UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 27, 1996
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________to__________
Commission File Number 0-28426
ZOMAX OPTICAL MEDIA, INC.
(Name of small business issuer in its charter)
Minnesota #41-1833089
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5353 Nathan Lane, Plymouth, MN 55442
(Address of Principal Executive Offices)
Issuer's telephone number (612) 553-9300
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES[x] NO[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer' revenues for its most recent fiscal year. $12,887,050.
The aggregate market value of the voting stock held by non-affiliates was
$14,668,353 based on the closing sale price of the Company's Common Stock as
reported on the Nasdaq National Market on March 3, 1997.
The number of shares outstanding of the registrant's common stock as of March 3,
1997: 4,388,572 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Zomax Optical Media, Inc. 1996 Annual Report to
Shareholders for the year ended December 27, 1996, are incorporated by
reference into Parts I, II and IV of this report.
(2) Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held April 22, 1997, are incorporated by reference into Part III
of this report.
Transitional Small Business Disclosure Format (check one): YES[ ] NO[X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Zomax Optical Media, Inc. ("Zomax" or the "Company") is a full-service,
turnkey provider of high quality compact discs ("CDs"), cassettes and diskettes
and related services to a wide variety of customers, including software
publishers, computer manufacturers, recording studios, book publishers,
marketing groups, data base suppliers and other producers of multimedia products
for retail distribution. The Company began manufacturing CDs in 1993. To further
its reputation as a full-service provider of multimedia products, in 1995 Zomax
acquired the cassette manufacturing operation from Metacom, Inc., an affiliate
of the Company and its principal shareholder, and later purchased Metacom's
diskette manufacturing operation. In addition to replicating information on the
CDs, cassettes and diskettes, the Company offers its customers a "one-stop shop"
with a full range of related services such as packaging design, graphics design,
printing, packaging, warehousing and drop shipping. The Company focuses its
marketing efforts primarily on multimedia software developers and independent
record labels who desire high quality product in a short turn-around time, a
high level of customer service and competitive prices.
The Company was incorporated on February 22, 1996 and completed its
initial public common stock offering on May 10, 1996. Upon completion of the
initial public stock offering, the Company received all of the operating assets,
liabilities and debt of Zomax Optical Media Limited Partnership (the
"Partnership") in exchange for 2,800,000 shares of its common stock. Since the
exchange created a new reporting entity, the financial statements of the
Partnership prior to the offering have been captioned Predecessor Partnership.
Industry
Originally introduced in 1982, CD technology evolved from serving a
narrow set of applications to being the preferred medium for the portable
storage of digital information. In 1995, CD-Audio and CD-ROM demand was
estimated at over 1.7 billion units. Despite the surge in CD sales, the need for
audio cassettes and computer diskettes remains strong. As a full-service,
turnkey multimedia products provider, Zomax offers its customers cassettes and
diskettes as well as CDs.
CD-ROM and Diskette Market
CD-ROM (compact disc-read only memory) technology offers the massive
storage memory needed to integrate sound, video, pictures and text. Retaining
the standard compact disc size, a single CD-ROM can store approximately 630
megabytes of information (the equivalent of 200,000 pages of text) and provide a
sophisticated multimedia environment of high definition images, data, stereo
sound, video and text. CD-ROM is ideally suited to applications involving the
storage of large amounts of stable information in a form which can be
distributed to a diverse user population, including businesses, educational
institutions and consumers.
Industry sources report that computers can be found in 30% of all U.S.
households. In the U.S. alone, based on industry sources, the installed base of
CD-ROM drives grew from approximately 26.9 million in 1994 to an estimated 49.5
million by the end of 1995. The increasingly widespread presence of personal
computers that include CD-ROM drives reflects consumer demand for applications
that are generally most readily available on CD-ROM, such as software,
interactive video games, retail catalogs, encyclopedias and other digital
information. In 1994, industry sources reported that 30% of retail software
sales were on CD-ROM. In 1995, CD-ROMs are believed to have accounted for 60% of
retail software sales. Industry sources estimate that approximately 1 billion
CD-ROM units were sold in 1995.
<PAGE>
The majority of the Company's revenues are generated from CD-ROM
orders. The Company's ability to offer turnkey services efficiently in a short
turn-around time has attracted CD-ROM customers whose specialized applications
typically require more complex production runs than CD-Audio. Further, some
CD-ROM customers also need diskettes containing the same or similar information.
Few of the Company's competitors offer customers a "one-stop shop" for CD-ROMs
and diskettes. The Company estimates that the market for diskette duplication
was over 2 billion units in 1995.
As the multimedia applications for CD-ROMs expand and become more
complex, so does the need for improvements in the storage capacity of CD-ROM
units. Recently, a new format was introduced in the industry called high-density
compact disc ("HD-CD"). HD-CDs can hold up to 14 times as much data as today's
CD-ROMs. In addition to expanding the uses of CD ROM, HD-CD is likely to be the
format used to create CD-Videos. The Company intends to modify its equipment and
processes to manufacture HD-CDs as market demand for such CDs dictates. The
Company's ability to make such modifications depends in part on its ability to
obtain financing. If the Company cannot obtain such financing or successfully
make such modifications, it may need to delay or cancel its plans, which may
adversely affect its operations.
CD-Audio and Cassette Market
The first major application of CD technology was in the prerecorded
music market. Approximately 3.5 billion CD-Audio units are estimated to have
been sold in the industry (worldwide or U.S.) in 1995 compared to approximately
3 billion in 1994. Consumer acceptance of CD-Audio has been driven by its
demonstrated advantages over other formats in sound quality, random accessing
and indexing of data and by the market penetration of CD players. CD-Audio has
become the standard for home audio systems with 65% of U.S. households now
having CD-Audio players according to industry sources. Additional significant
market expansion has resulted from increased sales of in-car and portable
players. Although CD-Audio is well on its way to becoming the standard in the
audio market, the audio cassette is still prominent in the market with unit
shipments of almost 800 million in 1995.
CD-Video Market
The Company believes that full motion video on compact disc
("CD-Video") is a logical extension of CD technology. The new HD-CDs are capable
of holding a full length motion picture (135 minutes) on a standard-sized CD
with video and audio quality superior to current videocassette technology. To
achieve this new format, far greater information density will be required as
well as a new playback technology. The creators of CD-Video technology have
agreed on a format capable of meeting the technological goals mentioned above.
Industry sources anticipate the market introduction of CD-Video to occur during
1997. Although the Company is not yet technically capable of manufacturing the
new format CDs, it expects to develop the capability to offer these
manufacturing services. If the Company cannot secure the financing it will need
to develop the CD-Video manufacturing capability, or successfully implement such
capability, its operations may be adversely affected.
