UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 27, 1997
Commission File Number 0-28426
ZOMAX OPTICAL MEDIA, INC.
(Name of small business issuer in its charter)
Minnesota 41-1833089
(state or other juris- (I.R.S. Employer
diction of incorporation) Identification No.)
5353 Nathan Lane, Plymouth, MN 55442
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(612) 553-9300
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 ( )
As of July 31, 1997, the Registrant had 4,447,840 shares of Common Stock, no par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes ( ) No (x)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS Jun. 27, 1997 Dec. 27, 1996
(Unaudited)
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,902,257 $ 6,914,899
Accounts receivable, net of allowance for doubtful
accounts of $855,000 and $531,000 6,215,266 3,944,929
Inventories 2,241,320 1,262,665
Prepaid expenses and deposits 2,787,101 110,443
----------- -----------
Total current assets 16,145,944 12,232,936
Property and equipment, net of accumulated depreciation
of $2,903,364 and $1,983,875 11,333,740 7,574,501
Goodwill, net 1,627,299
Other assets, net 205,256 147,416
----------- -----------
$29,312,239 $19,954,853
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 4,301,000 $ 0
Current portion of notes payable 2,392,861 1,508,607
Accounts payable 4,811,553 1,590,088
Accrued expenses 2,726,286 2,023,868
----------- -----------
Total current liabilities 14,231,700 5,122,563
Notes payable, net of current portion 964,368 1,714,374
Shareholders' Equity:
Undesignated stock, no par value, 10,000,000 authorized
shares: no shares issued and outstanding
Common stock, no par value, 15,000,000 authorized
shares, 4,447,840 and 4,385,000 shares issued
and outstanding 12,491,074 12,133,585
Retained earnings 1,625,097 984,331
----------- -----------
Total shareholders' equity 14,116,171 13,117,916
----------- -----------
$29,312,239 $19,954,853
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-2-
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(Predecessor
Partnership) (The Company)
Three Months Period from Period from
Ended April 1 Thru May 11 Thru
Jun. 27, May 10, Jun. 28,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 9,540,079 $ 1,892,612 $ 1,904,996
Cost of sales 7,346,363 1,388,958 1,389,913
----------- ----------- -----------
Gross profit 2,193,716 503,654 515,083
Selling, general and administrative
expenses 1,542,028 271,371 347,841
----------- ----------- -----------
Operating income 651,688 232,283 167,242
Interest expense (111,420) (47,007) (48,164)
Interest income 57,148 8,779 56,229
----------- ----------- -----------
Income before provision for income taxes 597,416 194,055 175,307
Provision for income taxes 235,000 85,000
----------- -----------
Net income $ 362,416 $ 90,307
=========== ===========
Net income per common share $ 0.08 $ 0.02
=========== ===========
Weighted average shares outstanding 4,442,560 4,247,175
=========== ===========
Proforma Information:
Provision for income taxes 74,000
-----------
Net income $ 120,055
===========
Net income per common share $ 0.04
===========
Weighted average shares outstanding 2,800,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(Predecessor
Partnership) (The Company)
Six Months Period from Period from
Ended Jan. 1 Thru May 11 Thru
Jun. 27, May 10, Jun. 28,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 14,975,650 $ 5,660,746 $ 1,904,996
Cost of sales 11,432,615 4,089,721 1,389,913
------------ ------------ ------------
Gross profit 3,543,035 1,571,025 515,083
Selling, general and administrative
expenses 2,438,638 956,239 347,841
------------ ------------ ------------
Operating income 1,104,397 614,786 167,242
Interest expense (185,895) (135,900) (48,164)
Interest income 137,264 23,011 56,229
------------ ------------ ------------
Income before provision for income taxes 1,055,766 501,897 175,307
Provision for income taxes 415,000 85,000
------------ ------------
Net income $ 640,766 $ 90,307
============ ============
Net income per common share $ 0.15 $ 0.02
============ ============
Weighted average shares outstanding 4,416,318 4,247,175
============ ============
Proforma Information:
Provision for income taxes 195,000
------------
Net income $ 306,897
============
Net income per common share $ 0.11
============
Weighted average shares outstanding 2,800,000
============
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Predecessor
Partnership) (The Company)
Six Months Period from Period from
Ended Jan. 1 Thru May 11 Thru
Jun. 27, 1997 May 10, 1996 Jun 28, 1996
------------- ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 640,766 $ 501,897 $ 90,307
Adjustments to reconcile net income to net
cash (used in) provided by operating activities-
Depreciation and amortization 926,201 326,876 122,001
Changes in operating assets and liabilities:
Accounts receivable (339,711) 227,468 41,216
Inventories (674,413) 58,741 (175,733)
Prepaid expenses and deposits (2,611,756) (15,042) 58,902
Accounts payable 2,107,642 (330,068) (252,809)
Accrued expenses (264,562) (66,738) 247,267
----------- ----------- -----------
Net cash (used in) provided by operating activities (215,833) 703,134 131,151
----------- ----------- -----------
Investing Activities:
Purchase of property and equipment (2,019,652) (1,089,227) (94,493)
