<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 0-28488
MULTIPLE ZONES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1431894
(State of incorporation) (I.R.S. Employer
Identification Number)
707 SOUTH GRADY WAY
RENTON, WASHINGTON 98055-3233
(Address of principal executive offices) (Zip Code)
(425) 430-3000
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has 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 [ ]
The number of shares of the registrant's Common Stock outstanding as of October
30, 1997, was 13,063,438.
<PAGE> 2
MULTIPLE ZONES INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996................................ 3
Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996................. 4
Statements of Shareholders' Equity
Nine months ended September 30, 1997.................................... 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996........................... 6
Notes to Consolidated Financial Statements.............................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 9
PART II. OTHER INFORMATION
Item 5. Other Information....................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................ 16
Signatures.............................................................. 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
MULTIPLE ZONES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,675,260 $ 976,464
Receivables, net 36,300,341 49,974,983
Inventories, net 41,568,467 77,501,216
Prepaids 3,216,293 7,148,161
Income tax receivable 1,962,494
Deferred income taxes 979,465 1,216,228
------------- -------------
Total current assets 95,702,320 136,817,052
Property and equipment, net 12,376,111 9,758,647
Other assets 657,989 3,225,314
------------- -------------
Total assets $ 108,736,420 $ 149,801,013
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 2,868,544 $ 3,026,298
Accounts payable 50,619,468 83,847,781
Accrued liabilities and other 6,958,766 8,404,882
Current portion of capital lease obligations 659,652 934,172
Income taxes payable 794,776
------------- -------------
Total current liabilities 61,106,430 97,007,909
Capital lease obligations, net of current portion 1,359,384 1,748,227
Deferred income taxes 248,506 249,506
Other 1,491,907 857,838
------------- -------------
Total liabilities 64,206,227 99,863,480
------------- -------------
Minority interest 391,018 468,741
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock 37,689,012 36,987,825
Retained earnings 6,654,589 12,563,859
Foreign currency translation adjustment (204,426) (82,892)
------------- -------------
Total shareholders' equity 44,139,175 49,468,792
------------- -------------
Total liabilities & shareholders' equity $ 108,736,420 $ 149,801,013
============= =============
</TABLE>
3
<PAGE> 4
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30, ended September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 346,523,124 $ 321,734,319 $ 115,724,744 $ 109,396,495
Cost of sales 305,958,844 276,818,952 102,694,163 93,875,000
------------- ------------- ------------- -------------
Gross profit 40,564,280 44,915,367 13,030,581 15,521,495
Selling, general and administrative expenses 46,492,543 31,558,294 15,278,721 10,436,336
------------- ------------- ------------- -------------
Income (loss) from operations (5,928,263) 13,357,073 (2,248,140) 5,085,159
------------- ------------- ------------- -------------
Other (income) expense:
Interest expense, net 805,107 1,258,240 215,511 241,867
Other (income) expense 263,150 (237,654) 48,126 (78,992)
Minority interest (36,259) 121,460 62,512 (6,174)
------------- ------------- ------------- -------------
1,031,998 1,142,046 326,149 156,701
------------- ------------- ------------- -------------
Income (loss) before income taxes (6,960,261) 12,215,027 (2,574,289) 4,928,458
Provision for (benefit from) income taxes (1,050,991) 4,397,873 (235,757) 1,726,481
------------- ------------- ------------- -------------
Net income (loss) $ (5,909,270) $ 7,817,154 $ (2,338,532) $ 3,201,977
============= ============= ============= =============
Primary earnings (loss) per share $ (0.46) $ 0.66 $ (0.18) $ 0.24
============= ============= ============= =============
Shares used in computation of primary
earnings (loss) per share 12,942,203 11,144,002 12,996,657 13,393,899
============= ============= ============= =============
Fully diluted earnings (loss) per share $ (0.46) $ 0.67 $ (0.18) $ 0.24
============= ============= ============= =============
Shares used in computation of fully
diluted earnings (loss) per share 12,942,203 11,706,971 12,996,657 13,542,504
============= ============= ============= =============
</TABLE>
4
<PAGE> 5
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
------------------------------ Retained Translation
Shares Amount Earnings Adjustment Total
----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 12,876,616 $ 36,987,825 $12,563,859 $ (82,892) $ 49,468,792
Issuance of common stock 150,373 701,187 701,187
Net loss (5,909,270) (5,909,270)
Translation adjustment (121,534) (121,534)
----------- ------------ ----------- --------- ------------
