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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 JUNE 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 August 11, 1999 was 13,314.365.
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MULTIPLE ZONES INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income
Three and six months ended June 30, 1999 and 1998 4
Statements of Shareholders' Equity
Six months ended June 30, 1999 5
Consolidated Statements of Cash Flows
Six months ended June 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</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>
JUNE 30, DECEMBER 31,
1999 1998
------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $18,940 $19,092
Receivables, net 35,719 43,687
Inventories, net 19,493 48,543
Prepaid expenses 1,697 3,632
Income taxes receivable 3,584 2,460
Deferred income taxes 3,353 3,353
------------ --------------
Total current assets 82,786 120,767
Property and equipment, net 10,787 10,384
Other assets 1,700 1,896
------------ --------------
Total assets $ 95,273 $133,047
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 1,483 $ 2,032
Accounts payable 46,079 79,659
Accrued liabilities and other 5,536 9,364
Current portion of capital lease obligations 1,145 911
Income taxes payable 887 1,200
------------ --------------
Total current liabilities 55,130 93,166
Capital lease obligations, net of current portion 1,245 338
Other 1,510 1,695
------------ --------------
Total liabilities 57,885 95,199
------------ --------------
Minority interest 120 498
------------ --------------
Commitments and contingencies
Shareholders' equity:
Common stock 38,847 38,434
Retained deficit (1,493) (982)
Foreign currency translation adjustment (86) (102)
------------ --------------
Total shareholders' equity 37,268 37,350
------------ --------------
Total liabilities and shareholders' equity $95,273 $133,047
------------ --------------
------------ --------------
</TABLE>
See notes to consolidated financial statements
3
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $121,548 $112,872 $256,640 $230,681
Cost of sales 109,060 102,740 229,676 206,631
-------- -------- -------- --------
Gross profit 12,488 10,132 26,964 24,050
Selling, general and administrative 13,263 18,364 27,274 34,272
-------- -------- -------- --------
Loss from operations (775) (8,232) (310) (10,222)
-------- -------- -------- --------
Interest expense 138 209 270 390
Other expense, net 670 3,397 464 3,103
Minority interest (15) (141) (43) (60)
-------- -------- -------- --------
Other expense 793 3,465 691 3,433
-------- -------- -------- --------
Loss before taxes (1,568) (11,697) (1,001) (13,655)
Benefit from income taxes (498) (3,930) (274) (4,654)
-------- -------- -------- --------
Net loss $ (1,070) $ (7,767) $ (727) $ (9,001)
-------- -------- -------- --------
-------- -------- -------- --------
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment (35) (160) (186) 19
Reclassification for losses included in
net loss 202 202 (243)
-------- -------- -------- --------
Other comprehensive income (expense) 167 (160) 16 (224)
-------- -------- -------- --------
Comprehensive loss $ (903) $ (7,927) $ (711) $ (9,225)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss attributable to basic and diluted
earnings per share $ (1,070) $ (7,767) $ (727) $ (9,001)
Basic and diluted loss per share $ (0.08) $ (0.59) $ (0.05) $ (0.69)
Shares used in computing basic and diluted
loss per share 13,269 13,074 13,236 13,065
</TABLE>
See notes to consolidated financial statements
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MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS 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 9,559 51 51
Exercise of stock options 94,721 362 362
Net loss (727) (727)
Tax effect of stock options
exercised 216 216
Translation adjustments 16 16
---------- ------- -------- ------------ -------
Balance, June 30, 1999 13,277,972 $38,847 $(1,493) $ (86) $37,268
---------- ------- -------- ------------ -------
---------- ------- -------- ------------ -------
</TABLE>
See notes to consolidated financial statements
5
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MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (727) $(9,001)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 1,860 1,715
Allowance for inventory and receivables (1,624) 1,773
Loss on disposal of subsidiaries 805
Loss on disposal of assets 3,685
Minority interest 428 (304)
Deferred income taxes 84
Tax effect of stock options exercised 216
Changes in assets and liabilities, net of dispositions:
Accounts receivable 4,885 9,677
Inventory 27,114 11,835
Prepaid expenses and other assets 950 569
Accounts payable (29,682) (2,741)
Accrued liabilities (3,096) (862)
Income taxes (1,364) (4,434)
-------- -------
Net cash provided by operating activities (235) 11,996
Cash flows from investing activities:
Purchases of property and equipment (2,875) (1,445)
Proceeds from sale of subsidiaries 540
-------- -------
