CINRAM
THIRD QUARTER REPORT 2003
UNAUDITED THIRD QUARTER ENDED SEPTEMBER 30, 2003, AND 2002
(PHOTO OF RACE CAR)
A RECORD
PERFORMANCE
(CINRAM LOGO)
CINRAM REPORTS INCREASED PROFITABILITY FOR THIRD QUARTER 2003
For the third quarter ended September 30, 2003, Cinram International Inc. (TSX:
CRW) reported increased net earnings of $19.1 million or $0.33 per share,
compared to $14.8 million or $0.27 per share last year - a 29% increase.
Consolidated revenue for the third quarter was $203.5 million, a 9% decline from
$224.7 million in the same period last year due to the impact of a stronger
Canadian dollar and a shift in product mix. Earnings before interest expense,
investment income and income taxes (EBIT*) increased to $28.3 million, compared
to $22.2 million in 2002.
These numbers do not include any results from the acquisition of the Time Warner
businesses, which closed after the end of the third quarter.
"We are very pleased with Cinram's year to date performance, from both a
financial and strategic perspective," says Cinram chief executive officer
Isidore Philosophe. "We have enjoyed strong cash flow from operations and our
solid financial position has allowed us to quickly expand to meet our customers'
growing demand for DVDs."
Cinram's total DVD unit shipments during the first nine months of 2003 increased
by more than 100% over the same period last year. At current rates, the Digital
Entertainment Group expects U.S. DVD industry shipments alone to exceed one
billion units in 2003. And, with the average price of DVD players declining, the
Group estimates that more than 48 million U.S. households now have at least one
DVD player - with household penetration expected to reach 50 million, or 50% by
the end of 2003.
INDUSTRY SEGMENTS
Third quarter DVD sales represented 52% of consolidated revenue, up from 30% in
2002. "We have been continually adding DVD capacity in order to meet the
increased demand for DVD product from our customers," adds Philosophe. Cinram
invested $24.1 million in capital expenditures in the third quarter and $65.4
million year to date, principally to increase DVD capacity in North America.
Sales for video cassettes continued to decline relative to Cinram's consolidated
revenue, accounting for 14% of consolidated revenue in the third quarter
compared to 33% for the same period last year. "Consumers' appetite for DVDs is
by far outpacing the demand for video cassette products," says Philosophe. "The
Time Warner acquisition gives us the opportunity to capitalize on this growth
throughout North America and Europe."
Video cassettes, by their product make-up, receive higher average selling
prices, generate lower profit margins and are more expensive to produce than
DVDs because of higher raw material costs and real time manufacturing
constraints. A shift in demand from video cassettes to DVD therefore has a
larger impact on top line revenue than net earnings.
CD shipments for the quarter made up 17% of consolidated sales. Despite the 4%
increase in CD unit shipments, lower average selling prices combined with a
strong Canadian dollar led to a 10% decline in revenue compared to the third
quarter of 2002.
Distribution services revenue increased by 20% over 2002, representing 9% of
consolidated revenue for the third quarter, fuelled by an overall increase in
units distributed during the quarter.
cinram 01 2003
CINRAM REPORTS INCREASED PROFITABILITY FOR THIRD QUARTER 2003 (continued)
GEOGRAPHIC SEGMENTS
U.S. sales represented 58% of consolidated revenue for the quarter. Excluding
foreign currency translation, third quarter revenue in the U.S. grew by 7%, led
by a significant increase in DVD unit shipments and higher distribution services
revenue. After foreign exchange translation, U.S. revenue decreased by 6%. In
Canada, third quarter revenue made up 24% of consolidated sales, rising by 16%
from last year with the growth in DVD unit shipments more than offsetting
reduced shipments for CDs and VHS video cassettes. In Europe, revenue decreased
by 36% due to the sale of the Company's facility in the Netherlands in early
2003, and reduced VHS video cassettes shipments in France and the United
Kingdom.
As a result of a shift in product mix to DVDs and the increased ability to
manufacture DVD orders in house, gross profit for the third quarter grew to
$47.1 million from $41.4 million during the same period last year.
Selling, general and administrative expense for the third quarter decreased
slightly to $18.7 million compared to $19.2 million during the same period last
year.
As at September 30, 2003, Cinram's gross cash position was $178.8 million
compared to $164.2 million as at December 31, 2002, and the net cash position
(cash and cash equivalents less bank operating loans and long-term debt) was
$140.2 million, an increase of $30.0 million from the end of 2002. The increase
in the cash balance is directly attributable to the Company's strong cash flow
from operations during the first nine months of the year.