Balance, September 30, 1997 13,026,989 $ 37,689,012 $ 6,654,589 $(204,426) $ 44,139,175
=========== ============ =========== ========= ============
</TABLE>
5
<PAGE> 6
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 5,909,270) $ 7,817,154
Adjustments to reconcile net income to
net cash used in operating activities:
Allowance for inventory and receivables 5,805,581 988,322
Depreciation and amortization 2,079,550 1,144,377
Write-off of goodwill 1,299,666
Loss on disposal of asset 306,867
Minority interest (36,259) 121,460
Changes in assets and liabilities:
Accounts receivable 9,519,408 (9,835,111)
Inventory 33,598,049 (8,437,712)
Prepaid and other assets 6,837,673 1,929,834
Accounts payable (34,904,932) (9,235,326)
Accrued liabilities (674,318) 2,974,089
Income taxes (2,335,231) (233,134)
------------ ------------
Net cash provided by (used in) operating activities 15,586,784 (12,766,047)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (4,821,602) (4,090,967)
Other (41,464)
------------ ------------
Net cash used in investing activities (4,863,066) (4,090,967)
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit agreement 66,729,962 48,604,552
Payments under line of credit agreement (66,815,000) (60,556,950)
Proceeds from sale of common stock 701,187 27,241,553
Net change in book overdrafts 428,034 2,659,809
Payments on capital leases (937,471) (545,100)
Other 21,769 (95,730)
------------ ------------
Net cash provided by financing activities 128,481 17,308,134
------------ ------------
Effect of exchange rate on cash and cash equivalents (153,403) (94,939)
------------ ------------
Net increase in cash and cash equivalents 10,698,796 356,181
Cash and cash equivalents at beginning of period 976,464 1,214,581
------------ ------------
Cash and cash equivalents at end of period $ 11,675,260 $ 1,570,762
============ ============
</TABLE>
6
<PAGE> 7
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements and related notes thereto for the three
and nine months ended September 30, 1997 and 1996 are unaudited and reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim period. The results of operations for such interim periods are not
necessarily indicative of the results for the entire fiscal year ending December
31, 1997. These financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year- ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation. Such reclassifications had no effect on net
income.
2. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common and
dilutive common equivalents outstanding during the period. Dilutive common
equivalents consist of stock options and warrants. The accretion related to the
Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock")
prior to the conversion to common stock is deducted from income only in the
calculation of primary earnings per share for the nine months ended September
30, 1996. For the three and nine months ended September 30, 1996, fully diluted
earnings per share assumes the conversion of Series B Preferred Stock to common
stock. Common and common equivalent shares issued at prices below the public
offering price during the 12 months preceding the initial public offering date
have been included in the calculation as if they were outstanding for all
periods presented. The calculation uses the treasury stock method in determining
the resulting incremental weighted average equivalent shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (the "Statement").
The Statement simplifies the standards for computing earnings per share. The
Company will adopt the Statement for the year ending December 31, 1997. The
adoption of this new accounting standard will not have a material effect on the
reported earnings per share of the Company.
3. SECOND AND THIRD QUARTER ADJUSTMENTS
The Company analyzes its inventory and vendor co-op receivables monthly by age,
platform and product category. During the second quarter, as a result of recent
market weakness in sales, the Company recorded additional inventory allowances
of $2.5 million for obsolete, slow-moving and excess inventory, and allowances
for uncollectible vendor co-op receivables of $2.5 million.
The Company plans to grow its PC/Wintel sales base aggressively, thereby
lessening its dependence on the Mac platform. Many of the Company's
international subsidiaries are heavily dependent on the sale of Mac products.
During the second quarter of 1997 the Company reevaluated the carrying value of
goodwill and other assets in its subsidiaries in Australia, Germany, Mexico and
the Netherlands, and based upon its analysis of expected future operating
results and cash flows, recorded a $1.4 million charge to income representing
all of the goodwill on these
7
<PAGE> 8
subsidiaries, and $347,000 for the write-off of other assets relating to the
international Mac marketplace, totaling $0.14 per share.
During the third quarter ended September 30, 1997, the Company further evaluated
the prospects for growing the PC/Wintel business in its international operations
and decided to exit two markets and change management in a third market.