<PAGE>
Manufacturing
Compact Discs
A compact disc is an injection molded plastic product that has digital
information stored on it through a series of microscopic indentations called
"pits" that can be "read" by a laser. The CD manufacturing process consists of
three stages: (i) preproduction which involves pre-mastering, mastering and
electroplating, (ii) replication using a fully integrated robotic line process
and printing using high speed six-color printing presses and (iii) packaging and
fulfillment. Except for preproduction, the manufacturing process is the same for
both CD-Audio and CD-ROM. The Company owns five inline compact disc machines,
each of which integrates the molding, metalizing, lacquering and inspection
processes. The machines feature full robotics and automated computer controls
and can run 24 hours a day depending on the number of orders and amount of
downtime, if any. Each machine has a theoretical capacity of over 5,000,000
units per year; however, a more practical capacity is approximately 4,000,000
units per year. In addition to maintenance and repairs, the actual capacity is
impacted by the quantity of each CD manufactured. The larger the run size per
title, the less impact the setup time has upon actual capacity.
Cassettes
Audio cassettes are mass-duplicated from a master tape which is run on
an endless loop on a high speed duplicating system comprised of a master unit
which feeds audio programming to "slave" units. The slave units make copies as
the master unit runs and reruns the tape, creating large reels or "pancakes" of
tape recorded with information. The tape is then fed into cassette loaders which
remove the duplicated tape off the reel and place it into cassette housings.
These housings are then labeled or imprinted and combined with graphics. The
final step in the manufacturing process is the packaging and shipping of the
cassettes.
Diskettes
The computer diskette is duplicated on multiple duplicating drives
which are connected to a PC-based controller. The master diskette is read into
the system and the controller sends the image of the master to each duplicating
drive. The operator loads blank diskettes into a hopper on each duplicating
drive and the system writes the information to the blank diskettes and verifies
the duplication. Each drive can duplicate and verify a full diskette in about 12
seconds. After duplication, the diskettes are labeled at a labeling machine.
After labeling, if the order calls for several diskettes to be assembled into a
multi-disk set, the diskettes are collated by an automatic collator which can
handle sets of up to six diskettes in a single operation. Diskettes or sets of
diskettes are retail packaged as necessary.
Sales and Marketing
The Company markets and sells its multimedia products and services to a
wide variety of customers, including software publishers, computer
manufacturers, recording studios and other producers for retail distribution,
book publishers, marketing groups and data base suppliers. Zomax focuses its
marketing efforts primarily on a niche of various media markets, such as
multimedia software publishers and independent record labels, that require
personal service, flexibility, fast turn-around time and the turnkey services
the Company offers such as packaging design, graphics design, printing,
packaging, warehousing and drop shipping.
The Company has obtained select authorized replicator status with
Microsoft, Inc. that allows the Company to replicate Microsoft(R) products for
Gateway 2000, a licensee of Microsoft(R) products. In addition, the Company has
passed the rigorous testing required to become an Apple(R)-approved vendor,
however, no significant sales to date have resulted from attaining this status.
<PAGE>
The Company's major customers include Gateway, a major manufacturer of
IBM-compatible personal computers, and Metacom, a supplier of audio cassettes.
Metacom is a significant shareholder of the Company and an affiliate of the
Company's Chairman of the Board, Phillip T. Levin. In 1996 and 1995, Gateway
accounted for 26.1% and 15.9% of the Company's total revenues, respectively, and
Metacom accounted for 8.6% and 19.1% of the Company total revenues,
respectively.. In 1996, Triad/Compass Productions accounted for 11.8% of the
Company's total revenues.
The Company's sales representatives are responsible for maintaining
relationships with their existing customers and developing new business
relationships. The sales representatives are supported by a customer service
staff that is responsible for ensuring that each order is processed on a timely
basis, that all required support materials are in place and that quality levels
are achieved.
Competition
Competition is intense in the multimedia products and services market.
The industry, in general, is experiencing growth, evidenced by the increase in
the number of businesses becoming CD manufacturers, a trend which may continue.
There are a number of national and regional companies which manufacture CDs,
cassettes and diskettes, many with significantly greater resources than the
Company.
CD-ROM and CD-Audio manufacturing is dominated by manufacturing
organizations affiliated with major international music companies, such as Sony,
PolyGram, Warner, BMG and EMI. Independent record producers are generally
serviced by the "non-affiliated" or independent CD manufacturers (including the
Company) because of their smaller average unit runs and their greater need for a
broad range of services such as pre-mastering, mastering replicating, packaging
and shipping in addition to short turn-around times. The major international
music company CD manufacturers and independent CD manufacturers collectively
produced a majority of the 1994 worldwide output of CD-ROM and CD-Audio. The
remaining 1994 CD-ROM and CD-Audio worldwide output was produced by many small
and medium scale CD manufacturing operations. In the U.S., the Company's
independent competitors include Disctronics, Inc. ("Disctronics"), Disc
Manufacturing Inc. (a subsidiary of Quixote Corporation) ("DMI"), JVC America,
Inc., Denon Electronics, Inc., KAO Infosystems Company ("KAO"), Imation Corp.
and Nimbus CD International, Inc.
The Company believes that the principal competitive factors in its
market are quality, service, reliability, price and timely delivery of product.
The Company believes that it competes favorably with its competitors with
respect to each of these factors. To enhance its competitive position, the
Company also offers a full range of services to customers including design,
preparation and printing of artwork and packaging, warehousing and shipping. The
Company also believes that its competitive position is enhanced by its ability
to provide its customers with both cassettes and diskettes as well as CDs. With
the increased production capacity in the market, CD prices have declined and CD
pricing has become an increasingly important factor in obtaining sales. The
Company believes that the quality of its products and services and its ability
to accommodate tight delivery schedules to some extent offset the price
competition currently existing in the market.
Other existing technologies also compete with the Company's products
which deliver digital information. Portable media, such as digital audio tape,
digital compact cassette and mini-disc have already been introduced commercially
but have not yet achieved widespread consumer acceptance. In addition, one-time
recordable CDs ("CD-R") are available and are often used to replicate short run
products that are more expensive to manufacture in the traditional manner.
Electronic on-line delivery of digital information, such as through the
Internet, is also a potential future competitor of CD-ROM.
<PAGE>
Proprietary Rights
Zomax, like most other CD manufacturers, uses patented technology
primarily under nonexclusive licenses. These licenses generally provide for the
payment of royalties based upon the number, size and use of CDs sold and
terminate either upon the expiration of the patent being licensed or on a date
certain.
Zomax currently has license agreements with U.S. Philips Corporation
("Philips") and Discovision Associates ("DVA"). The Philips license grants to
Zomax a non-exclusive, non-transferable license to make, use and sell licensed
products in the United States. The license further provides that any patent
rights not yet licensed which are essential to the manufacturing, use or sale of
licensed products, which Sony or Philips may acquire in the future, will be
licensed to Zomax on reasonable, non-discriminatory terms. Under the license
agreement, Zomax is obligated to make certain royalty payments to Philips. The
amount of the payment is determined by the number of CDs manufactured, their
size and their use. The Company's license from Philips expires in 2006.
Similarly, DVA has granted Zomax a non-exclusive, royalty bearing
license to make, use, rent, lease or sell CDs which make use of the DVA patents.