Net cash used in investing activities (2,335) (1,445)
Cash flows from financing activities:
Borrowings under line of credit agreement 1,775 8,451
Payments under line of credit agreement (838) (8,077)
Net change in book overdrafts (62) 2,448
Net proceeds from sale of common stock 413 120
Proceeds from capital lease financing 2,101
Payments on capital leases (869) (214)
Other (163)
-------- -------
Net cash provided by financing activities 2,520 2,565
Effect of exchange rate on cash and cash equivalents (102) (262)
-------- -------
Net increase (decrease) in cash and cash equivalents (152) 12,854
Cash and cash equivalents at beginning of period 19,092 1,644
-------- -------
Cash and cash equivalents at end of period $ 18,940 $14,498
-------- -------
-------- -------
</TABLE>
See notes to consolidated financial statements
6
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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 brands: Zones.com and Zones Business Solutions. 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 of 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
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
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. 133
was amended by SFAS No. 137, deferring the effective date to fiscal
years beginning after June 15, 2000.
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
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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.
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 primarily concentrated in Europe. 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 ELIMINATIONS TOTAL
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Net sales $111,822 $9,726 $121,548
Depreciation and amortization 1,012 51 1,063
Loss from operations 513 262 775
Interest revenue (expense) 114 (53) 61
THREE MONTHS ENDED JUNE 30, 1998
Net sales $94,939 $18,053 $ (120) $112,872
Depreciation and amortization 945 71 1,016
Loss from operations 7,864 368 8,232
Interest revenue (expense) (7) (112) (119)
SIX MONTHS ENDED JUNE 30, 1999
Net sales $228,683 $27,966 $ (9) $256,640
Depreciation and amortization 1,728 132 1,860
Loss from operations 6 304 310
Interest revenue (expense) 249 (78) 171
Total assets 90,330 4,990 (47) 95,273
SIX MONTHS ENDED JUNE 30, 1998
Net sales $194,348 $36,559 $ (226) $230,681
Depreciation and amortization 1,562 153 1,715
Loss from operations 9,823 399 10,222
Interest revenue (expense) (90) (186) (276)
Total assets 82,738 13,686 (2,689) 93,735
</TABLE>
5. DIVESTITURES
During the three months ended June 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, 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.
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.
8
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GENERAL
Multiple Zones International, Inc. 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
brands: Zones.com and Zones Business Solutions. 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
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.7 91.0 89.5 89.6
--------- ---------- ---------- ----------
Gross profit 10.3 9.0 10.5 10.4
Selling, general and administrative expenses 10.9 16.3 10.6 14.9
--------- ---------- ---------- ----------
Loss from operations (0.6) (7.3) (0.1) (4.5)
Other expense 0.7 3.1 0.3 1.5
--------- ---------- ---------- ----------
Loss before income taxes (1.3) (10.4) (0.4) (6.0)
Provision for (benefit from) income taxes (0.4) (3.5) (0.1) (2.0)
--------- ---------- ---------- ----------
Net income (loss) (0.9)% (6.9)% (0.3)% (4.0)%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Selected domestic operating data:
Catalog circulation 7,400,000 12,200,000 15,275,000 23,650,000
Number of orders shipped 192,000 242,000 431,000 522,000
Average order size $609 $419 $557 $400
</TABLE>
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
NET SALES. Net sales for the three months ended June 30, 1999 increased 7.7%
to $121.5 million compared to $112.9 million in 1998. The increase resulted
primarily from increases in the Company's Zones Business Solutions ("ZBS")
division and the Zones.com division's online sales, offset by a decrease in
Zones.com catalog sales. ZBS sales increased 59.6% to $63.7 million for the
three months ended June 30, 1999 compared to $39.9 million in 1998. ZBS sales
growth was due primarily to the increased number of Account Executives
("AE's"). The
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Company has aggressively hired individuals into the ZBS division. ZBS had 186
AE's at June 30, 1999 compared to 91 at June 30, 1998. Sales by the Company's
Zones.com division, which is comprised of the Internet and inbound catalog
operations, declined 12.6% to $48.1 million in the three months ended June
30, 1999 from $55.0 million in 1998. Internet sales increased 160.7% to $20.5
million for the second quarter of 1999, while catalog sales declined 41.4% to
$27.6 million due principally to a decline in catalog circulation since the
prior period.
