UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
Commission File Number 0-28429
ZOMAX INCORPORATED
(Name of registrant as specified in its charter)
Minnesota 41-1833089
(state or other juris- (I.R.S. Employer
diction of incorporation) Identification No.)
5353 Nathan Lane, Plymouth, MN 55442
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(763) 553-9300
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes (x) No ( )
As of April 27, 2000, the issuer had 15,903,561 shares of Common Stock, no par
value, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX INCORPORATED
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
ASSETS Mar. 31, 2000 Dec. 31, 1999
(Unaudited)
---------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 44,897 $ 51,128
Accounts receivable, net of allowance for doubtful
accounts of $ 2,569 and $2,645 36,266 28,291
Inventories 8,355 9,338
Deferred income taxes 2,594 2,899
Prepaid and other expenses 3,925 2,448
---------------- ---------------
Total current assets 96,037 94,104
Property and equipment, net of accumulated depreciation 38,952 40,642
of $17,132 and $14,822
Investments in unconsolidated entity 5,892 6,447
Goodwill and other assets, net 1,086 1,111
---------------- ---------------
$ 141,967 $ 142,304
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 4,008 $ 3,990
Accounts payable 16,690 18,768
Accrued expenses:
Accrued royalties 6,089 4,083
Accrued compensation 4,171 11,768
Other 5,814 6,342
Income taxes payable 431 1,687
---------------- ---------------
Total current liabilities 37,203 46,638
Notes payable, net of current portion 9,608 10,603
Deferred income taxes 2,633 2,633
Shareholders' Equity:
Common stock, no par value, 20,000 authorized 56,549 51,953
shares, 15,901 and 15,483 shares issued
and outstanding
Retained earnings 39,628 33,234
Other comprehensive income (loss) (3,654) (2,757)
---------------- ---------------
Total shareholders' equity 92,523 82,430
---------------- ---------------
$ 141,967 $ 142,304
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-2-
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements Of Operations
(Unaudited)
(In thousands, except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
Mar. 31, Mar. 26,
2000 1999
-------- --------
<S> <C> <C>
Sales $ 57,359 $ 48,235
Cost of Sales 38,673 36,200
-------- --------
Gross Profit 18,686 12,035
Selling, General and
Administrative Expenses 8,679 8,554
-------- --------
Operating Income 10,007 3,481
Equity in losses of unconsolidated entity (555) (406)
Interest Expense (288) (363)
Interest Income 651 72
Other income (expense), net (111) (3)
-------- --------
Income Before Income Taxes 9,704 2,781
Provision for Income Taxes 3,310 813
-------- --------
Net Income $ 6,394 $ 1,968
======== ========
Earnings Per Share
Basic $ 0.40 $ 0.14
======== ========
Diluted $ 0.38 $ 0.12
======== ========
Weighted Average Number of
Shares Outstanding
Basic 15,801 14,511
======== ========
Diluted 16,907 15,789
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 26,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net income $ 6,394 $ 1,968
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 2,330 1,854
Equity in losses of unconsolidated entity 555 406
Changes in operating assets and liabilities:
Accounts receivable (8,287) 4,227
Inventories 910 417
Prepaid expenses and deposits (1,507) (609)
Accounts payable (1,743) 9,724
Accrued expenses (5,940) (5,473)
Income taxes payable 1,468 193
-------- --------
Net cash provided (used) by operating activities (5,820) 12,707
-------- --------
Investing Activities:
Purchase of property and equipment (1,002) (1,207)
Acquisitions, net of cash acquired -- (39,500)
Change in other assets 4 1,099
-------- --------
Net cash used in investing activities (998) (39,608)
-------- --------
Financing Activities:
Issuance of common stock 2,196 128
Proceeds from notes payable -- 15,000
Repayment of notes payable (969) (458)
-------- --------
Net cash provided by financing activities 1,227 14,670
-------- --------
Effect of exchange rate changes on cash and cash equivalents (640) (176)
-------- --------
Net increase (decrease) in cash (6,231) (12,407)
Cash and Cash Equivalents:
Beginning of period 51,128 25,621
-------- --------
End of period $ 44,897 $ 13,214
======== ========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 288 $ 363
======== ========
Cash paid for income taxes $ 1,861 $ 604
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
Zomax Incorporated
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim financial statements of the Company are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation (consisting of only normal recurring adjustments) have been
reflected in the interim periods presented. Due principally to the seasonal
nature of some of the Company's business, results may not be indicative of
results for a full year. The accompanying financial statements should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 1999.
