[GRAPHIC CINRAM LOGO]
2003 ANNUAL INFORMATION FORM
May 10, 2004
For the year ended December 31, 2003
Cinram International Inc.
2255 Markham Road
Toronto, Ontario, Canada
M1B 2W3
Telephone: (416) 298-8190
Fax: (416) 298-0612
TABLE OF CONTENTS
1. About Cinram International Inc. p. 2
o Our corporate structure p. 3
o Our material subsidiaries p. 4
o Our Directors and Officers p. 4
o Our employees p. 5
o Our securities p. 5
o Our dividend policy p. 6
2. About our business p. 6
o Home Video p. 7
o Audio/ROM p. 7
o Printing p. 8
3. Risk factors that could affect our business p. 9
4. Legal proceedings we are involved in p. 14
5. Interest of management and others in material transactions p. 14
6. Protecting the environment p. 14
7. Selected consolidated financial information p. 15
8. Management's discussion and analysis p. 15
9. For more information p. 15
10. Transfer agent p. 15
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual information form constitute
"forward-looking statements" within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. These forward-looking statements, by their
nature, are not guarantees of future performance and involve risk and
uncertainties, which could cause actual results to differ materially from those
anticipated in these forward-looking statements. We consider the assumptions on
which these forward-looking statements are based to be reasonable, but caution
the reader that these assumptions regarding future events, many of which are
beyond our control, may ultimately prove to be incorrect. Cinram disclaims any
intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise. You should
read this annual information form with the understanding that the Company's
actual future results may be materially different from what we expect. All
forward-looking statements attributable to Cinram are expressly qualified by
these cautionary statements.
1. ABOUT CINRAM INTERNATIONAL INC.
Isidore Philosophe and Samuel Sokoloff founded Cinram in 1969 as a contract
manufacturer of pre-recorded 8-track cartridges and cassettes. In our 35-year
history, we have evolved with changes in technology and consumer preferences to
manufacture successive generations of pre-recorded media formats including:
8-track tapes, vinyl records, audio cassettes, CDs, CD-ROMs, VHS video cassettes
and DVDs.
Cinram established its first major manufacturing presence in the United States
in 1990 with the acquisition of one of the country's largest independent
duplicators of audio cassettes - PRC Tape Company of Richmond, Indiana. In 1995,
we entered the European market with the acquisition of two VHS video cassette
duplicators: Duplication France, S.A. and Video Pouce, S.A. Throughout the
remainder of the 1990s, we completed several acquisitions in both North America
and Europe to establish our market presence and to expand our operation in those
territories.
In 2000, Cinram entered into exclusive agreements with Twentieth Century Fox
Home Entertainment Inc. (TCFHE), a major North American motion picture studio,
to provide manufacturing, distribution and warehouse logistics services for VHS
video cassettes and DVDs in the United States and Canada. That same year, we
acquired the shares of Universal Music International Manufacturing and
Logistics, S.A. (UML) in France and signed a long-term CD supply contract with
UML - providing a solid foundation for our CD business in Europe.
In 2002, we added significant DVD capacity in North America, and to a lesser
extent Europe, as a result of the growing consumer demand for DVDs and
additional business from new, exclusive DVD supply agreements entered into
during the year.
In 2003, we completed the largest strategic acquisition in our history. We
acquired Time Warner Inc.'s DVD and CD manufacturing and physical distribution
businesses, together with certain related businesses, in the United States and
Europe, for $1.538 billion in cash.
As part of the transaction, we 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 transaction closed in October
2003 and increased Cinram's DVD and CD manufacturing capacity to over one
billion discs per year. The purchase price was funded from banking facilities of
up to US$1.175 billion.
Accordingly, Cinram's revenue, earnings and earnings per share all reached
record levels in 2003. Today, we are the world's largest independent provider of
pre-recorded multimedia products and related logistics services.
2
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
OUR CORPORATE STRUCTURE
Cinram International Inc. ("Cinram" or the "Company") was formed as Cinram
Ltd./Cinram Ltee by letters patent dated July 28, 1969 pursuant to the Canada
Corporations Act. The registered and principal office of Cinram is located at
2255 Markham Road, Toronto, Ontario, M1B 2W3 and its telephone number is (416)
298-8190. Cinram has amended its constating documents as follows:
(a) by Certificate of Continuance dated November 12, 1980, Cinram:
(i) re-organized its share capital by authorizing for issuance an
unlimited number of common shares, an unlimited number of
Class A shares, an unlimited number of Class B shares and an
unlimited number of Class C shares; and
(ii) was continued under the Canada Business Corporations Act;
(b) by Certificate of Amendment dated January 7, 1986, Cinram further
re-organized its share capital by:
(i) reducing the authorized capital of Cinram to an unlimited
number of common shares only;
(ii) subdividing each of its issued and outstanding common shares
into 140 common shares;
(iii) and deleting all restrictions on share transfers;
(c) by Certificate of Amalgamation dated December 31, 1986, Cinram
amalgamated with 147213 Canada Inc;
(d) by Certificate of Amendment dated June 25, 1987, Cinram subdivided
each of its issued and outstanding common shares into three (3)
common shares;
(e) by Certificate of Amalgamation dated June 30, 1988, Cinram:
(i) amalgamated with Praxis Technologies Corporation and Praxis
Technologies Inc. (collectively "Praxis");
(ii) increased its authorized share capital by creating an
unlimited number of redeemable preference shares. The holders
of the preference shares are entitled to receive dividends as
and when declared by the Directors of Cinram in such amount
and in such form as the Directors of Cinram may from time to
time determine.
