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 September 26, 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 October 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 Sept. 26, 1997 Dec. 27, 1996
(Unaudited)
--------------------- -------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $4,293,435 $6,914,899
Accounts receivable, net of allowance for doubtful
accounts of $585,000 and $531,000 6,234,720 3,944,929
Inventories 2,730,191 1,262,665
Prepaid expenses and deposits 580,682 110,443
--------------------- -------------------
Total current assets 13,839,028 12,232,936
Property and equipment, net of accumulated depreciation
of $3,549,694 and $1,983,875 14,344,105 7,574,501
Goodwill, net 1,188,073
Other assets, net 226,362 147,416
--------------------- -------------------
$29,597,568 $19,954,853
===================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $1,094,701 $0
Current portion of notes payable 2,587,978 1,508,607
Accounts payable 4,043,850 1,590,088
Accrued expenses 3,612,598 2,023,868
--------------------- -------------------
Total current liabilities 11,339,127 5,122,563
Notes payable, net of current portion 3,513,193 1,714,374
Shareholders' Equity:
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 2,254,174 984,331
--------------------- -------------------
Total shareholders' equity 14,745,248 13,117,916
--------------------- -------------------
$29,597,568 $19,954,853
===================== ===================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Sept. 26, Sept. 27,
1997 1996
------------------ --------------------
<S> <C> <C>
Sales $10,518,754 $4,768,914
Cost of sales 7,777,232 3,368,574
------------------ --------------------
Gross profit 2,741,522 1,400,340
Selling, general and administrative
expenses 1,663,179 771,901
------------------ --------------------
Operating income 1,078,343 628,439
Interest expense (108,423) (90,451)
Interest income 42,158 107,900
------------------ --------------------
Income before provision for income taxes 1,012,078 645,888
Provision for income taxes 383,000 258,000
------------------ --------------------
Net income $629,078 $387,888
================== ====================
Net income per common share $0.14 $0.09
================== ====================
Weighted average shares outstanding 4,611,591 4,438,906
================== ====================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(Predecessor
Partnership) (The Company)
Nine Months Period from Period from
Ended Jan. 1 Thru May 11 Thru
Sept. 26, May 10, Sept. 27,
1997 1996 1996
----------------- ------------------- -------------------
<S> <C> <C> <C>
Sales $25,494,404 $5,660,746 $6,673,910
Cost of sales 19,209,847 4,089,721 4,758,495
----------------- ------------------- -------------------
Gross profit 6,284,557 1,571,025 1,915,415
Selling, general and administrative
expenses 4,101,817 956,239 1,119,722
----------------- ------------------- -------------------
Operating income 2,182,740 614,786 795,693
Interest expense (294,318) (135,900) (138,615)
Interest income 179,422 23,011 164,129
----------------- ------------------- -------------------
Income before provision for income taxes 2,067,844 501,897 821,207
Provision for income taxes 798,000 343,000
----------------- -------------------
Net income $1,269,844 $478,207
================= ===================
Net income per common share $0.28 $0.11
================= ===================
Weighted average shares outstanding 4,481,409 4,308,697
================= ===================
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
===================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Predecessor
Partnership) (The Company)
Nine Months Period from Period from
Ended Jan. 1 Thru May 11 Thru
Sept. 26, 1997 May 10, 1996 Sept. 27, 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Operating Activities:
Net income $1,269,844 $501,897 $478,207
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 1,612,122 326,876 390,367
Changes in operating assets and liabilities:
Accounts receivable (419,165) 227,468 (771,599)
Inventories (1,163,284) 58,741 (193,420)
Prepaid expenses and deposits (405,337) (15,042) (106,603)
Accounts payable 1,339,939 (330,068) 173,065
Accrued expenses 626,589 (66,738) 696,490
--------------- ---------------- ----------------
Net cash (used in) provided by
operating activities 2,860,708 703,134 666,507
--------------- ---------------- ----------------
Investing Activities:
Purchase of property and equipment (5,711,578) (1,089,227) (2,189,038)
Acquistion of businesses, net of cash (1,465,818)
Other assets 14,167 6,749 256,469
--------------- ---------------- ----------------
Net cash used in investing activities (7,163,229) (1,082,478) (1,932,569)
--------------- ---------------- ----------------
Financing Activities:
Issuance of common stock 357,489 9,255,244
Note payable related to acquisition 250,000
Proceeds from notes payable 3,650,000 790,500
Repayment of notes payable (2,955,887) (413,577) (587,190)
Bank borrowings, net 379,455 300,000 (300,000)
Distributions to partners (1,109,402)
--------------- ---------------- ----------------
Net cash provided by (used in)
financing activities 1,681,057 (432,479) 8,368,054
--------------- ---------------- ----------------
Net increase (decrease) in cash (2,621,464) (811,823) 7,101,992
Cash and Cash Equivalents:
Beginning of period 6,914,899 936,662 124,839
--------------- ---------------- ----------------
End of period $4,293,435 $124,839 $7,226,831
=============== ================ ================
Supplemental Cash Flow Disclosures:
Cash paid for interest $300,405 $135,900 $138,615
=============== ================ ================
Cash paid for income taxes $1,395,623 $0 $0
=============== ================ ================
The accompanying notes are an integral part of these statements.
