UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
or
[ ] 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 INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota No. 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)
Registrant's telephone number (763) 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 registrant (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-K 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was $728.5
million based on the closing sale price of the Company's Common Stock as
reported on the Nasdaq National Market on March 8, 2000.
The number of shares outstanding of the registrant's common stock as of March 8,
2000: 15,895,961 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held April 19, 2000, are incorporated by reference into Part III of this report.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Zomax is a leading international outsource provider of process
management services. The Company's fully integrated services include "front-end"
E-commerce support, call center and customer support solutions; DVD authoring
services; CD and DVD mastering; CD and DVD replication; supply chain and
inventory management; graphic design; print management; assembly; packaging;
warehousing; distribution and fulfillment; and RMA processing. By providing a
full range of process management services, Zomax differentiates itself from its
competitors who offer only a subset of these services. Zomax believes its
expertise and capital investment allow its customers to focus on their core
competencies, reduce costs, accelerate time to market, access advanced
replication and design capabilities, reduce capital investment, improve
inventory management and purchasing power, and access manufacturing, warehousing
and distribution capabilities in a variety of geographic regions.
The Company services a broad customer base, including Microsoft,
Novell, Hewlett Packard and Gateway. The Company has demonstrated an ability to
provide consistently high quality products and services in a short turnaround
time. Zomax believes its high level of customer service and responsiveness to
customers' needs provides it with a competitive advantage which differentiates
the Company from its competitors. The Company was established in 1996 and
currently has nine offices and facilities with over 1,500 employees located in
the United States, Canada, Ireland and Germany.
Acquisitions
To enhance its position as a leading outsource service provider, Zomax
has expanded its geographic presence and outsource services by acquiring
production capacity as well as call centers, distribution and RMA capabilities.
The Company believes that its acquisitions enable it to provide additional
integrated services, create an opportunity to attract new customers and
cross-market its services to existing customers.
Within the last three years, the Company has made the following
acquisitions:
o Kao Corporation, an industry leading software replicator with
operations in Fremont and San Ramon, California; Arnprior, Canada;
Dublin, Ireland and Langen, Germany; acquired in January 1999;
o Primary Marketing Group Ltd., (PMG Ireland) an RMA processor and
provider of manufacturers' representative services in Ireland;
acquired in February 1998;
o Certain assets and contractual rights of Kao Corporation,
including an agreement regarding the manufacture and distribution
of products for Novell, Inc.; acquired in February 1998;
<PAGE>
o Next Generation Services, LLC, (NGS) an RMA processing company
with facilities in Hayward, California and Boston, Massachusetts;
acquired in February 1998;
o Primary Marketing Group, (PMG) a manufacturers' representative
group, based in San Jose, California servicing the needs of
computer hardware and software publishers; primary sales group for
Kao Corporation in California; acquired in February 1998;
o Trotter Technologies, Inc., (TTI) an RMA processing, warehousing
and distribution company based in San Jose, California; acquired
in May 1997;
o Benchmark Media Services, Inc., (Benchmark) a software media
replicator with operations in Plymouth, Minnesota and
Indianapolis, Indiana; acquired in March 1997.
Industry
The process management services industry consists of companies that
provide a wide variety of services to software publishers, computer
manufacturers, Internet companies, book publishers, independent record labels
and other producers of multimedia products ranging from replication to
fulfillment to complete process management services. Growing consumer demand for
multimedia products such as CD-ROM and DVD-ROM and a corresponding increase in
the installed base of CD and DVD drives as well as the increased business
conducted over the Internet have been significant factors driving the demand for
process management services.
During the 1990s, CD-ROM became the dominant medium for software
distribution nearly replacing diskettes. According to industry analysts, the
growth in CD-ROM unit volume is expected to continue into 2002 with an annual
unit volume of 3.6 billion. Industry analysts also project software sales will
continue their tremendous growth from $153 billion in 1999 to $270 billion in
2003.
DVD is becoming the accepted new medium for home video distribution.
Industry analysts believe the DVD-Video format will replace the VHS format in
the pre-recorded market over time as DVD-Video experiences no image or sound
degradation over normal usage and offers greater storage capacity, indexing,
random access and lower manufacturing costs. Industry analysts estimate the
worldwide installed base of DVD-Video players will reach over 95 million players
by 2004. DVD-ROM has grown at a slower rate than DVD-Video. But its increased
storage capacity allows DVD-ROM to be the natural replacement for CD-ROM as
programs expand and require more storage capacity.
The fulfillment segment of process management services is experiencing
rapid growth with the explosion of the Internet. Analysts are projecting
worldwide commerce on the Internet will grow from an estimated $50 billion in
1998 to $1.3 trillion in 2003. Web buyers worldwide are expected to reach $183
million in 2003 as compared to $31 million in 1998. Industry analysts are
projecting Internet-driven fulfillment services are projected to grow from $632
million in 1999 to $20 billion in 2003 to $42 billion in 2009.
<PAGE>
Some software publishers and computer hardware OEMs still dedicate
in-house resources to manufacturing and fulfillment. However, significant and
increasing demand exists for outsource services from providers who can reliably
manufacture and process multimedia products within short turnaround times. The
same factors that have led to the trend toward more outsourcing are driving
consolidation in the industry as many small local and regional service providers
find it increasingly difficult to access the capital required to invest in new
capital equipment and additional value-added services.
Services
The Company believes that it offers a comprehensive range of process
management services. These value-added services cover each aspect of a software
product's life cycle. Customers can engage Zomax on a service-by-service basis,
depending on their needs. In all cases, Zomax project management maintains
regular contact with customers and coordinates all services provided. With the
breadth of services offered by the Company, customers can bring their end
products to market without ever handling the product themselves.
Customer Contact Centers. The Company offers complete front-end
E-commerce and customer contact centers which include program management, call
center operations, financial services, fulfillment and information systems. The
call centers provide various levels of customer support, first level technical
support and outbound telemarketing services covering sixteen languages. The
Company is in direct contact with its customers' customers.
Graphic Design. The Company works directly with its customers in
developing product and packaging designs.
Print Management. The Company receives print specifications from its
customers, facilitates printing purchases and implements quality controls to
ensure on-time delivery of the end product. Additionally, Zomax provides print
inventory management services.
Mastering. During the mastering process, a laser beam recorder
transfers the digital information onto a glass mastering substrate. This
substrate then undergoes an electroforming process that creates a metal stamper
from which CDs and DVDs are molded. The mastering process is critical to product
quality and is conducted in a clean-room environment free of microscopic
contaminants which can obscure large amounts of data.
Replication. CDs and DVDs are replicated using an integrated robotic
line process which incorporates plastic injection molding, metalizing,
lacquering and inspection equipment. The replication process begins with the
injection of high quality, CD-grade polycarbonate into the mold cavity where the
metal stamper has been mounted. The top surface of the molded clear
polycarbonate disc containing all of the digitized data is then covered with a
metallic coating to provide for reflection of the reading laser beam in the
player. A thin layer of lacquer is then applied over the metal to protect it and
to serve as a base for printing on the disc. Unacceptable CDs and DVDs are
detected and discarded through the inline inspection process. The Company
currently has a combination of 60 CD and DVD production lines at its facilities.
<PAGE>
CD and DVD Printing. Printing is performed in batches off-line in order
to take advantage of the high speed nature of the printing process while
avoiding the production delays typically required for printer setup. The
Company's printing equipment includes screen printing presses with capabilities
of up to six-color printing. Automated label and print quality inspection
equipment is integrated with the screen printers to ensure high quality control
and reduce the need for manual quality inspection.
Packaging. The Company has automated equipment to provide for commonly
requested packaging configurations. Currently, standard CD packaging
configurations include the plastic "jewel box" with customer or Zomax supplied
print material in the bottom and top of the box and paper or chipboard sleeves.
For non-automated assembly requirements, the Company provides a full range of
hand assembly options. As part of its dedication to be full-service provider,
the Company works with its customers to develop sophisticated retail packaging
configurations.
Warehousing and Inventory Management. To assist customers in minimizing
costs and reducing time to market, Zomax offers comprehensive warehousing and
inventory management services. Increasingly, the Company is warehousing products
for customers and shipping those products directly into the customers'
distribution channels. The Company believes this service provides customers with
a more comprehensive solution and enables them to be more responsive to market
demands.
Distribution and Fulfillments. The Company offers its customers
flexible, just-in-time delivery programs allowing product shipments to be
closely coordinated with customers' inventory requirements. Zomax can
accommodate large shipments to distribution centers and receive and fulfill
same-day orders to individual locations.
RMA Processing. Zomax employees receive, sort, count, recycle,
re-price, repackage and redistribute returned, obsolete or excess software
merchandise. The Company also receives, tests and redistributes hardware
products. A customer can maximize its operating efficiencies by using Zomax to
coordinate RMA processing with inventory management and replication orders. The
Company estimates that, based on discussions with software publishers, 15% of
all unit shipments to software retailers ultimately require RMA processing.
Customers and Markets
The Company markets and sells multimedia services to a variety of
customers, including software publishers, computer manufacturers, Internet
companies, book publishers, independent record labels, marketing groups and data
base suppliers. Zomax currently services a broad customer base in these industry
segments including Microsoft and Gateway.
The Company is an authorized replicator with Microsoft, which allows
the Company to replicate Microsoft(R) products for any authorized distributor.
The Company is also authorized to perform fulfillment services for Microsoft
licensed OEMs. These arrangements are pursuant to annual agreements with
Microsoft. The Company expects, but cannot guarantee, that these agreements will
be renewed. The Company also provides certain telemarketing and fulfillment
services to Microsoft under a two-year Master Services Agreement which expires
in January 2001. In addition, the Company has an agreement with Microsoft to
<PAGE>
provide RMA processing, which agreement may be terminated by Microsoft upon 30
days' notice. During 1999, all Microsoft activities accounted for 40% of the
Company's consolidated sales.
One of the Company's primary customers is Gateway, which accounted for
4%, 17% and 38% of the Company's consolidated sales in 1999, 1998 and 1997,
respectively. Zomax is a primary supplier of CDs to Gateway. The Company has an
agreement with Gateway that governs the procedures for making and receiving
orders. This agreement expires July 31, 2000, but may be renewed for additional
one-year terms upon agreement of the parties, subject to earlier termination by
Gateway upon 30 days' notice.
Marketing and Sales
Zomax focuses its marketing efforts on customers that require personal
service, flexibility, fast turnaround time and a complete outsource solution to
their process management service needs. The Company has successfully marketed
itself to these customers by managing all of the steps in the process from
design to replication to packaging to delivery. As part of its strategy, the
Company also intends to continue cross-marketing its services to customers who
may currently rely on the Company for only a portion of their process management
service needs.
The Company employs a direct sales staff that is responsible for
maintaining relationships with existing customers and developing new business
relationships. The Company has a direct sales staff of 22 people. The Company's
direct sales staff is supported by a project management staff of 118 people that
is responsible for ensuring that each order is processed on a timely basis, all
required support materials are in place and desired quality levels are achieved.
Each customer account is assigned one or more project managers to provide daily
contact with the customer, coordinate the purchase and manufacture of all
necessary materials, adapt to order changes and generally act as liaison with
the customer.
Competition
The multimedia service industry is highly competitive and is
experiencing consolidation. The Company competes primarily with independent
service providers and, to a lesser extent, with affiliates of major
international music companies and small localized service providers. Each of
these producers generally services a defined set of customer needs.
o Independent service providers. Participants in this segment include
companies such as Zomax, Disctronics, Inc., Denon Electronics, Inc.,
Cinram International Inc., Startek Corporation, Future Media
Productions, Modus Media International and Metatec Corporation.
Independent service providers generally have the ability to handle
large volume requirements and have varying degrees of service
capability. However, most independent manufacturers do not typically
offer as comprehensive a range of outsource services as Zomax.
o Affiliates of major international music companies. This category
consists of large manufacturers who are affiliated with major
international music companies such as Sony Music Entertainment, Inc.,
PolyGram Holdings, Inc., Warner Music, BMG Music and EMI Music. These
<PAGE>
service providers dedicate a majority of their manufacturing capacity
to the production of CD-Audio for affiliated record labels and
typically offer a very limited range of services.
o Small localized service providers. These service providers generally
have limited production capacity and offer a limited range of related
services. The complexity of the manufacturing process and the large
capital investment required to maintain and upgrade capacity generally
constrain these small service providers.
Other existing technologies also compete with the Company's products
that 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. The
Company does not expect any of these technologies to expand beyond their current
market niches in the near future.
Electronic on-line delivery of digital information, such as through the
Internet, is a potential future competitor of CD and DVD technology. The Company
believes that current and projected transmission speeds and infrastructure
limitations of on-line delivery systems will prevent them from replacing CD and
DVD technology in the foreseeable future. In addition, future advances in CD and
DVD technology, such as higher speed drives and greater data compression, could
increase the advantages of these technologies over electronic on-line delivery
and other potential competitive technologies.
Competition in the hardware and software RMA processing industry
segment is extremely fragmented. Generally, participants in this industry
segment include a number of independent companies as well as publishers and OEMs
that dedicate in-house resources to RMA processing.
Many of the Company's national and regional competitors are, and future
potential competitors may be, larger and more established with greater financial
and other resources than the Company, particularly as consolidation in the
industry continues. As a result, such competitors may be able to respond more
quickly to market changes or to devote greater resources to the manufacture,
promotion and sale of their products and services than can the Company.
The Company believes that it competes favorably with its competitors
with respect to quality, service, reliability, price, manufacturing capacity and
timely delivery of product, the principal competitive factors in this industry.
The Company also believes that customers are willing to incur additional costs
for extra services. As such, to enhance its competitive position, the Company
offers a full range of value-added services to customers including design,
preparation and printing of artwork and packaging, warehousing and shipping and
RMA processing.
Proprietary Rights
Zomax, like most other CD and DVD 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
and DVDs sold and terminate either upon the expiration of the patents being
licensed or on a certain date.
<PAGE>
Zomax currently has CD license agreements with U.S. Philips Corporation
("Philips") and Discovision Associates ("DVA"). These agreements grant to Zomax
non-exclusive, royalty-bearing, non-transferable licenses to make, use and sell
CDs in the United States. The royalty payments due under the licenses generally
depend of the number of CDs manufactured, their size and their use. The
Company's license from Philips expires in 2006. The term of the DVA license
continues until the expiration of the last DVA patent covered by the license
which is currently in 2010. This date may change in the event of a patent
invalidity ruling, premature expiration of a currently licensed patent or the
subsequent issuance of a related patent. The Company is currently negotiating to
expand these agreements to be worldwide licenses. If the Company is unable to
obtain these licenses, it could have a material effect on the Company's results
of operations. Although the Company expects to obtain such licenses, no
assurances can be made that such licenses will be obtained and the Company
cannot predict the amount of the royalty that will be payable under any such
license.
The Company has entered into a DVD license agreement with U.S. Phillips
Corporation. This agreement expires in 2009 with royalty payments due based on
the number of DVDs manufactured. The Company is currently negotiating licenses
from other owners of DVD technology to manufacture DVDs worldwide. If the
Company is unable to obtain these licenses, it could have a material effect on
the Company's results of operations. Although the Company expects to obtain such
licenses, no assurances can be made that such licenses will be obtained and the
Company cannot predict the amount of the royalty that will be payable under any
such license.
Employees
The Company has approximately 1,500 full-time employees and hires
additional employees on a temporary basis to perform manufacturing-related
services as the need arises. The Company currently operates its Minneapolis,
Arnprior, Fremont and Dublin facilities 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.
