MULTIPLE ZONES INTERNATIONAL INC, 10-K405, 2000-03-29

MULTIPLE ZONES INTERNATIONAL INC
10-K405, 2000-03-29
CATALOG & MAIL-ORDER HOUSES

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO________

COMMISSION FILE NUMBER 0-28488

MULTIPLE ZONES INTERNATIONAL, INC
(Exact name of registrant as specified in its charter)

WASHINGTON 91-1431894
(State of Incorporation) (I.R.S. Employer
Identification Number)

707 SOUTH GRADY WAY
RENTON, WASHINGTON 98055-3233
(Address of Principal Executive Offices) (Zip Code)

(425) 430-3000

(Registrant's Telephone
Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock

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 _____

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ X ]

The aggregate market value of the Common Stock held by non-affiliates as of
March 9, 2000 was approximately $32,351,221 (1), based upon the last sales price
per share of $6.13 as reported by the NASDAQ National Market.

The number of shares of the registrant's Common Stock outstanding as of March 9,
2000, was 13,368,252.

(1) Excludes value of Common Stock held of record as of March 9, 2000 by
executive officers, directors and other 10% shareholders of the registrant.
Includes Common Stock held of record as of that date by certain depository
organizations. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant, or that
such person is controlled by or is under common control with the registrant.

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MULTIPLE ZONES INTERNATIONAL, INC.
FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS

PART I

Page No.
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<S> <C> <C>
Item 1. Business 3

Item 2. Properties 12

Item 3. Legal Proceedings 12

Item 4. Submission of Matters to a Vote of Security Holders 12

Item 4a. Executive Officers of the Registrant 12

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 13

Item 6. Selected Financial Data 14

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15

Item 7a. Quantitative and Qualitative Disclosures About Market Risk 19

Item 8. Financial Statements and Supplementary Data 20

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20

PART III

Item 10. Directors and Executive Officers of the Registrant 21

Item 11. Executive Compensation 21

Item 12. Security Ownership of Certain Beneficial Owners and Management 21

Item 13. Certain Relationships and Related Transactions 21

PART IV

Item 14. Exhibits, Financial Statements and Reports on Form 8-K 22

Signatures 24

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PART I

ITEM 1. BUSINESS

GENERAL

Multiple Zones International, Inc., together with its majority owned
subsidiaries (collectively the "Company"), is a leading direct marketer of over
100,000 computer products and services to businesses and consumers. The Company
serves customers through its flagship brands: Zones Business SolutionsTM,
encompassing small to medium size businesses, government and education; and
Zones.comTM, the Company's internet store, portal to THE PC ZONE (R) and THE MAC
ZONE (R), targeting Small Office/Home Office ("SOHO"), small business and
consumer customers. The Company offers products from leading manufacturers
including 3Com, Apple, Compaq, Hewlett-Packard, IBM, Microsoft and Toshiba. The
Company began operations in 1988 by advertising in national trade publications.
Catalog circulation commenced with THE MAC ZONE in 1990, followed by THE PC ZONE
in 1992. Outbound telemarketing operations, principally to business accounts,
were added in 1993. Internet sales and electronic marketing via e-mail began in
1997. The Company launched touchMarketing.com, an Internet-based application
service provider of Affordable 1-to-1 Marketing, in 1999.

INDUSTRY BACKGROUND

The Company believes that many individuals and businesses, increasingly familiar
with computers, have become more receptive to direct marketing and now make
their purchase decisions based primarily on product selection, availability,
convenience and price. Direct marketers enjoy efficiencies in the form of
centralized operations and distribution and also the ability to offer a broad
product selection and purchasing convenience. The Company believes direct
marketing efficiencies not only better satisfy many segments of the customer
market but also provide a cost-effective marketing vehicle for product
manufacturers.

PricewaterhouseCoopers LLP's 1999 Annual Technology Forecast predicts a very
rapid increase in business conducted over the Internet. Between 1997 and 2002,
the number of devices accessing the internet is expected to grow from 78 million
to more than 515 million. Additionally, the number of Web users is projected to
increase from 140 million users in 1998 to over 500 million users by 2003. Web
devices were estimated to increase from 140 million in 1998 to 700 million by
2003 as personal digital assistants and hand-held computers give users greater
mobility

RISK FACTORS

The discussion of the Company's business and operations contained in the Annual
Report on Form 10-K contains certain forward-looking statements. For this
purpose, any statements that are not statements of historical fact may be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," and "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by any such forward-looking statements, including the risk
factors identified below, or other factors of which the Company may not yet be
aware.

FUTURE GROWTH. The Company's net sales have grown from $242.6 million in 1995 to
$487.4 million in 1999. Although net sales in 1999 decreased 2.8% from $501.4
million in 1998, the Company generated on-line and outbound sales growth of
90.1% and 41.0%, respectively. The Company's business strategy is to pursue
additional growth and expand its customer base. The Company's future success
will depend in part on its ability to manage growth effectively in the future.
There can be no assurance that the Company will realize future growth in net
sales or will not experience decreases in net sales.

DEPENDENCE ON SALES OF MAC PRODUCTS. The Company is largely dependent on sales
of Mac products manufactured by a broad variety of vendors, including Apple
Computer. Mac products represented 48.6% and 52.0% of the Company's gross sales
in 1999 and 1998, respectively. During late 1997, Apple Computer began selling
directly to customers. In 1999 and 1998, sales of items manufactured by Apple
represented 23.9% and 19.4% of gross sales, respectively. Over the past three
years, Apple cancelled licenses for clone manufacturers, removing competition in
the Mac CPU market. During 1999, the Company had availability problems resulting
from Apple brand product shortage and limited allocation. There can be no
assurances that the Company will receive adequate allocation of Apple products
to meet demand. A further decline in the availability of Apple, or other Mac
products, would likely have a material adverse effect on the Company's business,
financial condition

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and results of operations. The Company plans to grow its PC customer base by
focusing on growing outbound sales to business, education, government and
corporate accounts. There can be no assurance that the Company will be
successful in increasing sales of PC products or reducing its dependence on
sales of Mac products.

VENDOR SUPPORT. The Company has various relationships with its vendors, which
contribute to profitability. The Company relies on its vendor partners for co-op
advertising funds to offset expenses associated with catalogs, e-vehicles and
direct mail pieces. In addition, certain manufacturers and distributors provide
the Company with incentives in the form of rebates, discounts and allowances.
Vendors also help offset the cost of returned inventory with discretionary
return privileges. If any of these relationships are terminated, there can be no
assurance that the Company's business, financial condition and results of
operations will not be adversely affected.

COMPETITION. The computer products industry continues to be highly competitive.
The Company competes with other national and international direct marketers, as
well as traditional computer retailers, computer superstores, consumer
electronics and office supply superstores, and product manufacturers that sell
direct to end-users. In addition, a number of the Company's competitors are
increasing the sale of computer products via the Internet, and several new
Internet only competitors have emerged who use extremely aggressive pricing
strategies to generate traffic to their sites. Some of the Company's larger
competitors compete principally on the basis of price and may have lower costs
than the Company. There can be no assurance that the Company will be able to
compete effectively with new or existing competitors that may enter the market,
or that the Company's business, financial condition and results of operations
will not be adversely affected by intensified competition.

PRESSURE ON MARGINS. The computer products industry has experienced intense
price competition. The Company believes that competition may increase in the
future and that it may be required to reduce its margins to remain competitive.
A number of the Company's competitors are increasing the sale of computer
products via the Internet, and several new Internet only competitors have
emerged who use extremely aggressive pricing strategies to generate traffic to
their site. There can be no assurance that the Company will be able to maintain
its gross margins in the future.

VARIABILITY OF OPERATING RESULTS. The Company has experienced significant
fluctuations in its operating results from quarter to quarter as a result of
many factors, including internal investment in sales growth, general economic
conditions, the condition of the computer products industry, shifts in demand
for computer products and industry announcements of new products or upgrades.
There can be no assurance that the Company will be profitable on a quarterly or
annual basis.

CHANGING METHODS OF DISTRIBUTIONS. The market for computer products is evolving
rapidly in terms of product offerings and methods of distribution. New methods
of distribution, such as on-line shopping services and electronic distribution
of software, have emerged. Additionally, some manufacturers sell their hardware
and software products directly to individual end-users, or corporate accounts.
These methods of distribution have resulted in increased patronage and other new
methods of distribution may emerge in the future. The Company will be required
to remain competitive with existing and evolving distribution channels and
methods, and may be required to develop or adopt new methods for distribution in
the future. Failure by the Company to do so could have a material adverse effect
on its business, financial condition and results of operations.

POTENTIAL DISRUPTION OF BUSINESS. The Company's success is dependent in part on
the quality, reliability and proper utilization of its information,
telecommunication, desktop publishing and other systems, which are used for
web-based distribution, marketing, catalog design and production, purchasing,
inventory management, order processing, product distribution, accounts
receivable, customer service and general accounting functions.. Interruption in
any of the Company's operating systems, internet systems, internet connectivity
or telecommunication systems could have a material adverse effect on the
Company's business, financial condition and results of operations.

POTENTIAL INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS. Postage and shipping
costs, as well as the cost of paper for the Company's catalogs, are significant
expenses in the operation of the Company's business. The Company generally mails
its catalogs through the U.S. Postal Service and ships its products to customers
by overnight delivery. Any future increases in postage, shipping rates or paper
costs could have a material adverse effect on the Company's business, financial
condition or results of operations.

RELIANCE ON VENDOR RELATIONSHIPS. The Company acquires products for resale from
manufacturers, as well as from distributors. Purchases from distributors
constituted 52.9% and 36.7% of the Company's total purchases in

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1999 and 1998, respectively. Certain hardware manufacturers limit the number of
product units available to direct marketers such as the Company. Substantially
all of the Company's contracts and arrangements with its vendors are terminable
without notice or upon short notice. Termination, interruption or contraction of
the Company's relationships with its vendors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, in 1999 products purchased from IM represented 48.3% of total
purchases from distribution, and 25.6%of total receipts. IM also participates in
the Company's logistics through EDI. If this relationship is terminated, there
could be an adverse effect on the Company's business, financial condition or
results of operations.

STATE SALES OR USE TAX UNCERTAINTIES. The Company currently collects sales taxes
or similar taxes on sales to customers in the States of Washington, Nevada,
Tennessee and Ohio. Various states have sought to require direct marketers to
collect sales taxes on sales shipped to their residents. The United States
Supreme Court held in 1992 that it is unconstitutional for a state to impose
sales or use tax collection obligations on an out-of-state mail order company
whose contacts with the state are limited to the distribution of catalogs and
other advertising materials through the mail and the subsequent delivery of
purchased goods by United States mail or by interstate common carrier. However,
legislation that would expand the ability of states to impose sales tax
collection obligations on direct marketers has been introduced in Congress on
many occasions. Due to its presence on various forms of electronic media and
other factors, the Company's contact with various states may exceed the contact
involved in the Supreme Court case. The Company cannot predict the level of
contact that is sufficient to permit a state to impose a sales tax collection
obligation on the Company. If legislation is passed to overturn the Supreme
Court decision, the requirement to collect sales taxes or similar taxes on sales
would result in additional administrative expenses for the Company, could result
in increased prices to customers and could have a material adverse effect on the
Company's business, financial condition or results of operations.

DEPENDENCE ON PERSONNEL. The Company's future success will depend to a
significant extent upon the ability to attract and retain skilled personnel. The
current job market is straining the ability to recruit knowledgeable personnel
across all departments. The Company's success will depend on its ability to
hire, train and retain competent personnel in all areas of its business.

RELIANCE ON OUTSOURCED DISTRIBUTION. Airborne Logistics Services, an affiliate
of Airborne Express, provides and operates a warehouse and distribution center
for the Company in Wilmington, Ohio under an annual renewable contract that
expires in August 2000. Any limitation or interruption of the service being
provided by Airborne Logistics could have a material adverse effect on the
Company's business, financial condition and results of operations. Certain
distributors also participate in the Company's logistics through EDI. Failure to
develop and maintain relationships with these and other vendors that would allow
the Company to source sufficient quantities of merchandise on acceptable
commercial terms could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE AND INVENTORY OBSOLESCENCE. The computer industry is
characterized by rapid technological change and frequent introductions of new
products and product enhancements. In order to satisfy customer demand and
obtain greater purchase discounts, the Company may be required to carry
increased inventory levels of certain products, which will subject it to
increased risk of inventory obsolescence. The Company participates in
first-to-market and end-of-life-cycle purchase opportunities, both of which
carry the risk of inventory obsolescence. Special purchase products are
sometimes acquired without return privileges and there can be no assurance that
the Company will be able to avoid losses related to obsolete inventory. In
addition, some vendors provide the Company with co-op advertising support in the
form of products, for which there may be no return privileges. Within the
industry, vendors are becoming increasingly restrictive in guaranteeing return
privileges. While the Company seeks to reduce its inventory exposure through a
variety of inventory control procedures and policies, there can be no assurance
that the Company will be able to avoid losses related to obsolete inventory.

BUSINESS STRATEGY

The Company's business strategy is to strengthen its position as a leading
direct marketer of computer products and services to small to medium sized
business and small office/home office ("SOHO") customers, as well as consumer
customers. During 1999 the Company continued its evolution towards separating
the majority of its employees into two divisions, Zones.com and Zones Business
Solutions, in order to more directly align resources to specifically satisfy the
needs of its two distinct customer groups. Another component of the Company's
business strategy is to develop web-based businesses that can leverage the
expertise resident within Multiple Zones into services that could assist
business customers. touchMarketing.com is an Internet-based,

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e-marketing services company that was developed on the foundation of the
Company's twelve years of direct marketing expertise. The organization of the
Company's resources into these three separate businesses allows the business
units to focus on fulfilling the unique needs of their customers and to
determine new ways to acquire and retain customers.

Zones.com is an integrated electronic retailer of brand name PC and Mac
computers and related peripherals and software products to SOHO customers, small
businesses and consumers. Zones.com acquires and retains its customers through
an integrated marketing and merchandising strategy targeted towards its specific
customer segments. Zones.com reaches customers through a combination of
e-catalogs, on-line partnerships and links, THE PC ZONE and THE MAC ZONE paper
catalogs, and print advertising, all designed to attract customers to purchase
products through its improved web store, Zones.com, or by calling one of over
100 sales associates. Zones.com's merchandising strategy involves offering
competitive prices on a broad variety of products combined with promotional
pricing on selected popular items or special buy opportunities which attract
customers to Zones.com.

Zones Business Solutions ("ZBS") acquires and develops on-going relationships
primarily with businesses and educational institutions through dedicated teams
of outbound account managers. ZBS reaches its customers through a combination of
outbound telemarketing, e-catalogs, direct mail and print advertising. ZBS'
merchandising strategy involves offering next day availability on a broad range
of brand name products at competitive prices. ZBS also offers services to
customers through individual B2B-Zone web pages, customized web sites that
provide ZBS customers with various benefits, including secure on-line
purchasing, comprehensive product and manufacturer information, order status
information, multiple shopping baskets, varying ship-to options per order,
enhanced search and browse capabilities and historical purchase information. By
the end of 1999 the Company had established 3,150 B2B Zones for its customers.

touchMarketing.com is an Internet-based e-marketing services company offering
business customers Affordable 1-to-1 Marketing. The Company offers this service
through its web site using its proprietary e-Marketing Management System
("EMS"). The system allows customers to create a variety of e-vehicles,
including postcards and catalogs, with on-line templates. touchMarketing.com
stores the customer's image library and customer database on its secure server,
eliminate the customer's need for expensive e-media staff and technology.
touchMarketing.com offers database segmentation capabilities based on specific
demographic information, a flexible delivery schedule, and on-line performance
analysis tools. Customers pay a fee upon delivery, as well as for custom
templates created for their use. touchMarketing.com reaches its customers
through its field sales organization currently located in Virginia, North
Carolina, Texas, Arizona, and Washington.

The Company's business strategy is comprised of the following central elements:

DELINEATION OF DISTINCT BUSINESSES. The Company is currently operating three
distinct businesses, Zones.com, Zones Business Solutions and touchMarketing.com.
During 1999, the Company further separated its Zones.com and Zones Business
Solutions businesses in order to increase the focus of these two business units
on sales, marketing and merchandising strategies that satisfy the needs of their
two distinct customer groups. Management believes that this separation will
allow the Company to optimize its customer acquisition and retention resources,
through more targeted marketing and merchandising programs. The launch of
touchMarketing.com during 1999 grew out of the Company's experience in direct
marketing and its need to quickly and effectively reach its customer.

ELECTRONIC MARKETING. The Company believes that the Internet offers both market
expansion opportunities and a more cost efficient means of communicating with
and fulfilling the needs of customers. Using the Internet, the Company can offer
significantly more products to reach an increased number of customers and offer
customers additional options for obtaining information and making purchases.
Similarly, e-mail and e-catalogs offer growth opportunities, cost efficiencies
and customer convenience. During 1999, the Company sent out over 10 million
e-catalogs or e-marketing messages. The Company uses electronic and "offline"
media in an integrated fashion to improve the efficiency of customer acquisition
and retention.

