SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): January 7, 1999
Zomax Optical Media, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Minnesota
(State or Other Jurisdiction of Incorporation)
0-28426 41-1833089
(Commission File Number) (I.R.S. Employer Identification Number)
5353 Nathan Lane
Plymouth, Minnesota 55442
(Address of Principal Executive Offices) (Zip Code)
612-553-9300
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
The Registrant hereby amends Item 7 of its Current Report on Form 8-K dated
January 7, 1999 as set forth below:
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired. Page
(i) Audited combined financial statements of The San Ramon
and Fremont Divisions of Kao Infosystems Company and Kao
Infosystems Canada, Inc. (a wholly-owned subsidiary of Kao
Infosystems Company) for the three years ended December 31,
1997, 1996 and 1995 are filed as part of this report on the
following pages immediately following the signature page of
this report:
Independent Auditor's Report ........................... F1-1
Combined Balance Sheets as of December 31, 1997 and
1996 ................................................... F1-2
Combined Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995........................ F1-3
Combined Statements of Equity in Net Assets for the Years
Ended December 31, 1997, 1996 and 1995.................. F1-4
Combined Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995........................ F1-5
Notes to Combined Financial Statements.................. F1-6
(ii) Audited financial statements of Kao Infosystems (Ireland)
Limited for the three years ended December 31, 1997, 1996 and
1995 are filed as part of this report on the following pages
immediately following the signature page of this report:
Report of Independent Chartered Accountants dated
April 30, 1998.......................................... F2-1
Profit and Loss Accounts for the Three Years Ended
31 December 1997........................................ F2-2
Statements of Total Recognised Gains and Losses for the
Three Years Ended 31 December 1997...................... F2-3
Balance Sheets as of 31 December 1997 and 1996 ......... F2-4
Notes forming part of Financial Statements.............. F2-5
(iii) Unaudited combined financial statements of The San
Ramon and Fremont Divisions of Kao Infosystems Company and Kao
Infosystems Canada, Inc. (a wholly-owned subsidiary of Kao
Infosystems Company) for the nine months ended September
30, 1998 and 1997 are filed as part of this report on the
following pages immediately following the signature page of
this report:
Condensed Combined Balance Sheets as of September 30,
1998 and December 31, 1997.............................. F3-1
Condensed Combined Statements of Operations for Nine
Months Ended September 30, 1998 and 1997................ F3-2
Condensed Combined Statements of Cash Flows for Nine
Months Ended September 30, 1998 and 1997................ F3-3
Notes to Condensed Combined Financial Statements........ F3-4
(iv) Unaudited financial statements of Kao Infosystems
(Ireland) Limited for the nine months ended September 30, 1998
and 1997 are filed as part of this report on the following
pages immediately following the signature page of this report:
Profit and Loss Accounts for Nine Months Ended
30 September 1998 and 1997.............................. F4-1
Balance Sheets as of 30 September 1998 and
31 December 1997 ....................................... F4-2
Cash Flow Statements for the Nine Months Ended
30 September 1998 and 1997 ............................. F4-3
Notes to Condensed Financial Statements................. F4-4
(b) Pro forma financial information. The unaudited pro forma financial
information set forth below is filed as part of this report on the following
pages immediately following the signature page of this report:
Introduction to Pro Forma Unaudited Condensed
Combined Financial Statements .......................... F5-1
Pro Forma Unaudited Condensed Combined Balance Sheet as
of September 25, 1998................................... F5-3
Pro Forma Unaudited Condensed Combined Statement of
Operations for the Nine Months Ended September 25,
1998.................................................... F5-4
Pro Forma Unaudited Condensed Combined Statement of
Operations for the Year ended December 26, 1997......... F5-5
Notes to Pro Forma Unaudited Condensed
Combined Financial Statements........................... F5-6
(c) Exhibits:
2.1 Asset Purchase and Sale Agreement dated November 28,
1998 by and among Zomax Optical Media, Inc. 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.
2.2 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.
2.3 Share Purchase and Sale Agreement dated November
28, 1998 between Primary Marketing Group Limited
and Kao Corporation.
2.4 Credit Agreement dated as of January 6, 1999
among the Registrant, Certain Lenders and General
Electric Capital Corporation.
2.5 Credit Agreement dated as of January 6, 1999 among
Zomax Canada Company, Certain Lenders and
General Electric Capital Canada Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 23, 1999
ZOMAX OPTICAL MEDIA, INC.
By /s/ James E. Flaherty
James E. Flaherty, Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Kao Infosystems Company
Plymouth, Massachusetts
We have audited the accompanying combined balance sheets of the San Ramon and
Fremont Divisions of Kao Infosystems Company and Kao Infosystems Canada, Inc. (a
wholly-owned subsidiary of Kao Infosystems Company) (collectively, the
"Businesses") as of December 31, 1997 and 1996, and the related combined
statements of operations, equity in net assets, and cash flows for each of the
three years in the period ended December 31, 1997. These combined financial
statements are the responsibility of the Businesses' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined 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, such combined financial statements present fairly, in all
material respects, the financial position of the San Ramon and Fremont Divisions
of Kao Infosystems Company and Kao Infosystems Canada, Inc. as of December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Businesses will continue as a going concern. As discussed in Note 1 to the
combined financial statements, the Businesses' recurring losses from operations
and heavy financial leverage raise substantial doubt about the Businesses'
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
New York, New York
December 18, 1998
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY
AND KAO INFOSYSTEMS CANADA, INC.
(A Wholly-Owned Subsidiary of Kao Infosystems Company)
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(In Thousands)
- -------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 1,172 $ 1,462
Accounts receivable-net of allowance for
doubtful accounts of $1,978 in 1997 and
$1,706 in 1996 20,401 17,338
Due from affiliates (Note 8) 3,054 5,097
Inventories-net (Note 3) 8,486 10,053
Prepaid expenses and other current assets 1,091 328
--------- ---------
Total current assets 34,204 34,278
PROPERTY, PLANT AND EQUIPMENT - Net (Note 4) 64,789 82,313
OTHER ASSETS 2,130 7,859
--------- ---------
TOTAL ASSETS $ 101,123 $ 124,450
========= =========
LIABILITIES AND EQUITY IN NET ASSETS
CURRENT LIABILITIES:
Notes payable (Note 5) $ 2,308 $ 7,184
Accounts payable 6,938 5,339
Due to affiliates (Note 8) 1,281 1,518
Current portion of long-term debt (Note 5) 6,295 2,000
Capital lease obligations (Note 4) 785 397
Accrued expenses and other current liabilities 9,828 10,446
--------- ---------
Total current liabilities 27,435 26,884
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt-net of current portion (Note 5) 12,245 19,340
Due to Corporate office (Note 1) 53,906 35,981
--------- ---------
Total long-term liabilities 66,151 55,321
--------- ---------
Total liabilities 93,586 82,205
--------- ---------
CONTINGENCIES (Note 9)
EQUITY IN NET ASSETS:
Common stock, $.0801 par value - authorized,
unlimited shares; outstanding, 383,956 shares 30,775 30,775
Additional paid-in capital 6,471 6,471
Divisional equity 28,279 16,490
Cumulative translation adjustment 128 523
Deficit (58,116) (12,014)
--------- ---------
Equity in net assets 7,537 42,245
--------- ---------
TOTAL LIABILITIES AND EQUITY IN NET ASSETS $ 101,123 $ 124,450
========= =========
See notes to combined financial statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY
AND KAO INFOSYSTEMS CANADA, INC.
(A Wholly-Owned Subsidiary of Kao Infosystems Company)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
- -------------------------------------------------------------------------------
1997 1996 1995
REVENUES:
Sales $ 106,710 $ 106,129 $ 110,263
Sales to related parties (Note 8) 16,400 16,000 11,400
--------- --------- ---------
123,110 122,129 121,663
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales (Note 8) 114,351 98,055 100,593
Selling, general and administrative
expenses (Note 8) 26,714 21,300 18,578
Restructuring costs (Note 11) 20,822 - -
Interest expense from related
parties (Notes 1 and 5) 3,923 2,572 3,352
Interest expense - other 366 281 734
Other 3,036 730 822
--------- --------- ---------
Total costs and expenses 169,212 122,938 124,079
--------- --------- ---------
NET LOSS $ (46,102) $ (809) $ (2,416)
========= ========= =========
See notes to combined financial statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY
AND KAO INFOSYSTEMS CANADA, INC.
(A Wholly-Owned Subsidiary of Kao Infosystems Company)
COMBINED STATEMENTS OF EQUITY IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
- -------------------------------------------------------------------------------
Kao Infosystems Canada, Inc.
--------------------------------- Cumulative Equity
Common Stock Addtional Divisional Translation in Net
Shares Amount Paid-In Capital Equity Adjustment Deficit Assets
BALANCE, JANUARY 1, 1995 383,956 $30,775 $ - $ 7,982 $ - $ (8,789) $29,968
Net loss - - - - - (2,416) (2,416)
Translation adjustment - - - - 597 - 597
------- -------- ------ --------- ----- ---------- -------
BALANCE, DECEMBER 31, 1995 383,956 30,775 - 7,982 597 (11,205) 28,149
Net loss (809) (809)
Capital contribution - - 6,471 8,508 - - 14,979
Translation adjustment - - - - (74) - (74)
------- -------- ------ --------- ----- ---------- -------
BALANCE, DECEMBER 31, 1996 383,956 30,775 6,471 16,490 523 (12,014) 42,245
Net loss - - - - - (46,102) (46,102)
Capital contribution - - - 11,789 - - 11,789
Translation adjustment - - - - (395) - (395)
------- -------- ------ --------- ----- ---------- -------
BALANCE, DECEMBER 31, 1997 383,956 $30,775 $6,471 $28,279 $128 $ (58,116) $ 7,537
======= ======= ====== ======= ==== ========== =======
See notes to combined financial statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY
AND KAO INFOSYSTEMS CANADA, INC.
(A Wholly-Owned Subsidiary of Kao Infosystems Company)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECMEBER 31, 1997, 1996 AND 1995
(In Thousands)
- -------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (46,102) $ (809) $ (2,416)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 13,735 8,267 7,897
Write-off of long-term assets 20,146 - -
Loss on sale of property, plant and equipment-net - 178 1,144
Increase (decrease) in cash due to changes in
operating assets and liabilities:
Accounts receivable (3,063) 2,240 (10,960)
Due from affiliates 2,043 (1,376) (1,597)
Inventories 1,567 851 (1,788)
Prepaid expenses and other current assets (2,541) 324 (427)
Other assets 1,947 (3,468) (150)
Accounts payable 1,600 86 3,271
Due to affiliates (237) 327 (162)
Accrued expenses and other current liabilities (619) 5,243 1,221
---------- --------- ---------
Net cash (used in) provided by operating
activities (11,524) 11,863 (3,967)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (9,830) (25,658) (2,590)
Proceeds from the sale of assets - 14 135
---------- --------- ---------
Net cash used in investing activities (9,830) (25,644) (2,455)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Corporate office 17,925 4,600 4,759
Principal payments on long-term debt (2,800) (4,974) (781)
Net (payments) proceeds from notes payable (4,876) 876 2,875
Principal payments on capital lease obligations (579) (1,049) (1,049)
Capital contributions 11,789 14,979 -
---------- --------- ---------
Net cash provided by financing activities 21,459 14,432 5,804
---------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (395) (74) 597
---------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (290) 577 (21)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,462 885 906
---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,172 $ 1,462 $ 885
========== ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 4,500 $ 2,800 $ 4,000
========== ========= =========
See notes to combined financial statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY
AND KAO INFOSYSTEMS CANADA, INC.
