UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 24, 1999
Commission File Number 0-28429
ZOMAX INCORPORATED
(Name of registrant as specified in its charter)
Minnesota 41-1833089
(state or other juris- (I.R.S. Employer
diction of incorporation) Identification No.)
5353 Nathan Lane, Plymouth, MN 55442
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(612) 553-9300
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes (x) No ( )
As of November 1, 1999, the issuer had 15,255,950 shares of Common Stock, no par
value, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX INCORPORATED
Consolidated Balance Sheets
(In Thousands)
ASSETS Sep. 24, 1999 Dec. 25, 1998
(Unaudited)
------------------ ----------------
Current Assets:
Cash and cash equivalents $ 32,104 $ 25,621
Accounts receivable, net of allowance for doubtful
accounts of $3,828 and $2,035 37,469 9,872
Inventories 6,498 2,088
Deferred income taxes 3,175 1,425
Prepaid expenses and deposits 2,504 543
------------------ ----------------
Total current assets 81,750 39,549
Property and equipment, net of accumulated depreciation 37,657 18,925
of $11,129 and $5,908
Investments in unconsolidated entity 3,352 4,662
Goodwill, net 1,102 1,158
Other assets, net 44 1,130
------------------ ----------------
$ 123,905 $ 65,424
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 3,237 $ 1,380
Accounts payable 21,273 5,469
Accrued expenses:
Accrued royalties 5,543 2,446
Accrued compensation 6,223 1,786
Other 3,669 566
Income taxes payable 5,632 934
------------------ ----------------
Total current liabilities 45,577 12,581
Notes payable, net of current portion 12,274 1,746
------------------ ----------------
Deferred income taxes 995 1,010
Shareholders' Equity:
Common stock, no par value, 30,000 authorized
shares, 15,243 and 14,378 shares issued
and outstanding 45,019 42,680
Retained earnings 21,747 7,407
Other comprehensive income (1,707) -
------------------ ----------------
Total shareholders' equity 65,059 50,087
------------------ ----------------
$ 123,905 $ 65,424
================== ================
The accompanying notes are an integral part of these consolidated statements.
ZOMAX INCORPORATED
Consolidated Statements Of Operations
(Unaudited)
(In Thousands, except Per Share Data)
Three Months Ended Nine Months Ended
------------------------- -------------------------------
Sep 24, Sep 25, Sep 24, Sep 25,
1999 1998 1999 1998
--------- --------- --------- ---------
Sales $ 61,603 $ 14,832 $ 164,978 $ 43,611
Cost of sales 41,045 11,310 114,861 31,871
--------- --------- --------- ---------
Gross profit 20,558 3,522 50,117 11,740
Selling, general and
administrative expenses 8,707 2,446 26,926 7,575
--------- --------- --------- ---------
Operating income 11,851 1,076 23,191 4,165
Equity in losses of unconsolidated entity (477) -- (1,311) --
Interest expense (277) (87) (921) (300)
Interest income 275 375 532 576
Other income (expense), net -- -- -- (278)
--------- --------- --------- ---------
Income before income taxes 11,372 1,364 21,491 4,163
Provision for income taxes 3,919 545 7,151 1,560
--------- --------- --------- ---------
Net income $ 7,453 $ 819 $ 14,340 $ 2,603
========= ========= ========= =========
PRO FORMA:
Net income before income taxes 4,163
Provision for income taxes 1,665
---------
Net income $ 2,498
=========
Earnings Per Share
Basic $ 0.50 $ 0.06 $ 0.98 $ 0.20
========= ========= ========= =========
Diluted $ 0.45 $ 0.05 $ 0.88 $ 0.19
========= ========= ========= =========
Weighted average common
shares outstanding 14,916 14,370 14,661 12,189
Dilutive effect of stock
compensation plans 1,645 623 1,588 769
--------- --------- --------- ---------
Weighted average common
and diluted shares outstanding 16,561 14,993 16,249 12,958
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
ZOMAX INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
For the nine months ended
Sept. 24, Sept. 25,
1999 1998
-------- --------
Operating Activities:
Net income $ 14,340 $ 2,603
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 5,737 2,763
Equity in losses of unconsolidated entity 1,311 --
Deferred income taxes (15) 19
Changes in operating assets and liabilities:
Accounts receivable 5,418 (1,481)
Inventories 1,681 (437)
Prepaid expenses and deposits (1,825) 109