EXPANSION OF ZONES BUSINESS SOLUTIONS. Sales to corporate and education accounts
represent a strong growth opportunity for the Company. The Company intends to
continue the growth in sales to these accounts by expanding its outbound sales
team. In addition to outbound telemarketing, ZBS is using dedicated e-marketing
and direct marketing vehicles to attract and retain customers. Additionally, the
outbound sales team is improving its productivity by providing customized web
stores for its major corporate customers.

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DEVELOPMENT OF E-BUSINESS SERVICES. The Company is determined to continue its
development of e-business services or to bring these services to its customers
through affiliations. In November 1999, the Company launched touchMarketing.com,
an Internet-based, e-marketing services company offering business customers
Affordable 1-to-1 Marketing. This business was developed in response to the
Company's own need for this service, and was based on its expertise as a direct
marketing company. The Company is continually exploring additional services to
offer its business and consumer customers.

MAINTAINING ADVANCED TECHNOLOGY INFRASTRUCTURE. During 1999 the Company invested
in its technology infrastructure in order to improve the efficiency of its
operations and the quality of the customer experience. In July 1999 the Company
upgraded its mail order and catalog management software package in order to
become Y2K compliant. In October 1999, the Company implemented an EDI
partnership with a major distribution partner in order to improve product
availability and operating efficiency. In November 1999, the Company launched
its new zones.com web store. This new web store has improved search,
merchandising and customer fulfillment functionality. The Company intends to
continue investing in its technology infrastructure across all of its businesses
and continue adding distribution partners as EDI alternatives.

REDUCTION OF OPERATING COSTS. The Company continually seeks ways to operate more
efficiently. Through ongoing operating productivity initiatives, the Company had
a sales-to-administration headcount ratio at the end of 1999 that was the
highest it has been in five years. The Company will continue in its efforts to
reduce operating expenses as a percentage of sales.

SALES AND MARKETING - ZBS

OUTBOUND TELEMARKETING. As of December 31, 1999 the Company had a staff of 238
account managers ("AM") actively pursuing sales to corporate and education
accounts by establishing one-to-one relationships through outbound
telemarketing. During 1999, the Company invested heavily in this sales force,
increasing it 67.6% from 142 AM's at the end of 1998. The primary targets for
these AM's are the small to medium sized businesses ("SMB"), government and
education customers. These commissioned AM's develop long-term relationships
with their accounts through frequent telephone contact and by providing
individual attention, quality service, and convenient one-stop shopping. In
addition, the Company utilizes e-marketing, fax broadcast messaging and other
marketing initiatives to enhance sales.

INTERNET COMMERCE. During 1999, the Company began offering customized web stores
for its corporate customers. These customized web pages provide ZBS customers
with various benefits, including secure on-line purchasing, comprehensive
product and manufacturer information, order status information, multiple
shopping baskets, varying ship-to options per order, enhanced search and browse
capabilities and historical purchase information. By the end of 1999 the Company
had established 3,150 B2B Zones for its customers.

SALES AND MARKETING - ZONES.COM

INTERNET COMMERCE. The Company was one of the first participants in the direct
marketing channel to participate and sell computer products online. The Company
has built and maintains an electronic commerce site on the Internet (zones.com),
offering THE MAC ZONE, THE PC ZONE, and ZonesAuction. The electronic stores
provide the Company with a way to offer customers detailed product information
and the convenience of online purchasing. To drive traffic to its Internet
sites, the Company leverages its catalog circulation by featuring the Internet
address throughout the catalogs, including the cover. The Company is also
increasingly using marketing through e-catalogs, as well as on-line price
promotions and affiliations. The Company sent 10.3 million e-catalogs in 1999.
Beginning in the fourth quarter 1999, the Company produced and distributed
marketing e-vehicles through its subsidiary, touchMarketing.com.

The Company continues to realign its promotional efforts to support its
e-commerce business strategy. The Company launched a new web store in November
1999. The new Zones.com web store has been designed to better serve the needs of
customers by offering new features including on-line order status, express
checkout, improved product descriptions, enhanced search and browse features,
and personalization. In addition, the new store features robust merchandising
capabilities to provide customers with solution-based product offerings to
satisfy their complete computing needs. The Company intends to refine the web
store, adding new features and functionality on an ongoing basis.

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ZonesAuction.com began in December 1998 and has been in existence for just over
a year. The auction site is hosted by FairMarket.com an industry leader in
Internet auction software services on an annual contractual relationship. The
products listed on ZonesAuction site also appear on over 100 other auction sites
that are members of the FairMarket.com Network. ZonesAuction provides complete
listing, merchandising, marketing, e-commerce transaction handling, product
distribution and delivery services for its vendors and customers.

CATALOGS. The Company markets products through targeted mailings of its flagship
catalogs, THE PC ZONE and THE MAC ZONE, each of which has been published monthly
since January 1995. The Company views catalog distribution as both a direct
marketing tool and a customer acquisition vehicle driving significant traffic to
its web store, zones.com. As the business model evolves and continues to focus
on outbound and e-commerce, the reliance on catalogs continues to diminish.
Total circulation for the Company's catalog distribution decreased 32.9% to 31.1
million catalogs in 1999 from 46.3 million in 1998. During 1999, the Company
sent 10.3 million e-catalogs.

Customers receive catalog mailings at a frequency that is based on their
purchase activity. Catalogs are also included with each order shipped, and
mailed periodically to potential customers in the Company's proprietary database
and to prospects obtained from list brokers and other sources. Each edition of
the catalogs is typically produced with several cover versions. Each catalog is
printed with full-color photographs, detailed descriptions of product
specifications, benefits and features, as well as pricing and ordering
information. The catalogs are designed and produced in-house by the Company's
staff of designers and production artists using a sophisticated computer-based
catalog production system. The Company also produces direct mail pieces for
highly targeted promotions of specific products, such as software upgrades, to
relevant customers. The Company's catalogs and direct mail pieces are printed
and distributed commercially.

INBOUND SALES. The Company has over 100 well trained and knowledgeable inbound
telemarketing representatives. The Company offers toll-free numbers for inbound
sales that are staffed seven days a week. Sophisticated systems allow the
Company's representatives to quickly access a customer's record and billing
information and review details of past purchases. For most products sold, the
systems also contain an extensive on-line database of information on product
specifications, benefits and features; compatibility of related products; and
system requirements for software programs. In addition, the systems
automatically prompt telemarketing representatives to offer customers the latest
upgrades and complementary software and peripherals.

PRODUCTS AND MERCHANDISING

Through the Company's catalogs, Internet site and consultative sales force, the
Company can offer customers access to over 100,000 hardware, software,
peripheral and accessory products and services for users of PC and Mac computers
from over 1,000 manufacturers. The Company is also authorized to sell volume
site licenses for products of Adobe, Lotus, Macromedia, Microsoft, Novell and
Symantec.

COMPUTERS. The Company offers a large selection of desktop, laptop and notebook
personal computer systems from leading manufacturers such as Apple, Compaq,
Hewlett-Packard, IBM, Sony, and Toshiba.

PERIPHERALS AND ACCESSORIES. The Company also sells peripherals and components
such as printers, servers, monitors, keyboards, memory, fax and other add-on
circuit boards, networking and communications products, mass storage devices,
modems, scanners, and digital cameras, as well as various accessories and
supplies such as toner cartridges, diskettes and connectors. Brands offered by
the Company include 3Com, Apple, Cisco, Epson, Hewlett-Packard, Iomega, Okidata,
Phillips, Quantum, Sony, UMAX and ViewSonic.

SOFTWARE. The Company sells a wide variety of software packages in the business
and personal productivity, connectivity, utility, language, educational and
entertainment categories. The Company offers products from larger, well-known
manufacturers as well as numerous specialty products from new and emerging
software development companies. Brands offered by the Company include Adobe,
Corel, Filemaker Incorporated, Intuit, Macromedia, Microsoft, Novell, and
Symantec.

The following table shows the Company's gross sales attributable to various
product categories during 1997, 1998, and 1999.

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YEAR ENDED DECEMBER 31,
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1999 1998 1997
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Computers 41.0% 32.7% 33.8%
Peripherals and accessories 43.7 49.3 48.8
----- ----- -----
Total hardware 84.7 82.0 82.6
Software 15.3 18.0 17.4
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

The Company's merchandising group determines the manufacturers whose products
are featured in its Internet and catalog offerings and negotiates the terms and
conditions of product coverage. In exchange for product coverage and the benefit
of having information about their products available to the Company's customers,
manufacturers provide the Company supplier investment funds. The Company uses
these funds to defray the expense of Internet marketing and catalog production,
brand specific training for sales staff, and promotional activities to incite
sales. The merchandising group is also responsible for developing effective
advertising campaigns for manufacturers, managing web-site and catalog design
and layout, and coordinating product procurement and inventory management with
the Company's purchasing group. In addition, the merchandising group works
closely with the purchasing group to capitalize on opportunities for
first-to-market and end-of-life-cycle product offerings.

The Company is focused on expanding its PC sales. PC sales represented 51.4% of
net sales in 1999, compared to 48.0% and 45.6% of net sales in 1998 and 1997,
respectively. The Company's PC net sales grew 14.1% during 1999 over 1998 and
increased 5.9% during 1998 over 1997. The increase in PC sales is a result of
the Company's increased sales to small and medium sized businesses, whose
purchases tend to be concentrated more heavily on PC products.

The Company's Mac net sales remained consistent during 1999 over 1998 and had
declined 3.9% during 1998 over 1997. Sales of Apple Computer products alone
constituted 23.9% of gross sales in 1999 compared to 19.4% of gross sales in
1998 and 17.1% of gross sales in 1997. During 1999, the Mac platform increased
in popularity primarily as a result of new Apple Computer product offerings and
innovative marketing strategies. The Company believes that the percentage of its
sales represented by Mac products is likely to continue to decline gradually
over time as a result the Company's continuing efforts to increase sales to
business and education accounts that are more heavily weighted to the PC
platform.

DATABASE MARKETING

The Company maintains a proprietary database containing 3.6 million customer and
inquirer records. The Company attracts new customers and prospective customers
through advertising in major trade publications, on-line media and through
selective mailing of catalogs to names on mailing lists obtained from list
brokers, product manufacturers, trade magazine publishers and other sources. The
Company periodically analyzes and updates its database and other available
information in order to enhance customer response and order rates. The Company
tracks the buying patterns of its customers in an attempt to anticipate
customers' needs and generate additional product orders. The Company also
strives to improve the size, quality and responsiveness of its database through
the use of sophisticated modeling techniques. The Company believes that by
selectively targeting its print media and e-vehicles to specific groups of
customers with known product affinities and purchasing characteristics, it will
be able to increase order rates from customers. This also enhances the
effectiveness of the Company's print catalogs and e-vehicles, and their
desirability as a marketing channel for product manufacturers. The Company
leverages its database marketing capabilities by providing key product
manufacturers with marketing research such as price sensitivity tests, list
response analyses, and database marketing consulting services. The Company
believes these efforts assist it in promoting and preserving positive
relationships with these manufacturers.

PURCHASING

The Company acquires products directly from manufacturers, such as Apple and
IBM, as well as from distributors such as Ingram Micro, Merisel and others. The
Company purchased 52.9% and 36.7% of its products from distributors in 1999 and
1998, respectively. Purchases from Ingram Micro represented 25.6% of the
Company's total product purchases in 1999. No other vendor supplied more than
10.0% of the Company's total product purchases in 1999.

9
<PAGE>

In October 1999, the Company entered into an agreement to use Ingram Micro
("IM") as a direct sales fulfillment partner using EDI. Under this agreement, IM
provides the Company's customers access to its vast inventory of products and
reduces handling costs. IM provides daily information on price and product
availability, which is uploaded into the Company's ERP inventory management
system. The Company places individual orders directly with IM, which assembles
these orders and ships directly to the Company's customers. Since October, the
Company has initiated EDI with other vendor partners, further increasing product
availability to its customers.

The Company seeks to efficiently manage its inventory to achieve high product
availability and fill rates. The Company utilizes sophisticated computer systems
that permit real-time monitoring of inventory and assist in managing inventory
levels. The Company's new EDI partnerships will further enhance its ability to
maintain minimum inventory levels. The Company has 14-day defective return
privileges on many of its product purchases, and has agreements with many of its
vendors providing price protection should a vendor subsequently lower its price.

TECHNICAL SUPPORT AND CUSTOMER SERVICE

The Company's customer service representatives respond to questions regarding
order status and related matters as well as assist customers with product
returns. Most vendors offer an unconditional 30-day warranty on defective
products. The Company also has a staff of dedicated technical support personnel
who assist customers with the installation and operation of the products they
purchase and are available toll-free during regular business hours. The
technical support staff also assists the Company's Account Managers with
pre-sale questions to ensure customer satisfaction at the point of sale. These
personnel also offer customers support with customized configuration of their
computer systems.

TOUCHMARKETING.COM

During 1999, the Company launched touchMarketing.com, an Internet-based
application service provider of Affordable 1-to-1 Marketing. Through its fully
integrated system, customers can easily create graphically-rich e-vehicles,
select appropriate, targeted customers from their e-mail lists, deliver the
campaigns quickly and effectively, and thoroughly analyze the results. Its
e-Marketing Management System ("EMS") was developed from Multiple Zones' direct
marketing expertise and its need to cost-effectively and quickly promote
offerings on line. As of December 31, 1999, touchMarketing.com had 12 employees.

INTERNATIONAL OPERATIONS

During 1999, the Company divested majority control over most of its
international operations including Germany, Austria, Switzerland, Mexico, United
Kingdom and France. The Company has continuing relationships with licensees
located in 6 other foreign countries, as well as a subsidiary in India. The
catalogs of the Company's subsidiary and licensees are published under THE PC
ZONE and THE MAC ZONE service marks, but are designed and produced locally in
the native language, which allows them to be customized both in presentation and
product mix to suit local needs.

SYSTEMS

The Company has committed significant resources to the development of
sophisticated management information, telecommunication, catalog production and
other systems, which are employed in virtually all aspects of its business,
including marketing, purchasing, inventory management, order processing, product
distribution, accounts receivable, customer service and general accounting
functions.

In 1999, the Company implemented EDI with several of their vendor/distributors
allowing better access to inventory availability and pricing. Additionally, the
company upgraded their Consumer Web store to a BroadVision Web engine.

DISTRIBUTION

The Company distributes products directly through its EDI, as well as through
its Airborne Logistics ("ALS") warehouse.

10
<PAGE>

In October 1999, the Company entered into an agreement to use IM as a primary
distribution partner utilizing EDI technology. EDI provides the Company's
customers access to IM's vast inventory of products and reduces handling costs.
IM provides daily information on price and product availability, which is
uploaded into the Company's ERP. The Company places individual orders directly
with IM, which assembles these orders and ships directly to the Company's
customers. During the first quarter of 2000, the Company established EDI
relationships with additional distributors and vendors.

ALS provides and operates a full-service warehouse and distribution center for
the Company at the Airborne Commerce Park in Wilmington, Ohio under a contract
that expires in August 2000. Employees of Airborne Logistics utilize the
Company's systems, policies and procedures to receive, log and warehouse
inventory shipments from product suppliers, fill and ship customer orders, and
return inventory to product suppliers when requested by the Company. The Company
also uses this warehouse facility to house special buys, constrained product and
other high velocity product.

The Company pays a flat rate for each order filled by ALS. Orders received by
the Company are electronically transmitted on a dedicated data line to its
computer equipment at the Airborne Logistics distribution center, where a
packing slip is printed out for order fulfillment and inventory availability is
automatically updated on all of the Company's information systems. All inventory
items are bar coded and located in computer-designated areas that are easily
identified on the packing slip. All items are checked with bar code scanners
prior to final packing, which helps to ensure that orders are filled correctly.
Orders accepted by 1:00 a.m. Eastern Time can generally be delivered overnight
via Airborne Express. Upon request, orders may also be shipped for Saturday
delivery or by ground service or other overnight delivery services.

The Company operates a return logistics warehouse in Henderson, Nevada. The
returns warehouse accepts returns on certain products, process the return and
determines viability of the product. The warehouse is then responsible for
return to vendor, return to general inventory, repairs, or liquidation of the
returned merchandise.

The Company experienced a significant decline in domestic customer return rate
to 4.3% of gross sales in 1999 from 6.2% in 1998. This decrease is primarily
attributable to a more effective sales force and mandating certain product
returns be sent directly to the vendor. Product returns are closely monitored to
identify trends in product offerings, enhance customer satisfaction and reduce
overall returns.

COMPETITION

The computer products industry is highly competitive. The Company competes with
other national and international direct marketers, including MicroWarehouse,
Inc., CDW Computer Centers, Inc., Insight Enterprises, Inc. and Creative
Computers, Inc. Increasingly, the Company competes with Internet only computer
retailers that can be extremely price competitive. The Company also competes
with product manufacturers that sell direct to end-users such as Dell and
Gateway; specialty computer retailers; computer and general merchandise
superstores; consumer electronic and office supply stores. Many of these
competitors rely heavily on the Internet as a marketing and sales channel.
Additional competition may arise if other new methods of distribution, such as
interactive television, emerge in the future. The Company competes not only for
customers, but also for co-op advertising support from computer product
manufacturers. The Company believes that product selection, availability and
price are the three most important competitive factors.