(A Wholly-Owned Subsidiary of Kao Infosystems Company)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
- -------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Kao Infosystems Company ("KIC"), a Delaware corporation, was a
wholly-owned subsidiary of Kao Corporation of America ("KCOA"). Effective
at the close of business on December 31, 1997, KCOA was liquidated, and
KIC became a direct subsidiary of Kao Corporation (Japan) ("Kao"). KIC's
principal business is the duplicating of software onto CDs as well as
packaging the goods and providing fulfillment services. Kao Infosystems
Canada Inc. ("KICI") is a wholly-owned subsidiary of KIC. The San Ramon,
California and Fremont, California divisions and KICI (collectively, the
"Businesses") are engaged in principally the same business as KIC.
The accompanying combined financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. During the
years ended December 31, 1997, 1996 and 1995, the combined net losses of
the Businesses were approximately $46,102, $809 and $2,416, respectively.
The Businesses also had heavy financial leverage of $74,754 and $64,505 at
December 31, 1997 and 1996, respectively. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities
that might be necessary should the Businesses be unable to continue as a
going concern. Under a new direction in strategy of concentrating on its
core businesses of household products and chemical products, Kao began a
full-scale restructuring and rationalization of its information business
during 1997, which resulted in the closing of two operating facilities of
KIC and laying off of employees. Additionally, during 1998, Kao closed
down its KIC operations at two other locations and on November 28, 1998,
entered into an agreement to sell certain assets of its information
technology business conducted in North America and Europe. This sale will
include the San Ramon and Fremont divisions of KIC and KICI . The sale is
expected to be finalized in January 1999. If the sale with the current
buyer is not finalized, management will attempt to find another buyer for
the Businesses.
KIC will continue to administer the Corporate Finance and Accounting
departments at the Corporate office in Plymouth, Massachusetts through the
closing down of the remainder of the KIC business, which is expected to be
completed during the first quarter of 1999.
The San Ramon and Fremont divisions were financed by KIC Corporate office
through various loans KIC obtained from Kao and an affiliate of Kao.
Interest on the loans was charged at interest rates ranging from 3.98% to
6.59% per annum, and the loans are payable at varying installments through
October 2003. Interest expense was allocated to the San Ramon and Fremont
divisions by KIC Corporate office and such amounts approximated $3,200,
$1,500 and $2,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Any remaining balance in due to Corporate office at the time
of the closing of the sale of the Businesses will be forgiven by KIC
Corporate office.
Divisional equity in the accompanying financial statements represents
management's estimate of the capital required to operate the Businesses.
Divisional equity was determined by reducing the net assets (before
considering due to Corporate office) of the San Ramon and Fremont
divisions by the amount of long-term financing provided through
intercompany advances from KIC to the divisions.
The Businesses rely upon KIC, Kao and an affiliate for financial support
and certain administrative services, and have material transactions with
related parties (Note 8). Consequently, the accompanying financial
statements may not be indicative of the conditions that would have existed
or the results of operations and cash flows that would have been realized
had the Businesses operated as an unaffiliated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination - The combined financial statements include the
accounts of the Businesses. All material intercompany profits,
transactions and balances have been eliminated.
Cash and Cash Equivalents - The Businesses considers all highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Inventories - Inventories are stated at the lower of cost or market, cost
being determined principally on the first-in, first-out ("FIFO") method.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost less accumulated depreciation. Major renewals or betterments are
capitalized while routine maintenance and repairs, which do not improve or
extend assets lives, are charged to expense when incurred. Depreciation is
computed principally by using the straight-line method based on the
estimated useful lives of the assets.
Income Taxes - KIC provides deferred income taxes for all temporary
differences and adjusts deferred tax balances for enacted tax rates as of
the balance sheet date. KIC's income taxes are accounted for on a separate
company basis and filed as part of a consolidated tax return until the
liquidation of KCOA (Note 1).
Postemployment Benefits - Effective January 1, 1994, KIC adopted Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS No. 112"). The standard requires employers
to recognize the obligation to provide postemployment benefits, if the
obligation is attributable to employees' services already rendered,
employees' rights to those benefits accumulate or vest, payment of the
benefits is probable, and the amounts of the benefits can be reasonably
estimated.
Long-lived Assets - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121"), "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of." KIC adopted SFAS 121 during the year
ended December 31, 1995. During 1997, KIC undertook a plan to restructure
its operations, which included a write-down of certain fixed assets (Note
11).
Other Assets - Deferred start-up costs are amortized over the estimated
useful lives of the assets, which range from 3 to 5 years, using the
straight-line method. Amortization expense for the years ended December
31, 1997, 1996 and 1995, was approximately $1,900, $772 and $475,
respectively. During 1997, KIC undertook a plan to restructure its
operations, which included a write-down of certain deferred start-up costs
(Note 11). The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities," in
1998. SOP 98-5 requires companies to expense as incurred start-up costs,
including previously capitalized start-up costs. At December 31, 1997, the
Businesses had a balance of approximately $800 in deferred start-up costs,
the unamortized balance of which will be written off as of January 1,
1999, the date SOP 98-5 will be effective for the Businesses.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
3. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
1997 1996
Finished products $ 4,903 $ 5,214
Raw materials and other supplies 3,991 4,417
Work in process 664 1,067
------- -------
9,558 10,698
Less reserve for obsolescence 1,072 645
------- -------
$ 8,486 $10,053
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31 (in
thousands):
1997 1996
Land $ 77 $ 77
Building and improvements 14,673 14,862
Machinery and equipment 104,310 92,542
Tools, furniture and fixtures 1,300 1,020
Construction in progress 3,055 4,404
Vehicles 66 66
-------- --------
123,481 112,971
Less accumulated depreciation 58,692 30,658
-------- --------
$ 64,789 $ 82,313
======== ========
Depreciation expense amounted to approximately $11,234, $6,502 and $6,546
for the years ended December 31, 1997, 1996 and 1995, respectively.
The Businesses capitalized interest on assets in construction in progress
of approximately $874 during the year ended December 31, 1996. Interest
capitalized in 1997 and 1995 was not significant.
Capital Lease Obligations - The Businesses leased transportation equipment
and machinery under noncancelable leases with periods of up to 60 months.
During November 1998, the Businesses paid any remaining balance on these
leases and assumed ownership of the property.
The Businesses' property held under capital leases, included within
property, plant and equipment, consisted of the following at December 31
(in thousands):
1997 1996
Machinery and equipment $3,554 $2,587
Less accumulated amortization 938 584
------ ------
$2,616 $2,003
====== ======
5. NOTES PAYABLE AND LONG-TERM DEBT
KICI had various notes payable to banks at December 31, 1997 and 1996, in
the amounts of $2,308 and $7,184, respectively. The balance outstanding at
December 31, 1996 was repaid during 1997 and the balance outstanding at
December 31, 1997 was repaid in January 1998. Interest on the note
outstanding at December 31, 1997 was charged at a rate of 5.75%. Interest
on the notes outstanding at December 31, 1996 was charged at rates ranging
from 3.5% to 6.05%. Interest on the notes outstanding at December 31, 1995
was charged at a rate 6.05%. The approximate maximum month-end borrowings
on notes payable during 1997,1996 and 1995 were $7,100, $14,500 and
$15,400, respectively. The approximate average month end borrowings during
1997, 1996 and 1995 were $5,000, $8,400 and $12,900, respectively. The
fair value of notes payable was considered to approximate the carrying
amounts at December 31, 1997 and 1996.
KICI had various loans from Kao at December 31, 1997 and 1996, in the
amounts of $18,540 and $21,340, respectively. Interest was charged on
these loans at rates ranging from 3.4% to 3.67% during 1997, from 4.94% to
5.18% during 1996 and from 6.8% to 8.3% during 1995. Interest expense on
these loans was approximately $700, $1,100 and $1,300 during the years
ended December 31, 1997, 1996 and 1995, respectively. The fair values of
these loans at December 31, 1997 and 1996 were approximately $14,400 and
$14,800, respectively.
Annual principal payments on long-term debt are as follows (in thousands):
Year 1997
1998 $ 6,295
1999 5,949
2000 6,295
--------
$ 18,540
========
Amounts outstanding with Kao and banks at the time of the sale of the
Businesses will be assumed by KIC Corporate office.
6. INCOME TAXES
The San Ramon and Fremont divisions' taxable income or loss is included in
the consolidated federal tax return of KIC. The San Ramon and Fremont
divisions had taxable income for the year ended December 31, 1995 and tax
losses for the years ended December 31, 1997 and 1996. However, KIC, as a
whole, had losses and recorded no tax provision during those years. There
were no interdivisional tax provision allocations and as such, separate
tax provisions are not reported for the San Ramon and Fremont divisions in
the accompanying financial statements. However, had the divisions not been
eligible to be included in the consolidated federal tax return of KIC,
income tax expense (benefit) for the divisions would have been
approximately $(686), $(56) and $772 for the years ended December 31,
1997, 1996 and 1995, respectively.
The net deferred tax assets (liabilities) of the divisions would have
consisted of the following at December 31 (in thousands):
1997 1996
Allowance for doubtful accounts $ 523 $ 523
Pensions and benefits 1,037 736
Depreciation and amortization (4,217) (2,633)
Deferred start-up costs 729 569
Various reserves 531 276
Other 875 402
Tax carryforward, primarily NOL 10,708 -
------- ------
Net deferred tax asset (liability) $10,276 $ (127)
======= ======
At December 31, 1997, the net deferred tax asset would have been offset by
a valuation allowance of an equal amount.
KICI is a reporting entity for Canadian federal and provincial tax
purposes. Due to operating losses at KICI, no tax provision was recorded
during the three years ended December 31, 1997. In addition, no deferred
tax assets or tax liabilities were recognized by KICI during those three
years. As of December 31, 1997, KICI had net operating loss carryforwards
for tax purposes amounting to approximately $1,900, which are scheduled to
expire in 1998.
