A Message from the President and CEO
In order to protect shareholder value and in light of the recent termination
of talks with a potential buyer, CINAR has decided to move forward with
a major restructuring plan. Our objective is to assure the ongoing viability
of the Company and to solidify the position of its key entertainment properties.
We believe that current economic and market conditions are not conducive
to maximize shareholder value by selling the Company's assets at this
time. We believe a transaction could be entered into, but we are not prepared
to sell at a low price just to get a transaction done.
Since becoming aware of, among other things,
allegations that CINAR improperly obtained tax credits from the Canadian
government, the transfer of US$122 million into offshore investments without
the approval of the Board and discovery of numerous related party transactions,
present management has focused on resolving these issues, on clarifying
the Company's financial position, correcting the books of the Company
and on trying to find a strategic partner/buyer for CINAR's assets.
We are pleased to announce that CINAR has appointed
Richter, Usher & Vineberg as its auditors. We intend to produce audited
financial statements for fiscal 2001 and we expect that an annual shareholder's
meeting will be held April 29, 2002.
Before dealing with the details of the restructuring
plan, I feel it is important to review the administrative steps that have
been taken to place CINAR on a solid footing once again.
Tax credit and accreditation issues: As previously
announced, under an agreement reached in December 2000, CINAR agreed to
pay the Canada Customs and Revenue Agency and Revenue Quebec a total of
$27 million for tax credits alleged to have been improperly received,
as well as penalties and the accumulated interest on these amounts. The
issue did not end there however. An agreement also had to be worked out
with Telefilm Canada to reflect the new status of our decertified productions.
Those negotiations were arduous and demanded a full-scale re-examination
of financial records going back almost ten years. Settling these issues
became even more difficult due to numerous lawsuits launched at various
stages of discussions. It should be noted that agreements with the Canadian
Radio-television and Telecommunications Commission (CRTC) and the Canadian
Television Fund (CTF) have yet to be concluded. Discussions with these
organizations are taking place.
The sales process: Merrill Lynch & Co. were
hired in August 2000 to explore strategic options to maximize shareholder
value, including business partnerships or mergers. In order to market
the Company, Merrill Lynch required credible financial information and
projections to include in a Descriptive Memorandum. We began a search
for a new CFO, culminating in the hiring of George Rossi in November 2000,
and the financial information was provided in early 2001. Merrill Lynch
identified 60 companies of which 34 received the Descriptive Memorandum.
Of those 34, 16 submitted non-binding expressions of interest by late
April. Twelve companies proceeded to the second phase and were provided
with more detailed information and attended presentations by CINAR Management.
By July 6, eight companies had submitted bids - three for all operating
assets, two for Entertainment assets only and three for CINAR Education
only. Of these eight only one was felt to reflect acceptable value for
shareholders and we elected to move forward with that party and granted
an exclusive period to complete an examination of CINAR's books and records
We announced on November 6 that discussions had
broken off with that party. Since that time, through Merrill Lynch &
Co., we engaged in some follow-up talks with other potential buyers, however,
it is clear that present market conditions are having an impact on values.
We will continue to seek opportunities offering shareholder value with
the expectation that external market conditions will improve and thereby
enhance the value of CINAR's library and improve the earnings multiples
offered for CINAR Education.
Under the Operating Plan for 2002, the Company
will focus on the following priorities:
1. Restructuring: We have taken the difficult decision to downsize
staff in CINAR's Entertainment Division and in the Montreal
corporate office from 164 to 110. Of those employees immediately
affected, 32 are in CINAR's corporate positions and 22 are
studios and animation. The Company has retained the resources
necessary to assure the continued progress of its key entertainment
properties Arthur(R) and Caillou(R).
We believe this decision protects shareholder value by maintaining
a focus on our key entertainment properties while at the
not incurring new deficits by greenlighting new series. We
continue to focus on the sale of the many titles within our
No staff reductions are planned in our profitable Education
Division, for which we foresee continued growth.
2. Licensing: Our licensing business has made solid progress in the
past two years, with Caillou enjoying particular success.
licensing income has grown from $1.7 million in 2000 to an
estimated $2.0 million for 2001 and a projected $3.0 million
2002. The Caillou property appears to have continued upside
potential into 2003 at least.
3. Music: CINAR Music was formed in 1995 to maximize music publishing
and retransmission royalty revenue collection. Gross revenue
grown from $1.75 million in 1999 to an estimated $2.3 million
2001. Gross revenue is expected to remain relatively stable
2002. However, this niche business is expected to add more
$1.3 million to our bottom line.
4. Studios: We have a first-class studio facility in Montreal and in
2001, we began an initiative to attract outside service production
work. We have experienced some success in this endeavor
intend to build on this success in the year ahead.
5. Legal: As many shareholders are aware, we face a number of legal
disputes. Management has set as a priority to resolve
expeditiously the class action litigation as well as those
lodged by the former owners of our Education subsidiaries,
provided that we can do so on reasonable terms.
We will continue to pursue vigorously the Company's action
recover some $29 million from three former senior officers
6. Financial: We intend to produce audited financial statements for
the fiscal year ending November 30, 2001. These will
at an annual shareholder's meeting to be held on April 29,
7. Globe-X Canadiana: We will continue to pursue vigorously recovery
of CINAR's funds, currently totaling about US$38 million
million canadian) excluded accrued interest, from the Bahamas.
8. Tax credits: CINAR currently has approximately $43 million in
receivable tax credits and recoverable Part I taxes. The
of these amounts, while time consuming, remains a priority.
9. CINAR Education: The education companies in the United States are
important contributors to CINAR's earnings and growth and
to ensure they have the financial resources to continue to
To provide shareholders with a better perspective on the financial issues
that we have been dealing with over the past 21 months, we thought it
would be useful to highlight the more significant factors that required
us to adjust CINAR's financial statements:
(a) Liabilities related to tax credit issues. As previously announced
tax credits repaid or foregone plus interest and penalties
shareholders equity by $27 million.
(b) Issues stemming from the Globe-X investment. As a result of the
difficulties in recovering our investment, we have
entire amount owing by Globe-X-Canadiana. The amount
outstanding represents a reduction to shareholders
equity of US$38
million ($59 million canadian) excluded accrued interest.
(C) Investment in Edusoft
The entire $46 million in goodwill related to the acquisition
Edusoft was written off reducing shareholders equity
(d) Investment in Lightspan
The investment in Lightspan was written down to market
reducing shareholders equity by $31 million.
(e) Change in accounting policies
Management has performed an extensive analysis to reconstruct
film cost balance based on the adoption of Financial
Standards Board No. 53 (FASB 53). In addition, certain
which were previously recorded as film costs, are now
period costs in the period in which they were incurred.
result, the Company has written down the value of its
by $54.3 million. This is an addition to the $41 million
down in 1999.
(f) Related-party transactions
Hundreds of related-party transactions involving former
were reviewed by the Company. Many of these were not
related party transactions but were described to appear
legitimate business transactions. It has been a very
consuming and labor intensive process to verify and
books of the Company. This has resulted in CINAR's
former senior management of some $29 million.
In closing, we want to assure you that maximizing shareholder value is
our key concern. If we are successful in achieving our objectives established
for next year, we believe the Company will maintain its value. If the
economy turns around, our operating entities should improve in market
value. As time passes, we will continue to reassess market conditions
to determine how we might best return value to our shareholders.
I want to thank all of our employees for their
loyalty and express my sincere regret to those whose services we are no
longer able to retain.
CINAR is a Company renowned for the award winning quality of its products
and we are committed to ensuring that the market recognizes the value
of that high quality.
President and Chief Executive Officer