EMPLOYEES

At December 31, 1999, the Company had 656 employees in its domestic operations.
The Company considers its employee relations to be good. The Company has never
had a work stoppage and no employees are represented by a labor organization.
The Company emphasizes the recruiting and training of high quality personnel
and, to the extent possible, promotes people to positions of increased
responsibility from within the Company. Each employee receives training
appropriate to his or her position, including: New Hire Orientation, Sales
Training and Management Development. New telemarketing representatives
participate in a five-week training program to introduce them to the Company's
systems and familiarize them with the available products and services.

TRADEMARKS

The Company conducts its business in the United States primarily under the
service marks THE PC ZONE(R) and THE Mac ZONE(R) registered with the United
States Patent and Trademark Office. These registrations have an

11
<PAGE>

indefinite term, so long as the service marks are used in connection with the
Company's business activities. The Company believes its service marks have
significant value and are an important factor in the marketing of its products.
The Company intends to take appropriate steps to protect and renew its service
mark registrations.

REGULATORY AND LEGAL MATTERS

In addition to federal, state and local laws applicable to all corporations and
employers in general, the direct marketing business as conducted by the Company
is subject to the Federal Trade Commission's Merchandise Mail Order Rule and
related regulations. The Company is also subject to laws and regulations
relating to truth-in-advertising and other fair trade practices. The Company has
implemented programs and systems to promote ongoing compliance with these laws
and regulations.

ITEM 2. PROPERTIES

The Company currently leases approximately 132,000 square feet of space for its
corporate headquarters, including its telemarketing operations, in Renton,
Washington and approximately 18,000 square feet of space for its return
warehouse facility in Henderson, Nevada.

ITEM 3. LEGAL PROCEEDINGS

Various claims and actions of a type commonly encountered in the Company's
industry have been asserted and are pending against the Company. The Company
believes that such claims and actions will not have a material adverse effect
upon the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted during the fourth quarter of 1999 to a vote of
security holders.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

FIROZ H. LALJI, age 53, has served as the Company's President and Chief
Executive Officer since May of 1998 and has served as a Director of the Company
since March 1990. Mr. Lalji is also a principle of Fana Capital Corp., an
investment holding company, and serves on the Board of Directors of RWI
Interactive Information Services, Inc., an internet based world access network
of directories. From 1981 to 1997, he was founder and Chief Executive Officer of
Kits Cameras, Inc., which operated over 145 camera specialty stores in eight
western states.

LORNE G. RUBIS, age 49, was appointed Chief Operating Officer in February of
1999. Mr. Rubis joined the Company and served as the Executive Vice President of
Sales beginning in July of 1997. From 1996 to 1997, Mr. Rubis was the Vice
President of Business Operations for the Los Angeles Kings Hockey Club. From
1992 to 1996, Mr. Rubis held the position of Vice President, reporting to the
Chairman and CEO, at U.S. WEST, Inc., a Fortune 50 telecommunications/multimedia
corporation.

JAMES H. BROMLEY, age 35, was appointed Senior Vice President - Finance and
Chief Financial Officer in June 1999. From 1998 to 1999, Mr. Bromley served as
Managing Director for Seattle Corporate Finance at McDonale Investments. From
1996 to 1998, Mr. Bromley served as Managing Director in charge of Retail
Consumer Products Corporate Finance at Dain Rauscher Wessels. From 1994 to 1996,
Mr. Bromley served as Senior Vice President in the Seattle Corporate Finance at
Pacific Crest Securities. He has had prior investment banking involvement with
the Company, including the placement of the Company's IPO in 1996.

LAWRENCE V. GRELLA, age 33, was appointed Senior Vice President and General
Manager of Zones.com in November of 1999. Mr. Grella served as Managing Director
for Globix Direct Internet Initiative during 1999. From 1997 to 1999, Mr. Grella
was Vice President fo Merchandising, Sales and Purchasing at RCS Computer
Experience. From 1995 to 1997, Mr. Grella was Vice President of Marketing for
Creative Computers. From 1992 to 1995, Mr. Grella was Group Manager for
MicroWarehouse.

GUIO G. BARELA, age 47, joined the Company in November of 1998 as Senior Vice
President of Corporate Development. From 1997 to 1998, Mr. Barela was Vice
President at Insight Enterprises, Inc. From 1996 to 1997, Mr. Barela was CEO and
Founder of ICXpress. From 1995 to 1997, he served as Vice President of Supplier
Relations of Tandy Procurement Alliance, a Tandy Corporation.

12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock is traded on the NASDAQ National Market under the
symbol MZON. The following table sets forth the range of high and low sales
prices for the Common Stock as reported by the NASDAQ National Market.

YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter 20 3/4 10 5 3/8 3 1/2
Second quarter 15 5 3/8 4 1/4 2 11/16
Third quarter 8 1/2 5 5/32 4 1/4 2 11/16
Fourth quarter 10 1/2 5 1/4 56 2 3/4

</TABLE>

As of the March 17 record date, the Company had over 8,000 holders of record of
its Common Stock. The Company has never paid and has no present plans to pay a
cash dividend on its Common Stock. The Company intends to retain its earnings to
finance the expansion of its business.

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<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the selected historical consolidated income and
balance sheet data of Multiple Zones International, Inc. and its subsidiaries.
The balance sheet data at December 31, 1999 and 1998 and the statement of
operations data for the years ended December 31, 1999, 1998 and 1997 have been
derived from the audited financial statements and notes thereto included in this
Annual Report on Form 10-K. The balance sheet data for the years ended December
31, 1997, 1996 and 1995 and the statement of operations data for the years ended
December 31, 1996 and 1995 have been derived from audited consolidated financial
statements and notes thereto not included in this Annual Report on Form 10-K.
This information should be read in conjunction with the consolidated financial
statements and notes thereto included in Item 8 and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

YEAR ENDED DECEMBER 31,

1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>

STATEMENT OF OPERATIONS DATA:

Net sales $ 487,410 $ 501,441 $ 490,025 $ 457,007 $ 242,587
Cost of sales (2,3) 438,643 447,005 431,905 393,998 211,037
------------ ------------ ------------ ------------ ------------
Gross profit 48,767 54,436 58,120 63,009 31,550
Selling, general and administrative
expenses(2,3) 57,502 63,409 62,910 44,613 25,425
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (8,735) (8,973) (4,790) 18,396 6,125
Other expense, net(1,2) 561 3,474 1,618 1,397 1,086
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (9,296) (12,447) (6,408) 16,999 5,039
Provision for (benefit from) income taxes (2,637) (4,114) (965) 6,125 1,847
------------ ------------ ------------ ------------ ------------
Net income (loss)(1,2,3) $ (6,659) $ (8,333) $ (5,443) $ 10,874 $ 3,192
============ ============ ============ ============ ============

Diluted earnings (loss) per share(1,2,3) $ (0.50) $ (0.64) $ (0.42) $ 0.91 $ 0.32
Shares used in computation of diluted
earnings (loss) per share 13,287 13,079 12,965 11,912 9,460

BALANCE SHEET DATA:

Working capital $ 17,303 $ 27,601 $ 35,057 $ 39,809 $ 7,750

Total assets 96,494 133,047 104,810 149,801 79,392
Short-term debt 1,615 2,943 3,045 3,960 12,757
Long-term debt, net of current portion 986 338 892 1,748 1,665
Series B preferred stock 6,461

Total shareholders' equity $ 31,840 $ 37,350 $ 44,971 $ 49,469 $ 4,736

SELECTED OPERATING DATA:(4)

Catalogs distributed 31,075,000 46,300,000 50,500,000 44,000,000 29,000,000
e-catalogs distributed 10,319,000
Number of orders(5) 844,646 1,033,182 1,116,664 1,094,643 791,242
Average order size(5) $ 556 $ 435 $ 406 $ 395 $ 296
Number of account managers 238 142 91 89

</TABLE>

(1) During 1999, the Company recognized gains and losses on the divestiture of
majority control in Austria, France, Germany, Mexico, Switzerland and the
United Kingdom, resulting in a new loss of $541,000

(2) During 1998, the Company recorded charges related to the write-off of
inventory, the closure of international subsidiaries, staffing reductions
and the disposal of unproductive computer hardware and software. Excluding
the effect of these charges, the Company would have reported a net loss of
$(2,600,000) or $(0.20) per share.

(3) During 1997, the Company recorded charges related to the write-off of
goodwill, accounts receivable, inventory and the closure of three
international subsidiaries. Excluding the effect of these charges, the
Company would have reported net income of $2,713,000 or $0.21 per share.

(4) Selected operating data exclude international operations.

(5) Number of shipments is the number of domestic outbound orders to customers
from the third-party distribution center utilized by the Company. Average
order size is calculated by dividing domestic gross sales by the number of
domestic orders.

14
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the Company's financial condition and
results of operations contains certain forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by any such forward-looking statements.
These factors include, without limitation, those items set forth in Item 1 above
under the caption "Risk Factors."

The following discussion and analysis should be read in conjunction with the
Company's Selected Consolidated Financial and Operating Data and the
Consolidated Financial Statements and Notes included in this Annual Report on
Form 10-K.

General

Multiple Zones International, Inc., together with its majority owned
subsidiaries (collectively the "Company"), is a leading direct marketer of over
100,000 computer products and services to businesses and consumers. The Company
serves customers through its flagship brands: Zones Business SolutionsTM,
encompassing small to medium size businesses, government and education; and
Zones.comTM, the Company's internet store, portal to THE PC ZONE (R) and The MAC
ZONE (R), targeting SOHO, small business and consumer customers. The Company
offers products from leading manufacturers including 3Com, Apple, Compaq,
Hewlett-Packard, IBM, Microsoft and Toshiba. The Company began operations in
1988 by advertising in national trade publications. Catalog circulation
commenced with The Mac Zone in 1990, followed by The PC Zone in 1992. Outbound
telemarketing operations, principally to business accounts, were added in 1993.
Internet sales and electronic marketing via e-mail began in 1997. The Company
launched touchMarketing.com, an Internet-based application service provider of
Affordable 1-to-1 Marketing in 1999.

The Company's revenues consist primarily of sales of computer hardware,
software, peripherals and accessories, as well as royalties from foreign
licensees. 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 revenue, warehousing, selling commissions, order processing,
telephone and credit card fees and other costs such as administrative salaries,
depreciation, rent and general overhead expenses. Other expense represents
interest expense net of non-operating income and minority interests in the
Company's foreign subsidiaries which the Company divested of majority control in
all foreign operations.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items from
the Company's Consolidated Statements of Operations expressed as a percentage of
net sales.

YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.0 89.1 88.1
----- ----- -----
Gross profit 10.0 10.9 11.9
SG&A expenses 11.8 12.6 12.8
----- ----- -----
Loss from operations (1.8) (1.8) (0.9)
Other expense 0.1 0.7 0.3
----- ----- -----
Loss before income taxes (1.9) (2.5) (1.2)
Benefit from income taxes (0.5) (0.8) (0.2)
----- ----- -----
Net loss (1.4)% (1.7)% (1.0)%
===== ===== =====

</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

NET SALES. Net sales declined 2.8% to $487.4 million in 1999 from $501.4 million
in 1998. The decrease was due to the sale of several international subsidiaries
during the second and fourth quarters of 1999. Domestic net sales increased 6.7%
to $449.8 million from $421.6 million. The domestic increase resulted primarily
from an

15
<PAGE>

increase in the Company's Zones Business Solutions ("ZBS") division, which grew
41.0% to $248.6 million in 1999. Due to the Company's transition to an
e-commerce model, the Company's Zones.com division, which is comprised of the
Internet and inbound catalog operations declined 17.7% to $200.7 million in
1999. This decline was offset by Internet sales increases of 90.1% to $90.2
million in 1999.

Net domestic PC/Wintel product sales increased 14.1% to $231.0 million in 1999
from $202.6 million in 1998. The growth was driven primarily by the increase in
ZBS sales as a percentage of total domestic net sales to 55.3% in 1999 from
41.8% in 1998. Sales to business and education accounts increased 41.0% to
$248.6 million from $176.3 million in 1998. The increase in ZBS sales was also
impacted by an increase in the number of ZBS outbound account managers to 238 at
year-end, compared with 142 at the end of 1998.

Net domestic Mac product sales remained constant at $218.8 million in 1999
compared to $219.0 million in 1998. Sales of Mac products to business and
education accounts through ZBS increased 17.5% during 1999 to $95.8 million, due
primarily to the increased number of outbound account managers.

International subsidiary net sales in 1999 were $37.6 million in 1999 compared
to $79.8 million in 1998. The significant decrease in international sales is due
to the divestiture of majority control in several subsidiaries during 1999,
including Germany, Austria, Switzerland, Mexico, France, and the United Kingdom.

GROSS PROFIT. Gross profit decreased to $48.8 million in 1999 from $54.4 million
in 1998, and declined to 10.0% of net sales in 1999 from 10.9% of net sales in
1998. During the second quarter of 1998, the Company recorded inventory
adjustments totaling $2.9 million, primarily related to allowances for obsolete
and non-returnable inventory. In addition to these adjustments, gross margin
declined due to increased price competition, lower average unit selling prices
and an increase in PC product sales and sales to business and education
accounts, which generally carry a lower average gross margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased to $57.5
million in 1999 from $63.4 million in 1998, and as a percentage of net sales
between periods to 11.8% from 12.6%. During the second quarter of 1998, the
Company recorded charges totaling $2.3 million primarily related to staffing
reductions and the closure or sale of certain international operations.

OTHER INCOME/EXPENSE. Other expense was $561,000 in 1999 compared to an expense
of $3.4 million in 1998. During the second quarter of 1998, the Company recorded
charges to income of $3.5 million related to the disposal of certain
unproductive computer hardware and software costs.

INCOME TAX BENEFIT. The income tax benefit for 1999 was $2.6 million. The income
tax benefit for 1998 was $4.1 million.

NET LOSS. As a result of the above factors, a net loss of $6.7 million or 1.4%
of net sales was incurred in 1999. Net loss for 1998 was $8.3 million or 1.7% of
net sales.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997

NET SALES. Net sales increased 2.3% to $501.4 million in 1998 from $490.0
million in 1997. The increase resulted primarily from an increase in the
Company's Zones Business Solutions ("ZBS") division, which grew 22.2% to $176.3
million in 1998. The Company's Zones.com division, which is comprised of the
Internet and inbound catalog operations declined 6.4% to $243.9 million in 1998.
Internet sales increased 386.8% to $47.5 million in 1998.

Net domestic PC product sales increased 11.2% to $202.6 million in 1998 from
$182.2 million in 1997 (excluding $9.2 million in fourth quarter 1997 PC Product
sales to corporate resellers, which have been discontinued). The increase was
due primarily to an increase in the number of ZBS outbound account managers to
142 at year-end, compared with 91 at the end of 1997. Sales to business and
education accounts increased 14.8% to $176.3 million from $144.2 million in
1997. PC product sales represented 56.3% and 54.4% of the sales to business and
education accounts in 1998 and 1997, respectively.

Net domestic Mac product sales decreased 3.9% to $219.0 million in 1998 from
$228.0 million in 1997. Sales of Mac products to business and education accounts
through ZBS increased 17.5% during 1998 to $77.0 million, due primarily to the
increased number of outbound account managers. Sales of Mac products through

16
<PAGE>

the combined catalog and Internet operations of Zones.com declined 13.6% to
$142.0 million, reflecting a continued overall decline in consumer demand for
Mac products.

International subsidiary net sales in 1998 were $79.8 million, an increase of
12.9% over the comparable period. The increase resulted primarily from sales
growth in the Company's operations in Germany, France, and the United Kingdom.

GROSS PROFIT. Gross profit decreased to $54.4 million in 1998 from $58.1 million
in 1997, and declined to 10.9% of net sales in 1998 from 11.9% of net sales in
1997. During the second quarter of each period, the Company recorded inventory
adjustments totaling $2.9 million and $2.5 million, respectively, primarily
related to allowances for obsolete and non-returnable inventory. In addition to
these adjustments, gross margin declined due to increased price competition,
lower average unit selling prices, and an increase in PC product sales and sales
to business and education accounts which generally carry a lower average gross
margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to $63.4
million in 1998 from $62.9 million in 1997, but declined as a percentage of net
sales between periods to 12.6% from 12.8%. During the second quarter of 1998,
the Company recorded charges totaling $2.3 million primarily related to staffing
reductions and the closure or sale of certain international operations. During
the second quarter of 1997 the Company recorded charges totaling $2.5 million
primarily related to uncollectable advertising receivables and staffing
reductions.

OTHER EXPENSE. Other expense increased to $3.4 million in 1998 from $1.6 million
in 1997. During the second quarter the Company recorded charges to income of
$3.5 million related to the disposal of certain unproductive computer hardware
and software costs.

INCOME TAX BENEFIT. The income tax benefit for 1998 was $4.1 million. The income
tax benefit for 1997 was $965,000. As of December 31, 1998 and 1997, the Company
had deferred tax assets attributable to foreign subsidiaries.

NET LOSS. As a result of the above factors, a net loss of $8.3 million or 1.7%
of net sales was incurred in 1998. Net loss for 1997 was $5.4 million or 1.0% of
net sales.