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 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
returned merchandise authorization (RMA) processing.
2. Recently Issued Accounting Pronouncement
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.
3. Stock Split
The Company's Board of Directors authorized a two-for-one split of its
common stock to be effected as a 100% stock dividend payable on August 11, 1999,
to stockholders of record at the close of business on July 30, 1999. All share
and per share amounts have been restated for both 1999 and 2000 in the
accompanying financial statements.
On April 19, 2000, the Company announced that its Board of Directors
authorized a second two-for-one split of its common stock to be effected as a
100% stock dividend payable on May 8, 2000 to stockholders of record at the
close of business on April 27, 2000.
<PAGE>
4. Industry Segment and Operations by Geographic Areas
The Company operates in one industry segment. The geographic
distributions of the Company's identifiable assets, operating income and
revenues for the periods ended March 31, 2000 and March 26, 1999 are summarized
as follows (in thousands):
March 31, 2000 March 26, 1999
-------------- --------------
Total revenues:
United States $ 41,713 $ 32,887
Europe 15,106 16,966
Canada 5,904 3,116
Less - Intergeographic revenues (5,364) (4,734)
--------- ---------
$ 57,359 $ 48,235
========= =========
Operating income:
United States $ 8,653 $ 3,285
Europe 2,909 1,743
Canada 1,474
921
Less - Corporate, interest, and
other income (expense) and eliminations (3,029) (2,468)
--------- ---------
$ 10,007 $ 3,481
========= =========
Assets:
United States $ 52,034 $ 63,117
Europe 39,017 24,997
Canada 12,566 10,769
--------- ---------
Total identifiable assets 103,617 98,883
Corporate assets and eliminations 38,350 7,690
--------- ---------
$ 141,967 $ 106,573
========= =========
Capital expenditures:
United States $ 688 $ 1,028
Europe 284
127
Canada 30
52
--------- ---------
$ 1,002 $ 1,207
========= =========
Depreciation and amortization:
United States $ 1,688 $ 1,483
Europe 432 205
Canada 210
166
--------- ---------
$ 2,330 $ 1,854
========= =========
<PAGE>
ITEM 2. 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.
Results of Operations
For the Thirteen Weeks Ended March 31, 2000 and March 26, 1999
Sales. The Company's sales were $57.4 million for the first quarter of
2000, an increase of 19%, from $48.2 million in the first quarter of 1999. The
increase in sales came from both existing and new customers. The increase in
total sales resulted from a 56% increase in CD and DVD related sales and a 2%
increase from the customer contact centers. These increases were partially
offset by a 76% decrease in diskette, audiocassette and RMA sales. Such sales
represent 3% of total sales.
Cost of sales. Cost of sales as a percentage of sales was 67.4% and
75.0% for the first quarter of 2000 and 1999, respectively. The decrease in the
cost of sales percentage was due to an increase in CD manufacturing utilization
<PAGE>
rates across all sites and a reduction in the amount of CD outsourcing
quantities. In addition, the Company implemented certain operating and financial
controls in the Kao acquired sites since the first quarter of 1999.
Selling, general and administrative expense. Selling, general and
administrative expenses as a percentage of sales were 15.1% for the first
quarter of 2000 and 17.7% for the first quarter of 1999. Selling, general and
administrative expenses increased $125,000 in the first quarter of 2000 as
compared to 1999. Selling, general and administrative expenses have decreased as
a percentage of sales in 2000 as the Company has achieved greater operational
efficiencies.
Equity in losses of unconsolidated entity. The Company owns an equity
interest in Chumbo Holdings Corporation, an Internet based reseller of software.
The Company accounts for this investment using the equity method accounting and,
accordingly, recognized a loss of $555,000 in the first quarter of 2000 and a
loss of $406,000 in the first quarter of 1999, representing its share of the
Chumbo net loss and the amortization of excess purchase price over the fair
value of the underlying net assets acquired.
