CINRAM
SECOND QUARTER REPORT 2003
UNAUDITED SECOND QUARTER ENDED JUNE 30, 2003 AND 2002
(PHOTO OF RACE CAR)
A RECORD
PERFORMANCE
(CINRAM LOGO)
CINRAM ANNOUNCES 2003 SECOND QUARTER RESULTS
For the second quarter ended June 30, 2003, consolidated revenue increased by
12% to $192.2 million, up from $171.6 million in the prior year second quarter.
Earnings before interest expense, investment income and income taxes (EBIT*)
increased to $16.9 million, compared to $11.9 million in 2002. Net earnings
increased to $11.6 million or $0.21 diluted per share, compared to $7.6 million
or $0.14 diluted per share in the prior year second quarter. Cinram's 2003
second quarter results are consistent with the Company's year to date
performance with all major financial performance measures showing improvements
year over year.
The home entertainment industry continues to enjoy another record year,
with DVD unit shipments during the first half of 2003 increasing by 56% over the
same period last year. At current rates, DVD units shipped for 2003 are expected
to reach in excess of 1 billion units in the United States. With the average
price of DVD players decreasing, DVD penetration rates in US households are
expected to reach 50% by the end of 2003.
The demand for DVDs continues to exceed expectations. In the 2003 second
quarter, DVD sales represented 47% of consolidated revenue, up from 26% in the
prior year. Accordingly, the Company has been adding DVD capacity over the past
few months in order to meet the increased demand for DVD product from our
customers. During the 2003 second quarter, Cinram invested $30.4 million in
capital expenditures, the majority of which has been designated to increase DVD
capacity in North America. In the coming weeks, this capacity expansion will be
completed, and the Company will have a daily DVD capacity in excess of 1 million
units.
In the United States, second quarter revenue increased by 32%, led by a
significant increase in DVD unit shipments, combined with higher distribution
services revenue. In Canada, second quarter revenue decreased by 8%, as the
growth in DVD unit shipments was more than offset by reduced shipments for CDs
and VHS video cassettes. In Europe, revenue decreased by 8%, resulting from the
sale of the Company's facility in the Netherlands in early 2003.
Gross profit for the 2003 second quarter increased to $34.2 million from
$27.4 million during the same period last year. As a percentage of revenue,
gross profit increased to 18% in the 2003 second quarter, compared to 16% in the
prior year second quarter. The increase in gross profit resulted from a shift in
product mix to DVDs and the increased ability to manufacture DVD orders in
house.
Selling, general and administrative expense for the 2003 second quarter
increased slightly to $17.4 million compared to $17.3 million during the same
period last year. As a percentage of revenue, selling, general and
administrative expense was 9% during the 2003 second quarter, down from 10% in
the prior year period.
As at June 30, 2003, the Company continues to maintain a strong balance
sheet. Cinram's gross cash position was $175.3 million compared to $164.2
million as at December 31, 2002, and the net cash position, consisting of cash
and cash equivalents less bank operating loans and long-term debt, was $134.3
million, an increase of $24.1 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 half of the year.
DIVIDEND
The Board of Directors has declared a quarterly dividend of $0.03 per share,
payable on September 30, 2003 to the shareholders of record at the close of
business on September 15, 2003.
SUBSEQUENT EVENT
As previously announced, on July 18, 2003, Cinram International Inc. entered
into a definitive agreement with AOL 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 US$1.05 billion in
cash. As part of the acquisition, Cinram will enter into exclusive
cinram 01 2003
long term contracts with Warner Home Video, Warner Music Group and New Line
Cinema to manufacture, print, package and physically distribute their DVDs and
CDs in North America and Europe. The acquisition is subject to applicable
regulatory approvals and other customary closing conditions and is expected to
close in October of 2003. The Company has secured committed bank facilities
aggregating US$1.2 billion which will be used to fund the acquisition and for
other corporate purposes.
ABOUT CINRAM INTERNATIONAL INC.