"As we head into our busiest season of the year, we are very optimistic about
the future of our market," concludes Philosophe. "This is the best year ever for
the home entertainment industry, and with our newly acquired assets, we are in a
better position than ever to meet our customers' requirements."
APPOINTMENT OF TWO NEW BOARD MEMBERS
During the quarter, Cinram also added valuable experience to its Board of
Directors with the appointment of Nadir H. Mohamed, president and chief
executive officer of Rogers AT&T Wireless and John R. Preston, executive
vice-president and chief financial officer of Ripplewood Investment Holdings.
Messrs. Mohamed and Preston have extensive accounting and financial backgrounds
and will both serve as members of the Board's audit committee.
DIVIDEND
The Board of Directors has declared a quarterly dividend of $0.03 per share,
payable on December 31, 2003, to the shareholders of record at the close of
business on December 15, 2003.
SUBSEQUENT EVENT
On October 24, 2003, Cinram International Inc. completed the agreement with Time
Warner Inc. to acquire its DVD and CD manufacturing and physical distribution
businesses, together with certain related businesses, in the U.S. and Europe for
approximately $1.05 billion US in cash. As part of the acquisition, Cinram also
entered into exclusive long-term agreements to manufacture, print, package and
physically distribute DVDs and CDs for Warner Home Video and Warner Music Group
in North America and Europe, and for New Line Home Entertainment, Inc. in North
America. The acquisition was funded by a $1.175 billion US bank facility
provided by a syndicate led by Citigroup and Merrill Lynch, of which $150
million US is a revolving credit facility that is undrawn at this time.
cinram 02 2003
FORWARD LOOKING STATEMENTS
Certain statements included in this quarterly report constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or results of the multimedia
duplication/replication industry, to be materially different from any future
results, performance or achievements expressed or implied by such forward
looking statements. Such factors include, among others, the following: general
economic and business conditions, which will, among other things, impact the
demand for the Company's products and services; multimedia
duplication/replication industry conditions and capacity; the ability of the
Company to implement its business strategy; the Company's ability to retain
major customers and participate in such customers' migration from VHS and audio
formats to DVD; the Company's ability to invest successfully in new
technologies; the effective integration of the Time Warner businesses; and other
factors which are described in the Company's filings with the securities
commissions.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
(in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
EBIT* $ 28,345 $ 22,208 $ 62,932 $ 40,296
Interest expense 882 1,513 2,930 3,865
Investment Income (1,164) (1,767) (3,358) (3,289)
Income taxes 9,504 7,619 21,677 13,317
-------- -------- -------- --------
Net earnings $ 19,123 $ 14,843 $ 41,683 $ 26,403
======== ======== ======== ========
* EBIT is defined herein as earnings before interest expense, investment income
and income taxes, and is a standard measure that is commonly reported and widely
used in the industry to assist in understanding and comparing operating results.
EBIT is not a defined term under generally accepted accounting principles
("GAAP"). Accordingly, this measure should not be considered as a substitute or
alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as
found in the table above.
ABOUT CINRAM
Cinram International Inc. is one of the world's largest independent providers of
pre-recorded multimedia products and logistics services. With facilities in
North America and Europe, Cinram manufactures and distributes pre-recorded DVDs,
VHS video cassettes, audio CDs, audiocassettes and CD-ROMs for motion picture
studios, music labels, publishers and computer software companies around the
world. The Company's shares are listed on the Toronto Stock Exchange (CRW) and
are included on the S&P/ TSX Composite Index. For more information, visit our
Web site at www.cinram.com.
/s/ Isidore Philosophe
ISIDORE PHILOSOPHE
Chief Executive Officer
cinram 03 2003
2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
This interim management discussion and analysis ("MD&A") should be read in
conjunction with the MD&A in the Company's annual report for the year ended
December 31, 2002. External economic and industry factors remain substantially
unchanged, unless otherwise stated.
OVERVIEW
Net earnings for the third quarter of 2003 reached $19.1 million, an increase of
$4.3 million over 2002 third quarter earnings of $14.8 million, resulting from
an increase in gross profit driven by the continued shift in product mix toward
the DVD multimedia format. Net earnings for the nine months ended September 30,
2003, increased by $15.3 million to $41.7 million, up from $26.4 million in the
comparable 2002 period.
REVENUE
Revenue for the third quarter decreased by 9%, to $203.5 million, from $224.7
million in the same period in 2002. Excluding the impact of foreign exchange,
2003 third quarter revenue decreased by 1%. Although total multimedia units
shipped during the quarter increased by 4%, the shift in product mix from VHS
video cassettes to DVDs precluded an equivalent increase in revenue. VHS video
cassettes are more expensive to produce because of the higher cost of raw
material inputs and therefore command higher average selling prices than DVDs.
