<PAGE>
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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 JUNE 30, 1998 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 July
31, 1998 was 13,084,723.
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1
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MULTIPLE ZONES INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 . . . . . . . . . . . . 3
Consolidated Statements of Operations and
Comprehensive Income Three and six months
ended June 30, 1998 and 1997. . . . . . . . . . . . . . . . 4
Statements of Shareholders' Equity
Six months ended June 30, 1998. . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 8
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
MULTIPLE ZONES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,498 $ 1,645
Receivables, net 32,426 42,944
Inventories, net 27,228 40,169
Prepaid expenses 3,394 4,012
Income tax receivable 5,267 1,127
Deferred income taxes 1,728 1,889
------------- -------------
Total current assets 84,541 91,786
Property and equipment, net 8,495 12,417
Other assets 699 607
------------- -------------
Total assets $ 93,735 $ 104,810
------------- -------------
------------- -------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 2,385 $ 2,084
Accounts payable 43,663 44,067
Accrued liabilities and other 7,769 9,059
Current portion of capital lease obligations 892 961
Income taxes payable 208 540
------------- -------------
Total current liabilities 54,917 56,711
Capital lease obligations, net of current portion 785 892
Other 1,844 1,608
------------- -------------
Total liabilities 57,546 59,211
------------- -------------
Minority interest 323 628
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock 37,871 37,751
Retained earnings (deficit) (1,745) 7,256
Foreign currency translation adjustment (260) (36)
------------- -------------
Total shareholders' equity 35,866 44,971
------------- -------------
Total liabilities & shareholders' equity $ 93,735 $ 104,810
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements
3
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MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $230,681 $230,798 $112,872 $108,043
Cost of sales 206,631 203,264 102,740 97,057
------------ ------------ ------------ ------------
Gross profit 24,050 27,534 10,132 10,986
Selling, general and administrative
expenses 34,272 31,214 18,364 18,285
------------ ------------ ------------ ------------
Loss from operations (10,222) (3,680) (8,232) (7,299)
------------ ------------ ------------ ------------
Other expense:
Interest expense, net 390 590 209 210
Other expense 3,103 215 3,397 214
Minority interest (60) (99) (141) (107)
------------ ------------ ------------ ------------
3,433 706 3,465 317
------------ ------------ ----------- ------------
Loss before income taxes (13,655) (4,386) (11,697) (7,616)
Benefit from income taxes (4,654) (815) (3,930) (1,980)
------------ ------------ ------------ ------------
Net loss $(9,001) $(3,571) $(7,767) $(5,636)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Other comprehensive income
(expense), net of tax
Foreign currency translation
adjustments 19 (112) (160) (26)
Reclassification adjustment for
gains included in net income (243)
Basic and diluted loss per share $ (0.69) $ (0.28) $ (0.59) $ (0.44)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computation of basic
and diluted loss per share 13,065 12,928 13,074 12,930
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Currency
Common Stock Retained Translation
Shares Amount Earnings Adjustment Total
------ ------ -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 13,041,464 $37,751 $ 7,256 $ (36) $44,971
Issuance of common stock 33,391 120 120
Net loss (9,001) (9,001)
Translation adjustment (224) (224)
---------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 13,074,855 $37,871 $ (1,745) $ (260) $35,866
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,001) $ (3,571)
Adjustments to reconcile net income to
net cash provided by operating activities:
Allowance for inventory and receivables 1,773 4,925
Depreciation and amortization 1,715 1,396
Deferred income taxes 84 1,329
Loss on disposal of asset 3,685 157
Minority interest (304) (100)
Changes in assets and liabilities:
Accounts receivable 9,677 11,534
Inventory 11,835 39,950
Prepaid expenses and other assets 569 5,438
Accounts payable (2,741) (50,384)
Accrued liabilities (862) 309
Income taxes (4,434) (2,391)
--------- --------
Net cash provided by operating activities 11,996 8,592
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,445) (2,936)
--------- --------
Net cash used in investing activities (1,445) (2,936)
--------- --------
Cash flows from financing activities:
Borrowings under line of credit agreement 8,451 66,051
Payments under line of credit agreement (8,077) (65,625)
Net change in book overdrafts 2,448 (6,024)
Proceeds from sale of common stock 120 (554)
Payments on capital leases (214) 393
Other (163) 282
--------- --------
Net cash provided by (used) in financing activities 2,565 (5,477)
--------- --------
Effect of exchange rate on cash and cash equivalents (262) (127)
--------- --------
Net increase in cash and cash equivalents 12,854 52
Cash and cash equivalents at beginning of period 1,644 976
--------- --------
Cash and cash equivalents at end of period $ 14,498 $ 1,028
--------- --------
--------- --------
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
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 six months ended June 30, 1998 and 1997 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, 1998. 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, 1997.