Cinram International Inc. is one of the world's largest independent providers of
pre-recorded multimedia products and logistic services. With facilities in North
America and Europe, Cinram manufactures and distributes pre-recorded DVDs, VHS
video cassettes, audio CDs, music cassettes and CD-ROMs for motion picture
studios, music labels, publishers and computer software companies around the
world. Since its inception, the Company has continuously demonstrated its
ability to evolve with changes in technology and consumer preferences.
CINRAM INTERNATIONAL INC. FORWARD-LOOKING STATEMENTS
Certain statements included in this release 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 customer's migration from VHS and audio
formats to DVD; the Company's ability to invest successfully in new
technologies; the failure of the transaction described for any reason; the
effective integration of the AOL businesses; and other factors which are
described in the Company's filings with the securities commissions.
Three months ended June 30 Six months ended June 30
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
EBIT* $ 16,940 $ 11,902 $ 34,587 $ 18,088
Interest expense 949 1,055 2,048 2,352
Investment Income (1,142) (878) (2,194) (1,522)
Income taxes 5,503 4,150 12,173 5,698
---------- ---------- ---------- ----------
Net earnings $ 11,630 $ 7,575 $ 22,560 $ 11,560
========== ========== ========== ==========
* 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.
/s/ Isidore Philosophe
ISIDORE PHILOSOPHE
Chief Executive Officer
cinram 02 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 second quarter of 2003 reached $11.6 million, an increase
from the prior year second quarter earnings of $7.6 million, resulting from an
increase in DVD unit shipments across all regions, combined with higher
distribution revenues.
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 revenues is typically earned in the fourth quarter. The
business seasonality results in performance for the second quarter ended June
30, 2003, which is not necessarily indicative of performance for the balance of
the year.
REVENUE
2003 second quarter revenue increased 12% to $192.2 million, from $171.6 million
in the prior year period. Total multimedia units shipped increased by 16% during
the 2003 second quarter. The significant increase in DVD unit shipments was
partially offset by unit declines for audio CD, CD-ROM, audio cassettes and VHS
video cassettes. Furthermore, the Company experienced lower average selling
prices for all media formats during the second quarter of 2003 as compared to
the prior year period.
2003 second quarter revenue from the home video replication/duplication
segment increased to $125.6 million from $95.8 million in the prior year period.
DVD revenue increased by 105% in the 2003 second quarter as consumer demand for
this product continues to grow, both in North America and Europe. The growth in
DVD demand during the second quarter of 2003 was offset by a 32% decrease in VHS
video cassette revenue, resulting from demand for DVDs replacing demand for VHS
video cassettes, and a 22% decrease in CD revenue.
2003 second quarter revenue from the audio/ROM replication/duplication
segment decreased to $40.9 million from $55.7 million in the prior year period.
Audio CD revenue decreased 22%, resulting from lower unit shipments combined
with declining average selling prices. CD-ROM revenue decreased 20% from the
second quarter of last year, resulting from a decrease in demand from the
internet service provider market. Audio cassette revenue decreased 58% in the
second quarter of 2003 compared to the prior year period, as sales for this
format continue to decline throughout the industry.
GEOGRAPHIC SEGMENTS
NORTH AMERICA
North American revenue increased 19% to $151.0 million in the second quarter of
2003, up from $126.8 million in the second quarter of 2002, driven by revenue
growth in the United States, offset by revenue declines in Canada.
In the United States, revenue increased 32% in 2003 from the second
quarter of 2002, reflecting continued growth in DVD unit shipments, combined
with an increase in distribution services revenue. The Company expects this
trend to continue given the growing consumer demand for DVDs. During the 2003
second quarter, increased DVD revenue was partially offset by revenue declines
for CD, audio cassette and VHS video cassette. As a result, U.S. revenues
represented 58% of consolidated revenue, up from 49% in the prior year.
cinram 03 2003
In Canada, 2003 second quarter revenue decreased 8%, reflecting additional
business from new DVD and distribution contracts being more than offset by lower
demand for CDs, audio cassettes and VHS video cassettes, combined with lower
selling prices. During the second quarter of 2003, revenue from Canadian
operations represented 18% of consolidated revenues, compared to 22% in the
prior year.
