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 March 27, 1998
Commission File Number 0-28429
ZOMAX OPTICAL MEDIA, INC.
(Exact 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)
Issuer's telephone number, including area code:
(612) 553-9300
Check whether the issuer (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 April 17, 1998, the issuer had 5,274,892 shares of Common Stock, no par
value, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOMAX OPTICAL MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS MAR. 27, 1998 DEC. 26, 1997
------------- -------------
Current Assets:
Cash and cash equivalents $ 6,596,330 $ 5,213,417
Accounts receivable, net of allowance
for doubtful accounts of
$1,138,000 and $881,000 7,873,172 7,160,198
Inventories 2,479,530 1,603,170
Deferred income taxes 1,056,000 897,000
Prepaid expenses and deposits 797,892 879,714
----------- -----------
Total current assets 18,802,924 15,753,499
Property and equipment, net of accumulated
depreciation of $5,351,000 and $4,609,000 17,607,497 14,002,694
Goodwill, net 1,210,323 1,228,023
Other assets, net 3,597 42,194
----------- -----------
$37,624,341 $31,026,410
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 3,000,000 $ --
Current portion of notes payable 3,146,361 2,293,950
Accounts payable 4,812,491 3,524,892
Accrued expenses:
Accrued royalties 3,515,221 2,994,768
Accrued compensation 1,147,226 1,155,298
Other 675,565 494,882
Income taxes payable 444,382 240,882
----------- -----------
Total current liabilities 16,741,246 10,704,672
Notes payable, net of current portion 2,673,465 3,103,975
Deferred income taxes 755,000 755,000
Shareholders' Equity:
Common stock, no par value, 15,000,000
authorized shares, 5,273,327 and
5,250,817 shares issued and outstanding 12,860,654 12,721,513
Retained earnings 4,593,976 3,741,250
----------- -----------
Total shareholders' equity 17,454,630 16,462,763
----------- -----------
37,624,341 31,026,410
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated
balance sheets.
-2-
ZOMAX OPTICAL MEDIA, INC.
Consolidated Statements Of Operations
(Unaudited)
For the Thirteen Weeks Ended
-----------------------------
Mar. 27, Mar. 28,
1998 1997
----------- ------------
Sales $14,232,712 $ 7,952,495
Cost of Sales 9,938,446 5,663,191
Gross Profit 4,294,266 2,289,304
Selling, General and
Administrative Expenses 2,712,036 1,714,635
----------- ------------
Operating Income 1,582,230 574,669
Interest Expense (117,722) (74,475)
Interest Income 59,047 82,158
Other Income (expense), net (277,829) 50,692
----------- ------------
Income Before Income Taxes 1,245,726 633,044
Provision for Income Taxes 393,000 180,000
----------- ------------
Net Income $ 852,726 $ 453,044
----------- ------------
----------- ------------
PRO FORMA:
Income before income taxes $ 1,245,726 $ 633,044
Provision for income taxes 498,000 251,000
----------- ------------
Net income $ 747,726 $ 382,044
----------- ------------
----------- ------------
Earnings Per Share
Basic $ 0.14 $ 0.07
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----------- ------------
Diluted $ 0.13 $ 0.07
----------- ------------
----------- ------------
Weighted Average Number of
Shares Outstanding
Basic 5,259,108 5,187,502
----------- ------------
----------- ------------
Diluted 5,655,302 5,190,077
----------- ------------
----------- ------------
The accompanying notes are an integral part of these consolidated Statements.