Net domestic PC product sales for the three months ended June 30, 1999
increased 21.6% to $56.5 million compared to $46.5 million in 1998. The
increase was due primarily to the increase in ZBS sales as a percentage of
total sales. ZBS represented 57.0% of domestic net sales for the three months
ended June 30, 1999 compared to 42.1% in 1998. In addition, PC product sales
increased to 62.3% of ZBS sales in the second quarter of 1999 compared to
54.6% in the second quarter of 1998. PC sales represented 50.5% of total
sales for the three months ended June 30, 1999 compared to 49.0% in 1998. Net
domestic Mac product sales increased 14.2% to $55.3 million for the three
months ended June 30, 1999 from $48.5 million in 1998. The increase in Mac
sales was due primarily to new product offerings by Apple Computer,
including, but not limited to the iMac.
International subsidiary net sales for the three months ended June 30, 1999
decreased 45.8% to $9.7 million compared to $17.9 million in the second
quarter of 1998. The decrease was due to the divestiture of two international
subsidiaries during the three months ended June 30, 1999 and the prior year
divestiture of the Company's Scandinavian subsidiaries.
GROSS PROFIT. Gross profit as a percentage of net sales decreased to 10.3% of
net sales in the three months ended June 30, 1999 compared to 11.5% in 1998,
excluding charges taken in the three months ended June 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 division. ZBS
sales have increased and represented 57.0% of domestic net sales in the three
months ended June 30, 1999 compared to 42.1% in 1998. Additionally, CPU's as
a percentage of total sales have increased and represented 42.3% for the
three months ended June 30, 1999 compared to 29.0% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 27.9%
to $13.2 million for the three months ended June 30, 1999 from $18.4 million
in 1998, representing 10.9% and 16.3% of net sales, respectively. The cost
reductions were principally related to decreased net cost of advertising and
reduced administrative staffing and overhead costs. The decreased net cost of
advertising was primarily related to the Company's decrease in catalog
circulation. Additionally, as a result of the Company's operational
realignment initiatives which began in the second quarter of 1998, the
Company's administrative staffing levels decreased over 14.0% as of June 30,
1999 compared to the end of the second quarter of 1998. Along with its
administrative headcount declines, sales staffing levels increased 17.4%. The
Company intends to intensify its promotion of its on-line store, Zones.com,
in order to increase traffic and internet revenue. In addition, the Company
intends to 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 $793,000 for the three months ended
June 30, 1999 from other income of $35,000, excluding $3.5 million of charges
taken in the second quarter of 1998. During the second quarter of 1999, the
Company divested two international subsidiaries resulting in a pretax loss on
disposition of $862,000. Excluding the effect of these transactions, the
Company recognized other income mainly related to increased interest income
earned from the Company's cash equivalent investments.
INCOME TAX BENEFIT. The income tax benefit for the three months ended June
30, 1999 was $498,000 as compared to $3.9 million in the prior year. The
Company's effective tax rate expressed as a percentage of income before taxes
decreased to 31.8% for the three months ended June 30, 1999 compared to 33.6%
in the prior year.
NET LOSS. Net loss for the three months ended June 30, 1999 was $1.1 million
compared to $7.8 million in 1998. Basic and diluted loss per share was $0.08
and $0.59 for the three months ended June 30, 1999 and 1998, respectively.