7. EMPLOYEE BENEFIT PLANS
Pension Plan - Substantially all employees of the San Ramon and Fremont
divisions are eligible to participate in a defined benefit pension plan
sponsored by KCOA. The plan was taken over by another subsidiary of Kao
after the dissolution of KCOA. The plan provides for the payment of
retirement benefits, mainly commencing between the ages of 55 and 65, and
also for the payment of certain death and disability benefits. After
meeting certain qualifications, an employee acquires a vested right to
future benefits. The benefits payable under the plan are generally
determined on the basis of the employee's length of service and earnings.
Net pension cost included the following components for the years ended
December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
Service cost $ 355 $ 246 $ 154
Interest cost 149 123 94
Actual return on plan assets (427) (237) (362)
Amortization of net loss 189 38 171
----- ----- -----
Pension cost $ 266 $ 170 $ 57
===== ===== =====
The funded status of the plan is as follows (in thousands):
1997 1996
Actuarial present value of benefit obligation:
Vested $ 1,101 $ 775
Nonvested 343 278
------- ------
Accumulated benefit obligation $ 1,444 $1,053
======= ======
Projected benefit obligation $ 2,738 $1,743
Fair value of plan assets, principally equity
securities and corporate and government bonds 3,376 2,200
------- ------
Excess of assets over projected benefit obligation 638 457
Unrecognized gain from experience differences (1,174) (777)
Unrecognized prior service costs 143 177
------- ------
Accrued pension cost $ (393) $ (143)
======= ======
Actuarial assumptions were:
1997 1996 1995
Discount rate 7.50% 7.50% 9.00%
Rate of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on assets 9.00 9.00 9.00
Unrecognized transition gains are amortized principally over a period of
15 years.
Profit-sharing Plan and Incentive Compensation Plan - All employees of the
San Ramon and Fremont divisions are eligible to participate in the Kao
Infosystems Company Employees Retirement Plan (the "Plan"). The Plan is a
profit-sharing plan and has been established in accordance with sections
401(a) and 401(k) of the Internal Revenue Code. KIC's contribution to the
Plan for participating employees at the San Ramon and Fremont divisions
was approximately $326, $472 and $365 for the years ended December 31,
1997, 1996 and 1995, respectively.
KICI has a defined contribution plan. All qualified employees are eligible
to participate in the retirement plan. KICI's contribution to the defined
contribution plan was approximately $130, $119, and $115 for the years
ended December 31, 1997, 1996 and 1995, respectively.
KIC also provided incentive compensation to key management employees based
on achievement of certain objectives. Such incentives were $275 and $110
for the years ended December 31, 1996 and 1995 for the San Ramon and
Fremont divisions. No such incentives were paid in 1997 for the San Ramon
and Fremont divisions.
Postretirement Health Care and Life Insurance - The San Ramon and Fremont
divisions fund benefit costs principally on a pay-as-you-go basis. Several
plan changes were recognized as of January 1, 1997:
* Cap of approximately twice the current cost was imposed for future
retirees. The family cap is 150% of the cap for a single retiree.
* A Medicare risk plan is being implemented for post-age 65 retirees.
All eligible retirees are assumed to participate in the plan.
* The cost for the Medicare risk plan is assumed to be $7 per month
per retiree.
These plan changes reduced the accumulated postretirement benefit
obligation ("APBO") by $1,090.
Summary information on the divisions' plan is as follows (in thousands):
1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 104 $ 114
Fully eligible active plan participants 30 185
Other active participants 325 1,734
------ ------
459 2,033
Unrecognized net gain from change in assumptions 497 473
Unrecognized prior service cost 117 -
Unrecognized transitional obligation - (958)
------ ------
Accrued postretirement benefit cost
(included in accrued expenses) $1,073 $1,548
====== ======
Net periodic postretirement benefit cost included
the following components:
Service cost of benefits earned $ 107 $ 343
Interest cost on accumulated postretirement
benefit obligation 31 135
Recognition of transitional obligation (6) 61
------ ------
Net periodic postretirement benefit cost $ 132 $ 539
====== ======
The discount rate used in determining the December 31, 1997, 1996 and 1995
APBO was 7% and separate health care cost trend rates for participants
under the age of 65 and over the age of 65 were used in measuring the
APBO. The pre 65 trend rate was 10%, 11% and 12% in 1997, 1996 and 1995,
respectively. The post 65 trend rate was 8.5%, 9% and 9.5% in 1997, 1996
and 1995, respectively. These rates will decline by 1% and .5%,
respectively, to an ultimate rate of 6% in 2001. If the health care cost
trend rate assumptions were increased by 1%, the APBO as of December 31,
1997, 1996 and 1995 would be increased by $23, $330 and $199,
respectively. The effect of this change on the aggregate of the service
and interest cost components of net periodic postretirement benefit cost
for 1997, 1996 and 1995 would be an increase $13, $107 and $38,
respectively.
8. RELATED PARTY TRANSACTIONS
The Businesses are involved in transactions with related parties in the
ordinary course of business. These transactions include the following:
Sales for the Businesses for the years ended December 31, 1997, 1996
and 1995 to Kao and other affiliated parties were approximately
$16,400, $16,000 and $11,400, respectively.
KICI purchases certain inventory from Kao and other affiliated
parties. During the years ended December 31, 1997, 1996 and 1995,
such purchases amounted to approximately $6,100, $7,400 and $7,300,
respectively.
The Corporate office allocated a portion of its general corporate
expenses to the San Ramon and Fremont divisions for certain
administrative services provided to the divisions by KIC. For the
three years ended December 31, 1997, KIC allocated approximately
$3,900, $2,400 and $2,000, respectively, to these divisions. These
allocations were based on identified departmental costs incurred at
the Corporate office on behalf of the divisions, which KIC believes
to be a reasonable basis. No allocations were made to KICI during
the three years ended December 31, 1997.
The San Ramon and Fremont divisions were also allocated interest
expense from the Corporate office during the three years ended
December 31, 1997 (Note 1).
In 1996, KICI purchased capital assets from a related party for
approximately $790.
9. CONTINGENCIES
The Businesses are party to various pending litigations arising out of the
normal course of business. While it is not possible to predict the outcome
of pending litigation and such actions are being vigorously defended,
management does not believe that the pending actions will have a material
adverse effect upon the financial statements of the Businesses.
10. CONCENTRATIONS
The Businesses sell products to customers primarily in the United States
and Canada. The Businesses perform ongoing credit evaluations of customers
and allowances are maintained for potential credit losses. Sales to one
customer (aside from Related Parties - Note 8) accounted for 11%, 21% and
28% of sales for the three years ended December 31, 1997, 1996 and 1995,
respectively. Outstanding accounts receivable at December 31, 1997 and
1996 from that customer were $1,755 and $3,875, respectively.
11. RESTRUCTURING
During 1997, KIC implemented a plan to restructure its operations,
including those of KICI and the San Ramon and Fremont divisions. The plan
included closing certain operating facilities, laying off approximately
104 full-time division employees, as well as a reduction in the carrying
amount of certain property, plant and equipment. This was primarily
related to the floppy disk line of business. In addition, the Businesses
recorded other expenses relating to the restructuring of the Businesses.
The following provides the detail of restructuring costs related to the
Businesses:
Amount
(In Thousands)
Write-down of property and equipment $16,494
Write-off of deferred start-up costs 1,874
Severance payments 676
Other costs 1,778
-------
Total $20,822
=======
As of December 31, 1997, a reserve of approximately $596 for severance
remained; such amount was paid during the first quarter of 1998 and all
related employees were laid off.
******
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Directors and Shareholders of KAO Infosystems (Ireland) Limited
We have audited the accompanying balance sheets of KAO Infosystems (Ireland)
Limited as of 31 December 1997 and 1996 and the related profit and loss
accounts, statements of total recognised gains and losses, reconciliations of
movements in shareholders' equity and cash flow statements for each of the years
in the three-year period ended 31 December 1997. 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 Ireland which do not differ significantly from generally accepted auditing
standards 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 the directors, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KAO Infosystems (Ireland)
Limited as of 31 December 1997 and 1996 and the results of its operations and
cash flows for each of the years in the three-year period ended 31 December
1997, in conformity with accounting principles generally accepted in Ireland.
Generally accepted accounting principles in Ireland vary in certain significant
respects from generally accepted accounting principles in the United States.
Application of generally accepted accounting principles in the United States
would have affected results of operations and shareholders' equity as of and for
the years ended 31 December 1997, 1996 and 1995 for KAO Infosystems (Ireland)
Limited to the extent summarised in note 25 to the consolidated financial
statements.
KPMG
Chartered Accountants 30 April 1998
Dublin, Ireland
KAO Infosystems (Ireland) Limited
Profit and loss accounts
for the three years ended 31 December 1997
1997 1996 1995
Notes IR(pound)'000 IR(pound)'000 IR(pound)'000
Turnover - continuing operations 2 64,901 63,085 47,486
Cost of sales (61,265) (59,295) (39,810)
Exceptional cost of sales 4 (3,237) - -
------- ------- -------
Gross profit 399 3,790 7,676
Distribution costs (3,169) (2,903) (2,221)
Administrative expenses (4,977) (5,140) (3,878)
------- ------- -------
Operating (loss)/profit - continuing operations (7,747) (4,253) 1,577
Exceptional items
Restructuring of continuing operations 5 (3,043) - -
Profit on sale of compact disc duplication equipment 5 498 - -
------- ------- -------
(Loss)/profit on ordinary activities before interest (10,292) (4,253) 1,577
Investment income 6 87 42 -
Interest payable and similar charges 7 (2,803) (2,849) (986)
------- ------- -------
(Loss)/profit on ordinary activities before taxation 8 (13,008) (7,060) 591
Tax on (loss)/profit on ordinary activities 9 (120) 83 (143)
------- ------- -------
(Loss)/profit for the financial year (13,128) (6,977) 448
Profit and loss account at beginning of year (8,967) (1,641) (2,089)
Reserve movements 16 - (349) -
------- ------- -------
Profit and loss account at end of year (22,095) (8,967) (1,641)
======= ======= =======
The accompanying notes are an integral part of these financial statements.
KAO Infosystems (Ireland) Limited
Statements of total recognised gains and losses
for the three years ended 31 December 1997
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
(Loss)/profit for the financial year (13,128) (6,977) 448
Currency translation gain on foreign currency
net investment 20 7 53
Unrealised deficit on revaluation of negative goodwill - (936) -
------- ------- -------
Total recognised gains and losses for the year (13,108) (7,906) 501
======= ======= =======
Reconciliation of movement in shareholders' funds
for the three years ended 31 December 1997
1997 1996 1995
IR(pound)'000 IR(pound)'000 (pound)'000
Total recognised gains and losses for the year (13,108) (7,906) 501
Nominal value of shares issued 5,000 4,500 -
Goodwill on acquisition set off against reserves - (349) -
Capital reserve release following closure of the Dutch branch (446) - -
------- ------- -------
Net movement in shareholders' funds (8,554) (3,755) 501
Opening shareholders' funds 228 3,983 3,482
------- ------- -------
Closing shareholders' funds (8,326) 228 3,983
======= ======= =======
The accompanying notes are an integral part of these financial statements.