-3-
ZOMAX OPTICAL MEDIA, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
For the thirteen weeks ended
-----------------------------
Mar. 27, Mar. 28,
1998 1997
----------- ------------
Operating Activities:
Net income $ 852,726 $ 453,044
Adjustments to reconcile net income to net
cash provided by (used by) operating
activities-
Depreciation and amortization 836,282 372,301
Deferred income taxes (159,000) --
Changes in operating assets and
liabilities:
Accounts receivable (712,974) 12,845
Inventories (876,360) (236,805)
Prepaid expenses and deposits 81,822 (2,137,415)
Accounts payable 1,287,599 (286,055)
Accrued expenses 693,064 878,103
Income taxes payable 203,500 (434,432)
----------- ------------
Net cash (used in) provided by
operating activities 2,206,659 (1,378,414)
----------- ------------
Investing Activities:
Purchase of property and equipment (4,422,885) (309,785)
Change in other assets 38,097 133,041
----------- ------------
Net cash used in investing activities (4,384,788) (176,744)
----------- ------------
Financing Activities:
Issuance of common stock 139,141 16,698
Proceeds from notes payable 1,124,346 1,134,000
Repayment of notes payable (702,445) (448,597)
Bank borrowings, net 3,000,000 --
Dividends and distributions -- (498,940)
----------- ------------
Net cash provided by
financing activities 3,561,042 203,161
----------- ------------
Net increase (decrease) in cash 1,382,913 (1,351,997)
Cash and Cash Equivalents:
Beginning of period 5,213,417 7,944,699
End of period $6,596,330 $ 6,592,702
----------- ------------
----------- ------------
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 117,175 $ 76,975
Cash paid for income taxes $ 489,814 $ 605,432
----------- ------------
----------- ------------
The accompanying notes are an integral part of these consolidtated statements.
-4-
Zomax Optical Media, Inc.
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-KSB for the year ended December 26,
1997.
Zomax Optical Media, Inc. (Zomax or the Company) is a leading outsource
service provider to software publishers, computer manufacturers and other
producers of multimedia products operating primarily in North America. These
outsource services include compact disc (CD) and digital versatile disc (DVD)
mastering; CD, diskette and cassette replication; graphic design; print
management; CD 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, Next Generation Services, LLC and Primary
Marketing Group Limited (collectively, the Companies) in exchange for 800,002
shares of the Company's common stock. Prior to the acquisitions, the Companies'
business consisted of providing manufacturers' representative services and
returned merchandise processing services for the computer industry. The
Companies intend to provide 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 $1,124,000. 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.
2. Bank Credit Facilities
On April 30, 1997, the Company entered into a new revolving line of
credit facility with a lender for up to $5 million. The facility expires on
April 30, 1999, and the interest rate is at the prime rate. Maximum
borrowings are limited to an amount based on a formula using eligible
receivables and inventories. As of March 27, 1998 the Company had $3.0
million outstanding under the line of credit.
In addition, the Company entered into a capital expenditure term loan
facility with a lender for up to $8 million. Borrowings under the capital
expenditure term loan may be for up to 60 months and interest rates will vary
based on the length of the term loans. As of March 27, 1998, the Company had
borrowings of $3,258,000 outstanding under this facility.
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 CD and DVD mastering; CD, diskette and cassette replication;
graphic design; print management; CD 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 is not a
meaningful indicator of future financial results.
On March 31, 1997, the Company acquired the outstanding shares of
Benchmark, a software media replicator with operations in Minneapolis,
Minnesota and Indianapolis, Indiana. The Company agreed to pay consideration
based on revenues of Benchmark in 1997. Revenue levels were not met;
therefore, no consideration was paid. The Benchmark acquisition was
accounted for using the purchase method of accounting.
On May 1, 1997, the Company acquired the outstanding shares of TTI, an RMA
processing, warehousing and distribution company based in San Jose, California,
servicing the software publishing market. The purchase price of TTI was
$712,000 cash and 59,268 shares of the Company's Common Stock. The acquisition
of TTI was accounted for using the purchase method of accounting. As a result
of this treatment, the TTI purchase price was allocated to net assets acquired
based on estimated fair values and approximately $1.2 million of cost in excess
of net assets acquired was recorded as goodwill.
On February 4, 1998, PMG, NGS and PMG Ireland were merged with and into
ZSI. 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 manufacturers' 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.
Prior to the Company's initial public offering, the Company operated as
a partnership and prior to the acquisitions described above, certain of the
companies operated as non-taxable entities. A pro forma tax provision has
been established as if all consolidated companies were taxable entities for
all periods presented.
RESULTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MARCH 28, 1997 AND MARCH 27, 1998
SALES. The Company's sales for the first quarter of 1998 were $14.2
million, an increase of 79.0% from $8.0 million for the first quarter of 1997.
The increase in total sales resulted from a 48% increase in CD related sales, a
168% increase in diskette related sales and a 3.5% increase in RMA services
fees. These increases were partially offset by a 40% decrease in audio cassette
sales. In addition, the Company, in connection with the acquisition of certain
assets and liabilities from an unrelated third party, began operating an
assembly and distribution warehouse facility which accounted for 37.5% of the
total increase in Company sales.
COST OF SALES. Cost of sales for the first quarter of 1998 was 69.8% as
a percentage of sales as compared to 71.2% for the first quarter of 1997.
The decrease in the cost of sales percentage was due to higher CD production
volumes resulting in improved equipment utilization and other operating
improvements made by the Company. These cost improvements were partially
offset by start-up costs incurred by the Company in connection with building
its new CD manufacturing facility in San Jose and an increase in RMA
processing related costs. There was no outsourcing of CD production in the
first quarters of 1997 and 1998. The San Jose facility had its initial
production run in March 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for the first quarter of 1998 were $2.7 million
compared to $1.7 million for the first quarter of 1997. The dollar increase
resulted primarily from a dramatic increase in sales volume and growth of the
Company. As a percentage of sales, selling, general and administrative
expenses decreased from 21.6% in the first quarter of 1997 to 19.1% in the
first quarter of 1998.
INTEREST INCOME AND EXPENSE. Interest income was $59,000 for the first
quarter of 1998 as compared to $82,000 for the first quarter of 1997.
Interest expense was $118,000 for the first quarter of 1998 as compared to
$74,000 for the first quarter of 1997. Interest expense increased due to
borrowings used to finance the purchase of mastering equipment in September
1997.
OTHER (INCOME) EXPENSE, NET. In the first quarter of 1998, the Company
incurred nonrecurring expenses totaling $278,000 related to the acquisition
of PMG, NGS and PMG Ireland. These costs were expensed as incurred following
the provision of pooling of interests accounting. In the first quarter 1997,
the Company generated other income totaling $51,000 resulting from PMG
representing certain manufacturers' products.
PRO FORMA PROVISION FOR INCOME TAXES. The pro forma effective income tax
rate for the first quarter of 1998 was 40.0% as compared to 39.7% for the first
quarter of 1997.
PRO FORMA NET INCOME. Pro forma net income was $748,000, an increase of
95.7% from $382,000 for the first quarter of 1997.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 27, 1998, the Company made sales of
securities that were not registered in reliance upon Section 4(2) of the
Securities Act, which provides an exemption for transactions not involving a
public offering, which transactions are set forth below.
(a) On February 4, 1998, the holder of a warrant to purchase 5,275 shares
at $8.10 per share purchased 1,684 shares of the Company's Common Stock by
exercising a cashless conversion right provided in the warrant. An
aggregate of 3,591 shares underlying the warrant were forfeited as
consideration.
(b) On February 4, 1998, as consideration for the acquisition of Next
Generation Services, LLC, Primary Marketing Group and Primary Marketing
Group Limited by the Company, the Company issued an aggregate of 800,002
shares of its Common Stock to the owners of such businesses.
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.
The Company filed a Form 8-K dated February 4, 1998 to report the
acquisition of Next Generation Services, LLC, Primary Marketing Group and
Primary Marketing Group Limited, which Form 8-K was subsequently amended to
file required financial statements.
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 OPTICAL MEDIA, INC.
Date: April 20, 1998 By
---------------------------------
James T. Anderson, President and
Chief Executive Officer (principal
executive officer)
By
---------------------------------
James E. Flaherty
Chief Financial Officer (principal
financial and accounting officer)
Zomax Optical Media, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended March 27, 1998
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)