(f) by Certificate of Amendment dated June 21, 1993, Cinram subdivided
each of its issued and outstanding common shares into two (2) common
shares;
(g) by Certificate of Amalgamation dated July 31, 1993, Cinram
amalgamated with Nelson Vending Technology Limited ("Nelson
Vending") and Nelson Videovend Ltd. ("Nelson Videovend");
(h) by Certificate of Amendment dated June 12, 1997, the name of the
Corporation was changed to Cinram International Inc.;
(i) and by Certificate of Amendment dated February 27, 1998, Cinram
subdivided each of its issued and outstanding common shares into two
(2) common shares
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
MATERIAL SUBSIDIARIES
<Table>
<Caption>
==========================================================================
NAME OF SUBSIDIARY % OWNERSHIP JURISDICTION OF INCORPORATION
==========================================================================
Cinram Inc. 100% Delaware, U.S.A.
Cinram Manufacturing Inc. 100% Delaware, U.S.A.
Ivy Hill Corporation 100% Delaware, U.S.A.
Cinram GmbH 100% Germany
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</Table>
References herein to "Cinram" include the Company and its material subsidiaries.
OUR DIRECTORS AND OFFICERS
As of May 1, 2004, Cinram's Directors and senior Officers, as a group,
beneficially owned directly or indirectly, or exercised control or direction
over, 4.6% of Cinram's outstanding common shares, or 2,562,098 common shares.
Under Cinram International Inc.'s by-laws, Directors hold office until the next
annual shareholders' meeting, or until their successors are elected.
DIRECTORS
The following table lists Cinram International Inc.'s Directors, their place of
residence and principal occupation on May 10, 2004. As a public company, we are
required by law to have an audit committee.
<Table>
<Caption>
=============================================================================================================
NAME AND PLACE OF RESIDENCE DATE ELECTED OR APPOINTED CURRENT PRINCIPAL OCCUPATION
TO THE BOARD OF DIRECTORS
=============================================================================================================
Henri A. Aboutboul 3 November 19, 1986 Chairman of the Board, Cinram International Inc.
London, United Kingdom Corporate Director
Norman May, Q.C. 2 December 1, 1985 Partner,
Ontario, Canada Fogler, Rubinoff LLP
Nadir H. Mohamed, CA 1, 3* September 25, 2003 President and Chief Executive Officer,
Ontario, Canada Rogers Wireless Communications Inc.
Isidore Philosophe August 29, 1969 Chief Executive Officer,
Ontario, Canada Cinram International Inc.
John R. Preston, CPA 1, 2* September 25, 2003 Vice-President, Finance and Administration,
Florida, USA Southern Wine & Spirits of America Inc.
Lewis Ritchie, CA June 1, 1985 Executive Vice-President, Finance and
Ontario, Canada Administration, Chief Financial Officer,
Cinram International Inc.
David Rubenstein June 19, 2002 President, Cinram Americas
Florida, USA Executive Vice-President, Cinram
International Inc.
Peter G. White 1*, 3 June 12, 1997 Co-Chief Operating Officer and Secretary,
Ontario, Canada Hollinger Inc.
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</Table>
1 Audit Committee
2 Corporate Governance and Nominations Committee
3 Compensation Committee
* Committee chair
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
All of Cinram's Directors have held the positions listed in the table above
during the past five years, except for the people listed in the table below.
<Table>
<Caption>
================================================================================
DIRECTOR PAST OCCUPATION
================================================================================
Henri A. Aboutboul Managing Director of Chemicals,
Waste Management International B.V.
Nadir H. Mohamed President and Chief Operating Officer of Rogers
Wireless Communications Inc. from August 2000 to
July 2001, Senior Vice-President of Marketing and
Sales of Telus Communications Inc. from February
1999 to August 2000
John R. Preston Executive Vice-President and Chief Financial
Officer, Ripplewood Investment Holdings prior to
January 2004
David Rubenstein President, Cinram U.S. Operations, prior to June
2001
Peter G. White Executive Vice-President, Argus Corporation, prior
to January 2004
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</Table>
OFFICERS
The table below lists Cinram International Inc.'s Officers, their place of
residence and principal occupation on May 10, 2004.
<Table>
<Caption>
==========================================================================================================
NAME PLACE OF RESIDENCE OFFICE HELD AT CINRAM INTERNATIONAL INC.
==========================================================================================================
Isidore Philosophe Ontario, Canada Chief Executive Officer
David Locksley Ontario, Canada Chief Information Officer
Jaime Ovadia Florida, USA Executive Vice-President, Worldwide Theatrical Home Video
Jacques Philosophe Ontario, Canada Executive Vice-President
Monique Rabideau Ontario, Canada Assistant Secretary
Lewis Ritchie Ontario, Canada Executive Vice-President, Finance and Administration,
Chief Financial Officer
David Rubenstein Florida, USA President, Cinram Americas
Executive Vice-President
John Tino Ontario, Canada Director, Financial Reporting and Treasurer
Marcel Tuchner Ontario, Canada Executive Vice-President, Manufacturing and Engineering
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</Table>
OUR EMPLOYEES
As of December 31, 2003, Cinram had approximately 9,400 employees worldwide.