The royalty payments due under the DVA license depends of the number of CDs
manufactured, their size and their use. The term of the DVA license continues
until the expiration of the last DVA patent.
In July 1995, the Company received a notice from a French company,
Thomson, which claims that it also owns rights to certain US patented CD
manufacturing technology. This notice also offered the Company a license to such
technology on terms similar to those of the licenses with Philips and DVA. If
Thomson were to pursue any action against the Company, it is expected that a
license could be negotiated and the results would not a material effect on the
Company's financial position or results of operations, although there can be no
assurance that a license could be negotiated on terms favorable to the Company
or at all. If the Company is unsuccessful in negotiating a license with Thomson
and if the Company is found to have infringed the Thomson patents, the Company
may be required to pay damages to Thomson.
The Company has received trademark registrations in the U.S. for the
name "Zomax Optical Media" and for the logo containing the same name.
Employees
The Company has approximately 150 full-time employees and hires
temporary employees as the need arises. The Company currently operates 24 hours
a day, seven days a week. The Company believes that its relations with its
employees are good. None of the Company's employees is covered by a collective
bargaining agreement. Pursuant to a Services Agreement with Metacom, the Company
receives for cost certain management information and related computer services.
The Company has begun the process of moving such services in-house and expects
to complete such move during 1997. See "Certain Relationships and Related
Transactions."
Cautionary Statements
Certain of the statements contained herein and in the Annual Report are
forward looking, based on current expectations and are made pursuant to the safe
harbor provisions of the Private Securities Reform Act of 1995. As stated
therein, there are certain important factors that could cause results to differ
materially from those anticipated by those statements. Investors are cautioned
that all forward-looking statements involve risk and uncertainty.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company shares a manufacturing, office and warehouse facility with
Metacom and another affiliate of Mr. Levin, the Company's Chairman of the Board.
The facility is owned by Metacom and the Company leases space from it pursuant
to a lease which expires on December 31, 1997, but is subject to three renewals,
each for a three-year period, at the option of Zomax. The Company occupies
approximately 9,000 square feet of office space, 11,000 square feet of
production space and 43,000 square feet of warehouse space. Also, the Company
has the option to rent additional office and warehouse space as its needs
dictate and expects it will exercise such option as it expands its operations.
Management believes this arrangement will provide adequate facilities for the
Company for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the section entitled
"Common Stock" appearing on page 19 of the Company's Annual Report to
Stockholders for the year ended December 27, 1996. Such information is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The information required by this item is contained in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" beginning on page 5 of the Company's Annual Report to Stockholders
for the year ended December 27, 1996. Such information is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is contained in the sections entitled
"Balance Sheets", "Statements of Operations," Statements of Changes in Partners'
Capital and Shareholders' Equity," "Statements of Cash Flows," "Notes to
Financial Statements" and Report of Independent Public Accountants beginning on
page 8 of the Company's Annual Report to Stockholders for the year ended
December 27, 1996. Such information is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16A OF THE EXCHANGE ACT
The information concerning the Company's directors and executive officers and
compliance with Section 16(a) required by this item is contained in the sections
entitled "Election of Directors," "Executive Officers of the Company" and
"Compliance with Section 16(a) of the Exchange Act," appearing in the Company's
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held on April 22, 1997.
Such information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained in the section entitled
"Executive Compensation" appearing in the Company's Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on April 22, 1997. Such information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections entitled
"Principal Shareholders and Management Shareholdings " appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on April 22, 1997. Such information is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled
"Certain Transactions" appearing in the Company's Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on April 22, 1997. Such information is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included in this report: See "Exhibit Index"
immediately following the signature page of this Form 10-KSB.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996.
Subsequently, the Company filed a Form 8-K dated March 17, 1997 to report the
proposed acquisition of Benchmark Media Services, Inc.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZOMAX OPTICAL MEDIA, INC.
Date: March 25, 1997
By/s/ James T. Anderson
James T. Anderson
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated below.
Each person whose signature appears below constitutes and appoints James T.
Anderson and James E. Flaherty as the undersigned's true and lawful attorneys-in
fact and agents, each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all amendments to this Annual Report on Form 10-KSB and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granted unto said
attorney's-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Name Title Date
/s/ James T. Anderson President, Chief Executive Officer March 25, 1997
James T. Anderson and Director (principal executive
officer)
/s/James E. Flaherty Chief Financial Officer March 25, 1997
James E. Flaherty and Secretary (principal financial
and accounting officer)
/s/Phillip T. Levin Chairman of the Board March 25, 1997
Phillip T. Levin
/s/Robert Ezrilov Director March 25, 1997
Robert Ezrilov
/s/Howard P. Liszt Director March 25, 1997
Howard P. Liszt
/s/Janice Ozzello Wilcox Director March 25, 1997
Janice Ozzello Wilcox
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended: Commission File No.
December 27, 1996 0-28426
Exhibit
Number Description
2.1 Form of Stock Purchase Agreement (1)
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Stock Certificate (1)
4.2 Articles of Incorporation (1)
4.3 Bylaws (1)
4.4 Form of Representative Warrant (1)
10.1 1996 Stock Option Plan and forms of Incentive Stock Option and
Non-qualified Option Agreements (1)*
10.2 1996 Employee Stock Purchase Plan (1)*
10.3 Manufacturing Agreement between the Company and Metacom, Inc.
dated January 1, 1995 (1)
10.4 Services Agreement between the Company and Metacom, Inc. dated
January 1, 1995 (1)
10.5 Lease between the Company and Metacom, Inc. dated January 1,
1995 (1)
10.6 Employment Agreement with James T. Anderson dated March 1,
1996 (1)*
10.7 License Agreement with U.S. Phillips Corporation effective
January 1, 1996 (1)
10.8 License Agreement with Discovision Associates dated January 1,
1994 (1)
10.9 Loan and Security Agreement with Phoenixcor, Inc. dated
May 24, 1993 (1)
10.10 Loan and Security Agreement with Phoenixcor, Inc. dated
July 22, 1993 (1)
10.11 Loan and Security Agreement with Phoenixcor, Inc. dated
February 10, 1994 (1)
10.12 Loan and Security Agreement with Phoenixcor, Inc. dated
July 5, 1995 (1)
10.13 Promissory Note issued by the Company to Norwest Equipment
Finance, Inc. dated May 22, 1996 and related documents (1)
10.14 Revolving Credit and Term Loan Agreement between the
Company and Marquette Capital Bank dated December 31, 1995 (1)
10.15 Amendment to Manufacturing Agreement between the Company
and Metacom Inc. dated January 31, 1997.
11 Computation of Earnings Per Share
13.1 Portions of Annual Report to Stockholders for the year ended
December 27, 1996
23.1 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of this report)
27 Financial Data Schedule (included in electronic version only)
. (1) Incorporated by reference to the corresponding exhibit
numbers to S-1 Registration Statement, SEC File No.
333-2430.
*Management agreement or compensatory plan or arrangement.
