SOURCE: Zones, Inc.

July 25, 2005 16:00 ET

Zones Announces Financial Results for the Second Quarter of 2005

AUBURN, WA -- (MARKET WIRE) -- July 25, 2005 -- Zones, Inc. (the "Company," "Zones"™) (NASDAQ: ZONS):

--  Eighth consecutive profitable quarter
--  Quarterly net income increased 13% compared to the prior year
--  Q2 2005 earnings per share increased to $0.09 per diluted share
    
Zones, a single-source direct marketing reseller of name-brand information technology products, today announced its results for the quarter ended June 30, 2005. Total net sales increased 2.9% to $127.6 million in the three-month period ended June 30, 2005 from $124.0 million in the second quarter of 2004. The Company reported net income of $1.3 million, or $0.09 per diluted share, for the quarter ended June 30, 2005 compared with net income of $1.2 million, or $0.08 per diluted share, for the same quarter of the prior year.

Mr. Lalji, President and CEO, remarked on today's announcement. "Our performance this quarter was, on balance, acceptable as we worked through a system conversion and integrated our CPCS subsidiary. I fully expect that by the end of the third quarter these actions should be completely behind us."

Net sales for the six months ended June 30, 2005 increased to $254.0 million from $238.1 million for the corresponding period of the prior year. Net income for the six months ended June 30, 2005 increased 26.3% to $2.4 million, or $0.17 per diluted share, compared to a net income of $1.9 million, or $0.13 per diluted share in the first six months of 2004.

Operating Highlights

Consolidated outbound sales increased 7.9% to $122.7 million in the quarter ended June 30, 2005 compared to $113.7 million in the corresponding period of the prior year. These sales as a percent of total net sales for the three month period ended June 30, 2005 and 2004 were 96.2% and 91.6%, respectively. Direct online orders increased to $21.3 million, an increase of 117.5% over the same period of the preceding year. Strategic product categories also contributed to the year over year growth, which include memory and processors, monitors and video and storage which increased 35.7%, 13.0% and 9.9%, respectively.

Gross profit margin was 11.4% in the second quarter of 2005, compared to 11.5% in the second quarter of 2004, and 11.7% in the first quarter of 2005. The sequential decrease in gross profit margin percentage was primarily due to mix issues.

Gross profit margins as a percent of sales are expected to vary on a quarterly basis due to vendor programs, product mix, pricing strategies, customer mix, and economic conditions.

Total selling, general and administrative expenses, as a percent of net sales, were 8.6% in the second quarter of 2005. This represents a nominal increase from 8.5% compared to the corresponding period of the prior year and a sequential decline from 8.9% for the first quarter of 2005. The Company expects to continue hiring 20 to 25 additional account executives per month to support its sales growth initiatives.

Asset Management

The Company's balance sheet remains in excellent condition. Consolidated working capital increased to $29.3 million at June 30, 2005 from $27.0 million at December 31, 2004. The Company's net inventory of $15.5 million at June 30, 2005 decreased from $17.4 million at December 31, 2004. Inventory turns increased to 28 times annually. Trade accounts receivable increased to $59.7 million at June 30, 2005 from $55.6 million at December 31, 2004. Days sales outstanding were 46 days, a slight decrease from 47 days at December 31, 2004.

About Zones, Inc.

Zones, Inc. and its subsidiaries are single-source direct marketing resellers of name-brand information technology products to the small to medium sized business market, large and public sector accounts, while supporting their legacy Mac customers. Zones sells these products through outbound and inbound account executives, specialty print and e-catalogs, and the Internet. Zones offers more than 150,000 products from leading manufacturers including 3COM, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston, Lenovo, Microsoft, Sony and Toshiba.

Incorporated in 1988, Zones, Inc., is headquartered in Auburn, Washington. Buying information is available at http://www.zones.com, or by calling 800-258-2088. The Company's investor relations information can be accessed online at www.zones.com/IR.

A live webcast of the Company's management discussion of the second quarter will be available on the Company's Web site at www.zones.com/IR under upcoming events. The webcast will be held Tuesday, July 26, 2005 at 8:30 am PT.

This press release may contain statements that are forward-looking. These statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These risk factors include, without limitation, future growth, vendor support, account executive hiring and productivity, increased expenses of being a public company, pressure on margin, competition, state tax uncertainties, rapid technological change and inventory obsolescence, reliance on vendor relationships, dependence on personnel, potential disruption of business from information systems failure, reliance on outsourced distribution, and other risks and uncertainties detailed in the Company's filings with the SEC.