Subsidiary operations have ceased in Belgium and Australia, and new management
will be introduced in to Holland. As a result, during the third quarter, the
Company recorded charges totaling $2.1 million related to recording of
allowances for receivables, write-down of inventory, loss on disposal of assets,
legal expenses, and other operating expenses.
4. INCOME TAXES
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" specifies that deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. As of September 30, 1997 the Company has
deferred tax assets attributable to foreign subsidiaries. The realization of
these deferred tax assets is uncertain and accordingly, a valuation allowance in
the amount of $1.6 million was established in the second and third quarters.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. Comprehensive
income includes items such as foreign currency translation adjustments that are
currently being presented by the Company as a component of shareholders' equity.
The impact of adopting FAS 130 has not been determined. The Company will adopt
the statement for the year ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." FAS 131 is effective for the year ending December 31, 1998
and requires restatement of earlier periods presented. The impact of adopting
FAS 131 has not been determined.
8
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The matters described below contain forward-looking statements which involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Risk Factors and other information contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
General
Multiple Zones International, Inc. together with its majority owned subsidiaries
(collectively the "Company") is a leading international direct marketer of brand
name microprocessor-based hardware, software, accessories and peripheral
products for users of both the PC/Wintel ("PC") and Macintosh ("Mac") operating
systems. The Company markets over 18,000 products through its two flagship
catalogs, The Mac Zone (R) and The PC Zone (R). The Company began operations in
1988 by advertising in national trade publications. Catalog circulation
commenced with The Mac Zone in 1990, followed by The PC Zone in 1992.
International subsidiary operations and licensing activities commenced in 1992,
and outbound telemarketing operations, principally to business accounts, were
added in 1993. The Company distributed 36.3 million catalogs domestically in the
nine months ended September 30, 1997, with additional circulation by its
subsidiaries and licensees through operations in 26 other countries worldwide.
Results of Operations
The following tables present the Company's unaudited consolidated results of
operations, in dollars and as a percentage of net sales, and selected domestic
operating data for the periods indicated. This information has been prepared by
the Company on a basis consistent with the Company's unaudited Consolidated
Financial Statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results of such periods.
9
<PAGE> 10
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- -------- --------- --------
(In thousands, except operating data)
<S> <C> <C> <C> <C>
Net sales $ 346,523 $321,734 $ 115,725 $109,396
Cost of sales 305,959 276,819 102,694 93,875
--------- -------- --------- --------
Gross profit 40,564 44,915 13,031 15,521
SG&A expenses 46,492 31,558 15,279 10,436
--------- -------- --------- --------
Income (loss) from operations (5,928) 13,357 (2,248) 5,085
Other expense 1,032 1,142 326 157
--------- -------- --------- --------
Income(loss) before taxes (6,960) 12,215 (2,574) 4,928
Provision for (benefit from)
taxes (1,051) 4,398 (235) 1,726
--------- -------- --------- --------
Net income (loss) $ (5,909) $ 7,817 $ (2,339) $ 3,202
========= ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.3 86.0 88.7 85.8
----------- ----------- ----------- -----------
Gross profit 11.7 14.0 11.3 14.2
SG&A expenses 13.4 9.8 13.2 9.6
----------- ----------- ----------- -----------
Income (loss) from
operations -1.7 4.2 -1.9 4.6
Other expense 0.3 0.4 0.3 0.1
----------- ----------- ----------- -----------
Income (loss) before taxes -2.0 3.8 -2.2 4.5
Provision for (benefit
from) taxes -0.3 1.4 -0.2 1.6
----------- ----------- ----------- -----------
Net income (loss) -1.7% 2.4% -2.0% 2.9%
=========== =========== =========== ===========
Selected domestic operating
data:
Catalog circulation 36,300,000 30,050,000 10,700,000 11,450,000
Number of shipments 918,000 838,000 288,000 282,000
Average order size $ 351 $ 364 $ 369 $ 368
</TABLE>
10
<PAGE> 11
Comparison of the Three-month Periods ending September 30, 1997 and 1996.
Net Sales. Net sales increased 5.8% to $115.7 million in the three months ended
September 30, 1997 from $109.4 million in the comparable period. The increase
resulted primarily from an increase in domestic PC product sales, partially
offset by a decrease in domestic Mac product sales. Additionally, the Company's
platform mix has continued to shift toward PC/Wintel products. PC/Wintel
platform sales increased to 45.3% of net sales in the quarter ended September
30, 1997 from 31.3% in the comparable period.
