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 September 29, 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 October 31, 2000, the issuer had 32,358,872 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 Sep. 29, 2000 Dec. 31, 1999
(Unaudited)
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 59,965 $ 51,128
Accounts receivable, net of allowance for doubtful
accounts of $ 2,535 and $2,645 35,556 28,291
Inventories 8,492 9,338
Deferred income taxes 2,203 2,899
Prepaid and other expenses 4,533 2,448
--------- ---------
Total current assets 110,749 94,104
Property and equipment, net of accumulated depreciation 46,331 40,642
of $22,097 and $14,822
Investments in unconsolidated entity 5,105 6,447
Goodwill and other assets, net 1,052 1,111
--------- ---------
$ 163,237 $ 142,304
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 4,035 $ 3,990
Accounts payable 19,297 18,768
Accrued expenses:
Accrued royalties 8,097 4,083
Accrued compensation 5,527 11,768
Other 3,953 6,342
Income taxes payable 3,148 1,687
--------- ---------
Total current liabilities 44,057 46,638
Notes payable, net of current portion 7,536 10,603
Deferred income taxes 2,633 2,633
Shareholders' Equity:
Common stock, no par value, 100,000 authorized 61,935 51,953
shares, 32,359 and 30,966 shares issued
and outstanding
Retained earnings 52,883 33,234
Other comprehensive loss (5,807) (2,757)
--------- ---------
Total shareholders' equity 109,011 82,430
--------- ---------
$ 163,237 $ 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 Nine Months Ended
Sep. 29 Sep. 24 Sep. 29 Sep. 24
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 58,824 $ 61,603 $ 179,123 $ 164,978
Cost of sales 41,949 41,045 123,282 114,861
--------- --------- --------- ---------
Gross profit 16,875 20,558 55,841 50,117
Selling, general and
administrative expenses 7,948 8,707 25,169 26,926
--------- --------- --------- ---------
Operating income 8,927 11,851 30,672 23,191
Equity in losses of unconsolidated entity (529) (477) (1,342) (1,311)
Interest expense (273) (277) (850) (921)
Interest income 845 275 2,270 532
Other expense, net (158) -- (74) --
--------- --------- --------- ---------
Income before income taxes 8,812 11,372 30,676 21,491
Provision for income taxes 3,355 3,919 11,027 7,151
--------- --------- --------- ---------
Net income $ 5,457 $ 7,453 $ 19,649 $ 14,340
========= ========= ========= =========
Earnings Per Share
Basic $ 0.17 $ 0.25 $ 0.62 $ 0.49
========= ========= ========= =========
Diluted $ 0.16 $ 0.23 $ 0.58 $ 0.44
========= ========= ========= =========
Weighted average common
shares outstanding 32,312 29,832 31,920 29,322
Dilutive effect of stock
options and warrants 1,493 3,290 1,896 3,176
--------- --------- --------- ---------
Weighted average common
and diluted shares outstanding 33,805 33,122 33,816 32,498
========= ========= ========= =========
</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 nine months ended
Sep. 29 Sep. 24
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net income $ 19,649 $ 14,340
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 7,087 5,737
Equity in losses of unconsolidated entity 1,342 1,311
Deferred income taxes -- (15)
Changes in operating assets and liabilities:
Accounts receivable (8,580) 5,418
Inventories 615 1,681
Prepaid and other expenses (2,206) (1,825)
Accounts payable 1,405 8,990
Accrued expenses (3,602) (2,791)
Income taxes payable 8,116 4,698
-------- --------
Net cash provided by operating activities 23,826 37,544
-------- --------
Investing Activities:
Purchases of property and equipment, net (14,010) (5,663)
Acquisitions, net of cash acquired -- (39,500)
Change in other assets (5) 1,086
-------- --------
Net cash used in investing activities (14,015) (44,077)
-------- --------
Financing Activities:
Issuance of common stock 4,081 2,339
Proceeds from notes payable -- 15,000
Repayment of notes payable (2,961) (2,616)
-------- --------
Net cash provided by financing activities 1,120 14,723
-------- --------
Effect of exchange rate changes on cash and cash equivalents (2,094) (1,707)
-------- --------
Net increase in cash 8,837 6,483
Cash and Cash Equivalents:
Beginning of period 51,128 25,621
-------- --------
End of period $ 59,965 $ 32,104
======== ========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 886 $ 921
======== ========
Cash paid for income taxes $ 2,970 $ 2,454
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE>
Zomax Incorporated
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim consolidated 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 the Company's business, results may not be
indicative of results for a full year. The accompanying consolidated 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 consolidated financial statements.
3. Shareholders' Equity
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
consolidated financial statements.
On October 18, 2000, the Company's Board of Directors authorized the
purchase of up to two million shares of the Company's common stock.