Interest income and expense. Interest income was $651,000 and $72,000
for the first quarter of 2000 and 1999, respectively. Interest expense was
$288,000 and $363,000 for the first quarter of 2000 and 1999, respectively.
Interest income increased with the increase in cash balances and an increase in
interest rates. Interest expense decreased as a result of lower outstanding loan
balances offset by an increase in interest rates.
Other expenses, net. In 2000, other expense consists of foreign
currency losses.
Provision for income taxes. The effective income tax rate for the first
quarter of 2000 was 34.1% as compared to 29.2% for the first quarter of 1999.
The increase in the effective income tax rate in 2000 is due to an increase in
U.S. based income, which is impacted by a higher tax rate.
Net income. Net income for the first quarter of 2000 was $6.4 million,
an increase of 225% from net income of $2.0 million in 1999. Diluted earnings
per share was $.38 for the first quarter of 2000, an increase of 217% from
diluted earnings per share of $.12 in first quarter of 1999.
Liquidity and Capital Resources
As of March 31, 2000, the Company had working capital of $58.8 million,
compared to working capital of $47.5 million as of December 31, 1999. As of
March 31, 2000, the Company had cash totaling $44.9 million.
<PAGE>
Cash used in operating activities for the first three months of 2000
was $5.8 million compared to cash generated of $12.7 million during the first
three months of 1999. The decrease in operating cash flow is primarily due to
the timing of receipts and disbursements on normal operating activities.
Cash used in investing activities during the first three months of 2000
was $998,000 compared to $39.6 million in the first three months of 1999. In
1999, the Company used $39.5 million to purchase the businesses and net assets
of Kao Corporation
In 1999, the Company financed a portion of the Kao acquisition with the
proceeds of a $15.0 million term loan facility. During the first three months of
2000, the Company repaid notes payable totaling $969,000 as compared to $458,000
in the first quarter of 1999.
As of March 31, 2000, 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 March 31, 2000.
Future liquidity needs will depend on, among other factors, the timing
of capital expenditures and expenditures in connection with any acquisitions,
changes in customer order volume and the timing and collection of receivables.
The Company believes that existing cash balances, anticipated cash flow from
operations and amounts available under existing credit facilities will be
sufficient to fund its operations for the foreseeable future.
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, 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 effected
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.
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.
<PAGE>
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
Form 10-Q 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 for CDs and services are expected to
remain somewhat consistent, although downward pricing pressure exists. 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
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
statements, 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.
<PAGE>
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency. 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 $111,000 for the first quarter
ended March 31, 2000. The Company anticipates it will incur exchange gains and
losses from foreign operations in the future. During the first quarter of 2000,
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 U.S. dollar generally has a positive translation effect. In the first
quarter of 2000, the stronger U.S. dollar reduced translated net sales and net
income by $221,000 and $40,000, respectively.
Interest. Substantially all of the Company's debt and associated
interest expense is sensitive to changes in the level of interest rates.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is included with the Form 10-Q
Exhibit 27 Financial Data Schedule (included in electronic
version only)
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZOMAX INCORPORATED
Date: May 12, 2000 By: /s/ James T. Anderson
James T. Anderson, Chairman and Chief
Executive Officer (principal executive
officer)
By: /s/ James E. Flaherty
James E. Flaherty Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
Zomax Incorporated
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2000
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 44,897
<SECURITIES> 0
<RECEIVABLES> 38,835
<ALLOWANCES> 2,569
<INVENTORY> 8,355
<CURRENT-ASSETS> 96,037
<PP&E> 56,084
<DEPRECIATION> 17,132
<TOTAL-ASSETS> 141,967
<CURRENT-LIABILITIES> 37,203
<BONDS> 0
0
0
<COMMON> 56,549
<OTHER-SE> 35,974
<TOTAL-LIABILITY-AND-EQUITY> 141,967
<SALES> 57,359
<TOTAL-REVENUES> 57,899
<CGS> 38,673
<TOTAL-COSTS> 47,352
<OTHER-EXPENSES> 555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288
<INCOME-PRETAX> 9,704
<INCOME-TAX> 3,310
<INCOME-CONTINUING> 6,394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,394
<EPS-BASIC> .40
<EPS-DILUTED> .38
</TABLE>
