UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 25, 1999
Commission File Number 0-28429
ZOMAX INCORPORATED
(Name of registrant as specified 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 registrant (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 28, 1999, the issuer had 7,350,455 shares of Common Stock, no par
value, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX INCORPORATED
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
ASSETS Jun. 25, 1999 Dec. 25, 1998
(Unaudited)
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,353 $ 25,621
Accounts receivable, net of allowance for doubtful
accounts of $3,435 and $2,035 33,201 9,872
Inventories 6,869 2,088
Deferred income taxes 3,175 1,425
Prepaid expenses and deposits 1,123 543
------------------ -----------------
Total current assets 64,721 39,549
Property and equipment, net of accumulated depreciation
of $9,136, and $5,908 36,131 18,925
Investment in unconsolidated entity 3,829 4,662
Goodwill, net 1,122 1,158
Other assets, net 262 1,130
------------------ -----------------
$ 106,065 $ 65,424
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 3,557 $ 1,380
Accounts payable 12,444 5,469
Accrued expenses:
Accrued royalties 4,337 2,446
Accrued compensation 3,739 1,786
Other 8,650 566
Income taxes payable 2,197 934
------------------ -----------------
Total current liabilities 34,924 12,581
Notes payable, net of current portion 13,056 1,746
Deferred income taxes 995 1,010
Shareholders' Equity:
Common stock, no par value, 15,000 authorized
shares, 7,290 and 7,189 shares issued
and outstanding 42,976 42,680
Retained earnings 14,294 7,407
Other comprehensive income (180) -
------------------ -----------------
Total shareholders' equity 57,090 50,087
------------------ -----------------
$ 106,065 $ 65,424
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-2-
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements Of Operations
(Unaudited)
(In thousands, except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Jun. 25 Jun. 26, Jun. 25 Jun. 26,
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales $ 55,140 $ 14,546 $ 103,375 $ 28,779
Cost of Sales 37,616 10,622 73,815 20,561
-------- -------- --------- --------
Gross Profit 17,524 3,924 29,560 8,218
Selling, General and
Administrative Expenses 9,662 2,418 18,220 5,130
-------- -------- --------- --------
Operating Income 7,862 1,506 11,340 3,088
Equity in losses of unconsolidated entity (428) - (833) -
Interest Expense (282) (95) (645) (213)
Interest Income 185 142 257 202
Other expense, net - - - (278)
-------- -------- --------- --------
Income Before Income Taxes 7,337 1,553 10,119 2,799
Provision for Income Taxes 2,419 615 3,232 1,015
-------- -------- --------- --------
Net Income $ 4,918 $ 938 $ 6,887 $ 1,784
======== ======== ========= ========
PRO FORMA:
Net income before income taxes $ 2,799
Provision for income taxes 1,120
-------
Net income $ 1,679
=======
Earnings Per Share
Basic $0.68 $0.16 $0.95 $0.30
======== ======== ========= ========
Diluted $0.60 $0.15 $0.86 $0.28
======== ======== ========= ========
Weighted Average Number of
Shares Outstanding
Basic 7,277 5,840 7,266 5,549
======== ======== ========= ========
Diluted 8,198 6,285 8,046 5,970
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-3-
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the six months ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Operating Activities:
Net income $ 6,887 $ 1,784
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 3,800 1,727
Equity in losses of unconsolidated entity 833 -
Deferred income taxes (15) (159)
Changes in operating assets and liabilities:
Accounts receivable 9,686 (1,327)
Inventories 1,310 (317)
Prepaid expenses and deposits (444) (447)
Accounts payable 8,238 779
Accrued expenses (9,575) (789)
Income taxes payable 1,262 (241)
------- -------
Net cash provided by operating activities 21,982 1,010
------- -------
Investing Activities:
Purchase of property and equipment (2,220) (5,028)
Acquisitions, net of cash acquired (39,500) -
Change in other assets 868 38
------- -------
Net cash used in investing activities (40,852) (4,990)
------- -------
Financing Activities:
Issuance of common stock 296 29,902
Proceeds from notes payable 15,000 1,124
Repayment of notes payable (1,514) (2,403)
------- -------
Net cash provided by financing activities 13,782 28,623
------- -------
Effect of exchange rate changes on cash and cash equivalents (180) -
Net increase (decrease) in cash (5,268) 24,643
Cash and Cash Equivalents:
Beginning of period 25,621 5,213
------- -------
End of period $ 20,353 $ 29,856
======= =======
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 645 $ 213
======= =======
Cash paid for income taxes $ 1,970 $ 1,406
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE>
Zomax Incorporated
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-K for the year ended December 25, 1998.