2. EARNINGS PER SHARE
Earnings per share is computed using the provision of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (the "Statement"). The
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS"). Basic EPS excludes all dilution. It is based
upon the weighted average number of shares outstanding during the period.
Diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
3. RECENT ACCOUNTING PRONOUNCEMENTS
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes a new
model for accounting for derivatives and hedging activities. The implementation
of FAS 133 is required for financial statements issued for periods beginning
after June 15, 1999; earlier application is permitted. Management is currently
evaluating the requirements of FAS 133; however it is not expected to have a
material impact on the presentation of the Company's financial statements.
4. STOCK OPTIONS
On June 1, 1998, the Board of Directors adopted a resolution for all employees
below the level of Vice-President, re-pricing all options granted and
unexercised prior to June 1, 1998 to that day's fair market value, or $3.13 per
share. While the vesting periods were not affected, employees must wait one
year to exercise vested shares at the new price.
7
<PAGE>
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, 1997.
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 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. In 1997 the Company expanded onto the Internet
through the opening of its online superstore, zones.com. The Company
distributed 23.65 million catalogs domestically in the six months ended June
30, 1998, with additional circulation by its subsidiaries and licensees
through operations in 15 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 of normal recurring accruals and special charges
necessary for a fair presentation of the results of such periods.
8
<PAGE>
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ----------
(In thousands, except operating data)
<S> <C> <C> <C> <C>
Net sales $ 230,681 $ 230,798 $ 112,872 $ 108,043
Cost of sales 206,631 203,264 102,740 97,057
--------- --------- --------- ---------
Gross profit 24,050 27,534 10,132 10,986
SG&A expenses 34,272 31,214 18,364 18,285
--------- --------- --------- ---------
Loss from operations (10,222) (3,680) (8,232) (7,299)
Other expense 3,433 706 3,465 317
--------- --------- --------- ---------
Loss before taxes (13,655) (4,386) (11,697) (7,616)
Benefit from taxes (4,654) (815) (3,930) (1,980)
--------- --------- --------- ---------
Net loss $ (9,001) $ (3,571) $ (7,767) $ (5,636)
--------- --------- --------- ---------
--------- --------- --------- ---------
Six months ended Three months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.6 88.1 91.0 89.8
--------- --------- --------- ---------
Gross profit 10.4 11.9 9.0 10.2
SG&A expenses 14.9 13.5 16.3 16.9
--------- --------- --------- ---------
Loss from operations (4.5) (1.6) (7.3) (6.7)
Other expense 1.5 0.3 3.1 0.3
--------- --------- --------- ---------
Loss before taxes (6.0) (1.9) (10.4) (7.0)
Benefit from taxes (2.0) (0.4) (3.5) (1.8)
--------- --------- --------- ---------
Net loss (4.0%) (1.5%) (6.9%) (5.2%)
--------- --------- --------- ---------
--------- --------- --------- ---------
Selected domestic operating data:
Catalog circulation 23,650,000 25,600,000 12,200,000 12,450,000
Number of shipments 594,000 631,000 278,000 271,000
Average order size $ 352 $ 342 $ 366 $ 361
</TABLE>
9
<PAGE>
Comparison of the Three-month Periods ending June 30, 1998 and 1997.
Net Sales. Net sales were $112.9 million for the three months ended June 30,
1998, representing a 4.5% increase over the prior year quarter. The increase
resulted primarily from increased PC product sales, partially offset by a
decrease in Mac product sales. PC platform sales increased to 49% of net
sales from 48% of net sales over the prior quarter and from 41.9% in the
comparable period.
Net domestic PC product sales increased 13.9% to $46.5 million in the three
months ended June 30, 1998 from $40.8 million in the comparable period. The
increase is due primarily to increased sales to business and education
accounts, as well as an increase in PC catalog circulation, which grew to 6.0
million in the three months ended June 30, 1998 from 4.8 million in the
comparable period. Sales to business and education accounts increased 22.7%
to $39.9 million in the three months ended June 30, 1998 from $32.5 million
in the comparable period. PC product sales represent 54.6% and 52.7% of sales
to business and education accounts in each of the respective periods.
