<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
-------- --------
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
------ -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PROCEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------ -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of the
registrant's Common Stock outstanding as of November 9, 1999 was 13,334,637.
1
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MULTIPLE ZONES INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income
Three and nine months ended September 30, 1999 and 1998 4
Statement of Shareholders' Equity
Nine months ended September 30, 1999 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
2
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PART I.
ITEM 1 FINANCIAL STATEMENTS
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,277 $19,092
Receivables, net 33,219 43,687
Inventories, net 18,463 48,543
Prepaid expenses 1,722 3,632
Income taxes receivable 3,311 2,460
Deferred income taxes 3,353 3,353
------------- ---------------
Total current assets 73,345 120,767
Property and equipment, net 10,867 10,384
Other assets 1,604 1,896
------------- ---------------
Total assets $ 85,816 $133,047
------------- ---------------
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 1,405 $ 2,032
Accounts payable 40,325 79,659
Accrued liabilities and other 6,233 10,564
Current portion of capital lease obligations 969 911
------------- ---------------
Total current liabilities 48,932 93,166
Capital lease obligations, net of current portion 1,100 338
Other 1,418 1,695
------------- ---------------
Total liabilities 51,450 95,199
------------- ---------------
Minority interest 90 498
------------- ---------------
Commitments and contingencies
Shareholders' equity:
Common stock 39,058 38,434
Retained Earnings deficit (4,712) (982)
Foreign currency translation adjustment (70) (102)
------------- ---------------
Total shareholders' equity 34,276 37,350
------------- ---------------
Total liabilities and shareholders' equity $85,816 $133,047
------------- ---------------
------------- ---------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 106,350 $ 124,329 $ 362,990 $ 355,010
Cost of sales 96,156 110,199 325,832 316,830
------------ ------------ ------------- --------------
Gross profit 10,194 14,130 37,158 38,180
Selling, general and administrative expense 13,508 13,877 40,782 48,149
------------ ------------ ------------- --------------
Income (Loss) from operations (3,314) 253 (3,624) (9,969)
------------ ------------ ------------- --------------
Interest expense 139 174 410 564
Other (income) expense, net (205) (165) 259 2,938
Minority interest (30) 18 (73) (42)
------------ ------------ ------------- --------------
Other (income) expense (96) 27 596 3,460
------------ ------------ ------------- --------------
Income (loss) before taxes (3,218) 226 (4,220) (13,429)
Provision for (benefit from) income taxes 77 (274) (4,577)
------------ ------------ ------------- --------------
Net Income (loss) $ (3,218) $ 149 $ (3,946) $ (8,852)
------------ ------------ ------------- --------------
------------ ------------ ------------- --------------
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment 217 2 31 18
Reclassification for losses included in
net loss 202 (243)
------------ ------------ ------------- --------------
Other comprehensive income (expense) 217 2 233 (225)
------------ ------------ ------------- --------------
Comprehensive income (loss) $ (3,001) $ 151 $ (3,713) $ (9,077)
------------ ------------ ------------- --------------
------------ ------------ ------------- --------------
Basic income (loss) per share $ (0.24) $ .01 $ (0.30) $ (0.68)
Shares used in computing basic income
(loss) per share 13,377 13,082 13,266 13,071
Diluted income (loss) per share $ (0.24) $ .01 $ (0.30) $ (0.68)
Shares used in computing diluted income
(loss) per share 13,377 13,161 13,266 13,071
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Foreign
Retained Currency
Common Stock Earnings Translation
Shares Amount (Deficit) Adjustment Total
---------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 13,173,692 $ 38,434 $ (982) $ (102) $ 37,350
Issuance of common stock 13,891 78 78
Exercise of stock options 142,415 546 546
Net loss (3,946) (3,946)
Tax effect of stock options
exercised 216 216
Translation adjustments 32 32
---------- ----------- ------------ -------------- -------------
Balance, September 30, 1999 13,329,998 $ 39,058 $ (4,712) $ (70) $ 34,276
---------- ----------- ------------ -------------- -------------
---------- ----------- ------------ -------------- -------------