Accounts payable 8,990 1,266
Accrued expenses (2,791) 305
Income taxes payable 4,698 134
-------- --------
Net cash provided by operating activities 37,544 5,281
-------- --------
Investing Activities:
Purchase of property and equipment (5,663) (7,715)
Acquisition of businesses, net of cash (39,500) --
Change in other assets 1,086 38
-------- --------
Net cash used in investing activities (44,077) (7,677)
-------- --------
Financing Activities:
Issuance of common stock 2,339 29,935
Proceeds from notes payable 15,000 1,124
Repayment of notes payable (2,616) (3,084)
-------- --------
Net cash provided by financing activities 14,723 27,975
-------- --------
Effect of exchange rate changes on cash and cash equivalents (1,707) --
Net increase (decrease) in cash 6,483 25,579
Cash and Cash Equivalents:
Beginning of period 25,621 5,213
-------- --------
End of period 32,104 30,792
======== ========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 921 $ 300
======== ========
Cash paid for income taxes $ 2,454 $ 1,426
======== ========
The accompanying notes are an integral part of these consolidated statements.
Zomax Incorporated
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying interim financial statements of the Company are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation (consisting of only normal recurring adjustments) have been
reflected in the interim periods presented. Due principally to the seasonal
nature of some of the Company's business, results may not be indicative of
results for a full year. The accompanying financial statements should be read in
conjunction with the Company's Form 10-K for the year ended December 25, 1998.
Zomax Incorporated (Zomax or the Company) is a leading outsource
service provider to software publishers, computer manufacturers and other
producers of multimedia products. These outsource services include call center
and customer support solutions; E-commerce solutions; compact disc (CD) and
digital versatile disc (DVD) mastering; CD, DVD, diskette and cassette
replication; graphic design; print management; CD and DVD printing; packaging;
warehousing; inventory management; distribution and fulfillment; and returned
merchandise authorization processing services.
The Company was incorporated on February 22, 1996 and completed its
initial public common stock offering on May 10, 1996. Concurrent with the
initial public offering of common stock, the Company received all of the
operating assets and liabilities of Zomax Optical Media Limited Partnership in
exchange for 2,800,000 shares of its common stock.
On February 4, 1998, the Company acquired all of the outstanding shares
of Primary Marketing Group, Inc. (PMG), Next Generation Services, LLC (NGS) and
Primary Marketing Group Limited (PMG Ireland) (collectively, the Companies) in
exchange for 800,002 shares of the Company's common stock. Prior to these
acquisitions, the Companies' business consisted of providing manufacturers'
representative services and returned merchandise processing services for the
computer industry. The Companies have provided substantially the same products
and services they provided prior to these transactions. In connection with the
transactions described above, Zomax acquired certain assets and assumed certain
liabilities, including a lease obligation from an unrelated third party for $1.1
million. The acquisitions of the Companies have been accounted for as a pooling
of interests and, accordingly, the consolidated financial statements for all
periods presented have been restated to reflect the effects of the transactions.
On January 7, 1999, the Company acquired the businesses and certain
net assets of Kao Corporation in the United States, Canada, Ireland and Germany.
The purchase price for the business, net assets and net working capital acquired
was $37.5 million plus transaction costs. The assets and businesses acquired by
the Company were used in the manufacturing and sale of CDs and related
businesses, and the Company intends to continue to use the assets and businesses
in a similar manner. The acquisition has been accounted for using the purchase
method of accounting and, accordingly the purchase price has been allocated to
net assets acquired based on their preliminary estimated fair values.
