----

----

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

**FORM 10-Q**

 
| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2001**             |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |
| **OR** |
|   |                                                                                                                                                   |
| o      | **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**

**ZONES, INC**(Exact name of registrant as specified inits 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 TelephoneNumber, Including Area Code)

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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     ý       No   o

 

The number of shares of the registrant'sCommon Stock outstanding as of July 31, 2001 was 13,499,118.

----

----

 

**ZONES, INC.**

**INDEX**

**PART I.  FINANCIAL INFORMATION**

| Item 1.  |   | Consolidated Financial  Statements:                                                                                |   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------|--------|
|     |   |                                                                                                               |   |
|     |   | Consolidated Balance Sheets  June 30, 2001 and December 31, 2000                                                   |   |
|     |   |                                                                                                               |   |
|     |   | Consolidated  Statements of Operations and Comprehensive Income Three and six months ended  June 30, 2001 and 2000 |   |
|     |   |                                                                                                               |   |
|     |   | Statements of  Shareholders’ Equity Six months ended June 30, 2001                                            |   |
|     |   |                                                                                                               |   |
|     |   | Consolidated  Statements of Cash Flows Six months ended June 30, 2001 and 2000                                     |   |
|     |   |                                                                                                               |   |
|     |   | Notes to Consolidated  Financial Statements                                                                        |   |
|     |   |                                                                                                               |   |
| Item  2. |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |   |
|     |   |                                                                                                               |   |
| Item  3. |   | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   |

 

**PART II. OTHER INFORMATION**

| Item 1.  |   | Legal Proceedings                 |   |
|----------|--------|-----------------------------------|--------|
|     |   |                              |   |
| Item  6. |   | Exhibits  and Reports on Form 8-K |   |
|     |   |                              |   |
|     |   | Signatures                        |   |

** **

 

**Part I.**

 

**Item 1.  FinancialStatements**

**ZONES,INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)**

|                                               | **June 30,**                                  |   | **December  31,** |   |
|----------------------------------------------------|-----------------------------------------------|--------|-------------------|--------|
|                                               | **2001**                                      |   | **2000**          |   |
|                                               | ****                                          |   | ****              |   |
| **ASSETS**                                         |                                          |   |              |   |
| Current  assets:                                   |                                          |   |              |   |
|                                               | Cash  and cash equivalents                    | $      | 11,749            |   | $ | 3,816 |   |
|                                               | Restricted  cash                              | 930    |              | 930    |   |
|                                               | Receivables,  net                             | 42,126 |              | 56,608 |   |
|                                               | Inventories,  net                             | 20,568 |              | 29,050 |   |
|                                               | Prepaid  expenses                             | 1,057  |              | 1,110  |   |
|                                               | Deferred  income taxes                        | 1,970  |              | 1,970  |   |
|                                               | Notes  Receivable                             | 1,076  |              | 1,080  |   |
|                                               |                                          |        |              |        |   |
|                                               | Total  current assets                         | 79,476 |              | 94,564 |   |
| Property  and equipment, net                       | 9,982                                         |   | 11,710            |   |
| Other  assets                                      | 4,989                                         |   | 4,996             |   |
|                                               |                                               |   |                   |   |
|                                               | Total  assets                                 | $      | 94,447            |   | $ | 111,270 |   |
|                                               |                                          |        |              |        |   |
|                                               |                                          |   |              |   |   |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**          |                                          |   |              |   |
| Current  liabilities:                              |                                          |   |              |   |
|                                               | Accounts  payable                             | $      | 51,932            |   | $ | 66,267 |   |
|                                               | Accrued  liabilities and other                | 7,230  |              | 9,212  |   |
|                                               | Current  portion of capital lease obligations | 1,743  |              | 1,905  |   |
|                                               |                                          |        |              |        |   |
|                                               | Total  current liabilities                    | 60,905 |              | 77,384 |   |
| Capital  lease obligations, net of current portion | 766                                           |   | 1,197             |   |
| Other  liabilities                                 | 771                                           |   | 955               |   |
|                                               |                                               |   |                   |   |
|                                               | Total  liabilities                            | 62,442 |              | 79,536 |   |
|                                               |                                               |   |                   |   |
|                                               |                                          |   |              |   |
| Minority  interest                                 | 129                                           |   | 131               |   |
|                                               |                                               |   |                   |   |
| Commitments  and contingencies                     |                                          |   |              |   |
|                                               |                                          |   |              |   |
| Shareholders'  equity:                             |                                          |   |              |   |
|                                               | Common  stock                                 | 39,437 |              | 39,360 |   |
|                                               | Accumulated  deficit                          | (7,561 | )                 | (7,757 | ) |
|                                               |                                          |        |              |        |   |
|                                               | Total  shareholders' equity                   | 31,876 |              | 31,603 |   |
|                                               |                                          |        |              |        |   |
|                                               | Total  liabilities and shareholders' equity   | $      | 94,447            |   | $ | 111,270 |   |
|                                               |                                          |        |              |        |   |
|                                                    |                                               |        |                   |        |  |  |  |  |

 

 

Seenotes to consolidated financial statements

 

 

**ZONES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME(in thousands, except earnings per share)(unaudited)**

 