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,946) $ (8,852)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 3,013 2,551
Loss on disposal of subsidiaries 805
Loss on disposal of assets 3,645
Minority interest 107 (325)
Deferred income taxes 87
Tax effect of stock options exercised 216
Changes in assets and liabilities, net of dispositions:
Accounts receivable 6,741 7,059
Inventory 27,386 7,507
Prepaid expenses and other assets 276 1,732
Accounts payable (35,811) 3,340
Accrued liabilities (3,113) 483
Income taxes (468) (4,778)
---------- -----------
Net cash provided by (used in) operating activities (4,794) 12,449
Cash flows from investing activities:
Purchases of property and equipment (4,078) (2,016)
Proceeds from sale of subsidiaries 540
---------- -----------
Net cash used in investing activities (3,538) (2,016)
Cash flows from financing activities:
Borrowings under line of credit agreement 5,650 14,136
Payments under line of credit agreement (4,788) (13,191)
Net change in book overdrafts 207 1,325
Net proceeds from sale of common stock 624 147
Proceeds from capital lease obligation 2,101
Payments on capital leases (1,189) (542)
Other (155)
---------- -----------
Net cash provided by financing activities 2,605 1,720
Effect of exchange rate on cash and cash equivalents (88) (186)
---------- -----------
Net increase (decrease) in cash and cash equivalents (5,815) 11,967
Cash and cash equivalents at beginning of period 19,092 1,645
---------- -----------
Cash and cash equivalents at end of period $ 13,277 $ 13,612
---------- -----------
---------- -----------
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Multiple Zones International, Inc. ("the Company") is a premier solutions
based direct reseller of brand name computer products and services. The
Company serves its customers with products from leading manufacturers through
its flagship divisions: Zones.com-TM- and Zones Business Solutions-TM-.
Zones.com is a full service electronic retailer of PC and Mac computers and
related peripherals and software products to consumer and small office/home
office ("SOHO") customers. Zones.com marketing vehicles include the Zones.com
online superstore, e-catalogs, paper catalogs (The PC Zone-Registered
Trademark- and The Mac Zone-Registered Trademark-), and print media. Zones
Business Solutions (ZBS) markets primarily to small and medium sized business
and educational institutions through dedicated teams of account managers. ZBS
reaches its target audience through a combination of outbound telemarketing,
customized web-stores, targeted e-catalogs, paper catalogs, and print media.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and notes have been
prepared in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by generally accepted
accounting principles. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position and
operating results for the interim periods. The results of operations for such
interim periods may not be indicative of results for the full year. 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, 1998.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
EARNING PER SHARE
Basic earnings per share ("EPS") exclude all dilution. EPS is based upon the
weighted average number of shares outstanding during the period. Diluted EPS
includes the impact of stock options assumed to be exercised using the treasury
stock method.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 137,
deferring the effective date to fiscal years beginning after June 15, 2000
amended SFAS No. 133.
Management believes that the adoption of this new standard will not have a
material impact on the Company's financial position or results of operations.
3. SHAREHOLDERS' EQUITY
STOCK OPTIONS
On April 29, 1999, at the Company's Annual Meeting of Shareholders, the
shareholders approved the adoption of the 1999 Director Stock Option Plan (the
"Directors Plan"). The Directors Plan provides for automatic granting of options
to non-employee directors who serve on the Company's board. The maximum number
of shares of common stock that can be issued under the Directors Plan is
150,000. Additionally, the shareholders approved an amendment to the 1993 Stock
Incentive Plan increasing the number of shares of common stock reserved for
awards from 1,650,000 to 2,650,000.
7
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4. SEGMENT INFORMATION
The Company has determined its reportable segments based on geographic areas of
operation. The Company's reportable segments are the United States and
International. The Company's international operations consist of majority owned
subsidiaries. Intersegment revenues are eliminated as the operations of the
segments are consolidated.