AMENDMENT #1 TO MANUFACTURING AGREEMENT
BY AND BETWEEN ZOMAX OPTICAL MEDIA, INC. AND
METACOM, INC. DATED JANUARY 1, 1995
DATE: JANUARY 31, 1997
RECITALS:
A. As of January 31, 1997, Metacom had not fulfilled its 1996
obligations to purchase the unit commitments of 2,000,000 cassette tapes and
1,000,000 compact discs in section 2.4 of the Manufacturing Agreement. Metacom
was short 152,321 compact discs and 619,191 cassette tapes from meeting its 1996
unit commitments.
B. Whereas the Manufacturing Agreement is in existence until December
31, 1997 and the parties wish to continue doing business past December 31, 1997.
AGREEMENT:
The parties hereto, each intending to be legally bound, agree as follows:
Unit Commitment Shortage
Zomax will grant a one year grace period in which Metacom can make-up
its 1996 unit commitment shortages and not be subject to the lost profit payment
outlined in Section 2.4 of the Manufacturing Agreement. During 1997, Metacom
must purchase the 1996 unit commitment shortages (as stated above) as well as
the 1997 yearly commitment specified by the agreement (this totals 1,152,321
CD's and 2,619,191 cassette tapes). If Metacom fails to fulfill these
obligations during 1997, it will be subject to the lost profit payment outlined
in Section 2.4 of the Manufacturing Agreement.
The pricing of the 1996 unit commitment shortage quantities will be
consistent with the prices charged for 1996 orders and shipments. The pricing
for the 1997 unit commitments will be as determined as outlined in Section 3.1
of the Agreement.
Contract Extension
In consideration for the granting of the grace period and the mutual
desire to extend the relationship between the parties, the parties agree to
extend the Manufacturing Agreement for a period of three years. The three year
extension shall continue in effect until December 31, 2000. During the three
year extension period Metacom will not have any unit commitments but pledges to
purchase all of its media needs with Zomax. Pricing of the new product orders in
the three year extension period will be as determined as outlined in Section 3.1
of the Agreement.
Other Provisions
All other provisions of the Manufacturing Agreement shall survive and
continue through the extended contract expiration period.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment #1
to the Manufacturing Agreement as of the date above written.
ZOMAX OPTICAL MEDIA, INC.
By: /s/ James T. Anderson
James T. Anderson
Its: Chief Executive Officer
METACOM, INC.
By: /s/ Phillip T. Levin
Phillip T. Levin
Its: President/CEO
Exhibit 11
ZOMAX OPTICAL MEDIA, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
(Predecessor Partnership)
Period From May 11
Through December Period From
27, January 1 Year ended
Primary Earnings Per Share: 1996 Through May 10, December 31, 1995
1996
-------------------- ----------------- -------------------
<S> <C> <C> <C>
Net income $ 984,331
==========
Weighted average number of shares
outstanding 4,337,465
Dilutive effect of stock options after application of
treasury stock method 17,969
----------
4,355,434
==========
Earnings Per Share $ .23
==========
Pro Forma:
Net income $ 306,897 $ 539,974
========== ==========
Weighted average number of shares
outstanding (1) 2,800,000 2,800,000
========== ==========
Earnings Per share $ .11 $ .19
========== ==========
Fully Diluted Earnings Per Share:
Net Income $ 984,331
==========
Weighted average number of shares
outstanding 4,337,465
Dilutive effect of stock options after application of
treasury stock method 17,969
----------
4,355,434
Earnings Per Share $ .23
==========
</TABLE>
(1) Reflects the issuance of stock issued within the 12-month period prior to
the public offering at a price less than the proposed public offering price
using the treasury stock method pursuant to Securities and Exchange
Commission Staff Bulletin No. 83.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a full-service, turnkey provider of CDs, cassettes,
diskettes and related services. The Company services the multimedia needs of a
wide variety of customers, including software distributors, computer
manufacturers, recording studios and other producers of multimedia products for
retail distribution, publishers, marketing groups and data base suppliers. In
addition to actually replicating information on CDs, cassettes, and diskettes,
the Company offers its customers a "one-stop shop" with a full range of related
services such as package design, graphics design, printing, packaging,
warehousing and drop shipping. The Company began manufacturing CDs in 1993. To
further its reputation as a full-service provider of multimedia products, in
1995 the Company acquired cassette manufacturing equipment and added diskette
manufacturing to its operations.
Zomax Optical Media, Inc. (the Company) was incorporated on February
22, 1996 and completed its initial public stock offering of its common stock on
May 10, 1996. Upon completion of the initial public stock offering, the Company
received all of the operating assets, liabilities, and debt of Zomax Optical
Media Limited Partnership (Partnership) in a tax-free exchange for 2,800,000
shares of its common stock. This transfer was accounted for at historical cost
with no change in the book and tax bases of the assets contributed and
liabilities and debts assumed, except for tax effects resulting from converting
from a partnership to a corporation. Since the exchange created a new reporting
entity, the financial statements of the Partnership prior to the offering have
been captioned Predecessor Partnership.
Results of Operations
The following table sets forth certain operating data as a percentage
of sales for the periods indicated.
<TABLE>
<CAPTION>
(Predecessor
Partnership)
For the Period (Predecessor
Period From May 11 from Jan. 1 Partnership)
Through Dec. 27, 1996 Through May 10, For the Year Ended
1996 Dec. 31, 1995
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold 71.2% 72.2% 75.9%
----- ----- -----
Gross profit 28.8% 27.8% 24.1%
SG&A 16.3% 16.9% 15.5%
----- ----- -----
Operating income 12.5% 10.9% 8.5%
Interest expense (1.7)% (2.4)% (2.4)%
Interest income 2.0% .4% .5%
---- --- ---
Income before income taxes 12.8% 8.9% 6.7%
---- ----
Income taxes 5.2%
-----
Net income 7.6%
-----
</TABLE>
<PAGE>
Year Ended December 27, 1996 Compared to Year Ended December 31, 1995
Sales
Sales increased 40.3% to $18,547,796 in 1996 for the combination of the
Predecessor Partnership and the Company from $13,217,539 in 1995. The higher
sales in 1996 resulted principally from a 46% increase in CD sales and the
addition of diskette duplicating services, offset by a 16% decline in cassette
sales. Substantially all of the increase in CD sales in 1996 was due to an
increase in the number of units sold. The Company believes the growth in CD
sales resulted from increased production capacity which allowed the Company to
manufacture more CDs and thereby compete more effectively in the rapidly growing
CD-ROM market, increased marketing efforts and the strategy of being a full
service provider of multimedia products and related services. Cassette unit
sales declined approximately 16% in 1996 principally due to lower sales to one
customer.