Cautionary Factors That May Affect Future Results
Certain statements contained in this Annual Report on Form 10-K are
forward-looking, based on current expectations. Such statements can be
identified by the use of terminology such as "anticipate," "believe,"
"estimate," "expect," "intend," "may," "could," "possible," "plan," "project,"
"will," "forecast" and similar words or expressions. The Company's
forward-looking statements generally relate to its growth strategy, financial
results and sales efforts. Investors are cautioned that all forward-looking
statements involve risks and uncertainties, including among others those
identified below. The Company undertakes no obligation to update any
forward-looking statement, but investors are advised to consult any further
disclosures by the Company on this subject in its filings with the Securities
and Exchange Commission. In this regard, please also see the Outlook section of
Item 7 below.
<PAGE>
Although it is not possible to create a comprehensive list of all
factors that may cause actual results to differ from the Company's
forward-looking statements, such factors include, among others, (i) the
Company's ability to sustain and manage its growth and implement its business
strategy, including the integration of newly acquired and geographically
dispersed operations; (ii) the Company's ability to adapt quickly to changes in
information storage and retrieval technology; (iii) the Company's reliance on a
few key customer and strategic relationships, including those with Microsoft,
Gateway and Novell; (iv) the trend of consolidation in the industry and the
ability of the Company to effectively compete in an intensely competitive
environment; (v) the development of new products or technologies by competitors,
technological obsolescence and other changes in competitive factors; (vi) risks
associated with establishing and maintaining international operations; (vii) the
risks associated with price declines; (viii) the Company's dependence on its
ability to obtain and maintain licenses to use patented technology in its
manufacturing operations; and (ix) economic factors over which the Company has
no control.
ITEM 2. PROPERTIES
The Company leases facilities throughout the U.S. and Europe and owns
property in Canada. The following table sets forth information about the
Company's facilities. Management believes its facilities are adequate for the
Company for the foreseeable future.
<TABLE>
<CAPTION>
Approximate Lease
Location Square Feet Expiration Services
- ---------------------------- ------------- ------------------ -------------------------------------------
<S> <C> <C> <C>
Arnprior, Canada 158,000 Owned Print management, mastering, replication,
printing, packaging, warehousing and
distribution.
Concord, California 30,000 2008 Customer contact center
Dublin, Ireland 100,000 2005 - 2016 (1) Customer contact center, print
management, mastering, replication,
printing, packaging, warehousing,
fulfillment, distribution and RMA
processing
Fremont, California 150,000 2006 Print management, mastering, replication,
printing, packaging, warehousing,
fulfillment and distribution.
Indianapolis, Indiana 91,000 2002 Diskette replication, packaging,
fulfillment and distribution
Langen, Germany 25,000 2001 Diskette duplication, packaging,
warehousing and distribution.
Minneapolis, Minnesota 134,000 2004 (2) Graphic design, print management,
mastering, replication, printing,
packaging, warehousing, fulfillment,
distribution and RMA processing
San Jose, California 275,000 2002 (3) Graphic design, print management,
packaging, warehousing, fulfillment,
distribution and RMA processing
</TABLE>
<PAGE>
(1) Includes leases for two different sites.
(2) Included leases for two sites, one of which is 82,000 sq. ft, with Nathan
Lane Partnership, LLP (described below) expires in 2000 but has an option
which the Company can extend two additional terms of three years each.
(3) Includes leases for three different sites, two of which expire in 2002 and
are currently not being utilized. The Company is attempting to sublease
sites to third parties.
The Company leases its manufacturing, office and warehouse space in
Minneapolis, Minnesota from Nathan Lane Limited Partnership, a Minnesota limited
liability partnership of which Mr. Phillip T. Levin, a Director of Zomax, owns a
one-third interest. Pursuant to this lease, as amended, the Company leases
approximately 82,000 square feet at an average base rent of $8.52 per net
rentable square foot per annum. The Company is also obligated to pay its
proportionate share of taxes and operating expenses.
ITEM 3. LEGAL PROCEEDINGS
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.
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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "ZOMX." The following table sets forth, for the periods
indicated, the high and low bid prices of the Company's Common Stock. These bid
quotations represent inter-dealer prices and do not include retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
Fiscal Year Ended December 25, 1998: High Low
First Quarter........................ $9.10 $4.56
Second Quarter....................... 10.00 7.07
Third Quarter........................ 8.13 4.25
Fourth Quarter....................... 8.25 1.94
Fiscal Year Ended December 31, 1999:
First Quarter........................ $37.94 $12.31
Second Quarter....................... 44.75 17.75
Third Quarter........................ 55.56 22.50
Fourth Quarter....................... 47.94 24.44
<PAGE>
The Company has never declared or 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 8, 2000, there were approximately 332 record holders of the
Company's Common Stock, 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 15,000
stockholders of the Company's Common Stock whose stock is held either in nominee
name and/or street name brokerage accounts.
On February 18, 2000, the Company issued 2,730 shares of Common Stock
upon the cashless conversion of an underwriter's warrant to purchase 2,978
shares at $4.05 per share. Pursuant to such conversion, the warrant holder
forfeited 278 shares under the warrant as consideration. The Company relied upon
Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(000's except per share data) For the years ended
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $229,261 $61,074 $47,877 $26,867 $16,858
Gross Profit 73,916 16,804 15,104 8,776 5,632
Selling, general and 37,764 10,595 9,860 5,366 3,853
administrative expenses
Operating Income 36,152 6,208 5,244 3,410 1,779
Income before taxes 37,804 6,141 5,218 3,613 3,575
Pro Forma(1):
Income before income taxes 37,804 6,141 5,218 3,613 3,575
Provision for income taxes (11,977) (2,580) (2,090) (1,461) (1,434)
Net Income 25,827 3,561 3,128 2,152 2,141
Earnings per share -
Basic 1.74 0.28 0.30 0.23 0.30
Diluted 1.58 0.26 0.29 0.23 0.30
Weighted average number of shares outstanding :
Basic 14,831 12,734 10,448 9,198 7,200
Diluted 16,346 13,462 10,716 9,202 7,200
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
Balance Sheet Data:
Cash 51,128 $ 25,621 $ 5,213 $ 7,945 $ 937
Working capital 95,691 26,969 5,049 9,029 2,631
Total assets 142,304 65,424 31,026 24,322 12,485
Long-term notes payable, less 3,990 1,746 3,104 1,834 2,979
current portion
Total shareholders' equity 82,430 50,087 16,463 14,643 5,166
</TABLE>
(1) A pro forma provision has been established as if all consolidated companies
were taxable entities for all periods presented.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading international outsource service provider of
process management services. The Company's fully integrated services include
"front end" E-commerce support; call center and customer support solutions; DVD
authoring services; CD and DVD mastering; CD and DVD replication; supply chain
and inventory management; graphic design; print management; CD and DVD printing;
assembly; packaging; warehousing; distribution and fulfillment; and RMA
processing services. Over the last three years, the Company has made six
acquisitions that have expanded its geographic presence and outsourcing service
offerings.
The Company recognizes revenue from 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 subsequent written customer instructions.
The Company's business 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 is not a meaningful indicator of
future financial results.
On January 7, 1999, the Company acquired the businesses and certain net
assets of Kao Corporation (Kao) in the United States, Canada, Ireland and
Germany. The purchase price for the Kao 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 services. 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 estimated fair market values.
On February 4, 1998, Primary Marketing Group of California (PMG), Next
Generation Services (NGS) and Primary Marketing Group Limited of Dublin Ireland
(PMG Ireland) were merged with 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. The acquisition 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 May 1, 1997, the Company acquired the outstanding shares of Trotter
Technologies, Inc. (TTI), an RMA processing, warehouse and distribution company
based in San Jose, CA, servicing the software publishing market. The purchase
price of TTI was $712,000 cash and 59,268 shares of the Company's Common Stock.
<PAGE>
The acquisition of TTI was accounted for using the purchase method of
accounting. As a result of this treatment, the TTI purchase price was allocated
to net assets acquired based on estimated fair market values and approximately
$1.2 million of cost in excess of net assets acquired was recorded as goodwill.
On March 31, 1997, the Company acquired the outstanding shares of
Benchmark Media Services, Inc., a software media replicator with operations in
Minneapolis, Minnesota and Indianapolis, Indiana. The Company agreed to pay
consideration for the acquisition based on revenues of Benchmark in 1997.
Revenue levels were not met; therefore, no consideration was paid. The Benchmark
acquisition was accounted for using the purchase method of accounting.
Prior to the acquisitions described above, some of the acquired
companies operated as non-taxable entities. A pro forma tax provision has been
established as if all consolidated companies were taxable entities for all
periods presented.
Results of Operations
The following table sets forth certain operating data as a percentage
of sales for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
December 31, December 25, December 26,
1999 1998 1997
---------------- --------------- -------------
<S> <C> <C> <C>
Sales........................................... 100.0% 100.0% 100.0%
Cost of sales................................... 67.7 72.5 68.5
---------------- --------------- -------------
Gross profit.................................... 32.3 27.5 31.5
Selling, general and administrative
expenses........................................ 16.5 17.3 20.6
---------------- --------------- -------------
Operating income................................ 15.8 10.2 10.9
Equity in losses of unconsolidated
entity.......................................... 0.8 0.6 -
Gain on unconsolidated entity stock sale........
(1.6) - -
Interest expense................................ 0.5 0.6 0.8
Interest income................................. (0.4) (1.6) (0.5)
Other (income) expense, net..................... - 0.5 (0.3)
---------------- --------------- --------------
Income before income taxes...................... 16.5 10.1 10.9
Provision for income taxes(1)................... 5.2 4.2 4.4
---------------- --------------- -------------
Net income...................................... 11.3% 5.9% 6.5%
================ =============== ==============
</TABLE>
(1) A pro forma tax provision has been established as if all consolidated
companies were taxable entities for 1998 and 1997.
<PAGE>
For the Years Ended December 31, 1999 and December 25, 1998
Sales. The Company's total net sales increased 275% to $229.3 million
in 1999 as compared to $61.1 million in 1998. CD and DVD related sales increased
298% in 1999. The Company's new customer contact centers contributed an
additional $26.3 million to 1999 sales. Diskette, audiocassettes and RMA sales
together increased 49% in 1999. The overall increase in sales was primarily due
to the Kao acquisition described above. The acquisition significantly expanded
the Company's geographic presence in the United States, Canada, Ireland and
Germany; and added the customer contact center capabilities, as well as
significantly increased the Company's CD and DVD manufacturing capacity. In
addition, the Company further increased its CD and DVD production capacity in
Ireland and North America with the addition of eight new manufacturing lines in
the third quarter of 1999.
Cost of sales. Cost of sales as a percentage of sales was 67.7% in 1999
and 72.5% in 1998. In dollars, cost of sales increased $110.1 million to $155.4
million from 1998. This cost of sales percentage decrease is due to several
factors, including the implementation of improved financial and operational
controls at the acquired Kao sites and operation of manufacturing facilities at
higher utilization rates. This was partially offset by an increase in
outsourcing. The Company outsources its CD production when customer orders
exceed its production capabilities. The Company outsourced 9% of its CD
manufacturing in 1999 and 7% in 1998. The cost for such outsourced production is
higher than the cost of CDs produced internally by the Company.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of sales were 16.5% in 1999 and 17.3% in
1998. In dollars, selling, general and administrative expenses increased $27.1
million to $37.7 million from 1998. The dollar increase in 1999 resulted
primarily from the acquisition of the Kao business.
Earnings from unconsolidated entity. During 1999, the Company
recognized a loss of $1.9 million from its equity investment in Chumbo Holdings
Corporation, an Internet based reseller of software. The loss represents the
Company's share of Chumbo losses and the amortization of excess purchase price
over the fair value of the underlying net assets acquired. In December 1999,
Chumbo sold additional equity in a private round of financing. The Company
recognized a gain on Chumbo's issuance of additional equity in the amount of
$3.7 million, representing the increase in the Company's share of Chumbo's net
assets after the funding.
Interest income and expense. Interest income was $1.0 million and
$949,000 for 1999 and 1998, respectively. Interest expense was $1.2 million and
$369,000 for 1999 and 1998, respectively. Interest expense increased with
borrowings used to finance the purchase of Kao.
Other (income) expense, net. In 1999, other expense consists of foreign
currency losses. In 1998, the Company incurred expenses totaling $278,000
relating to the acquisition of PMG, NSG and PMG Ireland. These costs were
expensed as incurred according to the pooling of interest accounting rules.
Provision for income taxes. The effective income tax rate for 1999 was
31.7% compared to a pro forma rate of 42.0% for 1998. The reduced rate in 1999
is due primarily to the lower effective tax rate in Ireland.
Net income. Net income for 1999 was $25.8 million, an increase of 625%
from the pro forma net income of $3.6 million in 1998.
<PAGE>
For the Years Ended December 25, 1998 and December 26, 1997
Sales. The Company's sales were $61.1 million for 1998, an increase of
27.6% from $47.9 million in 1997. CD related sales increased 68% in 1998 from
1997. The increase in 1998 CD related sales resulted from the increased CD
capacity in the Minneapolis, Minnesota facility and the opening of new CD and
assembly/distribution facilities in San Jose, California. The Company believes
the growth in CD related sales was due to its strategy of being a full-service
provider of multimedia products and related services. Diskette related sales
decreased 41% from the prior year as customers moved their software from
diskettes to CDs. RMA processing revenue is comprised of processing fees
associated with handling customer returns from the retail channels, as well as
sales of recycled diskettes which are received in returns and processed for
resale. RMA processing revenue decreased 34.0% in 1998 compared to 1997 as fewer
recycled diskettes were processed and sold in 1998 compared to 1997 and the 1997
RMA processing revenue included a significant one-time project.
Cost of sales. Cost of sales as a percentage of sales was 72.5% and
68.5% for 1998 and 1997, respectively. The cost of sales percentage increase
resulted from a change in product mix discussed above and start up expenses
incurred in connection with opening the new CD facility. The Company outsources
its CD production when customer orders exceed its production capabilities. The
Company outsourced 7% of its CD manufacturing in 1998 and 9% in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of sales were 17.3% in 1998 and 20.6% in
1997. In dollars, general and administrative expenses increased $735,000 from
1997. Selling, general and administrative expenses have decreased as a
percentage of sales in 1998 as the Company has achieved operational efficiencies
from integrating its acquisitions.
Equity in losses of unconsolidated entity. In the fourth quarter of
1998, the Company purchased a one-third equity interest in Chumbo Holdings
Corporation, an Internet based reseller of software. The Company accounts for
this investment using the equity method of accounting, and accordingly,
recognized a loss of $370,000 representing its share of Chumbo net losses and
the amortization of excess purchase price over the fair value of the underlying
net assets acquired.
Interest income and expense. Interest income was $949,000 and $228,000
for 1998 and 1997, respectively. The increase in interest income in 1998
resulted from investment income on proceeds from the Company's public stock
offering. Interest expense was $369,000 and $409,000 for 1998 and 1997,
respectively.
Other (income) expense, net. In 1998, the Company incurred expenses
totaling $278,000 relating to the acquisition of PMG, NGS and PMG Ireland. These
costs were expensed as incurred according to the pooling-of-interest accounting
rules. In 1997, PMG generated $155,000 of other income as a result of
representing certain manufacturers' products.
Pro forma provision for income taxes. The pro forma effective income
tax rate for 1998 was 42.0% compared to 40.1% for 1997. Such rates principally
reflect the federal statutory tax rate plus the effect of state income taxes.
<PAGE>
Pro forma net income. Pro forma net income for 1998 was $3.6 million,
an increase of 14.0% from $3.1 million in 1997.
Liquidity and Capital Resources
As of December 31, 1999, the Company had working capital of $47.5
million, compared to working capital of $27.0 million as of December 25, 1998
and $5.0 million as of December 26, 1997. The increase in working capital in
1999 was primarily due to the increase in cash provided by operating activities
which were significantly impacted by the Kao acquisition. The increase in
working capital in 1998 was primarily due to the proceeds received from the
Company's secondary stock offering. In May 1998, the Company sold 3.8 million
shares of common stock netting $30 million, net of offering costs.
