MULTIPLE ZONES INTERNATIONAL INC, 424B1, 1996-06-28

MULTIPLE ZONES INTERNATIONAL INC
424B1, 1996-06-28
CATALOG & MAIL-ORDER HOUSES

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<PAGE> 1

FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION STATEMENT NO. 333-4458

2,200,000 SHARES

MULTIPLE ZONES INTERNATIONAL, INC.
COMMON STOCK

All of the 2,200,000 shares of Common Stock being offered hereby are being
sold by the Company. Prior to the offering, there has been no public market for
the Common Stock. See "Underwriting" for the factors considered in determining
the initial public offering price. The Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "MZON."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share.......................................... $12.00 $0.84 $11.16
- ------------------------------------------------------------------------------------------------------------------
Total(3)........................................... $26,400,000 $1,848,000 $24,552,000
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$860,000.

(3) The Company has granted the Underwriters a 30-day option to purchase an
aggregate of up to 330,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $30,360,000, $2,125,200 and $28,234,800, respectively. See
"Underwriting."

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

The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by them, and subject to the right
of the Underwriters to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock will be made on or about July 2, 1996.

LOGO
FURMAN SELZ

The date of this Prospectus is June 27, 1996

<PAGE> 2
INSIDE FRONT COVER: ONE REPRESENTATIVE CATALOG COVER FOR EACH OF "THE MAC
ZONE" AND "THE PC ZONE," SET ABOVE THE COMPANY'S NAME.

GATEFOLD: MAP OF THE WORLD SHOWING LOCATIONS OF THE COMPANY AND ITS
SUBSIDIARIES AND LICENSEES, SET BELOW THE COMPANY'S NAME AND ABOVE THE TEXT "A
LEADING GLOBAL DIRECT MARKETER OF MICROCOMPUTER PRODUCTS," AND SURROUNDED BY A
FLOAT CHART OF PICTURES OF (1) REPRESENTATIVE SAMPLES OF THE COMPANY'S FLAGSHIP
CATALOGS, STAND-ALONE DIRECT MAIL PIECES AND SPECIALTY CATALOGS; (2)
REPRESENTATIVE SAMPLES OF TRADE PUBLICATIONS IN WHICH THE COMPANY ADVERTISES;
(3) THE COMPANY'S HOME PAGE ON MARKETPLACE-MCI; (4) THE COMPANY'S TELEMARKETING
OPERATIONS CENTER; (5) THE THIRD-PARTY DISTRIBUTION FACILITY UTILIZED BY THE
COMPANY; (6) AN AIRCRAFT OF AN OVERNIGHT EXPRESS DELIVERY COMPANY; (7) MODELS
REPRESENTING USERS OF PRODUCTS SOLD BY THE COMPANY; AND (8) MODEL OF A COMPUTER
REPRESENTING THE COMPANY'S CUSTOMER DATABASE.

INSIDE BACK COVER: COVERS OF REPRESENTATIVE CATALOGS OF ELEVEN OF THE
COMPANY'S SUBSIDIARIES AND LICENSEES, THE NAMES OF THE COUNTRIES WHERE THE
COMPANY'S SUBSIDIARIES AND LICENSEES ARE LOCATED, THE TEXT "ONE COMPANY . . .
GLOBAL MARKETPLACE," AND PICTURES OF TWO REPRESENTATIVE PROMOTIONAL SPREADS IN
THE COMPANY'S CATALOGS AND TWO REPRESENTATIVE ADVERTISEMENTS BY THE COMPANY IN
TRADE PUBLICATIONS.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. See "Risk Factors" for information
prospective investors should consider.

THE COMPANY

Multiple Zones International, Inc. (the "Company") is a leading
international direct marketer of microcomputer hardware, software, peripherals
and accessories for users of Apple Macintosh-compatible ("Mac") and
IBM-compatible ("PC") computers through two flagship catalogs, THE MAC ZONE and
THE PC ZONE. During 1995, over 29 million catalogs were distributed by the
Company domestically, with additional circulation by its subsidiaries and
licensees through operations located in 26 other countries worldwide, more
countries than any other catalog retailer of microcomputer products. The Company
offers a broad selection of over 18,000 microcomputer products at competitive
prices primarily through its distinctive catalogs, as well as through major
trade publications and an outbound telemarketing sales team focused on small and
medium-sized corporate, governmental and educational accounts. The Company
tailors its catalogs and targets specific customers based on individual customer
records in the Company's proprietary database. This targeted marketing, coupled
with the Company's knowledgeable sales assistance and superior customer service,
has produced an established base of satisfied customers. The Company believes
that a substantial portion of its revenues represent sales to repeat customers.

The Company has achieved strong growth in both sales and profitability. Net
sales grew at a compound annual growth rate of 50.9% to $242.6 million in 1995
from $46.8 million in 1991. Principally as a result of increased sales of
microcomputer hardware products, the Company's average order size grew to $336
in the three months ended March 31, 1996 from $201 in 1993. The Company's net
income increased to $3.2 million in 1995 from $468,000 in 1991, and increased to
$2.2 million in the three months ended March 31, 1996 from $234,000 in the
comparable prior period.

According to industry data, direct marketing is expected to be the fastest
growing major distribution channel for microcomputer products, with a domestic
market share that is projected to more than double from its 1994 level to over
15% of total domestic microcomputer product sales in 1998. The Company believes
this projected growth is attributable to consumers' increasing familiarity with
microcomputers, the emergence of component "plug-and-play" compatibility, and
manufacturers' growing recognition of the cost-effectiveness of marketing
microcomputer products through catalogs. Annual domestic sales of microcomputer
products are also projected to more than double from their 1994 level to over
$120 billion in 1998. The Company believes the international market for
microcomputer products should experience similar growth trends, due primarily to
an increasing installed base of microcomputers and expansion by manufacturers
seeking additional markets for their products. As a leading participant in the
direct marketing channel, the Company believes it is well positioned to
capitalize on the anticipated growth of the markets for microcomputer products.

Over the past three years, the Company has made significant investments in
its operating infrastructure to capitalize on its position in this rapidly
growing market. The Company has devoted considerable resources to building a
highly qualified management team to guide its anticipated growth; developing one
of the channel's largest databases of purchasers and prospective purchasers of
microcomputer products; installing sophisticated systems to provide the Company
with real-time access to information on customer purchase histories, inventory
availability, and product specifications, benefits and features; developing
in-house catalog design and production capability; and establishing
international operations.

The Company intends to leverage its operating infrastructure to strengthen
and expand its offerings of PC products to meet increasing customer demand;
increase the circulation of its flagship catalogs; increase the proportion of
the Company's sales to business accounts through its outbound sales team; expand
sales through its international operations; and enhance the Company's presence
on the World Wide Web of the Internet. In addition, the Company will strive to
enhance growth and profitability by expanding the breadth of its product
offerings; increasing inventory depth to improve in-stock positions; increasing
its emphasis on sales of hardware products in order to increase average order
size and gross profit dollars; purchasing more products directly from
manufacturers at more favorable prices; and more aggressively pursuing
first-to-market, end-of-life-cycle and other higher-margin product offerings.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........... 2,200,000 shares
Common Stock outstanding after the 12,493,710 shares
offering(1).................................
Use of proceeds............................... Repayment of borrowings, working capital
requirements and other general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol................. MZON
</TABLE>

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

(1) Does not include 1,171,310 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at June 27, 1996, and an additional
1,026,500 shares of Common Stock reserved for future issuance under the
Company's stock option and employee stock purchase plans. See "Management --
Benefit Plans," "-- Certain Transactions -- Benaroya-Bessemer Financing" and
Notes 10 and 11 of Notes to Consolidated Financial Statements.

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

The Company was incorporated on November 23, 1988 as a Washington
corporation. Unless the context otherwise requires, the term "Company" refers to
Multiple Zones International, Inc. and its direct and indirect subsidiaries. The
Company's principal executive offices are located at 15815 S.E. 37th Street,
Bellevue, Washington 98006-1800 and its telephone number is (206) 603-2400.

THE MAC ZONE(R) and THE PC ZONE(R) are registered service marks of the
Company. All other trademarks or service marks appearing in this Prospectus are
trademarks or registered trademarks of the respective companies that utilize
them.
------------------------

Unless otherwise indicated, all information in this Prospectus: (i) assumes
that the Underwriters' over-allotment option will not be exercised; (ii)
reflects a 50,000-for-9 stock split effected June 7, 1993, a 2-for-1 stock split
effected February 9, 1994, and a 1.5-for-1 stock split effected June 3, 1996;
(iii) reflects the conversion of all outstanding shares of the Company's Series
A Convertible Preferred Stock ("Series A Preferred Stock") into 1,874,999 shares
of Common Stock in October 1995; and (iv) reflects the conversion of all
outstanding shares of the Company's Series B Convertible Preferred Stock
("Series B Preferred Stock"), which were issued in October 1995, into 918,711
shares of Common Stock upon consummation of the offering. This Prospectus
contains forward-looking statements within the meaning of the federal securities
laws. There are many factors that could cause actual events and results to
differ materially from those expressed in or implied by these statements,
including those set forth in "Risk Factors" and elsewhere in this Prospectus.

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<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $46,834 $77,023 $80,515 $113,456 $242,587 $46,228 $100,927
Gross profit................... 7,483 9,868 11,217 15,245 31,550 6,301 13,963
Income (loss) from
operations................... 526 (1,953) 631 834 6,125 543 3,885
Net income (loss)(1)........... $ 468 $(2,065) $ 451 $ 412 $ 3,192 $ 234 $ 2,173
Pro forma earnings per
share(1)..................... $ 0.31 $ 0.02 $ 0.21
Shares used in computation of
pro forma earnings per
share(1)..................... 10,144 10,123 10,137
SELECTED OPERATING DATA(2):
Catalogs distributed........... 6,900,000 8,000,000 15,000,000 29,000,000 8,000,000 9,500,000
Number of shipments(3)......... 395,000 415,000 522,000 859,000 198,000 283,000
Average order size(3).......... $ 211 $ 201 $ 212 $ 273 $ 229 $ 336
Customer and inquirer
database(4).................. 1,626,000 1,908,000 1,711,000 2,023,000
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................... $ 8,498 $ 32,190
Total assets.................................................................. 92,701 104,603
Short-term debt............................................................... 12,970 1,180
Long-term debt, net of current portion........................................ 1,497 1,497
Series B Preferred Stock...................................................... 6,691 --
Total shareholders' equity.................................................... 6,706 37,089
</TABLE>

- ---------------
(1) During the period from its inception through June 5, 1993, the Company
elected to be treated as an S Corporation for federal income tax purposes
and accordingly made no provision for federal income taxes on income earned,
and derived no federal income tax benefit from any losses incurred, during
that period. See Note 8 of Notes to Consolidated Financial Statements. If
the Company had been subject to federal income taxes for all of 1993 at the
statutory rates in effect for that year, its pro forma net income for 1993
would have been $299,600. The pro forma earnings per share and pro forma
average number of common shares outstanding data are unaudited and assume
that all options and warrants exercisable for Common Stock, and all
securities convertible into Common Stock, issued by the Company since May 3,
1995 were issued and exercised or converted on January 1, 1993.