OUR SECURITIES
Our authorized capital stock consists of an unlimited number of common shares
and an unlimited number of preference shares. The preference shares are
non-voting and are entitled to dividends, as and when declared by the Board of
Directors. At December 31, 2003, Cinram had 56 million common shares issued and
outstanding. Cinram's common shares are listed and posted for trading on The
Toronto Stock Exchange under the symbol CRW. Effective January 1, 2001, we
de-listed from the NASDAQ.
5
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
<Table>
<Caption>
===============================================================================
2003 OPEN HIGH LOW CLOSE VOLUME TRADED
===============================================================================
January $ 9.99 $ 10.05 $ 8.85 $ 9.35 2,901,501
February $ 9.31 $ 9.40 $ 8.36 $ 8.41 2,103,713
March $ 8.41 $ 11.25 $ 8.41 $ 11.00 7,982,775
April $ 11.00 $ 13.70 $ 10.80 $ 13.49 9,673,700
May $ 13.48 $ 15.36 $ 13.40 $ 14.69 7,053,350
June $ 14.55 $ 16.85 $ 14.45 $ 16.43 4,898,619
July $ 16.50 $ 25.75 $ 15.51 $ 25.00 20,355,697
August $ 24.99 $ 29.60 $ 23.81 $ 28.55 9,583,202
September $ 28.27 $ 28.95 $ 24.72 $ 24.95 8,965,887
October $ 26.22 $ 27.47 $ 25.34 $ 27.47 7,126,204
November $ 27.75 $ 28.50 $ 25.58 $ 27.30 8,598,748
December $ 27.01 $ 28.59 $ 26.10 $ 28.35 5,762,996
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</Table>
OUR DIVIDEND POLICY
According to the Board of Director's current policy, Cinram International Inc.
declares and pays quarterly cash dividends on its common shares at a rate of
$0.12 per year. The Board of Directors regularly reviews its dividend policy.
The ability to declare dividends is restricted to the current policy by the
terms of the Cinram's credit facilities.
<Table>
<Caption>
=======================================================
YEAR CASH DIVIDEND DECLARED PER COMMON SHARE
=======================================================
2003 $0.12
2002 $0.08
2001 $0.06
- -------------------------------------------------------
</Table>
In 2004, Cinram's Board of Directors has so far declared quarterly dividends of
$0.03 per common share, payable on March 31, 2004, and June 30, 2004.
2. ABOUT OUR BUSINESS
Cinram International Inc. is the world's largest independent provider 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
globe.
In 2003, 84% of our revenue was generated outside of Canada - 62% in the United
States and Mexico and 22% Europe.
We operate in three main industry segments: Home Video replication/duplication,
Audio/ROM replication/duplication and Printing. As a custom audio and home video
replicator/duplicator, we only produce multimedia products to fill specific
orders from our customers. In North America and Europe, most of our major home
video and audio customers use our services to outsource manufacturing and
distribution of their content because they prefer to concentrate their efforts
on promotion and artistic development.
6
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
1. HOME VIDEO
Home Video replication/duplication customers provide us with a master
tape, label design, graphics and promotional materials. Cinram assumes
responsibility for all manufacturing and packaging operations and
delivers/distributes finished product directly to retailers or
distributors on behalf of our customers.
Our major customers in North America and Europe are major motion picture
studios. In Europe, we also participate in the competitive home video
replication/duplication market, where most of the major studios use third
party duplicators. Life-style, education and marketing videos are some of
the major markets.
We have non-exclusive DVD replication licensing agreements with MPEGLA,
the 3-C Group (administered by Philips Electronics), the 6-C Group,
(administered by Toshiba Corporation) and Discovision Associates.
The Home Video replication/duplication segment accounted for 60% of our
2003 consolidated revenue, compared with 61% in 2002. In 2003,
approximately 78% of Cinram's Home Video replication/duplication revenue
was generated in North America and 22% in Europe.
The competitive environment for DVDs in both in the United States and
Europe includes a number of significant players. Technicolor, subsequent
to the acquisitions of Nimbus' facility in Virginia and Panasonic, became
the largest independent DVD replicator and Cinram's most important
competitor. In addition to Technicolor, we compete with a number of other
independent replicators, including Infodisc, a Taiwan-based manufacturer,
and Deluxe, owned by Rank Group Plc.
While independent replicators are important competitors, a number of large
media conglomerates with music and film content subsidiaries, such as Sony
and Bertelsmann, continue to manufacture DVDs and other media in-house
through captive subsidiaries, such as Bertelsmann's Sonopress subsidiary.
Sony's captive subsidiary is one of the largest DVD replicators in the
world. However, most of its output is its own content including Columbia
Tri-Star films and Playstation games. Such captive subsidiaries also
provide significant competition for us but, as importantly, restrict the
potential market for our services, as we are unlikely to win the
manufacturing business of their associated music companies unless the
captive operations are sold.