For the past few years, VHS video cassettes have represented a significant
portion of Cinram's consolidated sales. The remarkable increase in demand for
DVDs has displaced the VHS format causing a shift in the Company's business
model and in turn a shift in revenues to lower priced, higher margin DVDs.
Continued decline in audio CD, CD-ROM, audio cassettes and VHS video cassettes,
coupled with the strengthening of the Canadian dollar relative to the U.S.
dollar, led to further revenue erosion in the third quarter of 2003.
GEOGRAPHIC SEGMENTS
NORTH AMERICA
North American revenue for the third quarter decreased by 1%, to $170.7 million,
down from $173.2 million in the third quarter of 2002. The decline was driven by
decreased revenue from the United States and to a lesser extent Mexico, and was
somewhat offset by growth in revenue from Canada. As stated previously, the
strengthening momentum of the Canadian dollar relative to the U.S. dollar led to
the contraction of North American revenue for the quarter. Excluding the impact
of foreign exchange, 2003 third quarter revenue increased by 9%.
In the United States, third quarter revenue decreased by 6% from the same period
in 2002. Excluding the impact of foreign exchange, third quarter revenue from
the United States increased by 7%. Although DVD unit shipments continue to
experience significant growth in the United States, the decline in all other
formats, primarily VHS video cassettes, offset the DVD growth enjoyed in this
region. For the third quarter of 2003, revenue from the United States
represented 58% of consolidated revenue, compared to 57% in the prior year.
In Canada, third quarter revenue increased by 16%, reflecting continued growth
in DVD unit shipments, combined with an increase in distribution services
revenue. Offsetting this revenue growth was the continued decrease in market
demand for audio cassettes, VHS video cassettes and CDs, combined with lower
selling prices. For the third quarter of 2003, revenue from Canadian operations
represented 24% of consolidated revenue, compared to 18% in the prior year.
cinram 04 2003
In Mexico, third quarter revenue decreased by 21% in 2003 from the same period
last year. Similar to other regions, DVD growth remained strong in the quarter,
however, all other formats experienced continued decline, particularly CD and CD
ROM. For the third quarter of 2003, revenue from Mexican operations represented
2% of consolidated sales during the quarter, consistent with 2002.
EUROPE
European revenue decreased by 36% to $32.7 million in the third quarter of 2003.
Excluding the impact of foreign exchange, 2003 third quarter European revenue
decreased by 26%. Consistent with all other regions, European DVD sales
experienced significant growth for the period, but were offset by the declines
in revenue from all other formats, mostly in VHS video cassettes. Furthermore,
the sale of the Company's facility in the Netherlands in early 2003, also
contributed to the erosion of revenue from the region. For the third quarter of
2003, European revenue represented 16% of consolidated sales, down from 23% in
the prior year.
In terms of individual territories, revenue in the United Kingdom was down 28%
in the third quarter of 2003, resulting from a decrease in revenue from VHS
video cassettes. The corresponding growth in DVD revenue was not sufficient to
offset the decline in other product lines.
In France, 2003 third quarter revenue decreased by 29% in comparison to prior
year levels, mainly due to decreased revenue from VHS videocassettes. Again, the
corresponding growth in DVD revenue was not sufficient to offset the decline in
other product lines.
INDUSTRY SEGMENTS
HOME VIDEO
Third quarter revenue from Cinram's home video segment, which includes DVDs and
VHS video cassettes, was $137.2 million, down from $143.5 million in the third
quarter of 2002. This segment accounted for 67% of consolidated revenue, up from
64% in the prior year. During the quarter, the Company added DVD capacity in the
United Kingdom and France, anticipating that European revenue associated with
VHS video cassette would be displaced by DVD.
DVD revenue for the quarter increased by 61%, or $40.4 million, from the prior
year reflecting increased consumer demand across all geographic regions,
especially in the United States where DVD shipments increased by 23 million
units, or 69%. DVD revenue represented 52% of consolidated revenue for the third
quarter, up from 30% in the third quarter of 2002.
The growth in DVD revenue during the period was dampened by a 62% or $46.2
million decrease in VHS video cassette revenue because of the shift in demand to
DVDs. VHS video cassette revenue for the quarter was $28.4 million, down from
$74.6 million in the same period last year, reflecting a decline in unit
shipments and selling prices together with a strong Canadian dollar. VHS video
cassette revenue represented 14% of consolidated revenue for the third quarter
of 2003, down from 33% in the prior year period.