(2) Selected operating data are unaudited and exclude international operating
data.

(3) Number of shipments is the number of outbound shipments 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
shipments.

(4) The database includes customer and inquirer records. Customers are people
who have purchased or received products from the Company. Inquirers are
people who have requested a catalog or product information from the Company.
Due to a change in the Company's customer and inquirer database, data for
1992 and 1993 are not comparable to the data for more recent periods and
accordingly have been omitted.

(5) As adjusted to give effect to the: (i) conversion of all outstanding shares
of Series B Preferred Stock upon consummation of the offering; (ii) sale of
the 2,200,000 shares of Common Stock being offered hereby; and (iii)
application of the estimated net proceeds of the offering. See "Use of
Proceeds."

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<PAGE> 6

RISK FACTORS

In evaluating the Company, its business and an investment in the shares of
Common Stock offered hereby, prospective investors should consider the following
risk factors, in addition to the other information in this Prospectus. This
Prospectus contains forward-looking statements within the meaning of the federal
securities laws. There are many factors that could cause actual events and
results to differ materially from those expressed in or implied by these
statements, including those set forth below and elsewhere in this Prospectus.

RISKS ASSOCIATED WITH RAPID GROWTH

Since its formation, the Company has experienced rapid growth in its
customer base and catalog circulation as its net sales increased to $242.6
million in 1995 from $46.8 million in 1991. This growth has placed strains on
the Company's management resources, facilities and equipment. The Company's
business strategy is to pursue additional growth by, among other things,
expanding the circulation of its catalogs; increasing its offerings of PC
products; increasing sales to business accounts through the Company's outbound
sales team; expanding the breadth of its product offerings; increasing inventory
depth; increasing the Company's emphasis on sales of hardware products; more
aggressively pursuing first-to-market, end-of-life-cycle and other similar
product offerings; and increasing international operations. To pursue this
strategy, the Company will be required to increase its capital and operating
expenditures and to retain, motivate and effectively manage its employees. Any
additional growth that may occur can be expected to result in additional demands
on the Company's resources. The Company's future success will depend in part on
its ability to manage growth successfully. Failure by the Company to do so would
have a material adverse effect on its business, financial condition and results
of operations. There can be no assurance that the Company's future growth in
sales and profits, if any, will be at rates comparable to those experienced in
recent periods. See "Business -- Business Strategy" and "-- Growth Strategy."

VARIABILITY OF QUARTERLY RESULTS

The Company has experienced significant fluctuations in its operating
results, and these fluctuations may continue in the future. The Company was only
marginally profitable in 1993 and 1994. The Company's results of operations are
significantly affected by many factors, including seasonal and other
fluctuations in demand for microcomputer products and in profit margins on
products sold, catalog timing and circulation, product availability, and timing
of releases of new and upgraded products. Many of these factors are outside the
control of the Company. The Company's operating results are heavily dependent
upon its ability to predict sales levels, monitor and control associated
expenses, and carefully manage all aspects of its operations, including product
selection and pricing, purchasing and payables practices, inventory management,
and catalog funding, production and circulation. If revenues do not meet
expectations in any given quarter, or if the Company experiences difficulty in
monitoring or controlling associated expenses, operating results may be
materially adversely affected. There can be no assurance that the Company will
be profitable on a quarterly or annual basis. It is possible that in some future
quarter the expectations of public market analysts and investors will exceed the
Company's operating results. In such event, the price of the Common Stock would
likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RELIANCE ON VENDOR SUPPORT AND RELATIONSHIPS

Most product manufacturers provide the Company with co-op advertising
support in exchange for product coverage in the Company's catalogs. This support
significantly defrays the expense of catalog production. The level of co-op
advertising support available to the Company may decline in the future. Such a
decline could increase the Company's selling, general and administrative expense
as a percentage of sales and have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Catalogs."

The Company acquires products for resale from manufacturers as well as from
distributors. Purchases of products from distributors constituted 35.5% and
25.7%, respectively, of the Company's total product purchases in 1995 and the
three months ended March 31, 1996. Purchases from Ingram Micro, Inc. ("Ingram

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<PAGE> 7

Micro") and from Apple Computer, Inc. ("Apple") represented 23.7% and 19.6%,
respectively, of the Company's total product purchases in 1995, and 15.1% and
27.0%, respectively, of the Company's total product purchases in the three
months ended March 31, 1996. No other vendor supplied more than 10% of the
Company's total product purchases in 1995 or the three months ended March 31,
1996. Certain hardware manufacturers either do not permit the Company to sell
the full line of their products or limit the number of product units available
to direct marketers such as the Company. Most of the Company's product vendors
provide the Company with trade credit, of which the net amount outstanding at
March 31, 1996 was $54.9 million. A number of major manufacturers participate in
flooring arrangements that assist the Company in financing purchases of their
products. 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. See "Business -- Purchasing."

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. Mac products represented 73.8%, 74.5%
and 73.8% of the Company's gross sales in 1994, 1995 and the three months ended
March 31, 1996, respectively. Following Apple's decision in 1994 to authorize
several direct marketers, including the Company, to sell microcomputers
manufactured by Apple, the Company's sales of Apple products increased
significantly from 2.0% to 23.5% of the Company's gross sales in 1994 and 1995,
respectively, and constituted 22.2% of the Company's gross sales in the three
months ended March 31, 1996. As is customary in the microcomputer products
industry, Apple participates in a flooring arrangement that assists the Company
in financing purchases of its products. Apple recently announced that: (i)
during the three months ended March 31, 1996, it experienced a significant
decline in revenues, number of units shipped and its share of the worldwide and
domestic microcomputer markets; (ii) it had significant overstocked inventory
positions on certain products; (iii) it planned to lay off 2,800 employees; (iv)
it incurred a $740 million operating loss for the three months ended March 31,
1996 as a result of inventory write-downs, restructuring costs, reduced revenues
and a significant decline in gross margin percentage; and (v) it commenced a
recall of certain product models. During 1995, certain Apple microcomputers were
in short supply. The Company's sales of microcomputers and other products
manufactured by Apple may be limited if the Company's reseller agreement with
Apple is curtailed or terminated or if product availability or financing is
otherwise restricted. A further 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 it will be
successful in doing so.

COMPETITIVE, PRICING AND ECONOMIC RISKS

The microcomputer products industry is highly competitive. The Company
competes with other national and international direct marketers. The Company
also competes with product manufacturers that sell direct to end-users;
specialty microcomputer retailers; microcomputer and general merchandise
superstores; consumer electronic and office supply stores; and shopping services
on television, the Internet and commercial on-line networks. The Company
competes not only for customers, but also for co-op advertising support from
microcomputer product manufacturers. Some of the Company's competitors are
larger and have substantially greater financial resources, superior operating
results, and larger catalog circulations and customer bases than the Company. In
addition, several direct marketers have recently been acquired by larger
competitors. There can be no assurance that the Company will be able to compete
effectively with existing competitors or any new 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.

The microcomputer 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 profit margins to remain competitive.
Such margin decreases could have a material adverse effect on the Company's
business, financial

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<PAGE> 8

condition and results of operations. In addition, the Company has recently
increased its sales of microcomputer hardware products, for which profit margins
are generally lower than those associated with software products.

The market for microcomputer products has grown rapidly in recent years. If
the growth of this market or the direct marketing channel were to cease or
decrease, the Company's business, financial condition and results of operations
could be adversely affected. Demand for many of the products carried by the
Company may be subject to economic cycles. A recession could have a material
adverse effect on the Company's sales and profitability. There can be no
assurance that the Company will be able to maintain consistent profit margins or
levels of profitability. See "Business -- Competition."

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 marketing, catalog design and production,
purchasing, inventory management, order processing, product distribution,
accounts receivable, customer service and general accounting functions. The
Company does not currently have a redundant or back-up telecommunication system.
The Company intends to relocate its corporate headquarters, including its
telemarketing operations, to a larger facility in the summer of 1996. Any
interruption in any of the Company's systems or other disruption in the
Company's business as a result of the relocation of its operations center, power
outages, system failure, the installation of planned enhancements or otherwise,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Systems" and
"-- Facilities."

ADMINISTRATIVE, FINANCIAL AND OTHER RISKS OF INTERNATIONAL OPERATIONS

The Company currently operates subsidiaries in ten foreign countries and
also derives license fees and royalties from catalog direct marketers located in
16 other foreign countries who sell microcomputer products in numerous foreign
countries using the Company's service marks. International subsidiary operations
accounted for 10.2%, 10.9% and 13.7% of the Company's net sales in 1994, 1995
and the three months ended March 31, 1996, respectively. The Company intends to
expand its international operations and may seek to acquire a controlling
interest in certain of its licensees. The Company's international operations are
subject to the general risks of remote management as well as other risks
associated with the conduct of business in foreign countries, including
economic, legal and regulatory uncertainties; currency fluctuations, which the
Company generally does not attempt to hedge; restrictions on repatriation of
earnings; potential conflicting claims to its service marks; export-import
regulations; customs matters; foreign collection problems; military, political
and transportation risks; and foreign laws and governmental regulation. The
Company's licensees may terminate their agreements with the Company on short
notice. Following termination, most of these licensees would retain rights to
their customer information without any express contractual restriction
preventing future competition. To date, three of the Company's licensees have
terminated their agreements in order to affiliate with a competitor. There can
be no assurance that the Company will be able to retain its licensees or to
replace any licensees it may lose in the future. See "Business -- International
Operations."

CHANGING METHODS OF DISTRIBUTION

The market for microcomputer products is evolving at a rapid rate both in
terms of product offerings and the methods of distribution for those products.
Direct marketing of microcomputer products through catalogs is a relatively new
distribution channel and currently accounts for only a relatively small
percentage of total microcomputer product sales. Some manufacturers sell their
hardware and software products directly to end-users, or to certain categories
of end-users such as corporate accounts; these efforts may intensify in the
future. Some software vendors distribute products through volume site licenses
or directly to end-users' microcomputers through the use of modem
telecommunications. Microcomputer products are also sold through

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<PAGE> 9

shopping services on the Internet and commercial on-line networks, encrypted
CD-ROM technology, infomercials and television shopping networks. Any or all of
these methods of distribution may attract increased patronage and other new
methods of distribution, such as interactive television, may emerge in the
future. In order to maintain its profitability, the Company will be required to
remain competitive with existing and evolving distribution channels and methods,
and possibly to develop or adopt new methods for distribution of products 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.

DEPENDENCE ON KEY PERSONNEL

The Company's performance will depend to a significant extent upon the
efforts and abilities of members of its senior management, particularly: Victor
J. Melfi, Jr., President and Chief Executive Officer; Bruce S. Martin,
Co-President and Chief Operating Officer; Peter J. Biere, Senior Vice
President -- Finance and Chief Financial Officer; and Sadrudin J. Kabani,
Chairman of the Board. Messrs. Melfi and Martin have had a relatively limited
tenure with the Company. The competition for qualified management personnel in
the microcomputer products industry and the direct marketing channel is
extremely intense, and the Company has recently lost several management
employees to a competitor. The loss of the services of one or more of the
Company's senior management could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
success will depend on its ability to hire, train and retain skilled personnel
in all areas of its business. There can be no assurance that the Company will be
able to attract, train and retain sufficient qualified personnel to achieve its
business objectives. See "Business -- Employees" and "Management."