As of December 31, 1999, the Company had cash totaling $51.1 million.
Cash generated from operating activities was $64.7 million, $7.7 million and
$6.9 million during 1999, 1998 and 1997, respectively. The increase in 1999
operating cash flow results primarily from the increase in net income and
improvements in accounts receivable collections from the Kao acquired
businesses.
Cash used in investing activities was $53.4 million, $15.0 million and
$6.6 million in 1999, 1998 and 1997, respectively. In 1999, the Company used
$42.5 million to purchase the businesses and net assets of Kao Corporation. In
1998, cash used in investing activities included $5.0 million for the purchase
of an equity interest in Chumbo Holdings Corporation. The balance of 1999, 1998
and prior years investing activities primarily relates to the purchase of
property and equipment to support the Company's growth in business.
In 1999, the Company financed a portion of the Kao acquisition with the
proceeds of a $15.0 million term loan facility. In 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. The
Company financed equipment purchases with long-term debt totaling $3.8 million
in 1997. The Company reduced the amount of notes payable in the amount of $3.6
million, $3.4 million and $3.9 million in 1999, 1998 and 1997, respectively. PMG
and NGS made distributions to its owners of $2.2 million in 1997. These
distributions were made in accordance with the dividend policies of these
companies. The Company has never declared or paid dividends on its Common Stock.
As of December 31, 1999, the Company had a revolving line of credit
facility for up to $25.0 million of borrowings. Such borrowings are 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 31, 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 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.
<PAGE>
Market Risk
Foreign currency. As a result of the Kao acquisition, a portion of the
Company's operations are located in foreign jurisdictions including Ireland,
Canada, and Germany. The Company's financial results could be significantly
affected by factors such as changes in foreign currency or weak economic
conditions in foreign markets. In addition, sales of products and services are
affected by the value of the U.S. dollar relative to other currencies.
Foreign currency gains and losses are reflected in the Company's
financial statements. The net exchange loss was $40,000 in 1999. The Company
anticipates it will incur exchange gains and losses from foreign operations in
the future. The Company's net investment in foreign subsidiaries was $32.2
million at December 31, 1999. During 1999, the U.S. dollar strengthened against
the participating Euro currencies. A stronger U.S. dollar generally has a
negative impact on non-U.S. results because foreign currency denominated
earnings translate into fewer U.S. dollars. A weaker dollar generally has
positive translation effect. In 1999, the stronger U.S. dollar reduced
translated net sales and net income by $9.1 million and $1.8 million,
respectively.
Interest. Substantially all of the Company's debt and associated
interest expense is sensitive to changes in the level of interest rates.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union, including Ireland and Germany, adopted the "euro" as their common legal
currency. The euro trades on currency exchanges and is available for non-cash
transactions. From January 1, 2000 through January 1, 2002, each of the
participating countries is scheduled to maintain its national ("legacy")
currency as legal tender for goods and services. Beginning January 1, 2002, new
euro-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation no later than July 1, 2002. The Company's foreign
operating subsidiaries affected by the euro conversion are evaluating the
business issues raised, including the competitive impact of cross-border price
transparency. The Company does not anticipate any significant near-term business
ramifications; however, long-term implications such as the euro currency
conversion's effect on accounting, treasury and computer systems are under
review.
Year 2000 Compliance
The Company developed a Year 2000 plan, the objective of which was 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 was to ensure
that current business operations would continue to function accurately with no
material disruption into and beyond year 2000. The Company formed internal
review teams and engaged an independent Year 2000 consulting firm to assist and
advise regarding Year 2000 compliance. The Year 2000 plan addressed (a)
information technology (IT) 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.
<PAGE>
During 1999, the Company completed the assessment of Year 2000
compliance with regard to embedded technology and material suppliers and
customers, implemented remediations for any Year 2000 problems identified and
formulated contingency plans to reduce risks and exposure to Year 2000 related
issues.
Through December 31, 1999, costs associated with the Company's Year
2000 plan were less than $50,000. Currently, no significant business
interruptions from the Year 2000 issue were encountered. The Company will
continue to monitor systems and vendors. Although the Company does not
anticipate any future business interruption, there is no assurance that such
interruption will not occur.
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.
Seasonality
The demand for CDs and other multimedia consumer products is seasonal,
with increases during 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.
Outlook
The statements contained in this Outlook section and elsewhere in this
Annual Report 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. Such statements can be identified by the
use of terminology such as "anticipate," "believe," "estimate," "expect,"
"intend," "may," "could," "possible," "plan," "project," "will," "forecast" and
similar words or expressions. The Company's forward-looking statements generally
relate to its growth strategy, financial results, sales efforts and cash
requirements. 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 risks and
uncertainties, including among others those identified below.
The Company believes the total number of CDs sold worldwide will
continue to grow in 2000. 2000 unit prices are expected to remain somewhat
consistent. The Company believes it has the personnel, strategies and financial
strength in place to support the expected increase in sales growth with a
minimum increase in salaried personnel. However, increases in the Company's
sales and its ability to be a leader in the industry depends on its ability to
manage industry changes as well as its own growth and organizational changes.
If 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. A
<PAGE>
substantial part of our revenue is derived from a small number of key customers.
Our revenues will be significantly lower than expected if we cannot keep these
customers. In addition, if the Company does not respond rapidly to technological
changes, we may lose customers and experience a significant decrease in revenue.
The Company undertakes no obligation to update any forward-looking
statement, but investors are advised to consult any further disclosures by the
Company on this subject in its filings with the Securities and Exchange
Commission, especially on Forms 10-K, 10-Q and 8-K (if any), in which the
Company discusses in more detail various important factors that could cause
actual results to differ from expected or historic results. It is not possible
to foresee or identify all such factors. As such, investors should not consider
any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" and "Euro Currency Conversion" under Item 7 above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and schedules are included
immediately following the signature page of this report on the pages indicated:
Page
Report of Independent Public Accountants on Consolidated
Financial Statements dated January 24, 2000 F-1
Consolidated Balance Sheets as of December 31, 1999 and
December 25, 1998 F-2
Consolidated Statements of Operations for Years Ended December
31, 1999, December 25, 1998 and December 26, 1997 F-3
Consolidated Statements of Shareholders' Equity for Years Ended
December 31, 1999, December 25, 1998 and December 26, 1997 F-4
Consolidated Statements of Cash Flows for Years Ended December
31, 1999, December 25, 1998 and December 26, 1997 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Schedule dated
March 29, 2000 F-19
Schedule II - Valuation and Qualifying Accounts F-17
All other schedules are omitted since they are not applicable, not
required or the information is presented in the consolidated financial
statements or related notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 19, 2000. Such
information is incorporated herein by reference.
ITEM 11. 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 19, 2000. Such information is incorporated
herein by reference.
ITEM 12. 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 19, 2000. Such information is
incorporated herein by reference.
ITEM 13. 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 19, 2000. Such information is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are included in this report: See "Exhibit Index"
immediately following the financial statements following the signature page of
this Form 10-K.
<PAGE>
(b) Financial Statements and Schedules.
The following financial statements and schedules are included in Part
II, Item 8 of this Form 10-K.
Report of Independent Public Accountants on Consolidated Financial
Statements dated January 24, 2000
Consolidated Balance Sheets as of December 31, 1999 and December 25,
1998
Consolidated Statements of Operations for Years Ended December 31,
1999, December 25, 1998 and December 26, 1997
Consolidated Statements of Shareholders' Equity for Years Ended
December 31, 1999, December 25, 1998 and December 26, 1997
Consolidated Statements of Cash Flows for Years Ended December 31,
1999, December 25, 1998 and December 26, 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants on Schedule dated March 29,
2000
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since they are not applicable, not
required or the information is presented in the consolidated financial
statements or related notes.
(c) Reports on Form 8-K.
None
<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 INCORPORATED
Date: March 29, 2000
By /s/ James T. Anderson
James T. Anderson
Chairman 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-K and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granted unto said
attorneys-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.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/James T. Anderson Chairman of the Board and Chief Executive March 29, 2000
Officer (principal executive officer)
James T. Anderson
/s/Anthony Angelini President, Chief Operating Officer March 29, 2000
Anthony Angelini and Director
/s/James E. Flaherty Chief Financial Officer and Secretary March 29, 2000
(principal financial and accounting officer)
and accounting officer)
James E. Flaherty
/s/Phillip T. Levin Director March 29, 2000
Phillip T. Levin
/s/Robert Ezrilov Director March 29, 2000
Robert Ezrilov
/s/Howard P. Liszt Director March 29, 2000
Howard P. Liszt
/s/Janice Ozzello Wilcox Director March 29, 2000
Janice Ozzello Wilcox
</TABLE>
<PAGE>
Report of Independent Public Accountants
To Zomax Incorporated:
We have audited the accompanying consolidated balance sheets of Zomax
Incorporated (a Minnesota corporation) as of December 31, 1999 and December 25,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zomax Incorporated
as of December 31, 1999 and December 25, 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 24, 2000
<PAGE>
ZOMAX INCORPORATED
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 25,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,128 $ 25,621
Accounts receivable, net of allowance for doubtful accounts
of $2,645 and $2,035 28,291 9,872
Inventories 9,338 2,088
Deferred income taxes 2,899 1,425
Prepaid expenses and other 2,448 543
------------ ------------
Total current assets 94,104 39,549
PROPERTY AND EQUIPMENT, net 40,642 18,925
INVESTMENT IN UNCONSOLIDATED ENTITY 6,447 4,662
GOODWILL AND OTHER ASSETS, net 1,111 2,287
------------ ------------
$ 142,304 $ 65,423
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 3,990 $ 1,380
Accounts payable 18,768 5,468
Accrued expenses-
Accrued royalties 4,083 2,446
Accrued compensation 11,768 1,786
Other 6,342 566
Income taxes payable 1,687 934
------------ ------------
Total current liabilities 46,638 12,580
LONG-TERM NOTES PAYABLE, net of current portion 10,603 1,746
DEFERRED INCOME TAXES 2,633 1,010
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares authorized; 15,483 and 14,378
shares issued and outstanding 51,953 42,680
Retained earnings 33,234 7,407
Other comprehensive income (2,757) --
------------ ------------
Total shareholders' equity 82,430 50,087
------------ ------------
$ 142,304 $ 65,423
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Operations
(In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------------
December 31, December 25, December 26,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
SALES $ 229,261 $ 61,074 $ 47,877
COST OF SALES 155,345 44,270 32,773
--------- --------- ---------
Gross profit 73,916 16,804 15,104
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
37,724 10,595 9,860
--------- --------- ---------
Operating income 36,192 6,209 5,244
EQUITY IN LOSSES OF UNCONSOLIDATED ENTITY
1,890 370 --
GAIN ON UNCONSOLIDATED ENTITY STOCK SALE (3,685) -- --
INTEREST EXPENSE 1,179 369 409
INTEREST INCOME (1,036) (949) (228)
OTHER (INCOME) EXPENSE, NET 40 278 (155)
--------- --------- ---------
Income before income taxes 37,804 6,141 5,218
PROVISION FOR INCOME TAXES 11,977 2,475 1,520
--------- --------- ---------
NET INCOME $ 25,827 $ 3,666 $ 3,698
========= ========= =========
PRO FORMA (Note 3):
Income before income taxes $ 6,141 $ 5,218
Provision for income taxes 2,580 2,090
--------- ---------
Net income $ 3,561 $ 3,128
========= =========
Earnings per share-
Basic $ 1.74 $ 0.28 $ 0.30
========= ========= =========
Diluted $ 1.58 $ 0.26 $ 0.29
========= ========= =========
Weighted average common shares outstanding
14,831 12,735 10,448
Dilutive effect of stock options and warrants 1,515 728 267
--------- --------- ---------
Weighted average common and diluted shares outstanding 16,346 13,463 10,715
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Shareholders' Equity
---------------------------------------------
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Earnings Income Total
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 27, 1996 10,370 $ 12,350 $ 2,293 $ -- $ 14,643
Net income -- -- 3,698 -- 3,698
Common stock issued under Employee Stock Purchase Plan 13 31 -- -- 31
Common stock issued in connection with the acquisition of Trotter
Technologies, Inc. on May 1, 1997 119 341 -- -- 341
Dividends and distributions -- -- (2,250) -- (2,250)
------- -------- -------- -------- --------
BALANCE, December 26, 1997 10,502 12,722 3,741 -- 16,463
Net income -- -- 3,666 -- 3,666
Common stock issued under Employee Stock Purchase Plan 16 57 -- -- 57
Common stock issued upon exercise of stock options and warrants 60 172 -- -- 172
Sale of common stock at $17.00 per share, net of offering
costs of $2,571 3,800 29,729 -- -- 29,729
------- -------- -------- -------- --------
BALANCE, December 25, 1998 14,378 42,680 7,407 -- 50,087
Comprehensive income:
Net income -- -- 25,827 -- --
Translation adjustments -- -- -- (2,757) --
Total comprehensive income -- -- -- -- 23,070
Common stock issued under Employee Stock Purchase Plan 93 622 -- -- 622
Common stock issued upon exercise of stock options and warrants 1,012 2,740 -- -- 2,740
Tax benefit realized from exercise of stock options -- 5,911 -- -- 5,911
------- -------- -------- -------- --------
BALANCE, December 31, 1999 15,483 $ 51,953 $ 33,234 $ (2,757) $ 82,430
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
December 31, December 25, December 26,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 25,827 $ 3,666 $ 3,698
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 7,970 4,043 2,246
Equity in losses of unconsolidated entity 1,890 370 --
Gain on unconsolidated entity stock sale (3,685) -- --
Deferred income taxes 149 (273) (133)
Changes in operating assets and liabilities:
Accounts receivable 12,027 (2,712) 910
Inventories (1,515) (485) 21
Prepaid expenses and other (1,816) 336 (581)
Accounts payable 7,285 1,943 (946)
Accrued expenses 7,538 153 2,000
Income taxes payable 8,992 694 (273)
--------- --------- ---------
Net cash provided by operating activities 64,662 7,735 6,942
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (11,963) (8,894) (6,007)
Acquisitions, net of cash acquired (42,500) -- (775)
Investment in unconsolidated entity -- (5,032) --
Change in other assets 1,088 (1,088) 192
--------- --------- ---------
Net cash used in investing activities (53,375) (15,014) (6,590)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable 15,000 1,124 3,749
Repayment of notes payable (3,560) (3,396) (3,899)
Repayment of short-term borrowings -- -- (715)
Dividends and distributions -- -- (2,250)
Issuance of common stock, net of offering costs 3,362 29,959 31
--------- --------- ---------
Net cash provided by (used in) financing activities 14,802 27,687 (3,084)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (582) -- --
--------- --------- ---------
Net increase (decrease) in cash 25,507 20,408 (2,732)
CASH AND CASH EQUIVALENTS:
Beginning of year 25,621 5,213 7,945
--------- --------- ---------
End of year $ 51,128 $ 25,621 $ 5,213
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 1,125 $ 369 $ 427
========= ========= =========
Cash paid for income taxes $ 2,682 $ 2,055 $ 1,954
========= ========= =========
Common shares issued in connection with the acquisition of
Trotter Technologies, Inc. $ -- $ -- $ 341
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ZOMAX INCORPORATED
Notes to Consolidated Financial Statements
1. Business Description:
Zomax Incorporated (Zomax or the Company) is a leading international outsource
provider of process management services. The Company's fully integrated services
include "front-end" E-commerce support, call center and customer support
solutions; DVD authorizing services; CD and DVD mastering; CD and DVD
replication; supply chain and inventory management; graphic design; print
management; assembly; packaging; warehousing; distribution and fulfillment; and
RMA processing.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year-End
The Company's fiscal year ends on the last Friday of the calendar year. For the
purposes of these notes to the consolidated financial statements, the fiscal
years ended December 31, 1999, December 25, 1998 and December 26, 1997 are
referred to as 1999, 1998 and 1997, respectively. The fiscal period for the year
ended in 1999 includes fifty-three weeks as compared to fifty-two weeks in 1998
and 1997.