TRENDS

During the year ended December 31, 1999, sales through the Company's Internet
store, zones.com, grew to $90.2 million, or 20.1% of domestic sales, an increase
of 90.1% over 1998. Net sales for zones.com grew to $31.6 million in the fourth
quarter of 1999, up 70.7% from net sales of $18.5 million in the fourth quarter
of 1998 and up 65.3% from net sales of $19.1 million in the third quarter of
1999. This increase was facilitated by a variety of web-site improvements during
the year, specifically the launch of the Company's new store in November 1999.
It also included hardware upgrades to increase system capacity, improvements to
the web site's user-friendliness, and the addition of expanded software-delivery
capabilities. The Company plans to further customize its web site to provide
more efficient access and improved product selection for its business and
education customers. The Company also promotes Internet sales by offering
telephone sales assistance to its online customers.

Outbound sales to business and education accounts grew to $66.0 million during
the fourth quarter of 1999, an increase of 31.6% and 8.0% over the fourth
quarter of 1998 and third quarter of 1999, respectively. Year over year growth
was 41.0% to $248.6 million in 1999 from $176.3 million in 1998. This growth was
achieved through a combination of process-based productivity improvements and
the Company's successful efforts to expand its outbound account executive
headcount. The Company had 238 account executives at December 31, 1999,
representing a 67.6% increase over the fourth quarter 1998, and intends to
continue its aggressive efforts to expand outbound sales personnel.

Inbound sales resulting from the circulation of the Company's catalogs, by
contrast, declined year over year to $21.6 million during the fourth quarter of
1999, representing a 58.8% decrease from inbound sales in the fourth quarter of
1998. The Company believes that the rapid growth of its Internet sales has been
a significant factor in the flattening of its inbound catalog sales, as
increasing numbers of catalog recipients choose to place their orders
electronically rather than over the phone. The Company encourages this
transition by featuring its Internet superstore prominently throughout its
catalogs and by making its inbound telephone sales personnel

17
<PAGE>

available to assist online customers. The Company intends to continue to adapt
and adjust the size, content and 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 gross average order size in the fourth quarter of 1999 has grown to
$533, an increase of 9.9% over the fourth quarter of 1998. This increase is due
primarily to the increase in outbound sales to business and education accounts
that support a higher average order. Although this increase in order size has
roughly 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 revenues 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 $3.5 million in 1999, or 0.8% of
domestic net sales. Domestic net advertising costs were $3.3 million in 1998 and
$3.9 million in 1997. 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

The Company had total assets of $96.5 million at December 31, 1999, of which
$79.5 million were current assets. At December 31, 1999 and 1998, the Company
had cash and cash equivalents of $25.8 million and $19.1 million respectively,
and working capital of $17.3 million and $27.6 million, respectively. Net cash
provided by operating activities was $11.4 million in 1999 and $20.5 million in
1998, respectively. The cash inflow in 1999 was primarily due to lower accounts
receivable and inventory, partly offset by decreased accounts payable. The cash
inflows during 1998 were primarily due to higher accounts payable offset by
increased inventories and accounts receivable.

Cash outlays for capital expenditures were $6.2 million in 1999 and $3.1 million
for 1998. In addition, the Company incurred capital lease obligations during
1999 and 1998, $2.1 million and $38,000, respectively. These expenditures were
primarily for information systems and software, leasehold improvements,
telecommunications system enhancements and furniture and equipment.

The Company has a domestic revolving line of credit of $15.0 million from a
commercial bank collateralized by accounts receivable. At December 31, 1999,
there were no borrowings outstanding under the facility. The facility contains
certain restrictive covenants related to leverage, current ratios and subsidiary
investments.

18
<PAGE>

Additionally, at December 31, 1999, the Company had $734,000 of unused letters
of credit.

The net amount of vendor credit outstanding at December 31, 1999 was $52.7
million of which $5.6 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

YEAR 2000

The year 2000 ("Y2K") issue was the result of computer programs being written
using two digits rather than four to define the applicable year. Possible
effects of this issue could have included 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 contacted and received responses from its domestic systems and service
suppliers. All major hardware and software systems were reviewed. A plan to
mitigate the known compliance issues was completed during the fourth quarter of
1998. The Company utilized both internal and external resources to reprogram and
test applications for compliance. The Company's upgrade to its enterprise
software system was completed in the third quarter of 1999. Although its current
software version was Y2K compliant, several minor software attachments were
replaced and brought into compliance in the process. Due to strict adherence to
guidelines, and effective planning and execution, the Company's hardware and
software systems successfully transitioned to the new millennium. The Company
has not experienced any significant problems as a result of the Year 2000 Issue
('Y2K') with its own systems or those of its vendors. However, the potential
still exists for a non-compliant system, either within the Company or at a
vendor, to malfunction due to Y2K and cause a disruption to the Company's
business. The Company believes that the possibility of significant interruptions
of normal operations should be minimal.

NEW 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. The effective date
of SFAS No. 133 has been delayed until the fiscal year beginning January 1,
2001. The Company is currently assessing the impact, if any, to its financial
position or results of operations.

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of its short-term borrowing and
investment activities, which generally bear interest at variable rates. Because
the short-term borrowings and investments have maturities of three months or
less, the Company believes that the risk of material loss is low.

19
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in this report beginning at
page 25.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.

20
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 2000 Annual Meeting of
Shareholder under the caption "Proposal No. 1: Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance." See also the
information concerning executive officers of the Company included in Item 4a of
Part I in this Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 2000 Annual Meeting of
Shareholders under the caption

"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 2000 Annual Meeting of
Shareholders under the caption "Stock Ownership of Management and Certain Other
Holders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

21
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

The financial statements of Multiple Zones International, Inc. and
subsidiaries and Independent Report of Independent Accountants are
included herein beginning on page 25.

(a) 2. Financial Statement Schedules:

Schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements and Notes thereto.

(a) 3. Exhibits required by Securities and Exchange Commission Regulation
S-K, Item 601:

Number Description
- -------------- ---------------------------------------------------------------
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS

<S> <C>
3.1 Restated Articles of Incorporation (incorporated by reference
from exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 filed on June 5, 1996 (File No. 333-04458))

3.2 Amended and Restated Bylaws (incorporated by reference from
exhibit 3.0 to the Annual Report on Form 10-K filed on March
31,1999 (File No. 000-28488 ))

EXHIBIT NO. 10: MATERIAL CONTRACTS

COMPENSATION PLANS AND AGREEMENTS

10.1 Multiple Zones International, Inc. amended and restated 1993
Stock Incentive Plan (incorporated by reference from the
Registrant's Proxy Statement from its 1999 Annual Meeting of
Shareholders filed on April 15, 1999)

10.2 Multiple Zones International, Inc. 1999 Director Stock Option
Plan (incorporated by reference from the Registrant's Proxy
Statement from its 1999 Annual Meeting of Shareholders filed on
April 15, 1999)

10.3 Form of Stock Option Agreement (used for all stock options
granted to executive officers after March 31, 1996) (incorporated
by reference from exhibit 10.4 to the Registrant's Registration
Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))

10.4 Form of Stock Option Agreement (used for all stand-alone stock
options granted to outside directors) (incorporated by reference
from exhibit 10.16 to the Registrant's Registration Statement on
Form S-1 filed on June 5, 1996 (File No. 333-04458))

10.5 Multiple Zones International, Inc. 401(k) Plan (incorporated by
reference from exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))

10.6 Multiple Zones International, Inc. Employee Stock Purchase Plan
(incorporated by reference from exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 filed on June 5, 1996 (File
No. 333-04458))

10.7 Multiple Zones International, Inc. Management Incentive Plan
(incorporated by reference from exhibit 10.7 to the Registrant's
Registration Statement on Form S-1 filed on June 5, 1996 (File
No. 333-04458))

10.8 Form of Indemnification Agreement (entered into with certain
executive officers and Registrant's outside directors)
(incorporated by reference from exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 filed on June 5, 1996 (File
No. 333-04458))

10.9 Employment Agreement dated as of July 14, 1997 between the
Registrant and Lorne G. Rubis (incorporated by reference from
exhibit 10.13 to the Annual Report on Form 10-K filed on March
31, 1998)

10.10 Employment Agreement dated as of October 1, 1998 between the
Registrant and Guio G. Barela

</TABLE>

22
<PAGE>

Number Description
- -------------- ---------------------------------------------------------------
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS

<S> <C>

10.11 Employment Agreement dated as of April 26, 1999 between the
Registrant and James H. Bromley

OTHER MATERIAL CONTRACTS

10.12 Standard Office Lease-Gross dated October 4, 1993 between the
Registrant and Hewlett-Packard Company (incorporated by reference
from exhibit 10.23 to the Registrant's Registration Statement on
Form S-1 filed on June 5, 1996 (File No. 333-04458))

10.13 Office Lease dated April 1, 1996 between the Registrant and
Renton Talbot Delaware, Inc. (incorporated by reference from
exhibit 10.24 to the Registrant's Registration Statement on Form
S-1 filed on June 5, 1996 (File No. 333-04458))

10.14 Industrial Real Estate Lease dated April 10, 1997 between the
Registrant and Pacific Industrial Park LLC (incorporated by
reference from exhibit 10.18 to the Annual Report on Form 10-K
filed on March 31, 1998)

10.15 Ingram Micro Resale Agreement dated April 1, 1996 between Ingram
Micro and the Registrant (incorporated by reference from exhibit
10.25 to the Registrant's Registration Statement on Form S-1
filed on June 5, 1996 (File No. 333-04458))

10.16 Authorized Apple Catalog Reseller Sales Agreement between the
Apple Computer, Inc. and the Registrant (incorporated by
reference from exhibit 10.26 to the Registrant's Registration
Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))

10.17 Storage and distribution Agreement dated September 28, 1992
between the Registrant and Advanced Logistics Services Corp., as
amended (incorporated by reference from exhibit 10.27 to the
Registrant's Registration Statement on Form S-1 filed on June 5,
1996 (File No. 333-04458))

10.18 Amendment to Storage and Distribution Agreement dated December
30, 1997 between the Registrant and Advanced Logistics Services
Corp.

10.19 Agreement for Wholesale Financing dated January 15, 1996, as
amended, between the Registrant and Deutsche Financial Services
Corporation (incorporated by reference from exhibit 10.19 to the
Registrant's Registration Statement on Form S-1 filed on June 5,
1996 (File No. 333-04458))

10.20 Amendment to Agreement for Wholesale Financing dated April 23,
1997, between the Registrant and Deutsche Financial Services
Corporation (incorporated by reference from exhibit 10.24 to the
Annual Report on Form 10-K filed on March 31, 1998)

10.21 Business Loan Agreement dated December 10, 1999, between the
Registrant and U.S. Bank of Washington, National Association

EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT

21.1 Subsidiaries of the Registrant

EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSELS

23.1 Consent of PricewaterhouseCoopers LLP

EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE

27.1 Financial Data Schedule (December 31, 1999)

</TABLE>

23
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

MULTIPLE ZONES INTERNATIONAL, INC.

Date: March 27, 2000

By: /s/ Firoz H. Lalji
---------------------------------------
Firoz H. Lalji,
Chairman and Chief Executive Officer

/s/ James H. Bromley
---------------------------------------
James H. Bromley,
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

Signature Title Date
- --------------------------------- --------------------------- ---------------

/s/ John H. Bauer Director March 27, 2000
- ---------------------------------
John H. Bauer

/s/ John T. Carleton Director March 27, 2000
- ---------------------------------
John T. Carleton

/s/ Richard E. Carter Director March 27, 2000
- ---------------------------------
Richard E. Carter

/s/ Firoz H. Lalji Director March 27, 2000
- ---------------------------------
Firoz H. Lalji

/s/ Kathleen S. Pushor Director March 27, 2000
- ---------------------------------
Kathleen S. Pushor

24
<PAGE>

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

<TABLE>

<S> <C>
Consolidated Balance Sheets
December 31, 1999 and 1998 26

Consolidated Statements of Operations and Comprehensive Income
Twelve months ended December 31, 1999, 1998 and 1997 27

Statements of Shareholders' Equity
Twelve months ended December 31, 1999, 1998 and 1997 28

Consolidated Statements of Cash Flows
Twelve months ended December 31, 1999, 1998 and 1997 29

Notes to Consolidated Financial Statements 30
Report of Independent Accountants 40

</TABLE>

25
<PAGE>

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
------------
1999 1998
--------- ---------
<S> <C> <C>

ASSETS
Current assets:
Cash and cash equivalents $ 25,774 $ 19,092
Receivables, net 32,484 43,687
Inventories, net 17,752 48,543
Prepaid expenses 1,805 3,632
Income taxes receivable 2,460
Deferred income taxes 1,682 3,353
--------- ---------
Total current assets 79,497 120,767
Property and equipment, net 11,435 10,384
Other assets 5,562 1,896
--------- ---------
Total assets $ 96,494 $ 133,047
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 709 $ 2,032
Accounts payable 52,664 79,659
Accrued liabilities and other 7,916 9,364
Current portion of capital lease obligations 905 911
--------- ---------
Income taxes payable 1,200
Total current liabilities 62,194 93,166
Capital lease obligations, net of current portion 986 338
Other 1,326 1,695
--------- ---------
Total liabilities 64,506 95,199
--------- ---------
Minority interest 148 498
--------- ---------

Commitments and contingencies

Shareholders' equity:
Common stock, no par value, 45,000,000 authorized,
13,346,287 and 13,173,692 shares issued and outstanding
at December 31, 1999 and 1998, respectively 39,184 38,434
Retained deficit (7,368) (982)
Foreign currency translation adjustment 24 (102)
--------- ---------
Total shareholders' equity 31,840 37,350
--------- ---------
Total liabilities and shareholders' equity $ 96,494 $ 133,047
========= =========

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

26
<PAGE>

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

YEAR ENDED DECEMBER 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 487,410 $ 501,441 $ 490,025
Cost of sales 438,643 447,005 431,905
--------- --------- ---------
Gross profit 48,767 54,436 58,120
Selling, general and administrative 57,502 63,409 62,910
--------- --------- ---------
Loss from operations (8,735) (8,973) (4,790)
--------- --------- ---------
Interest expense 512 598 1,096
Other expense 150 2,774 414
Minority interest (101) 102 108
--------- --------- ---------
561 3,474 1,618
--------- --------- ---------
Loss before taxes (9,296) (12,447) (6,408)
Benefit for income taxes (2,637) (4,114) (965)
--------- --------- ---------
Net loss $ (6,659) $ (8,333) $ (5,443)
========= ========= =========
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment (31) (11) 47
Reclassification for gains included in net
income (290) (55)
--------- --------- ---------
Other comprehensive income (expense) (321) (66) 47
--------- --------- ---------
Comprehensive loss $ (6,980) $ (8,399) $ (5,396)
--------- --------- ---------
Net loss attributable to basic earnings per share $ (6,659) $ (8,333) $ (5,443)
========= ========= =========

Basic loss per share $ (0.50) $ (0.64) $ (0.42)
Shares used in computing basic loss per share 13,287 13,079 12,965

Diluted loss per share $ (0.50) $ (0.64) $ (0.42)
Shares used in computing diluted loss per share 13,287 13,079 12,965

</TABLE>

The accompanying notes on an integral part of the consolidated
financial statements.