AUDIO/ROM
Revenue from Cinram's audio/ROM segment, which includes audio CD, CD-ROM and
audio cassette, totaled $45.2 million in the third quarter of 2003, decreasing
from $58.3 million in the prior year comparable period. This segment accounted
for 22% of consolidated revenue for the quarter, a decrease from 26% in the
prior year, as the Company experienced reduced unit sales of audio CD, CD-ROM
and audio cassette.
cinram 05 2003
2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
Although CD shipments increased by 4%, the decline in the average selling price
and strengthening of the Canadian dollar resulted in a net decline of 10%, or
$3.9 million, in CD revenue from the comparable 2002 period.
CD-ROM revenue decreased 43%, or $4.9 million, from the third quarter of last
year because of a decrease in demand from Internet service providers.
Audio cassette revenue decreased by 55%, or $4.3 million, in the third quarter
from the same period last year, as the Company completed the sale of its audio
and video cassette facility in the Netherlands in early 2003. This facility
accounted for 43% of Cinram's audio cassette revenue in the third quarter of
2002.
OTHER
Distribution and fulfillment services revenue (included in "other" segment)
increased by 20% or $3.1 million in the third quarter of 2003 compared to the
same period last year as a result of an overall increase in the number of units
distributed. Distribution and fulfillment services continue to be a key driver
of business, as well as a major influence in the Company's ability to secure
significant new contracts. The increase in distribution revenue was offset by a
71% or $4.9 million decline in other revenue for the same period, primarily
attributable to a decrease in non-core business activity.
GROSS PROFIT
Gross profit for the quarter was $47.1 million, compared to $41.4 million in the
prior year period. As a percentage of sales, gross profit increased to 23%,
compared to 18% in 2002. The increase is the result of a continued shift in
product mix towards DVDs, and the ability to manufacture a significant
percentage of DVD orders in house given the Company's recent DVD capacity
expansion.
Amortization expense from capital assets, included in cost of goods sold,
decreased to $18.7 million in the third quarter, compared to $21.7 million in
the prior year period, due in part to the reduced asset base in Europe, combined
with the impact of a strong Canadian dollar.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were down from the prior year,
totaling $18.7 million in the third quarter of 2003, compared to $19.2 million
in 2002. As a percentage of sales, selling, general and administrative expenses
for the quarter were 9.2%, compared to 8.5% in the prior year period.
INTEREST EXPENSE
Interest expense decreased to $0.9 million in the third quarter, compared to
$1.5 million in 2002, because of the reduction in capital lease obligations
associated with the sale of the facility in The Netherlands, combined with lower
debt levels.
INVESTMENT INCOME
Investment income decreased to $1.2 million in the third quarter, compared to
$1.8 million in the third quarter of 2002 because of lower average yields on
cash balances in the quarter.
cinram 06 2003
INCOME TAXES
The Company's effective tax rate for the third quarter was 33%, compared to an
effective rate of 34% in the comparable prior year period. The lower effective
tax rate reflects reduced tax rates in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company's net cash position, consisting of cash
and cash equivalents less bank operating loans and long-term debt, was $140.2
million compared to $110.2 million at December 31, 2002. The increase in the
cash balance is directly attributable to the Company's strong cash flow from
operations during the first nine months of the year.
The Company's working capital position was $187.9 million at the end of the 2003
third quarter, compared to $186.1 million as at December 31, 2002. Earnings
before interest expense, investment income and income taxes (EBIT*) for the
third quarter was $28.3 million, compared to $22.2 million in the third quarter
of 2002. Net earnings for the third quarter were $19.1 million compared to $14.8
million in the corresponding 2002 period.
During the third quarter of 2003, Cinram invested $24.1 million in capital
assets, the majority to increase DVD capacity in North America to support the
increased demand for DVD product from our customers.
RISKS AND UNCERTAINTIES
The risks and uncertainties faced by the Company are substantially the same as
those disclosed in the MD&A section of its December 31, 2002 annual report and
those disclosed in the press release dated November 11, 2003, under the Cinram
International Inc. forward looking statements heading.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
(in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
EBIT* $ 28,345 $ 22,208 $ 62,932 $ 40,296
Interest expense 882 1,513 2,930 3,865
Investment Income (1,164) (1,767) (3,358) (3,289)
Income taxes 9,504 7,619 21,677 13,317
-------- -------- -------- --------
Net earnings $ 19,123 $ 14,843 $ 41,683 $ 26,403
======== ======== ======== ========
* EBIT is defined herein as earnings before interest expense, investment income
and income taxes, and is a standard measure that is commonly reported and widely
used in the industry to assist in understanding and comparing operating results.
