UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 July 31, 2000, the issuer had 31,962,702 shares of Common Stock, no par
value, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX INCORPORATED
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
ASSETS Jun. 30, 2000 Dec. 31, 1999
(Unaudited)
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 62,767 $ 51,128
Accounts receivable, net of allowance for doubtful
accounts of $ 2,827 and $2,645 28,896 28,291
Inventories 8,708 9,338
Deferred income taxes 2,205 2,899
Prepaid and other expenses 4,709 2,448
-------------- -------------
Total current assets 107,285 94,104
Property and equipment, net of accumulated depreciation 38,234 40,642
of $20,610 and $14,822
Investments in unconsolidated entity 5,634 6,447
Goodwill and other assets, net 1,086 1,111
-------------- -------------
$ 152,239 $ 142,304
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 4,021 $ 3,990
Accounts payable 14,260 18,768
Accrued expenses:
Accrued royalties 6,984 4,083
Accrued compensation 6,367 11,768
Other 4,994 6,342
Income taxes payable 409 1,687
-------------- -------------
Total current liabilities 37,035 46,638
Notes payable, net of current portion 8,571 10,603
Deferred income taxes 2,633 2,633
Shareholders' Equity:
Common stock, no par value, 100,000 authorized 60,324 51,953
shares, 31,897 and 30,966 shares issued
and outstanding
Retained earnings 47,426 33,234
Other comprehensive income (loss) (3,750) (2,757)
-------------- -------------
Total shareholders' equity 104,000 82,430
-------------- -------------
$ 152,239 $ 142,304
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements Of Operations
(Unaudited)
(In thousands, except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
Jun. 30 Jun. 25 Jun. 30 Jun. 25
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 62,940 $ 55,140 $ 120,299 $ 103,375
Cost of Sales 42,660 37,616 81,333 73,815
--------- --------- --------- ---------
Gross Profit 20,280 17,524 38,966 29,560
Selling, General and
Administrative Expenses 8,543 9,662 17,222 18,220
--------- --------- --------- ---------
Operating Income 11,737 7,862 21,744 11,340
Equity in losses of unconsolidated entity (258) (428) (813) (833)
Interest Expense (289) (282) (577) (645)
Interest Income 774 185 1,426 257
Other income (expense), net 195 -- 84 --
--------- --------- --------- ---------
Income Before Income Taxes 12,159 7,337 21,864 10,119
Provision for Income Taxes 4,362 2,419 7,672 3,232
--------- --------- --------- ---------
Net Income $ 7,797 $ 4,918 $ 14,192 $ 6,887
========= ========= ========= =========
Earnings Per Share
Basic $ 0.24 $ 0.17 $ 0.45 $ 0.24
========= ========= ========= =========
Diluted $ 0.23 $ 0.15 $ 0.42 $ 0.21
========= ========= ========= =========
Weighted average common
shares outstanding 31,846 29,108 31,724 29,064
Dilutive effect of stock
options and warrants 1,996 3,684 2,098 3,120
--------- --------- --------- ---------
Weighted average common
and diluted shares outstanding 33,842 32,792 33,822 32,184
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ZOMAX INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the six months ended
June 30, June 25,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net income $ 14,192 $ 6,887
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 4,608 3,800
Equity in losses of unconsolidated entity 813 833
Deferred income taxes -- (15)
Changes in operating assets and liabilities:
Accounts receivable (839) 9,686
Inventories 536 1,310
Prepaid expenses and deposits (2,300) (444)
Accounts payable (4,124) 8,238
Accrued expenses (3,632) (9,575)
Income taxes payable 5,343 1,262
-------- --------
Net cash provided by operating activities 14,597 21,982
-------- --------
Investing Activities:
Purchase of property and equipment (2,681) (2,220)
Acquisitions, net of cash acquired -- (39,500)
Change in other assets (16) 868
-------- --------
Net cash used in investing activities (2,697) (40,852)
-------- --------
Financing Activities:
Issuance of common stock 2,470 296
Proceeds from notes payable -- 15,000
Repayment of notes payable (1,965) (1,514)
-------- --------
Net cash provided by financing activities 505 13,782
-------- --------
Effect of exchange rate changes on cash and cash equivalents (766) (180)
-------- --------
Net increase (decrease) in cash 11,639 (5,268)
Cash and Cash Equivalents:
Beginning of period 51,128 25,621
-------- --------
End of period $ 62,767 $ 20,353
======== ========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 548 $ 645
======== ========
Cash paid for income taxes $ 2,356 $ 1,970
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<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 Statement
of Financial Accounting Standard (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 Splits
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. The 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. All share and per share
amounts have been restated for both 1999 and 2000 in the accompanying financial
statements.