27
<PAGE>

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

Foreign
Retained Currency
Common Stock Earnings Translation
Shares Amount (Deficit) Adjustment Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 12,876,616 $ 36,988 $ 12,564 $ (83) $ 49,469
Issuance of common stock 33,748 196 196
Exercise of stock options 131,100 567 567
Net loss (5,443) (5,443)
Tax effect of stock options exercised 135 135
Translation adjustments 47 47
---------- ---------- ---------- -------- ----------
Balance, December 31, 1997 13,041,464 37,751 7,256 (36) 44,971
Issuance of common stock 33,223 96 96
Exercise of stock options 53,695 242 242
Exercise of warrants 45,310 345 345
Net loss (8,333) (8,333)
Tax effect of stock options exercised 95 95
Translation adjustments (66) (66)
---------- ---------- ---------- -------- ----------
Balance, December 31, 1998 13,173,692 38,434 (982) (102) 37,350

Issuance of common stock 18,130 98 98
Exercise of stock options 154,465 652 652
Net loss (6,659) (6,659)
Tax effect of stock options exercised 273 273
Translation adjustments 126 126
---------- ---------- ---------- -------- ----------
Balance, December 31, 1999 13,346,287 $ 39,184 $ (7,368) $ 24 $ 31,840
========== ========== ========== ======== ==========

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

28
<PAGE>

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>

Cash flows from operating activities:
Net loss $ (6,659) $ (8,333) $ (5,443)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 4,184 3,641 2,943
Write off of goodwill 1,233
Deferred income taxes 1,357 (2,179) (1,246)
Loss on disposal of assets 260 3,651 376
Loss on disposal of subsidiaries 541
Minority interest 229 (102) 108
Tax effect of stock options exercised 273 95 135
Changes in assets and liabilities excluding
effect of acquisitions:
Accounts receivable 5,864 (3,001) 6,380
Inventory 27,805 (9,972) 36,931
Prepaid expenses and other assets (1,091) (466) 5,016
Accounts payable (19,572) 37,043 (36,044)
Accrued liabilities (703) 872 1,807
Income taxes payable (1,077) (796) (1,387)
-------- -------- --------
Net cash provided by operating activities 11,411 20,454 10,809

Cash flows from investing activities:
Purchases of property and equipment (6,016) (3,064) (5,664)
Proceeds on disposal of subsidiaries 740
Other 51
-------- -------- --------
Net cash used in investing activities (5,276) (3,064) (5,613)

Cash flows from financing activities:
Net borrowing (payments) under line of
credit agreement 333 12 (843)
Net change in book overdrafts (1,003) 244 (2,985)
Payments on capital leases (1,552) (641) (1,250)
Net proceeds from sale of common stock 750 683 763
Capital lease obligation 2,101
Other (130) (264)
-------- -------- --------
Net cash provided by (used in)
financing activities 629 168 (4,579)

Effect of exchange rate on cash and cash equivalents (82) (111) 52
Net increase in cash and cash equivalents 6,682 17,447 669
Cash and cash equivalents at beginning of period 19,092 1,645 976
-------- -------- --------
Cash and cash equivalents at end of period $ 25,774 $ 19,092 $ 1,645
======== ======== ========
Supplemental cash flow information:
Cash paid during the period for interest $ (512) $ 598 $ 1,095
Cash (refunded) paid for income taxes $ (3,043) $ (1,356) $ 992
Noncash investing and financing activity:
Capital leases to finance purchases of equipment $ 233 $ 38 $ 420

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

29
<PAGE>

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 direct marketers of computer products and
services, for users of both the "PC" and Macintosh ("Mac") operating systems.
The Company reaches its customers through three distinct business models: Zones
Business Solutions encompassing small to medium size businesses, government and
education customers; Zones.com targeting small office/home office, small
business and consumer customers; and touchMarketing.com, an Internet based
service provider of Affordable 1-to-1 Marketing. The Company has licensed its
trade name to independent licensees that operate in a number of countries
worldwide.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

Cash equivalents are all highly liquid investments with initial maturities of
three months or less.

CONCENTRATION OF CREDIT RISK

Cash balances subject to credit risk consist of cash balances held in one
financial institution in the United States and cash balances held in foreign
financial institutions. The Company has not experienced any losses associated
with cash balances and believes that there is minimal risk associated with the
cash balances. Concentration of credit risk with respect to trade receivables is
limited due to the Company's diverse customer base. The Company closely monitors
extensions of credit but does not require collateral.

INVENTORIES

Inventories consist primarily of computer software and hardware. Inventories are
valued at the lower of first-in, first-out (FIFO) cost or market. Balances at
December 31, 1999 and 1998 are net of allowances of approximately $1,067,000 and
$3,834,000, respectively.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation is based on the
straight-line method over the estimated useful lives of the related assets.
Depreciation for computer hardware and software is generally over 3 to 5 years.
Other property and equipment is depreciated over 3 to 10 years. Amortization of
capital leases is based on the straight-line method over the estimated useful
lives of the related assets or lease life, whichever is shorter, generally 3 to
10 years. Expenditures for maintenance and repairs are charged to expense as
incurred, while additions, renewals and betterments are capitalized. Gains or
losses from sales or retirements are included in other income and expense. The
Company evaluates the carrying value of long-lived assets based upon current and
anticipated undiscounted cash flows, and recognizes an impairment when it is
probable that such estimated future net income and/or cash flows will be less
than the asset carrying value.

INCOME TAXES

Deferred income taxes are provided based on the estimated future tax effects of
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's foreign subsidiaries are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date and
revenues and expenses are translated at weighted average rates during the

30
<PAGE>

period. The resulting translation adjustment is reflected as a separate
component of shareholders' equity on the balance sheet.

REVENUE RECOGNITION

Revenue on product sales is recognized at the time of shipment. The Company
generally allows its customers to return products within 30 days of purchase. An
allowance for product returns is established based on experience.

LICENSE FEES AND ROYALTIES

The Company records revenues from license fees in net sales when licenses are
granted. Royalty income from licensees is recorded in net sales based on a
percentage of the licensees' gross sales in the period sales are made.

CATALOG COSTS AND REVENUES

The Company produces and distributes catalogs at various intervals throughout
the year. Costs to produce and distribute individual catalogs, including paper,
printing, postage, production and design costs, are capitalized and amortized to
selling expense during the period in which the catalogs are generating
substantial sales (generally one month). At December 31, 1999 and 1998
$1,313,000 and $2,257,000, respectively, of capitalized advertising costs were
included with prepaid expenses. The Company receives incentives in the form of
rebate dollars, discounts, allowances and cooperative advertising revenues from
most vendors who have placed advertisements in the Company's catalogs. These
revenues are recognized as a reduction of selling expense in the same period in
which the corresponding catalog cost is recognized as selling expense.
Advertising expense net of co-op advertising recovery is included in selling,
general and administrative expenses and totaled $3,622,000 and $3,300,000 for
the years ended December 31, 1999 and 1998, respectively.

The Company provides advertising in its catalogs in exchange for products or
services to be received from its vendors. These transactions are reported at the
estimated fair market value of the advertising provided by the Company, which
approximates the value of products or services received in exchange. Barter
revenues are recorded when the catalogs are published and receivables are
recorded for the products or services to be received. Barter expenses are
recorded when the products or services are used.

DEPENDENCE ON SALES OF MAC PRODUCTS

The Company is largely dependent on sales of Mac products manufactured by a
broad variety of vendors, including Apple. A decline in the demand for, or
availability of, Apple or other Mac products would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company intends to pursue increased sales of PC
products to reduce its dependence on sales of Mac products, there can be no
assurance that the Company will be successful in doing so.

SEGMENT REPORTING

The company is required to report operation segments in accordance with SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information". This
statement, which the company adopted in 1998, changed the way public companies
report information about operating segments. SFAS No. 131 is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the major countries in which
the Company holds assets and reports revenues. The Company has determined its
business has two segments, The United States and International.

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. 137,
deferring the effective date to fiscal years beginning after June 15, 2000
amended SFAS No. 133.

Management believes that the adoption of this new standard will not have a
material impact on the Company's financial position or results of operations.

31
<PAGE>

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial instruments approximates the
carrying value. The estimated fair value of the line of credit approximates the
carrying value, as this instrument requires interest payments at a market rate
of interest plus a margin.

4. RECEIVABLES

Receivables consist of the following (in thousands):

DECEMBER 31,
1999 1998
-------- --------

<S> <C> <C>
Trade $ 27,703 $ 40,153
Co-op advertising 3,736 4,105
Licensees 90 289
Returns, rebates and other 3,599 3,912
-------- --------
35,128 48,459
Less allowances (2,644) (4,772)
-------- --------
$ 32,484 $ 43,687
======== ========

</TABLE>

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------- --------

<S> <C> <C>
Equipment $ 6,766 $ 7,845
Computer hardware and software under capital leases 6,058 3,915
Computer software 6,963 3,742
Furniture and fixtures and leasehold improvements 3,024 3,022
-------- --------
22,811 18,524
Less accumulated depreciation and amortization (11,376) (8,140)
-------- --------
Property and equipment, net $ 11,435 $ 10,384
======== ========

</TABLE>

Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1999 and 1998 of
$3,708,000 and $2,861,000, respectively.

6. BANK LINES OF CREDIT

At December 31, 1999, the Company had a $15,000,000 revolving bank line of
credit expiring June 30, 2000. This line is collateralized by the Company's
accounts receivable. At December 31, 1999 and 1998 respectively, interest is
charged at 9.25% and 7.75%. The Company also has available an additional
$20,000,000 bank line of credit. This line is collaterized by the Company's
inventories. Interest is charged at the prime lending rate of 8.50% and 7.75% at
December 31, 1999 and 1998, respectively. No borrowing amounts were outstanding
on either line of credit at December 31, 1999 or 1998.

The line of credit agreements contain certain covenants and restrictions
requiring, among other things, a minimum tangible net worth and certain other
financial ratios and restrictions. The Company has complied with the restrictive
covenants contained in the agreements.

Bank lines of credit also included $709,000 and $2,032,000 of borrowings by the
Company's foreign subsidiaries at December 31, 1999 and 1998, respectively.

The Company uses the lines of credit under its cash management system to cover
checks presented for payment in excess of cash balances. As of December 31, 1999
and 1998 the Company had book overdrafts of $2,224,000 and $3,227,000,
respectively, which are included with accounts payable.

32
<PAGE>

7. TRADE CREDIT ARRANGEMENT

The Company has an agreement with a financial institution to facilitate the
purchase of inventory from various suppliers under certain terms and conditions.
The agreement allows a collateralized position in inventory up to an aggregate
of $35,000,000. At December 31, 1999, accounts payable included $5,572,000 owed
to this financial institution, compared to $31,421,000 at December 31, 1998.
Amounts purchased under these agreements generally require payment within a
period of 30 days, and no interest is charged. Interest will accrue on amounts
not paid by the end of this period at variable rates.

8. INCOME TAXES

The income tax benefit consists of the following (in thousands):

YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current $ (690) $(1,935) $ 281
Deferred (452) (2,496) (2,671)
Valuation allowance for deferred tax asset (1,495) 317 1,425
------- ------- -------
Total $(2,637) $(4,114) $ (965)
======= ======= =======

</TABLE>

The components of deferred taxes were as follows (in thousands):

DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>

Assets:
Allowance for doubtful accounts $ 879 $ 1,413
Inventory allowances 405 1,261
Inventory capitalization 4 50
Property and equipment depreciation 75
Deferred rent 488 624
Accrued liabilities and other 432 835
Net operating losses 5,014 1,849
Valuation allowance (355) (1,708)
------- -------
$ 6,867 $ 4,399
------- -------

Liabilities:
Property and equipment depreciation (248)
------- -------
(248)
------- -------
Net deferred tax asset $ 6,619 $ 4,399
======= =======

</TABLE>

The net deferred tax asset is recognized in the accompanying balance sheet as
follows (in thousands):

<TABLE>

<S> <C> <C>
Current deferred tax asset $1,682 $3,353
Non-current deferred income tax asset,
net of valuation allowance of $355 in
1999 and $1,708 in 1998 4,937 1,046
------ ------
Net deferred tax asset $6,619 $4,399
====== ======

</TABLE>

The deferred tax asset valuation allowance is primarily related to net operating
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that the deferred tax asset will be realized through
future taxable income. The Company's net operating losses begin expiring in
2019.

33
<PAGE>

A reconciliation of the effective income tax rate on loss before taxes with the
federal statutory rate follows:

YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----

<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income tax 0.6 1.4 1.4
Other (0.8) (0.9) 0.9
Valuation allowance for deferred tax assets (6.4) (2.5) (22.2)
---- ---- ----
Effective tax rate 28.4% 33.0% 15.1%
==== ==== ====

</TABLE>

9. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases its office and returns warehouse space under noncancelable
operating leases that expire through 2003. Under the terms of certain leases,
the Company is responsible for its share of taxes, insurance and common area
charges. At December 31, 1999, future minimum payments under operating leases
were as follows (in thousands):

<TABLE>
<S> <C>
2000 ......................... $1,805
2001 ......................... 1,805
2002 ......................... 1,751
2003 ......................... 1,006
------
Total ................... $6,367
======

</TABLE>

Rental expense totaled $2,165,000, $2,657,000 and $2,522,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.

OBLIGATIONS UNDER CAPITAL LEASES

The Company leases equipment and software under various long-term capital
leases. Future lease payments as of December 31, 1999 were as follows (in
thousands):

<TABLE>

<S> <C>
2000 .............................................. $ 1,042
2001 .............................................. 942
2002 .............................................. 82
-------
Total future minimum lease payments 2,066
Less amount representing interest (84)
-------
Present value of net minimum lease payments 1,892
Less current portion (905)
-------
Noncurrent portion $ 987
=======

</TABLE>

DISTRIBUTION CENTER

The Company has contracted with a freight company to provide and operate its
primary distribution center under an annual renewable contract that expires
August 31, 2000. Under this contract, the Company pays a flat rate for each
order filled.

LETTERS OF CREDIT

The Company had unused letters of credit totaling $734,000 at December 31, 1999.

LEGAL PROCEEDINGS

Various claims and actions, considered normal to the Company's business, have
been asserted and are pending against the Company. The Company believes that
such claims and actions will not have a material adverse effect upon the
Company's financial position or results of operations.

34
<PAGE>

10. SHAREHOLDERS' EQUITY

COMMON STOCK

In conjunction with the Company's 1996 public offering, warrants were issued for
the purchase of 45,310 shares of common stock exercisable at $7.62 per share.
All of the warrants were exercised during the fourth quarter of 1998.

STOCK OPTIONS

In 1993, the Company adopted a Stock Incentive Plan (the "Plan") whereby the
Company may issue incentive or nonqualified stock options, restricted shares,
stock units or stock appreciation rights to key employees. As of December 31,
1999, only stock options have been granted under the plan. Stock options are
granted solely at the discretion of the Board of Directors and are generally
issued at a price equal to the estimated fair market value of the stock at the
date of grant. The term of each option granted is for such period as determined
by the Board of Directors, but not more than ten years from date of grant.
Options may generally be exercised based on a vesting schedule determined by the
Board of Directors, and the plan provides for acceleration of outstanding
options under certain conditions, including certain changes in control of the
Company. Grants are nontransferable, and shares acquired upon exercise of
options may be subject to repurchase at the option of the Company under certain
conditions. The maximum number of shares to be granted under the Plan was
2,650,000 at December 31, 1999.

In addition to options granted under the Plan, the Company has granted options
under a separate plan to the Board of Directors. Options outstanding to these
individuals at December 31, 1999, were 93,125 shares at option prices of $2.75 -
$12.00 per share. The maximum number of shares to be granted under this plan was
150,000 at December 31, 1999.

On June 1, 1998, the Board of Directors adopted a resolution for all employees
below the level of vice-president, re-pricing all options granted and
unexercised prior to June 1, 1998 to that day's fair market value, or $3.13 per
share. The total number of shares re-priced was 344,672. While the vesting
periods were not affected, employees must wait one year to exercise vested
shares at the new price.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date of the awards, consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):

YEAR ENDED DECEMBER 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net loss - as reported $ (6,659) $ (8,333) $ (5,443)
========= ========= =========
Net loss - pro forma $ (7,342) $ (8,575) $ (6,816)
========= ========= =========
Diluted loss per share - as reported $ (0.50) $ (0.64) $ (0.42)
========= ========= =========
Diluted loss per share - pro forma $ (0.55) $ (0.66) $ (0.53)
========= ========= =========

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: expected
volatility of 99%, 98% and 75%; risk-free interest rate of 5.54%, 5.1% and 6.2%;
and expected lives of 4 years.

35
<PAGE>

Information regarding the stock option plans is as follows:

WEIGHTED-
AVERAGE OPTIONS
OPTIONS EXERCISE PRICE EXERCISABLE
--------- --------- -------
<S> <C> <C> <C>
Outstanding, January 1, 1997 1,094,760 $ 9.21
Granted 1,422,816 9.43
Exercised (131,100) 4.33
Cancelled (717,851) 10.29
--------- --------- -------
Outstanding, December 31, 1997 1,668,625 9.32 391,670
Granted 1,212,905 3.53
Exercised (53,695) 4.11
Cancelled (1,582,539) 8.58
--------- --------- -------
1,245,296 4.84 197,124
Granted 682,039 9.35
Exercised (154,465) 3.64
Cancelled (556,877) 6.18
--------- --------- -------
Outstanding, December 31, 1999 1,215,993 $ 6.93 206,864
========= ========= =======

1999 option price range for exercised shares $0.33 - $9.25
1999 weighted-average fair value of options granted during the year $6.42

</TABLE>

The following tables summarize information about fixed-price stock options
outstanding at December 31, 1999:

OPTIONS OUTSTANDING
---------------------------------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL YEARS EXERCISE PRICE
--------------- ----------- ----------------- --------------

<S> <C> <C> <C> <C>
$ 2.75 - $ 3.13 289,864 7.98 $ 3.03
$ 3.38 - $ 5.75 242,566 8.29 4.65
$ 5.88 - $ 7.75 307,669 9.53 7.02
$ 8.00 - $12.00 330,267 9.27 10.79
$12.13 - $18.25 45,627 9.09 14.48
--------------- --------- ---- --------
$ 2.75 - $18.25 1,215,993 8.83 $ 6.93
=============== ========= ==== ========

</TABLE>

<TABLE>

OPTIONS EXERCISABLE
-------------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 EXERCISE PRICE
--------------- ----------- --------------
<S> <C> <C> <C>
$ 2.75 - $ 3.13 94,373 $ 3.03
$ 3.38 - $ 5.75 93,871 4.75
$ 5.88 - $ 7.75 5,625 6.67
$ 8.00 - $12.00 12,875 10.57
$12.13 - $18.25 120 17.63
--------------- --- -----
$ 2.75 - $18.25 206,864 $ 4.39
=============== ======= =======

</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which was effective upon the completion of the public offering.
Under the terms of the Purchase Plan, employees other than officers and
employees of the Company's subsidiaries may purchase a total of up to 450,000
shares of common stock. The purchase price per share is 85% of the lower of the
market value per share of common stock determined as of the beginning or end of
the quarterly purchase period specified in the Purchase Plan.