Pro forma consolidated results of operations as if the acquisitions had taken
place at the beginning of 1998 are shown below (in thousands, except per share
data). The pro forma results for 1999 were not materially different as the
acquisition closed effective January 1, 1999.
Nine Months Ended
September 25, 1998
------------------
Net Sales $205,580
Net Income $5,155
Earnings per Share:
Basic $.42
Diluted $.40
2. Credit Facilities
On January 7, 1999, the Company entered into a $15 million term loan
facility which was used to finance the purchase of the businesses and assets of
the Kao Corporation. A $25 million revolving line of credit facility was also
established. The term loan facility requires quarterly principal payments on a
straight-line amortization schedule. Interest rate is at the lower of prime plus
.75% or LIBOR rate plus 2.25%. The revolving line-of-credit facility provides
for borrowings based on a formula using eligible accounts receivable and
inventories with interest rates of prime plus .5% or LIBOR plus 2.0%. Both
facilities have five-year terms and contain certain financial covenants.
3. Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting in the financial statements all changes in equity during a period,
except those resulting from investments by and distributions to owners. For the
Company, comprehensive income represents net income adjusted for cumulative
foreign currency translation adjustments. Comprehensive income as defined by
SFAS No. 130, was $12.6 million for the nine months period ended September 24,
1999.
4. Stock Split
The Company's Board of Directors authorized a two-for-one split of its
common stock to be effected as a 100% stock dividend payable on August 11, 1999,
to stockholders of record at the close of business on July 30, 1999. All share
and per share amounts have been restated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading outsource service provider to software
publishers, computer manufacturers and other producers of multimedia products.
These services include call center and customer support solutions; E-commerce
solutions; CD and DVD mastering; CD, diskette and cassette replication; graphic
design; print management; CD and DVD printing; packaging; warehousing; inventory
management; distribution and fulfillment; and RMA processing services. The
Company records sales to its customers at the time merchandise is shipped or as
services are rendered. For certain customers, merchandise is invoiced upon
completion of orders with shipment occurring based on written customer
instructions.
The multimedia services industry has been characterized by short lead
times for customer orders. For this reason and because of the timing of orders,
delivery intervals and the possibility of customer changes in delivery
schedules, the Company's backlog as of any particular date has not been
significant and is not a meaningful indicator of future financial results.
On February 4, 1998, PMG, NGS and PMG Ireland were merged with and into
Zomax Services Incorporated, a subsidiary of the Company. As a result of these
transactions, all ownership interests in the acquired companies were exchanged
for 800,002 shares of the Company's Common Stock. Prior to these transactions,
the businesses of PMG, NGS and PMG Ireland consisted of providing manufacturer's
representative services and RMA processing services to the computer industry.
PMG, NGS and PMG Ireland operated their respective businesses from facilities
located in and around San Jose, California; Boston, Massachusetts; and Dublin,
Ireland. In connection with the transactions described above, the Company
acquired certain assets and assumed certain liabilities from an unrelated third
party for $1.1 million. The acquisitions of PMG, NGS and PMG Ireland were
accounted for using the pooling-of-interests method of accounting, and,
accordingly, all periods presented have been restated to reflect the effects of
these transactions.
On January 7, 1999, the Company acquired certain businesses and assets
of Kao Corporation located in the United States, Canada, Ireland and Germany.
The purchase price for the businesses and assets acquired was $37.5 million plus
transaction costs. The assets and businesses acquired by the Company were used
in the manufacturing and sale of CDs and related businesses, and the Company is
continuing to use the assets and businesses in a similar manner. The Company
financed the acquisition through $22.5 million of its own funds and a $15.0
million term loan facility. The acquisition has been accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to net assets acquired based on their preliminary estimated fair
values.
Results of Operations
Sales. The Company's sales for the third quarter of 1999 were $61.6
million, an increase of 315% from $14.8 million for the third quarter of 1998.