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COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
NET SALES. Net sales for the six months ended June 30, 1999 increased 11.3%
to $256.6 million compared to $230.7 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 51.5% to $121.5 million for the six months ended
June 30, 1999 compared to $80.2 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 6.1% to $107.2 million in the six months ended June 30,
1999 from $114.2 million in 1998. Internet sales increased 157.1% to $39.5
million for the six months ended June 30, 1999, while catalog sales declined
to $67.7 million due principally to a decline in catalog circulation since
the prior period.
Net domestic PC product sales for the six months ended June 30, 1999
increased 22.1% to $115.0 million compared to $94.2 million in 1998. The
increase was due primarily to the increase in ZBS sales as a percentage of
total sales. ZBS represented 53.1% of domestic net sales for the six months
ended June 30, 1999 compared to 41.3% in 1998. PC product sales increased to
61.3% of ZBS sales in the six months ended June 30, 1999 compared to 55.8% in
1998. PC sales represented 50.3% of total sales for the six months ended June
30, 1999 compared to 48.5% in 1998. Net domestic Mac product sales increased
13.5% to $113.7 million for the six months ended June 30, 1999 from $100.1
million in 1998. The increase in Mac sales was due primarily to new product
offerings by Apple Computer, including, but not limited to the iMac.
International subsidiary net sales for the six months ended June 30, 1999
decreased 23.1% to $28.0 million compared to $36.3 million in 1998. The
decrease was due to the prior year divestiture of the Company's Scandinavian
subsidiaries.
GROSS PROFIT. Gross profit as a percentage of net sales decreased to 10.5% of
net sales in the six months ended June 30, 1999 compared to 11.5% in 1998,
excluding charges taken in the six months ended June 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 division. ZBS
sales have increased and represented 53.1% of domestic net sales in the six
months ended June 30, 1999 compared to 41.3% in 1998. Additionally, CPU's as
a percentage of total sales have increased and represented 41.2% for the six
months ended June 30, 1999 compared to 29.3% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 20.5%
to $27.3 million for the six months ended June 30, 1999 from $34.3 million in
1998, representing 10.6% and 14.9% of net sales, respectively. The cost
reductions were principally related to decreased net cost of advertising and
reduced administrative staffing and overhead costs. The decreased net cost of
advertising was primarily related to the Company's decrease in catalog
circulation from last year. Additionally, as a result of the Company's
operational realignment initiatives which began in the second quarter of
1998, the Company's administrative staffing levels decreased over 14.0% as of
June 30, 1999 compared to the end of the second quarter 1998. Along with its
administrative headcount declines, sales staffing levels have increased
17.4%. The Company intends to intensify 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 $691,000 for the six months ended
June 30, 1999 from other income of $67,000, excluding $3.5 million of charges
taken in the second quarter of 1998. During the second quarter ended 1999,
the Company divested of 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 increased interest income
earned from the Company's cash equivalent investments.
INCOME TAX BENEFIT. The income tax benefit for the six months ended June 30,
1999 was $274,000 as compared to $4.7 million in the prior year. The
Company's effective tax rate expressed as a percentage of income before taxes
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decreased to 27.4% for the six months ended June 30, 1999 compared to 34.1%
in the prior year.
NET LOSS. Net loss for the six months ended June 30, 1999 was $727,000
compared to $9.0 million in 1998. Basic and diluted loss per share was $0.05
and $0.69 for the six months ended June 30, 1999 and 1998, respectively.
INDUSTRY
The market for computer products is characterized by rapid changes and
frequent introductions of new products and product enhancements. These
changes result in rapid price fluctuations and have led to continued average
price reductions, and lower margin dollars per transaction. A number of
Internet-based competitors are selling computer products below cost plus a
transaction fee. 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 computer software and hardware products 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 increase marketing activities
related to the holiday season. Corporate purchasing activities also 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, 1999, the Company had total assets of $95.3 million, of which
$82.8 million were current assets. At June 30, 1999 and December 31, 1998 the
Company had cash and cash equivalents of $18.9 million and $19.1 million,
respectively, and working capital of $27.7 million and $27.6 million,
respectively. Net cash used by operating activities was $235,000 for the six
months ended June 30, 1999 compared to $12.0 million provided by operating
activities for 1998.
