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 30, 2001 and March 31, 2000 are summarized as follows (in thousands):
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; customer contact 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.
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. In these cases, the customer accepts title to the goods as of the date of the Company’s invoice.
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.
Results of Operations
Sales. The Company’s sales were $62.8 million for the first quarter of 2001, an increase of 8.5% from $57.9 million in the first quarter of 2000. The majority of the increase in sales was the result of an increase in CD and DVD related sales, although CD and DVD unit volume declined 3.1%. The increase in sales, despite the decrease in units, resulted from a change in sales mix. The Company’s sales mix included more lower margin materials and freight billings.
Cost of sales. Cost of sales as a percentage of sales was 76.3% and 67.7% for the first quarter of 2001 and 2000, respectively. The first quarter increase in the cost of sales percentage was primarily due to the change in the mix of sales. The Company’s sales mix for the first quarter of 2000 includes more lower margin materials and freight billings, as discussed above, while fixed costs increased due to CD/DVD manufacturing capacity expansion done last year, and the manufacturing facilities operating at lower utilizations.
Selling, general and administrative expenses. Selling, general and administrative expenses as a percentage of sales were 13.5% and 15.0% for the first quarter of 2001 and 2000, respectively. Selling, general and administrative expenses decreased $0.2 million in the first quarter of 2001 as compared to the first quarter of 2000.
Equity in losses of unconsolidated entity. The Company owns an equity interest in Microgistix, Inc. (formerly 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 $0.2 million in the first quarter of 2001 and a loss of $0.6 million in the first quarter of 2000, representing its share of the Microgistix’s 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 $0.8 million and $0.7 million for the first quarter of 2001 and 2000, respectively. Interest expense was $0.2 million and $0.3 million for the first quarter of 2001 and 2000, respectively. Interest income increased due to higher cash balances. There was a decrease in interest expense as a result of lower outstanding loan balances.
Other expenses, net. Other expense consists of foreign currency losses.
Provision for income taxes. The effective income tax rate for the first quarter of 2001 was 36.2%, as compared to 34.1% for the first quarter of 2000. The increase in the effective income tax rate in 2001 is due to an increase in U.S. based income taxed at a higher rate.
Net income. Net income for the first quarter of 2001 was $4.2 million, a decrease of 34.1% from net income of $6.4 million in 2000. Diluted earnings per share was $.13 for the first quarter of 2001, a decrease of 31.6% from diluted earnings per share of $.19 in first quarter of 2000.
Liquidity and Capital Resources
As of March 30, 2001, the Company had working capital of $74.5 million, compared to working capital of $69.9 million as of December 29, 2000. As of March 30, 2001, the Company had cash and cash equivalents totaling $66.6 million.
Cash provided by operating activities for the first quarter of 2001 was $6.1 million, compared to cash used of $5.8 million during the first quarter of 2000. The higher operating cash flow in 2001 was primarily due to a reduction of inventories and collection of related receivables.
Cash used in investing activities during the first quarter of 2001 was $1.6 million, compared to $1.0 million in the first quarter of 2000.
Cash used in financing activities during the first quarter of 2001 was $0.5 million compared to cash provided of $1.2 million during the first quarter of 2000. In 2001, the Company received $1.2 million from the issuance of common stock compared to $2.2 million in 2000. During the first quarter of 2001, the Company repaid principal on notes payable totaling $1.6 million as compared to $1.0 million in the first quarter of 2000.
As of March 30, 2001, 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 March 30, 2001.
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, 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.
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 into 2002. Unit prices may continue to decline given the overcapacity state of the industry. 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 effectively manage industry changes as well as its own growth and organizational changes.
If CD market demand does not continue to grow as expected or declines, revenue growth would be directly and adversely impacted and the manufacturing capacity installed will be underutilized. Pricing strategies of competitors and general economic factors, such as consumer confidence and inflation, directly impact the Company. A substantial part of the Company’s revenue is derived from a small number of key customers, and revenues will be significantly lower than expected if the Company cannot keep these customers. In addition, if the Company does not respond rapidly to technological changes, it may lose customers, which will cause a significant decrease in revenue. The Company operates several facilities in California which are subject to the current California power restrictions.
On April 27, 2001, the Company decided to close its German facility effective June 30, 2001. The facility primarily duplicated and packaged diskettes for one customer who has transitioned from diskettes to CD’s. The Company does not have CD replication equipment in Germany. The estimated cost of closing the facility is not expected to be material to the consolidated financial statements.
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, including, but not limited to, changes in foreign currency or weak economic conditions in foreign markets. In addition, product sales 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 $0.1 million for the first quarter ended March 30, 2001. The Company believes that it will continue to incur exchange gains and losses from foreign operations in the future.
Interest. As of March 30, 2001, the Company had total outstanding debt of $8.9 million, which bear interest rates that are tied to the prime rate or LIBOR. Therefore, the Company is subject to exposure to interest rate risk for these borrowings based on fluctuations in the interest rates. Based upon the outstanding indebtedness, an increase in the interest rates of 1.0% would cause a corresponding increase in our annual interest expense of approximately $0.1 million.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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 14, 2001 | | 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) |
| | | |