A summary of the Company's operations by segment follows (in thousands):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATION TOTAL
---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999
- ---------------------------------
Net sales $ 101,803 $ 4,547 $ 106,350
Depreciation (1,139) (20) (1,160)
Loss from operations (3,137) (177) (3,314)
Interest (revenue) expense 109 (43) 66
QUARTER ENDED SEPTEMBER 30, 1998
- --------------------------------
Net sales $ 105,854 $ 18,535 $ (61) $ 124,328
Depreciation (650) (81) (731)
Income (loss) from operations 484 (231) 253
Interest (revenue) expense 120 (128) (8)
NINE MONTHS ENDING SEPTEMBER 30, 1999
- -------------------------------------
Net sales $ 330,486 $ 32,513 $ (9) $ 362,990
Depreciation (2,862) (151) (3,013)
Loss from operations (3,144) (480) (3,624)
Interest (revenue) expense (503) (165) (668)
Total assets 81,367 4,349 101 85,817
NINE MONTHS ENDING SEPTEMBER 30, 1998
- -------------------------------------
Net sales $ 300,202 $ 55,094 $ (287) $ 355,009
Depreciation (2,487) (235) (2,722)
Loss from operations (9,340) (630) (9,970)
Interest (revenue) expense 3,470 31 3,501
Total assets 83,324 14,299 (2,601) 95,022
</TABLE>
5. DIVESTITURES
During the nine months ended September 30, 1999 the Company completed the
divestiture of its Germany and Mexico subsidiaries. The Company recorded a
pretax and after tax loss on the disposition of these subsidiaries of $862,000
and $588,000, respectively. In addition, the Company has entered into a
definitive agreement to divest its ownership in its United Kingdom subsidiary.
The Company's remaining investment in the United Kingdom, included in other
assets, will be divested over a period of two years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters described below contain forward-looking statements which involve
known and unknown risks, uncertainties, and other factors that may cause actual
results, performance, achievements of the Company or industry trends, to differ
materially from those expressed or implied by such forward-looking statements.
8
<PAGE>
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, 1998.
GENERAL
Multiple Zones International, Inc. is a premier solution based direct
reseller of brand name computer products and services. The Company serves its
customers with products from leading manufacturers through its flagship
divisions: Zones.com-TM- and Zones Business Solutions-TM-. Zones.com is a full
service electronic retailer of PC and Mac computers and related peripherals
and software products to consumer and small office/home office customers.
Zones.com marketing vehicles include the Zones.com online superstore,
e-catalogs, paper catalogs (The PC Zone-Registered Trademark- and The Mac
Zone-Registered Trademark-), and print media. Zones Business Solutions (ZBS)
markets primarily to small and medium business and educational institutions
through dedicated teams of account managers. ZBS reaches its target audience
through a combination of outbound telemarketing, customized web-stores,
targeted e-catalogs, paper catalogs, and print media.
The Company's revenues consist primarily of sales of computer hardware,
software, peripherals and accessories. Net sales reflect the effects of product
returns. Gross profit consists of net sales less product and freight costs.
Selling, general and administrative ("SG&A") expenses include advertising
expense net of co-op advertising recovery, warehousing, selling commissions,
order processing, telephone, credit card fees, and other costs such as
administrative salaries, depreciation, rent, and general overhead expenses.
Other expense represents interest expense, net non-operating expense and
minority interests in the Company's foreign subsidiaries.