EBIT is not a defined term under generally accepted accounting principles
("GAAP"). Accordingly, this measure should not be considered as a substitute or
alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBIT to net earnings under GAAP as
found in the table above.
cinram 07 2003
CONSOLIDATED BALANCE SHEETS
(stated in thousands of Canadian dollars)
- ------------------------------------------------------------------------------------------------
(UNAUDITED)
September 30, 2003, and December 31, 2002 2003 2002
---------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 178,799 $164,216
Accounts receivable 229,272 223,385
Inventories 27,803 63,063
Prepaid expenses 11,175 11,137
Future income taxes 7,896 8,905
--------- --------
454,945 470,706
Capital assets 291,478 298,345
Assets under capital lease 8,539 13,300
Goodwill 6,254 6,789
Other assets 24,513 40,553
--------- --------
$ 785,729 $829,693
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 244,749 $257,464
Income taxes payable 10,557 13,602
Current portion of long-term debt 10,533 11,977
Current portion of obligations under capital leases 1,246 1,569
--------- --------
267,085 284,612
Long-term debt 28,059 42,012
Obligations under capital leases 7,616 16,318
Future income taxes 23,387 26,581
SHAREHOLDERS' EQUITY:
Capital stock (note 3) 245,891 240,408
Contributed surplus 182 182
Retained earnings 230,415 193,734
Foreign currency translation adjustment (16,906) 25,846
--------- --------
459,582 460,170
Subsequent event (note 9)
--------- --------
$ 785,729 $829,693
========= ========
See accompanying notes to consolidated financial statements.
cinram 08 2003
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(unaudited, stated in thousands of Canadian dollars, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue $ 203,529 $ 224,726 $ 590,823 $ 577,729
Cost of goods sold 156,459 183,326 473,722 482,734
--------- --------- --------- ---------
Gross profit 47,070 41,400 117,101 94,995
Selling, general and
administrative expenses 18,725 19,192 54,169 54,699
--------- --------- --------- ---------
Earnings before interest expense,
investment income
and income taxes 28,345 22,208 62,932 40,296
Interest expense on long-term debt 731 1,038 2,408 2,558
Interest expense on capital leases 136 263 435 712
Interest expense - other 15 212 87 595
Investment income (1,164) (1,767) (3,358) (3,289)
--------- --------- --------- ---------
Earnings before income taxes 28,627 22,462 63,360 39,720
--------- --------- --------- ---------
Income taxes 9,504 7,619 21,677 13,317
--------- --------- --------- ---------
Net earnings 19,123 14,843 41,683 26,403
--------- --------- --------- ---------
Retained earnings,
beginning of period 212,968 153,030 193,734 143,670
Dividends declared (1,676) (1,104) (5,002) (3,304)
--------- --------- --------- ---------
Retained earnings, end of period $ 230,415 $ 166,769 $ 230,415 $ 166,769
========= ========= ========= =========
Earnings per share (note 5):
Basic $ 0.34 $ 0.27 $ 0.75 $ 0.48
Diluted $ 0.33 $ 0.27 $ 0.74 $ 0.48
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
cinram 09 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, stated in thousands of Canadian dollars)
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash provided by (used in):
OPERATIONS:
Net earnings $ 19,123 $ 14,843 $ 41,683 $ 26,403
Items not involving cash:
Amortization 18,744 21,716 52,471 55,749
Loss (gain) on disposition
of capital assets -- -- (185) --
Unrealized foreign exchange 906 8,888 (3,550) 4,547
Net change in non-cash working
capital (Note 6) (6,896) (17,839) (1,601) 25,263
--------- --------- --------- ---------
31,877 27,608 88,818 111,962
FINANCING:
Decrease in bank loans -- -- -- (8,517)
Increase in long-term debt -- -- -- 18,805
Repayment of long-term debt (2,569) (3,346) (8,129) (3,346)
Decrease in obligations under
capital lease (303) (176) (915) (1,130)
Issuance of common shares 752 -- 5,483 1,938
Dividends paid (1,676) (1,104) (5,002) (3,304)
--------- --------- --------- ---------
(3,796) (4,626) (8,563) 4,446
INVESTMENTS:
Purchase of capital assets (24,114) (14,183) (65,383) (43,710)
Proceeds on disposition of
capital assets -- -- 701 --
Decrease (increase) in other assets (857) 6,199 11,610 (10,995)
--------- --------- --------- ---------
(24,971) (7,984) (53,072) (54,705)
Foreign exchange gain/(loss) on
cash held in foreign currencies 356 (2,274) (12,600) (1,310)
--------- --------- --------- ---------
Increase in cash and cash equivalents 3,466 12,724 14,583 60,393
Cash and cash equivalents,
beginning of period 175,333 139,548 164,216 91,879
--------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 178,799 $ 152,272 $ 178,799 $ 152,272
========= ========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 769 $ 1,933 $ 2,532 $ 4,084
Income taxes paid $ 5,383 $ 2,064 $ 26,046 $ 8,862
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
cinram 10 2003
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended September 30, 2003, and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares and
per share information)
1. SIGNIFICANT ACCOUNTING POLICIES:
These unaudited interim consolidated financial statements do not contain
all disclosures required by Canadian generally accepted accounting
principles ("GAAP") for annual financial statements, and accordingly,
these unaudited interim consolidated financial statements should be read
in conjunction with the most recently prepared annual audited consolidated
financial statements for the year ended December 31, 2002.