KAO Infosystems (Ireland) Limited
Balance sheets
at 31 December 1997 and 1996
Note 1997 1996
IR(pound)'000 IR(pound)'000
Fixed assets
Tangible assets 10 18,517 28,657
------- -------
Current assets
Stocks 11 4,959 8,577
Debtors 12 13,459 16,291
Cash at bank and in hand 4,675 1,488
------- -------
23,093 26,356
Creditors: amounts falling due within one year 13 (42,690) (36,322)
------- -------
Net current liabilities (19,597) (9,966)
------- -------
Total assets less current liabilities (1,080) 18,691
Creditors: amounts falling
due after more than one year 14 (7,246) (18,463)
Net (liabilities)/assets (8,326) 228
======= =======
Capital and reserves
Called up share capital 15 13,681 8,681
Profit and loss account 16 (22,007) (8,899)
Capital reserve 16 - 446
------- -------
Shareholder's (deficit)/funds - equity (8,326) 228
======= =======
The accompanying notes are an integral part of these financial statements.
KAO Infosystems (Ireland) Limited
Cash flow statements
for the three years ended 31 December 1997
Note 1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Cash inflow/(outflow) from operating
activities 18 3,557 9,533 (16,231)
Returns on investments and
servicing of finance 19 (2,868) (2,526) (777)
Taxation 19 (4) - -
Capital expenditure and financial
investment 19 3,101 (13,070) (9,739)
Financing 19 (3,385) 7,165 27,813
------- ------- -------
Increase in cash in the year 401 1,102 1,066
======= ======= =======
Reconciliation of net cash flow to movement in net debt
for the three years ended 31 December 1997
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Increase in cash in the year 20 401 1,102 1,066
Cash inflow/(outflow) from increase/
(decrease) in debt and lease finance 20 8,411 (11,286) (23,133)
------- ------- -------
Movement in net debt in the year 8,812 (10,184) (22,067)
Net debt at beginning of year (38,565) (28,381) (6,314)
------- ------- -------
Net debt at end of year (29,753) (38,565) (28,381)
======= ======= =======
The accompanying notes are an integral part of these financial statements.
KAO Infosystems (Ireland) Limited
Notes
forming part of the financial statements
1 Accounting policies
Accounting policies
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the
company's financial statements.
Description of business
The company is a subsidiary undertaking of Kao Corporation which is
incorporated in Japan. The largest group in which the results of the
company are consolidated is headed by Kao Corporation. The consolidated
accounts of this group are available to the public and may be obtained
from 1401-Nihonbashi Kayabacho 1-Chome, Chuo-Ku, Tokyo 103, Japan.
Basis of preparation
The financial statements have been prepared in accordance with
generally accepted accounting principles under the historical cost
convention and comply with financial reporting standards of the
Accounting Standards Board, as promulgated by the Institute of
Chartered Accountants in Ireland.
The financial statements have been prepared on a going concern basis as
the directors of the parent company, Kao Corporation, have noted that
they will continue to provide the necessary financial support to the
Company to ensure its continued operation for a period of at least one
year from the date of approval of these financial statements.
Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost, less accumulated
depreciation. Depreciation is provided by the company to write off the
cost less the estimated residual value of tangible fixed assets as
follows:
Leasehold land and buildings - 35 years on a straight line basis
Plant and equipment - 10 years on a straight line basis
Machinery - 7 years on a straight line basis
Fixtures and fittings - 4 years on a straight line basis.
Foreign currencies
Transactions in foreign currencies are recorded at the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of
exchange ruling at the balance sheet date and gains or losses on
translation are included in the profit and loss account. Exchange
differences resulting from the retranslation of the opening balance
sheets of overseas operations at closing rates are dealt with through
reserves and reflected in the statement of total recognised gains and
losses.
KAO Infosystems (Ireland) Limited
Notes
forming part of the financial statements
Accounting policies (continued)
Government grants
Capital grants are shown as deferred income and credited to the profit
and loss account by instalments on a basis consistent with the
depreciation policy of the relevant assets. Revenue grants are credited
to the profit and loss account to offset matching expenditure.
Leased assets
Where the company enters into a lease which entails taking
substantially all the risks and rewards of ownership of an asset, the
lease is treated as a `finance lease'. The asset is recorded in the
balance sheet as a tangible fixed asset and is depreciated over its
estimated useful life or the term of the lease, whichever is shorter.
Future instalments under such leases, net of finance charges, are
included with creditors. Rentals payable are apportioned between the
finance element, which is charged to the profit and loss account, and
the capital element which reduces the outstanding obligation for future
instalments.
All other leases are accounted for as `operating leases' and the rental
charges are charged to the profit and loss account on a straight line
basis over the life of the lease.
Stocks
Stocks are stated at the lower of cost and net realisable value. In the
case of finished goods and work in progress cost is defined as the
aggregate cost of raw material, direct labour and the attributable
proportion of direct production overheads. Net realisable value is
based on normal selling price, less further costs expected to be
incurred to completion and disposal.
Taxation
The charge for taxation is based on the result for the year and takes
into account taxation deferred because of timing differences between
the treatment of certain items for taxation and accounting purposes.
Provision is made for deferred tax only to the extent that it is
probable that an actual liability will crystallise.
Turnover
Turnover represents net sales to customers and excludes value added
tax.
Pensions
Pension benefits for employees are met by payments to a defined
contribution pension fund. Contributions are charged to the profit and
loss in the year in which they fall due.
KAO Infosystems (Ireland) Limited
Notes
forming part of the financial statements
2 Turnover
Turnover is wholly attributable to sales in the EU except for sales to the
USA of IR(pound)727,000 (1996: IR(pound)5,008,000; 1995 IR(pound)23,020).
More than 90% of turnover in each year relates to the manufacture and
distribution of CD Roms and full turnkey operations.
3 Staff numbers and costs
The average number of persons employed by the company (including
directors) during each year, analysed by category, was as follows:
Number of employees 1997 1996 1995
Production 306 259 183
Sales 67 61 7
Administration 98 76 32
Fulfilment 13 33 20
---- ---- ----
484 429 242
==== ==== ====
The aggregate payroll costs of the above full time employees and other
temporary staff during each year were as follows:
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Wages and salaries 12,919 12,360 7,840
Social welfare costs 1,128 861 315
Other pension costs 281 225 151
------ ------ -----
14,328 13,446 8,306
====== ====== =====
KAO Infosystems (Ireland) Limited
Notes (continued)
4 Exceptional cost of sales
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Accelerated depreciation charge 3,237 - -
on plant and machinery
====== ====== ======
Prior to the year ended 31 December 1997, the company had depreciated CD
manufacturing machinery over ten years on the basis that it could be
converted easily into machinery which could manufacture digital video
disks. In 1997 the company realised this was not feasible and that a seven
year life for the assets was more appropriate. As a result the company
adjusted depreciation in 1997 to reflect the revised useful life of these
machines.
5 Exceptional items
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Restructuring costs:
Santry closure 1,413 - -
Rotterdam branch closure 1,630 - -
----- ----- -----
3,043
Profit on sale of compact disc duplication equipment (498) - -
----- ----- -----
2,545 - -
===== ===== =====
As part of the company's reorganisation in 1997 it closed its Rotterdam branch
and the turnkey operations in Santry, Ireland. The expenses for these closures
were all incurred by year end.
In 1997 the company sold several pieces of CD manufacturing equipment to KAO
Infosystems in the US, resulting in a profit of IR(pound)351,000. The company
also disposed of several other fixed assets to third parties resulting in a
profit of IR(pound)147,000.
6 Investment income
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Bank interest receivable 87 42 -
===== ===== =====
KAO Infosystems (Ireland) Limited
Notes (continued)
7 Interest payable and similar charges
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Finance charges payable in respect of finance
leases and hire purchase contracts 127 177 168
Exchange loss/(gain) on foreign currency borrowings
less deposits 522 380 (280)
Interest payable:
On bank loans, overdrafts and other loans
wholly repayable within five years 780 1,358 564
On loans from group undertakings 1,374 934 534
------- ------- -------
2,803 2,849 986
======= ======= =======
8 Statutory and other information
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Directors' emoluments 88 88 -
Auditors' remuneration 33 45 23
Depreciation and other amounts written off tangible fixed assets:
Owned 7,011 3,252 1,491
Leased 545 709 357
======= ======= =======
9 Tax on loss on ordinary activities
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Deferred taxation - (143) 143
Total overseas taxation relieved and unrelieved 120 60 -
------- ------- -------
120 (83) 143
======= ======= =======
The Rotterdam branch of KAO Infosystems (Ireland) Limited, which was
disposed of during the year ended 31 December 1997, is treated as a
permanent establishment for taxation purposes and is liable to Dutch
corporation tax. No corporation tax charge arises during the years ended
31 December 1997, 1996 and 1995 as the branch made a loss in each of those
years.
KAO Infosystems (Ireland) Limited
Notes (continued)
The German branch of KAO Infosystems (Ireland) Limited is treated as a
permanent establishment for taxation purposes and is liable to German
corporation tax. A corporation tax charge arose as the branch made a
taxable profit for the year and also in the prior year.
Corporation tax is charged at 10% on profits on manufacturing activities
carried out in Ireland, and at 38% on all other profits. No corporation
tax charge arises from operations in Ireland due to losses incurred in the
year.
10 Tangible fixed assets
Short Fixtures
leasehold Plant fittings
land and and tools and
buildings machinery equipment Total
IR(pound)'000 IR(pound)'000 IR(pound)'000 IR(pound)'000
Cost
At beginning of year 6,251 25,153 3,696 35,100
Disposals (1,695) (2,717) (590) (5,002)
Additions 183 1,578 78 1,839
Currency adjustments 20 11 16 47
------ ------ ----- ------
At end of year 4,759 24,025 3,200 31,984
====== ====== ===== ======
Depreciation
At beginning of year 398 5,067 978 6,443
Charge for year 149 7,156 251 7,556
Disposals (159) (240) (146) (545)
Currency adjustments 2 4 7 13
------ ------ ----- ------
At end of year 390 11,987 1,090 13,467
====== ====== ===== ======
Net book value
At 31 December 1997 4,369 12,038 2,110 18,517
====== ====== ===== ======
At 31 December 1996 5,853 20,086 2,718 28,657
====== ====== ===== ======
Included in the total cost of plant and machinery is IR(pound)3,106,000
(1996: IR(pound)3,029,000) in respect of assets held under finance leases.