RAPID TECHNOLOGICAL CHANGE AND EXPOSURE TO INVENTORY OBSOLESCENCE

The market for microcomputer products is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. The Company's success depends in part on its ability to identify
and market products that meet the needs of the marketplace. In order to satisfy
customer demand and to obtain greater purchasing discounts, the Company expects
to carry increased inventory levels of certain products in the future, which
will subject it to increased risk of inventory obsolescence. Pursuant to its
business strategy, the Company intends, among other things, to place larger
inventory stocking orders, increase its participation in first-to-market and
end-of-life-cycle purchase opportunities and market more products on a
private-label basis, all of which will further increase the risk of inventory
obsolescence. While the Company seeks to reduce its inventory exposure through a
variety of inventory control procedures and policies, including vendor price
protection and product return programs where available, there can be no
assurance that the Company will be able to avoid losses related to obsolete
inventory. End-of-life-cycle products are typically acquired without return
privileges. In addition, some manufacturers provide the Company with co-op
advertising support in the form of barter products, for which it often has no
return privileges. See "Business -- Business Strategy" and "-- Growth Strategy."

STATE EXCISE TAX UNCERTAINTIES

The Company presently collects retail sales taxes or similar taxes only on
sales to customers in the States of Washington and Ohio. Various states have
sought to require direct marketers to collect sales taxes on sales to their
residents. In addition, legislation that would expand the ability of states to
impose sales tax collection obligations on direct marketers has been introduced
in Congress on numerous occasions. The United States Supreme Court has held that
a state may not impose a sales tax collection obligation on a direct marketer
whose contact with the state is limited to the distribution of catalogs and
other advertising materials and the delivery of purchased products by U.S. mail
or interstate common carrier. Due to its presence on various forms of electronic
media and other factors, the Company's contact with many 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 on the Company a sales
tax collection obligation. There can be no assurance that the Company will not
incur material liabilities on account of past or future failures to accurately
determine the Company's sales tax collection obligations or other excise tax
liabilities with respect to one or more states. If

9
<PAGE> 10

the Company were required to collect sales tax, the effective cost of the
Company's products to customers in states that imposed a collection obligation
would increase, which could reduce demand for products sold by the Company and
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Regulatory and Legal Matters."

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 and ground delivery
services. The Company generally passes on only a portion of its shipping costs
directly to customers, particularly for back-ordered products. In 1995, postage
rates for mailing the Company's catalogs and overnight rates for delivery of
orders increased. Paper costs have generally increased over the last several
years. Any future increases in postage or shipping rates or in paper costs could
have a material adverse effect on the Company's business, financial condition
and results of operations.

RELIANCE ON OUTSOURCED DISTRIBUTION

Advanced Logistics Services Corp. ("Airborne Logistics") provides and
operates a warehouse and distribution center for the Company in Wilmington, Ohio
under a contract that expires in March 1998. Under the contract, employees of
Airborne Logistics utilize the Company's systems, policies and procedures to
receive, log and warehouse inventory shipments from product vendors, fill and
ship domestic customer orders, and return inventory to product vendors when
requested by the Company. The Company pays a flat rate for each order filled,
which rate is subject to periodic increases over the remainder of 1996. Any
limitation or interruption of the services being provided by Airborne Logistics
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Distribution Center."

CONTROL BY EXISTING SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS

After consummation of the offering, the Company's directors and executive
officers will beneficially own in the aggregate approximately 72% of the
Company's outstanding Common Stock (70% if the Underwriters' over-allotment
option is exercised in full). Certain principal shareholders or their
representatives are directors or executive officers of the Company. As a result
of such ownership, these shareholders, acting as a group, will be able to
control matters requiring approval by the shareholders of the Company, including
the election of directors. The Company is also authorized, without shareholder
approval, to issue preferred stock with such rights, preferences and privileges
as the Board of Directors may determine, including rights that may be senior to
or otherwise adversely affect the Common Stock. In addition, certain provisions
of Washington state law and of the Company's Articles of Incorporation and
Bylaws could make it more difficult for a third party to acquire, or could
discourage a third party from attempting to acquire, control of the Company. Any
or all of these factors could limit or depress the price that certain investors
might be willing to pay in the future for shares of Common Stock. See "Principal
Shareholders" and "Description of Capital Stock."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiations between the Company and the Representatives of the Underwriters,
and may not be indicative of the market price for the Common Stock in the
future. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that an
active trading market for the Common Stock will develop or be sustained after
the offering. If a trading market develops, the market price of the Common Stock
may fluctuate widely as a result of various factors, such as period-to-period
fluctuations in the Company's operating results, sales of Common Stock by
existing shareholders, developments in the microcomputer industry or the methods
of distribution of microcomputer products, competitive factors, regulatory
developments, economic and other external factors, general market conditions,
and market conditions affecting stocks of microcomputer product

10
<PAGE> 11

manufacturers and resellers in particular. The stock market in general, and the
stocks of microcomputer product resellers in particular, have in the past
experienced extreme volatility in trading prices and volumes that has often been
unrelated to operating performance. Such market volatility may have a
significant adverse impact on the market price and marketability of the Common
Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the offering, 12,493,710 shares of Common Stock will
be outstanding (12,823,710 shares if the Underwriters' over-allotment option is
exercised in full), of which the 2,200,000 shares offered hereby (2,530,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except to
the extent such shares are held by an affiliate of the Company. The remaining
10,293,710 shares of Common Stock were issued and sold by the Company in private
transactions, and public sale thereof is restricted except to the extent they
are registered under the Securities Act or sold in accordance with an exemption
from such registration. The Company and the holders of all of these remaining
shares have entered into agreements with the Underwriters (the "Lock-up
Agreements") not to sell, offer to sell, solicit an offer to buy, contract to
sell, grant any option to purchase, or otherwise transfer or dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Dain Bosworth Incorporated. Upon
expiration of the 180-day period, 9,374,999 of these remaining 10,293,710 shares
will be eligible for immediate public sale under Rule 144 as currently in effect
and the remaining shares of Common Stock will not be eligible for public sale
until October 1997 unless earlier registered under the Securities Act pursuant
to certain contractual registration rights. At June 27, 1996, options and
warrants for 1,171,310 shares of Common Stock were outstanding, of which options
for 230,250 shares will be exercisable upon consummation of the offering and the
shares issued upon exercise will be potentially eligible for public sale 90 days
after the date of this Prospectus pursuant to Rule 701 under the Securities Act;
of these shares, 200,250 shares are subject to Lock-up Agreements. Sales of
substantial amounts of shares of Common Stock in the public market following the
offering could adversely affect the market price for the Common Stock. See
"Shares Eligible for Future Sale."

DILUTION

Investors in Common Stock in the offering will experience immediate
dilution in the net tangible book value of their shares in the amount of $9.14
per share. Additional dilution will occur upon exercise of outstanding stock
options and warrants. If the Company seeks additional capital in the future, the
issuance of shares or convertible debt to obtain such capital may lead to
further dilution. See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting Underwriting Discounts and Commissions and
estimated expenses of the offering, are estimated to be $23,692,000 ($27,374,800
if the Underwriters' over-allotment option is exercised in full).

The Company intends to use the net proceeds to repay all amounts owed under
the Company's primary bank line of credit, which totaled $20.6 million at June
3, 1996, as well as for other working capital requirements and general corporate
purposes. This facility accrues interest at a rate equal to 0.75% above the
bank's prime rate (9% at June 3, 1996) and expires on December 31, 1996. A
portion of the net proceeds may also be used to take advantage of future
acquisition opportunities. The Company has no present understandings, agreements
or commitments with respect to any material acquisition, and there can be no
assurance that any acquisition will occur. Pending the above uses, the net
proceeds will be invested in short-term, liquid investments.

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the short-term obligations and
capitalization of the Company at March 31, 1996, and the short-term obligations
and capitalization of the Company as adjusted to give effect to the: (i)
conversion of all outstanding shares of Series B Preferred Stock upon
consummation of the offering; (ii) sale by the Company of the 2,200,000 shares
of Common Stock offered hereby; and (iii) application of the estimated net
proceeds of the offering. See "Use of Proceeds" and Notes 10 and 11 of Notes to
Consolidated Financial Statements. The information set forth below is unaudited
and should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Bank lines of credit................................................... $12,260 $ 470
Current portion of capital lease obligations........................... 710 710
------- -------
Total short-term debt............................................. 12,970 1,180
======= =======
Long-term debt, net of current portion................................. 1,497 1,497
------- -------
Series B Preferred Stock, no par value, $11.43 per share liquidation
preference:
612,476 shares issued and outstanding; none issued and outstanding as
adjusted(1)....................................................... 6,691 --
------- -------
Shareholders' Equity:
Common Stock, no par value: 45,000,000 shares authorized; 9,374,999
shares issued and outstanding; 12,493,710 shares issued and
outstanding as adjusted(2)........................................ 2,750 33,133
Foreign currency translation adjustment.............................. 25 25
Retained earnings.................................................... 3,931 3,931
------- -------
Total shareholders' equity........................................... 6,706 37,089
------- -------
Total capitalization.............................................. $14,894 $38,586
======= =======
</TABLE>

- ---------------
(1) At March 31, 1996, the Company had 5,000,000 shares of preferred stock
authorized, of which 612,476 shares were designated as Series B Preferred
Stock and 4,387,524 were undesignated.

(2) Does not include 724,810 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at March 31, 1996, and an additional
565,500 shares of Common Stock reserved for future issuance under the
Company's stock option and employee stock purchase plans. Subsequent to
March 31, 1996, options for an additional 477,250 shares of Common Stock
were granted by the Company, options for 30,750 shares of Common Stock
expired, and the number of shares reserved for issuance under the Company's
stock option plan was increased by 900,000. See "Management -- Benefit
Plans," "-- Certain Transactions -- Benaroya-Bessemer Financing" and Notes
10 and 11 of Notes to Consolidated Financial Statements.

DIVIDEND POLICY

The Company does not anticipate paying any cash dividends or other
distributions on its Common Stock in the foreseeable future. The Company's
primary bank line of credit restricts the payment of cash dividends. It will be
the policy of the Company's Board of Directors for the foreseeable future to
retain any earnings to finance the operations and expansion of the Company's
business.

12
<PAGE> 13

DILUTION

At March 31, 1996, the pro forma net tangible book value of the Company,
assuming all outstanding shares of Series B Preferred Stock had been converted
into Common Stock at that date, was approximately $12.0 million, or $1.17 per
share. Pro forma net tangible book value per share represents the Company's
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding.