For the nine months ended September 1999, sales were $165.0 million, an increase
of 278% from sales of $43.6 million for the first nine months of 1998. The
increase in sales for the above periods is primarily related to the Kao
acquisition, which occurred on January 7, 1999. For the nine-month period, the
increase in total sales resulted from a 373% increase in CD related sales, a
144% increase in diskette sales and a 129% increase in warehousing/fulfillment
services. These increases were partially offset by a 14% decrease in audio
cassette sales and a 63% decrease in RMA sales.
Cost of sales. Cost of sales as a percentage of net sales was 66.6% and
76.3 % for the third quarter ended September 1999 and 1998, respectively. For
the nine months of 1999 and 1998, cost of sales were 69.6% and 73.1%,
respectively. The decrease in cost of sales percentage for the third quarter of
1999 was due to several factors, including the implementation of improved
financial and operational controls at the acquired Kao sites and the operation
of all manufacturing plants at higher capacity utilization rates.
Selling, general and administrative expense. Selling, general and
administrative expense as a percentage of sales was 14.1% and 16.5% for the
third quarter ended September, 1999 and 1998, respectively. For the first nine
months of 1999, selling, general and administrative expense was 16.3% of net
sales as compared to 17.4% for the same period in 1998. The percentage decreases
in 1999 resulted primarily from the Kao acquisition.
Equity in losses of unconsolidated entity. In the fourth quarter of
1998, the Company purchased a one-third equity interest in Chumbo Holdings
Corporation (Chumbo), an Internet based reseller of software. The Company
accounts for this investment using the equity method of accounting and,
accordingly, recognized a loss of $477,000 in the third quarter and a $,.311
million loss in the first nine months of 1999, representing its share of the
Chumbo net loss and the amortization of excess purchase price over the fair
value of the underlying net assets acquired.
Interest income and expense. Interest income was $275,000 and $375,000
for the third quarter of 1999 and 1998, respectively. For the first nine months
of 1999, interest income was $532,000 as compared to $576,000 for the same
period in 1998. Interest expense was $277,000 and $87,000 for the third quarter
of 1999 and 1998, respectively. For the first nine months of 1999, interest
expense was $921,000 as compared to $300,000 for the same period in 1998.
Interest expense increased with the borrowings used to finance the Kao
acquisition in January 1999.
Other expenses, net. In the first quarter of 1998, the Company incurred
expenses totaling $278,000 related to the acquisition of PMG, NGS and PMG
Ireland.
Provision for income taxes. The effective income tax rate for the first
nine months of 1999 was 33.3% and the pro forma effective income tax rate for
the first nine months of 1998 was 40.0%. The decrease in the effective income
tax rate in 1999 is due to lower tax rates on income generated in Ireland.
Liquidity and Capital Resources
As of September 24, 1999, the Company had working capital of $36.2
million, compared to working capital of $27.0 million as of December 25, 1998.
As of September 24, 1999, the Company had cash totaling $32.1 million.
Cash generated from operating activities for the first nine months of 1999 was
$37.5 million compared to $5.3 million during the first nine months of 1998. The
increase in operating cash flow is primarily due to the acquisition of the Kao
businesses and growth of the Company's existing business.
Cash used in investing activities during the first nine months of 1999
was $44.1 million compared to $7.7 million in the first nine months of 1998. In
1999, the Company used $39.5 million to purchase the businesses and net assets
of Kao Corporation. In 1998, the Company used cash primarily to purchase
property and equipment including the construction of a new CD facility in San
Jose and new DVD equipment.
During the first nine months of 1998, the Company acquired certain
assets and assumed certain liabilities from an unrelated third party in exchange
for a short-term note in the principal amount of $1.1 million. During the first
nine months of 1999, the Company repaid notes payable totaling $2.6 million as
compared to repayment of notes payable of $3.1 million in 1998.
In January 1999, the Company entered into a $15 million term loan
facility and a $25 million revolving line of credit facility. The term loan
facility requires quarterly principal payments on a straight-line amortization
schedule. Interest rate is at the lower of prime plus .75% or LIBOR rate plus
2.25%. The revolving line-of-credit facility provides for borrowings based on a
formula using eligible accounts receivable and inventories with interest rates
of prime plus .5% or LIBOR plus 2.0%. Both facilities have five-year terms and
contain financial covenants. There are no borrowings outstanding under the
revolving line of credit facility as of September 24, 1999.
