Cinram International, Inc.

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Cinram International, Inc.

2255 Markham Rd.
Toronto, Ontario M1B 2W3
Canada
Telephone: (416) 298-8190
Fax: (416) 298-0612
Web site:http://www.cinram.com

Public Company
Incorporated:
1969 as Cinram Ltd.
Employees: 3,600
Sales: C$652.3 million (2000)
Stock Exchanges: Toronto
Ticker Symbol: CRW
NAIC: 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Reproducing; 334611 Software Reproducing; 51212 Motion Picture and Video Distribution; 42199 Other Miscellaneous Durable Goods Wholesalers

Cinram International, Inc. is one of the worlds leading independent manufacturers of prerecorded video- and audiocassettes, compact discs (CDs), CD-ROMs, and DVDs. Cinram also distributes videos and has stakes in several companies that offer media content online. Major customers of the firm include Twentieth Century Fox Home Entertainment, Polygram, Universal Music, and Sony. Based in Toronto, Canada, the publicly held Cinram operates through a number of subsidiaries in North America and Europe.

Early Years

Cinram was founded in 1969 by Isidore Philosophe, a Lebanese immigrant, and Samuel Sokoloff in Montreal to manufacture prerecorded 8-track tape cartridges and audiocassettes. The companys name was derived from a combination of the words cinema, radio, and music. During the mid-1970s Cinram expanded its ability to produce cassettes, which were beginning to replace the bulkier, lower-fidelity 8-tracks as the consumer format of choice. Injection molding equipment was also purchased to enable the manufacturing of cassette shells in-house.

In 1979 Cinram moved its operations to Toronto, putting it closer to the home base of many of its clients. At this time the firm further expanded its cassette manufacturing capabilities, and added a new plant to make vinyl records, giving it the ability to produce the full range of prerecorded music formats in use at the time.

Manufacturing capacity was again increased with the purchase of automated cassette-making equipment during the early 1980s, a period which saw the company experience dramatic growth in orders for both cassettes and records. In 1985 Cinram purchased the manufacturing operations of Quality Records, one of Canadas leading music companies. Quality then contracted with Cinram for production of its records and tapes.

Public Offering, Move into CD Production: 1986-93

By the early 1980s the compact disc had arrived as a music format, and all indications were that it would become a major new source of revenue for the industry. To acquire the capital needed to put a CD manufacturing facility into operation, Cinram made a public stock offering in March 1986. The following year the firm built a CD plant, which shipped its first orders by late fall. Cinram reported earnings of C$3.4 million for the year on sales of C$29.1 million.

In 1988 the company acquired Praxis Technologies Corp., a financially troubled maker of CDs. A favorable tax write-off was derived in the bargain. Late in the year Cinram signed a contract with CBS Canada to take over manufacture of CDs and vinyl records for that company. Cinrams move into CDs was proving to be a timely one, as orders for vinyl discs were dropping steeply while CDs were going through the roof. Soon sales of audiocassettes also began to fall off as the CD became the dominant prerecorded music format. With this in mind, Cinram established Nobler Technologies, Inc. in Boston, Massachusetts, to design and build automated CD manufacturing equipment. Nobler serviced both Cinram and outside clients. A second U.S. subsidiary was added in 1990 when Cinram purchased the PRC Tape Company of Richmond, Indiana. PRC, later renamed Cinram, Inc., was one of the largest independent audiocassette duplicators in the United States, with a workforce of 500.

Cinrams vinyl record output had now slowed to a trickle, and in 1991 the firm mothballed production of this venerable audio format. The company began manufacturing prerecorded videocassettes during the same year, producing them at the Richmond and Toronto factories. Plans were also announced for production of digital audiocassettes and laser videodiscs, which were both then expected to become popular consumer formats. The companys revenues and earnings for 1991 were more than double the figure of 1987, standing at C$67.8 million and C$8.5 million, respectively.

In 1993 Cinram purchased Nelson Vending Technologies Ltd. for C$4 million. Nelson had been formed in the mid-1980s to assemble a chain of video vending machines in Canada. This once-promising concept had not caught on with the public, however, and Nelson was limping along with 16 employees and 200 machines by the time Cinram acquired it. As had been the case with Praxis, Cinrams interest was as much in the favorable tax write-offs as it was in the video vending concept, due to Nelsons C$36 million in tax losses. Cinram also saw appeal in Nelsons advanced computer tracking system, which it hoped to adapt to its own purposes. Despite Nelsons marginal status, Cinram continued to run the company, which had recently acquired the more successful video vending chain Video Cube, Inc. After the acquisition, the latter firms management was put in charge of the entire operation. In hopes of stirring up business, the company was renamed The Amazing Video Network, and the ability to sell videotapes was added to the machines. The year 1993 also saw Cinram subsidiary Nobler Technologies begin shipping CD-making machinery to China in the first phase of a multimillion-dollar deal.