Net domestic PC product sales increased to $44.4 million in the three months
ended September 30, 1997 from $29.9 million in the comparable period. The
increase is due to an increase in PC catalog circulation and growth in sales to
business, education, and government accounts. PC catalog circulation increased
to 4.5 million in the three months ended September 30, 1997 from 3.5 million in
the comparable period. Sales to business, education, and government accounts
increased 40.3% to $38.2 million in the three months ended September 30, 1997
from $27.2 million in the comparable period. PC product sales represent 56.9%
and 41.9% of the sales to business, education, and government accounts in each
of the respective periods.
Net domestic Mac product sales decreased to $53.8 million in the three months
ended September 30, 1997 from $65.6 million in the comparable period, a decrease
of 18.0%. The decrease in the domestic Mac product sales reflects the overall
comparative weakness in demand for Mac products between the two periods.
International subsidiary net sales in the three months ended September 30, 1997
were $17.5 million, an increase of 25.9% over the comparable period. The
increase in international subsidiary net sales resulted primarily from the
addition of subsidiaries in Sweden, Venezuela, and India, as well as sales
growth in the Company's operations in France, Mexico and Germany.
Gross Profit. Gross profit decreased to $13.0 million in the three months ended
September 30, 1997 from $15.5 million in the comparable period, and decreased to
11.3% of net sales from 14.2%. During the third quarter of 1997, the Company
recorded $356,000 of inventory write-downs. In addition to these adjustments,
gross margin declined due to increased price competition, lower average unit
selling prices, and an increase in PC product sales, which carry a lower average
gross margin.
Selling, General, and Administrative Expenses. SG&A expenses increased to $15.3
million in the three months ended September 30, 1997 from $10.4 million in the
comparable period, and increased between periods as a percentage of net sales to
13.2% from 9.6%. During the third quarter of 1997, the Company recorded a $1.6
million charge to income related to the closure of its Belgium and Australia
subsidiaries and change of management and business focus of its Holland
subsidiary. The charges related to the write-off of accounts receivable, legal
expenses, and other operating expenses. In addition to these adjustments, SG&A
expense increased due to costs of focusing on growing the PC/Wintel and outbound
sales business, higher salary costs, professional fees, and depreciation.
Other Expense. Other expense increased to $326,000 in the three months ended
September 30, 1997 from $157,000 in the comparable period. The increase is
primarily attributable to $127,000 of losses on disposal of assets related to
the closure of two foreign subsidiaries.
11
<PAGE> 12
Income Tax (Benefit) Expense. The income tax benefit for the three months ended
September 30, 1997 was $235,000. Income tax expense for the three months ended
September 30, 1996 was $1.7 million. As of September 30, 1997 the Company has
deferred tax assets attributable to foreign subsidiaries. As the realization of
these deferred tax assets is uncertain, a valuation allowance of $754,000 was
recorded in the third quarter and is included in the quarterly tax provision.
Net (Loss) Income. As a result of the above factors, a net loss of $2.3 million,
2.0% of net sales was incurred for the three months ended September 30, 1997.
Net income for the three months ended September 30, 1996 was $3.2 million, 2.9%
of net sales.
Comparison of the Nine-Month Periods ending September 30, 1997 and 1996.
Net Sales. Net sales increased 7.7% to $346.5 million in the nine months ended
September 30, 1997 from $321.7 million in the comparable period. The increase
resulted primarily from an increase in domestic PC product sales partially
offset by a decrease in domestic Mac product sales.
Net domestic PC product sales increased to $130.2 million in the nine months
ended September 30, 1997 from $79.6 million in the comparable period. The
increase is due to an increase in PC catalog circulation and growth in sales to
business, education, and government accounts. PC catalog circulation increased
to 14.0 million in the nine months ended September 30, 1997 from 9.5 million in
the comparable period. Sales to business, education, and government accounts
increased 53.4% to $103.6 million in the nine months ended September 30, 1997
from $67.6 million in the comparable period. PC product sales represent 53.4%
and 41.2% of the sales to business, education, and government accounts in each
of the respective periods.