<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 six months ended June 30, 2000 and June 25, 1999 are summarized
as follows (in thousands):
June 30, 2000 June 25, 1999
--------- ---------
Total revenues:
United States $ 86,081 $ 69,522
Europe 31,926 32,853
Canada 10,866 7,779
Less - Intergeographic revenues (8,574) (6,779)
--------- ---------
$ 120,299 $ 103,375
========= =========
Operating income:
United States $ 18,051 $ 8,853
Europe 4,722 4,003
Canada 2,721 2,150
Corporate and eliminations (3,750) (3,666)
--------- ---------
$ 21,744 $ 11,340
========= =========
Assets:
United States $ 46,882 $ 51,160
Europe 39,657 25,311
Canada 12,868 10,224
--------- ---------
Total identifiable assets 99,407 86,695
Corporate assets and eliminations 52,832 19,370
--------- ---------
Total Assets $ 152,239 $ 106,065
========= =========
Capital expenditures:
United States $ 2,005 $ 1,053
Europe 398 660
Canada 278 507
--------- ---------
$ 2,681 $ 2,220
========= =========
Depreciation and amortization
United States $ 3,330 $ 2,901
Europe 824 565
Canada 454 334
--------- ---------
$ 4,608 $ 3,800
========= =========
<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
Sales. The Company's sales were $62.9 million for the second quarter of
2000, an increase of 14%, from $55.1 million in the second quarter of 1999. For
the six months ended June 2000, sales were $120.3 million, an increase of 16%
from sales of $103.4 million for the first six months of 1999. The increase in
six month sales resulted from a 20% increase in CD and DVD related sales and a
52% increase from the customer contact centers. These increases were partially
offset by a 77% decrease in diskette, audiocassette and RMA sales. Such sales
represent 2% of total sales for the six months ended June 2000.
Cost of sales. Cost of sales as a percentage of sales was 67.8% and
68.2% for the second quarter of 2000 and 1999, respectively. For the first six
months of 2000 and 1999, cost of sales percentages were 67.6% and 71.4%,
respectively. The decrease in the cost of sales percentage was due to an
increase in CD manufacturing utilization rates across all sites and a reduction
<PAGE>
in the amount of CD outsourcing quantities. In addition, the Company implemented
certain operating and financial controls in the Kao acquired sites since the
second quarter of 1999, which reduced the cost of sales percentages in 2000.
Selling, general and administrative expense. Selling, general and
administrative expenses as a percentage of sales were 13.6% for the second
quarter of 2000 and 17.5% for the second quarter of 1999. For the first six
months of 2000, selling, general and administrative was 14.3% of net sales, as
compared to 17.6% for the same period of 1999. Selling, general and
administrative expenses decreased $1.1 million in the second quarter of 2000 as
compared to 1999. Selling, general and administrative expense decrease in
dollars and as a percentage of sales was achieved with operational efficiencies
and consolidated and/or closing of certain facilities as part of the Kao
acquisition.
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 $258,000 in the second quarter of 2000 and a
loss of $428,000 in the second 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. For the six months ended June 2000
and 1999, the net loss from Chumbo was $813,000 and $833,000, respectively.