In Mexico, 2003 second quarter revenue remained consistent with prior year
levels and represented 3% of consolidated sales during the quarter, consistent
with 2002.
EUROPE
In Europe, revenue decreased 8% to $41.2 million in the second quarter of 2003,
down from $44.8 million in the prior year comparable period, resulting from the
sale of the Company's facility in The Netherlands in early 2003. Excluding
revenue from this facility, revenues for Europe increased 8%, resulting from the
increased demand for DVD and distribution services. European revenue represented
21% of consolidated sales, down from 26% in the prior year.
In terms of individual territories, revenue in the UK increased by 21% in
the second quarter of 2003, resulting from an increase in DVD unit sales.
In France, 2003 second quarter revenue increased by 4% in comparison to
prior year levels, due to increases in both DVD unit shipments and distribution
services revenue.
INDUSTRY SEGMENTS
Cinram's home video segment, consisting of DVDs and VHS videocassettes,
represented $125.6 million of revenue in the 2003 second quarter, increasing
from $95.8 million in the prior year comparable period. This segment accounted
for 65% of consolidated revenue, an increase from 56% in the prior year.
DVD revenue increased 105% to $90.7 million from $44.2 million in the
prior year, reflecting increased consumer demand for this product across all
geographic regions, especially in the United States. DVD revenue represents 47%
of consolidated revenue in the second quarter of 2003, up from 26% in the second
quarter of 2002.
Video cassette revenue decreased by 32% to $33.2 million in the second
quarter of 2003, down from $49.0 million in the prior year, reflecting a
decrease in both unit shipments and selling prices. VHS video cassette revenue
represents 17% of consolidated revenue for the second quarter of 2003, down from
29% in the prior year period.
Revenue from Cinram's audio/ROM segment, consisting of audio CD, CD-ROM
and audio cassette, totaled $40.9 million in the second quarter of 2003,
decreasing from $55.7 million in the prior year comparable period. This segment
accounted for 21% of consolidated revenue during the 2003 second quarter, a
decrease from 32% in the prior year, as the Company experienced reduced unit
sales for audio CD, CD-ROM and audio cassette.
Audio CD revenue decreased 22% in the second quarter of 2003 from the
prior year comparable period due to declining selling prices. CD-ROM revenue
decreased 20% during the 2003 second quarter compared to the prior year period,
driven by reduced orders associated with the internet service provider market.
Audio cassette revenue decreased 58% in the 2003 second quarter, as the
Company completed the sale of its audio and video cassette facility in the
Netherlands in early 2003. This facility accounted for 50% of Cinram's audio
cassette revenue in the second quarter of 2002.
Distribution and fulfillment services revenue (included in "other"
segment) increased by 67% in the second quarter of 2003, compared to the same
period last year. The Company provides these services in addition to
manufacturing, as these 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.
cinram 04 2003
2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
GROSS PROFIT
Gross profit was $34.2 million for the 2003 second quarter, compared to $27.4
million in the prior year comparable period. As a percentage of sales, gross
profit increased to 18%, compared to 16% over the past year. The increase is the
result of the continued shift in product mix towards DVDs which provide higher
margins on a per unit basis.
Amortization expense from capital assets decreased to $17.1 million in the
2003 second quarter, compared to $18.0 million in the prior year period,
resulting in part to the reduced asset base in Europe following the sale of the
facility in the Netherlands early in 2003.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased from the prior year,
totaling $17.4 million in the second quarter of 2003, compared to $17.3 million
in the prior year. As a percentage of sales, selling, general and administrative
expenses was 9% in the 2003 second quarter, compared to 10% in the same period
last year.