|                                                                    | **Three months ended  June 30,**         |       | **Six months ended  June 30,** |       |
|-------------------------------------------------------------------------|------------------------------------------|------------|--------------------------------|------------|
|                                                                    | **2001**                                 |       | **2000**                       |       | **2001** |   | **2000** |   |
|                                                                    | ****                                     |       | ****                           |       | **** |   | **** |   |
|                                                                    |                                     | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net  sales                                                              | $                                        | 145,163    |                           | $          | 171,839 |   | $ | 306,332 |   | $ | 298,145 |   |
| Cost  of sales                                                          | 130,894                                  |       | 156,310                        |       | 276,585 |   | 270,175 |   |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Gross  profit                                                           | 14,269                                   |       | 15,529                         |       | 29,747 |   | 27,970 |   |
|                                                                    |                                     |       |                           |       |   |   |   |   |
| Selling,  general and administrative                                    | 14,089                                   |       | 15,437                         |       | 29,288 |   | 30,283 |   |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Income  (loss) from operations                                          | 180                                      |       | 92                             |       | 459 |   | (2,313 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
|                                                                    |                                     |       |                           |       |   |   |   |   |
| Interest  expense                                                       | 79                                       |       | 87                             |       | 226 |   | 216 |   |
| Other  (income) expense, net                                            | (63                                      | )          | (442                           | )          | (99 | ) | (2,009 | ) |
| Minority  interest                                                      | (1                                       | )          | (5                             | )          | (2 | ) | (7 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
|                                                                    | Other  (income) expense                  | 15         |                           | (360       | ) | 125 |   | (1,800 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Income  (loss) before taxes                                             | 165                                      |       | 452                            |       | 334 |   | (513 | ) |
| Provision  for (benefit from) income taxes                              | 73                                       |       | 152                            |       | 138 |   | (199 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Net  income (loss) before cumulative change                             | $                                        | 92         |                           | $          | 300 |   | $ | 196 |   | $ | (314 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Cumulative  effect of change in accounting principle                    |                                     |       |                           |       |   |   | $ | (59 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Net  income (loss)                                                      | $                                        | 92         |                           | $          | 300 |   | $ | 196 |   | $ | (373 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
|                                                                    |                                     |       |                           |       |   |   |   |   |
| Other  comprehensive income (expense), net of tax:                      |                                     |       |                           |       |   |   |   |   |
|                                                                    | Foreign  currency translation adjustment |       |                           | 24         |   |   |   | 24 |   |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Comprehensive  income (loss)                                            | $                                        | 92         |                           | $          | 324 |   | $ | 196 |   | $ | (349 | ) |
|                                                                    |                                          |       |                                |       |  |   |  |   |
| Net  income (loss) attributable to basic and diluted earnings per share | $                                        | 92         |                           | $          | 300 |   | $ | 196 |   | $ | (373 | ) |
|                                                                    |                                     |       |                           |       |   |   |   |   |
| Basic  earnings (loss) per share                                        | $                                        | 0.01       |                           | $          | 0.02 |   | $ | 0.01 |   | $ | (0.03 | ) |
| Shares  used in computing basic earnings (loss) per share               | 13,476                                   |       | 13,374                         |       | 13,457 |   | 13,371 |   |
|                                                                    |                                     |       |                           |       |   |   |   |   |
| Diluted earnings  (loss) per share                                      | $                                        | 0.01       |                           | $          | 0.02 |   | $ | 0.01 |   | $ | (0.03 | ) |
| Shares  used in computing diluted earnings (loss) per share             | 13,476                                   |       | 13,436                         |       | 13,457 |   | 13,371 |   |

 

 

Seenotes to consolidated financial statements

 

 

**ZONES,INC. AND SUBSIDIARIESSTATEMENTS OF SHAREHOLDERS' EQUITY(in thousands, except share data)(unaudited)**

 

|                       |   | Common  Stock                      |   | Retained                     |                           |                        |   |
|----------------------------|--------|------------------------------------|--------|------------------------------|--------------------------------|-----------------------------|--------|
|                       |   | Shares                             |   | Amount                       |                           | Deficit                     |   | Total |   |
|                       |   |                                    |   |                              |                           |                             |   |  |   |
|                       |   |                               |   |                         |                           |                        |   |   |   |
| Balance, January 1,  2001  |   | 13,403,658     |   | $                            | 39,360     |                        | $      | (7,757)     |   | $ | 31,603     |   |
| Issuance of common  stock  |   | 70,481         |   | 72       |                           |                        |   | 72     |   |
| Exercise of stock  options |   | 1,500          |   | 5        |                           |                        |   | 5     |   |
| Net income                 |   |                               |   |                         |                           | 196     |   | 196     |   |
|                       |   |                                    |   |                              |                           |                             |   |  |   |
| Balance, June 30, 2001     |   | 13,475,639     |   | $                            | 39,437     |                        | $      | (7,561)     |   | $ | 31,876     |   |
|                       |   |                                    |   |                              |                           |                             |   |  |   |

 

 

 

 

 

 

 

 

 

 

 

 

Seenotes to consolidated financial statements

**ZONES,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**

 

|                                                  | **Six months ended  June 30,**                                               |    |
|-------------------------------------------------------|------------------------------------------------------------------------------|---------|
|                                                  | **2001**                                                                     |    | **2000** |   |
|                                                  | ****                                                                         |    | **** |   |
| Cash  flows from operating activities:                |                                                                         |    |   |   |
|                                                  | Net  income (loss)                                                           | $       | 196 |   | $ | (373 | ) |
|                                                  | Adjustments  to reconcile net income to net  cash from operating activities: |    |   |   |   |
|                                                  | Depreciation  and amortization                                               | 3,583   |   | 2,910 |   |
|                                                  | (Gain)  Loss on sale of subsidiaries                                         |    |   | (1,674 | ) |
|                                                  | Minority  interest                                                           | (2      | ) | (7 | ) |
|                                                  | Changes  in assets and liabilities:                                          |    |   |   |   |
|                                                  | Accounts  receivable                                                         | 14,482  |   | (25,697 | ) |
|                                                  | Inventory                                                                    | 8,482   |   | (18,872 | ) |
|                                                  | Prepaid  expenses and other assets                                           | 64      |   | (289 | ) |
|                                                  | Accounts  payable                                                            | (10,739 | ) | 13,952 |   |
|                                                  | Accrued  liabilities                                                         | (2,166  | ) | 860 |   |
|                                                  | Income  taxes                                                                | -       |   | (31 | ) |
|                                                  |                                                                         |         |   |  |   |
|                                                  | Net  cash provided by (used by) operating activities                         | 13,900  |   | (29,221 | ) |
|                                                  |                                                                         |    |   |   |
| Cash  flows from investing activities:                |                                                                         |    |   |   |
| Proceeds  from sale of subsidiaries                   |                                                                         |    | 500 |   |
| Purchases  of property and equipment                  | (1,855                                                                       | )       | (2,041 | ) |
|                                                  |                                                                              |    |  |   |
| Net  cash used in investing activities                | (1,855                                                                       | )       | (1,541 | ) |
|                                                  |                                                                         |    |   |   |
| Cash  flows from financing activities:                |                                                                         |    |   |   |
|                                                  | Net  borrowing under line of credit arrangement                              |    |   | 2,950 |   |
|                                                  | Net  change in book overdrafts                                               | (3,596  | ) | 3,518 |   |
|                                                  | Net  proceeds from sale of common stock                                      | 77      |   | 82 |   |
|                                                  | Net  proceeds from capital lease                                             | 445     |   |   |   |
|                                                  | Payments  on capital leases                                                  | (1,038  | ) | (655 | ) |
|                                                  |                                                                              |    |  |   |
|                                                  | Net  cash used by financing activities                                       | (4,112  | ) | 5,895 |   |
|                                                  |                                                                         |    |   |   |
| Net  increase (decrease) in cash and cash equivalents | 7,933                                                                        |    | (24,867 | ) |
| Cash  and cash equivalents at beginning of period     | 3,816                                                                        |    | 25,774 |   |
|                                                  |                                                                              |    |  |   |
|                                                  |                                                                         |    |   |   |
| Cash  and cash equivalents at end of period           | $                                                                            | 11,749  |   | $ | 907 |   |
|                                                  |                                                                              |    |  |   |
| Supplemental  cash flow information:                  |                                                                         |    |   |   |
|                                                  | Noncash  investing and financing activity:                                   |    |   |   |   |
|                                                  | Capital  leases to finance purchases of equipment                            |    |   | $ | 298 |   |
|                                                  | Note  received on sale of subsidiary                                         |    |   | $ | 1,400 |   |
|                                                       |                                                                              |         |  |  |  |  |  |  |