Today, the top three DVD manufacturers in North America are Technicolor,
Cinram and Sony, which together account for more than 80 percent of 2003
revenue. In Europe, the top three players are Sony, Technicolor and
Cinram, which comprise more than 50% of the market. To keep pace with the
demand that is expected to continue to accelerate, major manufacturers
have invested or are expected to invest to significantly increase capacity
over the next few years.
2. AUDIO/ROM
Audio/ROM replication/duplication customers provide us with a master tape,
label design, graphics and promotional materials. Cinram assumes
responsibility for all manufacturing and packaging operations and
delivers/distributes finished product directly to retailers or
distributors on behalf of our customers.
Cinram's principal customers in the Audio/ROM replication/duplication
segment are major music labels, publishers and computer software companies
in North America and Europe. We enter into agreements in the ordinary
course of our business with our major customers, which deal generally with
pricing, delivery, order size, confidentiality and copyright protection.
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
We have non-exclusive CD replication licensing agreements with a member of
the Philips Group of Companies in the Netherlands and with Discovision
Associates.
The Audio/ROM replication/duplication segment accounted for 21% of our
consolidated 2003 revenue, compared with 27% in 2002. In 2003,
approximately 68% of our Audio/ROM replication/duplication revenue was
generated in North America, and 32% in Europe.
Currently, the CD replicating industry is relatively fragmented with the
top eleven players accounting for less than half of global production in
2003. The four leading global CD manufacturers are Sony, Cinram,
Sonopress, and EMI followed by Universal, Disctronics, CMC, Technicolor
and JVC. Given the considerable excess capacity in the industry,
consolidation and rationalization is expected to continue
3. PRINTING
In 2003, Cinram acquired Ivy Hill Corporation as part of the Time Warner
transaction. Ivy Hill is one of the largest specialized printing companies
in the U.S. focused on printing and packaging for music, multimedia, home
video and publishing applications - including DVD and CD folders, patented
"Snapper" packages for DVD, point-of-purchase displays, custom box sets
and other customized printer products for media. Sales to Warner Home
Video and Warner Music Group represent approximately 70% of Ivy Hill's
revenues. Ivy Hill's results correspond to our new Printing industry
segment. Printing accounted for 6% of revenue in 2003.
Key success factors in the home video and audio replication industry include:
o Capacity: Critical to securing contracts with major studios and achieve
economies of scale to lower costs and achieve higher margins.
o Premium contracts: Market share is dependent upon strong relationships and
arrangements with large studios.
o Full service offering: Replicators must offer a complete package of services,
including high value-added distribution services, often in multiple
territories.
o Access to financing: Essential for investment in capacity, technological
improvements and product offering.
o Low cost of production: Customers are cost conscious and will make purchase
decisions based on price.
Key success factors in the printing industry include:
o Capacity: Critical to securing contracts and achieving economies of scale to
lower costs and achieve higher margins.
o Premium contracts: Market share is dependent upon strong relationships and
arrangements with large customers
o Access to financing: Essential for investment in capacity, technological
improvements and product offering.
o Low cost of production: Customers are cost conscious and will make purchase
decisions based on price.
We believe that our world-class distribution and logistics capabilities allow us
to differentiate ourselves from the competition by providing complete turnkey
services for our customers at a time when many studios and music labels are
looking to refocus on their core business and outsource their logistic needs. In
addition, given our greater scale and scope of operations, we are better
positioned to compete for additional large-scale contracts. Our operations now
span two continents and 20 major facilities worldwide (16 in North America and
four in Europe), with almost 6.0 million square feet of manufacturing and
distribution facilities. Our facilities are strategically located to serve key
North American and European markets quickly and efficiently.
8
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
We have maintained longstanding customer relationships with several major film
studios and music labels globally. Our customer base includes Warner Home Video,
Warner Music Group, MGM, Fox, Artisan, Universal, New Line Home Entertainment,
Alliance Atlantis, BMG, Universal Music and EMI. Revenues are derived mainly
from exclusive multi-year contracts typically ranging from two to five years -
approximately 80% of our revenues are generated under such contracts. We believe
our strong history of contract renewal success is based on our proven ability to
meet customer requirements consistently and accurately. Furthermore, the high
degree of integration between our customers and us adds significant value for
our customers and assists us in retaining customer relationships.
Raw materials purchased by Cinram are abundantly available. The major components
used in our products are plastics. Raw materials are sourced from North America,
Europe and the Far East.
We maintain sufficient production capacity in our industry segments to meet
surges in demand. The highest demand typically occurs during the fourth quarter.
In 2003, approximately 48% of our Audio/ROM replication/duplication revenue and
approximately 44% of our Home Video replication/duplication revenue was
generated in the fourth quarter.
In 2003, approximately 49% of revenue was derived from the Company's two largest
customers, compared to 52% in 2002. Also in 2003, the largest customer accounted
for 30% of consolidated revenue, down from 37% in 2002. The loss of one of our
major customers could have a materially adverse effect on our financial results.