Cost of goods sold
Cost of goods sold as a percentage of sales was 71.6% and 75.9% for
1996 and 1995, respectively. The Company was able to decrease the cost of goods
sold percentage through increased production and improved plant efficiency. The
Company outsourced 3% of its CD manufacturing during the year ended December 27,
1996 as compared to 35% in 1995. The cost for such outsourced production is
significantly higher than the cost of CDs produced by the Company. The Company
was able to reduce its outsourcing by increasing its CD manufacturing capacity
by approximately 10.0 million units in 1996 through the purchase of new
machinery.
Selling, general and administrative
Selling, general and administrative expense increased as a percentage
of sales to 16.4% in 1996 from 15.5% in 1995. The increase in 1996 resulted
principally from an increase in salary expense, resulting from hiring additional
corporate staff in sales, customer service, accounting and other administrative
functions. In 1996, the Company also increased its reserve for doubtful accounts
principally due to the uncertainty regarding the collection of a $209,000
receivable balance and an overall increase in accounts receivable balances. In
1996, the Company also incurred additional costs of being a public company.
Interest income (expense)
Interest income increased to $284,624 in 1996 from $70,956 in 1995. The
increase in interest income resulted from the investment of the proceeds of the
Company's initial public offering in May, 1996. Interest expense increased to
$357,166 in 1996 from $318,087 in 1995 as the result of increased borrowings to
finance purchases of additional CD manufacturing equipment in 1996.
Income tax expense
The Company's effective income tax rate for the period from May 11,
1996 through December 27, 1996 was 40.4%. Prior to May 11, 1996, the Company
operated as a partnership for income tax purposes.
Liquidity and Capital Resources
As of December 27, 1996, the Company had cash totaling $6,914,899 and
working capital of $7,110,373. The increase in cash and working capital from
1995 levels of $936,662 and $1,019,496, respectively, resulted from the
completion of the Company's initial public offering on May 10, 1996. Total
proceeds to the Company from the sale of 1,585,000 shares of common stock were
$9,251,850, net of offering costs. The Company has committed to the purchase of
mastering equipment with an estimated cost of $4.0 million and plans to purchase
additional CD manufacturing and related equipment totaling $3.0 million in 1997.
The Company plans to finance these purchases with long term financing and cash.
The Company has a revolving line of credit facility for up to $1.5 million of
borrowings limited to an amount based on a formula using eligible accounts
receivable and inventories. There were no borrowings outstanding under the
revolving line of credit facility at December 27, 1996. The Company believes
that it has sufficient liquidity and capital resources to meet its operating
needs and capital expenditure requirements for the foreseeable future.
<PAGE>
In 1996, the Company generated $2.1 million of cash from operations
while in 1995, the Company used cash in operations totaling $182,000. The use of
cash for operating activities in 1995 principally resulted from a $2.5 million
increase in accounts receivable. In 1996, the Company purchased $4.0 million of
equipment as compared to $2.4 million in 1995. During 1996, the Company financed
equipment purchases totaling $791,000 with long term debt compared to $2.1
million financed with long term debt in 1995. During the period when the
Partnership existed, $1.5 million of capital contributions were received in 1995
and partners distributions were $1.1 million and $230,000 in 1996 and 1995,
respectively.
In February 1997, the Company signed a letter of intent to purchase all
outstanding stock of Benchmark Media Services, Inc., a manufacturer, replicator
and marketer of compact discs and diskettes. The Company intends to use a
combination of cash and bank debt to finance this acquisition.
Seasonality
The demand for CDs and other multimedia consumer products is seasonal,
with increases in the fall reflecting increased demand relative to the new
school year and holiday season purchases. This seasonality could result in
significant quarterly variations in financial results, with the third and fourth
quarters generally being the strongest.
Inflation
Historically, inflation has not had a material impact on the Company.
The cost of the Company's products is influenced by the cost of raw materials
and labor. There can be no assurance that the Company will be able to pass on
increased costs to its customers in the future.
Outlook
The statements contained in this Outlook section are based on current
expectations. These statements are forward looking and are made pursuant to the
safe harbor provisions of the Private Securities Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risk and uncertainty.
The Company believes the total number of CDs sold worldwide will
continue to grow in 1997. Further, 1997 unit prices are expected to decrease as
a result of an increase in the number of CD manufacturers and higher production
capacity for existing manufacturers. The Company believes it has an organization
in place that will support the expected increase in sales growth with a minimum
increase in salaried personnel.
The Company plans to expand its manufacturing capacity through new
equipment purchases in 1997 including the installation of CD glass mastering
equipment during the second quarter of 1997 and additional molding equipment in
the second half of 1997. The Company believes that these advancements will allow
it to pursue a broader customer base and improve the quality of its products.
The Company intends to finance these purchases with long term financing and
existing cash. Additionally, the Company intends to expand its operations
nationally by increasing its presence on the East and West coasts as well as the
South through plant start-ups or acquisitions. There can be no guarantee that
the Company will be able to secure the necessary financing or find suitable
expansion opportunities. Its inability to do so will result in the delay or
cancellation of planned equipment purchases and the need to forego other growth
plans, which may adversely impact the Company's ability to meet market demand or
expand operations.
If the CD market demand does not continue to grow as expected, revenue
growth would be adversely impacted and the manufacturing capacity installed may
be underutilized. Pricing strategies of competitors and general economic
factors, such as consumer confidence and inflation, all impact the Company.
<PAGE>
COMMON STOCK
The Company's common stock began trading on May 10, 1996, on the Nasdaq
National Market under the symbol "ZOMX," in connection with its initial public
offering. Prior to May 10, 1996, there was no public market for the Company's
Common Stock. A summary of the range of high and low bid quotations for the
Company's common stock for the period from May 10, 1996 to December 27, 1996, is
presented below. These prices reflect interdealer prices and do not include
retail markups, markdowns or commissions.
High Low
1996
Second Quarter (May 10, $7.75 $6.75
1996 - June 30, 1996)
Third Quarter $8.63 $6.75
Fourth Quarter $7.88 $5.00
The Company has never paid cash dividends on its capital stock and does
not anticipate declaring or paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings for the development of its
business.