 

 

Seenotes to consolidated financial statements

 

 

**ZONES,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**1.  Description of Business**

Zones, Inc. is a single-source,multi-vendor direct reseller of name-brand information technology products andservices to the fast growing small to medium sized business market.  Zones sells these products and servicesthrough specialty print and e-catalogs, inbound and outbound account executivesand the Internet.  Zones offers morethan 150,000 products from leading manufacturers including Apple, Compaq,Hewlett-Packard, IBM, Microsoft and Toshiba.

Incorporatedin 1988, Zones, Inc., is headquartered in Renton, Washington. Company andbuying information is available at http://www.zones.com, or by calling800-258-2088.

**2.  Summary of Significant Accounting Policies**

The accompanying unaudited consolidatedfinancial statements and notes have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission and consequently do notinclude all of the disclosures normally required by generally acceptedaccounting principles. In the opinion of management, the accompanying unauditedconsolidated financial statements contain all adjustments (consisting of normalrecurring accruals) necessary to present fairly the financial position andoperating results for the interim periods. The results of operations for such interim periods are not necessarilyindicative of results for the full year. These financial statements should be read in conjunction with theaudited financial statements and notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000 as filed withthe Securities and Exchange Commission on March 13, 2001.

*Principles of Consolidation*

Theaccompanying consolidated financial statements include the accounts of theCompany and of its majority owned subsidiaries. Intercompany transactions andbalances have been eliminated in consolidation.

*Earnings Per Share*

Earnings per share (“EPS”) are based uponthe weighted average number of shares outstanding during the period. Basic EPSexclude all dilution.  Diluted EPSreflects the potential dilution that would occur if securities or othercontracts to issue common stock were exercised or converted into commonstock.  The Company excludes all optionsto purchase common from the calculation of diluted net loss per share if suchsecurities are antidilutive.

*Recent Accounting Pronouncements*

In June 1998, theFinancial Accounting Standards Board issued SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  Among other provisions, SFAS No. 133 requires that entitiesrecognize all derivatives as either assets or liabilities in the statement offinancial position and measure those instruments at fair value.  Gains and losses resulting from changes inthe fair values of those derivatives would be accounted for depending on theuse of the derivative and whether it qualifies for hedge accounting.  The effective date of SFAS No. 133 wasdelayed by the issuance of SFAS No. 137 until the fiscal years beginningJanuary 1, 2001. In June 2000, SFAS 138 was issued, which amends provisions ofSFAS 133.  Theadoption of these standards did not have a material impact on the Company’sfinancial position, as the Company currently holds no derivatives.

In July 2001, theFinancial Accounting Standards Board issued SFAS 141, "BusinessCombinations" ("FAS 141").  FAS 141 addresses financial accounting and reporting for businesscombinations.  FAS 141 is effective forall business combinations accounted for by the purchase method for which thedate of acquisition is July 1, 2001, or later. The Company is currently evaluating the implications of adoption of FAS141.

In July 2001, theFinancial Accounting Standards Board issued SFAS 142, "Goodwill and otherintangible assets" ("FAS 142"). FAS 142 addresses financialaccounting and reporting for acquired goodwill and other intangibleassets.  The provisions of FAS 142 willbe effective for fiscal years beginning after December 15, 2001, except thatcertain provisions of FAS 142 shall be applied to goodwill and other acquiredintangible assets for which the acquisition date is after June 30, 2001. TheCompany is currently evaluating the implications of adoption of FAS 142 andplans to adopt FAS 142 in the fiscal year 2002.

 

.

*Revenue Recognition*

The Company recognizes revenue on productsales at the point in time when the risks and rewards of ownership of theproduct have transferred to the customer. The Company considers this to be at the point of delivery of theproduct.  The Company offers limited returnrights on it product sales.  At thepoint of sale, the Company also provides for an allowance for sales returns,which is established based on historical experience.

**3.  Earnings Per Share**

The Company has 45,000,000 common sharesauthorized.  The Company has grantedoptions to purchase common shares to employees and directors of theCompany.  The options may have adilutive effect on the calculation of earnings per share.  The following is a reconciliation of thenumerators and denominators of the basic and diluted earnings per sharecomputations (in thousands).