Operating cash outflows for the six months ended June 30, 1999 were primarily
due to reductions in accounts payable and accrued liabilities partially
offset by decreases in accounts receivable and inventory. In the six-month
period ended June 30, 1999, accounts payable and accrued liabilities
decreased by $29.7 million and $3.1 million, respectively, and accounts
receivable and inventory decreased $4.9 million and $27.1 million,
respectively. Cash inflows in the six months ended June 30, 1998 were
primarily due to lower accounts receivable and inventory.
Cash outlays for capital expenditures were $2.9 million and $1.4 million in
the six months ended June 30, 1999 and 1998, respectively. These expenditures
were primarily for information system enhancements.
During the six months ended June 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 six months ended June 30, 1999 and 1998 the effect of the foreign
exchange rate on cash was an outflow of $102,000 and $262,000, 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, 1999, there were no borrowings outstanding under these facilities.
Additionally, at June 30, 1999, the Company had $1.8 million of unused
letters of credit.
12
<PAGE>
The net amount of vendor credit outstanding at June 30, 1999 was $46.1
million of which $6.5 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 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. A number of critical 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. These identified systems are in
the process of being upgraded and will be completed in the third and early
fourth quarter of 1999.
The Company continues to test its systems for Y2K compliance, and planning
for upgrading or replacing non-compliant systems is in progress. 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 has a
project underway to upgrade its Internet software package. The project will
be completed early in the fourth quarter of 1999. Contingency planning is
scheduled to begin during the third quarter. Compliance costs for repairing
known systems and software issues are estimated to be between $500,000 and
$750,000. 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>
PART II.
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of shareholders on April 29, 1999.
(b) Four matters were voted upon and approved by the shareholders. The
presentation below describes the matters voted upon and the results of
the shareholders vote.
1. Election of Directors
<TABLE>
<CAPTION>
NOMINEE VOTES FOR WITHHELD
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
John H. Bauer 7,501.472 783,908
John T. Carleton 7,501,722 783,658
Firoz H. Lalji 7,492,622 792,758
Kathleen S. Pushor 7,501,672 783,708
Richard E. Carter 7,501,672 783,708
</TABLE>
2. Approval of 1999 Director Stock Option Plan
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
------------------------ ------------------------ ------------------------ -------------------
<S> <C> <C>
8,225,956 57,839 1,585 0
</TABLE>
3. Approval of Amended and Restated 1993 Stock Incentive Plan
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
------------------------ ------------------------ ------------------------ ------------------
<S> <C> <C>
7,188,945 1,093,350 3,085 0
</TABLE>
4. Ratification of Appointment of Auditors
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
------------------------ ------------------------ ------------------------
<S> <C> <C>
8,271,017 3,878 10,486
</TABLE>
14
<PAGE>
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 June 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: August 13, 1999
By: /s/ FIROZ H. LALJI
-----------------------------------------
Firoz H. Lalji, Chairman and Chief
Executive Officer
/s/ JAMES H. BROMLEY
-----------------------------------------
James H. Bromley, Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MULTIPLE ZONES INTERNATIONAL, INC. SECOND 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,940
<SECURITIES> 0
<RECEIVABLES> 39,391
<ALLOWANCES> 3,672
<INVENTORY> 19,493
<CURRENT-ASSETS> 82,786
<PP&E> 20,256
<DEPRECIATION> 9,469
<TOTAL-ASSETS> 95,273
<CURRENT-LIABILITIES> 55,130
<BONDS> 0
0
0
<COMMON> 38,847
<OTHER-SE> (1,579)
<TOTAL-LIABILITY-AND-EQUITY> 95,273
<SALES> 256,640
<TOTAL-REVENUES> 256,640
<CGS> 229,676
<TOTAL-COSTS> 229,676
<OTHER-EXPENSES> 27,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> (1,001)
<INCOME-TAX> (274)
<INCOME-CONTINUING> (727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