Future liquidity needs will depend on, among other factors, the timing
of capital expenditures and expenditures in connection with any acquisitions,
changes in customer order volume and the timing and collection of receivables.
The Company believes that existing cash balances, anticipated cash flow from
operations and amounts available under existing credit facilities will be
sufficient to fund its operations for the foreseeable future.
Year 2000 Compliance
The Company is currently working to fully assess and resolve the
potential impact of the Year 2000 issue on both the information technology
("IT") and non-IT systems throughout its U.S. and European operations. The Year
2000 issue is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any systems that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system problems or failure.
Zomax has developed a Year 2000 plan, the objective of which is to
determine and assess the risks of the Year 2000 issue, and plan and institute
corrective actions to minimize those risks. The Company's goal is to ensure
current business operations will continue to function accurately with no
material disruption into and beyond year 2000. The Company has formed an
internal review team, and has engaged with an independent Year 2000 consulting
firm to provide advice regarding the Company's Year 2000 compliance. The Year
2000 plan addresses (a) information technology such as software and hardware,
(b) non-information system or embedded technology contained in manufacturing
equipment and facilities, and (c) readiness of key third party suppliers.
Zomax implemented a new enterprise wide financial and information
system in 1997 to meet its growing business needs. The Company also implemented
this financial and information system in new businesses acquired in 1997 and
1998 and has developed a schedule for implementation of its newly acquired Kao
facilities in 1999. The new business systems are represented to be Year 2000
compliant by the respective vendors and the Company has performed initial tests
confirming the compliance. The Company has identified embedded technology in its
manufacturing equipment and facilities and is testing such technology and
contacting vendors regarding the Year 2000 readiness of such technology. The
Company is also in the process of contacting material suppliers and customers to
address their exposure to Year 2000 related risks.
The Company has completed its assessment of Year 2000 compliance with
regard to embedded technology and material suppliers and customers as of
September 24, 1999. During the balance of 1999, the Company will work to
formulate contingency plans, if appropriate, to further reduce risks and
exposure to Year 2000 related issues.
Through September 24, 1999, costs associated with the Company's Year
2000 plan have not been material. The costs of addressing Year 2000 potential
problems are not currently expected to have a material adverse impact on the
financial position, results of operations or cash flows of the business in the
future. If significant customers or vendors identify Year 2000 issues in the
future and fail to resolve such issues in a timely manner, such failure could
result in a material adverse impact on the Company's business or results of
operations.
Forward-Looking Statements
This filing contains forward-looking statements related to the
sufficiency of the Company's cash reserves and working capital to fund its
operations for the foreseeable future and the ability of the Company to
adequately address the Year 2000 issues. Such forward-looking statements involve
risks and uncertainties which could cause actual results to differ materially
from those projected. The factors which could materially impact the Company's
ability to finance its operations are primarily a substantial reduction in sales
and profitability caused by one or more of the following: unforeseen increase in
expenses, significant increase in competition forcing the Company to reduce the
prices of its services, significant loss of CD market share, introduction of new
technologies and substantial worsening of overall economic conditions. The
Company's ability to adequately address the Year 2000 issue will depend on the
ability of the Company and its vendors and customer to replace, modify and/or
upgrade computer technology, which cannot be assured.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is included with the Form 10-Q
Exhibit 27 Financial Data Schedule (included in electronic
version only)
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZOMAX INCORPORATED
Date: November 5 , 1999 By: /s/ James T. Anderson
James T. Anderson, President and Chief
Executive Officer (principal executive officer)
By: /s/ James K. Flaherty
James E. Flaherty, Chief Financial Officer
(principal financial and accounting officer)
Zomax Incorporated
Form 10-Q Quarterly Report
For the Quarter Ended September 24, 1999
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)