MATERIAL CONTRACTS
On October 24, 2003, Cinram acquired from Time Warner Inc. the DVD and CD
manufacturing and physical distribution businesses of the Warner Music Group,
together with certain related businesses (collectively referred to as the "Time
Warner Businesses" or the "Acquired Businesses"), in the United States and
Europe for a purchase price of $1.538 billion in cash (the "Acquisition"). The
DVD and CD manufacturing and physical distribution businesses were comprised of
WEA Manufacturing Inc., Warner Music Manufacturing Europe GmbH and certain
distribution assets of WMG that were transferred to WEA LLC. The other two
acquired businesses were Ivy Hill, a specialty printing and packaging business,
and Giant Merchandising, a manufacturer and supplier of branded custom label
apparel and related development and design services.
As part of the Acquisition, we entered into exclusive supply relationships with
Time Warner companies. Warner Home Video has DVD distribution agreements with
Home Box Office ("HBO"), New Line and Turner Entertainment. The six-year
agreements allow us to supply substantially all of Time Warner's North American
and European DVD and CD replication requirements through 2009.
3. RISK FACTORS THAT COULD AFFECT OUR BUSINESS
OUR FINANCIAL PERFORMANCE IS SENSITIVE TO ECONOMIC TRENDS AND CONSUMER
PREFERENCES IN OUR MAJOR MARKETS.
Our financial performance depends on the continued growth and viability of the
industries of our customers. Substantially all of the purchases of the
pre-recorded CDs, DVDs and audio and video cassettes sold by our customers are
discretionary. Accordingly, weakening economic conditions or outlook could
reduce significantly consumption in any of our customers' major markets thereby
causing material declines in our revenue and operating income. If the current
unfavorable economic climate in the United States and Europe continues, if the
effects of international political and military instability depress consumer
confidence, or if other negative economic trends continue or accelerate in any
of our customers' major markets, our business, financial condition and results
of operations may be materially adversely affected. In addition, because of the
discretionary nature of their product, our customers must continually compete
for the public's leisure time and disposable income with other forms of
entertainment, including sporting events, concerts, live theatre and
restaurants. They also compete for retail shelf space
9
Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
with other consumer goods. As a result of this competition, demand for our
customers' products that we service could be reduced and our profit margins and
sales volumes could be adversely affected.
OUR BUSINESS IS THREATENED BY UNAUTHORIZED COPYING AND DISTRIBUTION OF MUSIC AND
VIDEO FILES.
Advances in technology that allow for the transfer and downloading of music
files from the Internet without authorization from the owners of the rights to
such content have threatened the conventional copyright-based business model of
our customers by making it easier to create and redistribute unauthorized music
files. In addition, as current technologies improve, the unauthorized transfer
and downloading of video files will likely become more widespread. The
proliferation of this unauthorized copying, use and distribution of such files
is supported by the increasing availability and decreasing price of new
technologies, such as analog recorders, personal video recorders and CD and DVD
burners, and the increasing number of peer-to-peer digital distribution services
that facilitate such transfers and downloading.
While certain industry associations, such as the Recording Industry Association
of America and the Canadian Recording Industry Association, have launched legal
action against heavy downloaders and file sharers, there can be no assurance of
the outcome of these lawsuits or that they will be able to effectively manage
these concerns. We expect that file sharing and downloading, both legitimate and
illegal, will continue to exert significant pressure on demand for CDs and, as
the speed and quality with which video files can be transferred and downloaded
improves, may in the future exert significant pressure on demand for DVDs.
Similarly, demand for our products is adversely affected by VHS video cassette,
CD and DVD piracy. File sharing, downloading and piracy have contributed to a
significant decrease in the volume, and have put significant pressure on the
price, of legitimate sales of VHS video cassettes, CDs and DVDs. As
substantially all of our net sales are derived from the sale of these products,
continued file sharing, downloading and piracy could materially adversely affect
our business, financial condition and results of operations.
DEMAND AND PRICING FOR OUR PRODUCTS COULD BE MATERIALLY ADVERSELY AFFECTED BY
THE INTRODUCTION OF DISTRIBUTION ALTERNATIVES.
Certain of our customers have begun to develop or partner with new services for
the authorized digital distribution of their music, movies and television
programs. These digital distribution outlets are supported by widespread access
to the Internet, as well as the increasing availability of affordable, portable
music and video players. In addition, our business faces pressure from the
emerging technology of video on demand (VOD). These services may offer more
attractive pricing or more convenient delivery and, as a result, could
materially reduced demand for pre-recorded CDs, DVDs and audio and VHS video
cassettes. These services, and any other future initiatives that reduce the
demand for or pricing of our products, could materially adversely affect our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT THE STRATEGIES RELATING TO THE
ACQUISITION OR ACHIEVE THE ANTICIPATED BENEFITS FROM THE ACQUISITION.
