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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 MARCH 31, 1999 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 May
10, 1999 was 13,263,952.
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MULTIPLE ZONES INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income
Three months ended March 31, 1999 and 1998 4
Statements of Shareholders' Equity
Three months ended March 31, 1999 5
Consolidated Statements of Cash Flows
Three months ended March 31, 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 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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>
MARCH 31, DECEMBER 31,
1999 1998
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,962 $19,092
Receivables, net 39,171 43,687
Inventories, net 30,404 48,543
Prepaid expenses 1,947 3,632
Income taxes receivable 2,529 2,460
Deferred income taxes 3,353 3,353
---------- ---------
Total current assets 92,366 120,767
Property and equipment, net 11,350 10,384
Other assets 1,644 1,896
---------- ---------
Total assets $105,360 $133,047
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 2,287 $ 2,032
Accounts payable 52,463 79,659
Accrued liabilities and other 6,687 9,364
Current portion of capital lease obligations 1,400 911
Income taxes payable 1,089 1,200
---------- ---------
Total current liabilities 63,926 93,166
Capital lease obligations, net of current portion 1,589 338
Other 1,603 1,695
---------- ---------
Total liabilities 67,118 95,199
---------- ---------
Minority interest 470 498
---------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock 38,665 38,434
Retained deficit (639) (982)
Foreign currency translation adjustment (254) (102)
---------- ---------
Total shareholders' equity 37,772 37,350
---------- ---------
Total liabilities and shareholders' equity $105,360 $133,047
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements
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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
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $135,092 $117,809
Cost of sales 120,616 103,891
-------- --------
Gross profit 14,476 13,918
Selling, general and administrative 14,011 15,908
-------- --------
Income (loss) from operations 465 (1,990)
-------- --------
Interest expense 132 182
Other income, net (206) (295)
Minority interest (28) 81
-------- --------
Other income (102) (32)
-------- --------
Income (loss) before taxes 567 (1,958)
Provision for (benefit from) income taxes 224 (724)
-------- --------
Net income (loss) $ 343 $ (1,234)
-------- --------
-------- --------
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment (152) (140)
Reclassification for gains included in net income - (243)
-------- --------
Other comprehensive income (expense) (152) (383)
-------- --------
Comprehensive income (loss) $ 191 $ (1,617))
-------- --------
-------- --------
Net income (loss) attributable to basic and diluted earnings
per share $ 343 $ (1,234)
Basic earnings (loss) per share $ 0.03 $ (0.09)
Shares used in computing basic earnings (loss) per share 13,204 13,057
Diluted earnings (loss) per share $ 0.03 $ (0.09)
Shares used in computing diluted earnings (loss) per share 13,619 13,057
</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 7,311 18 18
Exercise of stock options 51,174 213 213
Net income 343 343
Translation adjustments (152) (152)
---------- ------- --------- ------------ -------
Balance, March 31, 1999 13,232,177 $38,665 $(639) $(254) $37,772
---------- ------- --------- ------------ -------
---------- ------- --------- ------------ -------
</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>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 343 $(1,234)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 791 840
Allowance for inventory and receivables (845) (590)
Deferred income taxes - 31
Loss on disposal of assets - 12
Minority interest (28) (155)
Changes in assets and liabilities:
Accounts receivable 4,437 5,113
Inventory 19,198 3,330
Prepaid expenses and other assets 1,468 944
Accounts payable (27,477) 675
Accrued liabilities (2,744) (1,022)
Income taxes (283) (1,663)
---------- -------
Net cash provided by (used in) operating activities (5,140) 6,281
Cash flows from investing activities:
Purchases of property and equipment (1,708) (1,052)
---------- -------
Net cash used in investing activities (1,708) (1,052)
Cash flows from financing activities:
Borrowings under line of credit agreement 898 8,015
Payments under line of credit agreement (645) (8,073)
Net change in book overdrafts 589 405
Net proceeds from sale of common stock 231 90
Capital lease obligation 2,101 -
Payments on capital leases (358) (72)
Other - (162)
---------- -------
Net cash provided by financing activities 2,816 203
Effect of exchange rate on cash and cash equivalents (98) (275)
---------- -------
Net increase (decrease) in cash and cash equivalents (4,130) 5,157
Cash and cash equivalents at beginning of period 19,092 1,645
---------- -------
Cash and cash equivalents at end of period $ 14,962 $ 6,802
---------- -------
---------- -------
</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. and its majority owned subsidiaries
(collectively the "Company") are international direct marketers of
microchip-based hardware, software, peripherals and accessories for users of
both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. The Company
has licensed its trade name to independent licensees that operate in a number of
countries worldwide.