International Expansion: 1994-97

The recently enacted North American Free Trade Agreement (NAFTA) gave Cinram new opportunities to grow, and in 1994 the company established a joint venture with Auriga-Aurex S.A. de C.V. of Mexico to build a CD plant in Mexico City. Cinrams investment was C$10 million. The same year the company also bought a small maker of interactive advertising kiosks for retail stores, Sierra Creative Communications, Inc. Sierras kiosks used CD-ROMs which were made by Cinram.

In 1995 Cinram expanded to Europe with the acquisition of two leading French videocassette duplication companies, Duplication France S.A. and Video Pouce S.A. The deals were valued at C$4.5 million and C$1.5 million, respectively. Both companies were losing money at the time Cinram purchased them. That same year also saw a C$24 million acquisition on Cinrams home turf, that of Agincourt Productions Ltd., a division of Baton Broadcasting Inc. Agincourt, which operated under the name AP Video International, produced prerecorded videotapes in Canada for major movie studios.

The following year Cinram reached an agreement to buy the CD-manufacturing operations of an American company, Disc Manufacturing, Inc. (DMI), for US$80 million. DMI operated plants in Huntsville, Alabama, and Anaheim, California, which produced 200 million discs per year, including a sizable number of CD-ROMs. The new plants doubled Cinrams CD output. Shortly after this purchase Cinram got into the nascent DVD business when it formed a joint DVD-authoring venture with Pacific Ocean Post, a digital post-production company based in Santa Monica, California. DVDs, primarily used for video, held seven times as much data as CDs and could be produced at Cinrams CD manufacturing facilities.

Cinram was now receiving a great deal of attention from investors, and they boosted the companys stock price to more than C$27 by March 1996, up from just C$12 a year earlier. Revenues for the year were C$340.7 million, nearly five times the amount reported half a decade earlier. Profits were a healthy C$31.2 million. The company was also flush with capital from two special warrant issues, the most recent of which had raised more than C$100 million.

At the end of 1996 Cinram reached an agreement with Videoprint, Ltd. to purchase its videotape duplication and distribution operations for C$14.7 million. Videoprint, headquartered in the United Kingdom, gave Cinram additional presence in the European market. The company continued to broaden its European holdings in 1997 with acquisition of most of the videocassette duplication assets of Grupo Condor S.L. of Spain, which consisted of two manufacturing facilities that could produce 25 million tapes per year. These were later consolidated into a single site in Zaragoza, Spain, and renamed Cinram España S.A.

Cinram also reached agreements with two top entertainment corporations during the year to acquire some of their manufacturing operations in Europe. In the Netherlands, the company purchased video- and audiotape maker Polygram Manufacturing and Distribution Centres B.V. from Polygram N.V. Cinram subsequently reached an agreement to manufacture the bulk of Polygrams prerecorded tapes around the world. A similar deal was struck with Sony Music Entertainment (U.K.) Limited to take over Sonys British videocassette duplication operations, and then to manufacture tapes for Sony Music and sister company Columbia Tri-Star Home Video in the United Kingdom. During 1997 Cinram also changed its name to reflect the companys global reach, becoming Cinram International, Inc.

Company Perspectives:

Our customers success is our success. We are a leader by providing our customers with what they want, when they want it, how they want it, and at the right price.

Music Industry Downturn, Evaporating Profits: 1998-2001

The companys streak of upward stock price growth hit a rough spot in early 1998 when a quarterly earnings report came up short of analyst predictions. The share price quickly dropped by 15 percent, then continued to slide throughout the year. Cinrams earnings were being hurt by the sluggish sales of music recordings and videos, which were seeing few hits at the time. Investors were also skittish because of the growing popularity of the MP3 digital recording format, which was increasingly being used to trade music over the Internet. The long-term impact on prerecorded CD and tape sales was not yet clear, but it offered the potential of disaster for Cinram, as well as the music industry at large. Despite these troubles, Forbes still ranked Cinram one of the 100 best small companies in the world, an honor which the firm had received for several years running.

To address investor concerns, the company reached a deal with Internet music provider MP3.com in November 1999 in which the latter purchased 1.5 million shares of Cinram stock at C$13 each. Customers would be able to select a set of songs for a custom CD of their own creation on MP3.coms web site, and Cinram would manufacture and ship it within two days. Cinram also acquired a stake in U.S.-based Internet software and music distribution company Broadcast Software Corp. These forward-looking moves did not halt the companys stock slide, however, and the share price dropped below the C$5 mark by early 2000.

During the summer of 2000 a major agreement was reached with Twentieth Century Fox Home Entertainment to designate Cinram the exclusive manufacturer and distributor of that firms VHS tapes in North America, followed a short time later by a similar pact regarding DVDs. The deal was estimated to be worth more than C$750 million over five years. To handle the increased production this would require, Cinram began an 800,000-square-foot expansion of its Huntsville, Alabama plant.

The year 2000 also saw the company purchase another CD plant in Louviers, France, from Universal Manufacturing and Logistics, which was capable of producing 110 million discs per year. The deal included a pact with Universal Music Ltd. to manufacture that companys CDs in Europe. Cinram acquired a French DVD authoring firm in Paris around this time as well.