The Acquisition involves a strategy to, among other things, rationalize key
functions, reduce costs and increase profit margins by leveraging economies of
scale and capitalizing on the best practices of Cinram and the Acquired
Businesses. We cannot assure you that we will be able to implement this strategy
or that we will realize the benefits we anticipate from this strategy. This
depends in large part on our ability to successfully integrate the operations of
the Acquired Businesses with our existing operations. Successful integration
will depend on our ability to assess management depth, manage the new
operations, realize opportunities for revenue growth, capitalize on synergies
and eliminate redundant and excess costs. Although we have successfully
accomplished the integration of acquired businesses in the past, the Acquisition
is of a much larger scale than our previous endeavors. Successful integration is
subject to a number of risks, including difficulties in:
o assimilating and retaining employees,
o assimilating corporate cultures and practices and broad and
geographically dispersed personnel and operations;
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
o entering into markets in which we did not previously operate on a large
scale or at all, such as the specialty printing and packaging business
and the custom label apparel business; and
o integrating departments, systems, technologies, books and records and
procedures, as well as maintaining uniform standards and controls.
The success of the integration will also require the dedication of management
and other personnel resources, which may temporarily distract their attention
from our day-to-day business. We may not be able to successfully integrate any
or all of these businesses into our existing organization or that we will be
able to effectively manage these new operations. If we fail to properly
integrate the acquired businesses or to operate these entities in a cost
effective manner, our business, financial condition and results of operations
will suffer. Furthermore, we may not be able to maintain the levels of revenue,
earnings or operating efficiency that we or the Acquired Businesses had achieved
prior to the Acquisition or might achieve separately.
WE FACE SIGNIFICANT COMPETITIVE AND PRICING PRESSURES IN THE MARKETS WE SERVE.
We are engaged in a commodity driven industry that is highly price competitive,
and where no one participant has an exclusive license to replicate pre-recorded
DVDs or CDs in a particular territory. Some of our competitors are companies, or
divisions or operating units of companies, that have greater financial and other
resources than we do. In addition, there is competitive pressure from
lower-cost, offshore replicators. We may not be able to compete successfully in
our industry, which could have a material adverse effect on our business,
results of operations, financial condition and cash flow.
Many of our customers have recently undergone, or may choose to undergo,
consolidation. As our customers grow larger and their industries grow more
concentrated, the few remaining large entities may develop greater bargaining
power and may be able to exert significant pricing pressure on our products
which, would adversely affect our results of operations. If any of our customers
is acquired by or consolidates with another participant in the industry that has
either an existing relationship with one of our competitors or the internal
capacity to produce the products we provide, we may lose the business of this
customer and our results of operations could be impacted significantly.
Furthermore, our contracts with our customers often place restrictions on the
timing and amount of allowable price increases and also frequently contain a
market price test, which may force us to lower the prices we charge our
customers depending on prevailing industry prices.
OUR DEPENDENCE ON A LIMITED NUMBER OF LARGE CUSTOMERS WITH SUBSTANTIAL
BARGAINING POWER CREATES POTENTIAL RISKS TO OUR REVENUE AND PROFITS.
We operate in an industry in which the majority of sales are accounted for by a
few large companies. In 2003, approximately 49% of our revenue was derived from
our two largest customers, compared to 52% in 2002. Also in 2003, the largest
customer accounted for 30% of consolidated revenue, down from 37% in 2002. If
any of our most significant customers discontinue their relationships with us
for any reason our business could be materially adversely affected. In addition,
our customers face a variety of risks and competitive pressures in the
industries in which they operate and if market and other factors necessitate
them to cancel, reduce or postpone current or expected purchase commitments for
our products, our operating results and financial condition could suffer.
Similarly, if our significant customers do not own the licensing and
distribution rights to the content they produce, there is no assurance that we
will be provided with the contract for such products.
DEMAND AND PRICING FOR OUR PRODUCTS GENERALLY DECLINE AS OUR PRODUCTS MATURE.
Demand and pricing for our products generally decline as our products mature.
Through the history of their production, each of the audio cassette, VHS video
cassette and CD formats have experienced substantial declines in demand and
pricing. As a result, to the extent we are unable to increase our sales volumes
or reduce our costs for the manufacture of these formats, our profit margin for
these formats may decline. We are experiencing the same declines in respect of
DVD and expect to experience similar declines in any future formats that we
manufacture. Therefore, our long-term success depends on our ability to invest
in new technologies and to secure our customers for new formats as they
transition from
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
mature formats. In addition, as a result of declines in demand for audio
cassette, video cassette and CD formats, our revenue is increasingly dependent
on sales of a single format, DVD.
WE RELY ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY AND WE MAY NOT
BE ABLE TO RETAIN THOSE EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL.
Our operations and prospects depend in large part on the performance and
continued service of our senior and middle management teams. The loss of key
employees or the inability to attract skilled employees could adversely affect
our ability to effectively pursue our business strategy. Currently, only certain
of our key officers and employees are bound by employment contracts.
INCREASED RAW MATERIAL COSTS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Each year we purchase significant quantities of plastics for the manufacture of
DVDs, CDs and video and audio cassettes. The availability and prices of these
materials may be influenced by a number of different factors, many of which are
beyond our control. Significant shortages of, and price increases for some of
these materials have occurred in the past. For example, in fiscal 2000, we
experienced price increases for polycarbonate and polystyrene of approximately
17% and 47%, respectively. If we experience raw material price increases and we
are either unable to pass such increases through to our customers at all or we
are contractually restricted as to the timing of any increases in the amount we
charge our customers, our margins would be adversely affected.