Net domestic Mac product sales decreased to $165.8 million in the nine months
ended September 30, 1997 from $200.9 million in the comparable period, a
decrease of 17.5%. The decrease in the domestic Mac product sales reflects the
comparative overall weakness in demand for Mac products
International subsidiary net sales in the nine months ended September 30, 1997
were $50.4 million, an increase of 22.3% over the comparable period. The
increase in international subsidiary net sales resulted primarily from the
addition of subsidiaries in Sweden, Venezuela and India, as well as sales growth
in the Company's operations in France, Mexico and Germany.
Gross Profit. Gross profit decreased to $40.6 million in the nine months ended
September 30, 1997 from $44.9 million in the comparable period, and decreased to
11.7% of net sales from 14.0%. During the second quarter of 1997, the Company
recorded inventory allowances totaling $2.5 million, related to slow moving and
excess inventories. During the third quarter of 1997, the Company recorded
$356,000 of inventory write-downs related to its Belgium, Australia, and Holland
subsidiaries. In addition to these adjustments, gross margin declined due to
increased price competition, lower average unit selling prices, and an increase
in the PC product sales, which carry a lower average gross margin.
Selling, General and Administrative Expenses. SG&A expenses increased to $46.5
million in the nine months ended September 30, 1997 from $31.6 million in the
comparable period, and increased as a percentage of net sales between periods to
13.4% from 9.8%. During the second quarter of 1997, the Company recorded several
charges to income, including $2.5 million related to allowances for
uncollectible vendor co-op receivables, $1.4 million related to the write-off of
international goodwill, severance expense of $490,000, write-off of other assets
totaling
12
<PAGE> 13
$378,000, write-off of $234,000 related primarily to asset valuation adjustments
for the Company's subsidiary in the Netherlands and additional professional fees
of $243,000. During the third quarter of 1997, the Company recorded a $1.6
million charge to income related to the closure of its Belgium and Australia
subsidiaries and change of management and business focus of its Holland
subsidiary. The charges related to the write-off of accounts receivable, legal
expenses, and other operating expenses. In addition to these adjustments, SG&A
expense increased due to costs of focusing on growing the PC/Wintel and outbound
sales business, higher salary costs, professional fees, and depreciation.
Other Expense. Other expense decreased to $1.0 million in the nine months ended
September 30, 1997 from $1.1 million in the comparable period. The decrease is
primarily as a result of lower interest expense related to lower levels of
borrowing on the Company's primary line of credit, partially offset by the loss
on disposal of assets totaling $284,000 in the second and third quarters of
1997.
Income Tax (Benefit) Expense. The income tax benefit for the nine months ended
September 30, 1997 was $1.1 million. The income tax expense for the nine months
ended September 30, 1996 was $4.4 million. As of September 30, 1997 the Company
has deferred tax assets attributable to foreign subsidiaries. As the realization
of these deferred tax assets is uncertain, the Company established a valuation
allowance of $1.6 million. The valuation allowance has decreased the income tax
benefit.
Net (Loss) Income. As a result of the above factors, a net loss of $5.9 million
or 1.7% of net sales was incurred for the nine months ended September 30, 1997.
Net income for the nine months ended September 30,1996 was $7.8 million or 2.4%
of net sales.
Trends
In 1997, the Company increased its focus on PC product sales and sales to
business, education and government accounts. PC product sales have grown to
45.3% of domestic net sales for the third quarter from 45.1% and 31.3% in the
second quarter of 1997 and third quarter of 1996, respectively. Additionally,
domestic net PC product sales increased 8.9% to $44.4 million for the third
quarter of 1997 from $40.8 million for the second quarter of 1997.
Domestic net sales to business, education, and government accounts were $38.2
million in third quarter of 1997 compared to $32.5 million and $27.2 million in
the second quarter of 1997 and third quarter of 1996, respectively. During the
three month periods ended September 30, 1997, June 30, 1997 and September 30,
1996, PC/Wintel sales represented 56.9%, 52.7%, and 41.9% of the sales to
business, education, and government accounts. The number of outbound
telemarketing staff increased to 103 as of September 30,1997 compared to 100 at
June 30, 1997 and 83 at September 30, 1996.