Net tangible book value dilution per share represents the difference
between the amount per share paid by the purchasers of Common Stock in the
offering and the pro forma net tangible book value per share of Common Stock
immediately after consummation of the offering. After giving effect to the sale
by the Company of the 2,200,000 shares of Common Stock offered hereby and
receipt of the estimated net proceeds therefrom, the pro forma net tangible book
value of the Company at March 31, 1996 would have been approximately $35.7
million, or $2.86 per share. This represents an immediate increase in net
tangible book value of $1.69 per share to existing shareholders and an immediate
dilution of $9.14 per share to investors in the offering, as illustrated by the
following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $12.00
Net tangible book value per share at March 31, 1996.............. $ 1.17
Increase per share attributable to investors in the offering..... 1.69
------
Pro forma net tangible book value per share after the offering..... 2.86
------
Dilution in net tangible book value per share to investors in the
offering......................................................... $ 9.14
======
</TABLE>

The following table summarizes on a pro forma basis at March 31, 1996, for
existing shareholders and investors in the offering, the number of shares of
Common Stock purchased from the Company, the total consideration paid or to be
paid to the Company and the average price paid per share.

<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 10,293,710 82.4% $ 9,750,000 27.0% $ 0.95
Investors in the offering.......... 2,200,000 17.6 26,400,000 73.0 $ 12.00
---------- ----- ---------- ---- -
Total.................... 12,493,710 100.0% $36,150,000 100.0%
========== ===== ========== =====
</TABLE>

- ---------------
(1) The table is based on ownership at March 31, 1996, giving effect to the
conversion of all outstanding shares of Series B Preferred Stock into Common
Stock, and assumes no exercise of the Underwriters' over-allotment option.
Exercise of the Underwriters' over-allotment option in full would: (i)
reduce the proportion of shares held by existing shareholders to 80.3% of
the total number of shares of Common Stock outstanding after the offering;
and (ii) increase the number of shares held by investors in the offering to
2,530,000 shares, or 19.7% of such total number of shares.

The above computations assume no exercise of outstanding stock options and
warrants. At June 27, 1996, options and warrants to purchase 1,171,310 shares of
Common Stock were outstanding at a weighted average exercise price of $8.14 per
share. Exercise of such options and warrants will result in further dilution to
new investors. See "Management -- Benefit Plans," "-- Certain
Transactions -- Benaroya-Bessemer Financing" and Notes 10 and 11 of Notes to
Consolidated Financial Statements.

13
<PAGE> 14

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated financial and operating data should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The selected
consolidated financial data for the four years in the period ended December 31,
1995 are derived from the Consolidated Financial Statements of the Company
audited by Coopers & Lybrand L.L.P., independent accountants, and the selected
consolidated financial data for the year ended December 31, 1991 are derived
from the Financial Statements of the Company audited by the Company's prior
independent auditors. The selected consolidated financial data for the three
months ended March 31, 1995 and 1996 are derived from unaudited financial
statements prepared by the Company on a basis consistent with the Company's
audited Consolidated Financial Statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results for such periods. Operating results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for any other interim period or for the year ending
December 31, 1996.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $46,834 $77,023 $80,515 $113,456 $242,587 $46,228 $100,927
Cost of sales........................ 39,351 67,155 69,298 98,211 211,037 39,927 86,964
------- ------- ------- -------- -------- ------- --------
Gross profit......................... 7,483 9,868 11,217 15,245 31,550 6,301 13,963
Selling, general and administrative
expenses........................... 6,957 11,821 10,586 14,411 25,425 5,758 10,078
------- ------- ------- -------- -------- ------- --------
Income (loss) from operations........ 526 (1,953) 631 834 6,125 543 3,885
Other (income) expense:
Interest expense................... 55 193 213 277 1,149 167 504
Other income....................... 3 (62) (44) (78) (132) (27) (85)
Minority interest.................. -- (19) 8 16 69 26 49
------- ------- ------- -------- -------- ------- --------
Income (loss) before income taxes.... 468 (2,065) 454 619 5,039 377 3,417
Provision for income taxes(1)........ -- -- 3 207 1,847 143 1,244
------- ------- ------- -------- -------- ------- --------
Net income (loss)(1)................. $ 468 $(2,065) $ 451 $ 412 $ 3,192 $ 234 $ 2,173
======= ======= ======= ======== ======== ======= ========
Pro forma earnings per share(1)...... $ 0.31 $ 0.02 $ 0.21
======== ======= ========
Shares used in computation of pro
forma earnings per share(1)........ 10,144 10,123 10,137
SELECTED OPERATING DATA(2):
Catalogs distributed................. 6,900,000 8,000,000 15,000,000 29,000,000 8,000,000 9,500,000
Number of shipments(3)............... 395,000 415,000 522,000 859,000 198,000 283,000
Average order size(3)................ $211 $201 $212 $273 $229 $336
Customer and inquirer database(4).... 1,626,000 1,908,000 1,711,000 2,023,000
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............ $ 402 $(2,142) $ 217 $ 525 $ 7,750 $ 8,498
Total assets......................... 9,403 12,589 17,681 25,705 79,392 92,701
Short-term debt...................... 1,019 2,007 1,303 3,617 12,757 12,970
Long-term debt, net of current
portion............................ 93 305 732 791 1,665 1,497
Series B Preferred Stock............. -- -- -- -- 6,461 6,691
Total shareholders' equity
(deficit).......................... 901 (1,164) 1,287 1,705 4,736 6,706
</TABLE>

(See footnotes on following page)

14
<PAGE> 15

(2) Selected operating data are unaudited and exclude international operating
data.

15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 thereto included elsewhere in this
Prospectus.

GENERAL

The Company began operations in November 1988, generating customer orders
for Mac products by advertising in national trade publications. Catalog
circulation commenced with THE MAC ZONE in 1990, followed by THE PC ZONE in
1992. International subsidiary operations and licensing activities commenced in
1992, and outbound telemarketing operations, principally to business accounts,
were added in 1993.

The Company's financial resources have historically been concentrated on
establishing an infrastructure capable of supporting sustained profitable
growth. Over the past several years, the Company has focused on adding
management depth; improving the size, quality and responsiveness of its customer
database; investing in scalable information systems; developing its
international operations; increasing inventory levels to support growing
customer demand; strengthening sales of PC products; establishing an outbound
telemarketing force to increase sales to business accounts; and developing
in-house catalog design and production capability. In addition, the Company has
aggressively increased its domestic catalog circulation, which grew to over 29
million catalogs in 1995 from 6.9 million catalogs in 1992.

As a result of the Company's authorization to sell microcomputer products
manufactured by Apple, Hewlett-Packard, IBM and other manufacturers, the
Company's sales of these and other hardware products increased significantly to
78.1% of gross sales in the three months ended March 31, 1996, compared to 70.4%
and 54.7% of gross sales in 1995 and 1994, respectively. The Company's average
order size also increased to $336 in the three months ended March 31, 1996,
compared to $273 in 1995 and $212 in 1994. As average order size increases, more
gross profit dollars are available to cover order processing and other
transaction costs and to offset other factors that tend to adversely affect
gross margin percentage, such as increases in sales of hardware products and
sales to business accounts. The Company now offers a more complete computing
solution, including a broad selection of both hardware and software products,
which it believes has been one of the principal factors responsible for the
recent increases in both net sales and average order size. The Company believes
these increases are also attributable in part to the growing acceptance of the
direct marketing channel by microcomputer product users.

Sales through the Company's foreign subsidiaries accounted for 13.7% of the
Company's net sales in the three months ended March 31, 1996, compared to 10.9%
and 10.2% of net sales in 1995 and 1994, respectively. The Company expects
foreign subsidiary sales to increase as a percentage of net sales due to
increasing foreign demand for microcomputer products, growing acceptance of the
direct marketing channel in foreign markets, and the Company's continued efforts
to expand its foreign business operations. The Company currently has ten foreign
subsidiaries and has license relationships with 16 foreign licensees.

The Company's revenues consist primarily of sales of microcomputer
hardware, software, peripherals and accessories, as well as license fees and
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 recovery, warehousing, selling commissions,
order processing, telephone and credit card fees, and other costs such as
administrative salaries, depreciation, rent and general overhead expenses. Other
expense represents interest expense net of non-operating income and minority
interests in the Company's foreign subsidiaries.

16
<PAGE> 17

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.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 86.1 86.6 87.0 86.4 86.2
----- ----- ----- ----- -----
Gross profit............................. 13.9 13.4 13.0 13.6 13.8
SG&A expenses............................ 13.1 12.7 10.5 12.4 10.0
----- ----- ----- ----- -----
Income from operations................... 0.8 0.7 2.5 1.2 3.8
Other expense............................ 0.2 0.2 0.4 0.4 0.4
----- ----- ----- ----- -----
Income before income taxes............... 0.6 0.5 2.1 0.8 3.4
Provision for income taxes............... 0.0 0.1 0.8 0.3 1.2
----- ----- ----- ----- -----
Net income............................... 0.6% 0.4% 1.3% 0.5% 2.2%
===== ===== ===== ===== =====
</TABLE>

Comparison of Three-Month Periods Ended March 31, 1996 and 1995

Net Sales. Net sales increased 118.4% to $100.9 million in the three
months ended March 31, 1996 from $46.2 million in the comparable prior period.
The increase resulted primarily from an increase in hardware sales to 78.1% of
gross sales in the three months ended March 31, 1996 from 62.1% in the
comparable prior period. This increase in hardware sales contributed to a 46.7%
increase between periods in average order size to $336 from $229. Also
contributing to the increase in net sales was an increase in orders due
primarily to higher catalog circulation, which grew to 9.5 million in the three
months ended March 31, 1996, an increase of 18.7% over the comparable prior
period. International subsidiary net sales in the three months ended March 31,
1996 were $13.8 million, an increase of 165.4% over the comparable prior period,
primarily resulting from the recent addition of subsidiaries in Austria, Germany
and The Netherlands and sales growth in the Company's operations in Denmark and
Great Britain.

Gross Profit. Gross profit increased to $14.0 million in the three months
ended March 31, 1996 from $6.3 million in the comparable prior period, and
increased between periods to 13.8% from 13.6% of net sales. Gross profit dollars
increased due to higher sales volumes generated by increases in orders and
average order size. The increase in gross margin percentage resulted from
improved recovery of domestic freight costs and growth in higher-margin product
offerings, partially offset by increased sales of hardware products and sales to
business accounts, which generally carry a lower average gross margin
percentage. The Company expects that profit margins will be beneficially
affected by anticipated growth in its first-to-market, end-of-life-cycle and
other higher-margin product offerings, an increase in the proportion of products
purchased directly from manufacturers, and continued leveraging of transaction
costs over higher sales volumes and average order size. However, the Company
also anticipates that continued growth in sales of hardware products and sales
to business accounts will adversely affect its gross margin percentage.

Selling, General and Administrative Expenses. SG&A expenses increased to
$10.1 million in the three months ended March 31, 1996 from $5.8 million in the
comparable prior period, but decreased between periods as a percentage of net
sales to 10.0% from 12.4%. The dollar increase in SG&A expenses was primarily
attributable to an increase in transaction costs associated with higher sales
volumes, as well as to increased administrative salaries, partially offset by a
decrease in net advertising expense. The decline in SG&A expenses as a
percentage of net sales was due primarily to a decrease in net advertising
expense as a percentage of sales, resulting from improved co-op advertising
recovery and growth in sales at a rate outpacing the growth in SG&A expenses.