OUR BUSINESS COULD BE HARMED IF WE ARE UNABLE TO MANAGE THE SUCCESSFUL
PRODUCTION AND SUPPLY OF OUR PRODUCTS.
In our business, we are required to deliver substantial volumes of products
meeting the stringent requirements of our customers. Our failure to manage
successfully the production and supply of our products, including the failure to
meet scheduled production and delivery deadlines, or the failure of our products
to meet the product quality requirements of our customers, could materially
adversely affect our business, operating results and financial condition.
WE ARE EXPOSED TO POTENTIAL CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT.
The industry in which we compete has many participants who own, or claim to own
intellectual property. We cannot determine with certainty whether any existing
third party patents or the issuance of any third party patents would require us
to alter our manufacturing processes or obtain licenses relating to our
processes or products. There is no assurance that we will be able to obtain such
licenses on terms favorable to us, if at all, and obtaining and paying royalties
on new licenses might materially increase our costs. Although we have
established internal controls to verify that our customers own the rights to the
content we replicate/duplicate on their behalf, there can be no assurance that
the content on the multimedia products we manufacture does not infringe upon the
intellectual property rights of third parties. Any claims brought against Cinram
by third parties with respect to intellectual property rights, with or without
merit, could be time-consuming, and result in costly litigation or cause delays
in our operations. Since there can be no assurance of the outcome of such
claims, we may be subject to fines or penalties that could be significant.
WE CONDUCT BUSINESS INTERNATIONALLY, WHICH EXPOSES US TO UNCERTAINTIES AND RISKS
THAT COULD NEGATIVELY AFFECT OUR OPERATIONS AND SALES.
A significant portion of our sales are made to customers located outside the
United States and Canada. We expect our international operations to continue to
account for a significant portion of our revenues in the future and might expand
into new markets in the future. The economies of foreign countries important to
our operations could suffer slower economic growth or instability in the future.
In addition, our operations and sales in foreign markets could be negatively
affected by a variety of risks including new restrictions and controls on access
to markets, unusual or burdensome foreign laws or regulatory requirements or
unexpected changes to those laws or requirements, fluctuations in the value of
foreign currency versus the U.S. dollar and potential currency devaluations,
dependence on foreign distributors and their sales channels and poor recognition
of intellectual property rights. We may not be able to insure
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
or hedge against these risks, and we may not be able to ensure compliance with
all of the applicable regulations without incurring additional, significant
costs.
WE MAY EXPERIENCE ADVERSE EFFECTS DUE TO EXCHANGE RATE FLUCTUATIONS.
Our operations in foreign markets expose us to the risk of foreign currency
fluctuations. To the extent we incur expenses that are not denominated in the
same currency as the related revenues, exchange rate fluctuations could cause
our expenses to increase as a percentage of revenue affecting our profitability
and cash flows. For example, our supply agreements with the Time Warner
companies are priced in U.S. dollars although we incur a significant amount of
costs in foreign currencies in respect of the CDs and DVDs we manufacture for
their European and Canadian operations. Volatility in currency exchange rates
may generate losses, which could have a material adverse effect on our financial
condition or results of operations. In addition, we are exposed to currency
exchange risk on debt denominated in U.S. dollars.
CHANGES IN THE LEVEL OF INTEREST RATES MAY ADVERSELY AFFECT OUR CASH FLOWS AND
RESULTS OF OPERATIONS.
Our credit facilities bear interest at variable rates with a fixed interest rate
spread. The weighted average interest rate on our debt of $1,357.6 million for
the year ended December 31, 2003, was 6.0%. If the variable portion of the
interest rate increased by 10%, our interest rate would have risen to 6.1%, and
our interest expense would have increased by approximately $0.3 million for
fiscal 2003. Any future increases in interest rates will affect the amount
necessary to service our indebtedness under the credit facility and could have a
negative impact on our cash flows and results of operations.
ADVANCES IN TECHNOLOGY AND CHANGES IN OUR CUSTOMERS' DEMANDS MAY REQUIRE US TO
INCUR SIGNIFICANT CAPITAL EXPENDITURES IN ORDER TO REMAIN COMPETITIVE.
Changes in the technology employed by the pre-recorded media industry and the
emergence of the future generations of media products such as HD DVD, may
require us to extensively upgrade or alter our manufacturing processes and
production facilities in order to offer the most up-to-date product variations.
As the demands and requirements of our customers shift, it will be essential for
us to modify the products and services we offer in order to retain these
customers. The costs associated with adapting our operations in response to
obsolete equipment and products, as well as with continually meeting the
specifications of our customers, will likely be significant and there can be no
assurance that we will be able to finance the necessary capital requirements
through internally generated funds, additional borrowings or other sources. If
we are unable to obtain the resources necessary to fund product expansion and
new technology development, we may not be able to successfully implement our
business strategies and our market share, profit margins and results of
operations could be adversely affected. In addition, we cannot assure you that
all of existing customers with whom we only have contracts for current forms of
media will continue to employ our services when they migrate to the next
generation media.
DUE TO THE NATURE OF OUR BUSINESS, OUR RESULTS OF OPERATIONS AND CASH FLOWS MAY
FLUCTUATE SIGNIFICANTLY FROM PERIOD TO PERIOD.