RESULTS OF OPERATIONS
The following table presents the Company's unaudited consolidated results of
operations, 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.4 88.6 89.8 89.2
-------- -------- -------- ---------
Gross profit 9.6 11.4 10.2 10.8
Selling, general and administrative expenses 12.7 11.2 11.2 13.6
-------- -------- -------- ---------
Income (loss) from operations (3.1) 0.2 (1.0) (2.8)
Other (income) expense (0.1) 0.2 0.9
-------- -------- -------- ---------
Income (loss) before income taxes (3.0) 0.2 (1.2) (3.7)
Provision for (benefit from) income taxes 0.1 (0.1) (1.3)
-------- -------- -------- ---------
Net income (loss) (3.0)% 0.1% (1.1)% (2.4)%
-------- -------- -------- ---------
-------- -------- -------- ---------
Selected domestic operating data:
Number of orders shipped 181,000 248,000 612,000 770,000
Average order size $ 587 $ 453 $ 565 $ 417
</TABLE>
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NET SALES. Net sales for the three months ended September 30, 1999 decreased
14.5% to $106.4 million compared to $124.3 million in 1998. The Company
generated increases in Zones Business Solutions ("ZBS") and Zones.com's
online sales, which did not fully offset the decrease in Zones.com catalog
sales division. ZBS sales increased 33.2% to $61.1 million for the three
months ended September 30, 1999 compared to $45.9 million in the comparable
quarter of 1998. ZBS sales growth was due primarily to the increased number
of Account Executives ("AE's"). ZBS had 211 AE's at September 30, 1999
compared to 116 at September 30, 1998. Sales by the Company's
9
<PAGE>
Zones.com division, which is comprised of the Internet and inbound catalog
operations, declined 32.0% to $40.6 million in the three months ended
September 30, 1999 from $59.7 million in 1998. Internet sales increased 40.6%
to $19.1 million in the third quarter of 1999 compared to the third quarter
of 1998, while catalog sales declined 53.4% to $21.5 million due principally
to a decline in catalog circulation compared to the prior period and the
constrained availability of Apple products.
Net domestic PC product sales for the three months ended September 30, 1999
increased 9.0% to $56.3 million compared to $51.6 million in 1998. The increase
was due primarily to the increase in ZBS AE's, increasing sales to $61.1 million
for the period ending September 30, 1999, a 33.2% increase over the third
quarter of 1998. PC sales represented 55.3% of total sales for the three months
ended September 30, 1999 compared to 48.8% in 1998. Net domestic Mac product
sales decreased 16.0% to $45.5 million for the three months ended September 30,
1999 from $54.2 million in 1998. The decrease was primary due to the supply
constraints on Apple product.
International subsidiary net sales for the three months ended September 30, 1999
decreased 75.4% to $4.5 million compared to $18.5 million in the third quarter
of 1998. The decrease was due to the divestiture of certain international
subsidiaries and the prior year divestiture of the Company's Scandinavian
subsidiaries.
GROSS PROFIT. Gross profit decreased to 9.6% of net sales in the three months
ended September 30, 1999 compared to 11.4% in the comparable quarter of 1998.
The decrease in gross profit was primarily due to the increase in ZBS sales as a
percentage of total sales, the increase in CPU's as a percentage of total sales
and increased pricing pressure, particularly on Mac and PC CPU's. ZBS sales to
business and education accounts tend to carry a lower average gross margin as
compared to the sales through the Company's Zones.com brand. ZBS sales have
increased and represented 60.1% of domestic net sales in the three months ended
September 30, 1999 compared to 43.4% in the three months ended September 30,
1998. Additionally, CPU sales increased as a percentage of total sales and
represented 39.6% for the three months ended September 30, 1999 compared to
33.9% in the third quarter of 1998. The Company also began aggressively pricing
certain high velocity products in order to drive traffic to the on-line store,
Zones.com. This strategy is expected to continue into the fourth quarter, which
could have a negative impact on gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses remained consistent
at $13.5 million for the three months ended September 30, 1999 from $13.8
million in 1998, representing 12.7% and 11.2% of net sales, respectively. The
Company intends to continue its aggressive efforts to grow its outbound sales
force at ZBS, which increased 81.9% from third quarter 1998. In addition, the
Company incurred additional personnel costs, depreciation, and equipment
expenses directly related to system infrastructure and enhancement initiatives
that support future growth objectives and Y2K compliance. Subsidiary SG&A
decreased 67.8% from $2.5 million for the third quarter of 1998 to $805,000 for
the third quarter of 1999 due to the closure of certain subsidiaries. Net
advertising expenses remained consistent at $1.1 million as the Company focused
its efforts on moving their customers to an e-commerce model, which has lowered
circulation and page count on its catalogs. The Company has intensified its
promotion of its on-line store, Zones.com, in order to increase traffic and
Internet revenue. It is expected that the focus on increasing on-line and
outbound sales will increase Zones.com advertising expenditures and ZBS
operating expenses.
