments
all
match the terms of the debt instrument being hedged.
Interest rate swap agreements are used as part of the
Company's
program to manage the fixed and floating interest rate mix of
the
Company's total debt portfolio and related overall cost
of
borrowing. The interest rate swap agreements involve the
periodic
exchange of payments without the exchange of the notional
principal
amount upon which the payments are based, and are recorded as
an
adjustment of interest expense on the hedged debt instrument.
The
related amount payable to or receivable from the counterparties
is
included as an adjustment to accrued interest.
Gains and losses on terminations of interest rate swap
agreements
are deferred on the balance sheet and amortized as an adjustment
to
interest expense related to the obligation over the remaining
term
of the original contract life of the terminated swap agreement.
In
the event of early extinguishment of the debt obligation,
any
realized or unrealized gain or loss from the swap would
be
recognized in the consolidated statement of earnings at the time
of
extinguishment.
For those instruments that do not meet the above
criteria,
variations in their fair value are marked-to-market on a
current
basis, with the resulting gains or losses recorded in or
charged
against earnings.
CINRAM ANNUAL REPORT 2004 37
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of U.S.
dollars, except common shares and per share information)
Years ended December 31, 2004
and 2003
(k)
STOCK-BASED
COMPENSATION
Effective January 1, 2004, Canadian GAAP requires the Company
to
calculate the fair value of stock-based compensation awarded
to
employees and to
expense the fair value over the vesting period of
the stock options. In accordance with the transition rules,
the
Company adopted the standard retroactively to January 1,
2002,
without restating prior periods. The Company determined the
fair
value of stock options granted to employees since January 1,
2002,
using the Black-Scholes option pricing model and recorded
an
adjustment to opening retained earnings in the amount of
$2,759,
representing the expense for the 2003 and 2002 fiscal years, with
a
corresponding increase in contributed surplus.
(l)
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. Income tax expense is the sum of
the
Company's provision for current income taxes and the
difference
between opening and ending balances of future income tax assets
and
liabilities.
(m)
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.
(n)
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 volume rebates, the
allowance
for doubtful accounts, inventory valuation, income tax
valuation
allowances, restructuring costs, assets and obligations related
to
employee future benefits, the useful lives of all depreciable
assets
and the recoverability of capital assets and long-lived
assets.
Royalty charges are incurred as a result of the use of third
party
replication technologies. The Company records these amounts
as
incurred based on the sale of the Company's product. Accordingly,
at
each balance sheet date, the Company records its best estimate
of
the royalties payable based on contractual arrangements
and
management's best estimate for non-contractual amounts.
Actual
results could differ from those estimates.
(o)
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.
(p)
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
(i) LIABILITIES
AND EQUITY
Effective for fiscal years beginning after November 1,
2004,
CICA Handbook Section 3860, "Financial Instruments -
Disclosure and Presentation," has been amended to
provide
guidance for classifying certain financial obligations of
a
fixed amount 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. Any financial instruments 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.
38 CINRAM ANNUAL REPORT
2004
<PAGE>
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 issuer's equity 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.
(ii) CONSOLIDATION OF
VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting Guideline
AcG-15,
"Consolidation of Variable Interest Entities" (AcG-15).
AcG-15
addresses the consolidation of variable interest
entities
(VIEs), which are entities which have insufficient equity
at
risk to finance their operations without additional
subordinated financial support and/or entities whose
equity
investors lack one or more of the specified essential
characteristics of a controlling financial interest.
AcG-15
will be applied in the Company's year, beginning January
1,
2005. The adoption of this standard will not have an impact
on
the consolidated financial statements.
(iii) ARRANGEMENTS CONTAINING A LEASE
Emerging Issues Committee (EIC) Abstract 150,
"Determining
Whether an Arrangement Contains a Lease," addresses a
situation where an entity enters into an arrangement,
comprising a transaction that does not take the legal form
of
a lease but conveys a right to use a tangible asset in
return
for a payment or series of payments. For example, this
may
include items such as take-or-pay or similar contracts,
in
which specified payments must be made regardless of
whether
delivery is taken of the contracted products of services.
The
Company will adopt this standard effective January 1,
2005,
and is currently assessing its impact.
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 $1,137,378 plus acquisition costs of $13,111.
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.
During the
fourth quarter of fiscal 2004, the Company completed the
allocation
of the purchase price for the acquisition. The final
allocation
of the
purchase price, based on independent appraisals and
management's
estimates,
is as follows:
<TABLE>
<S>
<C>
Current assets, including
cash of $ 1,437
$
317,071
Capital assets
406,104
Intangible assets
387,900
Goodwill
320,351
-----------
1,431,426
Current liabilities
(208,715)
Other long-term liabilities
(49,611)
Future tax liabilities
(22,611)
-----------
(280,937)
-----------
Total cash purchase
consideration
$ 1,150,489
===========
</TABLE>
Included
in other long-term liabilities are pre-acquisition
contingencies
assumed on
the acquisition of the Time Warner Inc. businesses.
These
amounts
have been recorded based on management's best estimate.The
actual
cash
settlement amount and timing is unknown at this time.
CINRAM ANNUAL REPORT 2004 39
<PAGE>
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of U.S.
dollars, except common shares and per share information)
Years ended December 31, 2004
and 2003
Intangible
assets totalling $385,700 were assigned to customer
supply
agreements
with Time Warner Inc. and are being amortized over the
six-year
period of
the agreement. Intangible assets totalling $2,200 were
assigned
to certain
cross-licensing agreements and have been fully amortized
by
December
31, 2004.
3. INVENTORIES
<TABLE>
<CAPTION>
2004
2003
----
----
<S>
<C>
<C>
Raw materials
$ 38,481 $
32,844
Work in process
15,119 8,330
Finished goods
3,261 3,432
--------
--------
$ 56,861 $
44,606
========
========
</TABLE>
4. CAPITAL
ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
2004
COST
AMORTIZATION VALUE
----
----
------------ -----
<S>
<C>
<C>
<C>
Land
$ 23,440
$
-
$
23,440
Buildings
143,975
22,793
121,182
Machinery and equipment
837,303 357,747
479,556
Computer equipment
29,305
12,222
17,083
Furniture
20,213
15,526
4,687
Leasehold improvements
46,176
24,614
21,562
Construction in progress
38,850
-
38,850
----------- ---------
---------
$ 1,139,262 $ 432,902 $
706,360
=========== =========
=========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Net
book
2003
Cost
amortization value
----
----
------------ -----
<S>
<C>
<C>
<C>
Land
$ 23,265 $ -
$
23,265
Buildings
138,661
17,528
121,133
Machinery and equipment
664,993 233,567
431,426
Computer equipment
15,590
8,781
6,809
Furniture
19,162
14,266
4,896
Leasehold improvements
31,295
18,674
12,621
Construction in progress
46,413
-
46,413
---------
---------
---------
$ 939,379
$ 292,816 $
646,563
=========
=========
=========
</TABLE>
Included
in the above are assets under capital lease with a cost
of
$11,486
and a net book value of $6,350 (2003 - $16,914 and
$6,971,
respectively), which are being amortized on a straight-line basis
over
their
anticipated economic life, which is 20 years for building and
four
years for
machinery and equipment.
Amortization expense for capital assets for the year ended December
31,
2004
amounted to $146,697 (2003 - $63,707).
5. GOODWILL AND
INTANGIBLE ASSE