Still trying to come to grips with the protracted sales slump, in December 2000 Cinram announced a C$48 million restructuring which included layoffs at all of its facilities worldwide and the closing of its Anaheim, California CD plant. When the final figures were released for the year, the company had lost C$28 million on revenues of more than C$652 million. The red ink was attributed to a combination of the continuing lack of pop music hits, a spike in raw material costs, the impact of such online music trading services as Napster, and the strong sales of home CD-burners. At the companys spring 2001 annual meeting, founder and CEO Philosophe vowed to stick with Cinrams core strategy through the industrys continuing period of uncertainty. He noted that Cinrams increasing emphasis on distribution was proving to be a good addition to the companys portfolio of services, and predicted a return to profitability.

After a stunning run of success during most of the 1990s, Cinram was dealing with a lengthy revenue slump by tightening its belt while continuing to look to the future. With seasoned management in place, and the full potential of DVD not yet realized, it looked to be a strong candidate for survival during the ongoing industry shakeout.

Principal Subsidiaries

Video Centre; The Amazing Video Network; Cinram España S.A. (Spain); Cinram, Inc. (U.S.A.); Cinram Latinoamericana S.A.de C.V. (Mexico); Cinram Europe (U.K.); Cinram France; Cinram Audio Discs (France); Cinram U.K. Ltd.; Cinram Ne-derland B.V. (Netherlands).

Principal Competitors

Thomson Multimedia; QCA, Inc.; Metatec International, Inc.; WEA Manufacturing; DOCdata N.V.; G.T.C. Transcontinental Group Ltd.

Key Dates:

1969:
Cinram Ltd. is founded in Montreal to make prerecorded tapes.
1979:
Operations are moved to Toronto.
1985:
Company purchases Quality Records manufacturing unit.
1986:
Initial public offering raises funds to build Cinrams first compact disc (CD) plant.
1987:
CD factory opens, begins shipping orders.
1989:
Nobler Technologies, Inc. is formed to design and build CD-making equipment.
1990:
Richmond, Indiana-based PRC Tape Company is acquired and becomes companys first U.S. manufacturing site.
1991:
Cinram ceases making vinyl records, begins to produce videocassettes.
1993:
Nelson Vending Technologies is acquired and renamed The Amazing Video Network.
1994:
Joint venture is formed in Mexico with Auriga-Aurex to manufacture CDs.
1995:
Cinram purchases two French videotape makers and Canadian firm AP Video.
1996:
Company agrees to buy U.S. CD maker DMI and U.K. tape manufacturer Videoprint.
1997:
Company purchases tape and videocassette duplication arms of Dutch Polygram and British Sony, respectively; changes name to Cinram International, Inc.
2000:
Cinram signs major videotape, DVD manufacturing, and distribution deal with Fox Home Entertainment.

Further Reading

Brieger, Peter, Money-Losing Cinram Sticks with Strategy, National Post, June 14, 2001, p. C6.

, Will Cinram Survive Recording Shakeout?, National Post, March 29, 2001, p. D3.

Enchin, Harvey, Cinram Buys Arm of Quality, Globe and Mail, November 5, 1985, p. B2.

Hasselback, Drew, Cinram Well Prepared for High-Tech DVD Revolution, Financial Post, April 22, 1999, p. 31.

Mahood, Casey, Can Canada Compete? CD Maker Spins Its Way to Success, Globe and Mail, December 5, 1991, p. B1.

McArthur, Keith, Cinram May Climb Charts Again, Globe and Mail, December 23, 1999, p. B14.

Miles, Stephen, Cinram Still Has DVD Ace Up Its Sleeve, National Post, March 19, 1999, p. D3.

Northfield, Stephen, Cinrams Shares Pause After Lucrative Climb, Globe and Mail, April 1, 1997, p. B12.

, Cinram Tuned in to Multimedia Trends, Globe and Mail, March 7, 1996, p. B14.

Olunyk, Zena, Cinram Rides High on Cutting Edge of Technology, Financial Post, February 1, 1997, p. 21.

OReilly, Tom, Replication Doom & Gloom Forecast, Tape-Disc Business, January 1, 2001, p. 63.

Paddon, David, Cinram to Cut Jobs, Trim Costs in 2001 Following Weak Sales of CDs, CD-ROMs, Canadian Press, December 22, 2000.

Simons, Andrew, Cinram Closes Anaheim Plant, Lays Off 300,Orange County Business Journal, May 28, 2001, p. 3.

Stinson, Marian, Cinram Stock Boosted by News of Fox Deal, Globe and Mail, June 15, 2001, p. B19.

Waldie, Paul, Video Rental Machines a Challenge for Cinram, Financial Post, June 26, 1993, p. 10.

Weinberg, Paul, The Next Relic: Cinram Became a Success Making Prerecorded CDs and Tapes; Will the Internet Make Those Hard Media Obsolete?, Globe and Mail, October 29, 1999, p. 186.

Frank Uhle

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