 

|                                                 | **Three months  ended  June 30,** |       | **Six months ended June 30,** |       |
|------------------------------------------------------|----------------------------------------|------------|-------------------------------|------------|
|                                                 | **2001**                               |       | **2000**                      |       | **2001** |   | **2000** |   |
|                                                 | ****                                   |       | ****                          |       | **** |   | **** |   |
| **Basic  earnings (loss) per share:**                |                                   |       |                          |       |   |   |   |   |
|                                                 |                                   |       |                          |       |   |   |   |   |
| Income (loss)  available to common shareholders      | $                                      | 92         |                          | $          | 300 |   | $ | 196 |   | $ | (373 | ) |
|                                                 |                                        |       |                               |       |  |   |  |   |
|                                                 |                                   |       |                          |       |   |   |   |   |
| Weighted average  shares outstanding                 | 13,476                                 |       | 13,374                        |       | 13,457 |   | 13,371 |   |
|                                                 |                                        |       |                               |       |  |   |  |   |
| Basic  earnings (loss) per share                     | $                                      | 0.01       |                          | $          | 0.02 |   | $ | 0.01 |   | $ | (0.03 | ) |
|                                                 |                                        |       |                               |       |  |   |  |   |
| **Diluted earnings (loss) per  share:**              |                                   |       |                          |       |   |   |   |   |
|                                                 |                                   |       |                          |       |   |   |   |   |
| Net income (loss)                                    | $                                      | 92         |                          | $          | 300 |   | $ | 196 |   | $ | (373 | ) |
|                                                 |                                   |       |                          |       |   |   |   |   |
| Weighted average  shares outstanding                 | 13,476                                 |       | 13,374                        |       | 13,457 |   | 13,371 |   |
| Stock options                                        |                                   |       | 62                            |       |   |   |   |   |
|                                                 |                                        |       |                               |       |  |   |  |   |
| Total common shares  and dilutive securities         | 13,476                                 |       | 13,436                        |       | 13,457 |   | 13,371 |   |
|                                                 |                                        |       |                               |       |  |   |  |   |
| Dilutive earnings  (loss) per share                  | $                                      | 0.01       |                          | $          | 0.02 |   | $ | 0.01 |   | $ | (0.03 | ) |
|                                                 |                                        |       |                               |       |  |   |  |   |
| Pro forma amount for  new revenue recognition policy |                                   |       |                          |       |   |   |   |   |
| Income (loss) before  cumulative change              |                                   |       | $                             | 285        |   |   |   |   | $ | (220 | ) |
|                                                 | Basic and diluted loss  per share      |       |                          | $          | 0.02 |   |   |   |   | $ | (0.02 | ) |
|                                                 | Net income (loss)                      |       |                          | $          | 300 |   |   |   |   | $ | (314 | ) |
|                                                 | Basic and diluted loss  per share      |       |                          | $          | 0.02 |   |   |   |   | $ | (0.03 | ) |
|                                                 |                                   | ** ** |                          | ** ** |   | ** ** |   | ** ** |
|                                                      |                                        |            |                               |            |  |  |  |  |  |  |  |  |  |  |

All options to purchase common stock wereexcluded from the computation of diluted earnings per share for the six monthsended June 30, 2000 because the effect of the options on the calculation wouldhave been antidilutive.

**4.  Commitments and Contingencies**

*LegalProceedings*

Variouslegal claims and actions considered normal to the Company’s business have beenasserted and are pending against the Company. The Company believes that such claims and actions will not have amaterial adverse effect upon the Company’s financial position or results ofoperations.

*Other*

TheCompany’s state tax filings are currently under review by the Washington StateDepartment of Revenue for tax years 1996 through 1999.  There are no assurances that the Companywill not have a liability resulting from this audit.

 

 

**5.  Segment Information**

The Company reports its segments based onits two distinct business segments; Zones Business Solutions (“ZBS”) andZones.com.  These segments are based onthe Company’s method of internal reporting. Inter-segment revenues areeliminated as the operations of the segments are consolidated.  The Company does not segregate the assetsbased on the reportable segments.

On January 2, 2001, the Companydiscontinued its touchMarketing.com subsidiary.  Accordingly, no separate segment for this exists in fiscal year2001.

One of the Company’s customersrepresented over 10% of total revenue for the three-month period ended June 30,2001.  Net revenue from this customerwas $47.7 million for second quarter of 2001. This customer’s sales are included in the Company’s ZBS segment.  The loss of this customer could have a materialadverse effect on the Company.

(in thousands,except per share data).

|                            | **Zones.com** |   | **ZBS** |   |       |   |                   |   | **Total** |   |
|---------------------------------|---------------|--------|---------|--------|------------|--------|------------------------|--------|-----------|--------|
| **Quarter ended June 30, 2001** |          |   |    |   |       |   |                   |   |      |   |
| Net sales                       | $             | 24,719 |    | $      | 120,444    |   |                   |   |      |   |   | $ | 145,163 |   |
| Gross profit                    | 2,561         |   | 11,708  |   |       |   |                   |   | 14,269    |   |
| Operating expense               | (4,102        | )      | (9,987  | )      |       |   |                   |   | (14,089   | )      |
| Income (loss) from operations   | (1,541        | )      | 1,721   |   |       |   |                   |   | 180       |   |
|                            |          |   |    |   |       |   |                   |   |      |   |
|                            | **Zones.com** |   | **ZBS** |   |       |   |                   |   | **Total** |   |
| **YTD ended June 30, 2001**     |          |   |    |   |       |   |                   |   |      |   |
| Net sales                       | $             | 54,594 |    | $      | 251,738    |   |                   |   |      |   |   | $ | 306,332 |   |
| Gross profit                    | 5,764         |   | 23,983  |   |       |   |                   |   | 29,747    |   |
| Operating expense               | (9,456        | )      | (19,832 | )      |       |   |                   |   | (29,288   | )      |
| Income (loss) from operations   | (3,692        | )      | 4,151   |   |       |   |                   |   | 459       |   |
| Consolidated assets             |          |   |    |   |       |   |                   |   | 94,447    |   |
|                            |          |   |    |   |       |   |                   |   |      |   |
|                            | **Zones.com** |   | **ZBS** |   | **tM.com** |   | **Elimination’s** |   | **Total** |   |
| **Quarter ended June 30, 2000** |          |   |    |   |       |   |                   |   |      |   |
| Net sales                       | $             | 47,476 |    | $      | 124,422    |   | $                      | 112    |      | $      | (171 | ) | $ | 171,839 |   |
| Gross profit                    | 4,675         |   | 10,853  |   | 97         |   | (96                    | )      | 15,529    |   |
| Operating expense               | (6,237        | )      | (8,481  | )      | (815       | )      | 96                     |   | (15,437   | )      |
| Income (loss) from operations   | (1,562        | )      | 2,372   |   | (718       | )      |                   |   | 92        |   |
|                            |          |   |    |   |       |   |                   |   |      |   |
|                            | **Zones.com** |   | **ZBS** |   | **tM.com** |   | **Elimination’s** |   | **Total** |   |
| **YTD ended June 30, 2000**     |          |   |    |   |       |   |                   |   |      |   |
| Net sales                       | $             | 99,937 |    | $      | 198,190    |   | $                      | 304    |      | $      | (286 | ) | $ | 298,145 |   |
| Gross profit                    | 10,195        |   | 17,778  |   | 186        |   | (189                   | )      | 27,970    |   |
| Operating expense               | (13,675       | )      | (15,581 | )      | (1,216     | )      | 189                    |   | (30,283   | )      |
| Income (loss) from operations   | (3,480        | )      | 2,197   |   | (1,030     | )      |                   |   | (2,313    | )      |
| Consolidated assets             |          |   |    |   |       |   |                   |   | 115,954   |   |
|                                 |               |        |         |        |            |        |                        |        |           |        |  |  |  |  |  |  |