Zomax Incorporated (Zomax or the Company) is a leading outsource
service provider to software publishers, computer manufacturers and other
producers of multimedia products. These outsource services include call center
and customer support solutions; E-commerce solutions; compact disc (CD) and
digital versatile disc (DVD) mastering; CD, DVD, diskette and cassette
replication; graphic design; print management; CD and DVD printing; packaging;
warehousing; inventory management; distribution and fulfillment; and returned
merchandise authorization processing services.
The Company was incorporated on February 22, 1996 and completed its
initial public common stock offering on May 10, 1996. Concurrent with the
initial public offering of common stock, 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.
On February 4, 1998, the Company acquired all of the outstanding shares
of Primary Marketing Group, Inc. (PMG), Next Generation Services (NGS), LLC and
Primary Marketing Group Limited (PMG Ireland) (collectively, the Companies) in
exchange for 800,002 shares of the Company's common stock. Prior to these
acquisitions, the Companies' business consisted of providing manufacturers'
representative services and returned merchandise processing services for the
computer industry. The Companies have provided substantially the same products
and services they provided prior to these transactions. In connection with the
transactions described above, Zomax acquired certain assets and assumed certain
liabilities, including a lease obligation from an unrelated third party for $1.1
million. The acquisitions of the Companies have been accounted for as a pooling
of interests and, accordingly, the consolidated financial statements for all
periods presented have been restated to reflect the effects of the transactions.
<PAGE>
On January 7, 1999, the Company acquired the businesses and certain
net assets of Kao Corporation in the United States, Canada, Ireland and Germany.
The purchase price for the business, net assets and net working capital acquired
was $37.5 million plus transaction costs. The assets and businesses acquired by
the Company were used in the manufacturing and sale of CDs and related
businesses, and the Company intends to continue to use the assets and businesses
in a similar manner. The acquisition has been accounted for using the purchase
method of accounting and, accordingly the purchase price has been allocated to
net assets acquired based on their preliminary estimated fair values.
Pro forma consolidated results of operations as if the acquisitions had taken
place at the beginning of 1998 are shown below (in thousands, except per share
data). The pro forma results for 1999 were not materially different as the
acquisition closed effective January 1, 1999.
Six Months Ended
June 25, 1998
----------------
Net Sales $134,779
Net Income $3,376
Earnings per Share:
Basic $.61
Diluted $.57
2. Credit Facilities
On January 7, 1999, the Company entered into a $15 million term loan
facility which was used to finance the purchase of the businesses and assets of
the Kao Corporation. A $25 million revolving line of credit facility was also
established. The term loan facility requires quarterly principal payments on a
straight-line amortization schedule. Interest rate is at the lower of prime plus
.75% or LIBOR rate plus 2.25%. The revolving line-of-credit facility provides
for borrowings based on a formula using eligible accounts receivable and
inventories with interest rates of prime plus .5% or LIBOR plus 2.0%. Both
facilities have five-year terms and contain certain financial covenants.
3. Recently Issued Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting in the financial statements all
changes in equity during a period, except those resulting from investments by
and distributions to owners. For the Company, comprehensive income represents
net income adjusted for cumulative foreign currency translation adjustments.
Comprehensive loss as defined by SFAS No. 130, was $180,000 for the six month
period ended June 25, 1999.
<PAGE>
4. Stock Split
The Company's Board of Directors authorized a two-for-one split of its
common stock to be effected as a 100% stock dividend payable on August 11, 1999
to stockholders of record at the close of business on July 30, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a leading outsource service provider to software
publishers, computer manufacturers and other producers of multimedia products.