<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 September 29, 2000 and September 24, 1999 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 29, 2000 Sept 24, 1999 Sept 29, 2000 Sept 24, 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues:
United States $ 41,977 $ 44,930 $ 128,058 $ 114,452
Europe 15,028 16,679 46,954 49,532
Canada 5,204 5,760 16,070 13,539
Eliminations (3,385) (5,766) (11,959) (12,545)
--------- --------- --------- ---------
$ 58,824 $ 61,603 $ 179,123 $ 164,978
========= ========= ========= =========
Operating income:
United States $ 7,893 7,962 $ 25,944 $ 16,815
Europe 1,132 4,739 5,854 8,742
Canada 1,648 1,829 4,369 3,979
Corporate and eliminations (1,746) (2,679) (5,495) (6,682)
--------- --------- --------- ---------
$ 8,927 $ 11,851 $ 30,672 $ 22,854
========= ========= ========= =========
Captial expenditures:
United States $ 6,312 $ 2,331 $ 8,317 $ 3,384
Europe 2,299 923 2,697 1,583
Canada 2,718 189 2,996 696
--------- --------- --------- ---------
$ 11,329 $ 3,443 $ 14,010 $ 5,663
========= ========= ========= =========
Depreciation and amortization:
United States $ 1,823 $ 1,510 $ 5,153 $ 4,411
Europe 446 241 1,270 806
Canada 210 186 664 520
--------- --------- --------- ---------
$ 2,479 $ 1,937 $ 7,087 $ 5,737
========= ========= ========= =========
Assets: Sept 29, 2000 Sept 24, 1999
------------- -------------
United States $ 55,095 $ 52,199
Europe 38,363 33,557
Canada 15,432 11,670
--------- ---------
Total identifiable assets 108,890 97,426
Corporate and eliminations 54,347 26,479
--------- ---------
Total assets $ 163,237 $ 123,905
========= =========
</TABLE>
6
<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 are 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 $58.8 million for the third quarter of
2000, a decrease of 4.5% from $61.6 million in the third quarter of 1999. For
the nine months ended September, 2000, sales were $179.1 million, an increase of
8.5% from sales of $165.0 million for the first nine months of 1999. The decline
in third quarter sales was primarily to a decline in market conditions, in
particular the European market, and the modification of a third quarter program
by a major customer that the Company did not replace with other business. The
increase in nine month sales resulted from a 12% increase in CD and DVD related
sales and a 44% increase from the customer contact centers. These increases were
partially offset by a 68% decrease in diskette, audiocassette and RMA sales,
which represent 3% of total sales for the nine months ended September 2000.
<PAGE>
Cost of sales. Cost of sales as a percentage of sales was 71.3% and
66.6% for the third quarter of 2000 and 1999, respectively. For the nine months
of 2000 and 1999, cost of sales percentages were 68.8% and 69.6%, respectively.
The third quarter increase in the cost of sales percentage was primarily due to
the reduction in sales discussed above, while fixed costs increased due to
CD/DVD manufacturing capacity expansion and an increase in polycarbonate prices,
which were caused by crude oil price increases. The decrease in the cost of
sales percentage for the nine month period was due to a reduction in the amount
of CD outsourcing and the implementation of certain operating and financial
controls in the Kao acquired sites since the second quarter of 1999, which
offset the increases in cost of sales in the third quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of sales were 13.5% and 14.1% for the
third quarter of 2000 and 1999, respectively. For the first nine months of 2000,
selling, general and administrative was 14.0% of net sales, as compared to 16.3%
for the same period of 1999. Selling, general and administrative expenses
decreased $759,000 in the third quarter of 2000 as compared to 1999 and
decreased $1.8 million for the nine month periods. 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 $529,000 in the third quarter of 2000 and a
loss of $477,000 in the third 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 nine months ended September
2000 and 1999, the net loss from Chumbo was $1,342,000 and $1,311,000,
respectively.
Interest income and expense. Interest income was $845,000 and $275,000
for the third quarter of 2000 and 1999, respectively. For the nine months of
2000, interest income was $2.3 million, as compared to $532,000 for the same
period in 1999. Interest expense was $273,000 and $277,000 for the third quarter
of 2000 and 1999, respectively. For the first nine months of 2000, interest
expense was $850,000, as compared to $921,000 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 expenses, net. In 2000, other expense consists of foreign
currency losses.
Provision for income taxes. The effective income tax rate for the nine
months of 2000 was 35.9%, as compared to 33.3% for the first nine months of
1999. The increase in the effective income tax rate in 2000 is due to an
increase in U.S. based income taxed at a higher rate.
<PAGE>
Net income. Net income for the third quarter of 2000 was $5.5 million,
a decrease of 26.8% from net income of $7.5 million in 1999. Diluted earnings
per share was $.16 for the third quarter of 2000, a decrease of 30% from diluted
earnings per share of $.23 in third quarter of 1999. Net income for the first
nine months of 2000 was $19.6 million, an increase of 37% from net income of
$14.3 million in 1999. Diluted earnings per share was $.58 for the first nine
months of 2000, an increase of 31.8% from diluted earnings per share of $.44 in
the same period in 1999.
Liquidity and Capital Resources
As of September 29, 2000, the Company had working capital of $66.7
million, compared to working capital of $47.5 million as of December 31, 1999.
As of September 29, 2000, the Company had cash totaling $60.0 million.
Cash provided by operating activities for the nine months of 2000 was
$23.8 million, compared to cash provided of $37.5 million during the nine 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 related to normal operating activities.
Cash used in investing activities during the nine months of 2000 was
$14.0 million, compared to $44.1 million in the nine months of 1999. In 1999,
the Company used $39.5 million to purchase the businesses and net assets of Kao.
The purchase of property and equipment for the nine months ended September 2000
and 1999 was $14.0 million and $5.7 million, respectively.
In 1999, the Company financed a portion of the Kao acquisition with the
proceeds of a $15.0 million term loan facility. During the nine months of 2000,
the Company repaid principal on notes payable totaling $3.0 million as compared
to $2.6 million in the nine months of 1999.
As of September 29, 2000, the Company had a revolving line of credit
facility with available borrowings up to $25.0 million. 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 September 29, 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.
<PAGE>
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, however, is influenced by the cost of raw
materials and labor. There can be no assurance that the Company will be able to
pass on any increased costs to its customers in the future.
Seasonality
The demand for CDs and other multimedia consumer products is seasonal,
with demand increase in the fall due 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 in terms of revenue.
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 CD/DVDs 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.
<PAGE>
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.
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 $158,000 for the nine months
ended September 29, 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 $116,000 on an annual basis.
<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: November 13, 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 June 30, 2000
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