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.
Actual results could differ from those estimates.
Revenue Recognition
The Company records sales revenue 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. In 1999, one customer represented 40% of the Company's sales. In
1998, two customers accounted for 17% and 13% of the Company's sales. In 1997,
one customer accounted for 38% of the Company's sales.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of highly liquid short-term
investments with original maturities of 90 days or less and are recorded at
cost, which approximates market value.
<PAGE>
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 (in
thousands):
December 31, 1999 December 25, 1998
----------------- -----------------
Raw materials $6,404 $1,682
Finished goods 937 351
Work in process 1,997 55
------ ------
$9,338 $2,088
====== ======
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Repairs
and maintenance are charged to expense as incurred, while significant
improvements are capitalized. Depreciation is calculated using the straight-line
method for financial reporting purposes over the estimated useful lives.
Property and equipment consisted of the following (in thousands):
December 31, December 25,
1999 1998 Lives
----------- ----------- -----
Manufacturing equipment $ 44,830 $ 23,581 7 years
Office equipment 4,492 2,100 5-7 years
Land, building and leasehold improvements 6,084 1,412 4-35 years
Vehicles 58 55 5 years
-------- --------
55,464 27,148
Less- Accumulated depreciation and
amortization (14,822) (8,223)
-------- --------
Property and equipment, net $ 40,642 $ 18,925
======== ========
Goodwill
The Company has classified as goodwill cost in excess of fair value of the
underlying net assets acquired in connection with the acquisitions described in
Note 3. Goodwill is being amortized on a straight-line basis over 15 years.
Accumulated amortization was $195,000 and $121,000 at December 31, 1999 and
December 25, 1998, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return
and separate state and foreign returns. 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.
<PAGE>
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.
Long-Lived Assets
Long-lived assets, such as property and equipment and goodwill, are evaluated
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value.
Royalty Payments
The Company has license agreements with certain companies for the use of certain
CD manufacturing technology. The Company accrues for royalties based on units
manufactured.
Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive common shares related
to stock options had been issued.
Foreign Currency Translation
Zomax converts assets and liabilities of foreign operations to their U.S. dollar
equivalents at rates in effect at the balance sheet date and records translation
adjustments in shareholders' equity in the consolidated balance sheets. Income
statements of foreign operations are translated from the operations' functional
currency to U.S. dollar equivalents at the exchange rate on the transaction
dates. Foreign exchange transaction gains and losses are reported in other
income (expense), net.
Comprehensive Income
On December 26, 1998, Zomax adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." The standard requires the
display and reporting of comprehensive income, which includes all changes in
shareholders' equity with the exception of additional investments by
shareholders or distributions to shareholders. Comprehensive income is reported
on the consolidated statement of shareholders' equity.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 137
deferred the effective date of SFAS No. 133 to fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company believes that the adoption of
SFAS No. 133 will not have a material impact on the Company's financial
statements.
<PAGE>
3. Acquisitions:
In January 1999, the Company acquired the businesses and certain net assets of
Kao Corporation (Kao) in the United States, Canada, Ireland and Germany. The
purchase price for the business, net assets and net working capital acquired was
$37,500,000 in cash, 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 estimated fair values. Kao's results of
operations have been included in the accompanying consolidated statements of
operations since the date of acquisition.
Pro forma consolidated results of operations as if the acquisition had taken
place at the beginning of 1998 are shown below (in thousands, except for per
share data):
Year Ended
December 25, 1998
-----------------
Net sales $274,714
Net income 8,585
Earnings per share-
Basic 0.67
Diluted 0.64
In February 1998, the Company acquired all of the outstanding shares of Primary
Marketing Group, Next Generation Services, LLC and Primary Marketing Group
Limited (collectively, the Acquired Companies) in exchange for 800,002 shares of
the Company's common stock. The acquisitions of the Acquired Companies were
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements have been restated to reflect the effects of the
transactions for all periods presented.
Net sales and pro forma net income (pro forma for the effect of income taxes)
for the year ended December 26, 1997 were as follows (in thousands):
The Acquired
Zomax Companies
------- ----------
Net sales $37,907 $9,970
Net income 2,307 821
On May 1, 1997, the Company acquired all of the outstanding shares of Trotter
Technologies, Inc. (Trotter). The purchase price of Trotter was $712,000,
payable in cash and 59,268 shares of the Company's common stock. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values. This treatment resulted in approximately $1,200,000 of cost in
excess of net assets acquired (which has been recorded as goodwill in the
accompanying consolidated financial statements). Trotter's results of operations
<PAGE>
have been included in the accompanying consolidated statements of operations
since the date of acquisition. Trotter was a return merchandise processing,
warehousing and distribution company based in San Jose, California, servicing
the software publishing market.
On March 31, 1997, the Company acquired all of the outstanding shares of
Benchmark, Inc. (Benchmark) for no initial consideration; however, the Company
agreed to pay additional consideration based on revenues of Benchmark during
1997. Such levels were not met; therefore, no additional consideration was paid.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to net assets acquired based on
their estimated fair values. Benchmark's results of operations have been
included in the accompanying consolidated statements of operations since the
date of acquisition. Benchmark was a software replicator located in Plymouth,
Minnesota, and Indianapolis, Indiana.
Investment in Unconsolidated Entity
On October 2, 1998, the Company acquired 4,310,345 shares of the common stock of
Chumbo Holdings Corporation (Chumbo) in exchange for $5,000,000 in cash. In
addition, the Company granted warrants to certain shareholders of Chumbo to
purchase 200,000 shares of the Company's common stock at a price of $10.00 per
share. The warrants were immediately exercisable for a period of three years. At
the time of the investment, the Company owned approximately one-third of the
outstanding equity of Chumbo, which is accounted for using the equity method of
accounting. As part of the agreement, Zomax has access to Chumbo's proprietary
Internet software to service customers of the Company. The Company's chief
executive officer (CEO) served as Chumbo's CEO until August 27, 1999, and in
recognition of his additional duties and responsibilities, received warrants to
purchase Chumbo's common stock.
In December 1999, Chumbo sold additional equity in a private round of financing.
The Company recognized a gain on Chumbo's issuance of additional equity in the
amount of $3,685,000, representing the increase in the Company's share of
Chumbo's net assets after the transaction. As of December 31, 1999, the Company
now owns 25.2% of Chumbo. The Company recognized a loss of $1,890,000 and
$370,000 in 1999 and 1998, respectively, representing its share of Chumbo's net
loss and amortization of the purchase price in excess of the underlying fair
value of net assets acquired.
Chumbo conducts its operations through two wholly owned subsidiaries,
Chumbo.com, Inc. and Point Group Corporation. Chumbo.com, Inc. has developed
proprietary software for Internet commerce and operates a website
(http/www.chumbo.com) selling computer software over the Internet. Point Group
Corporation is a licensee and reseller of computer software.
Sales by the Company to the Point Group Corporation totaled $1,156,000,
$1,213,000 and $907,000 in 1999, 1998 and 1997, respectively.
4. Credit Facilities and Long-Term Notes Payable:
On January 7, 1999, the Company entered into a $15,000,000 term loan facility
which was used to finance the purchase of the businesses and net assets of Kao.
A $25,000,000 revolving line of credit facility was also established. The term
loan facility requires quarterly principal payments of $750,000 on a
straight-line amortization schedule. The 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
<PAGE>
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. The
Company was in compliance with the covenants as of December 31, 1999.
The amount outstanding on the term loan facility at December 31, 1999 was
$12,750,000. The Company had no borrowings outstanding under the revolving
line-of-credit facility at December 31, 1999.
The Company also has several installment notes, with monthly installments
payable through November 2001, at interest rates ranging from 8.1% to 9.7%. The
notes are collateralized by certain equipment. Amounts outstanding as of
December 31, 1999 and December 25, 1998 were $1,843,000 and $3,127,000,
respectively.
Future scheduled maturities of long-term debt are as follows as of December 31,
1999 (in thousands):
2000 $ 3,990
2001 3,802
2002 3,023
2003 3,023
2004 755
-------
Total 14,593
Less- Current portion (3,990)
-------
Long-term notes payable, net of current portion $10,603
=======
5. Shareholders' Equity:
In connection with an initial public stock offering in May 1996, the underwriter
purchased, for a nominal purchase price, warrants to purchase 280,000 shares of
common stock at a price of $4.05 per share. The warrants are exercisable for a
period of four years, commencing one year from the offering date. As of December
31, 1999, warrants to purchase 9,368 shares remain outstanding.
On May 21, 1998, the Company completed the sale of 3,200,000 shares of common
stock in a secondary public offering. On June 8, 1998, the underwriters
exercised an overallotment option and purchased an additional 600,000 shares.
The Company received proceeds from the offering, net of issuance costs, of
$29,729,000.
Effective August 11, 1999, the Company's Board of Directors approved a 2-for-1
stock split effected as a stock dividend to shareholders. All per share and
share outstanding data in the consolidated financial statements and notes to
consolidated financial statements have been retroactively restated to reflect
the stock split.
6. Stock Plans:
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the Employee Plan) which
enables employees to contribute up to 10% of their compensation toward the
purchase of the Company's common stock at a price equal to 85% of fair market
value. A total of 500,000 shares have been reserved for issuance under this
plan. Shares issued in 1999, 1998 and 1997 were 93,194, 15,900 and 13,094,
respectively.
<PAGE>
Stock Option Plan
The Company has a 1996 Stock Option Plan (the Plan) 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 authorized number of shares
reserved for issuance totaled 2,600,000, of which 227,800 remained available for
grant at December 31, 1999. 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. During 1999, the Company also issued
nonqualified stock options for the purchase of 170,000 shares of common stock.
These options were issued at the fair market value of the Company's stock on the
date of grant and vest over five years.
Information regarding the options are summarized below (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 2,312 $ 3.95 1,310 $ 3.22 720 $ 3.40
Granted 371 9.91 1,172 5.21 590 2.87
Exercised (886) 3.84 (52) 3.41 -- --
Canceled (192) 5.13 (118) 4.23 -- --
------ -------- ------ -------- ------ --------
Options outstanding, end of year 1,605 $ 5.26 2,312 $ 3.95 1,310 $ 3.22
====== ======== ====== ======== ====== ========
Options exercisable, end of year 129 $ 4.98 538 $ 3.43 302 $ 3.36
====== ======== ====== ======== ====== ========
</TABLE>
Options outstanding at December 31, 1999 have exercise prices ranging from $2.25
to $27.19 to a weighted average remaining contractual life of 8.37 years.
<PAGE>
The Company accounts for its stock option grants under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." 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 the
compensation cost of option grants been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's income and earnings per
share (EPS), on a pro forma basis, would have been reported as follows (in
thousands, except per share data):
1999 1998 1997
---------- --------- ---------
Net income:
As reported $ 25,827 $ 3,561 $ 3,128
========== ========= =========
Pro forma $ 23,030 $ 2,775 $ 2,615
========== ========= =========
EPS:
Basic $ 1.74 $ 0.28 $ 0.30
========== ========= =========
Diluted $ 1.58 $ 0.26 $ 0.29
========== ========= =========
Pro forma EPS:
Basic $ 1.55 $ 0.22 $ 0.25
========== ========= =========
Diluted $ 1.41 $ 0.21 $ 0.24
========== ========= =========
In determining the compensation cost of the options granted, as specified by
SFAS No. 123, the fair value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model. The weighted average
assumptions used in these calculations are summarized below:
1999 1998 1997
-------- -------- --------
Risk-free interest rate 5.48% 5.23% 6.72%
Expected life of options granted 10 years 10 years 10 years
Expected volatility of options
granted 82.67% 74.58% 50.23%
Weighted average fair value of
options granted $8.71 $7.88 $4.47
7. Income Taxes:
Prior to the acquisitions described in Note 3, the Acquired Companies operated
as nontaxable entities. A pro forma income tax provision has been established as
if they were taxable entities for all periods presented.
<PAGE>
The provision for income taxes (pro forma in 1998 and 1997) for the Company was
as follows (in thousands):
1999 1998 1997
------- ------ ------
Current taxes payable:
Federal $ 7,661 $2,493 $2,196
State 834 350 185
Foreign 3,333 10 -
------- ------ ------
11,828 2,853 2,381
Deferred 149 (273) (291)
------- ------ ------
Total provision $11,977 $2,580 $2,090
======= ====== ======
A reconciliation of the statutory federal income tax rate to the Company's pro
forma effective income tax rate is as follows:
1999 1998 1997
------ ------ ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 1.6 6.0 5.0
Nondeductible loss in unconsolidated entity 1.7 1.9 -
Foreign tax effect (8.3) - -
Other 2.7 0.1 1.1
------ ------ ------
Effective income tax rate 31.7% 42.0% 40.1%
====== ====== ======
<PAGE>
The components of the deferred tax asset (liability) were as follows:
December 31, December 25,
1999 1998
----------- -----------
Current:
Accounts receivable reserves $ 698 $ 760
Inventory reserves 450 126
Accrued liabilities 751 539
Foreign net operating loss carryforward 1,000 --
----------- -----------
Total current deferred tax asset $ 2,899 $ 1,425
=========== ===========
Long-term:
Long-lived assets $(1,159) $(1,010)
Gain on unconsolidated entity stock sale (1,474) --
----------- -----------
Total long-term deferred tax liability $(2,633) $(1,010)
=========== ===========
8. Related-Party Transactions:
Operating Lease
The Company leases one of its manufacturing and office facilities from a
partnership which is majority owned by a significant shareholder and director of
the Company. The Company believes the terms are equivalent to those that would
be paid on an arm's-length transaction. Lease payments for 1999, 1998 and 1997
totaled $719,000, $775,000 and $600,000, respectively.
Manufacturing Agreement
In connection with the acquisition of certain manufacturing operations of
Metacom Inc. (Metacom, a shareholder of the Company), Metacom and the Company
entered into a manufacturing agreement (the Agreement) whereby Metacom must
purchase minimum quantities of audio cassettes and CDs from the Company under
normal trade terms. In 1997 and 1996 Metacom did not fulfill its purchase
commitments. As a result of the 1996 shortfall, the Company and Metacom agreed
to allow Metacom to make up the shortfall during 1997 in exchange for a contract
extension until 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 with no minimum quantities required.
As a result of the 1997 shortfall, Metacom agreed to pay the Company $350,000
under a payment schedule through 1999. Revenue is recognized as payments are
received. As of December 31, 1999, the obligation has been paid in full.
Metacom purchases in 1999, 1998 and 1997 totaled $461,000, $411,000, and
$1,209,000 respectively.
<PAGE>
9. Commitments and Contingencies:
Operating Leases
The Company is committed under operating leases with related and unrelated
parties for the rental of manufacturing, warehouse and office facilities. Future
minimum lease obligations are as follows as of December 31, 1999 (in thousands):
2000 $ 6,182
2001 5,500
2002 3,855
2003 2,120
2004 2,120
Thereafter 23,610
Ireland Employment Grants
The Company and the Ireland businesses acquired have received employment grants
from the Ireland Development Authority (IDA) totaling $2,962,000 during the
period from 1995 through 1999. These grants were awarded by the IDA for creating
and maintaining permanent employment positions in Ireland for a period of at
least five years. The receipt of future grant installments will extend this
period of contingent repayment to five years from the date of the last receipt.
Termination of any number of these positions within a five-year period would
result in the pro rata return of the grants based on the number of positions
terminated compared to the number of new positions originally created.
401(k) Plan
The Company has a discretionary 401(k) plan for all employees who are at least
21 years of age and have completed one year of service with the Company. During
1999 and 1998, the Company's discretionary contributions totaled $252,000 and
$70,000, respectively. There were no contributions made during 1997.