OTHER EXPENSE. Other income increased to $96,000 for the three months ended
September 30, 1999 from other expense of $27,000 in the third quarter of 1998.
The Company recognized other income mainly related to increased interest income
earned from the Company's cash equivalent investments.
INCOME TAX BENEFIT. An income tax benefit for the three months ended September
30, 1999 was not recorded compared to a $77,000 expense in the prior year. Due
to the Company's loss, it was determined that a benefit could not be recognized
in the third quarter of 1999. Given recent losses, the Company has determined
that the deferred tax assets do not meet the realization criteria of Statement
of Financial Accounting Standards ("SFAS") No. 109.
NET LOSS. Net loss for the three months ended September 30, 1999 was $3.2
million compared to $149,000 profit in 1998. Basic and diluted loss per share
was $0.24 for the three months ended September 30, 1999 and earnings of $0.01 in
1998.
10
<PAGE>
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NET SALES. Net sales for the nine months ended September 30, 1999 increased 2.2%
to $363.0 million compared to $355.0 million in 1998. The increase resulted
primarily from increases in sales by the Company's ZBS division and the
Zones.com division online sales, offset by a decrease in Zones.com catalog
sales. ZBS sales increased 44.8% to $182.6 million for the nine months ended
September 30, 1999 compared to $126.1 million in 1998. ZBS sales growth is due
primarily to the increased number of AE's. Sales by the Company's Zones.com
division declined 14.7% to $147.5 million in the nine months ended September 30,
1999 from $172.9 million in 1998. Internet sales increased 102.4% to $58.6
million for the nine months ended September 30, 1999, while catalog sales
declined to $88.9 million due principally to a decline in catalog circulation
since the prior period and the constrained availability of Apple products to
resellers.
Net domestic PC product sales for the nine months ended September 30, 1999
increased 17.5% to $171.3 million compared to $145.8 million in 1998. The
increase was due primarily to the increase in the number of ZBS AE's that
increased ZBS sales to 55.3% of domestic net sales for the nine months ended
September 30, 1999 compared to 42.0% in 1998. PC sales represented 51.8% of
total sales for the nine months ended September 30, 1999 compared to 48.6% in
1998. Net domestic Mac product sales were consistent at $159.2 million for the
nine months ended September 30, 1999 from $154.4 million in 1998. Mac sales were
positively impacted by new product offerings by Apple Computer, such as the
iMac, however, supply constraints on these products in the three months ending
September 30, 1999 negatively impacted overall Mac sales.
International subsidiary net sales for the nine months ended September 30, 1999
decreased 40.7% to $32.5 million compared to $54.8 million in the nine months
ending September 30, 1998. The decrease was due to the prior year divestiture of
the Company's Scandinavian subsidiaries and the subsequent divestiture of
certain other subsidiaries in the second quarter of 1999.
GROSS PROFIT. Gross profit as a percentage of net sales decreased to 10.2% of
net sales in the nine months ended September 30, 1999 compared to 11.6% in 1998,
excluding charges taken in the nine months ended September 30, 1998. The
decrease in gross profit was primarily due to the increase in ZBS sales as a
percentage of total sales, the increase in CPU's as a percentage of total sales,
and increased pricing pressure, particularly on Mac and PC CPU's. ZBS sales to
business and education accounts tend to carry a lower average gross margin as
compared to the sales through the Company's Zones.com brand. ZBS sales have
increased and represented 55.3% of domestic net sales in the nine months ended
September 30, 1999 compared to 42.0% in 1998. Additionally, CPU's as a
percentage of total sales have increased and represented 40.7% for the nine
months ended September 30, 1999 compared to 30.9% in 1998. The Company's
aggressive pricing strategy on high velocity products also impacted margins.