                                  ZONES, INC.
                         CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (Unaudited)

                                          June 30,       December 31,
                                           2005              2004
                                         ----------      -----------
ASSETS
Current assets
     Cash and cash equivalents           $   3,094       $   6,457
     Receivables, net of allowance
      for doubtful accounts of
      $2,458 and $2,666                     54,258          53,903
        Vendor Receivables                  10,034          10,035
        Inventories, net                    15,492          17,405
        Prepaids                             1,175             958
        Deferred income taxes                1,525           1,525
                                         ----------      -----------

             Total current assets           85,578          90,283

Property and equipment, net                  3,744           3,951
Goodwill                                     5,098           5,098
Deferred income tax                          1,163           2,640
Other assets                                   187             172
                                         ----------      -----------

             Total assets                $  95,770       $ 102,144
                                         ==========      ===========

LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                    $  35,944       $  34,250
     Inventory Financing                     7,514          14,306
     Accrued liabilities and other           7,463           7,331
     Line of credit                          3,900           6,100
     Notes payable to former
      shareholders of CPCS                   1,468           1,272
                                         ----------      -----------

             Total current liabilities      56,289          63,259

Note payable for purchase of fixed asset        32              35
Notes payable to former shareholders of
 CPCS, net of current portion                    -           1,272
Deferred rent                                1,113           1,027
                                         ----------      -----------

             Total liabilities              57,434          65,593
                                         ----------      -----------

Commitments and contingencies

Shareholders' equity:
     Common stock                           38,186          38,788
     Retained earnings
      (accumulated deficit)                    150          (2,237)
                                         ----------      -----------

             Total shareholders' equity     38,336          36,551
                                         ----------      -----------

             Total liabilities &
              shareholders' equity       $  95,770       $ 102,144
                                         ==========      ===========



                              ZONES, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)
                              (unaudited)

                              For the three months     For the six months
                                 ended June 30,          ended June 30,
                                2005        2004        2005        2004
                             ----------  ----------  ----------  ----------

Net sales                    $  127,630  $  124,023  $  253,961  $  238,114
Cost of sales                   113,094     109,766     224,663     209,941
                             ----------  ----------  ----------  ----------

  Gross profit                   14,536      14,257      29,298      28,173
Selling, general and
 administrative expenses         10,979      10,602      22,178      21,251
Advertising expense               1,400       1,694       3,139       3,584
                             ----------  ----------  ----------  ----------

  Income from operations          2,157       1,961       3,981       3,338
                             ----------  ----------  ----------  ----------

Other expense:                       50          90         110         167

Income before income taxes        2,107       1,871       3,871       3,171
Provision for income taxes          811         720       1,484       1,229
                             ----------  ----------  ----------  ----------


  Net income                 $    1,296  $    1,151  $    2,387  $    1,942
                             ==========  ==========  ==========  ==========


  Basic earnings per share   $     0.10  $     0.08  $     0.18  $     0.14
  Shares used in
   computation of basic
   earnings per share            13,380      13,669      13,412      13,666
                             ==========  ==========  ==========  ==========

  Diluted earnings per share $     0.09  $     0.08  $     0.17  $     0.13
  Shares used in
   computation of diluted
   earnings per share            14,148      14,534      14,347      14,511
                             ==========  ==========  ==========  ==========


                           Operating Highlights
                             Supplemental Data

                               Three months ended       Six months ended
                              6/30/2005   6/30/2004   6/30/2005   6/30/2004
                             ----------  ----------  ----------  ----------
  Operating Data
    Number of orders             98,852     100,706     198,241     212,544
    Average order size            1,340       1,222       1,320       1,143
    Direct online net sales  21,303,000   9,793,000  37,441,000  21,615,000
    Sales force, end of
     period                                                 275         274

  Average Productivity
  (annualized)
    Per Account Executive     1,856,000   1,811,000   1,846,989   1,694,765
    Per Employee                865,000     892,000     860,885     856,527

  Product Mix (% of sales)
    Notebook & PDA's              15.0%       14.7%       14.0%       16.4%
    Desktops & Servers            19.8%       20.9%       22.3%       20.2%
    Software                      16.2%       16.9%       16.4%       16.1%
    Storage                        9.4%        9.0%        9.2%        9.0%
    NetComm                        4.2%        4.7%        4.0%        4.5%
    Printers                       9.8%        9.5%        9.4%        9.7%
    Monitors & Video              10.3%        9.7%       10.1%       10.0%
    Memory & Processors            6.0%        4.7%        5.6%        4.7%
    Accessories & Other            9.3%        9.9%        9.0%        9.4%

Contact Information

  • Contact:
    Ronald McFadden
    Zones, Inc.
    Chief Financial Officer
    253-205-3000