 

 

**Item 2.****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

The matters described below containforward-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 thoseexpressed or implied by such forward-looking statements.  Forward-looking statements may be identifiedby the use of forward-looking terminology such as “may,” “will,” “expect,”“estimate,” “anticipate,” “continue,” or similar terms, variations of such termsor the negative of those terms, but the absence of such terms does not meanthat a statement is not forward-looking.

Factors that could affect the Company’sactual results include, but are not limited to: (i) future growth, (ii)dependence on sales of Mac products, (iii) vendor support, (iv) competition,(v) pressure on margin, (vi) variability of operating results, (vii) changingmethods of distribution, (viii) potential disruption of business, (ix)potential increases in postage, shipping, and paper costs, (x) reliance onvendor relationships, (xi) state sales or use tax uncertainties, (xii)dependence on personnel, (xiii) reliance on outsourced distribution, (xiv)reliance on major customer, and (xv) rapid technological change and inventoryobsolescence, and other risks and uncertainties detailed in the Company’sfiling with the SEC. The following discussion and analysis should be read inconjunction with the Risk Factors and other information contained in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2000 andfiled on March 13, 2001 with the Securities Exchange Commission.

**General**

TheCompany’s revenues consist primarily of sales of computer hardware, software,services, peripherals and accessories, as well as revenue associated withfreight billed to its customers.  Netrevenues reflect the effects of product returns.  Gross profit consists of net sales less product and freightcosts. Selling, general and administrative (“SG&A”) expenses includeadvertising expense net of vendor co-op, warehousing, selling commissions,order processing, telephone, credit card fees, and other costs such asadministrative salaries, depreciation, rent, and general overheadexpenses.  Other expense representsinterest expense, net non-operating expense and minority interests in theCompany's domestic and former foreign subsidiaries.

**Results of Operations**

The following table presents theCompany’s unaudited consolidated results of operations, as a percentage of netsales, and selected domestic operating data for the periods indicated.  This information has been prepared by theCompany on a basis consistent with the Company’s unaudited consolidatedfinancial statements and, in the opinion of management, includes alladjustments, consisting only of normal recurring accruals, necessary for a fairpresentation of the results of such periods.

 

|                                          | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------------------|----------------------------------|--------|--------------------------------|--------|
|                                          | **2001**                         |   | **2000**                       |   | **2001** |   | **2000** |   |
|                                          | ****                             |   | ****                           |   | **** |   | **** |   |
| Net  sales                                    | 100.0                            | %      | 100.0                          | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                 | 90.2                             |   | 91.0                           |   | 90.3 |   | 90.6 |   |
|                                          |                                  |   |                                |   |  |   |  |   |
| Gross profit                                  | 9.8                              |   | 9.0                            |   | 9.7 |   | 9.4 |   |
| Selling,  general and administrative expenses | 9.7                              |   | 9.0                            |   | 9.6 |   | 10.2 |   |
|                                          |                                  |   |                                |   |  |   |  |   |
| Income (loss) from  operations                | 0.1                              |   | 0.1                            |   | 0.1 |   | (0.8 | ) |
| Other  (income) expense                       | 0.0                              |   | (0.2                           | )      | 0.0 |   | (0.6 | ) |
|                                          |                                  |   |                                |   |  |   |  |   |
| Income  (loss) before income taxes            | 0.1                              |   | 0.3                            |   | 0.1 |   | (0.2 | ) |
| Provision  for (benefit from) income taxes    | 0.1                              |   | 0.1                            |   | 0.0 |   | (0.1 | ) |
|                                          |                                  |   |                                |   |  |   |  |   |
| Net  income (loss)                            | 0.1                              | %      | 0.2                            | %      | 0.1 | % | (0.1 | )% |
|                                          |                                  |   |                                |   |  |   |  |   |
|                                          |                             |   |                           |   |   |   |   |   |
| **Selected  domestic operating data:**        |                             |   |                           |   |   |   |   |   |
| Catalog circulation                           | 3,875,000                        |   | 4,152,000                      |   | 7,075,000 |   | 10,052,000 |   |
| E-media circulation                           | 2,700,000                        |   | 5,100,000                      |   | 5,765,000 |   | 9,700,000 |   |
| Number of orders                              | 145,000                          |   | 214,000                        |   | 328,000 |   | 463,000 |   |
| Average  order size                           | $                                | 1,026  |                           | $      | 816 |   | $ | 949 |   | $ | 657 |   |
| Number  of account executives, end of period  | 261                              |   | 220                            |   |   |   |   |   |
|                                          |                             |   |                           |   |   |   |   |   |
|                                               |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