17
<PAGE> 18

Other Expense. Other expense increased to $468,000 in the three months
ended March 31, 1996 from $166,000 in the comparable prior period, primarily as
a result of higher interest expense related to higher levels of borrowing on the
Company's primary bank line of credit.

Income Taxes. Income tax expense increased in the three months ended March
31, 1996 to $1.2 million from $143,000 in the comparable prior period, due to
the significant increase in profitability between periods.

Net Income. As a result of the above factors, net income increased to $2.2
million in the three months ended March 31, 1996 from $234,000 in the comparable
prior period.

Comparison of Years Ended December 31, 1995 and 1994

Net Sales. Net sales increased 113.7% to $242.6 million in 1995 from
$113.5 million in 1994. The increase resulted primarily from an increase in
orders due primarily to higher catalog circulation, which grew 93.3% to 29
million in 1995 from 15 million in 1994. The increase in net sales was also due
in part to an increase in hardware sales to 70.4% of gross sales in 1995 from
54.7% in 1994, which contributed to a 28.8% increase in average order size to
$273 in 1995 from $212 in 1994. International subsidiary net sales in 1995 were
$26.3 million, an increase of 128.7% over 1994, primarily resulting from sales
growth in the Company's operations in Denmark, Great Britain and France and the
addition of a subsidiary in The Netherlands in mid-1995.

Gross Profit. Gross profit increased to $31.6 million in 1995 from $15.2
million in 1994, but decreased to 13.0% of net sales in 1995 from 13.4% in 1994.
Gross profit dollars increased due to higher sales volumes generated by
increases in orders and average order size. The decline in gross margin
percentage reflects the increased proportion of sales of hardware products,
partially offset by improved recovery of domestic freight costs in 1995.

Selling, General and Administrative Expenses. SG&A expenses increased to
$25.4 million in 1995 from $14.4 million in 1994, but decreased as a percentage
of net sales to 10.5% in 1995 from 12.7% in 1994. The dollar increase in SG&A
expenses was primarily attributable to an increase in transaction costs
associated with higher sales volumes, as well as to increased administrative
salaries. The decline in SG&A expenses as a percentage of net sales was due
primarily to a decrease in net advertising expense as a percentage of sales,
resulting from improved co-op advertising recovery and growth in sales at a rate
outpacing the growth in SG&A expenses.

Other Expense. Other expense increased to $1.1 million in 1995 from
$215,000 in 1994, primarily as a result of higher interest expense related to
higher levels of borrowing on the Company's primary bank line of credit.

Income Taxes. Income tax expense increased in 1995 to $1.8 million from
$207,000 in 1994, due to the significant increase in profitability during 1995.

Net Income. As a result of the above factors, net income increased to $3.2
million in 1995 from $412,000 in 1994.

Comparison of Years Ended December 31, 1994 and 1993

Net Sales. Net sales increased 41.0% to $113.5 million in 1994 from $80.5
million in 1993. The increase resulted primarily from an increase in orders due
to higher catalog circulation and expanded product offerings, although the rate
of growth was adversely impacted in part due to the Company's curtailment of
trade publication advertising in 1994. Catalog circulation grew to 15 million in
1994, an increase of 87.5% over 1993. Most of the increase in circulation
occurred in the last half of 1994. Also contributing to the increase in net
sales was an increase in sales to business accounts as a proportion of sales due
in part to outbound telemarketing operations, which commenced in early 1993.
International subsidiary sales in 1994 grew to $11.5 million, an increase of
219.4% over their 1993 level, primarily due to the addition of subsidiary
operations in Great Britain and Denmark in late 1993 and mid-1994, respectively.

18
<PAGE> 19

Gross Profit. Gross profit increased to $15.2 million in 1994 from $11.2
million in 1993, but decreased to 13.4% of net sales in 1994 from 13.9% in 1993.
Gross profit dollars increased primarily due to higher sales volumes generated
by the increase in orders and to an increase in average order size resulting
primarily from increased levels of hardware sales. The decline in gross margin
percentage was primarily attributable to an increase in sales to business
accounts.

Selling, General and Administrative Expenses. SG&A expenses increased to
$14.4 million in 1994 from $10.6 million in 1993, but decreased as a percentage
of net sales to 12.7% in 1994 from 13.1% in 1993. The dollar increase in SG&A
expenses was primarily attributable to an increase in transaction costs
associated with higher sales volumes and an increase in net advertising expense
due to increased catalog circulation. The decline in SG&A expenses as a
percentage of net sales was due primarily to growth in sales at a rate outpacing
the growth in SG&A expenses.

Other Expense. Other expense increased to $215,000 in 1994 from $177,000
in 1993. This increase is primarily as a result of higher interest expense
related to higher levels of borrowing on the Company's primary bank line of
credit.

Income Taxes. Income tax expense increased in 1994 to $207,000 from $3,000
in 1993, due to the June 1993 termination of the Company's S Corporation tax
status. In 1993, the Company reported a tax benefit of approximately $89,000
associated with this change in tax status.

Net Income. As a result of the above factors, net income decreased to
$412,000 in 1994 from $451,000 in 1993.

QUARTERLY RESULTS

The following tables present the Company's unaudited quarterly consolidated
results of operations, in dollars and as a percentage of net sales, for the nine
quarters ended March 31, 1996. This information has been prepared by the Company
on a basis consistent with the Company's audited Consolidated Financial
Statements and, in the opinion of management, includes all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for such periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------------ ------------------------------------------ --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $22,576 $21,401 $ 27,756 $41,723 $46,228 $50,815 $ 58,677 $86,867 $100,927
Cost of sales.............. 19,481 18,386 23,869 36,475 39,927 44,295 50,904 75,911 86,964
------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit............... 3,095 3,015 3,887 5,248 6,301 6,520 7,773 10,956 13,963
SG&A expenses.............. 3,043 2,782 3,812 4,774 5,758 5,220 6,326 8,121 10,078
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from operations..... 52 233 75 474 543 1,300 1,447 2,835 3,885
Other expense.............. 10 70 88 47 166 287 276 357 468
------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before income
taxes.................... 42 163 (13) 427 377 1,013 1,171 2,478 3,417
Provision (benefit) for
income taxes............. 14 55 (4) 142 143 383 444 877 1,244
------- ------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).......... $ 28 $ 108 $ (9) $ 285 $ 234 $ 630 $ 727 $ 1,601 $ 2,173
======= ======= ======= ======= ======= ======= ======= ======= ========
Pro forma earnings per
share.................... $ 0.02 $ 0.06 $ 0.07 $ 0.16 $ 0.21
======= ======= ======= ======= ========
</TABLE>

19
<PAGE> 20

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------------ ------------------------------------------ --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 86.3 85.9 86.0 87.4 86.4 87.2 86.8 87.4 86.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............... 13.7 14.1 14.0 12.6 13.6 12.8 13.2 12.6 13.8
SG&A expenses.............. 13.5 13.0 13.7 11.4 12.4 10.2 10.7 9.3 10.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations..... 0.2 1.1 0.3 1.2 1.2 2.6 2.5 3.3 3.8
Other expense.............. 0.1 0.3 0.3 0.2 0.4 0.6 0.5 0.4 0.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes.................... 0.1 0.8 (0.0) 1.0 0.8 2.0 2.0 2.9 3.4
Provision (benefit) for
income taxes............. 0.1 0.3 (0.0) 0.3 0.3 0.8 0.8 1.1 1.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).......... 0.0% 0.5% (0.0)% 0.7% 0.5% 1.2% 1.2% 1.8% 2.2%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

The Company has historically experienced fluctuations in its gross margin
percentage due primarily to variability in sales of hardware products as a
percentage of gross sales, price fluctuations resulting from new product
introductions, changes in the proportion of products purchased directly from
manufacturers rather than distributors, and other general conditions in
technology markets. Results of operations for any quarter are not necessarily
indicative of the results that may be expected for any future period. There can
be no assurance that the Company will not experience significant variations in
its future results of operations. See "Risk Factors -- Variability of Quarterly
Results."

SEASONALITY AND TRENDS

The Company believes that certain seasonal factors cause sales of
microcomputer software and hardware products through the direct marketing
channel to be somewhat stronger in the fourth and first calendar quarters than
in the second and third quarters. The fourth quarter tends to be stronger as
manufacturers make year-end introductions of new products and increase related
marketing activities, and as corporate purchasing activities increase at the end
of budgetary cycles. Sales in the first quarter typically benefit from the
fourth quarter sales as customers add peripherals and additional memory
products.

The market for microcomputer products is characterized by rapid change and
frequent introductions of new products and product enhancements. These changes
result in frequent price fluctuations. Typically, prices of microcomputers
initially increase with improvements in features, such as processing speed and
storage capacity, and subsequently decrease as manufacturers pass on savings
from lower-cost components and reduce their inventories of older models.

Pursuant to its business strategy, the Company intends, among other things,
to place larger inventory stocking orders, increase its participation in
first-to-market and end-of-life-cycle purchase opportunities and market more
products on a private-label basis, all of which increase the risk of inventory
obsolescence. To reduce this risk, the Company has agreements with many vendors
containing provisions whereby vendors supply price protection and product return
privileges, subject to some limitations. End-of-life-cycle products are
typically acquired without return privileges.

The Company receives co-op advertising support from product manufacturers,
which significantly defrays catalog production and distribution costs. Growth in
sales has led to increased manufacturer support for the Company's catalog
marketing efforts and, coupled with improved controls over catalog costs and
recovery efforts, has resulted in a reduction of net advertising expense as a
percentage of sales. Advertising expense net of co-op advertising recovery
represented 0.7%, 2.3% and 2.3% of net sales for 1995, 1994 and 1993,
respectively. See "Risk Factors -- Reliance on Vendor Support and Relationships"
and "-- Rapid Technological Change and Exposure to Inventory Obsolescence."

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.

20
<PAGE> 21

LIQUIDITY AND CAPITAL RESOURCES

The Company had total assets of $92.7 million at March 31, 1996, of which
$85.3 million were current assets. At March 31, 1996 and December 31, 1995 and
1994, the Company had cash and cash equivalents of $1.0 million, $1.2 million
and $514,000, respectively, and working capital of $8.5 million, $7.8 million
and $525,000, respectively. Net cash used in operating activities was $2.1
million, $14.4 million and $4.4 million in the three months ended March 31, 1996
and in 1995 and 1994, respectively. Cash outflows in these periods were
primarily due to higher accounts receivable resulting from growing sales to
business accounts, and to investment in increased inventories necessary to
support rapidly growing sales. In the three months ended March 31, 1996 and in
1995 and 1994, accounts receivable increased by $7.4 million, $12.5 million and
$3.1 million, respectively, and inventories increased by $5.8 million, $28.2
million and $3.9 million, respectively. At March 31, 1996, inventories included
$8.1 million of inventory in transit.