11. EARNINGS PER SHARE

The Company has 45,000,000 common shares issued, with 13,346,287 outstanding at
December 31, 1999. The Company has also granted options and warrants to purchase
common shares to the employees and directors of the Company. The options,
warrants and preferred stock may

36
<PAGE>

have a dilutive effect on the calculation of earnings per share. The following
is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations as required by SFAS 128 (in thousands, except
per share data).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>

BASIC AND DILUTED EARNINGS PER SHARE:
Net loss $ (6,659) $ (8,333) $ (5,433)
-------- -------- --------
Loss available to common shareholders $ (6,659) $ (8,333) $ (5,433)
======== ======== ========
Total common shares and dilutive securities 13,287 13,079 12,965
======== ======== ========
Basic and diluted loss per share $ (0.50) $ (0.64) $ (0.42)
======== ======== ========

</TABLE>

All options and warrants to purchase common stock were excluded from the
computation of diluted earnings per share for the year ended December 31, 1999,
1998, and 1997 because the effect of the options and warrants on the calculation
would have been antidilutive.

12. DEFERRED INCOME 401(K) PLAN

The Company offers a deferred income 401(k) plan to substantially all full time
employees with a minimum of six months of service. Participants may make
tax-deferred contributions of up to 15% of annual compensation subject to
certain limitations specified by the Internal Revenue Code.

13. RELATED PARTY TRANSACTIONS

Related party transactions for 1999, 1998 and 1997 were as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Sales to licensees $ 541 $1,009 $1,660

</TABLE>

37
<PAGE>

14. SEGMENT INFORMATION

The Company has determined its reportable segments based on geographic areas of
operation. The Company's reportable segments are the United States and
International. The Company's international operations consist of majority owned
subsidiaries primarily concentrated in Europe. Intersegment revenues are
eliminated as the operations of the segments are consolidated.

A summary of the Company's operations by segment follows (in thousands):

UNITED STATES INTERNATIONAL ELIMINATION TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>

YEAR ENDED DECEMBER 31, 1999
Net sales $ 450,001 $ 37,581 $ (172) $ 487,410
Depreciation and amortization (4,006) (181) (4,187)
Income (loss) from operations (7,721) (1,014) (8,735)
Interest revenue (expense) (248) (264) (512)
Total assets 96,124 969 (599) 96,494

YEAR ENDED DECEMBER 31, 1998
Net sales $ 421,625 $ 80,338 $ (522) $ 501,441
Depreciation and amortization (3,246) (395) (3,641)
Income (loss) from operations (10,639) 1,396 (8,973)
Interest revenue (expense) 245 (322) 77
Total assets 121,178 15,239 (3,369) 133,047

YEAR ENDED DECEMBER 31, 1997
Net sales $ 419,359 $ 70,666 $ (887) $ 490,025
Depreciation and amortization (2,677) (266) (2,943)
Loss from operations (1,616) (3,174) (4,790)
Interest revenue (expense) (702) (381) (1,083)
Total assets 89,710 17,311 (2,211) 104,810

</TABLE>

DIVESTITURE OF INTERNATIONAL SUBSIDIARIES

During 1999, the Company divested majority control over subsidiaries in Austria,
France, Germany, Mexico, Switzerland and the United Kingdom. Net sales and
results of operations for the subsidiaries that were disposed were recorded
through date of divestiture and totaled $33.6 million and a net loss of
$828,000, respectively. The Company received proceeds of $740,000 related to the
sales and recognized gains and losses on the divestiture of these subsidiaries,
resulting in a net loss of $541,000. The Company has no further commitments to
these subsidiaries. The Company expects to dispose of its remaining
international subsidiary during 2000.

SUBSEQUENT EVENT

On March 24, 2000, the Company entered into a definitive agreement to sell the
remaining interest in its India subsidiary. The Company anticipates
recognizing a gain on the transaction of $1,400,000 when all conditions of the
sale are satisfied. The sale is expected to close early in the second quarter
of 2000.

38
<PAGE>

15. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)

The following information is for the years ended December 31, 1999 and 1998:

(in thousands, except per share data)

FIRST SECOND THIRD FOURTH
DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 135,092 $ 121,548 $ 106,350 $ 124,420
Cost of sales 120,616 109,060 96,156 112,811
--------- --------- --------- ---------
Gross profit 14,476 12,488 10,194 11,609
SG&A expenses 14,011 13,263 13,508 16,720
--------- --------- --------- ---------
Income (loss) from operations 465 (775) (3,314) (5,111)
Other expense (102) 793 (96) (35)
--------- --------- --------- ---------
Income (loss) before income taxes 567 (1,568) (3,218) (5,076)
Provision (benefit from) for income taxes 224 (498) (2,363)
--------- --------- --------- ---------
Net income (loss) $ 343 $ (1,070) $ (3,218) $ (2,713)
========= ========= ========= =========
Diluted earnings (loss) per share 1 $ 0.03 $ (0.08) $ (0.24) $ (0.20)
========= ========= ========= =========

</TABLE>

FIRST SECOND THIRD FOURTH
DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 117,809 $ 112,872 $ 124,329 $ 146,431
Cost of sales 103,891 102,740 110,199 130,175
--------- --------- --------- ---------
Gross profit 13,918 10,132 14,130 16,256
SG&A expenses 15,908 18,364 13,877 15,260
--------- --------- --------- ---------
Income (loss) from operations (1,990) (8,232) 253 996
Other expense (32) 3,465 27 14
--------- --------- --------- ---------
Income (loss) before income taxes (1,958) (11,697) 226 982
Provision (benefit from) for income taxes (724) (3,930) 77 463
--------- --------- --------- ---------
Net income (loss) $ (1,234) $ (7,767) $ 149 $ 519
========= ========= ========= =========
Diluted earnings (loss) per share(1) $ (0.09) $ (0.59) $ 0.01 $ 0.04
========= ========= ========= =========

</TABLE>

(1) Net income (loss) per share is computed independently for each of the
quarters presented therefore, the sum of the quarterly net income (loss) per
share does not equal the total computed for the year due to shares issued each
quarter.

39
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Multiple Zones International, Inc.
Renton, Washington

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Multiple Zones International, Inc. and Subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Seattle, Washington
January 27, 2000

<PAGE>

[LETTERHEAD]

October 1, 1998
Guio Barela
16837 South 11th Way
Phoenix, AZ 85048

RE: Offer of Employment

Dear Mr. Barela,

I am pleased to offer you the position of Senior Vice President of
Corporate Development for Multiple Zones International, Inc., reporting to
Mr. Firoz (Phil) Lalji, President & CEO. This offer is made for employment
at will beginning no later than Tuesday, December 1, 1998, and includes the
following:

COMPENSATION
A SALARY OF $5,625.00 PER PAY PERIOD (24 per year). You will also be
eligible for a bonus opportunity 50% of your base pay, payable quarterly upon
reaching certain milestones and metrics as agreed upon between yourself and
Mr. Lalji at the onset of your employment.

A $25,000 SIGNING BONUS will also be paid to you following 90 days of
employment with the Company, but is contingent upon a commitment of 12 months
continuous employment. Should you decide for any reason to terminate your
employment prior to that time, these funds must be repaid in full.

The Company will provide you with an option grant to purchase 45,000
SHARES at an exercise price equal to the closing price of the Company's stock
as of December 1st, following Board Approval. The incentive stock options
shall vest over a five (5) year period, 20% each year. Per your agreement
with Mr. Lalji, vesting will be accelerated per the following achievement
schedule: If the stock price reaches $10+ and sustains for 60 days, 1/3 of
the original grant will vest immediately; if the stock price reaches $20+ and
sustains for 60 days, another 1/3 of the original grant will vest
immediately; if the stock price reaches $30 or above and sustains for 60
days, all remaining options will vest immediately on the 61st day of that
period.

BENEFITS
The Company will provide you with medical, dental, vision and
prescription insurance coverage in accordance with the Company insurance
plan. There is optional coverage for spouses and immediate family members,
but the cost of this additional coverage will be your responsibility. Your
eligibility for benefits begins on December 1, 1998.

VACATION
You begin to accrue vacation right from the onset of employment. You
will accrue vacation at a rate 4 hours per pay period (96 hours per year)
during your first year, 5 hours per pay period during your second year and
6.67 hours after your 5th anniversary. Additional paid leave may be granted
by Mr. Lalji on a case-by-case basis.

(continued)
<PAGE>

[LETTERHEAD]

Guio Barela
Offer Letter - Page Two
10/1/98

RELOCATION

The Company will provide you with up to $25,000 FOR EXPENSE REIMBURSEMENT to
assist you in your relocation to the Puget Sound area. These funds can be
used for travel, transport of household goods, closing costs, interim living
expenses, house hunting trips and other ordinary moving expenses. These
funds may be subject to personal income tax as advised by our accounting
firm, Coopers & Lybrand LLP. You should plan on working directly with Annette
Gregorich, Vice President of Human Resources to coordinate use of these
funds, submitting receipts for an expense reimbursement to Annette or gaining
pre-approval from her for expenses that you would like the Company to pay
directly.

It is my understanding that the foregoing terms and conditions of your
employment represent our entire agreement and supersede all prior discussions
regarding your employment with Multiple Zones International, Inc. Any
questions regarding this offer of employment or MZI benefits may be directed
to me at (425) 430-3000. A second copy of this letter is enclosed for your
records. Please indicate your acceptance by signing and returning the signed
original to my office at your earliest convenience.

Thank you very much -- I'm very pleased to have you joining the MZI Team!

Sincerely,

/s/ Firoz Lalji
Firoz Lalji
President & CEO
Multiple Zones International, Inc.

Accepted: /s/ Guio Barela Date: Oct/10/1998
-------------------------- -------------
GUIO BARELA

<PAGE>

[LETTERHEAD]

April 26, 1999

James Bromley
4616 New Sweden Avenue
Bainbridge Island, WA 98110 Fax: (206)343-6877

RE: Offer of Employment

Dear Jim:

I am pleased to offer you the position of Senior Vice President of Finance
and CFO for Multiple Zones International, Inc., reporting to Phil Lalji,
President/CEO. This offer is made for employment beginning Tuesday, June 1,
1999 and includes the following:

COMPENSATION

A salary of $6,250.00 per pay period (24 per year). You will also be eligible
for the company's incentive bonus compensation at the Executive Level (50%
comprised of 25% individual goals, 25% company plan). As with all company
incentive plans, this is subject to change at management's discretion.

The Company will provide you with 100,000 stock option grants, under the 1993
Stock Incentive Plan as amended, priced as of the date of acceptance of this
offer, and this grant will vest according to Stock Option plan except that
the vesting will accelerate in the event of a change of control. In the event
of separation from MZI due to change of control, the company will guarantee a
one-year severance at your then current salary. For purposes of this
Employment Offer, the term "Change of Control" is limited to the following:
(a) Any sale or exchange of Common Stock of the Company, any sale or exchange
of assets of the Company (other than in the ordinary course of business), or
any merger, statutory share exchange or other similar transaction, as a
result of which, together with all other similar transactions that have
occurred during the period of eighteen (18) months ending on the date of the
transaction, there has been during that period a transfer of ownership or
control of more than seventy-five percent (75%) of the Company's stock,
voting power, assets or business; or (b) The acquisition by any person or
entity or any group of persons or entities acting in concert of the
ownership of, or the power to vote, more than fifty percent (50%) of the
outstanding voting securities of the Company (for which purpose, securities
which are convertible into voting securities will be deemed voting securities).

You will also have an annual stock option grant opportunity equal to 40% of
your base salary as of January 1st of each year. Annual grants are subject to
approval of the Board

<PAGE>

of Directors during the Board Meeting, generally held in April that precedes
the Annual Meeting of Shareholders.

BENEFITS

The Company will provide you with medical, dental, vision and prescription
insurance coverage in accordance with the Company insurance plan. There is
optional coverage for spouses and immediate family members, but the cost of
this additional coverage will be your responsibility. Your eligibility for
benefits would begin on the first of the month following employment. (e.g.
If you begin on June 1, 1999, your benefits will begin July 1, 1999)

VACATION

You will be eligible for three weeks vacation right from the onset of
employment.

RESPONSIBILITY

You will be responsible for Finance, Administration, Strategic Planning,
Budgeting, and Investor Relations. In this respect the VP of Finance and
Administration, the Director of Budget and Planning and the Investor
Relations Coordinator will report to you.

It is my understanding that the foregoing terms and conditions of your
employment represent our entire agreement and supersede all prior discussions
regarding your employment with Multiple Zones International, Inc. Any
questions regarding this offer of employment or MZI benefits may be directed
to me at (425) 430-3206. A second original of this letter is enclosed for
your records. Please indicate your acceptance by signing and returning the
signed original to my office (under confidential cover) at your earliest
convenience.

Thank you very much - we'd be very glad to have you join the MZI Team!

Sincerely,

/s/ Firoz Lalji

Firoz Lalji
President/CEO

FL/mm

Enclosure

Accepted: /s/ James H. Bromley Date: 4/26/99
-------------------- --------
James H. Bromley

<PAGE>

FOURTH AMENDMENT
TO
STORAGE AND DISTRIBUTION AGREEMENT

THIS FOURTH AMENDMENT TO STORAGE AND DISTRIBUTION AGREEMENT is entered into
this 20th day of September, 1999 by and between AIRBORNE LOGISTICS SERVICES,
a division of ABX Air Inc., ("ALS") and MULTIPLE ZONES INTERNATIONAL, INC., a
Washington Corporation ("MZI").

RECITALS

A. MZI and Airborne Freight Corporation ("Airborne") entered into that
certain Storage and Distribution Agreement dated September 28, 1992 (the
"Primary Agreement").

B. Airborne assigned all of its interest in and to the Agreement to ALS (the
"Assignment").

C. The term of the Primary Agreement was extended pursuant to that certain
Letter Agreement dated May 23, 1995 (the "Extension"). The Primary
Agreement was later amended by that certain First Amendment to Storage
and Distribution Agreement dated December 22, 1995 (the "First
Amendment"). The Primary Agreement was additionally amended by that
certain Second Amendment to Storage and Distribution Agreement dated
October 3rd, 1996 (the "Second Amendment"). The Primary Agreement, as
amended, was further amended pursuant to that certain Letter Agreement
dated October 10, 1997 (the "Second Extension"). The Primary Agreement,
as amended, was further amended by that certain Letter Agreement dated
December 31, 1997 (the "Third Amendment"). The Primary Agreement, the
Assignment, the Extension, the First Amendment, the Second Amendment, the
Second Extension, and the Third Amendment are referred to collectively
herein as the "Agreement."

D. The parties have agreed to modify the charges for services under the
Agreement and extend the Term of the Agreement, all in accordance with
this Amendment.

NOW THEREFORE, the parties agree to amend the Agreement as follows:

1. Except as specifically amended herein, the Agreement shall remain in full
force and effect.

2. For the term of this Fourth Amendment (9/01/99-8/31/00), the provisions of
the Third Amendment, Schedule 1 ("Rates and Charges"), Schedule 1A
("Definitions"), Schedule 1B ("Terms and Conditions"), and Exhibit 1
("Revised Receiving, Inventory Control and Shipping Estimates") are hereby
superseded and replaced in their entirety by the provisions of this Fourth
Amendment, Schedule 1 ("Rates and Charges"), Schedule 1A ("Definitions"),
Schedule 1B ("Terms and Conditions"), and Exhibit 1 ("Revised Receiving,
Inventory Control and Shipping Estimates") all of which are attached
hereto.

3. For the term of this Fourth Amendment, the provisions of the Primary
Agreement, Section 7 (Standards and Requirements for Airborne's Operation
of the Management and Distribution of the Stock) paragraph 7.(a)(i),
7.(a)(ii), 7.(a)(iii), and 7.(a)(iii)(a), are hereby deleted in their
entirety and replaced with Amendment 4, Exhibit 2 "Limit of Inventory
Liability," and Exhibit 2 - Attachment A, "Multiple Zones International
Stock Adjustment Codes." These documents ("Limit of Inventory Liability"
and "Multiple Zones International Stock

<PAGE>

Adjustment Codes") will supersede any previous agreement between MZI and
ALS defining payment from ALS to MZI as a result of inventory shrinkage.

4. Item 6 in Amendment 1 as well as subparagraph 15 b. in the primary
agreement are both hereby deleted in their entirety.

5. The following Termination Clauses will be added for the term of this
Fourth Amendment:

a) Termination for Convenience:

MZI or ALS may terminate this agreement for purposes of convenience
with one-hundred eighty (180) day's prior written notice. In this
event, MZI shall have no more than 180 days to remove all MZI owned
inventory and property from the ALS Wilmington, Ohio, warehouse. If
termination for convenience is enacted, the terminating party shall pay
all labor and transportation costs associated with moving MZI owned
inventory and property from the Wilmington, Ohio, warehouse.

b) Termination for Breach:

Either MZI or ALS may terminate this agreement for material breach
thereof by giving the other party not less than 30 days written notice
of its intent to terminate and specifying in the notice the reason or
reasons for such termination. If the breach is not cured within the
time stated in the notice, the termination shall be effective on the
date specified in the notice. The party determined to be in breach,
shall pay all labor and transportation costs associated with moving MZI
owned inventory and property from the Wilmington, Ohio, warehouse.