 

*Comparison of Three Month Periods Ended June 30, 2001 and2000*

*Net Revenue. *Netrevenue for the quarter ended June 30, 2001 decreased 15.5% to $145.2 millioncompared to $171.8 million in the second quarter of 2000. The decrease inrevenue resulted primarily from the impact of waning consumer sales during aneconomic downturn, and as a result of the Company’s planned discontinuation ofmarketing and advertising to the PC consumer in the Zones.com segment.  Additionally, the pervasive economicdownturn has drastically reduced IT spending by businesses. Sales by theCompany’s Zones.com segment, which is comprised of the Internet and inboundcatalog operations, decreased 48.0% to $24.7 million in the second quarter of2001 from $47.5 million in the second quarter of 2000.  Internet sales decreased 57.5% to $13.2million for the second quarter of 2001 compared to $31.0 million in the secondquarter of 2000, while catalog sales declined 29.9% to $11.5 million from $16.5million in the comparable quarter of 2000. Sales by the Company’s ZonesBusiness Solutions (“ZBS”) segment decreased 3.2% to $120.4 million for thethree months ended June 30, 2001 compared to $124.4 million in the comparableperiod in 2000. ZBS had 261 Account Executives (“AE”) at June 30, 2001 comparedto 220 at June 30, 2000. However, the Company realized an increase in averageorder size to $1,026 for the three months ended June 30, 2001 from $816 in thesecond quarter of 2000.TheCompany continues to expand its portfolio of enterprise accounts, as well asfocusing on the productivity of its commercial accounts core business.

The following platform sales have notbeen affected for the reclassification of freight revenue in compliance withEITF 00-10 “Accounting for Shipping and Handling Fees and Costs”.  PC platform sales accounted for 78.0% oftotal sales for the quarter ended June 30, 2001 compared to 66.0% in the secondquarter of 2000.  Net PC product salesfor the three months ended June 30, 2001 remained flat at $111.4 million in thesecond quarter year over year. PC product sales increased to 88.0% of total ZBSsales in the second quarter of 2001 compared to 79.4% in the second quarter of2000.  Net Mac product sales decreased45.3% to $31.4 million for the three months ended June 30, 2001 from $57.4million in 2000. This decrease is consistent with the industry-wide Macplatform sales decline.

The fastest growing product categories interms of sales dollars and the respective growth rates in the second quarter of2001 compared to the second quarter of 2000 were:

| **Product Category** | **Growth Rate** |
|----------------------|-----------------|
| ****                 | ****            |
| Services             | 109.2%          |
| Licensing            | 52.9%           |
| Servers              | 33.7%           |
| Networking  Hardware | 30.8%           |

*Gross Profit.*Gross profit dollar contribution decreased to $14.3 million for the secondquarter of 2001, down 8.1% from the second quarter of 2000.  However, gross profit as a percentage of netsales increased to 9.8% in the quarter ended June 30, 2001 compared to 9.0% inthe second quarter of 2000. This increase in gross profit percentage isprimarily due to the continued shift in revenue mix to higher margin productsand services partially offset by an increase in ZBS sales as a percentage oftotal sales.  ZBS sales to business,enterprise and education accounts, which tend to carry a lower average grossprofit, represented 83.0% of net revenue in the three months ended June 30,2001 from 72.3% in the comparable period of 2000.  Gross profit for ZBS was $11.7 million, or 9.7% of ZBS sales, inthe second quarter of 2001 compared to $10.9 million, or 8.7%, in the secondquarter of 2000.  Gross profit forZones.com was $2.6 million, or 10.3% of Zones.com sales, in the second quarterof 2001 compared to $4.7 million, or 9.9% of Zones.com sales in the secondquarter of 2000.

*Selling, General and Administrative Expenses. *SG&Aexpense dollars decreased 8.4% to $14.1 million for the quarter ended June 30,2001 from $15.4 million in the second quarter of 2000, and sequentially,SG&A expense dollars decreased 7.3% from $15.2 million in the first quarterof 2001.The Companyrationalized its discretionary expenses during the quarter due to the moredifficult economic and operating environment. As a percent of sales, SG&Aincreased to 9.7% for the quarter ended June 30, 2001 from 9.0% in the secondquarter of 2000 due to the decline in sales volume. The Company continued toinvest in the training and development of its account executives to create andmaintain a more productive outbound sales force.

TheCompany produces and distributes catalogs at various intervals throughout theyear.  The Company's net cost ofadvertising increased to $848,000 in the three month period ended June 30, 2001from $230,000 in the comparable 2000 period. This increase in net cost is primarily due to a declension in co-opadvertising reimbursement.

*Other Income/Expense. *Otherexpense increased to $15,000 for the quarter ended June 30, 2001 from otherincome of $360,000 in the second quarter of 2000. The change was primarily dueto a gain on divestiture of an overseas subsidiary recorded in the secondquarter of 2000.

*Income Tax Expense.*  The income tax expense for the quarter endedJune 30, 2001 was $73,000 as compared to a recorded expense of $152,000 in the comparableperiod of the prior year.  The Company’seffective tax rate expressed as a percentage of income before taxes was 44.2%for the quarter ended June 30, 2001.

*Net Income. *Netincome for the quarter ended June 30, 2001 was $92,000 compared to net incomeof $300,000 in the second quarter of 2000. Basic and diluted earnings per share were $0.01 for the quarter endedJune 30, 2001 and basic and diluted earnings per share was $0.02 in the secondquarter of 2000.

