Year-End Report

Year-End Report for AudioDev AB (PLC) 1 January - 31 December 2001 (Figures within parenthesis refer to the period January-December 2000) · Net sales amounted to SEK 215 (237) million.. AudioDev's sales continue to grow strongly within the DVD segment and sales amounted to SEK 180 (104) million. · Operating profit amounted to SEK 40 (60) million. · Cash flow from current operations amounted to SEK 19 (-8) million. · The volume of orders amounted to SEK 8 (45) million as of 31 December 2001. This volume is a result of weak demand in the branch. Jan-Dec 2001 Jan-Dec 2000 Change % Net sales, SEK millions 215.1 237.1 -9 Operating income, SEK millions 39.7 60.0 -34 - as % of net sales 18.5 25.3 - Profit for period, SEK millions 32.1 46.0 -30 - as % of net sales 14.9 19.4 - Volume of orders, SEK millions 7.7 44.8 -83 The AudioDev Group AudioDev is an international market leader in the field of testing equipment for optic media such as CDs and DVDs. With a market share of 35 percent (according to our own estimates) and a unique product range in a key growth area, AudioDev holds the strongest position in its segment of a rapidly expanding market. The base of the Company's operations is the market for optic media as a whole. The actors in this market are the content suppliers (film companies, record companies, computer gaming companies, etc.) who use CDs and DVDs to distribute their products, and the manufacturers of optic media and players for these media types. AudioDev is a supplier of production equipment for the optic media market and a leading actor in the testing equipment niche. The Company's Market Position Since its start in 1987, AudioDev has developed the de facto standards for how optic media are tested. By establishing de facto standards for how each new format is to be quality tested, we became the industry's quality control yardstick. The Parent Company has its headquarters in Malmö, where our European operations are based. Subsidiaries in the USA and Hong Kong are responsible for the American and Asian markets. In addition, AudioDev has built a network of agents in every land and region of noticeable importance. None of the Company's competitors has the same global presence. Our customers include Technicolor, Ritek Global Media, Microsoft, EMI, Samsung, Warner, Sonopress, Pioneer, Cinram, Panasonic, MBI, DAI Nippon Printing, and CMC. Four Factors that Drive the Demand for Testing Equipment 1. Demand for optic media is increasing. Music is bought on CD, information is stored on CD-R, we watch films on DVD, and so on. 2. New optic formats are introduced at an increasing rate. Recordable and re-recordable DVD-formats, DVD-ROM, and DVD-Audio (audio discs with higher capacity than CD) are a few examples. DVR is the next generation of DVD with greater capacity and better image quality. 3. Complexity is increasing. For each new format, the demand for more advanced analysers increases. 4. Development of existing formats. Product development of an established format places new demands on quality testing. Irregular Growth in the Market for Production Equipment Demand for testing equipment is dependent upon the demand for optic media, but displays another pattern. When an optic media, such as recordable DVDs for example, gains acceptance in the consumer chain, a large demand for testing equipment arises among the manufacturers. These have a tendency to over invest, which regularly leads to surplus capacity for a certain period. Then comes a new period of major investment, followed by a new period of stagnation - repeating until growth declines and the media enters a mature phase, where the demand for testing equipment is primarily comprised of re-investments and service and the like. Strong Development in underlying markets Even if the demand for testing equipment, as mentioned earlier, does not follow the optic media market, it is important to study the development of these underlying markets in order to gain a picture of the need for investment in the industry. During 2001, all these markets have experienced positive and steady development. For DVDs and CD-Rs, growth has even been higher than expected. The only media that is decreasing is CD. On a global scale, the number of DVD discs sold during 2001 equalled SEK 1.2 billion (650 million), according to the British research firm Understanding & Solutions (published during the second half of 2001). Growth is driven by the USA, which with its 563 million DVD discs (294) sold was responsible for nearly half the world's market. In total, the sales of DVD discs in various formats are expected to increase by 70 percent during 2002. Much indicates that 2002 will be the year that re-recordable DVDs experience their true breakthrough. Re-recordable DVDs enable DVD media to replace VHS cassettes, which means that the media faces considerable growth. The prognosis from Understanding & Solutions shows an increase from about 25 to about 170 million discs sold in 2002. There are currently two technical solutions that are competing to be the standard: DVD-R/RW and DVD+RW. Behind these two formats we find different arrays of companies. Sony, Philips, and Thomson are supporting the +RW format, while Pioneer, Panasonic, and others are betting on R/RW. The first recordable format launched was R/RW. Which of these formats becomes the standard is, in principle, of no importance, since during 2001 AudioDev was able to present analysers that set the standard for both DVD-R/RW and DVD+RW. Even the DVD-ROM market indicates a strong increase. A DVD-ROM can store 7-15 times as much information as a CD-ROM and the launch of Sony's Playstation 2, Nintendo's GameCube, and Microsoft's Xbox has established the trend for DVD games. Even PCs are more and more often delivered with DVD players - and in more exclusive models even with DVD burners. Since a DVD-ROM is recorded at high speed, the sensitivity for minor errors increases and the need for quality testing along with it. This is of benefit to AudioDev, since our analysers can identify any possible playability problems at an early stage. Another differentiating factor is the copy protection that more and more game manufacturers are using on their DVD-ROMs. This protection makes testing more difficult, and poses a technical problem that AudioDev has great experience in dealing with. The potential for increased demand for DVD-ROM analysers must therefore be judged as very large. As far as pre-recorded formats such as CDs and CD-ROMs are concerned, investment is judged to be low next year as well, since both formats have entered a mature phase of the product life cycle. The need for CD-R analysers is expected to increase, since this format is still in a growth phase. During 2001, the number of CD-R discs sold increased by 35 percent to SEK 5.5 (4.2) billion. Growth for 2002 is estimated at 20 percent. AudioDev's Operations 2001 During 2001, the excess capacity in the production equipment market has been greater than expected. 2001 has been the lowest growth year to date for suppliers of production equipment since the market came into being in the beginning of the 1980s. This has created major problems for all suppliers, which has led to structural shifts in the industry. Profit for the Year Against the somewhat bleak background of these conditions, 2001 can be viewed as a relatively good year for AudioDev. We have increased our position, despite the generally low level of demand for testing equipment. This is due, to a large extent, to the fact that demand for AudioDev's DVD analysers has increased dramatically - sales of DVD analysers increased by 73 percent to SEK 180 million (104). Operating profit fell to SEK 39.7 (60.0) million and sales to SEK 215.1 (237.1) million. The operating margin decreased as a result of the fact that costs could not be decreased to a level matching that of the reduced sales. A certain amount of recruitment took place during the first quarter, but since then the number of employees has decreased, a trend that did not include the R&D department however. Staff reductions will have an effect on the result in 2002. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/02/12/20020212BIT01160/bit0003.doc The full year-end report http://www.waymaker.net/bitonline/2002/02/12/20020212BIT01160/bit0003.pdf The full year-end report http://www.waymaker.net/bitonline/2002/02/12/20020212BIT01160/bit0003.xls Appendix