Litigation
The Company is involved in various 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 the
results of its operations.
<PAGE>
10. Quarterly Financial Data (Unaudited):
The Company's results of operations for each of the quarters in the years ended
December 31, 1999 and December 25, 1998 reflect the pro forma effect of
providing a provision for income taxes for all consolidated companies as if they
were taxable entities for all periods presented. The pro forma EPS information
also reflects the effects of the shares issued in connection with the
acquisition of the Acquired Companies. Unaudited quarterly data is as follows
(in thousands, except per share data):
Quarters Ended
------------------------------------------------------------
March 26 June 25 September 24 December 31
-------- --------- -------- --------
1999
Sales $48,235 $55,140 $61,603 $64,283
Gross profit 12,036 17,524 20,558 23,798
Net income 1,968 4,918 7,453 11,488
Basic EPS .14 .34 .50 .75
Diluted EPS .12 .30 .45 .69
Quarters Ended
------------------------------------------------------------
March 27 June 26 September 25 December 25
-------- --------- -------- --------
1998
Sales $14,233 $14,546 $14,832 $17,463
Gross profit 4,294 3,924 3,523 5,063
Net income 748 932 819 1,062
Basic EPS 0.07 0.08 0.06 0.07
Diluted EPS 0.07 0.07 0.05 0.07
<PAGE>
11. Industry Segment and Operations by Geographic Areas:
The Company operates predominantly in one industry segment. Previous to 1999,
the Company operated predominantly in the United States. The geographic
distributions of the Company's identifiable assets, operating income and
revenues for 1999 are summarized as follows (in thousands):
Total revenues:
United States $160,064
Europe 67,759
Canada 17,560
Less- Intergeographic revenues (16,122)
--------
$229,261
========
Operating income:
United States $ 28,202
Europe 12,670
Canada 4,440
Less- Corporate, interest and other income
(expense) and eliminations (9,818)
--------
$ 35,494
========
Assets:
United States 47,125
Europe 34,773
Canada 12,921
--------
Total identifiable assets 94,819
Corporate assets and eliminations 47,485
--------
Total assets $142,304
========
Capital expenditures:
United States $ 5,885
Europe 5,660
Canada 418
--------
$ 11,963
========
Depreciation and amortization:
United States $ 6,455
Europe 1,269
Canada 246
--------
$ 7,970
========
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of Zomax Incorporated incorporated by
reference in this Form 10-K and have issued our report dated January 24, 2000.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 24, 2000
<PAGE>
Zomax Incorporated
Schedule II Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charges to
beginning of costs and Charged to Write-offs, Balance at end
Description period expenses other accounts net of of period
recoveries
- ---------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1999 $2,035,000 $1,953,000 $0 ($1,343,000) $2,645,000
For the year ended December 25, 1998 $881,000 $1,149,000 $0 $5,000 $2,035,000
For the year ended December 26, 1997 $531,000 $425,000 $0 ($75,000) $881,000
</TABLE>
<PAGE>
ZOMAX INCORPORATED
EXHIBIT INDEX TO FORM 10-K
For the fiscal year ended: Commission File No.
December 31, 1999 0-28426
Exhibit
Number Description
- ------- ------------
2.1 Stock Purchase Agreement dated October 2, 1998 by and among the
Company, Chumbo Holdings Corporation and the shareholders of Chumbo
Holdings Corporation. Upon the request of the Commission, the
Registrant agrees to furnish a copy of the exhibits and schedules to
the Stock Purchase Agreement, subject to requests for confidential
treatment of certain information contained in such exhibits and
schedules. (4)
2.2 Asset Purchase and Sale Agreement dated November 28, 1998 by and among
the Company and Kao Infosystems Company. Upon the request of the
Commission, the Registrant agrees to furnish a copy of the exhibits and
schedules to the Asset Purchase and Sale Agreement, subject to requests
for confidential treatment of certain information contained in such
exhibits and schedules. (3)
2.3 Asset Purchase and Sale Agreement dated November 28, 1998 by and among
Zomax Canada Company and Kao Infosystems Canada, Inc. Upon the request
of the Commission, the Registrant agrees to furnish a copy of the
exhibits and schedules to the Asset Purchase and Sale Agreement,
subject to requests for confidential treatment of certain information
contained in such exhibits and schedules. (3)
2.4 Share Purchase and Sale Agreement dated November 28, 1998 by and among
Primary Marketing Group Limited and Kao Corporation. (3)
3.1 Articles of Incorporation as amended (Incorporated by reference to
Exhibit 3.1 to Quarterly report on Form 10-Q for quarter ended March
26, 1999).
3.2 Bylaws (1)
4.1 Form of Stock Certificate (1)
4.2 Articles of Incorporation (See Exhibit 3.1)
4.3 Bylaws (See Exhibit 3.2)
4.4 Form of Representative Warrant (1)
10.1* 1996 Stock Option Plan, as amended through January 19, 2000, and Forms
of Incentive and Non-qualified Stock Option Agreements**
10.2 1996 Employee Stock Purchase Plan (1)**
10.3 Manufacturing Agreement between the Company and Metacom, Inc. dated
January 1, 1995, as amended January 31, 1997 (Incorporated by reference
to Exhibit 10.3 to Registration Statement on Form S-1, SEC File No.
333-2430, and Exhibit 10.15 to Annual Report on Form 10-KSB for the
year ended December 27, 1996).
10.4 Lease between the Company and Nathan Lane Partnership, LLP dated
January 1, 1995, as amended October 28, 1997 (Incorporated by reference
to Exhibit 10.5 to Registration Statement on Form S-1, SEC File No.
333-2430 and Exhibit 10.15 to Annual Report on Form 10-KSB for the year
ended December 26, 1997). (1)
10.5* Employment Agreement with James T. Anderson dated January 1, 1999.**
<PAGE>
10.6 License Agreement with U.S. Phillips Corporation effective January 1,
1996 (Incorporated by reference to Exhibit 10.7 to Registration
Statement on form S-1, SEC File No. 333-2430).
10.7 License Agreement with Discovision Associates dated January 1, 1994
(Incorporated by reference to Exhibit 10.8 to Registration Statement on
Form S-1, SEC File No. 333-2430).
10.8 Revolving Credit and Term Loan Agreement between the Company and
Marquette Capital Bank dated December 31, 1995, as amended April 30,
1997 (Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1, SEC File No. 333-2430, and Exhibit 10.16 to
Quarterly Report on Form 10-QSB for the quarter ended March 27, 1997).
10.9 Lease between the Company and Chaboya Ranch dated June 5, 1997
(Incorporated by reference to Exhibit 10.16 to Quarterly Report on Form
10-QSB for the quarter ended March 28, 1997).
10.10 Credit Agreement dated as of January 6, 1999 among the Company, Certain
Lenders and General Electric Capital Corporation. (3)
10.11 Credit Agreement dated as of January 6, 1999 among Zomax Canada
Company, Certain Lenders and General Electric Capital Canada Inc. (3)
21.1 Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1
to Annual Report on Form 10-K for the year ended December 25, 1998)
23* 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)
* Filed herewith.
** Management agreement or compensatory plan or arrangement.
(1) Incorporated by reference to the corresponding exhibit numbers to Form
S-1 Registration Statement, SEC File No. 333-2430.
(2) Incorporated by reference to the corresponding exhibit numbers to Form
10-Q for quarter ended June 26, 1998.
(3) Incorporated by reference to exhibits to Current Report on Form 8-K/A-1
dated January 7, 1999.
(4) Incorporated by reference to Exhibit 2.1 Current Report on Form 8-K
dated October 2, 1998.
ZOMAX INCORPORATED
1996 STOCK OPTION PLAN
(As Amended Through January 19, 2000)
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) The "Company" shall mean Zomax Incorporated, a Minnesota
corporation.
(b) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
(c) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant to
this Plan.
(d) The "Plan" means the Zomax Incorporated 1996 Stock Option Plan, as
amended hereafter from time to time, including the form of Option
Agreements as they may be modified by the Board from time to time.
(e) Non-Employee Directors shall mean members of the Board who are not
employees of the Company or any Subsidiary.
(f) The "Optionee" for purposes of Section 9 is an employee of the
Company or any Subsidiary to whom an incentive stock option has been
granted under the Plan. For purposes of Section 10, the "Optionee" is a
consultant or advisor to or an employee, officer or director of the
Company or any Subsidiary to whom a nonqualified stock option has been
granted. For purposes of Section 11, the "Optionee" is a Non-Employee
Director to whom a nonqualified stock option has been granted.
(g) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. As long
as the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, then, to the extent
necessary for compliance with Rule 16b-3, or any successor provision,
each of the members of the Committee shall be a "Non-Employee
Director." For purposes of this Section 1(g) "Non-Employee Director"
shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and Regula
tions under the Securities Exchange Act of 1934, as amended.
<PAGE>
(h) The "Internal Revenue Code" is the Internal Revenue Code of 1986,
as amended from time to time.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and
its subsidiaries by facilitating the employment and retention of competent
personnel and by furnishing incentive to directors, officers, employees,
consultants, and advisors upon whose efforts the success of the Company and its
subsidiaries will depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "Incentive Stock Options" under
the provisions of Section 422 of the Internal Revenue Code, and through the
granting of "Nonqualified Stock Options" pursuant to Sections 10 and 11 of this
Plan. Adoption of this Plan shall be and is expressly subject to the condition
of approval by the shareholders of the Company within twelve (12) months before
or after the adoption of the Plan by the Board of Directors. In no event shall
any stock options be exercisable prior to the date this Plan is approved by the
shareholders of the Company. If shareholder approval of this Plan is not
obtained within twelve (12) months after the adoption of the Plan by the Board
of Directors, any stock options previously granted shall be revoked.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is adopted by the Board
of Directors of the Company, subject to approval by the shareholders of the
Company as required in Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Stock Option Committee
(hereinafter referred to as the "Committee" and as defined in Section 1(g) of
this Plan) which may be appointed by the Board from time to time. The Board or
the Committee, as the case may be, shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Board, or the Committee, shall have full power and authority to administer and
interpret the Plan, to make and amend rules, regulations and guidelines for
administering the Plan, to prescribe the form and conditions of the respective
<PAGE>
stock option agreements (which may vary from Optionee to Optionee) evidencing
each option and to make all other determinations necessary or advisable for the
administration of the Plan. The Board's, or the Committee's, interpretation of
the Plan, and all actions taken and determinations made by the Board or the
Committee pursuant to the power vested in it hereunder, shall be conclusive and
binding on all parties concerned. No member of the Board or the Committee shall
be liable for any action taken or determination made in good faith in connection
with the administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majori ty vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board or the Committee, as the case may be, shall from time to
time, at its discretion and without approval of the shareholders, designate
those employees, directors, officers, consultants or advisors of the Company or
of any Subsidiary to whom nonqualified stock options shall be granted under this
Plan; provided, however, that consultants or advisors shall not be eligible to
receive stock options hereunder unless such consultant or advisor renders bona
fide services to the Company or Subsidiary and such services are not in
connection with the offer or sale of securities in a capital-raising
transaction. The Board or the Committee, as the case may be, shall, from time to
time, at its discretion and without approval of the shareholders, designate
those employees of the Company or any Subsidiary to whom incentive stock options
shall be granted under this Plan.
The Board or the Committee may grant additional incentive stock options
or nonqualified stock options under this Plan to some or all participants then
holding options or may grant options solely or partially to new participants. In
designating participants, the Board or the Committee shall also determine the
number of shares to be optioned to each such participant. The Board may from
time to time designate individuals as being ineligible to participate in the
Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Option Stock. Three million two hundred thousand
(3,200,000) shares of Option Stock shall be reserved and avail able for options
under the Plan; provided, however, that the total number of shares of Option
Stock reserved for options under this Plan shall be subject to adjustment as
provided in Section 13 of the Plan. In the event that any outstanding option
under the Plan for any reason expires or is terminated prior to the exercise
thereof, the shares of Option Stock allocable to the unexercised portion of such
option shall continue to be reserved for options under the Plan and may be
optioned hereunder.
<PAGE>
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time
to time during a period of ten (10) years from the earlier of the date the Plan
is approved by the Board or the date it is approved by the shareholders of the
Company. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the Plan is adopted by the Board and until the Plan is
discontinued or terminated by the Board.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant
to this Plan with cash, certified check, Common Stock of the Company valued at
such stock's then "fair market value" as defined in Section 9 below, or such
other form of payment as may be authorized by the Board or the Committee. The
Board or the Committee may, in its sole discretion, limit the forms of payment
available to the Optionee and may exercise such discretion any time prior to the
termination of the Option granted to the Optionee or upon any exercise of the
Option by the Optionee.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Board or the Committee and may vary from Optionee to Optionee; provided,
however, that each Optionee and each Option Agreement shall comply with and be
subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. The
option price per share shall not be less than one hundred percent
(100%) of the fair market value of the Common Stock per share on the
date the Board or the Committee, as the case may be, grants the option;
provided, however, that if an Optionee owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of its parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the fair
<PAGE>
market value of the Common Stock per share on the date of the grant of
the option. For purposes hereof, if such stock is then reported in the
national market system or is listed upon an established exchange or
exchanges, "fair market value" of the Common Stock per share shall be
the highest clos ing price of such stock in such national market system
or on such stock exchange or exchanges on the date the option is
granted or, if no sale of such stock shall have occurred on that date,
on the next preceding day on which there was a sale of stock. If such
stock is not so reported in the national market system or listed upon
an exchange, "fair market value" shall be the mean between the "bid"
and "asked" prices quoted by a recognized specialist in the Common
Stock of the Company on the date the option is granted, or if there are
no quoted "bid" and "asked" prices on such date, on the next preceding
date for which there are such quotes. If such stock is not publicly
traded as of the date the option is granted, the "fair market value" of
the Common Stock shall be determined by the Board, or the Committee, in
its sole discretion by applying principles of valuation with respect to
all such options. The Board or the Committee, as the case may be, shall
have full authority and discretion in establishing the option price and
shall be fully protected in so doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Board or the
Committee, as the case may be, but in no event shall any incentive
stock option be exercisable during a term of more than ten (10) years
after the date on which it is granted; provided, however, that if an
Optionee owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of its
parent or any Subsidiary, the incentive stock option shall be
exercisable during a term of not more than five (5) years after the
date on which it is granted. The Option Agreement shall state when the
incentive stock option becomes exercisable and shall also state the
maximum term during which the option may be exercised. In the event an
incentive stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the Option Agreement. The Board or
the Committee, as the case may be, may accelerate the exercise date of
any incentive stock option granted hereunder which is not immediately
exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Board or the
Committee, as the case may be, shall deem advisable. Any such Option
Agreement shall contain such limitations and restrictions upon the
exercise of the option as shall be necessary to ensure that such option
will be considered an "Incentive Stock Option" as defined in Section
422 of the Internal Revenue Code or to conform to any change therein.
(d) Holding Period. The disposition of any shares of Common Stock
acquired by an Optionee pursuant to the exercise of an option described
above shall not be eli gible for the favorable taxation treatment of
Section 421(a) of the Internal Revenue Code unless any shares so
acquired are held by the Optionee for at least two (2) years from the
date of the granting of the option under which the shares were acquired
and at least one year after the acquisition of such shares pursuant to
the exercise of such option, or such other periods as may be prescribed
by the Internal Revenue Code. In the event of an Optionee's death, such
holding period shall not be applicable pursuant to Section 421(c)(1) of
the Internal Revenue Code.