Acquistion of businesses, net of cash (1,956,343)
Other assets 35,773 6,749 (2,126)
----------- ----------- -----------
Net cash used in investing activities (3,940,222) (1,082,478) (96,619)
----------- ----------- -----------
Financing Activities:
Issuance of common stock 357,489 9,254,637
Note payable related to acquisition 750,000
Proceeds from notes payable -- 790,500
Repayment of notes payable (2,549,830) (413,577) (220,530)
Bank borrowings, net 3,585,754 300,000 (300,000)
Distributions to partners (1,109,402)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,143,413 (432,479) 8,734,107
----------- ----------- -----------
Net (decrease) increase in cash (2,012,642) (811,823) 8,768,639
Cash and Cash Equivalents:
Beginning of period 6,914,899 936,662 124,839
----------- ----------- -----------
End of period $ 4,902,257 $ 124,839 $ 8,893,478
=========== =========== ===========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 124,982 $ 135,900 $ 48,184
=========== =========== ===========
Cash paid for income taxes $ 967,623 $ 0 $ 0
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim financial statements of the Company are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation (consisting of only normal recurring adjustments) have been
reflected in the interim periods presented. Due principally to the seasonal
nature of some of the Company's business, results may not be indicative of
results for a full year. The accompanying financial statements should be read in
conjunction with the Company's Form 10-KSB for the year ended December 27, 1996.
The Company was incorporated on February 22, 1996 and completed its
initial public 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 in a
tax-free 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.
2. Acquisitions
As of March 31, 1997, the Company acquired all of the outstanding
shares of Benchmark Media Services, Inc. (Benchmark). Prior to the acquisition,
Benchmark was a software replicator located in Plymouth, Minnesota with
operations in Orlando and Indianapolis. The purchase price for Benchmark's
outstanding capital stock will be based on revenues of Benchmark during 1997.
The consideration payable to the seller will range from $0 if revenues generated
are less than $7.5 million, or up to $1.25 million if revenues generated are in
excess of $13 million. The Company has estimated the purchase price to be
$750,000. The Company intends to fund this transaction using working capital. In
addition, the Company paid the seller $1.0 million plus accrued interest as the
repayment of certain debt owed by Benchmark to the seller. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to assets acquired based on their estimated fair values.
This treatment resulted in approximately $.6 million of cost in excess of net
assets acquired. This excess is being amortized on a straight-line basis over 15
years. Benchmark's results of operations have been included in the consolidated
statements of operations since the date of acquisition. On the basis of a pro
forma consolidation of the results of operations as if the acquisition had taken
place at the beginning of 1996, consolidated sales would have been $17.2 million
and $13.0 million for the first six months ended June 27, 1997 and June 28,
1996, respectively. Consolidated pro forma net income and earnings per share
would have been $515,000, or $.12 per share and $351,000, or $.11 per share, for
the first six months ended June 27, 1997 and June 28, 1996, respectively. Such
pro forma amounts are not necessarily indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of the year.
As of May 1, 1997, the Company acquired all of the outstanding shares
of Trotter Technologies, Inc. (Trotter). Trotter is a return merchandise
processing, warehousing and distribution company based in San Jose, California
servicing the software publishing market. The purchase price of Trotter was
$1,225,000 payable in cash and 59,268 shares of Zomax common stock. The
acquisition was accounted for using the purchase method. Accordingly, the
purchase price was allocated to assets acquired based on their estimated fair
values. This treatment resulted in approximately $1.1 million of cost in excess
of net assets acquired. This excess is being amortized on a straight-line basis
over 15 years. Trotter's results of operations have been included in the
consolidated statements of operations since the date of acquisition. The
acquisition did not have a material pro forma impact on operations.
<PAGE>
3. Bank Credit Facilities
On April 30, 1997, the Company entered into a new revolving
line of credit facility with a lender for up to $5 million. The facility expires
on April 30, 1999, and the interest rate is at the prime rate. Maximum
borrowings are limited to an amount based on a formula using eligible
receivables and inventories. As of June 27, 1997, the Company had $4,301,000
outstanding under the line of credit.
In addition, the Company entered into a new capital expenditure term
loan facility with a lender for up to $8 million. Borrowing under the capital
expenditure term loan may be for up to 60 months and interest rates will vary
based on length of the term loans. As of June 27, 1997, the Company had no
borrowings outstanding under this facility.