Net domestic Mac product sales were relatively stable, decreasing 2.5% to
$48.5 million in the three months ended June 30, 1998 from $49.7 million in
the comparable period. In addition, Mac catalog circulation decreased to 6.0
million in the three months ended June 30, 1998 from 7.0 million in the
comparable period. While sales per catalog increased, unit sales and average
selling price declined slightly. Unit sales declines were due in part to the
discontinuance of Mac clones in early 1998.
International subsidiary net sales in the three months ended June 30, 1998 were
$17.9 million, an increase of 2.2% over the comparable period. Excluding results
of subsidiaries no longer operating, net sales increased 2.7% over the
comparable period. The increase in international subsidiary net sales resulted
primarily from sales growth in the Company's operations in Germany, France, and
the United Kingdom.
Gross Profit. Gross profit decreased to $10.1 million in the three months ended
June 30, 1998 from $11.0 million in the comparable period. Included in each
period are charges totaling $2.9 million and $2.5 million, respectively,
primarily related to allowances for obsolete and non-returnable inventory.
Prior to the charges, gross profit as a percentage of sales was 11.5% and
12.5%, respectively. Gross profit dollars declined in general due primarily to
lower sales volume. Gross profit as a percentage of net sales declined due to
continued industry price competition and lower average unit selling prices
during the period.
Selling, General, and Administrative Expenses. SG&A increased to $18.4 million
in the three months ended June 30, 1998, from $18.3 million in the comparable
period, and decreased as a percentage of sales to 16.3% from 16.9%,
respectively. Included in the current quarter are charges totaling $2.3
million, primarily related to staffing reductions and the closure or sale of
certain international operations. Included in the prior year quarter are
charges totaling $5.3 million, primarily related to uncollectable co-op
receivables, write-off of international goodwill and severance expenses. Prior
to the charges, SG&A expenses increased to 14.2% in the three months ended June
30, 1998, from 12.0% in the comparable quarter. The increase in SG&A expense is
primarily related to higher net advertising costs, salaries, depreciation and
professional fees.
Other Expense. Other expense was $3.5 million in the three months ended June
30, 1998 compared to $.3 million in the prior quarter. During the second
quarter the Company recorded charges to income of $3.5 million related to the
disposal of certain unproductive computer hardware and software costs in the
current year quarter.
10
<PAGE>
Income Tax Benefit. The income tax benefit for the three months ended June 30,
1998 was $3.9 million. The income tax benefit for the three months ended June
30, 1997 was $2 million. The increase in income tax benefit is due to the
increased loss recognized by the company in the three months ended June 30, 1998
compared to loss in the prior year comparable period.
Net Loss. As a result of the above factors, a net loss of $7.8 million, or 6.9%
of net sales was incurred for the three months ended June 30, 1998. Net loss
for the three months ended June 30, 1997 was $5.6 million, 5.2% of net sales.
Comparison of the Six-month Periods ending June 30, 1998 and 1997.
Net Sales. Net sales were $230.7 million in the six months ended June 30,
1998 in line with $230.8 million in the comparable period. The decrease in
domestic Mac product sales was offset by an increase in domestic PC product
sales. PC platform sales increased from 43.4% of net sales to 48.5% over the
prior year period.
Net domestic PC product sales increased to $94.2 million in the six months
ended June 30, 1998 from $85.8 million in the comparable period. The
increase is due to an increase in catalog circulation to 11.3 million in the
six months ended June 30, 1998, from 9.5 million in the comparable period.
Sales to business and education accounts increased 4.2% to $80.2 million in
the six months ended June 30, 1998 from $65.4 million in the comparable
period. PC product sales represented 55.8% and 51.7% of sales to business
and education accounts in each of the respective periods.
Net domestic Mac product sales decreased 10.7% to $100.1 million in the six
months ended June 30, 1998 from $112.1 million in the comparable period. In
addition, Mac catalog circulation decreased to 12.0 million in the six months
ended June 30, 1998 from 15.0 million in the comparable period. While sales
per catalog increased, unit sales and average selling price declined. Unit
sales declines were due in part to the discontinuance of Mac clones in early
1998.