Accumulated depreciation on these assets was IR(pound)1,830,000 as at
31 December 1997 (1996:IR(pound)1,285,000).
KAO Infosystems (Ireland) Limited
Notes (continued)
11 Stocks
1997 1996
IR(pound)'000 IR(pound)'000
Raw materials and consumables 2,312 5,997
Work in progress 279 382
Finished goods 2,368 2,198
-------- --------
4,959 8,577
The replacement cost of stocks does not differ materially from the figures
shown.
12 Debtors
1997 1996
All due within one year IR(pound)'000 IR(pound)'000
Trade debtors net of bad debt allowance 9,404 9,555
Amounts owed by group undertakings 1,341 1,525
Other debtors 261 2,313
Prepayments and accrued income 2,453 2,898
-------- --------
13,459 16,291
======== ========
13 Creditors: amounts falling due within one year
1997 1996
IR(pound)'000 IR(pound)'000
Bank loans and overdrafts 15,622 14,438
Loans from group undertakings 11,088 6,582
Obligations under finance leases and
hire purchase contracts 472 570
Trade creditors 3,998 5,747
Amounts owed to group undertakings 5,047 3,404
Taxation and social welfare (see note 13a) 506 687
Accruals and deferred income 5,957 4,894
-------- --------
42,690 36,322
======== ========
KAO Infosystems (Ireland) Limited
Notes (continued)
13a Taxation and social welfare
1997 1996
IR(pound)'000 IR(pound)'000
Corporation tax 116 -
PAYE/PRSI 390 687
------ ------
506 687
====== ======
14 Creditors: amounts falling due after more than one year
1997 1996
IR(pound)'000 IR(pound)'000
Obligations under finance leases and
hire purchase contracts 772 1,170
Loans from group undertakings 6,474 17,293
------ ------
7,246 18,463
====== ======
The maturity of obligations under finance leases and hire purchase
contracts is as follows:
1997 1996
IR(pound)'000 IR(pound)'000
Within one year 554 698
In the second to fifth years 837 1,313
----- -----
1,391 2,011
Less: future finance charges (147) (271)
----- -----
1,244 1,740
===== =====
KAO Infosystems (Ireland) Limited
Notes (continued)
15 Share capital
1997 1996
IR(pound)'000 IR(pound)'000
Authorised
20,000,000 (1996:20,000,000
ordinary shares of IR(pound)1 each) 20,000 20,000
========= =========
Allotted, called up and fully paid
13,681,000 ordinary shares of IR(pound)1 13,681 8,681
each (1996: 8,681,000 ordinary shares) ========= =========
During the year ended 31 December 1997 the company allotted 5,000,000
ordinary shares with a nominal value of IR(pound)1 each at par, in order
to finance its working capital requirements.
During the year ended 31 December 1996 the company's authorised share
capital was increased by IR(pound)15,000,000 to IR(pound)20,000,000 by the
creation of 15,000,000 ordinary shares of IR(pound)1 each. The company
also issued 4,500,000 shares at par in the year to finance working capital
requirements.
KAO Infosystems (Ireland) Limited
Notes (continued)
16 Reserves
Capital Profit and
reserve loss account
IR(pound)'000 IR(pound)'000
At 1 January 1996 1,382 (1,580)
Loss for the year - (6,977)
Translation exchange adjustment - 7
Release of the capital reserve following
revaluation of land and buildings (936) -
Goodwill on acquisition written off - (349)
------ ------
At 1 January 1997 446 (8,899)
Loss for the financial year - (13,128)
Translation exchange adjustment - 20
Release of capital reserve following the
closure of the Dutch branch (446) -
------ ------
At 31 December 1997 - (22,007)
====== ======
The goodwill arose as a result of the acquisition on 29 February 1996, by
the company, of its German branch at a cost in excess of the net assets
acquired.
The capital reserve arose from the excess of the net assets acquired over
the cost paid by the company for its Dutch Branch. It is represented by an
increase in the fair value of land and buildings acquired by the company
at the date of acquisition, 1 November 1994.
In 1996 the company revalued its assets which resulted in a writedown of
the negative goodwill.
In 1997 the Rotterdam branch was closed and thus the remaining capital
reserve was written off.
KAO Infosystems (Ireland) Limited
Notes (continued)
17 Commitments and contingencies
(i) Capital commitments are as follows:
1997 1996
IR'000 IR(pound)'000
Contracted for expansion of premises - -
====== ======
(ii) Annual commitments under non-cancellable operating leases are as follows:
1997 1996
IR(pound)'000 IR(pound)'000
Operating leases which expire:
Within one year 310 414
Two to five years 385 1,335
------- ------
695 1,749
======= ======
(iii) Grant contingencies
Under agreements between the company and Forbairt which are dated on
various dates between 31 December 1993 and 23 June 1995, the company has a
contingent liability to repay in whole or in part grants received
amounting to IR(pound)932,000 (1996: IR(pound)932,000; 1995:
IR(pound)512,000) if certain circumstances set out in those agreements
occur within five years of the receipt of monies under these agreements.
18 Reconciliation of operating (loss)/profit to net cash inflow/(outflow)
from
operating activities
1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Operating (loss)/profit (7,747) (4,474) 1,577
Exceptional items (2,545) - -
Depreciation of tangible fixed assets 7,556 3,986 1,848
Profit on disposal of fixed assets (943) -
Employment grants - (722) (511)
Capital grants - - (44)
Decrease/(increase) in stocks 3,618 3,730 (10,476)
Decrease/(increase) in debtors 2,832 (2,799) (9,440)
Increase in creditors 786 9,837 823
Foreign exchange difference - (25) (8)
------- ------- -------
3,557 9,533 (16,231)
======= ======= =======
KAO Infosystems (Ireland) Limited
Notes (continued)
19 Gross cash flows 1997 1996 1995
IR(pound)'000 IR(pound)'000 IR(pound)'000
Returns on investments and servicing of finance
Interest received 57 42 -
Interest paid (2,925) (2,568) (777)
------- ------ -----
Net cash outflow for returns on
investments and servicing of finance (2,868) (2,526) (777)
======= ====== =====
Taxation
Overseas tax paid (4) - -
------- ------ -----
Net cash outflow for taxation (4) - -
======= ====== =====
Capital expenditure and financial investment
Purchase of tangible fixed assets (1,828) (13,070) (9,739)
Sale of tangible fixed assets 4,929 - -
------- ------ -----
Net cash inflow/(outflow) for capital expenditure 3,101 (13,070) (9,739)
and financial investment ======= ====== =====
Financing
Issue of ordinary share capital 5,000 4,500 -
Grants received - 838 134
Loans from group undertaking (repaid)/received (6,287) 9,243 8,050
Bank loans repaid (1,602) (7,182) 20,019
Capital element of finance lease rental (496) (234) (390)
------- ------ -----
Net cash (outflow)/inflow for financing (3,385) 7,165 27,813
======= ====== ======
KAO Infosystems (Ireland) Limited
Notes (continued)
20 Analysis of net debt
At 31 December At 31 December At 31 December At 31 December
1997 Cash flows 1996 Cash flows 1995 Cash flows 1994
IR(pound)'000 IR(pound)'000 IR(pound)'000 IR(pound)'000 IR(pound)'000 IR(pound)'000 IR(pound)'000
Cash in hand, at bank 4,675 3,187 1,488 (894) 2,382 2,308 74
Overdrafts (3,287) (2,786) (501) 1,996 (2,497) (1,242) (1,255)
------ ------ ------- ------ ------- ------- ------
1,388 401 987 1,102 (115) 1,066 (1,181)
------ ------ ------- ------ ------- ------- -------
Debt due after one year (6,474) 10,819 (17,293) (9,243) (8,050) (6,222) (1,828)
Debt due within one year (23,423) (2,904) (20,519) (2,277) (18,242) (16,939) (1,303)
Finance leases (1,244) 496 (1,740) 234 (1,974) 28 (2,002)
------ ------ ------- ------ ------- ------- ------
(31,141) 8,411 (39,552) (11,286) (28,266) (23,133) (5,133)
------ ------ ------- ------ ------- ------- ------
Total (29,753) 8,812 (38,565) (10,184) (28,381) (22,067) (6,314)
====== ====== ======= ====== ======= ======= =======
21 Comparative figures
Comparative amounts have been restated, where necessary, on the same basis
as those for the current year.
22 Pension scheme
The company operates a defined contribution pension scheme. The pension
cost charge for the year represents contributions payable by the company
to the fund and amounted to IR(pound)281,840 (1996: IR(pound)225,030; 1995
IR(pound)151,000).
There were no outstanding or prepaid contributions at either the beginning
or end of the financial year.
23 Acquisition of KAO Corporation GmbH
On 29 February 1996, the company acquired the business of KAO Corporation
GmbH. At that date the net liabilities of the acquired entity were
IR(pound)210,000. The company paid cash of IR(pound)139,000 resulting in
goodwill of IR(pound)349,000 which has been written off against the profit
and loss account.
KAO Infosystems (Ireland) Limited
Notes (continued)
24 Related party transactions
The company has availed of the exemption in FRS8 (Related Party
Disclosures) from the requirement to disclose details of transactions with
group undertakings. Details of the availability of group consolidated
financial statements are given in note 1.
25 Summary of differences between Irish and United States generally accepted
accounting principles
(a) Significant differences
The financial statements of KAO Infosystems (Ireland) Ltd. are
prepared in accordance with generally accepted accounting principles
("GAAP") applicable in Ireland which differ significantly in certain
respects from those generally accepted in the United States (US). These
significant differences are described below:
(i) Deferred tax
Under Irish GAAP, KAO Infosystems (Ireland) Ltd provide for
deferred taxation using the liability method on all material
timing differences to the extent that it is probable that
liabilities will crystallise in the foreseeable future. Net
deferred tax assets are not recognised except to the extent that
they are expected to be recoverable without replacement by
equivalent asset balances. Under US GAAP, as set out in Statement
of Financial Accounting Standards (SFAS) No. 109 `Accounting for
Income Taxes' deferred taxation is provided on all temporary
differences between the financial statement carrying value of
assets and liabilities and the tax value of such assets and
liabilities on a full provision basis. Deferred tax assets are
recognised if their realisation is considered to be more likely
than not.
(ii) KAO Corporation GmbH acquisition
Under Irish GAAP, the purchase of KAO Corporation GmbH has been
treated as an acquisition and the acquired assets and liabilities
have been recorded in the financial statements at their fair
value. The goodwill resulting from the acquisition was
written-off against reserves. Under US GAAP the accounting for
the acquisition would be the same except the goodwill would be
accounted for as an asset and amortised over its estimated useful
life which, in this case, has been determined as seven years.