*Comparison of Six Month Periods Ended June 30, 2001 and 2000*

*Net Sales. *Netsales for the six months ended June 30, 2001 increased 2.7% to $306.3 millioncompared to $298.1 million in the comparable period of 2000.  The increase resulted primarily fromincreases in sales by the Company’s ZBS segment offset by a decrease in theZones.com segment.  ZBS sales increased27.0% to $251.7 million for the six months ended June 30, 2001 compared to$198.2 million in the comparable period of 2000. Growth in the core business aswell as sales to enterprise accounts contributed to this increase. TheCompany’s model has proven to be a very efficient fulfillment engine in theenterprise market and the Company intends to continue its efforts tosuccessfully penetrate these markets. Sales by the Company’s Zones.com segment declined 45.3% to $54.6 millionin the six months ended June 30, 2001 from $99.9 million in the comparableperiod of 2000.  Internet salesdecreased 52.8% to $30.2 million for the six months ended June 30, 2001compared to $64.1 million for the six months ended June 30, 2000, while catalogsales declined to $24.4 million from $35.8 million in the comparable period of2000 due principally to a decline in catalog circulation compared to the sameperiod of the prior year.  The declinein the revenue for the Zones.com segment was primarily due to the impact ofwaning consumer sales during the economic downturn and in response to theCompany’s planned discontinuation of marketing and advertising to the PCconsumer.

PC platform sales represented 77.0% oftotal sales for the six months ended June 30, 2001 compared to 60.2% in thecomparable period of 2000.  Net PCproduct sales for the six months ended June 30, 2001 increased 32.2% to $231.9million compared to $175.4 million in the comparable period of 2000.  The increase was due primarily to theincrease in ZBS sales, which represented 82.2% of domestic net sales for thesix months ended June 30, 2001 compared to 66.4% in the comparable period of2000. Sales to SMB and enterprise accounts have a much higher proportion of PCproducts.  PC product sales increased to87.4% of ZBS sales in the six months ended June 30, 2001 compared to 73.8% inthe comparable period of 2000. Net Mac product sales decreased 40.3% to $69.3million for the six months ended June 30, 2001 from $116.1 million in thecomparable period of 2000. This decrease is consistent with the industry-wideMac platform sales decline.

The fastest growing product categories interms of sales dollars and the respective growth rates in the six months endedJune 30,2001 compared to the same period a year ago were:

| **Product Category** | **Growth Rate** |
|----------------------|-----------------|
| ****                 | ****            |
| Servers              | 111.0%          |
| Services             | 71.0%           |
| Licensing            | 69.0%           |
| Networking  Hardware | 58.2%           |

* *

 

*Gross Profit.*  Gross profit dollar contribution increasedto $29.7 million for the six months ended June 30, 2001, up 6.4% from the sameperiod of the prior year.  Gross profitas a percentage of net sales increased to 9.7% in the six months ended June 30,2001 compared to 9.4% in the comparable period of 2000.  The increase in gross profit was primarilydue to a change in product mix as the Company shifted its focus to highermargin product lines such as services and enterprise technology.  The increase in profit was partially offsetby increased sales to ZBS customers, which tend to carry a lower average grossprofit.  Outbound sales as a percentageof total revenue has increased and now represents 82.2% of net sales in the sixmonths ended June 30, 2001 compared to 66.4% in the comparable period of 2000.

*Selling, General and Administrative Expenses. *SG&Aexpense dollars decreased 3.3% to $29.3 million for the six months ended June30, 2001 from $30.3 million in the comparable period a year ago. The Companycontinued to rationalize its operating costs during the turbulent economic andoperating environment experienced in the first half of 2001. As a percent ofsales, SG&A decreased to 9.6% for the six months ended June 30, 2001 from10.2% in the comparable period of 2000. The Company continued to invest in thetraining and development of its account executives to create and maintain amore productive ZBS sales force.

The Company produces and distributescatalogs at various intervals throughout the year.  The Company's net cost of advertising decreased slightly to $1.6million in the six month period ended June 30, 2001 from $1.7 million in thecomparable 2000 period.

*OtherIncome/Expense. *Otherexpense was $125,000 for the six months ended June 30, 2001 compared to otherincome of $1.8 million in the six months ended June 30, 2000.  The Company realized a one-time gain ondisposition of two of its investments in its international subsidiaries for thesix months ended June 30, 2000 of $1.7 million.

*Income Tax Expense/Benefit.*  The income tax expensed for the six monthsended June 30, 2001 was $138,000 as compared to a recorded benefit of $199,000in the six month comparable period of 2000. The Company’s effective tax rate, as a percentage of income beforetaxes, was 41.3% for the six months ended June 30, 2001.

*Net Income/Loss.*Netincome for the six months ended June 30, 2001 was $196,000 compared to a netloss of $373,000 in the comparable period of 2000.  Basic and diluted earnings per share were $0.01 for the sixmonths ended June 30, 2001 and basic and diluted loss per share was $0.03 forthe six months ended June 30, 2000.

**Trends**

The Company completed its transition to amulti-vendor business to business Information Technology (“IT”) reseller andaccelerated its customer acquisition focus to cultivate the growth of the SMBand enterprise customer base. The Company’s strategy has evolved over the pasttwo years.  The Company believes thissingular focus will keep it moving forward and growing in order to remaincompetitive in today’s competitive economic landscape.

The Company has been affected by theslowdown in U.S. corporate IT spending, creating a more intense competitivelandscape that is disrupting the stability of pricing and exerting pressure onmargins across all product lines. The industry remains susceptible to further declensionin IT spending.  In addition, theeconomic conditions may make available financing increasingly difficult toobtain.  There can be no assurance thatthe Company will realize future growth in net sales, will not experiencedecreases in net sales or that the Company will be profitable on a quarterly orannual basis.

 

 

The computer products industry is highlycompetitive. The Company competes with other national direct marketers, productmanufacturers entering the direct to user market, specialty computer retailers,computer and general merchandise superstores, and consumer electronic andoffice supply stores. Some of the Company's larger competitors competeprincipally on the basis of price and may have lower costs than the Company.  The Company believes that competition mayintensify in the future due to market conditions and consolidation, and that itmay be required to reduce its margins to remain competitive. There can be noassurance that the Company will be able to maintain its gross margins in thefuture.

The Company’s category merchandisinggroup determines the manufacturers whose products are featured in its Internetand catalog offerings and negotiates the terms and conditions of productcoverage. The brand management group works with certain manufacturers anddistributors to provide the Company with incentives in the form of rebates,discounts and allowances. The merchandising group is also responsible fordeveloping effective advertising campaigns for manufacturers, managing web-siteand catalog design and layout, and coordinating product procurement andinventory management with the Company's purchasing group. In addition, themerchandising group works closely with the purchasing group to capitalize onopportunities for first-to-market and end-of-life-cycle product offerings. Ifany of these relationships are terminated, there can be no assurance that theCompany's business, financial condition and results of operations will not beadversely affected.