PC product sales and sales to business accounts tend to carry a lower average
gross margin percentage and have contributed to a decrease in the gross margin
percentage. The Company's gross margin percentage has increased to 11.3% in the
third quarter of 1997, compared to 10.2% in the second quarter of 1997 and
decreased from 14.2% in the third quarter of 1996. Circulation of The PC Zone
decreased slightly to 4.5 million in the third quarter of 1997 compared to 4.8
million in the second quarter of 1997 and increased from 3.5 million in the
third quarter of 1996. The Company plans to circulate 6.5 million and 5.3
million The PC Zone catalogs in the fourth quarter of 1997 and first quarter of
1998, respectively.
Net domestic Mac product sales increased to $53.8 million in the third quarter
of 1997 from $49.7 million in the second quarter and decreased from $65.6
million in
13
<PAGE> 14
the third quarter of 1996. Circulation of The Mac Zone decreased to 6.0 million
in the third quarter of 1997 compared to 7.0 million in the second quarter of
1997 and third quarter of 1996. The Company plans to circulate 8.0 million and
6.0 million The Mac Zone catalogs in the fourth quarter of 1997 and first
quarter of 1998, respectively. A further decline in the demand for Mac products
could have a material adverse effect on the Company's future results of
operations.
Pricing in the microcomputer software and hardware industry is very competitive.
The Company expects pricing pressure to continue. In order to remain
competitive, the Company may be required to reduce its prices. Such a reduction
in prices could have a material adverse effect on the Company's future results
of operations.
Seasonal Factors
Seasonal factors cause sales of microcomputer software and hardware products
through the direct marketing channel to be somewhat stronger in the first and
fourth calendar quarter than in the second and third quarter. Sales during the
fourth quarter tend to be stronger as manufacturers make year-end introductions
of new products and increase marketing activities related to the holiday season,
and as corporate purchasing activities increase at the end of budgetary cycles.
Sales in the first quarter typically benefit from the fourth quarter sales as
customers add peripherals and additional memory.
The market for microcomputer products is characterized by rapid changes and
frequent introductions of new products and product enhancements. These changes
result in rapid price fluctuations. Typically, prices of microcomputer products
initially increase with improvements in features, such as processing speed and
storage capacity. Prices subsequently decrease as manufacturers pass on savings
from lower-cost components and reduce their inventory of older models.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations. However, there can be no assurance that inflation will
not have such an effect in future periods.
Liquidity and Capital Resources
As of September 30, 1997, the Company had total assets of $108.7 million, of
which $95.7 million were current assets. At September 30, 1997 and December 31,
1996 the Company had cash and cash equivalents of $11.7 million and $976,000,
respectively, and working capital of $34.6 million and $39.8 million,
respectively. Net cash provided by (used in) operating activities was $15.6
million and ($12.8) million for the nine months ended September 30, 1997 and
1996, respectively.
Cash inflows in the nine months ended September 30, 1997 were primarily due to a
reduction in accounts receivable and inventories. In the period ended September
30, 1997 accounts receivable decreased $9.5 million primarily as a result of
decreased receivables from vendors for returned product and decreased
receivables from business accounts. Additionally, inventories decreased $33.6
million resulting from efforts to improve inventory turns and reduce inventory
overstocking. Cash outflows in the nine months ended September 30, 1996 were
primarily due to higher accounts receivable resulting from growing sales to
business accounts, and to increased inventories necessary to support rapidly
growing sales. In the nine months ended September 30, 1996 accounts receivable
increased $9.8 million and inventories increased $8.4 million.
14
<PAGE> 15
Cash outlays for capital expenditures were $4.8 million and $4.1 million in the
nine months ended September 30, 1997 and 1996, respectively. These expenditures
were primarily for information and telecommunication system enhancements,
furniture and equipment and leasehold improvements.
During the nine months ended September 30, 1997 and 1996 the effect of the
foreign exchange rate on cash was an outflow of $153,000 and $95,000,
respectively.
The Company has a domestic revolving line of credit of $30.0 million from a
commercial bank collateralized by accounts receivable. At September 30, 1997,
there were no borrowings outstanding under the facility. Additionally, at
September 30, 1997, the Company had $2.9 million of unused letters of credit.
In May 1997, the Company obtained an additional $20.0 million line of credit
from a commercial lender collateralized by inventory.
The net amount of vendor credit outstanding at September 30, 1997 was $50.6
million of which $16.5 million was drawn from a $30 million inventory financing
facility between the Company and a commercial lender, which provides financing
for, and is collateralized by, inventory purchased from certain participating
vendors.