Cash outlays for capital expenditures were $433,000, $1.4 million and
$538,000 in the three months ended March 31, 1996 and in 1995 and 1994,
respectively. In addition, the Company incurred capital lease obligations during
1995 and 1994 of $1.8 million and $405,000, respectively (none was incurred in
the three months ended March 31, 1996). These expenditures were primarily for
information and telecommunication system enhancements, furniture and equipment,
and leasehold improvements. The Company estimates that its annualized capital
expenditures in 1996 will approximate $6.0 million, as it continues to make
other investments in its infrastructure to support its anticipated growth,
including the relocation of its corporate headquarters and telemarketing
operations to a larger facility. See "Use of Proceeds" and "Business --
Facilities."

The Company's primary sources of financing have been vendor credit lines,
bank lines of credit and equity provided by its shareholders, including a $7.0
million investment by the holders of the Series B Preferred Stock completed in
October 1995. The level of borrowings under the Company's bank lines of credit
increased to $12.3 million at March 31, 1996, compared to $12.0 million and $3.3
million at December 31, 1995 and 1994, respectively. The Company intends to
repay its primary bank line of credit and finance its working capital and
capital expenditure requirements with the net proceeds of the offering, together
with vendor credit lines, operating cash flow and additional borrowings on its
bank lines of credit. See "Use of Proceeds."

The Company has a revolving line of credit of $25.0 million from a
commercial bank collateralized by inventories and accounts receivable. This
facility is scheduled to expire on December 31, 1996. At March 31, 1996, there
were borrowings outstanding under the facility of $11.8 million accruing
interest at a rate equal to 0.75% above the bank's prime rate (9% at March 31,
1996), in addition to $2.8 million of unused letters of credit. The facility
contains certain restrictive covenants related to leverage, current ratios,
capital expenditures and subsidiary investments. At June 3, 1996, there were
$20.6 million in borrowings outstanding under the facility.

The net amount of vendor credit outstanding at March 31, 1996 was $54.9
million. A portion of this vendor credit was drawn from a $25.0 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 terms of each advance under the facility are
determined at the time inventory is purchased. Typically, no interest is charged
to the Company for the first 45 days an advance is outstanding, after which
interest accrues at an agreed rate for that particular advance. The facility is
terminable at will by either party, subject to certain advance notice
requirements. Outstanding advances under the facility totalled $16.4 million at
March 31, 1996, of which $8.1 million was related to inventory in transit. 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 anticipates that the net proceeds of the offering, together
with vendor credit lines, operating cash flow, available cash and cash
equivalents, and bank lines of credit, will provide it with sufficient funds to
finance its operations through at least the next twelve 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.

21
<PAGE> 22

BUSINESS

GENERAL

The Company is a leading international direct marketer of microcomputer
hardware, software, peripherals and accessories for users of Mac and PC
computers through two flagship catalogs, THE MAC ZONE and THE PC ZONE. During
1995, over 29 million catalogs were distributed by the Company domestically,
with additional circulation by its subsidiaries and licensees through operations
located in 26 other countries worldwide, more countries than any other catalog
retailer of microcomputer products. The Company offers a broad selection of over
18,000 microcomputer products at competitive prices primarily through its
distinctive catalogs, as well as through major trade publications and an
outbound telemarketing sales team focused on small and medium-sized corporate,
governmental and educational accounts. The Company tailors its catalogs and
targets specific customers based on individual customer records in its
proprietary database. This targeted marketing, coupled with the Company's
knowledgeable sales assistance and superior customer service, has produced an
established base of satisfied customers. The Company believes that a substantial
portion of its revenues represent sales to repeat customers.

INDUSTRY BACKGROUND

The market for microcomputer products is served by a variety of
distribution channels. According to industry data published in May 1995, direct
marketing is expected to be the fastest growing major distribution channel, with
a domestic market share that is projected to more than double from its 1994
level to over 15% of total domestic microcomputer product sales in 1998. The
Company believes that many individuals and businesses, increasingly familiar
with microcomputers, have become more receptive to catalog marketing and now
make their purchase decisions based primarily on product selection and
availability, convenience and price. At the same time, intense competition for
market share has forced microcomputer product manufacturers to seek new channels
through which to distribute their products. Direct marketers enjoy efficiencies
in the form of centralized operations and distribution and are able to offer
broader 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.

Domestic sales of microcomputer hardware, software, peripherals and
accessories exceeded $56 billion in 1994, representing a 32.9% compound annual
growth rate since 1992. Annual domestic sales of microcomputer products are
projected to more than double from their 1994 level to over $120 billion in
1998, according to industry data. The Company believes that sales of
microcomputer products are increasing as a result of a number of factors,
including improved affordability and performance of microcomputer products;
growing user familiarity with microcomputers; rapid technological advances and
resulting short product life cycles; the proliferation of microcomputer
products; and the emergence of industry standards, component "plug-and-play"
compatibility, and higher performance operating systems such as Microsoft
Windows 95. The Company believes that the international market for microcomputer
products should experience similar growth trends, due primarily to an increasing
installed base of microcomputers and expansion by manufacturers seeking
additional markets for their products.

The direct marketing channel is currently dominated by a small number of
companies that commenced operations prior to 1990. New entrants into the channel
must overcome a number of significant barriers to entry, including the time and
resources required to build a customer database of sufficient size, quality and
responsiveness for cost-effective circulation; the significant investment
required to develop the information and operating infrastructure required for a
direct catalog marketer; the advantages enjoyed by larger established

22
<PAGE> 23

competitors in terms of purchasing and operating efficiencies; the established
relationships of manufacturers who may be reluctant to allocate co-op
advertising funds to additional participants; and the difficulty of identifying
and recruiting management personnel with significant relevant experience.

The direct marketing channel has historically served a significant share of
the market for Mac products, but a relatively small share of the market for PC
products. However, sales of PC products through this channel are increasing
dramatically, as consumer familiarity with microcomputer products grows,
products are becoming increasingly user-friendly, and manufacturers recognize
the cost-effectiveness of the catalog channel. As the industry continues to
evolve, the Company believes that first-time buyers may largely utilize retail
channels that provide the opportunity to "touch and feel" the products, but that
a growing number of computer-literate consumers will increasingly rely on the
convenience and other advantages of the direct marketing channel. The Company
believes the growing acceptance of this channel, particularly for PC products,
presents a significant opportunity for increased sales by direct marketers.

BUSINESS STRATEGY

The Company's business objective is to strengthen its position as a leading
international direct marketer of products for users of Mac and PC
microcomputers. The central elements of the Company's business strategy include:

Targeted Direct Marketing. The Company's core competence lies in
generating demand for microcomputer products by utilizing the Company's database
marketing capabilities to distribute its catalogs to a targeted base of
computer-literate customers who have demonstrated an acceptance of the direct
marketing channel. The Company circulates its catalogs to selected names from
the Company's database of 2.0 million domestic customers and inquirers, as well
as to prospective customers on mailing lists obtained from list brokers and
other sources. The Company believes that by selectively targeting its catalogs
to specific groups of customers with known product affinities and purchasing
characteristics, the Company will be able to increase order rates from customers
and enhance the effectiveness of its catalogs and their desirability as a
marketing channel for product manufacturers. The Company personalizes its
catalogs, often with individual messages based on individual customer records.
In addition to its flagship catalogs, THE MAC ZONE and THE PC ZONE, the Company
occasionally produces targeted specialty catalogs offering relatively narrow but
deep product selection, such as THE HOME COMPUTER CATALOG, which is focused on
home computing needs, and THE LEARNING ZONE, which is targeted at purchasers for
primary, secondary and post-secondary educational institutions. The Company also
produces stand-alone direct mail pieces for specialized offerings, such as
product upgrades, and occasionally creates specialty catalogs based on vendor
and end-user needs. The Company intends to explore opportunities to further
pursue these targeted marketing efforts.

Development of Product Breadth and Mix. The Company has significantly
broadened its product offerings over the past 18 months, increasing the number
of products offered to over 18,000. The Company plans to continue to broaden its
product selection, which it believes should enable it to offer more
comprehensive computing solutions and to increase customer satisfaction. The
Company also intends to continue to increase its emphasis on microcomputers,
printers, monitors, memory, mass storage, networking, communications and other
hardware products, particularly in the PC category, which it believes should
result in a higher average order size. In addition, the Company plans to
merchandise a broader selection of private-label products such as mass storage
devices, modems and other peripherals.

Improved Purchasing Opportunities. The Company intends to focus on
opportunities to offer higher-margin products, which it believes will be more
readily available in view of the additional financial strength provided by the
offering. The Company intends to obtain larger allocations of constrained
products, which often are available only if purchased in significant quantities;
expand inventory positions of end-of-life-cycle products, which typically must
be purchased in large quantities and which can be offered at attractive price
points to end users; pursue first-to-market product offerings; and purchase more
products directly from manufacturers at more favorable prices than are available
through distributors. The Company believes that these purchasing opportunities
will have a continued beneficial effect on its gross profit margins, and that
improved product availability is likely to enhance customer satisfaction and
retention as well as expansion of

23
<PAGE> 24

its customer base. The Company believes the additional financial strength
provided by the offering will enable it to more effectively satisfy its
customers' current excess demand for selected products.

Continued Development of Infrastructure. The Company expects to further
develop its infrastructure to support effective management of its anticipated
growth. The Company continues to devote significant resources to develop and
maintain sophisticated information, telecommunication, catalog production and
other systems essential for the successful operation of its domestic and
international businesses. These systems afford the Company's management,
telemarketing, customer service and technical support personnel real-time access
to information on customer purchase histories, inventory availability, and
detailed descriptions of product specifications, benefits and features. The
Company intends to make increased use of prospect lists and marketing data,
which enable it to improve the size, quality and responsiveness of its customer
database. The Company is currently building a new site on the World Wide Web of
the Internet in order to more aggressively pursue on-line marketing
opportunities.

GROWTH STRATEGY

The Company is pursuing a number of initiatives designed to promote future
growth. The Company believes the additional financial strength provided by the
offering should permit it to more aggressively pursue these initiatives, which
include the following:

Increased Sales of PC Products. The Company believes that sales of PC
products represent its greatest opportunity for future growth, in view of the
tremendous size of the PC microcomputer market and the relatively small but
growing share of that market currently served by the direct marketing channel.
The Company believes that the percentage of PC products sold through this
channel is increasing steadily, reflecting the importance of convenience and
broad product selection and availability to a growing number of PC consumers and
the growing acceptance of the channel by PC product manufacturers. The Company
intends to aggressively pursue increased sales of PC hardware and software
products through expanded merchandising of PC products through THE PC ZONE
catalog to offer a better mix of high-demand and high average order size
products; increased offerings of a broad range of name-brand products of major
manufacturers; increased circulation of THE PC ZONE catalog; increased
advertising in PC trade publications; and increased emphasis on outbound
telemarketing to business accounts, which predominantly purchase PC products.

Improved Catalog Effectiveness. The Company plans to feature a broader
variety of products in its flagship catalogs, THE MAC ZONE and THE PC ZONE,
including first-to-market, end-of-life-cycle, private-label and other
higher-margin product offerings. The circulation of these catalogs grew to over
9.5 million in the three months ended March 31, 1996 from 8.0 million in the
comparable prior period, and the Company intends to seek to further increase
sales and acquire new customers by continuing to expand the circulation of these
catalogs in 1996. The Company also expects to attract new catalog customers by
increasing its advertising in microcomputer trade publications.