**Industry**

The market for computer products ischaracterized by rapid changes and frequent introductions of new products andproduct enhancements.  These changesresult in rapid price fluctuations and have led to continued average pricereductions, and lower margin dollars per transaction.  A number of Internet-based competitors are selling computerproducts below cost plus a transaction fee.  In order to remain competitive, the Company may be required to reduceits prices.  Such a reduction in pricescould have a material adverse effect on the Company’s future results ofoperations.

**Inflation**

The Company does not believe thatinflation has had a material impact on its results of operations.  However, there can be no assurance thatinflation will not have such an effect in future periods.

**Liquidity and Capital Resources**

As of June 30, 2001, the Company hadtotal assets of $94.4 million, of which $79.5 million were current assets.  At June 30, 2001 and December 31, 2000 theCompany had cash and cash equivalents, and restricted cash of $12.7 million and$4.7 million, respectively, and working capital of $18.6 million and $17.2million, respectively.

Net cash provided by operating activitieswas $13.9 million for the six months ended June 30, 2001 compared to cash usedby operating activities of $29.2 million for the six months ended June 30,2000.  Cash inflows for the six monthsended June 30, 2001 were primarily due to decreases in accounts receivable andinventory. In the six months ended June 30, 2001, accounts receivable decreased$14.5 million and inventory decreased by $8.5 million from December 31, 2000.

Cash outlays for capital expenditureswere $1.9 million and $2.0 million in the six months ended June 30, 2001 and2000, respectively.  These expenditureswere primarily for continued improvement, and other enhancements, of theCompany’s information systems.

The net amount of accounts payableoutstanding at June 30, 2001 was $51.9 million of which $15.4 million was drawnfrom a $35.0 million flooring facility and working capital line, collateralizedby inventory and accounts receivable. The facility contains various restrictive covenants relating toprofitability, tangible net worth, leverage, dispositions and use ofcollateral, other asset dispositions, and merger and consolidation of theCompany.

 

 

The Company believes that its existingavailable cash and cash equivalents, operating cash flow and existing creditfacilities will be sufficient to satisfy its operating cash needs for at leastthe next 12 months at our current year over year rate of growth.  However, if the Company’s future rate ofgrowth exceeds the current rate, or if working capital or other capitalrequirements are greater than currently anticipated, the Company could berequired to seek additional funds through sales of equity, debt or convertiblesecurities or increased credit facilities. There can be no assurance that additional financing will be available orthat, if available, the financing will be on terms favorable to the Company andits shareholders.

**Other Matters**

The Company’s state tax filings arecurrently under review by the Washington State Department of Revenue for taxyears 1996 through 1999.  There are noassurances that the Company will not have a liability resulting from thisaudit.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

The Company is subject to the risk offluctuating interest rates in the normal course of business, primarily as aresult of its short-term borrowing and investment activities, which generallybear interest at variable rates. Because the short-term borrowings and investments have maturities ofthree months or less, the Company believes that the risk of material loss islow.

 

**PartII.**

 

**Item 1.****Legal Proceedings**

Various claims and actions of a typecommonly encountered in the Company's industry have been asserted and arepending against the Company. The Company believes that such claims and actionswill not have a material adverse effect upon the Company's financial positionor results of operations.

**Item 4.****Submission of Matters to a vote of Security Holders**

| (a)    | The  Company held its annual meeting of shareholders on April 26, 2001.                                                                                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                    |
| (b)    | Two  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 ofDirectors**

 

| Nominee                                          |                | Votes For |          | Against |        | Withheld |
|--------------------------------------------------|---------------------|-----------|---------------|---------|-------------|----------|
|                                                  |                |           |          |         |        |          |
|                                             | John  H. Bauer      |      | 9,521,250     |    |        |     | 36,967 |
|                                             | John  T. Carleton   |      | 9,522,445     |    |        |     | 35,772 |
|                                             | Firoz  H. Lalji     |      | 9,522,100     |    |        |     | 36,117 |
|                                             | Kathleen  S. Pushor |      | 9,514,813     |    |        |     | 43,404 |
|                                             | Richard  E. Carter  |      | 9,521,145     |    |        |     | 37,072 |
|                                             |                |      |          |    |        |     |
|                                             |                |      |          |    |        |
| 2.  Ratification of Appointment of Auditors |                |      |          |    |        |
|                                             |                |      |          |    |        |
|                                             | Votes For           |      | Votes Against |    | Abstentions |
|                                             |                     |      |               |    |             |
|                                             | 9,534,596           |      | 19,520        |    | 4,101       |

 

 

 

** **

**Item 6.****Exhibits and Reports on Form 8-K**

| (a)    | Exhibits                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                     |
|   | 3  (i)                                                                                                                                                                                                                                                                                                                                                                   | Amended  Articles of Incorporation |
|   |
| (b)    | Reports  on Form 8-K                                                                                                                                                                                                                                                                                                                                                     |
|   |
|   | On  May 10, 2001, the Company filed a report on form 8-K containing the release  that it had changed its name from “Multiple Zones, Inc.” to “Zones,  Inc.”  The Company is now quoted on  the Nasdaq National Market under the symbol “ZONS.”  No other Reports on Form 8-K were filed during the quarter  ended June 30, 2001. |
|        |                                                                                                                                                                                                                                                                                                                                                                          |  |  |

 

Signatures

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned:

 

ZONES,INC.

 

                  Date: August 14, 2001

|   | By:    | /S/      FIROZ H. LALJI           |
|--------|--------|-------------------------------------------------------|
|   |   |                                                       |
|   |   | Firoz H. Lalji, Chairman and Chief Executive  Officer |
|   |   |                                                  |
|   |   |                                                  |
|   |   | /S/      RONALD P. MCFADDEN       |
|   |   |                                                       |
|   |   | Ronald P. McFadden, Chief Financial Officer           |
|   |   |                                                  |