Interest income and expense. Interest income was $774,000 and $185,000
for the second quarter of 2000 and 1999, respectively. For the first six months
of 2000, interest income was $1.4 million, as compared to $257,000 for the same
period in 1999. Interest expense was $289,000 and $282,000 for the second
quarter of 2000 and 1999, respectively. For the first six months of 2000,
interest expense was $577,000, as compared to $645,000 for the same period in
1999. Interest income increased with the increase in cash balances and an
increase in interest rates. Interest expense changed as a result of lower
outstanding loan balances offset by an increase in interest rates.
Other income (expenses), net. In 2000, other income consists of foreign
currency gains.
Provision for income taxes. The effective income tax rate for the first
six months of 2000 was 35.1% as compared to 31.9% for the first six months of
1999. The increase in the effective income tax rate in 2000 is due to an
increase in U.S. based income at a higher tax rate.
Net income. Net income for the second quarter of 2000 was $7.8 million,
an increase of 58% from net income of $4.9 million in 1999. Diluted earnings per
share was $.23 for the second quarter of 2000, an increase of 53% from diluted
earnings per share of $.15 in second quarter of 1999. Net income for the first
six months of 2000 was $14.2 million, an increase of 106% from net income of
$6.9 million in 1999. Diluted earnings per share was $.42 for the first six
months of 2000, an increase of 100% from diluted earnings per share of $.21 in
1999.
<PAGE>
Liquidity and Capital Resources
As of June 30, 2000, the Company had working capital of $66.8 million,
compared to working capital of $47.5 million as of December 31, 1999. As of June
30, 2000, the Company had cash totaling $62.8 million.
Cash provided by operating activities for the first six months of 2000
was $14.6 million, compared to cash provided of $22.0 million during the first
six months of 1999. The higher operating cash flow in 1999 was primarily due to
the collection of receivables purchased in the Kao acquisition and timing of
receipts and disbursements on normal operating activities.
Cash used in investing activities during the first six months of 2000
was $2.7 million, compared to $40.9 million in the first six 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 six months of
2000, the Company repaid notes payable totaling $2.0 million as compared to $1.5
million in the first six months of 1999.
As of June 30, 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 June 30, 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.
<PAGE>
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
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
<PAGE>
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 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 gain was $84,000 for the first six months
ended June 30, 2000. The Company anticipates it will continue to incur exchange
gains and losses from foreign operations in the future.
Interest. Substantially all of the Company's debt and associated
interest expense is sensitive to changes in the level of interest rates. The
effect of a one percent change in the interest rate could cause interest expense
to change by $113,000 on an annual basis.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting, was held on April 19, 2000.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as listed in the
proxy statement, and all of such nominees were elected.
The shareholders set the number of directors at six (6) by a vote of
29,644,334 shares in favor, with 39,572 shares voted against and 22,362 shares
abstaining. The following persons were elected to serve as directors of the
Company until the next annual meeting of shareholders with the following votes:
Nominees Votes For Votes Witheld
-------- --------- -------------
James T. Anderson 29,346,330 359,938
Anthony Angelini 29,347,390 358,878
Robert Ezrilov 20,474,624 9,231,644
Philip T. Levin 28,816,790 889,478
Howard P. Liszt 29,369,696 336,572
Janice Ozzello Wilcox 29,368,890 337,378
The shareholders approved an amendment to the Company's Articles of
Incorporation to increase the authorized shares from 25 million to 125 million
by a vote of 17,480,206 shares in favor, 12,201,701 shares voted against, and
24,352 shares abstaining.
The shareholders approved an amendment to the 1996 Stock Option Plan to
increase the shares reserved under the Plan from 5.2 million to 6.4 million by a
vote of 26,689,924 shares in favor, 2,927,492 shares against, and 88,852 shares
abstaining.
The shareholders ratified the appointment of Arthur Andersen LLP as
independent public accountants for the Company by a vote of 29,029,326 shares in
favor, 654,900 shares against and 22,042 shares abstaining.
<PAGE>
PART III - 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: August 4, 2000 By: /s/ James T. Anderson
James T. Anderson, Chairman and Chief
Executive Officer (principal executive
officer)
By: /s/ Jams E. Flaherty
James E. Flaherty Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
Zomax Incorporated
Form 10-Q Quarterly Report
For the Quarter Ended June 30, 2000
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