KAO Infosystems (Ireland) Limited
Notes (continued)
25 Summary of differences between Irish and United States generally accepted
accounting principles (continued)
(iii) The Rotterdam branch of KAO Infosystems (Ireland) Ltd
Under Irish GAAP, the purchase of the Rotterdam branch of KAO
Infosystems (Ireland) Ltd has been treated as an acquisition and
the acquired assets and liabilities have been recorded in the
financial statements at their fair value. The negative goodwill
resulting from the acquisition was accounted for as a capital
reserve. Under US GAAP the accounting for the acquisition would be
the same except the negative goodwill would be netted off the non
current assets. As a result depreciation would be lower than under
Irish GAAP and there would be no capital reserve.
(iv) Employment grants
Under Irish GAAP, employment grants paid by the Irish Government
are recognised in the profit and loss account on approval and a
contingent liability is disclosed for amounts which may become
repayable in certain predefined circumstances. Under US GAAP,
these revenues are recognised in the profit and loss account over
the period for which minimum employment levels apply under the
terms of the agreement and the unamortised balance is treated as
deferred income.
KAO Infosystems (Ireland) Limited
Notes (continued)
25 Summary of differences between Irish and United States generally accepted
accounting principles (continued)
(b) Net income under US GAAP
Year ended Year ended Year ended
31 December 31 December 31 December
(Loss)/profit for the financial year 1997 1996 1995
as reported in the profit and loss IR(pound)000 IR(pound)000 IR(pound)000
accounts and in accordance with
Irish GAAP (13,128) (6,977) 448
Adjustments
Negative goodwill:
basis of accounting for the Rotterdam
branch of KAO Infosystems (Ireland) Ltd
acquisition (a)(ii) (87) 40 40
Amortisation of intangible fixed assets:
basis of accounting for KAO Corporation GmbH
acquisition (a)(iii) (42) (42) -
Employment grants:
amortisation of employment grant received (a) (iv) 246 (474) (409)
Taxation
effect of above adjustments - - -
----- ------ -----
Net income/(loss) as adjusted to accord
with US GAAP (13,011) (7,453) 79
====== ====== =====
KAO Infosystems (Ireland) Limited
Notes (continued)
25 Summary of differences between Irish and United States generally accepted
accounting principles (continued)
(c) Shareholders' equity
31 December 31 December 31 December
1997 1996 1995
IR(pound)000 IR(pound)000 IR(pound)000
Shareholders' equity as reported
in the consolidated balance
sheets (Irish GAAP) (8,326) 228 3,983
Adjustments
Negative goodwill: - (359) (1,335)
basis of accounting for the Rotterdam
branch of KAO Infosystems (Ireland) Ltd
acquisition (a)(ii)
Amortisation of intangible fixed assets:
basis of accounting for KAO Corporation GmbH
acquisition (a)(iii) 265 307 -
Employment grants:
amortisation of employment grant received (a)(iv) (637) (883) (409)
Tax effect of adjustments - - -
------ ------ -----
Shareholders' equity/(deficit) as adjusted
to accord with US GAAP (8,698) (707) 2,239
====== ====== =====
KAO Infosystems (Ireland) Limited
Notes (continued)
25 Summary of differences between Irish and United States generally accepted
accounting principles (continued)
(d) Cash flows
In accordance with Irish GAAP, the company complies with Financial
Reporting Standard No. 1 - "Cash Flow statements" (FRS 1). Its objective
and principles are similar to those set out in SFAS No. 95 "Statement of
Cash Flows". The principal difference between the standards is in respect
of classification. Under FRS 1, the company presents its cash flows for
(a) operating activities; (b) returns on investments and servicing of
finance; (c) taxation; (d) capital expenditure; (e) acquisitions and
disposals; and (f) financing activities. SFAS No. 95 requires only three
categories of cash flow activity (a) operating; (b) investing; and (c)
financing.
Cash flows arising from taxation and returns on investments and servicing
of finance under FRS 1 are included as operating activities under SFAS No
.95. In addition, under FRS 1, cash and liquid resources include short
term borrowings repayable on demand. SFAS No. 95 requires movements in
such borrowings to be included in financing activities.
Disclosure of accounting policy
For the purposes of cash flows under US GAAP, the group considers all
highly liquid deposits with a maturity of three months or less to be cash
equivalents. Under Irish GAAP, cash represents cash held at bank available
on demand offset by bank overdrafts and liquid resources comprise bank
fixed deposits with maturities of greater than one day.
KAO Infosystems (Ireland) Limited
Notes (continued)
25 Summary of differences between Irish and United States generally accepted
accounting principles (continued)
(e) Cash flows (continued)
A summarised cash flow under US GAAP is as follows:
Year ended Year ended Year ended
31 December 31 December 31 December
1997 1996 1995
IR(pound)000 IR(pound)000 IR(pound)000
Cash inflow /(outflow) from operating activities 685 7,007 (17,008)
Cash (outflow)/inflow from investing
activities 3,101 (13,070) (9,739)
Cash (outflow)/inflow from financing
activities ( 599) 5,169 29,055
------- ------- -------
Increase in cash and cash
equivalents 3,187 (894) 2,308
Cash and cash equivalents at
beginning of year 1,488 2,382 74
------- ------- -------
Cash and cash equivalents at
end of year 4,675 1,488 2,382
======= ======= =======
KAO Infosystems (Ireland) Limited
Notes (continued)
26 New accounting pronouncements
Comprehensive Income: Statement of Financial Accounting Standard No 130
("SFAS 130"), "Reporting Comprehensive Income", was issued in June 1997.
SFAS 130 established standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. This statement requires that all items that are required to be
recognised under Accounting Standards as components of comprehensive
income be reported in an annual financial statement that is displayed with
the same prominence as other financial statements. This standard is
effective for periods beginning after 15 December 1997.
Segmental Information: Statement of Financial Accounting Standard No 131
("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information" was issued in June 1997 and establishes standards for the way
public companies report information about operating segments in annual
financial statements and requires that those companies report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
standard is effective for periods beginning after 15 December 1997.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY AND KAO INFOSYSTEMS CANADA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KAO INFOSYSTEMS COMPANY)
Condensed Combined Balance Sheets
(Unaudited)
(In Thousands)
September 30, December 31,
1998 1997
--------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,106 $ 1,172
Accounts receivable, net 27,478 20,401
Due from affiliate - 3,054
Inventories 6,251 8,486
Other current assets 1,305 1,091
-------- --------
Total current assets 39,140 34,204
PROPERTY AND EQUIPMENT, net 60,515 64,789
OTHER ASSETS, net 970 2,130
-------- --------
$100,625 $101,123
======== ========
LIABILITIES AND SHAREHOLDERS'/DIVISIONAL EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 18,211 $ 10,669
Accounts payable and accrued expenses 22,489 16,766
-------- --------
Total current liabilities 40,700 27,435
LONG TERM DEBT, net of current portion 47,509 66,151
TOTAL SHAREHOLDERS' AND DIVISIONAL EQUITY 12,416 7,537
-------- --------
$100,625 $101,123
======== ========
The accompanying notes are an integral part of
these condensed combined balance sheets.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY AND KAO INFOSYSTEMS CANADA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KAO INFOSYSTEMS COMPANY)
Condensed Combined Statements of Operations
For the Nine Months Ended September 30
(Unaudited)
(In Thousands)
1998 1997
-------- -------
SALES $101,869 $90,657
COST OF SALES 85,636 80,237
-------- -------
Gross profit 16,233 10,420
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,758 16,373
RESTRUCTURING CHARGE 4,111 -
-------- -------
Operating loss (1,636) (5,953)
INTEREST EXPENSE 2,947 2,892
OTHER (INCOME) EXPENSE (85) 10
-------- -------
NET LOSS $ (4,498) $(8,855)
======== =======
The accompanying notes are an integral part of these
condensed combined statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY AND KAO INFOSYSTEMS CANADA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KAO INFOSYSTEMS COMPANY)
Condensed Combined Statements of Cash Flows
For the Nine Months Ended September 30
(Unaudited)
(In Thousands)
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,498) $(8,855)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 6,632 10,301
Changes in operating assets and liabilities:
Accounts receivable and due from affiliate (4,023) (3,475)
Inventories 2,235 (4,887)
Other current assets (214) (2,675)
Accounts Payable 5,723 (6,397)
------- -------
Net cash provided by (used in) operating activities 5,855 (15,988)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,358) (12,860)
Change in other assets 1,160 6,818
------- -------
Net cash used in investing activities (1,198) (6,042)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt to affiliates, net (9,265) 22,894
Net proceeds (payments) on notes payable 7,542 (2,326)
------- -------
Net cash provided by (used in) financing activities (1,723) 20,568
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,934 (1,462)
CASH AND CASH EQUIVALENTS, beginning of year 1,172 1,462
------- -------
CASH AND CASH EQUIVALENTS, end of year $ 4,106 $ -
======= =======
NONCASH ITEM:
Affiliate debt contributed to equity $ 9,377 $ 1,876
======= =======
The accompanying notes are an integral part of
these condensed combined statements.
THE SAN RAMON AND FREMONT DIVISIONS OF
KAO INFOSYSTEMS COMPANY AND KAO INFOSYSTEMS CANADA, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KAO INFOSYSTEMS COMPANY)
Notes to Condensed Combined Financial Statements
(Unaudited)
1. General:
Kao Infosystems Company (KIC), a Delaware corporation, was a wholly-owned
subsidiary of Kao Corporation of America (KCOA). Effective at the close of
business on December 31, 1997, KCOA was liquidated, and KIC became a direct
subsidiary of Kao Corporation (Japan) (Kao). KIC's principal business is the
duplicating of software onto CDs as well as packaging the goods and providing
fulfillment services. Kao Infosystems Canada Inc. (KICI) is a wholly-owned
subsidiary of KIC. The San Ramon, California and Fremont, California divisions
and KICI (collectively, the Businesses) are engaged in principally the same
business as KIC.
The condensed combined financial statements which are unaudited have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, these financial statements include
all adjustments (consisting only of normal adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the entire year. Pursuant
to SEC rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from these
statements. The condensed combined financial statements and notes thereto should
be read in conjunction with the audited financial statements and notes included
in this Form 8-K.
2. Inventories:
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following (in thousands):
September 30, 1998 December 31, 1997
Raw materials $2,810 $4,903
Work in process 844 3,991
Finished Goods 3,474 664
Less reserve for obsolescence (877) (1,072)
----- ------
$6,251 $8,486
===== =====
3. Contingencies:
The Businesses are party to various pending litigation arising out of the normal
course of business. While it is not possible to predict the outcome of pending
litigation and such actions are being vigorously defended, the management of Kao
does not believe that the pending actions will have a material adverse effect
upon the financial statements of the Businesses.
4. Sale of the Businesses:
On January 7, 1999, the Businesses were sold to Zomax Optical Media, Inc., an
outsource service provider to software publishers, computer manufacturers and
other producers of multimedia products.