4. SFAS 128
The Company will adopt in the fiscal year ending December 26, 1997,
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
No. 128), which was issued in February 1997. SFAS No. 128 requires disclosure of
basic earnings per share (EPS) and diluted EPS, which replaces the existing
primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is
computed by dividing net income by the weighted average number of shares of
Common Stock outstanding during the year. Dilutive EPS is computed similar to
primary EPS as previously reported, provided that, when applying the treasury
stock method to common equivalent shares, the Company must use its average share
price for the period rather than the more dilutive greater of the average share
price or end of period share price required by APB No. 15. This will not have a
material affect on EPS.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
General
The Company is a full-service, turnkey provider of compact discs,
cassettes, diskettes and related services. The Company services the multimedia
needs of 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,
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.
During the quarter, the Company completed the acquisition of Benchmark
Media Services Inc., a CD and diskette replicator, and Trotter Technologies, a
RMA processing service company. Effective March 31, 1997, the Company purchased
all of the stock of Benchmark Media Services. The acquisition of Benchmark
expands our customer base, gives us regional facilities in Indianapolis, Orlando
having diskette duplicating as well as a full complement of assembly and
distribution services. Zomax will now be able to offer our customers RMA
processing and inventory recycling. This added service will complete the sale
cycle for our customers from manufacturing to distribution to complete product
returns processing.
Results of Operations
The following table sets forth for the three months and six
months ended June 27, 1997 and June 28, 1996, certain operating data as a
percentage of sales for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.0 73.2 76.3 72.4
------ ------ ------ ------
Gross profit 23.0 26.8 23.7 27.6
Selling, general and
administrative expenses 16.2 16.3 16.3 17.3
------ ------ ------ ------
Operating income 6.8% 10.5% 7.4% 10.3%
Interest expense (1.2) (2.5) (1.2) (2.4)
Interest income .6 1.7 .9 1.0
------ ------ ------ ------
Income before provision 6.2% 9.7% 7.1% 8.9%
------ ------ ------ ------
for income taxes
Provision for income taxes 2.5 2.8
------ ------
Net income 3.7% 4.3%
------ ------
</TABLE>
Sales increased 151% to $9,540,079 for the quarter ended June 27, 1997
from $3,797,608 for the quarter ended June 28, 1996. For the six months ended
June 27, 1997, sales were $14,975,650, an increase of 98% over sales of
$7,565,742 for the first six months of 1996. The higher sales in the second
quarter of 1997 resulted principally from a 92% increase in sales from existing
and new customers and $2,265,000 from sales of companies acquired during the
quarter.
The higher sales in 1997 resulted from a significant increase in sales
of CD-Rom units and diskettes partially offset by lower selling prices. The
Company also has a higher production capacity in 1997 with the purchase of
additional production equipment.
Cost of sales as a percentage of sales were 77.0% and 76.3% for the
three and six months ended June 27, 1997 compared to 73.2% and 72.4%,
respectively, for the same periods in 1996. The 1997 second quarter cost of
sales percentage was affected by the integration of Benchmark operations into
the Company. This integration is substantially complete and the Company
anticipates cost savings in the second half of 1997. Also, in the second quarter
of 1997, the Company had to outsource a portion of its CD manufacturing which
increased the cost of sales percentages. Cost of sales percentages was generally
higher in 1997 due to a general reduction in product prices in 1997 as compared
to 1996.
Selling, general and administrative (SG&A) expenses as a percentage of
sales were 16.2% and 16.3%, respectively, for the three and six months ended
June 27, 1997 compared to 16.3% and 17.3%, respectively, for the same periods in
1996. Total SG&A expenses increased from $619,212 in the second quarter of 1996
to $1,542,028 in the second quarter of 1997. The dollar increase in 1997
resulted from hiring additional corporate staff in sales, customer support and
other administrative functions as Company sales increased. In addition, the
second quarter SG&A expenses include SG&A expenses from the two acquisitions
made in the quarter.
Interest expense was $185,895 for the first six months of 1997 as
compared to $184,064 during the same period in 1996. The Company anticipates
interest expense will increase in the second half of 1997 as additional
borrowings are incurred for its mastering project and additional production
equipment.
Interest income increased to $137,264 during the first six months of
1997 from $79,240 during the same period in 1996 as the result of investing
proceeds from the Company's May 1996 initial public stock offering. The Company
has utilized some of its cash to retire debt associated with its recent
acquisitions.
The Company's effective income tax rate for the six months ended June
27, 1997 was 39.3%. For the period from January 1, 1996 through May 10, 1996,
the Company operated as a partnership for income tax purposes.