INTEREST EXPENSE
Interest expense decreased to $0.9 million in the second quarter of 2003,
compared to $1.1 million in 2002, resulting from the reduction in capital lease
obligations associated with the sale of the facility in The Netherlands.
INVESTMENT INCOME
Investment income increased to $1.1 million in the second quarter of 2003,
compared to $0.9 million in the second quarter of 2002, resulting from higher
average cash balances.
INCOME TAXES
The Company's effective tax rate for the second quarter of 2003 is 32%, compared
to an effective rate of 35% in the comparable prior year period. The lower
effective tax rate reflects reduced tax rates in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Company's net cash position, consisting of cash and
cash equivalents less bank operating loans and long-term debt, was $134.3
million compared to $110.2 million at December 31, 2002. This increase in the
net cash position is the result of cash flow from operations during the first
six months of 2003.
The Company's working capital position was $174.4 million at the end of
the 2003 second quarter, down from $186.1 million as at December 31, 2002
resulting from the significant capital expenditure made during the first half of
2003. Earnings before interest expense, investment income and income taxes
(EBIT*) was $16.9 million during the 2003 second quarter, compared to $11.9
million in the second quarter of 2002.
During the second quarter of 2003, Cinram invested $30.4 million in
capital assets, the majority earmarked for increased DVD capacity in North
America, as the Company is significantly increasing capacity this year.
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 August 11, 2003 under the Section
Cinram International Inc. forward looking statements.
cinram 05 2003
On July 18, 2003, Cinram International Inc. entered into a definitive
agreement with AOL 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 US$1.05 billion in cash. As part of the
acquisition, Cinram will enter into exclusive long term contracts with Warner
Home Video, Warner Music Group and New Line Cinema to manufacture, print,
package and physically distribute their DVDs and CDs in North America and
Europe. The acquisition is subject to applicable regulatory approvals and other
customary closing conditions and is expected to close in October of 2003. The
Company has secured committed bank facilities aggregating US$1.2 billion which
will be used to fund the acquisition and for other corporate purposes.
Three months ended June 30 Six months ended June 30
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
EBIT* $ 16,940 $ 11,902 $ 34,587 $ 18,088
Interest expense 949 1,055 2,048 2,352
Investment Income (1,142) (878) (2,194) (1,522)
Income taxes 5,503 4,150 12,173 5,698
---------- ---------- ---------- ----------
Net earnings $ 11,630 $ 7,575 $ 22,560 $ 11,560
========== ========== ========== ==========
* 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 06 2003
CONSOLIDATED BALANCE SHEETS
(stated in thousands of Canadian dollars)
-----------------------------------------
(UNAUDITED)
June 30, 2003 and December 31, 2002 2003 2002
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 175,333 $ 164,216
Accounts receivable 198,063 223,385
Inventories 29,119 63,063
Prepaid expenses 4,304 11,137
Future income taxes 7,885 8,905
---------- ----------
414,704 470,706
Capital assets 289,206 298,345
Assets under capital lease 8,838 13,300
Goodwill 6,249 6,789
Other assets 23,833 40,553
---------- ----------
$ 742,830 $ 829,693
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 223,164 $ 257,464
Income taxes payable 5,635 13,602
Current portion of long-term debt 10,330 11,977
Current portion of obligations under capital leases 1,222 1,569
---------- ----------
240,351 284,612
Long-term debt 30,711 42,012
Obligations under capital leases 7,875 16,318
Future income taxes 23,354 26,581
SHAREHOLDERS' EQUITY:
Capital stock (note 2) 245,139 240,408
Contributed surplus 182 182
Retained earnings 212,968 193,734
Foreign currency translation adjustment (17,750) 25,846
---------- ----------
440,539 460,170
Subsequent event (note 6)
---------- ----------
$ 742,830 $ 829,693
========== ==========
See accompanying notes to consolidated financial statements.