6. Renewal Term

a. The schedule of dates and associated terms stated in that certain
letter ("The Second Extension") dated October 10, 1997 are hereby
deleted in their entirety and replaced with the schedule of dates and
associated terms listed below (item 6c).

b. Additionally, Paragraph 14 in Amendment 1 and Section 14 in the
Original Agreement are hereby deleted in their entirety.

c. ALS and MZI agree to enter into the following schedule of negotiations
no later than 5 months prior to expiration of this Fourth Amendment.
This following schedule of dates and listed terms will replace those
previously agreed upon prior to Amendment 4:

1) ALS shall notify MZI no later than April 1, 2000 of the rates it
intends to charge MZI for the contract term proceeding Amendment
Four.

2) MZI shall have until June 1, 2000 to accept or reject the pricing
provided by ALS.

3) If MZI accepts the pricing the rates shall become effective
September 1, 2000.

4) If MZI rejects the pricing, MZI shall have until October 31, 2000
to vacate the ALS warehouse in Wilmington, Ohio.

2
<PAGE>

Additionally, if MZI rejects the pricing and MZI desires to operate a
warehouse distribution facility within the Commerce Park in Wilmington, Ohio,
ALS agrees to pay all transportation costs for transporting the Stock (as
this term is defined in the Agreement) to such location designated by MZI. In
addition, ALS shall exercise best efforts and good faith in using its
influence with the developers of the Commerce Park to secure a commitment to
lease a warehouse facility to MZI in the Commerce Park from which MZI can
operate a distribution facility for its business, at a rental rate and on
terms and conditions comparable to rental rates and terms agreed to with
tenants of similar size in the Commerce Park (including competitors of MZI),
and with a lease term of not less than five (5) years from the expiration of
the Term, plus options to renew. If MZI is unable to secure a new warehouse
on the terms stated above prior to the expiration of the term, the agreement
shall terminate on the expiration date and MZI shall remove its inventory and
owned property from the Stock Exchange on or before October 31, 2000. MZI
shall pay the rates and charges in this agreement existing at the end of the
term.

In the event MZI and ALS extend this Agreement by mutual consent for one
additional year (expiration then being August 31, 2001, and vacancy date then
being October 31, 2001) the terms and conditions of Amendment 4 will likewise
be extended for the same one year period.

<PAGE>

[US BANK LOGO]

LOAN AGREEMENT

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$15,000,000.00 12-10-1999 06-30-2000 391 070 6057628480 TWC02 TL
- ------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability
of this document to any particular loan or item.
- ------------------------------------------------------------------------------------------------------------

BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK NATIONAL ASSOCIATION
707 SOUTH GRADY WAY EAST KING COUNTY CORPORATE BANKING
RENTON, WA 98055 10800 NE 8TH STREET, SUITE 1000
BELLEVUE, WA 98004
</TABLE>

===============================================================================
THIS LOAN AGREEMENT between MULTIPLE ZONES INTERNATIONAL, INC. ("Borrower") and
U.S. Bank National Association ("Lender") is made and executed on the following
terms and conditions. Borrower has received prior commercial loans from Lender
or has applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as the
"Loan" and collectively as the "Loans." Borrower understands and agrees that:
(a) in granting, renewing, or extending any Loan, Lender is relying upon
Borrower's representations, warranties, and agreements, as set forth in this
Agreement; (b) the granting, renewing, or extending of any Loan by Lender at
all times shall be subject to Lender's sole judgment and discretion; and (c)
all such Loans shall be and shall remain subject to the following terms and
conditions of this Agreement.

TERM. This Agreement shall be effective as of DECEMBER 13, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.

AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.

ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).

ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.

ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.

BORROWER. The word "Borrower" means MULTIPLE ZONES INTERNATIONAL, INC.
The word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."

BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $15,000,000.00; or (b) 70.000% of
the aggregate amount of Eligible Accounts.

BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Washington.

CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.

CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.

COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or indirectly,
whether granted now or in the future, and whether granted in the form of
a security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien, charge, lien or title retention contract, lease
or consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or otherwise.
The word "Collateral" includes without limitation all collateral
described below in the section titled "COLLATERAL."

DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.

ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against which
Borrower may borrow shall exclude all returns, discounts, credits, and
offsets of any nature. Unless otherwise agreed to by Lender in writing,
Eligible Accounts do not include:

(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.

(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or its
shareholders, officers, or directors.

(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by
the Account Debtor may be conditional.

(d) Accounts with respect to which Borrower is or may become liable
to the Account Debtor for goods sold or services rendered by the
Account Debtor to Borrower.

(e) Accounts which are subject to dispute, counterclaim, or setoff.

(f) Accounts with respect to which the goods have not been shipped
or delivered, or the services have not been rendered, to the Account
Debtor.

(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.

(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy, insolvency,
or debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has made an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its
payrolls) as such debts become due.

(i) Accounts which have not been paid in full within 60 days past
due. The entire balance of any Account of any single Account debtor
will be ineligible whenever the portion of the Account past due 60
days is in excess of 25.00% of the total amount outstanding on the
Account.

(j) Datings, Progress Billings, Retainages, Cash Sales, Cash on
Delivery, Service Charges.

ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.

EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."

EXPIRATION DATE. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.

GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the indebtedness, including without limitation all
Borrowers granting such a Security Interest.

GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.

INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such indebtedness may be or
hereafter may become otherwise unenforceable.

LENDER. The word "Lender" means U.S. Bank National Association, its
successors and assigns.

LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.

<PAGE>

12-10-1999 LOAN AGREEMENT PAGE 2
LOAN NO 391 (CONTINUED)
- --------------------------------------------------------------------------------

LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.

LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.

NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes. If any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes thereafor.

PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of the Borrower's assets.

RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.

SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.

SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended
as a security device, or any other security or lien interest whatsoever,
whether created by law, contract or otherwise.

SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.

SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.

TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.

WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to
time from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed the
Borrowing Base. Within the foregoing limits, Borrower may borrow, partially
or wholly prepay, and reborrow under this Agreement as follows.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is
subject to the following conditions precedent, with all documents,
instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to lender.

(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.

(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.

(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and
shall be in full force and effect.

(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be
in full force and effect.

(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.

(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents as
are then due and payable.

(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement,
and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled "Compliance
Certificate."

MAKING LOAN ADVANCES. Advances under the credit facility, as well as
directions for payment from Borrower's accounts, may be requested orally or
in writing by authorized persons. Lender may, but need not, require that
all oral requests be confirmed in writing. Each Advance shall be
conclusively deemed to have been made at the request of and for the benefit
of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.

MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.

LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such
property and assets as Lender may require (the "Collateral"), including
without limitation Borrower's present and future Accounts and general
intangibles. Lender's Security Interests in the Collateral shall be
continuing liens and shall include the proceeds and products of the
Collateral, including without limitation the proceeds of any insurance. With
respect to the Collateral, Borrower agrees and represents and warrants to
Lender:

PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution of the Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender
in writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.

COLLATERAL RECORDS. Borrower does now, and at all times hereafter
shall, keep correct and accurate records of the Collateral, all of which
records shall be available to Lender or Lender's representative upon
demand for Inspection and copying at any reasonable time. With respect
to the Accounts, Borrower agrees to keep and maintain such records as
Lender may require, including without limitation information concerning
Eligible Accounts and Account balances and agings.

COLLATERAL SCHEDULES. Concurrently with the execution and delivery
of this Agreement, Borrower shall execute and deliver to Lender a
schedule of Accounts and Eligible Accounts, in form and substance
satisfactory to the Lender. Thereafter Borrower shall execute and
deliver to Lender such supplemental schedules of Eligible Accounts and
such other matters and information relating to Borrower's Accounts as
Lender may request. Supplemental schedules shall be delivered according
to the following schedules:

<PAGE>

12-10-1999 LOAN AGREEMENT PAGE 3
LOAN NO 391 (CONTINUED)
- --------------------------------------------------------------------------------

AGINGS OF ACCOUNTS RECEIVABLE AND PAYABLE. Borrower covenants and agrees
with Lender that, while this Agreement is in effect, Borrower shall deliver
to Lender within twenty (20) days after the end of each month, a detailed
aging of Borrower's accounts and contracts receivable and accounts payable
as of the last day of that quarter, together with an explanation of any
adjustments made at the end of that quarter, all in a form acceptable to
Lender.

CUSTOMER LISTING. Borrower agrees with Lender that, while this Agreement is
in effect, Borrower will furnish Lender, no later than twenty (20) days
after the end of each fiscal quarter and in form satisfactory to Lender, a
current listing of Accounting Debtors and their addresses.

BORROWING BASE CERTIFICATE. Unless waived in writing by Lender, Borrower
agrees to provide Lender with a Borrower's Certificate within twenty (20)
days after the end of each month and with each Advance. Each Borrower's
Certificate shall be in a form acceptable to Lender, duly executed by
Borrower and detailing the status of the Line of Credit as of the date
thereon.

REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposed of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:

ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Washington
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.

AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.

FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change
in Borrower's financial condition subsequent to the date of the most
recent financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.

LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.

PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.

HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and not other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.

TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.

LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security interests and rights in and to such
Collateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.

COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief Executive office, if Borrower has more than one place
of business, is located at 707 SOUTH GRADY WAY, RENTON, WA 98055. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
collateral.

INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is
or will be incomplete by omitting to state any material fact necessary
to make such information not misleading.

SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

LITIGATION. Promptly Inform Lender in writing of (a) all material adverse
changed in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.

FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted principles, applied on a consistent basis
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12-10-1999 LOAN AGREEMENT PAGE 4
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and permit Lender to examine and audit Borrower's books and records at all
reasonable times.

FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to Lender,
and, as soon as available, but in no event later than sixty (60) days after
the end of each fiscal quarter, Borrower's balance sheet and profit and
loss statement for the period ended, prepared and certified as correct to
the best knowledge and belief by Borrower's chief financial officer or
other officer or person acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.

ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.

FINANCIAL COVENANTS AND RATIOS. Comply with the following convenants and
ratios:

(F4) BORROWER AGREES AND UNDERSTANDS THAT COMPLIANCE WITH ALL RATIOS AND
COVENANTS WILL BE TESTED QUARTERLY. Except as provided above, all
computations made to determine compliance with the requirements contained
in this paragraph shall be made in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.

INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holder or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.

OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims
that, if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits. Provided however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy, lien
or claim so long as (a) the legality of the same shall be contested in
good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.

PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.

OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.

INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession
of third party, Borrower, upon request of Lender, shall notify such party
to permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request, all at
Borrower's expense.

COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
QUARTERLY and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that,
as of the date of the certificate, no Event of Default exists under
this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local government authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security interests.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:

INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien,
sell, transfer, mortgage, assign, pledge, lease, grant a security interest
in, or encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders

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12-10-1999 LOAN AGREEMENT PAGE 5
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of a Subchapter S Corporation because of their ownership of shares of stock
of Borrower, or (d) purchase or retire any of Borrower's outstanding shares
or alter or amend Borrower's capital structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.

DISCLOSURE. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.

YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that
is, that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or Note
or delivers any information to Lender. Borrower will promptly deliver to Lender
such information relating to this representation as Lender requests from time to
time.

ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.

COLLATERAL AUDITS. Borrower agrees that Lender without limitation may require
semi-annual collateral audits, the cost of which will be borne by Borrower.

RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts,
and, at Lender's option, to administratively freeze all such accounts to allow
Lender to protect Lender's charge and setoff rights provided on this paragraph.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.

DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.

FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.

INSOLVENCY. This dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the indebtedness,
or by any governmental agency. This includes a garnishment, attachment, or
levy on or of any of Borrower's deposit accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.

ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.

INSECURITY. Lender, in good faith, deems itself insecure.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party of parties sought to be charged or bound by the alteration or
amendment.

APPLICABLE LAW. This agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
County, the State of Washington. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed in accordance with the
laws of the State of Washington.

ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputee, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in any action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.

CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used in interpret or define the provisions
of this Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
<PAGE>

12-10-1999 LOAN AGREEMENT PAGE 6
LOAN NO 391 (CONTINUED)

================================================================================

interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation
interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees
that either Lender or such purchaser may enforce Borrower's obligation
under the Loans irrespective of the failure or insolvency of any holder
of any interest in the Loans. Borrower further agrees that the purchaser
of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower
also will pay any court costs, in addition to all other sums provided by
law.

NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the
notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice purposes,
Borrower will keep Lender informed at all times of Borrower's current
address(es).

SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.

SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.

SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and
delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.

WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under
this Agreement, the granting of such consent by Lender in any instance
shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF DECEMBER 10,
1999.

BORROWER:

MULTIPLE ZONES INTERNATIONAL, INC.

By: /s/ [illegible]
- ----------------------------------------------------
AUTHORIZED OFFICER, TITLE
SUP & CFO
---------

LENDER:

U.S. BANK NATIONAL ASSOCIATION

By: /s/ Tony W. Chalfant, V.P.
- ----------------------------------------------------
AUTHORIZED OFFICER

===============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.28 (c) 1999 CFI ProServices, Inc.
All rights reserved. [WA-C40 ZONE.LNC12.OVL]

<PAGE>

ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)

$15,000,000.00 Dated as of: 12/13/99
- ----------------------------- --------

MULTIPLE ZONES INTERNATIONAL, INC. ("Borrower")

U.S. BANK NATIONAL ASSOCIATION ("Lender")

1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation
to repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:

/ / single disbursement loan. Amounts loaned to Borrower hereunder will
be disbursed in a single Advance in the amount shown in Section 2.

X revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.

/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.

2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not
exceed $15,000,000.00.

3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at COMMERCIAL LOAN SERVICE CENTER-WEST AT 555 S.W. OAK, PORTLAND, OR.
97220, the Principal Balance of this note, with interest thereon at the
rate(s) specified in Sections 4 and 11 below.

4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to
the provisions of this note, Borrower shall have the option from time to time
of choosing to pay interest at the rate or rates and for the applicable
periods of time based on the rate options provided herein; PROVIDED, however,
that once Borrower notifies Lender of the rate option chosen in accordance
with the provisions of this note, such notice shall be irrevocable. The rate
options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as
defined herein.

(a) DEFINITIONS. The following terms shall have the following meanings:

"Business Day" means any day other than a Saturday, Sunday, or other day
that commercial banks in Portland, Oregon, Minneapolis, Minnesota, New York
City or Seattle, Washington are authorized or required by law to close;
provided, however that when used in connection with a LIBOR Rate, LIBOR
Amount or LIBOR Interest Period such term shall also exclude any day on which
dealings in U.S. dollar deposits are not carried on in the London interbank
market.

"Dow Jones Page 3750" means the display designated as such on the Dow
Jones Markets Service (formerly known as Telerate) (or such other page as may
replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks for United States Dollar deposits).

"LIBOR Amount" means each principal amount for which Borrower chooses to
have the LIBOR Borrowing Rate apply for any specified LIBOR Interest Period.

"LIBOR Interest Period" means as to any LIBOR Amount, a period of 1, 2, 3
OR 6 months commencing on the date the LIBOR Borrowing Rate becomes
applicable thereto; PROVIDED, however, that: (i) the first day of each LIBOR
Interest Period must be a Business Day; (ii) no LIBOR Interest Period shall
commence on or after MAY 31, 2000; (iii) no LIBOR Interest Period shall be
selected which would extend beyond JUNE 30, 2000; (iv) no LIBOR Interest
Period shall extend beyond the date of any principal payment required under
Section 6 of this note, unless the sum of the Prime Rate Amount, plus LIBOR
Amounts with LIBOR Interest Periods ending on or before the scheduled date of
such principal payment, plus principal amounts remaining unborrowed under a
line of credit, equals or exceeds the amount of such principal payment; (v)
any LIBOR Interest Period which would otherwise expire on a day which is not
a Business Day, shall be extended to the next succeeding Business Day, unless
the result of such extension would be to extend such LIBOR Interest Period
into another calendar month, in which event the LIBOR Interest Period shall
end on the immediately preceding Business Day; and (vi) any LIBOR Interest
Period that begins on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the calendar month at
the end of such LIBOR Interest Period) shall end on the last Business Day of
a calendar month.

"LIBOR Rate" means, for any LIBOR Interest Period, the average offered
rate for deposits in United States Dollars (rounded upwards, if necessary, to
the nearest 1/16 of 1%) for delivery of such deposits on the first day of
such LIBOR Interest Period, for the number of months therein, which appears
on Dow Jones Page 3750 as of 11:00 a.m., London time (or such other time as
of which such rate appears) on the day that is two Business Days preceding
the first day of such LIBOR Interest Period; or the rate for such deposits
determined by Lender at such time based on such other published service of
general application as shall be selected by Lender for such purpose;
provided, that in lieu of determining the rate in the foregoing manner, Lender
may determine the rate based on the rates offered to Lender for deposits in
United States Dollars (rounded upwards, if necessary, to the nearest 1/16 of
1%) in the interbank eurodollar market at such time for delivery on the first
day of such LIBOR Interest Period for the number of months therein; and
provided, further, that in any case the LIBOR Rate shall be adjusted to take
into account the maximum reserves required to be maintained for Eurocurrency
liabilities by banks during each such LIBOR Interest Period as specified in
Regulation D of the Board of Governors of the Federal Reserve System or any
successor regulation.