As of March 3, 1997, the Company had 85 stockholders of record,
excluding stockholders whose stock is held either in nominee name and/or street
name brokerage accounts. Based on information which the Company has obtained
from its transfer agent, there are approximately 1,500 stockholders whose stock
is held either in nominee name and/or street name brokerage accounts.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zomax Optical Media, Inc.:
We have audited the accompanying balance sheets of Zomax Optical Media, Inc. (a
Minnesota corporation which operated as Zomax Optical Media Limited Partnership
through May 10, 1996) as of December 27, 1996 and December 31, 1995, and the
related statements of operations, changes in partners' capital and shareholders'
equity and cash flows for the periods from May 11, 1996 through December 27,
1996 and January 1, 1996 through May 10, 1996 and for the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zomax Optical Media, Inc. as of
December 27, 1996 and December 31, 1995, and the results of its operations and
its cash flows for the periods from May 11, 1996 through December 27, 1996 and
January 1, 1996 through May 10, 1996 and for the year ended December 31, 1995,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 24, 1997
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Balance Sheets
<TABLE>
<CAPTION>
(Predecessor
Partnership)
December 27, 1996 December 31, 1995
----------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,914,899 $ 936,662
Accounts receivable, net of
allowance for doubtful accounts
of $531,000 and $110,000 3,944,929 3,019,333
Inventories 1,262,665 787,198
Prepaid expenses 110,443 102,234
----------- ----------
Total current assets 12,232,936 4,845,427
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,983,875 and $938,904 7,574,501 4,662,406
RESTRICTED CASH (Note 2) 135,249 391,406
OTHER ASSETS, net 12,167 5,167
----------- ----------
$19,954,853 $9,904,406
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL/ SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 1,508,607 $1,216,375
Accounts payable 1,590,088 1,767,262
Accrued expenses 1,510,049 719,065
Income taxes payable 513,819 -
Preferential distribution to partners - 123,229
----------- ----------
Total current liabilities 5,122,563 3,825,931
NOTES PAYABLE, net of current portion 1,714,374 2,589,218
COMMITMENTS AND CONTINGENCIES (Notes 2, 9 and 10)
PARTNERS' CAPITAL - 3,489,257
----------- ----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 authorized
shares, 4,385,000 shares issued and outstanding 12,133,585 -
Retained earnings 984,331 -
----------- ----------
Total shareholders' equity 13,117,916 -
----------- ----------
$19,954,853 $9,904,406
=========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Statements of Operations
<TABLE>
<CAPTION>
(Predecessor Partnership)
Period From Period From
May 11 Through January 1 Year Ended
December 27, Through May 10, December 31,
1996 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
SALES $12,887,050 $5,660,746 $13,217,539
COST OF SALES 9,180,325 4,089,721 10,036,991
---------- ---------- ----------
Gross profit 3,706,725 1,571,025 3,180,548
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,094,741 956,239 2,053,443
---------- ---------- ----------
Operating income 1,611,984 614,786 1,127,105
INTEREST EXPENSE (221,266) (135,900) (318,087)
INTEREST INCOME 261,613 23,011 70,956
---------- ---------- ----------
Income before income taxes 1,652,331 501,897 879,974
PROVISION FOR INCOME TAXES 668,000
----------
NET INCOME $ 984,331
==========
EARNINGS PER SHARE $ 0.23
==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,355,434
==========
PRO FORMA:
Provision for income taxes 195,000 340,000
--------- ---------
Net income $ 306,897 $ 539,974
========= =========
Earnings per share $ 0.11 $ 0.19
========= =========
Weighted average number of shares outstanding 2,800,000 2,800,000
========= =========
</TABLE>
The accompanying notes are an integral part of these tatements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Statements of Changes in Partners' Capital and Shareholders' Equity
<TABLE>
<CAPTION>
Shareholders' Equity
---------------------------------------------------------
Partners' Common Retained
Capital Shares Stock Earnings Total
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $1,634,632 - $ - $ - $ 1,634,632
Partner capital contributions,
net of issuance costs 1,527,735 - - - 1,527,735
Repurchase of limited interests (300,000) - - - (300,000)
Net income for the Predecessor Partnership 879,974 - - - 879,974
Distribution to partners (253,084) - - - (253,084)
---------- --------- ----------- --------- -----------
BALANCE, December 31, 1995 3,489,257 - - - 3,489,257
Net income for the Predecessor Partnership 501,897 - - - 501,897
Distribution to partners (1,109,419) - - - (1,109,419)
---------- --------- ----------- --------- -----------
BALANCE, May 10, 1996 2,881,735 - - - 2,881,735
Issuance of common stock at initial public
offering at $6.75 per share, net of
offering costs of $1,446,900 - 1,585,000 9,251,850 - 9,251,850
Transfer of partnership interests in exchange
for common stock in the Company (2,881,735) 2,800,000 2,881,735 - -
Net income for the Company for the period from
May 11, 1996 to December 27, 1996 - - - 984,331 984,331
---------- --------- ----------- --------- -----------
BALANCE, December 27, 1996 $ - 4,385,000 $12,133,585 $984,331 $13,117,916
========== ========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
(Predecessor Partnership)
--------------------------------
Period From Period From
May 11 Through January 1 Year Ended
December 27, Through May 10, December 31,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 984,331 $ 501,897 $ 879,974
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization 720,076 326,876 542,122
Deferred income taxes (9,000) - -
Changes in operating assets and liabilities:
Accounts receivable (1,153,064) 227,468 (2,527,001)
Inventories (534,208) 58,741 (375,488)
Prepaid expenses 6,833 (15,042) (99,397)
Accounts payable 152,894 (330,068) 1,062,782
Accrued expenses 734,493 (66,738) 335,354
Income taxes payable 513,819 - -
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,416,174 703,134 (181,654)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,867,837) (1,089,210) (2,361,683)
Sale of financial instruments 249,408 265,749 519,275
Purchase of financial instruments - (259,000) (391,406)
------------ ------------ ------------
Net cash used in investing activities (2,618,429) (1,082,461) (2,233,814)
------------ ------------ ------------
FINANCING ACTIVITIES:
Capital contributions, net of issuance costs - - 1,527,735
Proceeds from notes payable-
Affiliate - - 207,341
Other - 790,500 1,845,171
Repayment of notes payable-
Affiliate (52,848) (25,327) (129,167)
Other (906,687) (388,250) (685,782)
Short-term borrowings (300,000) 300,000 -
Repurchase of limited interests - - (300,000)
Distribution to partners - (1,109,419) (229,855)
Proceeds from sale of common stock, net of offering costs 9,251,850 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities 7,992,315 (432,496) 2,235,443
------------ ------------ ------------
Net increase (decrease) in cash 6,790,060 (811,823) (180,025)
CASH AND CASH EQUIVALENTS:
Beginning of period 124,839 936,662 1,116,687
------------ ------------ ------------
End of period $6,914,899 $ 124,839 $ 936,662
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 221,155 $ 135,900 $ 296,524
============ ============ ============
Cash paid for income taxes $ 162,000 $ - $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral art of these statements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Notes to Financial Statements
December 27, 1996 and December 31, 1995
1. Business Description:
Zomax Optical Media, Inc. (the Company) was incorporated on February 22, 1996
and completed its initial public common stock offering on May 10, 1996. Upon
completion of the initial public stock offering, the Company received all of the
operating assets and liabilities of Zomax Optical Media Limited Partnership in
exchange for 2,800,000 shares of its common stock. Since the exchange created a
new reporting entity, the financial statements of Zomax Optical Media Limited
Partnership prior to the offering have been captioned Predecessor Partnership.
The Company is a full-service provider of compact discs (CDs), cassettes,
diskettes and related services to a variety of customers operating primarily in
North America.
2. Summary of Significant Accounting Policies:
Revenue Recognition
The Company records sales to its customers at the time merchandise is shipped.
For certain customers, merchandise is invoiced upon completion of orders with
shipment occurring based on written customer instructions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
Ultimate results could differ from those estimates.