KAO INFOSYSTEMS (IRELAND) LIMITED
Profit and Loss Accounts
For the Nine Months Ended 30 September 1998 and 1997
(Amounts in IR(pound) and in 000)
(Unaudited)
1998 1997
--------- ---------
Turnover--continuing operations IR(pound)41,167 IR(pound)47,639
Cost of sales 22,873 29,782
--------------- ---------------
Gross profit 18,294 17,857
Distribution costs and administrative expenses 16,336 19,447
--------------- ---------------
Operating profit/(loss)--continuing operations 1,958 (1,590)
Exceptional items
Restructuring of continuing operations - (1,630)
--------------- ---------------
Profit/(loss) on ordinary activities before interest 1,958 (3,220)
Investment income - 350
Interest payable and similar charges (1,520) (2,718)
--------------- ---------------
Profit/(loss) on ordinary activities before taxation 438 (5,588)
Tax on profit/(loss) on ordinary activities - -
Extraordinary gain on debt forgiveness 5,054 -
--------------- ---------------
Profit/(loss) for the financial period 5,492 (5,588)
Profit and loss account at beginning of period (22,095) (8,967)
Reserve movements - -
--------------- ---------------
Profit and loss account at end of period IR(pound)(16,603) IR(pound)(14,555)
=============== ===============
The accompanying notes are an integral part of
these financial statements.
KAO INFOSYSTEMS (IRELAND) LIMITED
Balance Sheets
(Amounts in IR(pound) and in 000)
(Unaudited)
30 September, 31 December,
1998 1997
--------------- ----------------
Fixed assets
Tangible assets IR(pound)16,739 IR(pound)18,517
Other assets 86 -
--------------- ---------------
Current assets
Stocks 2,438 4,959
Debtors 8,835 13,459
Cash at bank and in hand 4,023 4,675
Prepaid expenses 2,619 -
--------------- ---------------
17,915 23,093
Creditors: amounts falling due within one year (15,980) (42,690)
--------------- ---------------
Net current assets (liabilities) 1,935 (19,597)
--------------- ---------------
Total assets less current liabilities 18,760 (1,080)
Creditors: amounts falling due after more than one year 21,787 (7,246)
--------------- ---------------
Net liabilities IR(pound)(3,027) IR(pound)(8,326)
=============== ===============
Shareholders' deficit IR(pound)(3,027) IR(pound)(8,326)
=============== ===============
The accompanying notes are an integral part of
these financial statements.
KAO INFOSYSTEMS (IRELAND) LIMITED
Cash Flow Statements
For the Nine Months Ended 30 September
(Amounts in IR(pound) and in 000)
(Unaudited)
1998 1997
--------- ---------
IR(pound) IR(pound)
Cash outflow from operating activities (9,207) (8,413)
Returns on investments and servicing of finance (1,476) (2,185)
Taxation - -
Capital expenditure and financial investment 939 3,292
Financing (1) 9,092 8,609
------ ------
Increase (decrease) in cash in the period IR(pound)(652) IR(pound)1,303
============= ==============
(1) Includes extraordinary gain on debt forgiveness.
The accompanying notes are an integral part of
these financial statements.
KAO INFOSYSTEMS LIMITED
Notes to Condensed Financial Statements
(Unaudited)
1. General:
Kao Infosystems (Ireland) Limited (the Company) is a subsidiary undertaking of
Kao Corporation, which is incorporated in Japan. The largest group in which the
results of the Company are consolidated is headed by Kao Corporation. The
consolidated accounts of this group are available to the public and may be
obtained from 1401-Nihonbashi Kayabacho 1-Chrome, Chuo-Ku, Tokyo 103, Japan.
The condensed financial statements, which are unaudited, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). In management's opinion, these financial statements include all
adjustments (consisting only of normal adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the entire year. Pursuant
to SEC rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from these
statements. The condensed financial statements and notes thereto should be read
in conjunction with the audited financial statements and notes included in this
Form 8-K.
2. Summary of Differences Between Irish and United States Generally Accepted
Accounting Principles:
Significant Differences
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles (GAAP) applicable in Ireland which
differ significantly in certain respects from those generally accepted in the
United States (US). These significant differences are described below:
Deferred Tax
Under Irish GAAP, KAO Infosystems (Ireland) Ltd. provides for deferred
taxation using the liability method on all material timing differences to
the extent that it is probable that liabilities will crystallise in the
foreseeable future. Net deferred tax assets are not recognised except to
the extent that they are expected to be recoverable without replacement by
equivalent asset balances. Under U.S. GAAP, as set out in Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," deferred taxation is provided on all temporary differences between
the financial statement carrying value of assets and liabilities and the
tax value of such assets and liabilities on a full provision basis.
Deferred tax assets are recognised if their realisation is considered to be
more likely than not.
Notes (continued)
KAO Corporation GmbH Acquisition
Under Irish GAAP, the purchase of KAO Corporation GmbH has been treated
as an acquisition and the acquired assets and liabilities have been
recorded in the financial statements at their fair value. The goodwill
resulting from the acquisition was written-off against reserves. Under
U.S. GAAP the accounting for the acquisition would be the same except the
goodwill would be accounted for as an asset and amortised over its
estimated useful life which, in this case, has been determined as seven
years.
The Rotterdam Branch of KAO Infosystems (Ireland) Ltd.
Under Irish GAAP, the purchase of the Rotterdam branch of the Company
has been treated as an acquisition and the acquired assets
and liabilities have been recorded in the financial statements at their
fair value. The negative goodwill resulting from the acquisition was
accounted for as a capital reserve. Under U.S. GAAP the accounting for
the acquisition would be the same except the negative goodwill would be
netted off the noncurrent assets. As a result, depreciation would be
lower than under Irish GAAP and there would be no capital reserve.
Employment Grants
Under Irish GAAP, employment grants paid by the Irish Government are
recognised in the profit and loss account on approval and a contingent
liability is disclosed for amounts which may become repayable in certain
predefined circumstances. Under U.S. GAAP, these revenues are recognised
in the profit and loss account over the period for which minimum
employment levels apply under the terms of the agreement and the
unamortised balance is treated as deferred income.
Notes (continued)
Net income under U.S. GAAP
For the nine months ended 30 September (in thousands):
(Unaudited)
1998 1997
--------------- ---------------
Profit/(Loss) for the nine months as reported in the profit and loss accounts
and in accordance with Irish generally accepted accounting principles IR(pound) 5,492 IR(pound)(5,588)
Adjustments
Negative goodwill: basis of accounting for the Rotterdam branch of KAO Infosystems
(Ireland) Ltd. acquisition - (65)
Amortisation of intangible fixed assets: basis of accounting for KAO Corporation
GmbH acquisition (32) (32)
Employment grants: amortisation of employment grant received 185 185
Taxation: effect of above adjustments - -
--------------- ---------------
Net profit/(loss) as adjusted to accord with U.S. GAAP IR(pound )5,645 IR(pound)(5,500)
=============== ===============
Shareholders' Deficit
For the nine months ended 30 September (in thousands): (Unaudited)
1998 1997
--------------- ---------------
Shareholders' deficit as reported in the consolidated balance sheets (Irish GAAP) IR(pound)(3,027) IR(pound)(8,326)
Adjustments
Amortisation of intangible fixed assets: basis of accounting for KAO Corporation
GmbH acquisition 199 265
Employment grants: amortisation of employment grant received (478) (637)
Taxation: effect of adjustments - -
--------------- ---------------
Shareholders' deficit as adjusted to accord with U.S. GAAP IR(pound)(3,306) IR(pound)(8,698)
=============== ===============
Cash Flows
In accordance with Irish GAAP, the company complies with Financial Reporting
Standard No. 1, "Cash Flow Statements," (FRS 1). Its objective and principles
Notes (continued)
are similar to those set out in SFAS No. 95 "Statement of Cash Flows." The
principal difference between the standards is in respect of classification.
Under FRS 1, the company present its cash flows for (a) operating activities;
(b) returns on investments and servicing of finance; (c) taxation; (d) capital
expenditure; (e) acquisitions and disposals; and (f) financial activities. SFAS
No. 95 requires only three categories of cash flow activity (a) operating; (b)
investing; and (c) financing.
Cash flows arising from taxation and returns on investments and servicing of
finance under FRS 1 are included as operating activities under SFAS No. 95. In
addition, under FRS 1, cash and liquid resources include short term borrowings
repayable on demand. SFAS No. 95 requires movements in such borrowings to be
included in financing activities.
Disclosure of Accounting Policy
For the purposes of cash flows under U.S. GAAP, the group considers all highly
liquid deposits with a maturity of three months or less to be cash equivalents.
Under Irish GAAP, cash represents cash held at bank available on demand offset
by bank overdrafts and liquid resources comprise bank fixed deposits with
maturities of greater than one day.
Cash Flows
A summarised cash flow under U.S. GAAP is as follows for the nine months ended
30 September (in thousands):
(Unaudited)
1998 1997
--------- ---------
Cash (outflow) from operating activities IR(pound)(5,629) IR(pound)(10,598)
Cash inflow from investing activities 939 3,292
Cash inflow from financing activities 4,038 8,609
-------------- ----------------
Increase (decrease) in cash and cash equivalents (652) 1,303
Cash and cash equivalents, beginning of period 4,675 1,488
-------------- ---------------
Cash and cash equivalents, end of period IR(pound)4,023 IR(pound) 2,791
============== ================
2. Sale of the Company:
On January 7, 1999, the Company was sold to Zomax Optical Media, Inc., an
outsource service provider to software publishers, computer manufacturers and
other producers of multimedia products.
PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma unaudited condensed consolidated financial statements
include the historical financial statements of Zomax Optical Media, Inc. and
give effect to the transaction and events described in the notes accompanying
the pro forma unaudited condensed consolidated financial statements as if the
transactions and events referred to therein were initiated at the beginning of
the periods presented.
On January 7, 1999, Zomax Optical Media, Inc. and its subsidiaries (the Company)
simultaneously closed on the acquisition (the Transaction) of three units of Kao
Corporation, a Japanese company.
o In the United States, the Company acquired certain assets and assumed
certain contractual rights and obligations of Kao Infosystems Company
pursuant to an Asset Purchase and Sale Agreement dated November 28, 1998,
between the Company and Kao Infosystems Company.
o In Canada, the Company's wholly owned subsidiary, Zomax Canada Company,
acquired certain assets and assumed certain contractual rights and
obligations of Kao Infosystems Canada, Inc., pursuant to an Asset Purchase
and Sale Agreement dated November 28, 1998, between Zomax Canada Company
and Kao Infosystems Canada, Inc. The acquired operations in Canada and the
United States are referred to herein as Kao North America.
o In Ireland, the Company's wholly owned Irish subsidiary, Primary Marketing
Group Limited, acquired all of the outstanding stock of Kao Infosystems
(Ireland) Limited, pursuant to a Share Purchase and Sale Agreement dated
November 28, 1998, between Primary Marketing Group Limited and Kao
Corporation.