This strategy is expected to continue into the fourth quarter, which could
result in a negative impact on gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 11.1% to
$40.8 million for the nine months ended September 30, 1999 from $45.8 million in
1998 (excluding charges taken related to staffing reductions and the closure of
certain international operations during 1998), representing 11.2% and 12.9% of
net sales, respectively. The cost reductions were principally related to
decreased net cost of advertising and reduced administrative staffing and
overhead costs. Additionally, as a result of the Company's operational
realignment initiatives that began in the second quarter of 1998, the Company's
administrative staffing levels decreased over 11.0% as of September 30, 1999
compared to the end of the third quarter 1998. Along with its administrative
headcount declines, inbound sales staffing levels have declined 33.6% while
outbound headcount increased 81.9%. The nine months ending September 30, 1999
also includes hardware and software upgrades, as well as Y2K compliance upgrades
that have increased equipment, personnel, and depreciation costs. The Company
continued its customer migration from a catalog centric model to an
e-commerce-based model by intensifying its promotion of its on-line store,
Zones.com, in order to increase traffic and Internet revenue. In addition, the
Company will continue to aggressively grow its outbound sales force at ZBS. The
Company expects that the intensified focus on increasing on-line and outbound
sales will increase Zones.com advertising expenditures and ZBS operating
expenses.
OTHER EXPENSE. Other expense increased to $596,000 for the nine months ended
September 30, 1999 from other income of $40,000, excluding $3.5 million of
charges taken in the second quarter of 1998. During the second quarter ended
1999, the Company divested two international subsidiaries resulting in a loss on
disposition of $862,000. Excluding the effect of these transactions the Company
recognized other income mainly related to
11
<PAGE>
increased interest income earned from the Company's cash equivalent investments.
INCOME TAX BENEFIT. The income tax benefit for the nine months ended September
30, 1999 was $274,000 as compared to $4.6 million in the prior year. Due to the
Company's ongoing net operating losses, a provision for income taxes was not
recorded in the third quarter of 1999. Given recent losses, the Company has
determined that the deferred tax assets do not meet the realization criteria of
Statement of Financial Accounting Standards ("SFAS") No. 109.
NET LOSS. Net loss for the nine months ended September 30, 1999 was $3.9 million
compared to $8.9 million in 1998. Basic and diluted loss per share was $0.30 and
$0.68 for the nine months ended September 30, 1999 and 1998, respectively.
INDUSTRY
Rapid changes and frequent introductions of new products and product
enhancements characterize the market for computer products. These changes
result in rapid price fluctuations and have led to continued average price
reductions and lower margin dollars per transaction. The trend of
manufacturers going direct to market is also impacting sales, availability of
high velocity products, and pricing. 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. Additionally, sales during the fourth calendar quarter tend to be
stronger as manufacturers make year-end introductions of new products and
increase marketing activities related to the holiday season.
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, 1999, the Company had total assets of $85.8 million, of
which $73.3 million were current assets. At September 30, 1999 and December 31,
1998 the Company had cash and cash equivalents of $13.3 million and $19.1
million, respectively, and working capital of $24.4 million and $27.6 million,
respectively. Net cash used by operating activities was $4.8 million for the
nine months ended September 30, 1999 compared to $12.4 million provided by
operating activities for 1998.
Operating cash outflows for the nine months ended September 30, 1999 were
primarily due to reductions in accounts payable and accrued liabilities
partially offset by decreases in accounts receivable and inventory. In the
nine-month period ended September 30, 1999, accounts payable and accrued
liabilities decreased by $35.8 million and $3.1 million, respectively, and
accounts receivable and inventory decreased $6.7 million and $27.4 million,
respectively. The reductions in inventory levels related to continued steps
taken to improve turn rate, which increased to 20 times annually as of September
30, 1999 from 15 times as of September 30, 1998, while the change in accounts
payable is due to the timing of payments with vendors. Cash inflows in the nine
months ended September 30, 1998 were primarily due to lower accounts receivable
and inventory.