The unaudited interim consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present
fairly the financial position of Cinram International Inc. (the "Company")
as of September 30, 2003, and the results of operations and cash flows for
the three and nine months then ended.
The Company's business follows a seasonal pattern, with pre-recorded media
sales traditionally being higher in the fourth quarter than in other
quarterly periods due to consumer holiday buying patterns. As a result, a
disproportionate portion of total revenue is typically earned in the
fourth quarter. The business seasonality results in performance for the
third quarter ended September 30, 2003, which is not necessarily
indicative of performance for the balance of the year.
The unaudited interim consolidated financial statements have been prepared
in accordance with Canadian GAAP and are based upon accounting principles
consistent with those used and described in note 1 to the December 31,
2002, audited consolidated financial statements, except as follows:
GUARANTEES:
(a) Effective January 1, 2003, the Company implemented Accounting
Guideline 14 "Disclosure of Guarantees", issued by the Canadian Institute
of Chartered Accountants, which requires a guarantor to disclose in its
notes to the consolidated financial statements significant information
about guarantees it has provided. Under this Guideline, a guarantee is
defined as a contract or indemnification agreement, which requires the
Company to make payments (cash, financial instruments, other assets, the
Company's own shares or the provision of services) to a third party
contingent on future events. These payments are contingent on either (I)
changes in an underlying interest rate, security price, commodity price,
foreign exchange rate or other variables that are related to an asset,
liability or an equity security of the guaranteed party, or (ii) the
failure of another party to pay its indebtedness when due (a "Guarantee").
The disclosures are required even when the likelihood of the guarantor
having to make any payments under the Guarantee is remote.
The Company provides routine indemnifications, whose terms range in
duration and often are not explicitly defined. The maximum amount from
these indemnifications cannot be reasonably estimated. In some cases the
Company has recourse against other parties to mitigate its risk of loss
from these guarantees. Historically, the Company has not made significant
payments relating to these types of indemnifications.
2. REVENUE RECOGNITION:
Revenue is comprised of product sales and service revenue earned from
fulfillment services. Revenue from product sales is recognized when title
to the goods is transferred to customers, the selling price is fixed and
determinable and collectibility is reasonably assured. Volume rebates are
recorded as a reduction of revenue at the time of shipment. Payments to
acquire sales contracts are amortized against revenue over the term of the
contract.
Services revenue is recognized as services are performed.
cinram 11 2003
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three and nine months ended September 30, 2003, and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares
and per share information)
3. CAPITAL STOCK:
The following table summarizes information on capital stock and related
matters at September 30, 2003:
Outstanding Exercisable
----------- -----------
Warrants 1,700,000 1,700,000
Common shares 55,875,291 55,875,291
Common share stock options 2,527,939 1,418,706
========== ==========
4. STOCK BASED COMPENSATION:
In accordance with CICA Handbook section 3870, "Stock-based Compensation
and Other Stock-based Payments", the Company discloses pro forma net
earnings and earnings per share information as if the Company had
accounted for employee stock options under the fair value method.