International subsidiary net sales in the six months ended June 30, 1998 were
$36.3 million, an increase of 10.4% over the comparable period. Excluding
the results of subsidiaries no longer operating, net sales increased 11% over
the comparable period. The increase in international subsidiary net sales
resulted primarily from sales growth in the Company's operations in Germany,
France, and the United Kingdom.
Gross Profit. Gross profit decreased to $24.1 million in the six months
ended June 30, 1998 from $27.5 million in the comparable period, and
decreased between periods to 10.4% from 11.9% of net sales. Included in each
period are charges totaling $2.9 million and $2.5 million, respectively,
primarily related to allowances for obsolete and non-returnable inventory.
Prior to the charges, gross profit as a percentage of sales were 11.5% and
12.5%, respectively.
Selling, General and Administrative Expenses. SG&A expenses increased to
$34.3 million in the six months ended June 30, 1998 from $31.2 million in the
comparable period, and increased between periods as a percentage of net sales
to 14.9% from 13.5%. Included in the current period are charges totaling
$2.3 million, primarily related to staffing reductions and the closure or
sale of certain international operations. Included in the prior year period
are charges totaling $5.3 million, primarily related to uncollectable co-op
receivables, write off of international goodwill and severance expense.
Prior to the charges, SG&A increased to 14.2% in the 6 months ended June 30,
1998 from 12.0% in the comparable period. The increase in SG&A expense is
primarily related to higher net advertising costs, salaries, depreciation and
professional fees.
11
<PAGE>
Other Expense. Other expense increased to $3.4 million in the six months
ended June 30, 1998 from $.7 million in the comparable period, primarily as a
result of recognition of loss on the disposal of certain unproductive
computer hardware and software costs in the current period.
Income Tax Benefit. The income tax benefit for the six months ended June 30,
1998 was $4.7 million. The income tax benefit for the six months ended June
30, 1997 was $.8 million. The increase in income tax benefit is due to the
increased loss recognized by the company in the six months ended June 30,
1998 compared to loss in the prior year comparable period.
Net Loss. As a result of the above factors, a net loss of $9.0 million or
4.0% of net sales was incurred for the six months ended June 30, 1998. Net
loss for the six months-ended June 30,1997 was $3.6 million or 1.5% of net
sales.
Trends
PC product sales represented 49.0% of domestic net sales for the second
quarter of 1998 as compared to 45.1% in the three months ended June 30, 1998
and 48.0% in the three months ended March 31, 1998. Additionally, domestic
net PC product sales increased 13.9% to $46.5 million for the second quarter
of 1998 from $40.8 million in the second quarter of 1997 and decreased 3%
from $47.7 million in the first quarter 1998. Circulation of The PC Zone was
6.0 million in the second quarter of 1998 compared to 4.75 million in the
second quarter of 1997 and 5.25 million distributed in the first quarter of
1998.
Domestic net sales to business and education accounts were $39.9 million in
the second quarter of 1998 compared to $32.5 million and $40.3 million in the
second quarter of 1997 and first quarter of 1998, respectively. During the
three months ended June 30, 1998, June 30, 1997 and March 31, 1998, PC sales
represented 54.6%, 52.7%, and 57.0% of the sales to business and education
accounts.
PC product sales and sales to business accounts tend to carry a lower average
gross margin percentage and have contributed to a decrease in overall gross
margin percentage. The Company's gross margin as a percentage of net sales
has decreased to 9% in the second quarter of 1998, compared to 10.2% in the
second quarter of 1997 and 11.8% in the first quarter of 1998. Prior to
special charges, gross profit as a percentage of sales was 11.5%.
Net domestic Mac product sales decreased 2.5% to $48.5 million in the second
quarter of 1998 from $50 million in the second quarter of 1997. Circulation
of The Mac Zone decreased to 6.0 million in the second quarter of 1998
compared to 7.0 million in the second quarter of 1997. Decline in the demand
for Mac products has stabilized in the first two quarters of 1998.
The Company opened its Internet site in the first quarter of 1997. Web-based
sales increased to $7.8 million in the three-month period ended June 30, 1998
compared to $1.4 million in the quarter ended June 30, 1997 and $7.5 million
in the quarter ended March 31, 1998.
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
12
<PAGE>
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. 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 fourth
calendar quarter than in the other periods. Sales during the fourth quarter
tend to be stronger as manufacturers make year-end introductions of new
products and increased marketing activities related to the holiday season,
and as corporate purchasing activities increase at the end of budgetary
cycles.