Cash outlays for capital expenditures were $4.1 million and $2.0 million in the
nine months ended September 30, 1999 and 1998, respectively. These expenditures
were primarily for information system enhancements.
During the nine months ended September 30, 1999 the Company obtained lease
financing for information system enhancements purchased during the quarter ended
December 31, 1998. This transaction provided $2.1 million from financing
activities.
During the nine months ended September 30, 1999 and 1998 the effect of the
foreign exchange rate on cash was an outflow of $88,000 and $186,000,
respectively.
12
<PAGE>
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
September 30, 1999, there were no borrowings outstanding under these facilities.
Additionally, at September 30, 1999, the Company had $1.8 million of standby
letters of credit.
The net amount of vendor credit outstanding at September 30, 1999 was $40.3
million of which $5.0 million was drawn from a $35.0 million inventory flooring
facility between the Company and a commercial lender, which provides financing
for, and is collateralized by, inventory purchased from certain participating
vendors. The facility contains various restrictive covenants relating to
profitability, tangible net worth, leverage, dispositions and use of collateral,
other asset dispositions, and merger and consolidation of the Company.
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 Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Possible
effects of this issue could include disruption of operations including inability
to ship orders, process invoices and order product.
The Company established a Y2K assessment team in late 1997 to review all of its
information technology ("IT") systems and non-IT systems for Y2K compliance.
Certain service providers have not indicated that they are currently compliant,
including local and long distance phone providers, and several small software
solution providers. After reviewing all major hardware and software systems, the
Company believes that most of its systems, including its enterprise software
system, are Y2K compliant. The Company has identified several systems that are
not compliant, including a third party Internet software system, its phone
system operating software and various computer workstations and servers. The
identified systems that were not upgraded during the third quarter will be
completed early fourth quarter of 1999.
The Company continues to test its systems for Y2K compliance, and is finishing
necessary upgrades or replacement of non-compliant systems. Early in the third
quarter of 1999, the Company completed an upgrade of its enterprise software
package. Although the system was Y2K compliant, several software attachments
were replaced and brought into compliance. The Company's project to upgrade its
Internet software package entered the final stage of compliance at the close of
the third quarter. The project was completed early in November 1999. Contingency
plans began during the third quarter. Total compliance costs for repairing known
systems and software issues are estimated to be between $500,000 and $750,000.
Total expenses associated with compliance testing are estimated to be between
$150,000 and $250,000. The Company expects to be Y2K compliant during the fourth
quarter of 1999.
The Company cannot provide any assurance that it will be able to achieve timely
Y2K compliance, or that its critical service providers and suppliers will not
have service disruptions associated with the Y2K problem. Failure of the Company
or any of its critical service providers to achieve Y2K compliance could result
in serious disruptions of the Company's operations, such as preventing the
Company from receiving or processing customer orders. Such disruptions would
likely have a material adverse effect on the Company's results of operations,
liquidity or financial condition.
The activities associated with Y2K compliance have not had a material impact on
other critical IT or non-IT initiatives, and efforts to bring the Company's
non-compliant systems into compliance are not expected to delay any project or
impact financial results in any material way.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7a, Quantitative and Qualitative Disclosures
about Market Risk, in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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, 1999.
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.
Date: November 12, 1999
By: /S/ FIROZ H. LALJI
-----------------------------
Firoz H. Lalji, Chairman and Chief
Executive Officer
/S/ JAMES H. BROMLEY
-----------------------------
James H. Bromley, Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MULTIPLE
ZONES INTERNATIONAL, INC. THIRD QUARTER 1999 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,277
<SECURITIES> 0
<RECEIVABLES> 36,151
<ALLOWANCES> 2,932
<INVENTORY> 18,463
<CURRENT-ASSETS> 73,345
<PP&E> 21,469
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<TOTAL-ASSETS> 85,816
<CURRENT-LIABILITIES> 48,932
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<COMMON> 39,058
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