Had the Company determined compensation expense based on the fair values
at grant dates of the stock options consistent with the fair value method,
the Company's earnings per share would have been reported as the pro forma
amounts indicated below. The pro forma disclosure omits the effects of
awards granted before fiscal years beginning on or after January 1, 2002.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net earnings, as reported $ 19,123 $ 14,843 $ 41,683 $ 26,403
Stock-based compensation
expense 665 562 2,130 622
---------- ---------- ---------- ----------
Pro forma net earnings $ 18,458 $ 14,281 $ 39,553 $ 25,781
========== ========== ========== ==========
Basic earnings per share,
as reported $ 0.34 $ 0.27 $ 0.75 $ 0.48
Effect of stock-based
compensation expense 0.01 0.01 0.04 0.01
---------- ---------- ---------- ----------
Pro forma basic earnings
per share $ 0.33 $ 0.26 $ 0.71 $ 0.47
========== ========== ========== ==========
Diluted earnings per share,
as reported $ 0.33 $ 0.27 $ 0.74 $ 0.48
Effect of stock-based
compensation expense 0.01 0.01 0.04 0.01
---------- ---------- ---------- ----------
Pro forma diluted earnings
per share $ 0.32 $ 0.26 $ 0.70 $ 0.47
========== ========== ========== ==========
The weighted average estimated fair value at the date of the grant for
options granted during the nine months ended September 30, 2003, was $5.56
per share (2002 - $5.28).
cinram 12 2003
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing model with the
following assumptions:
2003 2002
---- ----
Risk-free interest rate 4.0% 4.0%
Dividend yield 1.0% 0.768%
Volatility factor of the future expected market price
of common shares 57% 60%
Weighted average expected life of the options 5 YEARS 5 years
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
5. EARNINGS PER SHARE:
The reconciliation of the numerator and denominator for the calculation of
basic and diluted earnings per share is as follows:
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
------- ------- ------- -------
Earnings available to
common shareholders $19,123 $14,843 $41,683 $26,403
BASIC EARNINGS PER SHARE
Weighted average number
of shares outstanding 55,851 55,195 55,501 55,109
Basic earnings per share $ 0.34 $ 0.27 $ 0.75 $ 0.48
DILUTED EARNINGS PER SHARE
Weighted average number
of shares outstanding 55,851 55,195 55,501 55,109
Dilutive effect of stock options
and warrants 1,968 313 896 276
------- ------- ------- -------
Adjusted weighted average
number of shares outstanding 57,819 55,508 56,397 55,385
Diluted earnings per share $ 0.33 $ 0.27 $ 0.74 $ 0.48
======= ======= ======= =======
cinram 13 2003
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three and nine months ended September 30, 2003, and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares and
per share information)
6. CONSOLIDATED STATEMENTS OF CASH FLOWS:
The change in non-cash working capital items is comprised of the following:
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Increase) decrease in
accounts receivable $(32,044) $(47,640) $(30,128) $ 20,653
Decrease (increase)
in inventories 1,353 (24,187) 31,785 (20,574)
(Increase) in prepaid expenses (7,000) (1,275) (615) (3,393)
Increase (decrease) in
accounts payable and
accrued liabilities 25,616 48,364 (369) 21,963
Increase (decrease) in
income tax payable 5,179 6,899 (2,274) 6,614
-------- -------- -------- --------
$ (6,896) $(17,839) $ (1,601) $ 25,263
======== ======== ======== ========
7. SEGMENTED INFORMATION:
The Company has two reportable business segments, being audio/ROM
replication/duplication and home video replication/duplication.
The audio/ROM replication/duplication segment manufactures audio
cassettes, CDs and CD-ROMs and the home video replication/duplication
segment manufactures video cassettes and DVDs.
The accounting policies of the segments are the same as those described in
the summary of accounting policies to the December 31, 2002 audited
consolidated financial statements. The Company evaluates segment
performance based on earnings before interest expense, investment income
and income taxes.