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 are not necessarily 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") 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard 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
becomes effective for the Company beginning January 1, 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 that can be issued under the 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.
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
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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>
QUARTER ENDED MARCH 31, 1999
Net sales $116,861 $18,240 $ (9) $135,092
Depreciation and amortization (710) (81) (791)
Income (loss) from operations 506 (41) 465
Interest revenue (expense) 135 (24) 111
Total assets 94,435 14,151 (3,226) 105,360
QUARTER ENDED MARCH 31, 1998
Net sales $99,409 $18,506 $ (106) $117,809
Depreciation and amortization (784) (56) (840)
Loss from operations (1,958) (32) (1,990)
Interest revenue (expense) (82) (74) 41 (115)
Total assets 89,316 16,379 (3,705) 101,990
</TABLE>
5. SUBSEQUENT EVENT
On April 29, 1999, the Company's Board of Directors announced its intention
to divest the remaining five international subsidiaries to allow the Company
to focus solely on its domestic growth opportunities. The Company believes
that the divestiture of its international subsidiaries, in total, will not
result in a net loss. In February of 1999, the minority shareholders of the
Company's German subsidiary exercised their option to sell their minority
shares to the Company, and on April 19, 1999 the Company agreed to a $3.3
million valuation of the minority shares. As of May 14, 1999, the Company
sold two of its subsidiaries, including its German subsidiary and the
assumption of the obligation to purchase the minority shares. The disposal of
the two subsidiaries resulted in a combined after tax loss of approximately
$420,000 or $0.03 per share. The timing of the other three transactions,
which are in various stages of completion with prospective purchasers, is
uncertain, but it is expected that they will close by September 30, 1999.
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 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, 1998.
GENERAL
Multiple Zones International, Inc. (the Company) is a leading international
direct marketer of over 100,000 computer products to businesses and
consumers. 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
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 and print media.
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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 and credit card fees and other costs such as
administrative salaries, depreciation, rent and general overhead expenses. Other
income represents interest expense net of non-operating income and minority
interests in the Company's foreign subsidiaries.
RESULTS OF OPERATIONS
The following tables present 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
MARCH 31,
1999 1998
---------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 89.3 88.2
---------------------------------
Gross profit 10.7 11.8
Selling, general and administrative expenses 10.4 13.5
---------------------------------
Income (loss) from operations 0.3 (1.7)
Other income (0.1) (0.1)
---------------------------------
Income (loss) before income taxes 0.4 (1.6)
Provision for (benefit from) income taxes 0.1 (0.6)
---------------------------------
Net income (loss) 0.3% (1.0)%
---------------------------------
---------------------------------
Selected domestic operating data:
Catalog circulation 7,875,000 11,450,000
Number of shipments 285,000 316,000
Average order size $432 $340
</TABLE>
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
NET SALES. Net sales increased 14.7% to $135.1 million for the quarter ended
March 31, 1999 from $117.8 million in 1998. The increase resulted primarily from
an increase in the Company's Zones Business Solutions ("ZBS") division, which
grew 43.4% to $57.7 million for the quarter ended March 31, 1999. ZBS sales
growth is due to an increase in account managers to 177 at March 31, 1999
compared to 84 a year ago. The Company's Zones.com division, which is comprised
of the Internet and inbound catalog operations remained consistent, $59.1
million for the quarter ended March 31, 1999 compared to $59.2 million in 1998.
Internet sales increased 153.3% to $19.0 million for the quarter ended March 31,
1999, while catalog sales declined 22.4% to $40.1 million due principally to a
31.2% decline in catalog circulation during the period.
Net domestic PC product sales increased 22.6% to $58.5 million for the quarter
ended March 31, 1999 from $47.7 million in 1998. The increase was due primarily
to an increase in the number of ZBS outbound account managers. PC sales
represented 50.1% of total sales for the quarter ended March 31, 1999 compared
to 48.0% in 1998. Net domestic Mac product sales increased 12.9% to $58.4
million for the quarter ended March 31, 1999 from $51.7 million in 1998. The
increase in Mac sales is due primarily to new product offerings by Apple
Computer, including, but not limited to the iMac.