These services include call center and customer support solutions; E-commerce
solutions; CD and DVD mastering; CD, diskette and cassette replication; graphic
design; print management; CD and DVD printing; packaging; warehousing; inventory
management; distribution and fulfillment; and RMA processing services. The
Company records sales to its customers at the time merchandise is shipped or as
services are rendered. For certain customers, merchandise is invoiced upon
completion of orders with shipment occurring based on written customer
instructions.
The multimedia services industry has been characterized by short lead
times for customer orders. For this reason and because of the timing of orders,
delivery intervals and the possibility of customer changes in delivery
schedules, the Company's backlog as of any particular date has not been
significant and is not a meaningful indicator of future financial results.
On February 4, 1998, PMG, NGS and PMG Ireland were merged with and into
Zomax Services Incorporated, a subsidiary of the Company. As a result of these
transactions, all ownership interests in the acquired companies were exchanged
for 800,002 shares of the Company's Common Stock. Prior to these transactions,
the businesses of PMG, NGS and PMG Ireland consisted of providing manufacturer's
representative services and RMA processing services to the computer industry.
PMG, NGS and PMG Ireland operated their respective businesses from facilities
located in and around San Jose, California; Boston, Massachusetts; and Dublin,
Ireland. In connection with the transactions described above, the Company
acquired certain assets and assumed certain liabilities from an unrelated third
party for $1.1 million. The acquisitions of PMG, NGS and PMG Ireland were
accounted for using the pooling-of-interests method of accounting, and,
accordingly, all periods presented have been restated to reflect the effects of
these transactions.
On January 7, 1999, the Company acquired certain businesses and assets
of Kao Corporation located in the United States, Canada, Ireland and Germany.
The purchase price for the businesses and assets acquired was $37.5 million plus
transaction costs. The assets and businesses acquired by the Company were used
in the manufacturing and sale of CDs and related businesses, and the Company
intends to continue to use the assets and businesses in a similar manner. The
Company financed the acquisition through $22.5 million of its own funds and a
$15.0 million term loan facility. The acquisition has been accounted for using
the purchase method of accounting and accordingly, the purchase price has been
allocated to net assets acquired based on their preliminary estimated fair
values.
<PAGE>
Results of Operations
Sales. The Company's sales for the second quarter of 1999 were $55.1
million, an increase of 279% from $14.5 million for the second quarter or 1998.
For the six months ended June 1999, sales were $103.4 million, an increase of
259% from sales of $28.8 million for the first six months of 1998. The increase
in sales for the above periods is primarily related to the Kao acquisition,
which occurred on January 7, 1999. For the six-month period, the increase in
total sales resulted from a 431% increase in CD related sales and a 197%
increase in diskette sales. These increases were partially offset by a 29%
decrease in audio cassette sales and a 68% decrease in RMA sales.
Cost of sales. Cost of sales as a percentage of net sales was 68.2% and
73.0% for the second quarter ended June, 1999 and 1998, respectively. For the
first six months of 1999 and 1998, cost of sales remained constant at 71.4%. The
decrease in cost of sales percentage in the second quarter of 1999 was due to a
number of factors including: 1) the implementation of improved financial and
operational controls at the acquired Kao sites, 2) the operation of all
manufacturing plants at higher capacity utilization rates, 3) the strengthening
of our customer mix, and 4) the cross selling of additional value added services
to existing customers.
Selling, general and administrative expense. Selling, general and
administrative expenses as a percentage of sales was 17.5% and 16.6% for the
second quarter ended June, 1999 and 1998, respectively. For the first six months
of 1999, selling, general and administrative was 17.6% of net sales as compared
to 17.8% for the same period in 1998. The percentage increases in 1999 resulted
primarily from the Kao acquisition.
Equity in losses of unconsolidated entity. In the fourth quarter of
1998, the Company purchased a one-third equity interest in Chumbo Holdings
Corporation (Chumbo), an Internet based reseller of software. The Company
accounts for this investment using the equity method accounting and,
accordingly, recognized a loss of $428,000 in the second quarter and a $834,000
loss in the first six months of 1999, representing its share of the Chumbo net
loss and the amortization of excess purchase price over the fair value of the
underlying net assets acquired.