<PAGE>
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by a written Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Board or the Committee and may
vary from Optionee to Optionee; provided, however, that each Optionee and each
Option Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
The option price per share shall be equal to one hundred percent (100%)
of the fair market value of the Common Stock per share on the date the
Board or the Committee grants the option unless otherwise determined by
the Board or the Committee, as the case may be; provided, however, that
the option price per share shall be equal to at least eighty-five
percent (85%) of the fair market value of the Common Stock per share on
the date of grant. For purposes hereof, the "fair market value" of a
share of Common Stock shall have the same meaning as set forth under
Section 9(a) herein.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Board or the
Committee, as the case may be, but in no event shall any option be
exercisable during a term of more than ten (10) years after the date on
which it was granted. The Option Agreement shall state when the
nonqualified stock option becomes exercisable and shall also state the
maximum term during which the option may be exercised. In the event a
nonqualified stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the Option Agreement. The Board or
the Committee, as the case may be, may accelerate the exercise date of
any nonqualified stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Withholding. In the event the Optionee is required under the Option
Agreement to pay the Company, or make arrangements satisfactory to the
Company respecting payment of, any federal, state, local or other taxes
required by law to be withheld with respect to the option's exercise,
the Board or the Committee, as the case may be, may, in its discretion
and pursuant to such rules as it may adopt, permit the Optionee to
satisfy such obligation, in whole or in part, by electing to have the
Company withhold shares of Common Stock otherwise issuable to the
Optionee as a result of the option's exercise equal to the amount
required to be withheld for tax purposes. Any stock elected to be
<PAGE>
withheld shall be valued at its "fair market value," as provided under
Section 9(a) hereof, as of the date the amount of tax to be withheld is
determined under applicable tax law. The Optionee's election to have
shares withheld for this purpose shall be made on or before the date
the option is exercised or, if later, the date that the amount of tax
to be withheld is determined under applicable tax law. Such election
shall also comply with such rules as may be adopted by the Board or the
Committee to assure compliance with Rule 16b-3, as then in effect, of
the General Rules and Regulations under the Securities Exchange Act of
1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Board, or the
Committee, as the case may be, shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director whose
initial election or appointment to the Board of Directors occurs after
the date this Plan is adopted by the Board of Directors shall, as of
the date of such election or appointment to the Board, automatically be
granted an option to purchase 20,000 shares of the Common Stock at an
option price per share equal to one hundred percent (100%) of the fair
market value of the Common Stock on the date of such election or
appointment. Such option shall become exercisable to the extent of
4,000 shares on each of the first, second, third, fourth and fifth
anniversaries of the date of grant.
(b) Upon Re-election to Board. Each Non-Employee Director who,
after the date this Plan is adopted by the Board of Directors, is
re-elected as a Non-Employee Director of the Company or whose term of
office continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 4,000 shares of
Common Stock at an option price per share equal to one hundred percent
(100%) of the fair market value of the Common Stock on the date of such
re-election or shareholder meeting; provided that a Non-Employee
Director who receives an option pursuant to subsection (a) above shall
not be entitled to receive an option pursuant to this subsection (b)
until at least twelve (12) months after such Non-Employee Director's
initial election to the Board. Options granted pursuant to this
subsection (b) shall be immediately exercisable in full.
(c) General. Non-Employee Directors shall not receive more
than one option to purchase 4,000 shares pursuant to this Section 11 in
any one fiscal year. All options granted pursuant to this Section 11
shall be designated as nonqualified options and shall be subject to the
same terms and provisions as are then in effect with respect to
granting of nonqualified options to officers and employees of the
Company, except that the option shall expire on the earlier of (i)
three months after the optionee ceases to be a director (except by
death) and (ii) ten (10) years after the date of grant. Notwithstanding
the foregoing, in the event of the death of a Non-Employee Director,
any option granted to such Non-Employee Director may be exercised at
any time within twelve (12) months of the death of such Non-Employee
Director or on the date on which the option, by its terms expire,
whichever is earlier.
<PAGE>
SECTION 12.
TRANSFER OF OPTION
No option shall be transferable, in whole or in part, by the Optionee
other than by will or by the laws of descent and distribution and, during the
Optionee's lifetime, the option may be exercised only by the Optionee. If the
Optionee shall attempt any transfer of any option granted under the Plan during
the Optionee's lifetime, such transfer shall be void and the option, to the
extent not fully exercised, shall terminate.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Option Stock reserved under Section 6 hereof and the
number of shares of Option Stock covered by each outstanding option and the
price per share thereof shall be adjusted by the Board to reflect such change.
Additional shares which may be credited pursuant to such adjustment shall be
subject to the same restrictions as are applicable to the shares with respect to
which the adjustment relates.
Unless otherwise provided in the stock option agreement, in the event
of an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding options shall become immediately exercisable,
whether or not such options had become exercisable prior to the transaction;
provided, however, that if the acquiring party seeks to have the transaction
accounted for on a "pooling of interests" basis and, in the opinion of the
Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the foregoing, in the event of such a
transaction, the Board may provide for one or more of the following:
(a) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Optionees a reasonable period of time in
which to exercise the options prior to the effectiveness of such
transaction);
(b) that Optionees holding outstanding incentive or
nonqualified options shall receive, with respect to each share of
Option Stock subject to such options, as of the effective date of any
<PAGE>
such transaction, cash in an amount equal to the excess of the Fair
Market Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of
such options; provided that the Board may, in lieu of such cash
payment, distribute to such Optionees shares of stock of the Company or
shares of stock of any corporation succeeding the Company by reason of
such transaction, such shares having a value equal to the cash payment
herein; or
(c) the continuance of the Plan with respect to the exercise
of options which were outstanding as of the date of adoption by the
Board of such plan for such transaction and provide to Optionees
holding such options the right to exercise their respective options as
to an equivalent number of shares of stock of the corporation
succeeding the Company by reason of such transaction.
The Board may restrict the rights of or the applicability of this
Section 13 to the extent necessary to comply with Section 16(b) of the
Securities Exchange Act of 1934, the Internal Revenue Code or any other
applicable law or regulation. The grant of an option pursuant to the Plan shall
not limit in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
SECTION 14.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Option Stock to an Optionee, the Board or the Committee may
require the Optionee to (a) represent that the shares of Option Stock are being
acquired for investment and not resale and to make such other representations as
the Board, or the Committee, as the case may be, shall deem necessary or
appropriate to qualify the issuance of the shares as exempt from the Securities
Act of 1933 and any other applicable securi ties laws, and (b) represent that
Optionee shall not dispose of the shares of Option Stock in violation of the
Securities Act of 1933 or any other applicable securities laws. The Company
reserves the right to place a legend on any stock certificate issued upon
exercise of an option granted pursuant to the Plan to assure compliance with
this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
<PAGE>
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend
or discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amend ment, except as is authorized in Section 13,
shall impair the terms and conditions of any option which is outstanding on the
date of such revision or amendment to the material detriment of the Optionee
without the consent of the Optionee. Notwithstanding the foregoing, no such
revision or amendment shall (i) materially increase the number of shares subject
to the Plan except as provided in Section 12 hereof, (ii) change the designation
of the class of employees eligible to receive options, (iii) decrease the price
at which options may be granted, or (iv) materially increase the benefits
accruing to Optionees under the Plan, unless such revision or amendment is
approved by the shareholders of the Company. Furthermore, the Plan may not,
without the approval of the shareholders, be amended in any manner that will
cause incentive stock options to fail to meet the requirements of Section 422 of
the Internal Revenue Code. In addition to and notwithstanding the foregoing, the
provisions of Section 11 shall not be amended more than once every six months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee
to exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, made this ________ day of _______________, 19___, by
and between ZOMAX OPTICAL MEDIA, INC., a Minnesota corporation (the "Company"),
and _______________________________ (the "Optionee");
W I T N E S S E T H
WHEREAS, the Optionee on the date hereof is an employee of the Company
or a Subsidiary of the Company;
WHEREAS, to induce the Optionee to continue in its employ and to
further the Optionee's efforts in its behalf, the Company desires to grant to
the Optionee an incentive stock option to purchase shares of its Common Stock;
WHEREAS, the Company's Board of Directors has adopted a stock option
plan providing for the grant of incentive stock options known as "Zomax Optical
Media, Inc. 1996 Stock Option Plan" (hereinafter referred to as the "Plan"); and
WHEREAS, on the date hereof, the Company's Board of Directors (or, if
so appointed and empowered by the Board, the Board's Stock Option Committee)
authorized the grant of this incentive stock option to the Optionee;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Optionee hereby agree as
follows:
1. Grant of Option. The Company hereby grants to the Optionee, on the
date of this Agreement, the option to purchase ___________ shares of Common
Stock of the Company (the "Option Stock") subject to the terms and conditions
herein contained, and subject only to adjustment in such number of shares as
provided in Section 13 of the Plan. This option is intended to be an incentive
stock option within the meaning of Section 422, or any successor provision, of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder.
2. Option Price. During the term of this option, the purchase price for
the shares of Option Stock granted herein is $_________ per share (not less than
the fair market value as of date of grant), subject only to adjustment of such
price as provided in Section 13 of the Plan.
3. Term of Option. Unless terminated earlier under the provisions of
Paragraphs 10, 11 or 12 below, this option shall terminate as of the close of
business on _____________________. During the first year after the date of this
Agreement, this option shall not be exercisable. Thereafter, this option shall
be exercisable to the extent of _____________ percent (_____%) of such total
<PAGE>
number of shares during each succeeding year until the earlier of the time this
option shall have become exercisable to the extent of one hundred percent (100%)
of the total number of shares granted or its termination as provided herein. If
the Optionee does not purchase the full number of shares which the Optionee is
entitled to purchase upon an exercise of this option, the Optionee may purchase
upon any subsequent exercise prior to the option's termination such previously
unpurchased shares in addition to those the Optionee is otherwise entitled to
purchase. If this option has been granted prior to approval of the Plan by the
Company's shareholders, this option shall not be exercisable until such approval
is obtained.
4. Personal Exercise by Optionee. This option shall, during the
lifetime of the Optionee, be exercisable only by said Optionee, or by the
Optionee's guardian or other legal representative, and shall not be transferable
by the Optionee, in whole or in part, other than by will or by the laws of
descent and distribution.
5. Manner of Exercise of Option.
a. The option may be exercised only by Optionee (or other
proper party in the event of death), subject to the conditions of the Plan and
subject to such other administrative rules as the Board of Directors may deem
advisable, by delivering a written notice of exercise to the Company at its
principal office. The notice shall state the number of shares as to which the
option is being exercised and shall be accompanied by payment in full of the
option price for all shares designated in the notice. The exercise of the option
shall be deemed effective upon receipt of such notice by the Company and upon
payment that complies with the terms of the Plan and this Agreement. The option
may be exercised with respect to any number or all of the shares as to which it
can then be exercised and, if partially exercised, may be so exercised as to the
unexercised shares any number of times during the exercise period as provided
herein.
b. Payment of the option price by Optionee shall be in the
form of cash, certified check or previously acquired shares of Common Stock of
the Company, or any combination thereof; provided, however, that the Board or
any Committee appointed by the Board to administer the Plan may, in its sole
discretion, limit the form of payment to cash or certified check and may
exercise its discretion any time prior to the termination of this option or upon
any exercise of this option by the Optionee. Any stock so tendered as part of
such payment shall be valued at its fair market value as provided in the Plan.
As soon as practicable after the effective exercise of all or any part of the
option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company.
6. Employment; Rights as a Shareholder. This Agreement shall not confer
on Optionee any right with respect to continuance of employment by the Company
or any of its Subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment. The Optionee or a transferee of this
option shall have no rights as a shareholder with respect to any shares covered
by this option until the date of the issuance of a stock certificate for such
shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 13 of the Plan.
<PAGE>
7. 1996 Stock Option Plan. The option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby made a part of this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this option, and, in the event of any question as to the
construction of this Agreement or of a conflict between the Plan and this
Agreement, the Plan shall govern, except as the Plan otherwise provides.
8. Withholding Taxes on Disqualifying Disposition by Optionee. In the
event of a disqualifying disposition of Option Stock by Optionee, Optionee
hereby agrees to inform the Company of such disposition. Upon notice of a
disqualifying disposition or upon independently learning of such a disposition,
the Company may take such action as it deems appropriate to insure that, if
necessary to provide the Company with the opportunity to claim the benefit of
any income tax deduction which may be available to it upon such disqualifying
disposition and to comply with all applicable federal or state income tax laws
or regulations, all applicable federal and state payroll, income or other taxes
are withheld from any amounts payable by the Company to Optionee. If the Company
is unable to withhold such federal and state taxes, for whatever reason, the
Optionee hereby agrees to pay to the Company an amount equal to the amount the
Company would otherwise be required to withhold under federal or state law. The
Optionee may, subject to the approval and discretion of the Board of Directors
or such other administrative rules it may deem advisable, elect to have all or a
portion of such tax withholding obligations satisfied by delivering shares of
the Company's Common Stock having a fair market value equal to such obligations.
9. Securities Law Compliance. The exercise of all or any parts of this
option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
10. Termination of Employment (Other than for Death or Change of
Control). If Optionee ceases to be an employee of the Company or any Subsidiary
for any reason, other than because of a "change of control transaction" as
described in Paragraph 11 or because of death, this option shall completely
terminate on the earlier of (i) the close of business on the three-month
anniversary date of such termination of employment, and (ii) the expiration date
of this option stated in Paragraph 3 above. In such period following such
termination of employment, this option shall be exercisable only to the extent
the option was exercisable on the date of termination of employment, but had not
previously been exercised.
<PAGE>
11. Change of Control. If Optionee's employment with the Company or any
Subsidiary is terminated because of a "change of control transaction," this
option shall completely terminate on the earlier of (i) the close of business on
the three-month anniversary date of such termination of employment and (ii) the
expiration date of this option stated in Paragraph 3 above; provided, however,
that if (a) such transaction is treated as a "pooling of interests" under
generally accepted accounting principles and (b) Optionee is an "affiliate" of
the Company or Subsidiary under applicable legal and accounting principles, this
Option shall completely terminate on the later of (A) the close of business on
the three-month anniversary date of such termination of employment or (B) the
close of business on the date that is sixty (60) days after the date on which
affiliates are no longer restricted from selling, transferring or otherwise
disposing of the shares of stock received in the change of control transaction.
In such period following the termination of Optionee's
employment upon a change of control transaction, this option shall be fully
exercisable unless the acceleration of the exercisability of this option has
been prevented as provided in Section 13 of the Plan, in which case, this option
shall be exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding such termination of employment, but had not
previously been exercised. To the extent this option was not exercisable upon
such termination of employment or if Optionee does not exercise the Option
within the time specified in this Paragraph 11, all rights of Optionee under
this option shall be forfeited. If Optionee exercises this option on a date that
is after the three-month anniversary date of the termination of Optionee's
employment or on a date that is more than ten years (or five years, if
applicable) after the Date of Grant, this option shall not be treated as an
incentive stock option within the meaning of Code Section 422.
For purposes of this Paragraph 11, a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture (including a spin-off) or
liquidation of the Company.
12. Death of Optionee. If the Optionee dies (i) while in the employ of
the Company or any Subsidiary, or (ii) within the period of three months after
the termination of employment with the Company or any Subsidiary as provided in
Paragraph 10, this option shall terminate on the earlier of (i) the close of
business on the twelve-month anniversary date of the Optionee's death, and (ii)
the expiration date under this option. In such period following the Optionee's
death, this option may be exercised by the person or persons to whom the
Optionee's rights under this option shall have passed by the Optionee's will or
by the laws of descent and distribution only to the extent the option was
exercisable on the date of death but had not previously been exercised. To the
extent this option was not exercisable upon Optionee's death, or if the option
is not exercised within the time specified in this Paragraph 12, all rights
under this option shall be forfeited.