cinram 07 2003
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(unaudited, stated in thousands of Canadian dollars, except per share amounts)
Three months ended June 30 Six months ended June 30
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenue $ 192,188 $ 171,570 $ 387,294 $ 353,003
Cost of goods sold 158,023 144,179 319,113 300,691
---------- ---------- ---------- ----------
Gross profit 34,165 27,391 68,181 52,312
Selling, general and
administrative expenses 17,429 17,303 35,444 35,507
Exchange gain on foreign
currency balances (204) (1,814) (1,850) (1,283)
---------- ---------- ---------- ----------
Earnings before interest expense,
investment income and income taxes 16,940 11,902 34,587 18,088
Interest expense on long-term debt 785 793 1,677 1,520
Interest expense on capital leases 147 228 299 449
Interest expense - other 17 34 72 383
Investment income (1,142) (878) (2,194) (1,522)
---------- ---------- ---------- ----------
Earnings before income taxes 17,133 11,725 34,733 17,258
---------- ---------- ---------- ----------
Income taxes 5,503 4,150 12,173 5,698
---------- ---------- ---------- ----------
Net earnings 11,630 7,575 22,560 11,560
---------- ---------- ---------- ----------
Retained earnings,
beginning of period 203,007 146,558 193,734 143,670
Dividends declared (1,669) (1,103) (3,326) (2,200)
---------- ---------- ---------- ----------
Retained earnings, end of period $ 212,968 $ 153,030 $ 212,968 $ 153,030
========== ========== ========== ==========
Earnings per share (note 4):
Basic $ 0.21 $ 0.14 $ 0.41 $ 0.21
Diluted $ 0.21 $ 0.14 $ 0.40 $ 0.21
========== ========== ========== ==========
Weighted average number of shares outstanding (note 4):
Basic (in thousands) 55,450 54,973 55,324 54,914
Diluted (in thousands) 56,111 55,342 55,734 55,177
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
cinram 08 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, stated in thousands of Canadian dollars)
Three months ended June 30 Six months ended June 30
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Cash provided by (used in):
OPERATIONS:
Net earnings $ 11,630 $ 7,575 $ 22,560 $ 11,560
Items not involving cash:
Amortization 17,101 18,034 33,727 34,033
Loss (gain) on disposition
of capital assets 32 -- (185) --
Unrealized foreign exchange (5,357) (4,304) (12,487) (4,367)
Net change in non-cash
working capital (2,692) 4,221 9,073 43,102
---------- ---------- ---------- ----------
20,714 25,526 52,688 84,328
FINANCING:
Decrease in bank loans -- -- -- (8,517)
Increase in long-term debt -- 20,964 -- 18,805
Repayment of long-term debt (2,591) -- (5,560) --
Decrease in obligations
under capital lease (329) (104) (612) (954)
Issuance of common shares 4,731 1,732 4,731 1,964
Dividends paid (1,669) (1,103) (3,326) (2,200)
---------- ---------- ---------- ----------
142 21,489 (4,767) 9,098
INVESTMENTS:
Purchase of capital assets (30,411) (25,140) (41,268) (29,527)
Proceeds on disposition
of capital assets 319 -- 700 --
Decrease (increase) in other assets 6,635 (20,294) 16,720 (17,194)
---------- ---------- ---------- ----------
(23,457) (45,434) (23,848) (46,721)
Foreign exchange gain/(loss) on
cash held in foreign currencies (5,051) 77 (12,956) 964
---------- ---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents (7,652) 1,658 11,117 47,669
Cash and cash equivalents,
beginning of period 182,985 137,890 164,216 91,879
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 175,333 $ 139,548 $ 175,333 $ 139,548
========== ========== ========== ==========
Supplemental Cash Flow Information:
Interest paid $ 826 $ 1,173 $ 1,763 $ 2,151
Income taxes paid $ 12,373 $ 937 $ 20,663 $ 6,798
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
cinram 09 2003
Three and six months ended June 30, 2003 and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares
and per share information)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2003 and the results of operations and cash flows for the
three and six 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 revenues is typically earned in the
fourth quarter. The business seasonality results in performance for the
second quarter ended June 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 indemnification's 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 type of
indemnifications.