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International subsidiary net sales for the quarter ended March 31, 1999 were
$18.2 million compared to net sales of $18.4 million in 1998. Excluding the
results of closed location, international subsidiary net sales increased 29.1%
from $14.1 million in the quarter ended March 31, 1998.
GROSS PROFIT. Gross profit increased to $14.5 million for the quarter ended
March 31, 1999 from $13.9 million in 1998, and declined as a percentage of net
sales to 10.7% from 11.8%, for the same periods. The decrease in gross profit
percentage is primarily due to lower pricing strategies on certain CPU's and
hardware items in the quarter ended March 31, 1999. Additionally, sales of CPU's
represented 40.1% of net sales for the quarter ended March 31, 1999 compared to
29.6% in 1998. CPU's generally carry a lower average gross margin percentage
than other products offered by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased to
$14.0 million for the quarter ended March 31, 1999 from $15.9 million in
1998, representing 10.4% and 13.5% of net sales, respectively. The cost
reductions are principally related to reduced administrative staffing and
overhead costs as a result of the Company's operational realignment
initiatives which began in the second quarter of 1998.
OTHER INCOME. Other income increased to $102,000 for the quarter ended March
31, 1999 from $32,000 in 1998. The increase is primarily related to increased
interest income in 1999 compared to 1998 and decreased interest expense. The
interest income is earned from the Company's cash equivalent investments.
INCOME TAX EXPENSE/BENEFIT. The income tax expense for the quarter ended
March 31, 1999 was $224,000, the income tax benefit for the quarter ended
March 31, 1998 was $724,000. The Company's effective tax rate was 39.5% and
37.0% respectively.
NET INCOME/LOSS. Net income for the three months ended March 31, 1999, was
$343,000, compared to a net loss of $1.2 million for the three months ended
March 31, 1998. Diluted earnings per share was $0.03 compared to a loss of
$0.09 for the three months ended March 31, 1999 and 1998, respectively.
TRENDS
During the quarter ended March 31, 1999, sales through the Company's Internet
superstore, zones.com, grew to $19.0 million, or 16.3% of domestic sales, an
increase of 153.3% over the first quarter of 1998 and a 2.8% over the
seasonally higher fourth quarter of 1998. The Company expanded its e-commerce
offerings by introducing its new e-catalog program to over 800,000 customers
and prospects and announced B-Zones-TM-, web sites which will provide
customized merchandising, special volume pricing, online order status and
account information for business customers. About 70% of sales dollars
through the Company's Internet store are phone-assisted, which affords
additional sales opportunities and results in increased order sizes.
Outbound sales to business and education accounts grew to $57.7 million
during the first quarter, an increase of 43.4% and 15.0% over the first
quarter of 1998 and fourth quarter of 1998, respectively. This growth was
achieved through a combination of process based productivity improvements and
the Company's successful efforts to increase sales through the expansion of
outbound account executive headcount. The Company had 177 account executives
at March 31, 1999, representing a 24.6% increase during the first quarter,
and intends to continue its aggressive efforts to expand the number of
outbound sales personnel.
Inbound sales resulting from the circulation of the Company's catalogs, by
contrast, declined year over year to $39.9 million during the first quarter,
representing a 21.9% decrease from inbound sales in the first quarter of
1999. The Company believes that the rapid growth of its Internet sales has
been a significant factor in the decline of its inbound catalog sales, as
increasing numbers of catalog recipients choose to place their orders
electronically rather than over the phone. Approximately 60% of customers
placing orders through the Internet store have migrated from the Company's
inbound catalog sales division. The Company encourages this transition by
featuring its Internet superstore prominently throughout its catalogs and by
making its inbound telephone sales personnel available to assist online
customers. The Company intends to continue to adapt and adjust the size,
content and
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circulation of its outbound sales catalogs in an effort to optimize the
combined sales of its inbound and Internet divisions.