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 June 30, 1998, the Company had total assets of $93.7 million, of which
$84.5 million were current assets. At June 30, 1998 and December 31, 1997
the Company had cash and cash equivalents of $14.5 million and $1.6 million,
respectively, and working capital of $29.6 million and $35.1 million,
respectively. Net cash provided by operating activities was $12.0 million
and $8.6 million for the six months ended June 30, 1998 and 1997,
respectively.
Cash inflows in the six months ended June 30, 1998 were primarily due to a
reduction in accounts receivable and inventories. In the period ended June
30, 1998 accounts receivable decreased $9.7 million and inventories decreased
$11.8 million. Cash inflows in the six months ended June 30, 1997 were
primarily due to a reduction in accounts receivable and inventories. In the
six months ended June 30, 1997, accounts receivable decreased $11.5 million
and inventories decreased $39.9 million.
Cash outlays for capital expenditures were $1.4 million and $2.9 million in
the six months ended June 30, 1998 and 1997, respectively. During the
quarter ended June 30, 1998 the Company wrote off $3.5 million of
unproductive computer hardware and software costs. The Company has committed
to investing a like amount to upgrade its computer systems capacity and to
migrate to the newest version of its enterprise software system over the next
three quarters.
During the six months ended June 30, 1998 and 1997 the effect of the foreign
exchange rate on cash was an outflow of $.3 million and $.1 million,
respectively.
The Company has two domestic revolving lines of credit from commercial banks.
The Company has a $15.0 million and a $20.0 million line of credit
collateralized by accounts receivable and inventories, respectively. At June
30, 1998, the Company received a waiver related to noncompliance with one of
the restrictive covenants under its $15.0 million line of credit
collateralized by accounts receivable. At June 30, 1998, there were no
borrowings outstanding under either of the facilities. Additionally, at June
30, 1998, the Company had $2.5 million of unused letters of credit.
13
<PAGE>
The net amount of vendor credit outstanding at June 30, 1998 was $43.7
million of which $17.2 million was drawn from a $35.0 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.
Other Matters
The Company is currently conducting its assessment of the potential impact of
the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems and those of its customers and
vendors. The year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year.
Any programs of the Company, its customers or its vendors that have
time-sensitive software may recognize a date using "00" as the year 1900
rather that the year 2000, which could result in miscalculations or system
failures.
The Company's assessment has not yet been completed. Accordingly, the extent
of potential impact, if any, of the year 2000 on these computerized
information systems, whether or not processing errors caused thereby may be
remedied, the cost of such remedies, and the time necessary to implement them
are uncertain. If the Company, its customers or vendors are unable to resolve
such processing issues in a timely manner, it could result in a material
financial risk. The Company believes it is devoting the resources necessary
to assess and resolve all significant year 2000 issues in a timely manner.
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 Macintosh products. These and other risk factors are described
generally in the Risk Factors section of the Company's 10-K dated December
31, 1997 filed with the Securities and Exchange Commission.
14
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On May 20, 1998, the Company filed a report on form 8-K containing the
press release that announced the appointment of Firoz Lalji as the
Company's President and Chief Executive Officer. No other Reports on Form
8-K were filed during the Quarter ended June 30, 1998.
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: August 14, 1998 By: /s/ Firoz H. Lalji
---------------------------------------
Firoz H. Lalji, Chief Executive Officer
Dated: August 14, 1998 By: /s/ Peter J. Biere
---------------------------------------
Peter J. Biere, Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibits
27.1 Financial Data Schedule
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,498
<SECURITIES> 0
<RECEIVABLES> 36,753
<ALLOWANCES> (8,181)
<INVENTORY> 31,082
<CURRENT-ASSETS> 84,541
<PP&E> 17,170
<DEPRECIATION> (8,675)
<TOTAL-ASSETS> 93,735
<CURRENT-LIABILITIES> 54,917
<BONDS> 0
0
0
<COMMON> 37,871
<OTHER-SE> (2,005)
<TOTAL-LIABILITY-AND-EQUITY> 93,735
<SALES> 230,681
<TOTAL-REVENUES> 230,681
<CGS> 206,631
<TOTAL-COSTS> 206,631
<OTHER-EXPENSES> 37,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,654)
<INCOME-TAX> (4,654)
<INCOME-CONTINUING> 0
<DISCONTINUED> (9,001)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,001)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