Expansion of Outbound Sales. The Company believes that sales to small and
medium-sized corporate, governmental and educational accounts represent another
strong growth opportunity for the Company, particularly with respect to PC
products. Through frequent telephone contact and a commitment to individual
attention and superior service, the Company's outbound sales team seeks to build
long-term relationships with these business accounts. The Company intends to
increase sales to these accounts by expanding its outbound sales team and
committing additional capital to finance the growth of this segment of its
business. In addition, the Company will seek to acquire new business accounts
through targeted catalog mailings. The Company has developed a customized site
on the Internet that allows major accounts to electronically determine product
pricing and availability and to place orders.

International Growth. The Company intends to expand sales through its
existing operations in international markets, which it believes have lower
microcomputer product penetration and are likely to experience more rapid growth
than the domestic market. The Company has subsidiaries and licensees located in
26 countries worldwide, more than any other catalog retailer of microcomputer
products. The Company's international sales (including sales through its
subsidiaries and royalties from licensees) were $15.2 million in

24
<PAGE> 25

the three months ended March 31, 1996, $29.7 million in 1995 and $14.1 million
in 1994, representing increases of 157.6%, 110.6% and 161.1%, respectively, over
the comparable prior periods. The Company intends to pursue purchasing, systems
and other operating efficiencies across its international operations. Due to its
extensive international operations, the Company believes that it is well
positioned to benefit from the anticipated growth in international microcomputer
product sales. In addition, the Company believes that its network of
subsidiaries and licensees is increasingly attractive to manufacturers seeking
global distribution of their products.

Participation in Emerging Marketing Channels. The Company believes the
direct marketing channel for microcomputer products will continue to evolve, and
will in the future involve the increasing use of alternative vehicles such as
on-line shopping and software delivery, interactive television, and encrypted
CD-ROM software delivery. The Company was one of the first participants in the
direct marketing channel to participate in on-line sales of computer products
and currently maintains sites on the Internet at CompuServe and marketplaceMCI.
The Company plans to continue exploring alternative direct marketing vehicles in
order to remain strategically positioned as distribution channels evolve. While
the Company believes that printed catalogs will remain an important tool in the
direct marketing of microcomputer products, it also believes that its strengths
in database marketing and order fulfillment should enable it to respond
effectively to new and emerging direct marketing vehicles.

PRODUCTS

The Company offers over 18,000 hardware, software, peripheral and accessory
products for users of Mac and PC microcomputers from over 1,900 manufacturers.
The Company is also authorized to sell volume site licenses for products of
Microsoft, Lotus and Novell.

Microcomputers. The Company offers a large selection of desktop, laptop
and notebook personal microcomputer systems from leading manufacturers such as
Acer, Apple, AST Research, Canon, Hewlett-Packard, IBM, NEC, Packard Bell, Power
Computing, Texas Instruments, Toshiba and Zenith.

Peripherals and Accessories. The Company also sells peripherals and
components such as printers, monitors, keyboards, memory, fax and other add-on
circuit boards, networking and communications products, mass storage devices,
modems and scanners, as well as various accessories and supplies such as toner
cartridges, diskettes and connectors. Brands offered by the Company include
3Com, Apple, Canon, CTX, Epson, Global Village, Hewlett-Packard, Iomega,
Logitech, Okidata, Phillips, Quantum, Sony, SyQuest, U.S. Robotics and
ViewSonic.

Software. The Company sells a wide variety of software packages in the
business and personal productivity, connectivity, utility and 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, Claris, Corel, Edmark, IBM, Intuit, Lotus, Macromedia, Microsoft,
Novell, Sierra On-Line, Symantec and The Learning Company.

The following table shows the percentage of the Company's gross sales
attributable to various product categories during 1994, 1995 and the three
months ended March 31, 1996.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Microcomputers.................... 2.3% 18.5% 26.5%
Peripherals and accessories....... 52.4 51.9 51.6
----- ----- -----
Total hardware.................. 54.7 70.4 78.1
Software.......................... 45.3 29.6 21.9
----- ----- -----
Total................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

In 1995, the Company received authorization from Apple, Hewlett-Packard,
IBM and a number of other major manufacturers to offer all or a portion of their
product lines. The availability of these new product lines

25
<PAGE> 26

permitted the Company to pursue its strategy of emphasizing hardware sales by
gradually increasing its catalog coverage of these and other hardware products,
particularly desktop, notebook and laptop microcomputers. Microcomputers
comprised a significantly larger percentage of the Company's gross sales in both
1995 and the three months ended March 31, 1996, compared to 1994, as reflected
in the above table.

Sales of Apple and other Mac products represented 73.8% of gross sales in
the three months ended March 31, 1996, compared to 74.5% and 73.8% of gross
sales in 1995 and 1994, respectively. Sales of Apple products alone constituted
22.2% of gross sales in the three months ended March 31, 1996, compared to 23.5%
of gross sales in 1995 and 2.0% of gross sales in 1994, due primarily to sales
of Apple microcomputers. The Company believes that the percentage of its sales
represented by Mac products is likely to decline gradually over time as a result
of increasing acceptance of the direct marketing channel by PC product
manufacturers and users, the Company's expanded focus on PC product sales, and
its efforts to increase sales to business accounts, which tend to be
concentrated more heavily on PC products. See "Risk Factors -- Reliance on
Vendor Support and Relationships" and "-- Dependence on Sales of Mac Products."

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.
Subsequent to its October 1995 private placement, the Company intensified its
efforts to purchase more hardware products directly from manufacturers and
succeeded in establishing direct purchasing arrangements with Hewlett-Packard,
Kingston, Power Computing and a number of other hardware product manufacturers.
As a result of this success, purchases of products from distributors decreased
from 35.5% to 25.7% of the Company's total product purchases in 1995 and the
three months ended March 31, 1996, respectively. Purchases from Ingram Micro and
Apple represented 23.7% and 19.6%, respectively, of the Company's total product
purchases in 1995. No other vendor supplied more than 10% of the Company's total
product purchases in 1995. The Company intends to continue to purchase more
products directly from manufacturers and pursue other purchasing opportunities
that it believes will have a beneficial effect on its profit margins.

The Company seeks to efficiently manage its inventory to achieve high
product availability and fill rates. The Company utilizes sophisticated
computerized systems that permit real-time monitoring of inventory and assist
the Company in managing inventory at appropriate levels. The Company has 90-day
return privileges on most of its product purchases, and has agreements with many
of its vendors providing price protection should a vendor subsequently lower its
price. The Company had a customer return rate of 8.0% and 8.5% of gross sales in
1995 and the three months ended March 31, 1996, respectively. Product returns
are closely monitored to identify trends in product offerings, enhance customer
satisfaction and reduce overall returns. See "Risk Factors -- Rapid
Technological Change and Exposure to Inventory Obsolescence."

CATALOGS

The Company markets products primarily through targeted mailings of its
flagship catalogs, THE MAC ZONE and THE PC ZONE, each of which has been
published monthly since January 1995. Customers receive frequent catalog
mailings that vary depending on their purchase activity. A catalog is also
included with each order shipped. Catalogs are also mailed periodically to
potential customers in the Company's proprietary database and to prospects
obtained from list brokers and other sources. The following table provides
information regarding the number of editions and total circulation of THE MAC
ZONE and THE PC ZONE catalogs published domestically in 1993, 1994 and 1995.

<TABLE>
<CAPTION>
THE MAC ZONE THE PC ZONE
--------------------------------- ---------------------------------
1993 1994 1995 1993 1994 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Number of editions...... 8 11 12 6 7 12
Total circulation....... 6,000,000 9,000,000 18,500,000 2,000,000 6,000,000 10,500,000
</TABLE>

The Company intends to continue to publish monthly editions of THE MAC ZONE
and THE PC ZONE in 1996. The Company plans to feature a broader variety of
products in its flagship catalogs, including first-to-

26
<PAGE> 27

market, end-of-life-cycle, private-label and other higher-margin product
offerings. The circulation of these catalogs grew to over 9.5 million in the
three months ended March 31, 1996 from 8.0 million in the comparable prior
period, and the Company intends to seek to further increase sales and acquire
new customers by continuing to expand the circulation of these catalogs in 1996.
The Company also expects to attract new catalog customers by increasing its
advertising in microcomputer trade publications.

Each edition of the catalogs is typically produced with several cover
versions, which highlight different products of particular interest to specific
customer segments, such as graphics or entertainment products, based on data in
individual customer records. Within each version, the Company further
personalizes certain catalogs with an ink-jetted cover message, also based on
individual customer data, such as "Mary, it's time to upgrade your Adobe Photo
Shop -- See Page 28." Catalogs may also differ based on the customer type. The
Company believes this highly targeted marketing treatment increases customer
response.

The Company has produced targeted specialty catalogs offering a relatively
narrow but deep product line, such as THE HOME COMPUTER CATALOG, which is
focused on home computing needs, and THE LEARNING ZONE, which is targeted at
purchasers for primary, secondary and post-secondary educational institutions.
The Company intends to explore opportunities to further pursue targeted
marketing efforts.

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 over 40 designers and production artists using a
sophisticated computer-based catalog production system. The Company believes
that in-house preparation of the catalogs streamlines the production process,
provides for greater flexibility and creativity in catalog production, and
results in significant cost savings. 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.

The Company's merchandising group determines the manufacturers whose
products are featured in its catalogs 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, most
manufacturers provide the Company with co-op advertising support, which
significantly defrays the expense of catalog production. The merchandising group
is also responsible for developing effective advertising campaigns for
manufacturers, managing 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 to expand the Company's first-to-market, end-
of-life-cycle and private-label product offerings.

The Company continuously attempts to attract new catalog customers and
generate orders through multi-page advertisements placed in microcomputer trade
publications such as Mac World, Mac User, PC Magazine, PC World, PC Computing
and Computer Shopper. The Company plans to increase trade publication
advertising during 1996, with most of the increase directed to PC publications
in an effort to increase the Company's sales of PC products and its PC customer
base.

The Company believes the direct marketing channel for microcomputer
products will continue to evolve, and will in the future involve the increasing
use of alternative vehicles such as on-line shopping and software delivery,
interactive television, and encrypted CD-ROM software delivery. The Company was
one of the first participants in the direct marketing channel to participate in
on-line sales of computer products and currently maintains sites on the Internet
at CompuServe (Go MZ) and marketplaceMCI (http://www.internetmci.com/
marketplace/mzone). The Company plans to continue exploring alternative direct
marketing vehicles in order to remain strategically positioned as distribution
channels evolve. While the Company believes that printed catalogs will remain an
important tool in the direct marketing of microcomputer products, it also
believes that its strengths in database marketing and order fulfillment should
enable it to respond effectively to new and emerging direct marketing vehicles.