- ------------------------------------------------------------------------------------------------------
Industry segments: Three months ended September 30, 2003
- ------------------------------------------------------------------------------------------------------
Audio/ROM Home video
replication/ replication/
duplication duplication Other Total
----------- ----------- ------- --------
Revenue from
external customers $ 45,233 $137,175 $21,121 $203,529
Earnings before interest
expense, investment
income and income taxes 3,754 23,500 1,091 28,345
Total assets 211,054 494,581 80,094 785,729
Amortization of capital assets 4,182 13,008 1,554 18,744
Capital expenditures 254 22,568 1,292 24,114
cinram 14 2003
- ------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENTS: NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------
AUDIO/ROM HOME VIDEO
REPLICATION/ REPLICATION/
DUPLICATION DUPLICATION OTHER TOTAL
----------- ----------- ------- --------
REVENUE FROM
EXTERNAL CUSTOMERS $125,878 $383,878 $81,067 $590,823
EARNINGS BEFORE INTEREST
EXPENSE, INVESTMENT
INCOME AND INCOME TAXES 6,018 54,878 2,036 62,932
TOTAL ASSETS 211,054 494,581 80,094 785,729
AMORTIZATION OF CAPITAL ASSETS 12,396 35,226 4,849 52,471
CAPITAL EXPENDITURES 1,865 59,635 3,883 65,383
=========== =========== ======= ========
- ------------------------------------------------------------------------------------------------------
Industry segments: Three months ended September 30, 2002
- ------------------------------------------------------------------------------------------------------
Audio/ROM Home video
replication/ replication/
duplication duplication Other Total
----------- ----------- ------- --------
Revenue from
external customers $ 58,330 $143,469 $ 22,927 $224,726
Earnings before interest
expense, investment income
and income taxes 6,166 14,943 1,099 22,208
Total assets 232,494 482,142 103,396 818,032
Amortization of capital assets 5,638 13,065 3,013 21,716
Capital expenditures 652 10,679 2,852 14,183
=========== =========== ======= ========
- ------------------------------------------------------------------------------------------------------
Industry segments: Nine months ended September 30, 2002
- ------------------------------------------------------------------------------------------------------
Audio/ROM Home video
replication/ replication/
duplication duplication Other Total
----------- ----------- ------- --------
Revenue from
external customers $166,316 $350,904 $ 60,509 $577,729
Earnings before interest
expense, investment income
and income taxes 10,460 28,469 1,367 40,296
Total assets 232,494 482,142 103,396 818,032
Amortization of capital assets 16,049 33,063 6,637 55,749
Capital expenditures 2,537 35,289 5,884 43,710
=========== =========== ======= ========
cinram 15 2003
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three and nine months ended September 30, 2003, and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares and
per share information)
- ---------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS: THREE MONTHS ENDED SEPTEMBER 30, 2003, AND 2002
- ---------------------------------------------------------------------------------------------
UNITED
2003 CANADA STATES FRANCE OTHER TOTAL
---------- --------- ---------- ---------- ---------
REVENUE FROM
EXTERNAL CUSTOMERS $ 47,857 $ 118,839 $ 23,933 $ 12,900 $ 203,529
CAPITAL ASSETS
AND GOODWILL 87,550 178,969 36,525 3,227 306,271
---------- --------- ---------- ---------- ---------
United
2002 Canada States France Other Total
---------- --------- ---------- ---------- ---------
Revenue from
external customers $ 41,117 $ 127,014 $ 33,547 $ 23,048 $ 224,726
Capital assets
and goodwill 72,676 212,494 31,185 14,057 330,412
---------- --------- ---------- ---------- ---------
- ---------------------------------------------------------------------------------------------
GEOGRAPHIC SEGMENTS: NINE MONTHS ENDED SEPTEMBER 30, 2003, AND 2002
- ---------------------------------------------------------------------------------------------
UNITED
2003 CANADA STATES FRANCE OTHER TOTAL
---------- --------- ---------- ---------- ---------
REVENUE FROM
EXTERNAL CUSTOMERS $ 125,796 $ 336,366 $ 82,737 $ 45,924 $ 590,823
CAPITAL ASSETS
AND GOODWILL 87,550 178,969 36,525 3,227 306,271
---------- --------- ---------- ---------- ---------
United
2002 Canada States France Other Total
---------- --------- ---------- ---------- ---------
Revenue from
external customers $ 111,962 $ 309,692 $ 88,646 $ 67,429 $ 577,729
Capital assets
and goodwill 72,676 212,494 31,185 14,057 330,412
---------- --------- ---------- ---------- ---------
8. RELATED PARTY TRANSACTIONS:
During the 2003 third quarter, the Company purchased certain premises from
three companies owned by certain shareholders of the Company and their
families for $7.4 million, representing the fair market value of the land
and building on the date of acquisition.
9. SUBSEQUENT EVENT:
On October 24, 2003, Cinram International Inc. completed the agreement
with Time Warner Inc. to acquire its DVD and CD manufacturing and physical
distribution businesses, together with certain related businesses, in the
U.S. and Europe for approximately $1.05 billion US in cash. As part of the
acquisition, Cinram also entered into exclusive long-term agreements to
manufacture, print, package and physically distribute DVDs and CDs for
Warner Home Video and Warner Music Group in North America and Europe, and
for New Line Home Entertainment, Inc. in North America. The acquisition
was funded by a $1.175 billion US bank facility provided by a syndicate
led by Citigroup and Merrill Lynch, of which $150 million US is a
revolving credit facility that is undrawn at this time.
cinram 16 2003
(CINRAM LOGO) CINRAM INTERNATIONAL INC.
CORPORATE HEAD OFFICE
2255 Markham Road
Toronto, Ontario, Canada M1B 2W3
Telephone (416) 298-8190
Fax (416) 298-0612
www.cinram.com