cinram 10 2003
Three and six months ended June 30, 2003 and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares
and per share information)
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
2. CAPITAL STOCK:
The following table summarizes information on Capital Stock and related
matters at June 30, 2003:
Outstanding Exercisable
----------- -----------
Warrants 1,700,000 1,700,000
Common shares 55,814,959 55,814,959
Common share stock options 2,588,272 1,479,039
=========== ===========
3. 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 Six months
ended June 30, ended June 30,
2003 2003
--------- ---------
Net earnings, as reported $ 11,630 $ 22,560
Stock-based compensation expense 915 1,465
--------- ---------
Pro forma net earnings $ 10,715 $ 21,095
========= =========
Basic earnings per share, as reported $ 0.21 $ 0.41
Effect of stock-based compensation expense 0.02 0.03
--------- ---------
Pro forma basic earnings per share $ 0.19 $ 0.38
========= =========
Diluted earnings per share, as reported $ 0.21 $ 0.40
Effect of stock-based compensation expense 0.02 0.02
--------- ---------
Pro forma diluted earnings per share $ 0.19 $ 0.38
========= =========
The weighted average estimated fair value at the date of the grant for
options granted during the six months ended June 30, 2003 was $5.56 per
share (2002 - $5.28).
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing 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
cinram 11 2003
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
4. EARNINGS PER SHARE:
The reconciliation of the numerator and denominator for the calculation of
basic and diluted earnings per share is as follows:
(all figures in 000s) Three months ended June 30, Six months ended June 30,
--------------------- --------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings available to
common shareholders $ 11,630 $ 7,575 $ 22,560 $ 11,560
BASIC EARNINGS PER SHARE
Weighted average number
of shares outstanding 55,450 54,973 55,324 54,914
Basic earnings per share $ 0.21 $ 0.14 $ 0.41 $ 0.21
DILUTED EARNINGS PER SHARE
Weighted average number
of shares outstanding 55,450 54,973 55,324 54,914
Dilutive effect of stock options
and warrants 661 369 410 263
-------- -------- -------- --------
Adjusted weighted average
number of shares outstanding 56,111 55,342 55,734 55,177
Diluted earnings per share $ 0.21 $ 0.14 $ 0.40 $ 0.21
======== ======== ======== ========
5. 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: SIX MONTHS ENDED JUNE 30, 2003
------------------ -----------------------------------------------------------
AUDIO/ROM HOME VIDEO
REPLICATION/ REPLICATION/
2003 DUPLICATION DUPLICATION OTHER TOTAL
---- ------------ ------------ ---------- ----------
REVENUE FROM
EXTERNAL CUSTOMERS $ 80,645 $ 246,703 $ 59,946 $ 387,294
EARNINGS BEFORE INTEREST
EXPENSE, INVESTMENT INCOME
AND INCOME TAXES 2,264 31,378 945 34,587
TOTAL ASSETS 204,784 463,174 74,870 742,830
AMORTIZATION OF CAPITAL ASSETS 8,214 22,218 3,295 33,727
CAPITAL EXPENDITURES 1,611 37,067 2,590 41,268
---------- ---------- ---------- ----------
cinram 12 2003
Three and six months ended June 30, 2003 and 2002
(unaudited, stated in thousands of Canadian dollars, except common shares
and per share information)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(continued)
INDUSTRY SEGMENTS: THREE MONTHS ENDED JUNE 30, 2003
------------------ ----------------------------------------------------------
AUDIO/ROM HOME VIDEO
REPLICATION/ REPLICATION/
2003 DUPLICATION DUPLICATION OTHER TOTAL
---- ------------ ------------ ---------- ----------
REVENUE FROM