<PAGE>
Liquidity and Capital Resources
As of June 27, 1997, the Company had cash totaling $4.9 million and
working capital of $1.9 million as compared to cash of $6.9 million and working
capital of $7.1 million as of December 27, 1996. The Company has committed to
the purchase of mastering equipment with an estimated cost of $4 million and
plans to purchase additional CD manufacturing and related equipment totaling $5
million in 1997. The Company plans to finance these purchases with long term
financing and cash. On April 30, 1997, the Company entered into a new line of
credit facility for up to $5 million and a new capital expenditure term loan
facility for up to $8 million. The Company believes that it has sufficient
liquidity and capital resources to meet its operating needs and capital
expenditures requirements for the foreseeable future.
In the first six months of 1997, the Company used $.2 million of cash
in operations as compared to $.7 million generated in 1996. The use of cash in
1997 was primarily due to $2.6 million of deposits placed on mastering
equipment. The purchase of property and equipment totaled $2.0 million and $1.1
million for the first six months of 1997 and 1996 respectively. In the first six
months of 1997, the reduction of long term debt totaled $2.5 million as compared
to $.6 million in 1996. In the first six months of 1996, the Partnership made
partner distributions of $1.1 million.
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 usually being the strongest.
Forward-Looking Statements
This letter contains forward-looking statements regarding expansion
into new markets, integration of recent acquisitions and their effect on
operating efficiencies, expansion of facilities, including the building of a new
manufacturing facility in San Jose, CA, the upgrade of equipment and
installation of mastering equipment, among other statements. Such
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by some of the statements herein. Investors are cautioned that all
forward-looking statements involve risks and uncertainty. Among the factors that
could cause actual results to differ materially are the following: strength of
the CD market, pricing strategies of competitors, manufacturing capacity and
efficiency, overall economic conditions, including inflation and consumer
confidence and other risks identified in filings with the Securities and
Exchange Commission from time to time.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 1, 1997, the Company issued 59,268 shares of Common Stock to the
sole shareholder of Trotter Technologies, Inc., a California corporation
(Trotter), as partial consideration for all of the outstanding shares of
Trotter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting on April 22, 1997.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as listed in the
proxy statement, and all of such nominees were elected.
The shareholders set the number of directors at five (5) by a vote of
4,158,659 shares in favor, with 1,500 shares voted against and no shares
abstaining. The following persons were elected to serve as directors of the
Company until the next annual meeting of shareholders with the following votes:
Number of Number of
Nominee Votes for Votes Withheld
Philip T. Levin 4,158,659 1,500
James T. Anderson 4,155,998 4,161
Janice Ozzello Wilcox 4,158,659 1,500
Robert Ezrilov 4,158,659 1,500
Howard P. Liszt 4,158,659 1,500
The shareholders approved an amendment to the Company's 1996 Stock
Option Plan to increase the reserved shares from 600,000 to 850,000 by a vote of
3,913,672 shares in favor, with 184,281 shares voted against, 14,837 shares
abstaining and 47,369 shares present for determining the quorum but which lacked
authority to vote on this matter (broker non-votes).
The shareholders ratified the appointment of Arthur Andersen LLP as
independent public accountants for the Company by a vote of 4,144,023 shares in
favor, with 14,186 shares voted against and 1,950 shares abstaining.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is included with this Form 10-QSB:
Exhibit 27 Financial Data Schedule (included in electronic version only)
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
In accordance with the requirements 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: August 8, 1997 By /s/ James T. Anderson
James T. Anderson, President and
Chief Executive Officer (principal
executive officer)
By /s/ James E. Flaherty
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
Zomax Optical Media, Inc.
Form 10-QSB Quarterly Report
For the Quarter Ended June 27, 1997
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> JUN-27-1997
<EXCHANGE-RATE> 1
<CASH> 4,902,257
<SECURITIES> 0
<RECEIVABLES> 7,070,266
<ALLOWANCES> 855,000
<INVENTORY> 2,241,320
<CURRENT-ASSETS> 16,145,944
<PP&E> 14,237,104
<DEPRECIATION> 2,903,364
<TOTAL-ASSETS> 29,312,239
<CURRENT-LIABILITIES> 14,231,700
<BONDS> 0
0
0
<COMMON> 12,491,074
<OTHER-SE> 1,625,097
<TOTAL-LIABILITY-AND-EQUITY> 29,312,239
<SALES> 14,975,650
<TOTAL-REVENUES> 15,112,914
<CGS> 11,432,615
<TOTAL-COSTS> 13,871,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,895
<INCOME-PRETAX> 1,055,766
<INCOME-TAX> 415,000
<INCOME-CONTINUING> 640,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640,766
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