</TABLE>
<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 $250,000. 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 $100,000 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 $27.7 million
and $20.1 million for the first nine months ended September 26, 1997 and
September 27, 1996, respectively. Consolidated pro forma net income and earnings
per share would have been $1.1 million, or $.26 per share and $.6 million, or
$.17 per share, for the first nine months ended September 26, 1997 and September
27, 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.
<PAGE>
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 $1.2 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.
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 September 26, 1997, the Company had $1,094,701 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 September 26, 1997, the Company had
$3,650,000 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 second quarter of 1997, the Company acquired Benchmark Media
Services Inc., a CD and diskette replicator, and Trotter Technologies, a RMA
processing service company. The acquisition of Benchmark expands our customer
base and gives us a regional facility in Indianapolis having diskette
duplicating as well as a full complement of assembly and distribution services.
Zomax will now be able to offer our customers expanded RMA processing and
inventory recycling services. This added service will complete the sale cycle
for our customers from manufacturing to distribution to complete product returns
processing.
The Company has announced plans to build a new CD manufacturing facility in
San Jose, CA adjacent to the Trotter facility. Estimated completion date for the
facility is December 1998.
Results of Operations
The following table sets forth for the three months and nine months ended
September 26, 1997 and September 27, 1996, certain operating data as a
percentage of sales for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.9 70.6 75.3 71.7
------ ------ ------ ------
Gross profit 26.1 29.4 24.7 28.3
Selling, general and
administrative expenses 15.8 16.2 16.1 16.8
------ ------ ------ ------
Operating income 10.3% 13.2% 8.6% 10.3%
Interest expense (1.0) (1.9) (1.2) (2.2)
Interest income .4 2.3 .7 1.5
------ ------ ------ ------
Income before provision 9.6% 13.5% 8.1% 10.7%
for income taxes ------ ------ ------ ------
Provision for income taxes 3.6 5.4 3.1
------ ------ ------
Net income 6.0% 8.1% 5.0%
------ ------ ------
</TABLE>
<PAGE>
Sales increased 121% to $10,518,754 for the quarter ended September 26,
1997 from $4,768,914 for the quarter ended September 27, 1996. For the nine
months ended September 26, 1997, sales were $25,494,404, an increase of 107%
over sales of $12,334,656 for the first nine months of 1996. The higher sales in
the third quarter of 1997 resulted principally from a 83% increase in sales from
existing and new customers and $1,815,000 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 73.9% and 75.3% for the three
and nine months ended September 26, 1997 compared to 70.6% and 71.7%,
respectively, for the same periods in 1996. The 1997 third quarter cost of sales
percentage was affected by the outsourcing of a portion of its CD manufacturing
which increased the cost of sales percentages. Cost of sales percentages were
generally higher in 1997 due to a general reduction in product prices in 1997 as
compared to 1996 and second quarter 1997 included the costs associated with
integration of Benchmark operations into the Company.
Selling, general and administrative (SG&A) expenses as a percentage of
sales were 15.8% and 16.1%, respectively, for the three and nine months ended
September 26, 1997 compared to 16.2% and 16.8%, respectively, for the same
periods in 1996. Total SG&A expenses increased from $772,000 in the third
quarter of 1996 to $1,663,000 in the third 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 third quarter SG&A expenses include SG&A expenses from the two
acquisitions made in the second quarter.
Interest expense was $294,000 for the first nine months of 1997 as compared
to $275,000 during the same period in 1996. The Company anticipates interest
expense will increase as additional borrowings are incurred for its mastering
project and additional production equipment.
Interest income was $179,000 during the first nine months of 1997 compared
to $187,000 during the same period in 1996. 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 nine months ended September
26, 1997 was 39%. 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 September 26, 1997, the Company had cash totaling $4.3 million and
working capital of $2.5 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 additional CD manufacturing and related equipment totaling $6.0
million over the next two quarters. 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 nine months of 1997, the Company generated $2.9 million of
cash in operations as compared to $1.4 million generated in 1996. The purchase
of property and equipment totaled $5.7 million and $3.3 million for the first
nine months of 1997 and 1996, respectively. In 1997 the Company acquired two
companies with an acquisition cost of $1.5 million. In the first nine months of
1997, the reduction of long term debt totaled $3.0 million as compared to $1.0
million in 1996. During the third quarter of 1997, the Company financed the
purchase of its mastering equipment in the amount of $3,650,000. In 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, 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 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: November 7, 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
<CIK> 1010788
<NAME> Zomax Optical Media, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-26-1997
<EXCHANGE-RATE> 1
<CASH> 4,293,435
<SECURITIES> 0
<RECEIVABLES> 6,819,720
<ALLOWANCES> 585,000
<INVENTORY> 2,730,191
<CURRENT-ASSETS> 13,839,028
<PP&E> 17,893,799
<DEPRECIATION> 3,549,694
<TOTAL-ASSETS> 29,597,568
<CURRENT-LIABILITIES> 11,339,127
<BONDS> 0
0
0
<COMMON> 12,491,074
<OTHER-SE> 2,254,174
<TOTAL-LIABILITY-AND-EQUITY> 29,597,568
<SALES> 25,494,404
<TOTAL-REVENUES> 25,673,826
<CGS> 19,209,847
<TOTAL-COSTS> 23,311,664
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,318
<INCOME-PRETAX> 2,067,844
<INCOME-TAX> 798,000
<INCOME-CONTINUING> 1,269,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,269,844
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