<PAGE>
13. Recapitalizations, Sales, Mergers, Exchanges, Consolidations,
Liquidation. Pursuant and subject to Section 13 of the Plan, certain changes in
the number or character of the Common Stock of the Company (through sale,
merger, consolidation, exchange, reorganization, divestiture (including a
spin-off), liquidation, recapitalization, stock split, stock dividend or
otherwise) shall result in an adjustment, reduction or enlargement, as
appropriate, in Optionee's rights with respect to any unexercised portion of the
option (i.e., Optionee shall have such "anti-dilution" rights under the option
with respect to such events, but shall not have "preemptive" rights).
14. Scope of Agreement. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 4 hereof.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement in the manner appropriate to each, as of the day and year first above
written.
ZOMAX OPTICAL MEDIA, INC.
By ____________________________________
Its ________________________________
COMPANY
______________________________________
OPTIONEE
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made this ______ day of _____________, 19___, by and
between ZOMAX OPTICAL MEDIA, INC., a Minnesota corporation (the "Company"), and
_________________________ (the "Optionee");
W I T N E S S E T H
WHEREAS, the Optionee on the date hereof is an employee, officer,
director, consultant or advisor of the Company or a Subsidiary of the Company;
WHEREAS, to induce the Optionee to further the Optionee's efforts in
its behalf, the Company desires to grant to the Optionee a nonqualified stock
option to purchase shares of its Common Stock;
WHEREAS, the Company's Board of Directors has adopted a stock option
plan providing for the grant of nonqualified stock options known as "Zomax
Optical Media, Inc. 1996 Stock Option Plan" (hereinafter referred to as the
"Plan"); and
WHEREAS, on the date hereof, the Company's Board of Directors (or, if
so appointed and empowered by the Board, the Board's Stock Option Committee)
authorized the grant of this nonqualified stock option to the Optionee;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Optionee hereby agree as
follows:
1. Grant of Option. The Company hereby grants to the Optionee, on the
date of this Agreement, the option to purchase _________ shares of Common Stock
of the Company (the "Option Stock") subject to the terms and conditions herein
contained, and subject only to adjustment in such number of shares as provided
in Section 13 of the Plan. This option is a nonqualified stock option and will
not be treated as an incentive stock option, as defined under Section 422, or
any successor provision, of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder.
2. Option Price. During the term of this option, the purchase price for
the shares of Option Stock granted herein is $___________ per share, subject
only to adjustment of such price as provided in Section 13 of the Plan.
3. Term of Option. Unless terminated earlier under the provisions of
Paragraphs 10, 11 or 12 below, this option shall terminate as of the close of
business on _________________. During the first year after the date of this
<PAGE>
Agreement, this option shall not be exercisable. Thereafter, this option shall
be exercisable to the extent of ____________ percent (____%) of such total
number of shares during each succeeding year until the earlier of the time this
option shall have become exercisable to the extent of one hundred percent (100%)
of the total number of shares granted or its termination as provided herein. If
the Optionee does not purchase the full number of shares which the Optionee is
entitled to purchase upon an exercise of this option, the Optionee may purchase
upon any subsequent exercise prior to the option's termination such previously
unpurchased shares in addition to those the Optionee is otherwise entitled to
purchase. If this option has been granted prior to approval of the Plan by the
Company's shareholders, this option shall not be exercisable until such approval
is obtained.
4. Personal Exercise by Optionee. This option shall, during the
lifetime of the Optionee, be exercisable only by said Optionee, or by the
Optionee's guardian or other legal representative, and shall not be transferable
by the Optionee, in whole or in part, other than by will or by the laws of
descent and distribution.
5. Manner of Exercise of Option.
a. The option may be exercised only by Optionee (or other
proper party in the event of death), subject to the conditions of the Plan and
subject to such other administrative rules as the Board of Directors may deem
advisable, by delivering a written notice of exercise to the Company at its
principal office. The notice shall state the number of shares as to which the
option is being exercised and shall be accompanied by payment in full of the
option price for all shares designated in the notice. The exercise of the option
shall be deemed effective upon receipt of such notice by the Company and upon
payment that complies with the terms of the Plan and this Agreement. The option
may be exercised with respect to any number or all of the shares as to which it
can then be exercised and, if partially exercised, may be so exercised as to the
unexercised shares any number of times during the exercise period as provided
herein.
b. Payment of the option price by Optionee shall be in the
form of cash, certified check or previously acquired shares of Common Stock of
the Company, or any combination thereof; provided, however, that the Board or
any Committee appointed by the Board to administer the Plan may, in its sole
discretion, limit the form of payment to cash or certified check and may
exercise its discretion any time prior to the termination of this option or upon
any exercise of this option by the Optionee. Any stock so tendered as part of
such payment shall be valued at its fair market value as provided in the Plan.
As soon as practicable after the effective exercise of all or any part of the
option, the Optionee shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership. All requisite original issue or transfer documentary stamp taxes
shall be paid by the Company.
6. Employment; Rights as a Shareholder. This Agreement shall not confer
on Optionee any right with respect to continuance of employment, if so employed,
by the Company or any of its Subsidiaries, nor will it interfere in any way with
the right of the Company to terminate such employment. The Optionee or a
transferee of this option shall have no rights as a shareholder with respect to
any shares covered by this option until the date of the issuance of a stock
<PAGE>
certificate for such shares. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property), distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 13 of the Plan.
7. 1996 Stock Option Plan. The option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
the Optionee and is hereby made a part of this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this option, and, in the event of any question as to the
construction of this Agreement or of a conflict between the Plan and this
Agreement, the Plan shall govern, except as the Plan otherwise provides.
8. Withholding Taxes. In order to provide the Company with the
opportunity to claim the benefit of any income tax deduction which may be
available to it upon the exercise of this option and to permit the Company to
comply with all applicable federal or state income tax laws or regulations, the
Company may take such action as it deems appropriate to insure that, if
necessary, all applicable federal or state payroll, income or other taxes are
withheld from any amounts payable by the Company to the Optionee. If the Company
is unable to withhold such federal and state taxes, for whatever reason, the
Optionee hereby agrees to pay to the Company an amount equal to the amount the
Company would otherwise be required to withhold under federal or state law. The
Optionee may, subject to the discretion of the Board of Directors or such other
administrative rules it may deem advisable, elect to have all or a portion of
such tax withholding obligations satisfied by delivering shares of the Company's
Common Stock having a fair market value equal to such obligations.
9. Securities Law Compliance. The exercise of all or any parts of this
option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
10. Termination of Relationship With Company (Other than Because of
Death or Change of Control). If the Optionee ceases to be an employee or
director of or a consultant or advisor to the Company or any Subsidiary for any
reason, other than because of a "change of control transaction" as described in
Paragraph 11 or because of death, this Option shall completely terminate on the
earlier of (i) the close of business on the three-month anniversary date of such
termination of such relationship, and (ii) the expiration date of this Option
stated in Paragraph 3 above. In such period following termination of such
relationship, this option shall be exercisable only to the extent the option was
exercisable on the date of termination of such relationship, but had not
previously been exercised.
<PAGE>
11. Change of Control. If the Optionee ceases to be an employee or
director of or a consultant or advisor to the Company or any Subsidiary because
of a "change of control transaction," this Option shall completely terminate on
the earlier of (i) the close of business on the three-month anniversary date of
such termination of employment and (ii) the expiration date of this Option
stated in Paragraph 3 above; provided, however, that if (a) such transaction is
treated as a "pooling of interests" under generally accepted accounting
principles and (b) Optionee is an "affiliate" of the Company or Subsidiary under
applicable legal and accounting principles, this Option shall completely
terminate on the later of (A) the close of business on the three-month
anniversary date of such termination or (B) the close of business on the date
that is sixty (60) days after the date on which affiliates are no longer
restricted from selling, transferring or otherwise disposing of the shares of
stock received in the change of control transaction.
In such period following the termination of Optionee's
employment upon a change of control transaction, this Option shall be fully
exercisable unless the acceleration of the exercisability of this Option has
been prevented as provided in Section 13 of the Plan, in which case, this Option
shall be exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding such termination of employment, but had not
previously been exercised. To the extent this Option was not exercisable upon
termination of such relationship or if Optionee does not exercise the Option
within the time specified in this Paragraph 11, all rights of Optionee under
this Option shall be forfeited.
For purposes of this Paragraph 11, a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture (including a spin-off) or
liquidation of the Company.
12. Death of Optionee. If the Optionee dies (i) while an employee or
director of or consultant or advisor to the Company or any Subsidiary, or (ii)
within the period of three months after the termination of Optionee's
relationship with the Company or any Subsidiary as provided in Paragraph 10,
this option shall terminate on the earlier of (i) the close of business on the
twelve-month anniversary date of the Optionee's death, and (ii) the expiration
date under this option. In such period following the Optionee's death, this
option may be exercised by the person or persons to whom the Optionee's rights
under this option shall have passed by the Optionee's will or by the laws of
descent and distribution only to the extent the option was exercisable on the
date of death but had not previously been exercised. To the extent this option
was not exercisable upon Optionee's death, or if the option is not exercised
within the time specified in this Paragraph 12, all rights under this option
shall be forfeited.
13. Recapitalizations, Sales, Mergers, Exchanges, Consolidations,
Liquidation. Pursuant and subject to Section 13 of the Plan, certain changes in
the number or character of the Common Stock of the Company (through sale,
merger, consolidation, exchange, reorganization, divestiture (including a
spin-off), liquidation, recapitalization, stock split, stock dividend or
otherwise) shall result in an adjustment, reduction or enlargement, as
appropriate, in Optionee's rights with respect to any unexercised portion of the
option (i.e., Optionee shall have such "anti-dilution" rights under the option
with respect to such events, but shall not have "preemptive" rights).
<PAGE>
14. Scope of Agreement. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 4 hereof.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement in the manner appropriate to each, as of the day and year first above
written.
ZOMAX OPTICAL MEDIA, INC.
By ____________________________________
Its ________________________________
COMPANY
______________________________________
OPTIONEE
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is hereby entered into between
Zomax Incorporated, a Minnesota corporation (the "Company") and James T.
Anderson ("Executive").
PREAMBLE
Executive has been employed as President and Chief Executive Officer of
Zomax Incorporated since 1996. The Company desires to continue to have the
benefit of Executive's experience and loyalty, and Executive has indicated his
willingness to provide his services on the terms and conditions set forth below.
AGREEMENT
1. Definitions.
The following capitalized terms used in this Agreement shall be defined
as follows:.
Agreement shall mean this Agreement between the Company and Executive.
Base Salary shall mean the annual base salary payable to Executive
pursuant to Section 4(a) hereof, and "monthly Base Salary" shall mean the Base
Salary divided by twelve (12).
Board shall mean the Board of Directors of the Company.
Cause shall mean termination of the Executive's employment with the
Company by the Board because of (1) gross misconduct, dishonesty or disloyalty;
(2) willful and material breach of this Agreement by Executive; or (3)
conviction or entry of a plea of guilty or nolo contendere to any felony or to
any misdemeanor involving fraud, misrepresentation or theft.
A Change of Control shall be deemed to have occurred if (1) any
"person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
20% or more of the combined voting power (with respect to the election of
directors) of the Company's then outstanding securities; (2) at any time after
the execution of this Agreement, individuals who as of the date of the execution
of this Agreement constitute the Board (and any new director whose election to
the Board or nomination for election to the Board by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
inn office) cease for any reason to constitute a majority of the Board; (3) the
consummation of a merger or consolidation of the Company with or into any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 70% of the combined
voting power (with respect to the election of directors) of the securities of
<PAGE>
the Company or of such surviving entity outstanding immediately after such
merger or consolidation; or (4) the consummation of a plan of complete
liquidation of the Company or of an agreement for the sale or disposition by the
Company of all or substantially all of the Company's business or assets.
Change of Control Payments shall mean any payment (including any
benefit or transfer of property) in the nature of compensation to or for the
benefit of Executive under any arrangement which is partially or entirely
contingent on a Change of Control, or is deemed to be contingent on a Change of
Control for purposes of Section 280G of the Code. As used in this definition,
the term "arrangement" includes any agreement between Executive and the Company
and any and all of the Company's salary, bonus, incentive, compensation or
benefit plans, programs or arrangements, and shall include this Agreement.
Code shall mean the Internal Revenue Code of 1986, as amended from time
to time.
Company shall mean Zomax Incorporated, a Minnesota corporation, any
subsidiaries thereof, and any successors or assigns, including any Successor.
Company Product means any product, product line or service (including
any component thereof or research to develop information useful in connection
with a product or service) that is being designed, developed, manufactured,
marketed or sold by the Company or with respect to which the Company has
acquired Confidential Information which it intends to use in the design,
development, manufacture, marketing or sale of a product or service.
Competitive Product means any product, product line or service
(including any component thereof or research to develop information useful in
connection with a product or service) that is being designed, developed,
manufactured, marketed or sold by anyone other than the Company and is of the
same general type, performs similar functions, or is used for the same purposes
as a Company Product.
Confidential Information means any information or compilation of
information that Executive learns or develops during the course of his
employment with the Company that derives independent economic value from not
being generally known, or readily ascertainable by proper means, by other
persons who can obtain economic value from its disclosure or use. It includes
but is not limited to trade secrets, inventions, discoveries, and may relate to
such matters as research and development, manufacturing processes, management
systems and techniques and sales and marketing plans and information.
Good Reason shall mean (1) a substantial reduction in the nature or
status of Executive's responsibilities hereunder; (2) a reduction by the Company
in the Base Salary of Executive except to the extent permitted by this
Agreement; (3) failure by the Company to allow Executive to participate to the
full extent in all plans, programs or benefits in accordance with this
Agreement; and (4) relocation of Executive's principal office more than 20 miles
from its current location. Notwithstanding the foregoing, "Good Reason" shall be
deemed to occur only if such event enumerated in (1) through (4) above has not
<PAGE>
been corrected by the Company within two weeks of receipt of notice from
Executive of the occurrence of such event, which notice shall specifically
describe such event.
Inventions means any inventions, discoveries, improvements, ideas or
works of authorship (whether patentable or not and including those which may be
subject to copyright protection) generated, conceived, authored or reduced to
practice by Executive alone or in conjunction with others, during or after
working hours, while an employee of the Company, and that:
(i) are derived in whole or in part from, or use,
incorporate or represent any improvement to any
Invention or trade secret of the Company; or
(ii) result from any work Executive performs for the
Company; or
(iii) use any of the Company's equipment, supplies,
facilities or trade secret information; or
(iv) otherwise relate to the Company's products or the
Company's present or possible future research or
development.
Term shall mean the term of Executive's employment under Section 3
hereof.
Permanently Disabled shall mean permanently disabled in accordance with
the disability policy (as defined by the Company's Long-Term Disability
Insurance Plan) of the Company as in effect on the date of this Agreement and as
evaluated by sufficient documentation including doctors' statements, etc. as
requested by the Company.
Person shall mean an individual, partnership, corporation, estate or
trust or other entity.
Successor shall be any entity acquiring substantially all of the assets
of the Company or a corporation into which the Company is merged or with which
it is consolidated.
2. Employment and Duties.
(a) General. The Company hereby agrees to employ Executive as its
President and Chief Executive Officer upon the terms and conditions set forth in
this Agreement and Executive agrees to serve as President and Chief Executive
Officer of the Company. Executive shall report directly to the Board of
Directors of the Company. Executive shall perform the duties and assume the
responsibilities and obligations contemplated by his title of President and
Chief Executive Officer and shall perform such other duties and undertake such
other responsibilities and obligations, consistent with his position, as the
Board of Directors shall determine from time to time.
(b) Exclusive Services. The Executive shall (i) devote his full
business time and attention and best efforts to the business and affairs of the
Company and its affiliates, (ii) use his best efforts to promote and further the
interests of the Company, (iii) faithfully and diligently perform his
<PAGE>
responsibilities and duties hereunder; and (iv) conduct himself in a competent
and professional manner which reflects positively upon the Company.