Concentrations of Credit Risk
The Company markets and sells its multimedia products and services through its
own sales force to a wide variety of customers, including recording studios and
other producers for retail distribution, distributors, software developers,
publishers, marketing groups and database suppliers.
At December 27, 1996, Metacom, Inc. (Metacom) (see Note 8) accounted for 17.9%
of the Company's accounts receivable, and three unaffiliated customers accounted
for 15.9%, 13.0% and 12.1% of accounts receivable.
For the year ended December 27, 1996, two customers accounted for 26.1% and
11.8% of the Company's sales. For the year ended December 31, 1995, two
customers accounted for 19.1% and 15.9% of the Company's sales.
<PAGE>
Cash and Cash Equivalents
Cash equivalents consist of highly liquid short-term investments with original
maturities of 90 days or less and are recorded at cost, which approximates
market value.
Inventories
Inventories, consisting of material, labor and overhead, are stated at the lower
of first-in, first-out cost or market.
Inventories were as follows:
December 27, December 31,
1996 1995
------------ ------------
Raw materials $1,132,083 $663,707
Finished goods 126,316 109,272
Work in process 4,266 14,219
------------ ------------
$1,262,665 $787,198
============ ============
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are charged
to expense as incurred, while significant betterments are capitalized.
Depreciation is calculated using the straight-line method for financial
reporting purposes over the following estimated useful lives:
Property and equipment consisted of the following:
December 27, December 31,
1996 1995 Lives
------------ ------------ ---------
Manufacturing equipment $8,782,310 $5,360,874 7 years
Office equipment 630,742 129,174 5-7 years
Building improvements 116,406 111,262 Lease term
Vehicles 28,918 - 5 years
------------ ------------
9,558,376 5,601,310
Less- Accumulated depreciation (1,983,875) (938,904)
------------ ------------
Property and equipment, net $7,574,501 $4,662,406
============ ============
Restricted Cash
Restricted cash represents amounts invested in certificates of deposit held as
collateral for notes payable (see Note 3). The rights to the certificates of
deposit had been assigned to the lender and were released in January 1997.
<PAGE>
Other Assets
Other assets consist of organization costs, which are amortized over five years,
and deferred taxes. At December 27, 1996 and December 31, 1995, accumulated
amortization was $6,833 and $4,833, respectively.
Accrued Expenses
Accrued expenses consisted of the following:
December 27, December 31,
1996 1995
------------ ------------
Accrued royalties $ 793,468 $283,000
Accrued compensation 466,896 300,731
Other 249,685 135,334
------------ ------------
$1,510,049 $719,065
============ ============
The Company accrues for all known royalties using estimated rates on all units
manufactured. Currently, the Company has license agreements with two companies
for the use of certain CD manufacturing technology. In 1995, a third company
approached the Company and claimed it also owns rights to certain patented CD
manufacturing technology. The Company believes that the resolution of this
matter will not have a material effect on the Company's financial position or
results of operations.
Income Taxes
Deferred income taxes are provided for differences between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, based on income tax rates in effect at the balance sheet date.
Fair Value of Financial Instruments
The financial instruments with which the Company is involved are primarily of a
traditional nature. For most instruments, including cash, receivables, accounts
payable, accrued expenses and short-term debt, the Company has assumed that the
carrying amounts approximate fair value because of their short-term nature.
Earnings Per Share
Primary and fully diluted earnings per common share are based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares include the dilutive effects of stock options
and warrants which are assumed to be exercised or converted to common stock at
the beginning of the applicable period. Common stock and common stock
equivalents issued during the 12-month period prior to the initial filing of the
initial public offering have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method. Fully
diluted earnings per share did not differ significantly from primary earnings
per share for any of the periods presented.
<PAGE>
Stock Option Plan
The Company accounts for its stock option grants under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
provides the pro forma footnote disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
3. Notes Payable:
Notes payable consist of several installment notes, with monthly installments
payable through November 1999, at interest rates ranging from 8.4% to 10.5%. The
notes are collateralized by certain equipment. In addition, one note was
collateralized by certificates of deposits totaling $135,249 which were released
subsequent to December 27, 1996. A note payable to Metacom (see Note 8) was
repaid in full during 1996.
Future scheduled maturities of notes payable are as follows as of December 27,
1996:
1997 $1,508,607
1998 1,270,147
1999 444,227
----------
$3,222,981
==========
4. Bank Credit Facilities:
As of December 27, 1996, the Company had a revolving line-of-credit facility
with a lender for up to $1,500,000, which expires on April 30, 1997. The
interest rate is at prime (8.25% at December 27, 1996). Maximum borrowings are
limited to an amount based on a formula using eligible accounts receivable and
inventories ($1,500,000 as of December 27, 1996). During 1996 maximum borrowings
outstanding were $300,000.
In addition, the Company has a capital expenditure term loan facility with the
lender for up to $3,000,000. Borrowings under the capital expenditure term loan
may be for up to 60 months, and interest rates will vary based on the length of
the term loan and the interest rate structure selected. The interest rate
structure that can be selected by the Company varies from a variable rate of
prime plus 1/4% or a fixed rate equal to the three-year U.S. Treasury rate plus
3%.
At December 27, 1996, there were no borrowings under the revolving
line-of-credit facility, and $633,670 outstanding under the capital expenditure
term loan facility.
The line-of-credit agreement and certain of the notes contain covenants related
to levels of net income and net worth. The Company was in compliance with these
covenants as of December 27, 1996.
5. Shareholder's Equity:
On May 10, 1996, the Company completed the sale of 1,400,000 shares of common
stock in an initial public stock offering. Subsequently, on June 17, 1996, the
underwriter exercised an overallotment option and purchased an additional
185,000 shares. The Company received proceeds from the offering, net of issuance
costs, of $9,251,850. The underwriter also purchased, for a nominal purchase
price, warrants to purchase 140,000 shares of common stock at a price of $8.10
per share. The warrants are exercisable for a period of four years, commencing
one year from the offering date.
<PAGE>
6. Stock Plans:
Employee Stock Purchase Plan
In March 1996, the board of directors of the Company adopted an Employee Stock
Purchase Plan (the Employee Plan) effective July 1, 1996. The Employee Plan
enables employees to contribute up to 10% of their compensation toward the
purchase of the Company's common stock at 85% of fair market value. A total of
250,000 shares have been reserved for issuance under this plan. No shares were
issued in 1996 under this plan.
Stock Option Plan
In March 1996, the board of directors of the Company adopted the 1996 Stock
Option Plan (the Plan) in order to provide for the granting of stock options to
employees, officers, directors and independent consultants of the Company at
exercise prices not less than 100% of the fair market value of the Company's
common stock on the date of grant. The Company has reserved 600,000 shares of
its common stock for issuance upon exercise of options granted under the Plan.
These options, which can be either incentive stock options or nonqualified
options, vest over a three- to five-year schedule and expire ten years after the
grant date.