"Prime Rate" means the rate of interest which Lender from time to time
establishes as its prime or reference rate and is not, for example, the
lowest rate of interest which Lender collects from any borrower or class of
borrowers. When the Prime Rate is applicable under Section 4(b) or 11(b), the
interest rate hereunder shall be adjusted without notice effective on the day
the Prime Rate changes, but in no event shall the rate of interest be higher
than allowed by law.

"Prime Rate Amount" means any portion of the Principal Balance bearing
interest at the Prime Borrowing Rate.

(b) THE PRIME BORROWING RATE.

(i) The Prime Borrowing Rate is a variable per annum rate equal to
the Prime Rate plus 0.750%.

(ii) Whenever Borrower desires to use the Prime Borrowing Rate
option, Borrower shall give Lender notice orally or in writing in accordance
with Section 15 of this note, which notice shall specify the requested
effective date (which must be a Business Day) and principal amount of the
Advance or increase in the Prime Rate Amount, and whether Borrower is
requesting a new Advance under a line of credit or conversion of a LIBOR
Amount to the Prime Borrowing Rate.

(iii) Subject to Section 11 of this note, interest shall accrue on
the unpaid Principal Balance at the Prime Borrowing Rate unless and except to
the extent that the LIBOR Borrowing Rate is in effect.

(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 2.500% per
annum.

(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
before 10:00 a.m. (Portland, Oregon time) on any Business Day. Borrower may
request an Advance, conversion of any portion of the Prime Rate Amount to a
LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR Amount, at
such rate only by giving Lender notice in accordance with Section 4(c)(iii)
before 10:00 a.m. (Portland, Oregon time) on such day.

Libor-wa (Washington) (6/99) LHH Page 1 of 4

<PAGE>

(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) no late than 10:00 a.m. (Portland, Oregon time)
two (2) Business Days prior to the desired effective date of such rate. Any oral
notice shall be given by, and any written notice or confirmation of an oral
notice shall be signed by, the person(s) authorized in Section 15 of this note,
and shall specify the requested effective date of the rate, LIBOR Interest
Period and LIBOR Amount, and whether Borrower is requesting a new Advance at the
LIBOR Borrowing Rate under a line of credit, conversion of all or any portion of
the Prime Rate Amount to a LIBOR Amount, or a new LIBOR Interest Period for an
outstanding LIBOR Amount. Notwithstanding any other term of this note, Borrower
may elect the LIBOR Borrowing Rate in the minimum principal amount of
$500,000.00 and in multiples of $100,000.00 above such amount; PROVIDED,
however, that no more than FOUR (4) separate LIBOR Interest Periods may be in
effect at any one time.

(iv) If at any time the LIBOR Rate is unascertainable or unavailable to
Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR
Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is then
in effect, (A) it shall terminate automatically with respect to all LIBOR
Amounts (i) on the last day of each then applicable LIBOR Interest Period, if
Lender may lawfully continue to maintain such loans, or (ii) immediately if
Lender may not lawfully continue to maintain such loans through such day, and
(B) subject to Section 11, the Prime Borrowing Rate automatically shall become
effective as to such amounts upon such termination.

(v) If at any time after the date hereof (A) any revision in or adoption of
any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of payments
to Lender with respect to any loans bearing interest based on the LIBOR Rate, or
(ii) shall impose or modify any reserve, insurance, special deposit, or similar
requirements against assets of, deposits with or for the account of, or credit
extended by Lender or its Eurodollar lending office, or impose on Lender or its
Eurodollar lending office any other condition affecting any such loans, and (B)
the result of any of the foregoing is (i) to increase the cost to Lender of
making or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office, Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(c)(v),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all LIBOR Amounts, together with any additional amounts payable
under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such
accrued interest and additional costs, the Prime Borrowing Rate immediately
shall be effective with respect to the unpaid principal balance of such LIBOR
Amounts.

(vi) Borrower will indemnify Lender upon demand against any loss or expense
which Lender may sustain or incur (including, without limitation, any loss or
expense sustained or incurred in obtaining, liquidating or employing deposits or
other funds acquired to effect, fund or maintain any portion of the loan or any
Advance) as a consequence of (A) any failure of Borrower to make any payment
when due of any amount due hereunder, (B) any failure of Borrower to borrow, if
permitted by the terms of this note, continue or convert any portion of the
Prime Rate Amount to a LIBOR Amount, on a date specified therefor in a notice
thereof, or (C) any payment, voluntary or mandatory or mandatory prepayment or
payment on default or conversion of any LIBOR Amount to the Prime Borrowing
Rate, on a date other than the last day of the applicable LIBOR Interest Period.
Determinations by Lender of the amount required to indemnify Lender shall be
conclusive in the absence of manifest error.

(vii) Notwithstanding any provision of this note to the contrary, Lender
shall be entitled to fund and maintain its funding of all or any part of the
loan evidenced by this note in any manner it elects; it being understood,
however, that with respect to any LIBOR Amount, all determinations hereunder
shall be made as if Lender had actually funded and maintained each LIBOR Amount
during the LIBOR Interest Period applicable to it through the purchase of
deposits having a term corresponding to such LIBOR Interest Period and bearing
an interest rate equal to the LIBOR Rate for such LIBOR Interest Period (whether
or not Lender shall have granted any participations in such LIBOR Amounts).

(viii) Notwithstanding any other term of this note, Borrower may not select
the LIBOR Borrowing Rate if an event of default hereunder has occurred and is
continuing.

(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or require payment on demand.

5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360-day year and applied to the
actual number of days elapsed.

6. PAYMENT SCHEDULE

(a) PRINCIPAL. Principal shall be paid:

/ / on demand.

X on demand, or if no demand, on JUNE 30, 2000.

/ / on _______________________.

/ / subject to Section 8, in installments of

/ / _________________________ each, plus accrued interest,
beginning on ____ and on the same day of each
__________________ thereafter until
__________________________ when the entire Principal Balance
plus interest thereon shall be due and payable.

/ / ___________________________________.

(b) INTEREST.

(i) Interest on the Prime Rate Amount shall be paid:

X on the LAST day of DECEMBER, 1999, and on the same day of
each MONTH thereafter prior to maturity and at maturity.

/ / at maturity.

/ / at the time each principal installment is due and at
maturity.

/ / _________________________________________.
_________________________________________.

(ii) Interest on all LIBOR Amounts shall be paid:

/ / on the last day of the applicable LIBOR Interest Period, and
if such LIBOR Interest Period is longer than three months,
on the last day of each three month period occurring during
such LIBOR Interest Period, and at maturity.

X on the LAST day of December, 1999, and on the same day of
each MONTH thereafter prior to maturity and at maturity.

/ / at maturity.

/ / at the time each principal installment is due and at
maturity.

/ / _________________________________________.

(iii) PERFORMANCE PRICING: IF DURING THE TERM OF THE CREDIT LINE
FACILITY, BEGINNING WITH THE QUARTER ENDING DECEMBER 31,
1999, THE COMPANY REPORTS A QUARTERLY PROFIT, THE INTEREST
RATE OPTIONS WILL IMMEDIATELY DECREASE TO THE PRIME
BORROWING RATE PLUS 0.000 PER ANNUM FULLY FLOATING OR THE
LIBOR BORROWING RATE PLUS 1.750 PER ANNUM.

7. PREPAYMENT.

(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.

(b) Except as otherwise specifically set forth herein, Borrower may not prepay
all or any part of any LIBOR Amount or terminate any LIBOR Borrowing Rate,
except on the last day of the applicable LIBOR Interest Period.

(c) Principal prepayments will not postpone the date of or change the amount of
any regularly scheduled payment. At the time of any principal prepayment,
all accrued interest, fees, costs and expenses shall also be paid.

Libor-wa (Washington) (6/99)LHH Page 2 of 4
<PAGE>

8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note changes
the holder of this note may, from time to time, in holder's sole discretion,
increase or decrease the amount of each of the installments remaining unpaid at
the time of such change in rate to an amount holder in its sole discretion
deems necessary to continue amortizing the Principal Balance at the same rate
established by the installment amounts specified in Section 6(a), whether or not
a "balloon" payment may also be due upon maturity of this note. Holder shall
notify the undersigned of each such change in writing. Whether or not the
installment amount is increased under this Section 8, Borrower understands that,
as a result of increases in the rate of interest the final payment due, whether
or not a "balloon" payment, shall include the entire Principal Balance and
interest thereon then outstanding, and may be substantially more than the
installment specified in Section 6.

9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.

10. PAYMENT BY AUTOMATIC DEBIT.

X Borrower hereby authorizes Lender to automatically deduct the amount of all
principal and interest payments from account number 153504884322 with Lender. If
there are insufficient funds in the account to pay the automatic deduction in
full, Lender may allow the account to become overdrawn, or Lender may reverse
the automatic deduction. Borrower will pay all the fees on the account which
result from the automatic deductions, including any overdraft and non-sufficient
funds charges. If for any reason Lender does not charge the account for a
payment, or if an automatic payment is reversed, the payment is still due
according to this note. If the account is a Money Market Account, the number of
withdrawals from that account is limited as set out in the account agreement.
Lender may cancel the automatic deduction at any time in its discretion.

Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic debit.

11. DEFAULT.

(a) Without prejudice to any right of Lender to require payment on demand or to
decline to make any requested Advance, each of the following shall be an event
of default: (i) Borrower fails to make any payment when due. (ii) Borrower fails
to perform or comply with any term, covenant or obligation in this note or any
agreement related to this note, or in any other agreement or loan Borrower has
with Lender or any affiliate of Lender. (iii) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this note or
perform Borrower's obligations under this note or any related documents. (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates
or dissolves, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (vii) Any of the events described in
this default section occurs with respect to any general partner in Borrower or
any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender
ceases to be, or is asserted not to be, in full force and effect. (viii) There
is any material adverse change in the financial condition or management of
Borrower or Lender in good faith deems itself insecure with respect to the
payment or performance of Borrower's obligations to Lender. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.

(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire
unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice; provided, however, that if any
proceeding under any bankruptcy or insolvency law is commenced by or against
Borrower, the availability of Advances shall be immediately terminated
without notice and the entire Principal Balance and all accrued interest
shall, without notice, become immediately due and payable. Upon default,
including failure to pay upon final maturity, Lender, at its option, may
also, if permitted under applicable law, increase the interest rate on this
note to a rate equal to the Prime Borrowing Rate plus 5%. The interest rate
will not exceed the maximum rate permitted by applicable law. In addition, if
any payment of principal or interest is 15 or more days past due, Borrower
will be charged a late charge of 5% of the delinquent payment.

12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall,
at any time, be conclusive evidence of the unpaid Principal Balance and interest
owing on this note. Notwithstanding any other provisions of this note, in the
event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.

13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is
a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.

14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nore any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.

15. REQUEST FOR ADVANCES.

(a) Any Advance may be made or interest rate option selected upon the
request of Borrower (if an individual), any of the undersigned (if Borrower
consists of more than one individual), any person or persons authorized in
subsection (b) of this Section 15, and any person or persons otherwise
authorized to execute and deliver promissory notes to Lender on behalf of
Borrower.

(b) Borrower hereby authorizes any one of the following individuals to request
Advances and to select interest rate options:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
unless Lender is otherwise instructed in writing.

(c) All Advances shall be disbursed by deposit directly to Borrower's account
number ________________________ with Lender, or by cashier's check issued to
Borrower.

(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such
requests. In consideration of Lender agreeing, at its sole discretion, to
make Advances upon such requests, Borrower promises to pay holder, in
accordance with the provisions of this note, the Principal Balance together
with interest thereon and other sums due hereunder, although any Advances
may have been requested by a person or persons not authorized to do so.

16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not limited
to, financial statements, tax returns, lists of assets and liabilities, agings
of receivables and payables, inventory schedules, budgets and forecasts. If upon
review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.

17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all.

18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney
regarding the enforcement of any of its rights under this note or any
document securing the same, or if this note is placed in the hands of an
attorney for collection of if suit or litigation is brought to enforce this
note or any document securing the same, Borrower promises to pay all costs
thereof including such additional sums as the court or arbitrator(s) may
adjudge reasonable as attorney fees, including without limitation, costs and
attorney fees incurred in any appellate court, in any proceeding under the
bankruptcy code, or in any receivership and post-judgment attorney fees
incurred in enforcing any judgment.

Libor-wa (Washington) (6/99)LHH Page 3 of 4
<PAGE>

19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or
otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender may, in its sole discretion: (a) make secured or
unsecured loans to Borrower and agree to any number of waivers, modifications,
extensions and renewals of any length of such loans, including the loan
evidenced by this note; (b) impair, release (with or without substitution of new
collateral), fail to perfect a security interest in, fail to preserve the value
of, fail to dispose of in accordance with applicable law, any collateral
provided by any person; (c) sue, fail to sue, agree not to sue, release, and
settle or compromise with, any person.

20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers
are joint and several and are binding upon any marital community of which any
of the undersigned are members. Holder's rights and remedies under this note
shall be cumulative.

21. SEVERABILITY. If any term or provision of this note is declared by a court
of competent jurisdiction to be illegal, invalid or unenforceable for any reason
whatsoever, such illegality, invalidity or unenforceability shall not affect the
balance of the terms and provisions hereof, which terms and provisions shall
remain binding and enforceable, and this note shall be construed as if such
illegal, invalid or unenforceable provision had not been contained herein.

22. ARBITRATION.

(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to
the statutes of limitation applicable if they were litigated. This provision
is void if the Loan, at the time of the proposed submission to arbitration, is
secured by real property located outside of Oregon or Washington, or if the
effect of the arbitration procedure (as opposed to any Claims of Borrower) would
be to materially impair Lender's ability to realize on any collateral securing
the Loan.

(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Washington State Bar members in good standing. All arbitration hearings
will be held in Seattle, Washington. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.

(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently; (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.

23. GOVERNING LAW. This note shall be governed by and construed and enforced in
accordance with the laws of the State of Washington without regard to conflicts
of law principles; PROVIDED, however, that to the extent that Lender has greater
rights or remedies under Federal law, this provision shall not be deemed to
deprive Lender of such rights and remedies as may be available under Federal
law.

24. YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is,
that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on any shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or Note
or delivers any information to Lender. Borrower will promptly deliver to Lender
such information relating to this representation as Lender requests from time to
time.

25. RENEWAL AND EXTENSION. This Note is given in renewal and extension and not
in novation of the following described indebtedness: That certain Promissory
Note dated February 28, 1999, in the amount of $15,000,000.00 executed by
Borrower payable to Lender. It is further agreed that all liens and security
interest securing said indebtedness are hereby renewed and extended to secure
the Note and all renewals, extensions and modifications thereof.

26. DISCLOSURE.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.

EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.

MULTIPLE ZONES INTERNATIONAL, INC.
- ----------------------------------
Borrower Name (Corporation, Partnership or other Entity)

illegible SUP & CFO
- ----------------------------------
AUTHORIZED OFFICER, TITLE

- --------------------------------------------------------------------------------

For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.

U.S. BANK NATIONAL ASSOCIATION

By: /s/ Tony W. Chalfant
---------------------------
Title: Vice President
------------------------
Date: 12/14/99
-------------------------

Libor-wa (Washington) (6/99)LHH Page 4 of 4

<PAGE>

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------

<S> <C>
Multiple Zones India Private Ltd. (80% owned by Multiple Zones Mauritius Ltd.,
a holding company wholly owned by Multiple Zones International, Inc.) ............................. India
touchMarketing.com.....................................................................................USA
</TABLE>

<PAGE>

Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-87255, File No. 333-06961, File No.333-13501
and File No. 333-25859) of Multiple Zones International, Inc. of our report
dated January 27, 2000, related to the financial statements, which is included
in this Annual Report on Form 10-K.

Seattle, Washington
March 28, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Multiple Zones International, Inc. fiscal year ended 12/31/99 consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,774
<SECURITIES> 0
<RECEIVABLES> 35,128
<ALLOWANCES> 2,644
<INVENTORY> 17,752
<CURRENT-ASSETS> 79,497
<PP&E> 22,811
<DEPRECIATION> 11,376
<TOTAL-ASSETS> 96,494
<CURRENT-LIABILITIES> 62,194
<BONDS> 0
0
0
<COMMON> 39,184
<OTHER-SE> (7,344)
<TOTAL-LIABILITY-AND-EQUITY> 96,494
<SALES> 487,410
<TOTAL-REVENUES> 487,410
<CGS> 438,643
<TOTAL-COSTS> 438,643
<OTHER-EXPENSES> 57,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512
<INCOME-PRETAX> (9,296)
<INCOME-TAX> (2,637)
<INCOME-CONTINUING> (6,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,659)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)

</TABLE>