(c) No Other Employment. Throughout the Term, Executive shall not,
directly or indirectly, render services to any other person or organization for
which he receives compensation (excluding volunteer services or outside Board
activities with modest time commitments) without the consent of the Board or
otherwise engage in activities which would interfere significantly with the
performance of his duties hereunder.
3. Term of Employment.
(a) Commencement. The term of this Agreement shall be effective as of
January 1, 1999 and may not be terminated except as expressly provided herein.
(b) Term. Unless extended by mutual consent or as provided in Section
3(c) below, this Agreement shall terminate on the first (1st) anniversary of the
Effective Date (such one-year period being hereinafter referred to as the
"Term").
(c) Automatic Extension. Following the initial expiration date of the
Term, this Agreement shall be deemed extended from year to year ("Extension
Year") unless, no later than three (3) months prior to the end of the Term (or
any Extension Year) the Company or the Executive shall have notified the other
party in writing that it or he does not elect to extend the Term (or any
Extension Year) past its then expiration date.
4. Compensation and Other Benefits. Subject to the provisions of this Agreement,
the Company shall pay and provide the following compensation and other benefits
to Executive during the Term as compensation for services rendered hereunder.
(a) Base Salary. The Company shall pay to Executive a Base Salary at
the rate of $400,000 per annum, payable in accordance with the Company's
standard payroll practices. The Company shall be entitled to deduct or withhold
all taxes and charges which the Company may be required to deduct or withhold
therefrom. The Base Salary will be reviewed not less than annually by the Board
and may be increased or reduced; provided, however, that any reduction shall be
permitted only if the Company then reduces the base compensation of its
executive employees generally and shall not exceed the average percentage
reduction for all such executive employees.
(b) Incentive Compensation. During the term of this Agreement,
Executive will receive an annual bonus, consisting of a combination of cash and
stock options, based on his performance and the performance of the Company
against a business plan approved by the Board of Directors. The terms of the
incentive compensation award will be determined by the Board and communicated to
Executive no later than February 28 of each calendar year.
(c) Other Plans. The Executive shall be entitled to participate in
additional Company stock option plans or other equity plans or programs, if any,
in which executives of the Company are eligible to participate generally as may
<PAGE>
be determined by the Board of Directors. No stock options granted to Executive
will vest later than four years after grant.
(d) Executive Benefit Plans. At all times during the Term, Executive
shall, unless prohibited by the Code or other applicable law, be eligible to
participate in pension and welfare plans and programs of the Company for
executive employees, currently existing or subsequently adopted, including the
following:
(i) all qualified benefit plans and programs (e.g.
defined contribution, supplemental retirement and
Section 401(k) plans, long-term disability and life
insurance plans and programs);
(ii) all hospitalization and medical plans and programs;
and
(iii) all retirement plans and programs.
5. Termination of Employment for Cause; Resignation Without Good Reason;
Resignation Not Following a Change of Control.
(a) Compensation and Benefits. If Executive's employment is terminated
by the Company for Cause or if Executive resigns from his employment hereunder
other than for Good Reason or other than within one year after a Change of
Control, then Executive shall not be eligible to receive any compensation or
benefits, or to participate in any plans or programs under Section 4 hereof with
respect to future periods after the date of such termination or resignation
except for the right to receive benefits under any plan or program, to the
extent vested, in accordance with the terms of such plan or program and except
for benefits provided in accordance with customary practices of the Company at
Executive's expense (e.g., hospitalization and medical insurance). Except that
in the case of Resignation Without Good Reason, the Company will continue, for a
period of up to five years, after his resignation to provide to Executive and
his family at the Company's cost, comparable health care, hospital and medical
benefits, subject to termination of such benefits at such time as Executive
becomes entitled to reasonably comparable benefits upon subsequent employment.
(b) Date of Termination. The date of termination of Executive's
employment by the Company under this Section 5 shall be effective immediately
after written notice of termination. The date of resignation by Executive under
this Section 5 shall be one (1) month after receipt by the Company of written
notice of resignation.
6. Termination of Employment Without Cause; Resignation for Good Reason;
Resignation Following Change of Control, and Failure to Extend
Employment Agreement.
(a) Compensation and Benefits. If Executive's employment is terminated
by the Company without Cause, Executive resigns from his employment hereunder
for good reason, Executive resigns from his employment hereunder for any reason
<PAGE>
within one (1) year after a Change of Control, or the Company fails to extend
this Agreement, Executive shall be entitled to receive the following from the
Company:
(i) Executive shall receive from the Company within sixty
(60) days after such termination, resignation, or end
of Term without an extension by the Company an amount
equal to twice his Base Salary and all unused
vacation as in effect on the effective date of such
termination or resignation or as of the end of the
Term. The Company shall be entitled to deduct or
withhold all taxes and charges which the Company may
be required to deduct or withhold therefrom.
(ii) Executive shall receive from the Company within sixty
(60) days after such termination, resignation or end
of Term without an extension by the Company an amount
equal to twice Executive's bonus payment(s) under
Section 4(b) above earned for the fiscal year of the
Company ending immediately prior to such termination
or resignation or twice the maximum amount Executive
is eligible to earn in the current fiscal year,
whichever is higher. The Company shall be entitled to
deduct or withhold all taxes and charges which the
Company may be required to deduct or withhold
therefrom.
(iii) With respect to any stock options, SARs, restricted
stock awards or performance share awards granted to
Executive and outstanding immediately prior to such
termination, resignation or failure to extend this
Agreement, all restrictions on all shares of
restricted stock awards shall lapse immediately, all
outstanding options and SARs will become exercisable
immediately, and all performance share objectives
shall be deemed to be met.
(iv) Executive and his family shall be entitled to
continued participation in hospital and medical plans
and programs of the Company at the Company's expense
for a five-year period following such termination,
resignation or end of Term subject to termination of
participation upon Executive becoming entitled to
comparable benefits on subsequent employment.
(v) Executive shall be entitled to the payment in full,
upon the effective date of termination, of all unpaid
vacation allowances.
(b) Date of Termination or Resignation. The date of termination of
Executive's employment by the Company under this Section 6 shall be one (1)
month after receipt by Executive of written notice of termination. The date of
resignation by Executive for Good Reason under this Section 6 shall be one (1)
month after receipt by the Company of written notice of resignation, provided
that the Good Reason specified in such notice shall not have been corrected by
the Company during such one (1) month period.
<PAGE>
(c) Limitation on Change of Control Compensation. In the event that
Executive is a "disqualified individual" within the meaning of Section 280G of
the Code, the parties expressly agree that the payments described in this
Section 6 shall be considered together with all Change of Control Payments so
that, with respect to Executive, all Change of Control Payments are collectively
subject to an overall maximum limit. Such maximum limit shall be One Dollar
($1.00) less than the largest amount under which no portion of the Change of
Control Payments is considered a "parachute payment" within the meaning of
Section 280G of the Code. Accordingly, to the extent that the Change of Control
Payments would be considered a "parachute payment" with respect to Executive,
then the portions of such Change of Control payments shall be reduced or
eliminated in the following order until the remaining Change of Control Payments
with respect to Executive is One Dollar ($1.00) less than the maximum allowable
which would not be considered a "parachute payment" under the Internal Revenue
Code:
(i) First, any cash payment to Executive;
(ii) Second, any Change of Control Payments not described
in this Agreement; and
(iii) Third, any forgiveness of indebtedness of Executive
to the Company.
Executive expressly and irrevocably waives any and all rights to receive any
Change of Control payments which would be considered a "parachute payment" under
the Code.
7. Termination of Employment by Disability or Death.
(a) Compensation and Benefits. If Executive becomes Permanently
Disabled prior to the expiration of the Term, the Company shall be entitled to
terminate Executive's employment subject to the Company's normal policies in
such matters as applied to all other salaried employees. In the event of such
termination of Executive's employment or termination of Executive's employment
by reason of the death of Executive prior to the expiration of the Term, the
Executive (or Executive's estate, as the case may be), shall be entitled to
receive from the Company the following:
(i) In the event of termination after Executive has
become Permanently Disabled, Executive and his family
shall be entitled to continue participation in
hospital and medical plans and programs of the
Company at the Company's expense for the period of
said disability or until normal retirement age
subject to rules and practice of the plan(s).
(ii) Executive (or, in the event of his death, Executive's
estate or his designated beneficiary) shall be
entitled to receive benefits under any other Company
plan or program (to the extent Executive is vested)
in accordance with the terms of such plan or program.
Executive shall be entitled to continued
contributions under the Company's qualified profit
sharing plan 401(k) to the extent permitted in said
Plan.
<PAGE>
(b) Date of Termination. The date of termination of Executive's
employment under this Section 7 shall be the date Executive becomes Permanently
Disabled or the date of Executive's death, as the case may be.
8. Legal Fees and Expenses. The Company shall pay or reimburse Executive for all
reasonable legal fees and expenses incurred by Executive in seeking to obtain or
enforce any right or benefit provided by this Agreement from or against the
Company in a proceeding before a court of competent jurisdiction.
9. Assignment of Inventions. Executive agrees to promptly disclose to the
Company in writing all Inventions; and all such Inventions shall be the
exclusive property of the Company and are hereby assigned by Executive to the
Company. Further, Employee will, at the Company's expense, give the Company all
assistance it reasonably requires to perfect, protect, and use its rights to
Inventions. In particular, but without limitation, Executive will sign all
documents, do all things, and supply all information that the Company may deem
necessary or desirable to:
(i) transfer or record the transfer of his entire right,
title and interest in Inventions; and
(ii) enable the Company to obtain patent, copyright or
trademark protection for Inventions anywhere in the
world.
The obligations of this Section shall continue beyond the termination
of employment with respect to Inventions conceived or made by Executive during
the period of his employment and shall be binding upon assigns, executors,
administrators and other legal representatives. For purposes of this Agreement,
any Invention relating to the business of the Company on which Executive files a
patent application within six (6) months after termination of employment with
the Company shall be presumed to cover Inventions conceived by Executive during
the term of his employment, subject to proof to the contrary by good faith,
written and duly corroborated records establishing that such Invention was
conceived and made following termination of employment.
NOTICE: Pursuant to Minnesota Statutes ss. 181.78, Executive is hereby
notified that this Section 11 does not apply to any invention for which no
equipment, supplies, facility, or trade secret information of the Company was
used and which was developed entirely on Executive's own time, and (1) which
does not relate (a) directly to the business of the Company or (b) to the
Company's actual or demonstrably anticipated research or development, or (2)
which does not result from any work performed by the employee for the Company.
10. Confidential Information. Executive agrees not to directly or indirectly use
or disclose Confidential Information for the benefit of anyone other than the
Company, either during or after employment, for as long as the information
retains the characteristics of Confidential Information described in Section 1
above.
<PAGE>
11. Return of Documents and Property. All documents and tangible items provided
to Executive by the Company, or possessed by or created by Executive for use in
connection with his employment, are the property of the Company and shall be
promptly returned to the Company on termination of employment together with all
copies, recordings, abstracts, notes or reproductions of any kind made from or
about the documents and tangible items or the information they contain.
12. Noncompetition. In consideration of Executive's rights under this Agreement,
including without limitation Sections 5 through 7 hereof, Executive agrees that,
from and after the Effective Date and continuing until the one-year anniversary
of termination or cessation of Executive's employment with the Company,
Executive will not, alone or in any capacity with another legal entity:
(i) directly or indirectly, own any interest in, control,
be employed by or associated with, or render services
to (including but not limited to services in
research), any person, entity, or subsidiary,
subdivision, division, or joint venture of such
entity in connection with the design, development,
manufacture, marketing, or sale of a Competitive
Product that is sold or intended for use or sale in
any geographic area in which the Company actively
markets a Company Product or intends to actively
market a Company Product of the same general type or
function;
(ii) directly or indirectly, solicit any of the Company's
present or future employees for the purpose of hiring
them or inducing them to leave their employment with
the Company;
(iii) directly or indirectly, solicit, attempt to solicit,
interfere, or attempt to interfere with the Company's
relationship with its customers or potential
customers, on behalf of himself or any other person
or entity engaged in the design, development,
manufacture, marketing, or sale of a Competitive
Product; or
(iv) directly or indirectly design, develop, manufacture,
market, or sell any Competitive Product that is sold
or intended for use or sale in any geographic area in
which the Company actively markets a Company Product
or intends to actively market a Company Product of
the same general type or function.
In the event that Executive receives a payment from the Company pursuant to
Sections 6(a)(i) and 6(a)(ii) above, the reference to the "one-year anniversary"
in the first sentence of this Section shall be changed to the "two-year
anniversary".
13. Breach of Noncompetition Provisions of this Agreement. In addition to any
other relief or remedies afforded by law or in equity, if Executive breaches
Section 12 of this Agreement, Executive agrees that the Company shall be
entitled, as a matter of right, to injunctive relief in any court of competent
jurisdiction plus reasonable attorneys' fees for securing such relief. Executive
<PAGE>
recognizes and hereby admits that irreparable damage will result to the Company
if he violates or threatens to violate the terms of Section 12 of this
Agreement. This Section 13 shall not preclude the granting of any other
appropriate relief including, without limitation, money damages against
Executive for breach of Section 12 of this Agreement.
14. Effect of Other Obligations. It is intended that the obligation of the
parties to perform the terms of this Agreement is unconditional and does not
depend on the performance or non-performance of any terms, duties or obligations
not specifically recited in this Agreement.
15. Binding Agreement. This Agreement shall be binding upon, and inure to the
benefit of, the parties hereto, any Successor to or assigns of the Company, and
Executive's heirs and the personal representative of Executive's estate.
16. Severability. If the final determination of a court of competent
jurisdiction declares, after the expiration of the time within which judicial
review (if permitted) of such determination may be perfected, that any term of
provision hereof is invalid or unenforceable, (a) the remaining terms and
provisions hereof shall be unimpaired, and (b) the invalid or unenforceable term
or provision shall be deemed replaced by a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision.
17. Amendment; Waiver. This Agreement may not be modified, amended or waived in
any manner except by an instrument in writing signed by both parties hereto. The
waiver by either party of compliance with any provision of this Agreement by the
other party shall not operate or be construed as a waiver of any other provision
of this Agreement, or of any subsequent breach by such party of a provision of
this Agreement.
18. Governing Law. All matters affecting this Agreement, including the validity
thereof, are to be governed by, interpreted and construed in accordance with the
laws of the State of Minnesota.
19. Notices. Any notice hereunder by either party to the other shall be given in
writing by personal delivery or certified mail, return receipt requested. If
addressed to Executive, the notice shall be delivered or mailed to Executive at
the address specified under Executive's signature hereto, or if addressed to the
Company, the notice shall be delivered or mailed to the Company at its executive
offices to the attention of the Board of Directors of the Company. A notice
shall be deemed given, if by personal delivery, on the date of such delivery or,
if by certified mail, on the date shown on the applicable return receipt.
20. Supersedes Previous Agreements. This Agreement supersedes all prior or
contemporaneous negotiations, commitments, agreements and writings with respect
to the subject matter hereof, all such other negotiations, commitments,
agreements and writings will have no further force or effect, and the parties to
any such other negotiation, commitment, agreement or writing will have no
further rights or obligations thereunder.
21. Headings; Construction. The headings of Sections and paragraphs herein are
included solely for convenience of reference and shall not control the meaning
<PAGE>
or interpretation of any of the provisions of this Agreement. This Agreement
shall be construed without regard to any presumption or other rule requiring
construction hereof against the party causing this Agreement to be drafted.
22. Benefit. Nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective
successors or assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its Chairman of the Board pursuant to the authority of its Board, and
Executive has executed this Agreement, effective as of January 1, 1999.
ZOMAX INCORPORATED
By: /s/ Phillip T. Levin
Chairman of the Board
/s/ James T. Anderson
James T. Anderson
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated January 24, 2000 incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statements File Nos. 333-06133,
333-06145, 333-81491 and 333-90209.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 29, 2000
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