The Company believes that its existing available cash and cash equivalents,
operating cash flow and existing credit facilities will be sufficient to satisfy
its operating cash needs for at least the next 12 months. However, if working
capital or other capital requirements are greater than currently anticipated,
the Company could be required to seek additional funds through sales of equity,
debt or convertible securities or increased credit facilities. There can be no
assurance that additional financing will be available or that, if available, the
financing will be on terms favorable to the Company and its shareholders.
Statement under the Private Securities Litigation Reform Act of 1995
With the exception of the historical information contained herein, the matters
described herein contain forward-looking statements that involve risk and
uncertainties including but not limited to variability of quarterly results,
reliance on vendor support and relationships, and dependence on sales of Mac
products. These and other risk factors are described generally in the Risk
Factors section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
15
<PAGE> 16
Part II. Other Information
Item 5. Other information
As disclosed previously in the prospectus for the Company's initial public
offering, Mr. Sadrudin J. Kabani's spouse owns and operates a computer products
dealer, currently known as the LLB Company, Inc. ("LLB"). LLB's product line has
historically consisted predominantly of memory modules, with very limited
offerings of other computer products. With the recent softening of the memory
market, LLB has placed a greater emphasis on sales in other product categories,
including computers, printers, modems and other peripherals. Although these
other product categories still account for only a small percentage of LLB's
sales, there is a potential for future competition with the Company's business.
As a result, Ms. Kabani has instituted a process for divesting herself of
control and ownership of LLB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the Quarter ended September 30,
1997.
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:
MULTIPLE ZONES INTERNATIONAL, INC.
Dated: November 14, 1997 By: /s/
-------------------------------------------
John E. DeFeo, Chief Executive
Officer and President
Dated: November 14, 1997 By: /s/
-------------------------------------------
Peter J. Biere, Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,909,270) $ 7,817,154 $ (2,338,532) $ 3,201,977
Adjustment to net income for
accretion of Series B convertible
Preferred Stock (459,262)
------------ ----------- ------------ -----------
Net income (loss) applicable to
common stock equivalents $ (5,909,270) $ 7,357,892 $ (2,338,532) $ 3,201,977
============ =========== ============ ===========
Shares used in calculating primary
earnings (loss) per share:
Weighted average common shares
outstanding 12,942,203 10,507,148 12,996,657 12,771,442
Net effect of stock options
and warrants calculated using
the treasury stock method 636,854 622,457
------------ ----------- ------------ -----------
Total shares 12,942,203 11,144,002 12,996,657 13,393,899
============ =========== ============ ===========
Primary earnings (loss)
per share $ (0.46) $ 0.66 $ (0.18) $ 0.24
============ =========== ============ ===========
</TABLE>
18
<PAGE> 2
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,909,270) $ 7,817,154 $ (2,338,532) $ 3,201,977
Shares used in calculating fully
diluted earnings (loss) per share:
Weighted average common shares
outstanding 12,942,203 10,507,148 12,996,657 12,771,442
Net effect of stock options
and warrants calculated using
the treasury stock method 773,586 764,074
Weighted average Series B
Convertible Preferred Stock
issued during the 12 months
prior to the public offering
calculated using the treasury
stock method and treated as
outstanding of the entire period 426,237 6,988
------------ ----------- ------------ -----------
Total shares 12,942,203 11,706,971 12,996,657 13,542,504
============ =========== ============ ===========
Fully diluted earnings
(loss) per share $ (0.28) $ 0.67 $ (0.44) $ 0.24
============ =========== ============ ===========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,675,260
<SECURITIES> 0
<RECEIVABLES> 41,106,327
<ALLOWANCES> 4,805,986
<INVENTORY> 41,568,467
<CURRENT-ASSETS> 95,702,320
<PP&E> 18,735,085
<DEPRECIATION> 6,358,974
<TOTAL-ASSETS> 108,736,420
<CURRENT-LIABILITIES> 61,106,430
<BONDS> 0
0
0
<COMMON> 37,689,012
<OTHER-SE> 6,450,163
<TOTAL-LIABILITY-AND-EQUITY> 108,736,420
<SALES> 346,523,124
<TOTAL-REVENUES> 346,523,124
<CGS> 305,958,844
<TOTAL-COSTS> 305,958,844
<OTHER-EXPENSES> 47,524,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,960,261)
<INCOME-TAX> (1,050,991)
<INCOME-CONTINUING> (5,909,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,909,270)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