Our revenue and profitability are largely affected by the release schedule of
our major customers, which, in turn, is dependent on a variety of factors such
as consumer demand. We report results of operations quarterly and our results of
operations and cash flows in any reporting period may be materially affected by
the timing of releases by our customers, which may result in significant
fluctuations from period to period. In many of the industries in which we
operate, purchases typically are made in the last three months of the calendar
year. Accordingly, a significant percentage of our annual revenue and earnings
is realized during our fourth quarter, making fourth quarter results material to
our full-year performance. This sales seasonality affects our operating cash
flow from quarter to quarter. We cannot assure you that our fourth quarter
performance in any calendar year will be sufficient to meet our obligations or
projections for the year.
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
WORK STOPPAGES OR OTHER LABOR DISRUPTIONS AFFECTING OUR KEY CUSTOMERS COULD HAVE
AN ADVERSE EFFECT ON OUR PROFITABILITY AND FINANCIAL CONDITION.
Labor disruptions at our key customers or the clients they service, particularly
work stoppages involving those associated with the music recording or film
industries, could significantly affect demand for our products. Any prolonged
strikes or other forms of labor protests affecting the businesses of our
customers could have a material impact on our financial condition and results of
operations.
OUR MANUFACTURING OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND REQUIREMENTS
THAT MAY IMPOSE MATERIAL LIABILITIES AS WELL AS OPERATING AND CAPITAL
EXPENDITURES ON US.
Our manufacturing facilities are subject to a range of federal, state, local and
foreign laws and regulations relating to the environment. These include laws and
regulations that govern discharges to the air, water and land, the handling and
disposal of hazardous substances and wastes and the remediation of contamination
associated with our facilities and off-site disposal locations. Compliance with
existing and future environmental laws and enforcement policies may require us
to incur capital and other costs, which may materially adversely affect our
future financial condition. In addition, if we are found not to be in compliance
with applicable environmental regulations at our facilities, we may be subject
to fines and penalties that could be significant.
4. LEGAL PROCEEDINGS WE ARE INVOLVED IN
Cinram is involved in various legal actions that are normal to the course of our
business. We do not expect any resulting liability to have a material adverse
effect on our financial position or our results.
5. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
In September 2003, we purchased premises from three companies owned by certain
shareholders of Cinram International Inc. (including the President and Chief
Executive Officer and the Executive Vice-President, Operations of the
Corporation) and their families for $7,400,000 representing the fair market
value of the land and building based on independent appraisals on the date of
acquisition. Prior to the purchase of the building, we leased our premises at
2255 Markham Road, Toronto, at an annual rental net to the landlord of
approximately $760,000.
In 2003, we also paid $3.2 million ($0.5 million in 2002) to a law firm where
one of our Directors and one of our Officers are each partners, of which $3.0
million related to the Time Warner acquisition; and we paid $0.25 million ($0.19
million in 2002) in consulting fees to one of our Directors.
6. PROTECTING THE ENVIRONMENT
Our facilities are subject to laws and regulations, and international
agreements, governing protection of the environment, natural resources, human
health and safety, and the use, management and disposal of hazardous substances.
In particular, our operations are subject to stringent requirements for
packaging content and recycling, air and water emissions, and waste management.
We believe that we comply substantially with all applicable environmental
requirements. Although the costs of maintaining such compliance have not
materially affected us to date, we cannot predict the costs of complying with
requirements that may be imposed in the future. Such costs, or related
third-party personal injury or property damage claims, could have a material
adverse affect on our business, results of operations or financial condition.
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Cinram International Inc. - 2003 Annual Information Form
(all figures in Canadian dollars, unless otherwise stated)
7. SELECTED CONSOLIDATED FINANCIAL INFORMATION
Selected consolidated financial information for the last eight quarters is
available in the "Summary of Quarterly Results" section on pages 18 and 60 of
Cinram's 2003 Annual Report and is incorporated herein by reference.
8. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of financial condition and results of
operations is available starting on page 10 of Cinram's 2003 Annual Report and
is incorporated herein by reference.
9. FOR MORE INFORMATION
Additional information, including executive and Directors' compensation and
interests of management and others in material transactions, where applicable,
is contained in our management information circular dated May 10, 2004, for the
annual and special meeting of shareholders to be held on June 16, 2004, which
involves the election of directors. Additional financial information is provided
in Cinram's comparative financial statements for 2003 on pages 37 to 57 of
Cinram's 2003 Annual Report, which are incorporated herein by reference.
You can ask for a copy of Cinram's annual and quarterly management's discussion
and analysis by contacting our investor relations department at 2255 Markham
Rd., Scarborough, Ontario, M1B 2W3, by sending an e-mail to
investorrelations@cinram.com, or by calling (416) 298-8190.
These documents, as well as Cinram's annual reports, quarterly reports and news
releases, are available on Cinram's Web site at www.cinram.com. Additional
information relating to Cinram is also available on SEDAR at www.sedar.com.
10. TRANSFER AGENT
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario
M5J 2Y1
Telephone: 1-800-564-6253
Fax: 1-888-453-0330
E-mail: CARegistryInfo@computershare.com
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