Interest income and expense. Interest income was $185,000 and $142,000
for the second quarter of 1999 and 1998, respectively. For the first six months
of 1999, interest income was $257,000 as compared to $202,000 for the same
period in 1998. Interest expense was $282,000 and $95,000 for the second quarter
of 1999 and 1998, respectively. For the first six months of 1999, interest
expense was $645,000 as compared to $213,000 for the same period in 1998.
Interest expense increased with the borrowings used to finance the Kao
acquisition in January 1999.
Other expenses, net. In the first quarter of 1998, the Company incurred
expenses totaling $278,000 related to the acquisition of PMG, NGS and PMG
Ireland.
<PAGE>
Provision for income taxes. The effective income tax rate for the first
six months of 1999 was 31.9% and the pro forma effective income tax rate for the
first six months of 1998 was 40.0%. The decrease in the effective income tax
rate in 1999 is due to lower tax rates on income generated in Ireland.
Liquidity and Capital Resources
As of June 25, 1999, the Company had working capital of $29.8 million,
compared to working capital of $27.0 million as of December 25, 1998.
As of June 25, 1999, the Company had cash totaling $20.4 million. Cash
generated from operating activities for the first six months of 1999 was $22.0
compared to $1.0 million during the first six months of 1998. The increase in
operating cash flow is primarily due to the acquisition of the Kao businesses
and growth of the Company's existing business.
Cash used in investing activities during the first six months of 1999
was $40.9 million compared to $5.0 million in the first six months of 1998. In
1999, the Company used $39.5 million to purchase the businesses and net assets
of Kao Corporation. In 1998, the Company used cash primarily to purchase
property and equipment including the construction of a new CD facility in San
Jose and new DVD equipment.
During the first six months of 1998, the Company acquired certain
assets and assumed certain liabilities from an unrelated third party in exchange
for a short-term note in the principal amount of $1.1 million. During the first
six months of 1999, the Company repaid notes payable totaling $1.5 million as
compared to $2.4 million in 1998.
In January, 1999, the Company entered into a $15 million term loan
facility and a $25 million revolving line of credit facility. The term loan
facility requires quarterly principal payments on a straight-line amortization
schedule. Interest rate is at the lower of prime plus .75% or LIBOR rate plus
2.25%. The revolving line-of-credit facility provides for borrowings based on a
formula using eligible accounts receivable and inventories with interest rates
of prime plus .5% or LIBOR plus 2.0%. Both facilities have five-year terms and
contain financial covenants. There are no borrowings outstanding under the
revolving line of credit facility as of June 25, 1999.
Future liquidity needs will depend on, among other factors, the timing
of capital expenditures and expenditures in connection with any acquisitions,
changes in customer order volume and the timing and collection of receivables.
The Company believes that existing cash balances, anticipated cash flow from
operations and amounts available under existing credit facilities will be
sufficient to fund its operations for the foreseeable future.
Year 2000 Compliance
The Company is currently working to fully assess and resolve the
potential impact of the Year 2000 issue on both the information technology
("IT") and non-IT systems throughout its U.S. and European operations. The Year
<PAGE>
2000 issue is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any systems that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system problems or failure.
Zomax has developed a Year 2000 plan, the objective of which is to
determine and assess the risks of the Year 2000 issue, and plan and institute
corrective actions to minimize those risks. The Company's goal is to ensure
current business operations will continue to function accurately with no
material disruption into and beyond year 2000. The Company has formed an
internal review team, and has engaged with an independent Year 2000 consulting
firm to provide advice regarding the Company's Year 2000 compliance. The Year
2000 plan addresses (a) information technology such as software and hardware,
(b) non-information system or embedded technology contained in manufacturing
equipment and facilities, and (c) readiness of key third party suppliers.
Zomax implemented a new enterprise wide financial and information
system in 1997 to meet its growing business needs. The Company also implemented
this financial and information system in new businesses acquired in 1997 and
1998 and has developed a schedule for implementation of its newly acquired Kao
facilities in 1999. The new business systems are represented to be Year 2000
compliant by the respective vendors and the Company has performed initial tests
confirming the compliance. The Company has identified embedded technology in its
manufacturing equipment and facilities and is testing such technology and
contacting vendors regarding the Year 2000 readiness of such technology. The
Company is also in the process of contacting material suppliers and customers to
address their exposure to Year 2000 related risks.