The assets acquired consist primarily of real property and leasehold interests
in manufacturing facilities, machinery and equipment used in the manufacture of
compact disks, office equipment and inventory. The assets and businesses
acquired by the Company were used in the manufacture and sale of CDs and related
businesses, and the Company intends to continue to use the assets and businesses
in a similar manner. The aggregate consideration for the Transaction was
$37,500,000, subject to certain post closing adjustments. The Company used
$22,500,000 of cash on hand and borrowed $15,000,000 from General Electric
Capital Corporation to fund the Transaction.
The Transaction will be accounted for using the purchase method of accounting
The pro forma adjustments are based on available information and certain
estimates and assumptions. Therefore, it is likely that the actual adjustments
will differ from the pro forma adjustments. The Company believes that such
estimates and assumptions provide a reasonable basis for presenting all of the
significant effects of the transactions and events and that the pro forma
adjustments give appropriate effect to those estimates and assumptions and are
properly applied in the pro forma unaudited condensed consolidated financial
statements.
The pro forma unaudited condensed consolidated financial statements should be
read in conjunction with the historical financial statements and related notes
included in the Company's Form 10-K. The pro forma unaudited condensed
consolidated financial statements are provided for informational purposes only
and should not be construed to be indicative of the Company's results of
operations or the Company's financial position had the transactions and events
described above been consummated on the dates assumed and do not project the
Company's financial position or results of operations for any future date or
period.
ZOMAX OPTICAL MEDIA, INC.
Pro Forma Unaudited Condensed Consolidated Balance Sheet
As of September 25, 1998
Kao
The North Kao Pro Forma Pro
(In US $000's) Company America Ireland Subtotal Adjustments Forma
------- ------- ------- -------- ----------- -----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $30,792 $ 4,106 $ 6,013 $ 40,911 $ (39,227) (1) $ 12,026
(4,658) (1)
15,000 (2)
Accounts receivable, net 8,641 27,478 13,204 49,323 49,323
Inventories 2,040 6,251 3,644 11,935 11,935
Deferred income taxes 897 727 - 1,624 (727) (1) 897
Prepaid expenses and deposits 771 578 3,914 5,263 (200) (1) 5,063
------- -------- ------- -------- --------- --------
Total current assets 43,141 39,140 26,775 109,056 (29,812) 79,244
------- -------- ------- -------- --------- --------
PROPERTY AND EQUIPMENT, net 19,009 60,515 25,017 104,541 (66,782) (1) 37,759
GOODWILL AND OTHER ASSETS, net 1,178 970 127 2,275 (252) (1) 2,023
DEFERRED INCOME TAXES - - - - 1,750 (1) 1,750
------- -------- ------- -------- --------- --------
$63,328 $100,625 $51,919 $215,872 $ (95,096) $120,776
======= ======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 1,462 $ 18,211 $ 8,924 $ 28,597 $ (27,135) (1) $ 1,462
Accounts payable and accrued expenses 9,740 22,489 14,919 47,148 5,000 (1) 52,148
Income taxes payable 375 - 40 415 - 415
------- -------- ------- -------- --------- --------
Total current liabilities 11,577 40,700 23,883 76,160 (22,135) 54,025
LONG-TERM NOTES PAYABLE,
net of current portion 1,976 47,509 32,560 82,045 (80,069) (1) 16,976
15,000 (2)
DEFERRED INCOME TAXES 774 - - 774 - 774
SHAREHOLDERS' EQUITY 49,001 12,416 (4,524) 56,893 (7,892) (1) 49,001
------- -------- ------- -------- --------- --------
Total liabilities and
shareholders' equity $63,328 $100,625 $51,919 $215,872 $ (95,096) $120,776
======= ======== ======= ======== ========= ========
The accompanying notes are an integral part of
this unaudited pro forma balance sheet.
ZOMAX OPTICAL MEDIA, INC.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Nine Months Ended September 25, 1998
Kao
The North Kao Pro Forma Pro
(In US $000's except share and per share data) Company America Ireland Subtotal Adjustments Forma
------- -------- ------- -------- ----------- --------
SALES $43,611 $101,869 $60,101 $205,581 $ - $205,581
COST OF SALES 31,870 85,636 33,394 150,900 (8,625)(4) 142,275
------- -------- ------- -------- ------- --------
Gross profit 11,741 16,233 26,707 54,681 8,625 63,306
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,576 13,758 23,849 45,183 - 45,183
RESTRUCTURING CHARGES - 4,111 - 4,111 - 4,111
------- -------- ------- -------- ------- --------
Operating income (loss) 4,165 (1,636) 2,858 5,387 8,625 14,012
INTEREST EXPENSE 300 2,947 2,154 5,401 900 (5) 6,301
INTEREST INCOME (576) - - (576) - (576)
OTHER (INCOME) EXPENSE 278 (85) 64 257 - 257
------- -------- ------- -------- ------- --------
Income (loss) before income taxes 4,163 (4,498) 640 305 7,725 8,030
PROVISION FOR INCOME TAXES 1,560 - - 1,560 - 1,560
------- -------- ------- -------- ------- --------
Net income (loss) $ 2,603 $ (4,498) $ 640 $ (1,255) $ 7,725 $ 6,470
======= ======== ======= ======== ======= ========
PRO FORMA: (7)
Income (loss) before income taxes 4,163 (4,498) 640 305 7,725 $8,030
Provision for income taxes 1,665 - - 1,665 1,106 (6) 2,771
------- -------- ------- -------- ------- --------
Net income (loss) $ 2,498 $ (4,498) $ 640 $ (1,360) $ 6,619 $ 5,259
======= ======== ======= ======== ======= ========
Earnings per common share-
Basic $ 0.41 $ 0.86
======= ========
Diluted $ 0.39 $ 0.81
======= ========
Weighted average shares outstanding-
Basic 6,095 6,095
======= ========
Diluted 6,479 6,479
======= ========
The accompanying notes are an integral part of
this unaudited pro forma statement.
ZOMAX OPTICAL MEDIA, INC.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Year Ended December 26, 1997
The Kao North Kao Pro Forma Pro
(In US $000's) Company America Ireland Subtotal Adjustments Forma
------- -------- ------- -------- ----------- -----
SALES 47,877 $123,110 $100,043 $271,030 $ - (3) $271,030
COST OF SALES 32,773 114,351 99,428 246,552 (11,500)(4) 235,052
------ -------- -------- -------- -------- --------
Gross profit 15,104 8,759 615 24,478 11,500 35,978
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,860 26,714 12,557 49,131 49,131
RESTRUCTURING CHARGES - 20,822 3,923 24,745 24,745
------ -------- -------- -------- -------- --------
Operating income (loss) 5,244 (38,777) (15,865) (49,398) 11,500 (37,898)
INTEREST EXPENSE 409 366 4,321 5,096 1,200 (5) 6,296
INTEREST EXPENSE PAID TO RELATED PARTY - 3,923 - 3,923 - 3,923
INTEREST INCOME (228) - (134) (362) - (362)
OTHER (INCOME) EXPENSE (155) 3,036 - 2,881 - 2,881
------ -------- -------- -------- -------- --------
Income (loss) before income taxes 5,218 (46,102) (20,052) (60,936) 10,300 (50,636)
PROVISION FOR INCOME TAXES 1,520 - 185 1,705 - 1,705
------ -------- -------- -------- --------
Net income (loss) $3,698 $(46,102) $(20,237) $(62,641) $ 10,300 $(52,341)
====== ======== ======== ======== ========
PRO FORMA: (7)
Income (loss) before income taxes $5,218 $(46,102) $(20,052) $(60,936) 10,300 $(50,636)
Provision for income taxes 2,090 - 185 2,275 (2,090)(6) 185
------ -------- -------- -------- -------- --------
Net income (loss) $3,128 $(46,102) $(20,237) $(63,211) $12,390 $(50,821)
====== ======== ======== ======== ======== ========
Earnings (loss) per common share-
Basic $ 0.60 $ (9.73)
====== ========
Diluted $ 0.58 $ (9.73)
====== ========
Weighted average shares outstanding-
Basic 5,224 5,224
====== ========
Diluted 5,358 5,224
====== ========
The accompanying notes are an integral part of this
unaudited pro forma statement.
ZOMAX OPTICAL MEDIA, INC.
Notes to Pro Forma Unaudited Condensed
Consolidated Financial Statements
As of September 25, 1998
1. Purchase Accounting
Reflects the allocation of purchase of $37.5 million, plus an assumed working
capital adjustment of approximately $1.7 million as of September 25, 1998.
The purchase price was allocated to the assets acquired and liabilities assumed
or incurred in connection with the Transaction as follows:
(Assets not acquired)/Liabilities not assumed:
Cash $(4,658)
Deferred income taxes (727)
Prepaid expenses and deposits (200)
Other assets (252)
Current portion of notes payable 27,135
Long-term portion of notes payable 80,069
Effect on shareholders' equity (101,367)
Allocation of purchase price and related
elimination entries:
Cash paid ($39,227)
Reduction of property to appropriately
allocate purchase price (66,782)
Establishment of deferred income taxes 1,750
Accounts payable and accrued expenses incurred in
relation to transaction expenses and amount required
to shut-down certain facilities (5,000)
Elimination of the equity of the acquired companies 109,259
2. Debt
Reflects the proceeds from a $15.0 million term note used entirely to finance
the Transaction.
3. Related Party Sales
For the year ended December 26, 1997 net sales include sales to related parties
of approximately $16.4 million.
4. Depreciation Expense
Represents a decrease in depreciation expense as a result of purchase accounting
entries.
5. Interest Expense
Represents an increase an interest expense for the additional $15 million in
borrowings at an assumed annual interest rate of 8%.
6. Provision for Income Taxes
Reflects the pro forma income tax provision for Kao North America at the
Company's statutory tax rate of 37.5%.
7. Other Pro Forma Adjustments
In February 1998, the Company acquired certain nontaxable entities in a
transaction that was accounted for as a pooling of interests. A pro forma
income tax provision has been established as if they were taxable entities
for all periods presented.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 8-K
Date of Report: Commission File No.:
January 7, 1999 0-28426
ZOMAX OPTICAL MEDIA, INC.
EXHIBIT NO. ITEM
2.1* Asset Purchase and Sale Agreement dated November 28, 1998 by
and among Zomax Optical Media, Inc. 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.
2.2* 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.
2.3* Share Purchase and Sale Agreement dated November 28,
1998 between Primary Marketing Group Limited and Kao
Corporation.
2.4* Credit Agreement dated as of January 6, 1999 among the
Registrant, Certain Lenders and General Electric Capital
Corporation.
2.5* Credit Agreement dated as of January 6, 1999 among Zomax
Canada Company, Certain Lenders and General Electric
Capital Canada Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG
* Previously filed.