Gross product margins have continued to decline industry-wide, primarily due
to falling average unit selling prices and increased price competition. The
Company's average order size in the first quarter of 1999 grew to $432, an
increase of 27.0% and 4.3% over the first quarter of 1998 and the fourth
quarter of 1998, respectively. This increase is due primarily to the increase
in outbound sales to business and education accounts which support a higher
average order. Although this increase in order size has partially offset the
recent declines in gross margin percentage on an average order, the Company
expects that there may be further declines in gross product margins, and that
continued growth in order size, as well as continued cost reductions, will
likely be required to improve profitability.
The Company uses cooperative advertising funds to substantially offset the
costs associated with its catalog circulation and other marketing activities.
The amount of funding available from the Company's vendor-partners has
generally declined since 1997, both in dollars and as a percentage of sales.
The Company's domestic net cost of advertising totaled $462,000 in the first
quarter ended March 31, 1999, or 0.4% of domestic net sales. Domestic net
advertising costs were $636,000 in the comparable 1998 period and $352,000 in
the fourth quarter of 1998. Net advertising costs may continue to fluctuate
or rise in the future, as the Company continues to adapt and adjust its
catalog circulation, Internet and other marketing activities to optimize
sales and profitability in light of changing market conditions.
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 at 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
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 increase 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 March 31, 1999, the Company had total assets of $105.4 million, of
which $92.4 million were current assets. At March 31, 1999 and December 31,
1998 the Company had cash and cash equivalents of $15.0 million and $19.1
million, respectively, and working capital of $28.4 million and $27.6
million, respectively. Net cash used by operating activities was $5.2 million
for the quarter ended March 31, 1999 and net cash provided by operating
activities was $6.3 million for the three month ended March 31, 1998.
Operating cash outflows for the quarter ended March 31, 1999 were primarily
due to a reduction in accounts payable and accrued liabilities partially
offset by decreases in inventory and accounts receivable. In the period ended
March 31, 1999 accounts payable and accrued liabilities decreased $27.5
million and $2.7 million,
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respectively and inventories and accounts receivable decreased $19.2 million
and $4.4 million, respectively. Cash inflows in the three months ended March
31, 1998 were primarily due to lower accounts receivable and inventory.
Cash outlays for capital expenditures were $1.7 million and $1.1 million in
the quarter ended March 31, 1999 and 1998, respectively. These expenditures
were primarily for information system enhancements. During the quarter ended
March 31, 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
quarter.
During the quarter ended March 31, 1999 and 1998 the effect of the foreign
exchange rate on cash was an outflow of $98,000 and $275,000, 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 March
31, 1999, there were no borrowings outstanding under the facilities.
Additionally, at March 31, 1999, the Company had $2.5 million of unused
letters of credit.
The net amount of vendor credit outstanding at March 31, 1999 was $52.5
million of which $12.5 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. The Company has contacted and received response from
approximately 90% of its domestic systems and service suppliers. 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.
The Company continues to test its systems for Y2K compliance, and planning
for upgrading or replacing non-compliant systems is in progress.
Additionally, the Company has a project underway to upgrade its enterprise
and Internet software systems. Although its current enterprise software
version is Y2K compliant, several software attachments will be replaced and
brought into compliance. These projects are scheduled for completion during
the third 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.
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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 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 March 31,
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: May 14, 1999
By: /S/ FIROZ H. LALJI
------------------------------------------
Firoz H. Lalji, Chairman and Chief Executive
Officer
/S/ PETER J. BIERE
------------------------------------------
Peter J. Biere, Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MULTIPLE
ZONES INTERNATIONAL, INC. FIRST 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,962
<SECURITIES> 0
<RECEIVABLES> 43,834
<ALLOWANCES> 4,663
<INVENTORY> 30,404
<CURRENT-ASSETS> 92,366
<PP&E> 20,016
<DEPRECIATION> 8,666
<TOTAL-ASSETS> 105,360
<CURRENT-LIABILITIES> 63,926
<BONDS> 0
0
0
<COMMON> 38,665
<OTHER-SE> (893)
<TOTAL-LIABILITY-AND-EQUITY> 105,360
<SALES> 135,092
<TOTAL-REVENUES> 135,092
<CGS> 120,616
<TOTAL-COSTS> 120,616
<OTHER-EXPENSES> 13,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 567
<INCOME-TAX> 224
<INCOME-CONTINUING> 343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