The Company has completed its assessment of Year 2000 compliance with
regard to embedded technology and material suppliers and customers as of June
25, 1999. During the balance of 1999, the Company will work to formulate
contingency plans, if appropriate, to further reduce risks and exposure to Year
2000 related issues.
Through June 25, 1999, costs associated with the Company's Year 2000
plan have not been material. The costs of addressing Year 2000 potential
problems are not currently expected to have a material adverse impact on the
financial position, results of operations or cash flows of the business in the
future. However, the costs relating to the resolution of Year 2000 compliance
issues cannot be fully estimated at this time. The Company has not yet formed
expectations regarding a most likely worst case scenario for the Year 2000 but
expects to do so upon completing its assessment of embedded technology and the
readiness of material vendors and customers. If significant customers or vendors
identify Year 2000 issues in the future and fail to resolve such issues in a
timely manner, such failure could result in a material adverse impact on the
Company's business or results of operations.
<PAGE>
Forward-Looking Statements
This filing contains forward-looking statements related to the adequacy
of the Company's cash reserves and working capital to fund its operations for
the foreseeable future and address the Year 2000 issues. Such forward-looking
statements involve risks and uncertainties which could cause actual results to
differ materially from those projected. The factors which could materially
impact the Company's ability to finance its operations are primarily a
substantial reduction in sales and profitability caused by one or more of the
following: unforeseen increase in expenses, significant increase in competition
and reduction in prices, loss of strength in the CD market, introduction of new
technologies and worsening of overall economic conditions. The Company's ability
to address the Year 2000 issue will depend on the ability of the Company and its
vendors and customer to replace, modify and/or upgrade computer technology,
which cannot be assured.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting, was held on May 3, 1999.
(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
6,296,234 shares in favor, with 22,445 shares voted against and 10,317 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
Nominees Votes for Votes Withheld
-------- --------- --------------
Philip T. Levin 6,314,824 14,172
James T. Anderson 6,313,844 15,152
Janice Ozzello Wilcox 6,312,889 16,107
Robert Ezrilov 6,312,989 16,007
Howard P. Liszt 6,312,989 16,007
The shareholders approved an amendment to the Company's Articles of
Incorporation to change the corporate name from Zomax Optical Media, Inc. to
Zomax Incorporated by a vote of 6,314,545 shares in favor, and 3,314 shares
voted against, and 11,137 shares abstaining.
The shareholders ratified the appointment of Arthur Andersen LLP as
independent public accountants for the Company by a vote of 6,302,184 shares in
favor, 11,560 shares against and 15,252 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is included with the Form 10-Q
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 INCORPORATED
Date: August 4, 1999 By: /s/ James T. Anderson
James T. Anderson, President and Chief
Executive Officer (principal executive
officer)
By: /s/ James E. Flaherty
James E. Flaherty, Chief Financial
Officer (principal financial and
accounting officer)
<PAGE>
Zomax Incorporated
Form 10-Q Quarterly Report
For the Quarter Ended June 25, 1999
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Currency
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> JUN-25-1999
<EXCHANGE-RATE> 1,000
<CASH> 20,353
<SECURITIES> 0
<RECEIVABLES> 36,636
<ALLOWANCES> 3,435
<INVENTORY> 6,869
<CURRENT-ASSETS> 64,721
<PP&E> 45,267
<DEPRECIATION> 9,136
<TOTAL-ASSETS> 106,065
<CURRENT-LIABILITIES> 34,924
<BONDS> 0
0
0
<COMMON> 42,976
<OTHER-SE> 14,114
<TOTAL-LIABILITY-AND-EQUITY> 106,065
<SALES> 103,375
<TOTAL-REVENUES> 103,632
<CGS> 73,815
<TOTAL-COSTS> 92,035
<OTHER-EXPENSES> 833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645
<INCOME-PRETAX> 10,119
<INCOME-TAX> 3,232
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,887
<EPS-BASIC> .95
<EPS-DILUTED> .86
</TABLE>