Information regarding the Company's stock option plan is summarized below:
1996
------------------------
Weighted
Average
Shares Exercise Price
-------- --------------
Options outstanding, beginning of period - $ -
Granted 395,000 6.79
Canceled (35,000) 6.75
Exercised - -
------- ------
Options outstanding, end of period 360,000 $ 6.79
======= ======
Options exercisable, end of period 62,500 $ 6.75
======= ======
Weighted average fair value of
options granted $ 5.95
======
Options outstanding at December 27, 1996 have an exercise price ranging between
$6.75 and $8.00 and a weighted average remaining contractual life of 9.39 years.
<PAGE>
The Company accounts for its stock option grants under APB 25. Since options
have been granted at not less than the market value on the date of grant, no
compensation expense has been recognized for the stock options granted. Had
compensation cost of option grants been determined consistent with SFAS 123, the
Company's income and earnings per share, on a pro forma basis, would have been
reported as follows:
1996
----
Net income:
As reported $984,331
Pro forma 614,331
Primary and fully diluted earnings per share:
As reported 0.23
Pro forma 0.14
In determining the compensation cost of the options granted during 1996, as
specified by SFAS 123, the fair value of each option grant has been estimated on
the date of grant using the Black-Scholes option pricing model, and the weighted
average assumptions used in these calculations are summarized below:
Risk-free interest rate 6.97%
Expected life of options granted 10 years
Expected volatility of options granted 76.45%
7. Income Taxes:
The provision for income taxes for the Company for the period from May 11, 1996
to December 27, 1996 was as follows:
Current $677,000
Deferred (9,000)
--------
Total provision $668,000
========
The components of the deferred tax asset, which is classified as a component of
other assets, at December 27, 1996 was as follows:
Accounts receivable reserves $202,000
Accrued liabilities 292,000
Long-lived assets (485,000)
--------
Net deferred tax asset $ 9,000
========
<PAGE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Predecessor Partnership
(Pro Forma)
Period From Period From
May 11 January 1
Through Through Year Ended
December 27, May 10, December 31,
1996 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 4.1 4.0 4.0
Other 2.3 0.9 0.6
------------ ----------- ------------
Effective income tax rate 40.4% 38.9% 38.6%
============ =========== ============
</TABLE>
8. Related-Party Transactions:
A significant shareholder of the Company, Metacom, provides certain
administrative functions, including costs of occupancy, to the Company for a
monthly fee. Charges for these services were as follows:
1996 1995
-------- --------
Administrative support $ 88,194 $139,670
Occupancy 460,218 380,780
-------- --------
$548,412 $520,450
======== ========
In addition, the Company reimbursed Metacom $117,407 and $56,622 in 1996 and
1995, respectively, for certain expenditures for the Company.
Metacom Manufacturing Assets--Manufacturing Agreement
In January 1995, the Company acquired the entire manufacturing operation of
Metacom in exchange for $318,000 in cash, two promissory notes totaling
$207,341, the assumption of $42,085 of Metacom's liabilities and limited
interests in the Predecessor Partnership which, upon completion of the initial
public offering, were exchanged for common stock of the Company (see Note 1).
Both promissory notes were paid in full and canceled during 1995 and 1996.
As a result of the common control of the Predecessor Partnership and Metacom,
the acquisition was accounted for essentially as a pooling of interests and no
value was assigned to the limited partnership units issued in the transaction.
The difference of $62,810 between the cash and note payable consideration, the
assumed liability and Metacom's historical net book value of the net assets of
the manufacturing operation received was treated as a distribution of partners'
capital in the accompanying financial statements.
<PAGE>
In connection with this transaction, Metacom and the Company entered into a
manufacturing agreement (the Agreement) whereby Metacom must purchase a minimum
of two million audio cassettes and one million CDs from the Company under normal
trade terms. The Agreement was to expire in December 1997. However, in 1996
Metacom did not fulfill its purchase commitment. As a result, the Company and
Metacom have agreed to allow Metacom to make up the 1996 shortfall during 1997
in exchange for a contract extension until the year 2000. This contract
extension specifies that Metacom is to purchase all of its supply of CDs and
audio cassettes exclusively from the Company under normal trade terms. No
minimum quantities have been established.
Metacom purchases totaled $1,587,000 and $2,524,000 in 1996 and 1995,
respectively.
9. Commitments and Contingencies:
Litigation
The Company is involved in claims arising in the normal course of business. In
management's opinion, the final resolution of these claims should not have a
material adverse effect on the Company's financial position or results from
operations.
Operating Leases
The Company is committed under an operating lease with Metacom for the rental of
manufacturing, warehouse and office facilities. The initial lease term is for
three years ending December 31, 1997, and provides for renewal options of three
3-year periods. In addition, the Company is obligated to pay a proportionate
share of real estate taxes, insurance, utilities, repairs and maintenance, and
common area costs. Based on current space rented, annual rental expense is
$575,000.
Purchase Commitments
In February 1997, the Company committed to the purchase of approximately
$4,000,000 of manufacturing equipment to provide in-house mastering for its
customers. The Company plans to finance the equipment on a long-term basis.
Employment Agreement
The Company has in place an employment agreement with its chief executive
officer which provides for base compensation, bonus payments of 5% of the
Company's earnings before taxes, as defined, and a severance payout in case
employment is terminated under conditions specified in the agreement. The
agreement expires on December 31, 1998.
10. Events Subsequent to December 27, 1996:
In February 1997, the Company signed a letter of intent to purchase all
outstanding shares of Benchmark Media Services, Inc., a manufacturer, replicator
and marketer of CDs and diskettes.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants for Zomax Optical Media, Inc. (the "Company"),
we hereby consent to the incorporation of our report dated January 24, 1997,
incorporated by reference in this Form 10-KSB, into the Company's previously
filed Registration Statements on Form S-8, File Nos. 333-06145 and 333-06133.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> MAY-11-1996<F1>
<PERIOD-END> DEC-27-1996
<EXCHANGE-RATE> 1
<CASH> 6,914,899
<SECURITIES> 0
<RECEIVABLES> 4,475,929
<ALLOWANCES> 531,000
<INVENTORY> 1,262,665
<CURRENT-ASSETS> 12,232,936
<PP&E> 9,558,376
<DEPRECIATION> 1,983,875
<TOTAL-ASSETS> 19,954,853
<CURRENT-LIABILITIES> 5,122,563
<BONDS> 0
0
0
<COMMON> 12,133,585
<OTHER-SE> 984,331
<TOTAL-LIABILITY-AND-EQUITY> 19,954,853
<SALES> 12,887,050
<TOTAL-REVENUES> 12,887,050
<CGS> 9,180,325
<TOTAL-COSTS> 11,275,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,266
<INCOME-PRETAX> 1,652,331
<INCOME-TAX> 668,000
<INCOME-CONTINUING> 984,331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 984,331
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<FN>
<F1>Information for the period January 1, 1996 to May 10, 1996 relating to
the Predecessor Partnership is included in the Report on Form 10-KSB but is
not included in the Financial Data Schedule.
</FN>
</TABLE>