EXTERNAL CUSTOMERS $ 40,888 $ 125,568 $ 25,732 $ 192,188
EARNINGS BEFORE INTEREST
EXPENSE, INVESTMENT INCOME
AND INCOME TAXES 986 15,505 449 16,940
TOTAL ASSETS 204,786 463,174 74,870 742,830
AMORTIZATION OF CAPITAL ASSETS 4,001 11,524 1,576 17,101
CAPITAL EXPENDITURES 1,578 26,387 2,446 30,411
---------- ---------- ---------- ----------
Industry segments: Six months ended June 30, 2002
------------------ ----------------------------------------------------------
Audio/ROM Home Video
replication/ replication/
2002 duplication duplication Other Total
---- ------------ ------------ ---------- ----------
Revenue from
external customers $ 107,986 $ 207,435 $ 37,582 $ 353,003
Earnings before interest
expense, investment income
and income taxes 4,294 13,526 268 18,088
Total assets 219,301 424,027 83,368 726,696
Amortization of capital assets 10,411 19,998 3,624 34,033
Capital expenditures 1,885 24,610 3,032 29,527
---------- ---------- ---------- ----------
Industry segments: Three months ended June 30, 2002
------------------ ----------------------------------------------------------
Audio/ROM Home Video
replication/ replication/
2002 duplication duplication Other Total
---- ------------ ------------ ---------- ----------
Revenue from
external customers $ 55,739 $ 95,791 $ 20,040 $ 171,570
Earnings before interest
expense, investment income
and income taxes 2,857 8,794 251 11,902
Total assets 219,301 424,027 83,368 726,696
Amortization of capital assets 5,786 10,177 2,071 18,034
Capital expenditures 1,477 22,233 1,430 25,140
---------- ---------- ---------- ----------
cinram 13 2003
GEOGRAPHIC SEGMENTS: SIX MONTHS ENDED JUNE 30, 2003 AND 2002
-------------------- ----------------------------------------------------------------
UNITED
2003 CANADA STATES FRANCE OTHER TOTAL
---- -------- -------- -------- -------- --------
REVENUE FROM
EXTERNAL CUSTOMERS $ 77,939 $217,527 $ 58,804 $ 33,024 $387,294
CAPITAL ASSETS
AND GOODWILL 77,222 186,868 37,740 2,463 304,293
United
2002 Canada States France Other Total
---- -------- -------- -------- -------- --------
Revenue from
external customers $ 70,845 $182,678 $ 55,099 $ 44,381 $353,003
Capital assets
and goodwill 65,839 200,822 37,434 14,760 318,855
GEOGRAPHIC SEGMENTS: THREE MONTHS ENDED JUNE 30, 2003 AND 2002
-------------------- ----------------------------------------------------------------
UNITED
2003 CANADA STATES FRANCE OTHER TOTAL
---- -------- -------- -------- -------- --------
REVENUE FROM
EXTERNAL CUSTOMERS $ 34,974 $111,105 $ 29,940 $ 16,169 $192,188
CAPITAL ASSETS
AND GOODWILL 77,222 186,868 37,740 2,463 304,293
United
2002 Canada States France Other Total
---- -------- -------- -------- -------- --------
Revenue from
external customers $ 37,990 $ 83,930 $ 28,704 $ 20,946 $171,570
Capital assets
and goodwill 65,839 200,822 37,434 14,760 318,855
6. SUBSEQUENT EVENT
On July 18, 2003, Cinram International Inc. entered into a definitive
agreement with AOL 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 US$1.05
billion in cash. As part of the acquisition, Cinram will enter into
exclusive long term contracts with Warner Home Video, Warner Music Group
and New Line Cinema to manufacture, print, package and physically
distribute their DVDs and CDs in North America and Europe. The acquisition
is subject to applicable regulatory approvals and other customary closing
conditions and is expected to close in October of 2003. The Company has
secured committed bank facilities aggregating US$1.2 billion which will be
used to fund the acquisition and for other corporate purposes.
cinram 14 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