27
<PAGE> 28

DATABASE MARKETING

The Company maintains a proprietary database containing 2.0 million
customer and inquirer records, including approximately 895,000 customers, of
which approximately 450,000 customers have purchased products from the Company
during the last twelve months. The Company believes that a substantial portion
of its revenues represent sales to repeat customers, which it attributes in part
to its ability to effectively target its catalog to computer-literate customers
who have demonstrated an acceptance of the direct marketing channel. As a result
of its database marketing capabilities, the Company is increasingly sought as a
direct marketer by microcomputer product manufacturers. The Company tracks the
buying patterns of its customers in an attempt to anticipate customers' needs
and generate additional product orders. The Company attracts new customers and
prospective customers through advertising in major trade publications. The
Company also attracts new customers 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 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 catalogs to specific groups of
customers with known product affinities and purchasing characteristics, the
Company will be able to increase order rates from customers and enhance the
effectiveness of its catalogs and their desirability as a marketing channel for
product manufacturers. The Company seeks to leverage 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. As an example,
the Company participated in a price elasticity test, providing strategic pricing
data to Microsoft's Consumer Division.

SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE

The Company strives to optimize customer satisfaction and retention through
knowledgeable sales assistance, exceptional technical support and superior
customer service. The Company's sophisticated systems permit its representatives
to quickly access a customer's record and billing information and review details
of past purchases. For most products sold by the Company, 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 for products previously purchased from
the Company.

New telemarketing representatives participate in an intensive training
program to introduce them to the Company's systems and familiarize them with
available products and services. Training for specific product lines and
continuing technical education are conducted on an ongoing basis and include
manufacturer-sponsored training programs for telemarketing representatives. The
Company regularly monitors calls for quality assurance purposes.

The Company offers toll-free numbers for sales that are staffed 24 hours a
day, seven days a week. Customer service and technical support are also
available toll-free during regular business hours. The Company's staff of
dedicated technical support personnel assist customers with the installation and
operation of the products they purchase. These personnel also offer customers
support with customized configuration of their microcomputer systems. 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 return policy on their products.

OUTBOUND SALES

At March 31, 1996, the Company had a staff of 34 experienced account
managers who pursue sales to small and medium-sized corporate, governmental and
educational accounts through outbound telemarketing. Each of these commissioned
account managers seeks to develop long-term personal relationships with

28
<PAGE> 29

business accounts in a particular geographic region through frequent telephone
contact and by providing the accounts with individual attention, quality
service, and the convenience of one-stop shopping for many of their
microcomputer product needs. In addition to outbound telemarketing, the Company
utilizes catalog mailings, fax broadcast messaging and other marketing tactics
to enhance sales to these accounts. As a service to qualified business accounts,
account managers will facilitate the leasing of products through third-party
leasing companies. The Company believes that sales to business accounts are an
attractive growth opportunity, because they tend to place more frequent orders
that are generally larger than those of other customers. As average order size
increases, more gross profit dollars are available to cover order processing and
other transaction costs and to offset other factors that tend to adversely
affect gross margin percentage.

The Company intends to increase its sales to business accounts. The Company
believes that its product offerings will be more attractive as it secures larger
inventory positions in the products most commonly requested by these accounts,
such as desktop, notebook and laptop microcomputers; networking, desktop
publishing and graphics products; and a wide range of printers and other
peripherals, particularly PC products. The Company also intends to intensify its
sales efforts to these accounts by hiring additional experienced account
managers, developing targeted business catalogs for specific applications, and
committing additional capital to finance the growth of this segment of its
business.

INTERNATIONAL OPERATIONS

The Company has subsidiaries and licensees located in 26 countries
worldwide, more than any other catalog retailer of microcomputer products. The
Company's subsidiaries are located in Australia, Austria, Belgium, Denmark,
France, Germany, Great Britain, Mexico, The Netherlands and Switzerland. The
Company's licensees are located in 16 other foreign countries. The Company's
international sales (including sales through its subsidiaries and royalties from
licensees) were $15.2 million in the three months ended March 31, 1996, $29.7
million in 1995 and $14.1 million in 1994, representing increases of 157.6%,
110.6% and 161.1%, respectively, over the comparable prior periods.

The Company believes there is strong established name recognition in many
international markets for its service marks, THE MAC ZONE and THE PC ZONE. The
Company believes it is well positioned to benefit from the anticipated growth in
international microcomputer product sales and to pursue opportunities for
purchasing, systems and other operating efficiencies across its international
operations.

The Company's international strategy generally has been to enter a country
through a relationship with a local entrepreneur with industry experience who
can provide local knowledge for the business operations. Depending on the size
of the potential market and other factors, the Company may establish a license
arrangement with the entrepreneur or form a subsidiary in which the entrepreneur
has a minority interest. Both types of relationships have the advantage of
providing significant incentives to the local entrepreneurs, which the Company
believes is of critical importance to the success of the local ventures. With a
license arrangement, the Company may at some point seek to convert the licensee
to a controlled subsidiary, depending on the development of the market and the
business. Such a conversion typically provides the operation with greater access
to capital and management, enabling it to increase product selection and
availability, as well as catalog circulation.

The catalogs of the Company's subsidiaries and licensees are published
under THE MAC ZONE and THE PC 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. The Company's headquarters
provides ongoing support in database marketing, catalog design, establishing
relationships with product manufacturers, and product merchandising. The
international catalogs attract manufacturers seeking broad international
exposure for marketing of their microcomputer hardware, software and peripheral
products. The Company believes that a number of microcomputer product
manufacturers utilize the operations of the Company and its licensees as their
primary channel for international distribution.

All of the minority shareholders of the Company's subsidiaries have the
right to require the Company to purchase their shares at a price calculated by a
pre-determined formula based on performance of the business. The Company also
has an option to purchase the minority interest in a number of its subsidiaries.
Typically, a

29
<PAGE> 30

licensee will pay a one-time license fee plus a percentage royalty on ongoing
sales revenues. Many of the licensees have granted the Company a right of first
refusal in the event of any proposed sale of their business. See "Risk
Factors -- Administrative, Financial and Other Risks of International
Operations."

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. The
Company's primary computer system consists of a Hewlett-Packard 3000 Model
987/200, shadowed by a redundant Hewlett-Packard 3000 Model 995 for disaster
recovery, and utilizes a widely-used mail order and catalog management software
package. The primary computer system is used for marketing, purchasing,
inventory management, order processing, product distribution, accounts
receivable, customer service and general accounting functions. The Company's
primary computer system interfaces with an automated telephone call distribution
system, which routes calls to the Company's telemarketing representatives. The
technical architecture of most of the Company's systems is modular, which the
Company believes will facilitate system expansion to the extent required by its
anticipated growth. The Company believes that its systems have enabled it to
enhance customer service, maintain efficient controls and receive timely access
to essential management information. Although the Company continuously evaluates
routine system enhancements, it believes that its systems will be adequate for
the foreseeable future. See "Risk Factors -- Potential Disruption of Business."

DISTRIBUTION CENTER

Airborne Logistics 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 March 1998. Employees of Airborne
Logistics utilize the Company's systems, policies and procedures to receive, log
and warehouse inventory shipments from product vendors, fill and ship domestic
customer orders, and return inventory to product vendors when requested by the
Company. The Company pays a flat rate for each order filled, which rate is
subject to periodic increases over the remainder of 1996. See "Risk
Factors -- Reliance on Outsourced Distribution."

Domestic 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.

COMPETITION

The microcomputer products industry is highly competitive. The Company
competes with other national and international direct marketers, including Micro
Warehouse, Inc., CDW Computer Centers, Inc., Insight Enterprises, Inc. and
Creative Computers, Inc. The Company also competes with product manufacturers
that sell direct to end-users; specialty microcomputer retailers; microcomputer
and general merchandise superstores; consumer electronic and office supply
stores; and shopping services on television, the Internet and commercial on-line
networks. 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 microcomputer
product manufacturers. The Company believes that product selection, availability
and price are the three most important competitive factors. Some of the
Company's competitors are larger and have substantially greater financial
resources, superior operating results, and larger catalog circulations and
customer bases than the Company. In addition, several direct marketers have
recently been acquired by larger competitors. See "Risk Factors -- Reliance on
Vendor Support and Relationships" and "-- Competitive, Pricing and Economic
Risks."

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<PAGE> 31

EMPLOYEES

At March 31, 1996, the Company had 460 domestic employees, and over 100
persons were employed by the Company's foreign subsidiaries. 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. As a result
of its growth, the Company has added a significant number of employees and has
expended considerable efforts in training these new employees. See "Risk
Factors -- Dependence on Key Personnel."

TRADEMARKS

The Company conducts its business in the United States primarily under the
service marks THE MAC ZONE and THE PC ZONE, which are registered with the United
States Patent and Trademark Office. These registrations have an indefinite term,
so long as the service marks are used in connection with the Company's business
activities. The Company intends to obtain service mark protection for these and
related marks, to the extent available, in the foreign countries where the
Company does or expects to do business and where it has or expects to have
licensees. 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.

FACILITIES

The Company currently leases approximately 41,000 square feet of space for
its corporate headquarters, including its telemarketing operations, in Bellevue,
Washington. The Company recently signed a lease for approximately 132,000 square
feet of space in Renton, Washington, to which it expects to relocate in the
summer of 1996. Following the relocation, the Company plans to sublet its
current facilities until the expiration of the lease in June 1999, although
there can be no assurance that it will be able to do so. The Company also
operates sales and distribution facilities in Australia, Austria, Belgium,
Denmark, France, Germany, Great Britain, Mexico, The Netherlands and
Switzerland. See "Risk Factors -- Potential Disruption of Business" and Note 9
of Notes to Consolidated Financial Statements.

REGULATORY AND LEGAL MATTERS

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.

The Company is not a party to any material pending legal proceedings.

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<PAGE> 32

MANAGEMENT

The members of the Board of Directors, executive officers and other key
employees of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Victor J. Melfi, Jr.................... 39 President, Chief Executive Officer and
Director
Bruce S. Martin........................ 37 Co-President and Chief Operating
Officer
Sadrudin J. Kabani(1).................. 51 Chairman of the Board
Peter J. Biere......................... 39 Senior Vice President -- Finance and
Chief Financial Officer
Judith A. Roseth....................... 49 Senior Vice President -- Sales
John H. Bauer(2)....................... 55 Director
John T. Carleton(2).................... 51 Director
John E. DeFeo(1)....................... 49 Director
Firoz H. Lalji(2)...................... 49 Director
Carol L. Miltner(2).................... 53 Director
Paul E. Monson(1)...................... 50 Director
Steve Sarich, Jr.(1)................... 75 Director
Ramona A. Agin......................... 36 Vice President -- Academic Division
Phillip M. Arcidiacono................. 40 Vice President -- Purchasing
Timothy J. Carroll..................... 44 Vice President -- Investor Relations
John J. Convery........................ 48 Vice President -- Corporate, Education
and Governmental Sales
Robert L. Hines, Jr.................... 36 General Counsel and Secretary
Bruce W. Koenigsberg................... 42 Vice President -- PC Merchandising
Mark C. Maliwauki...................... 32 Vice President -- International
Business Development
David R. McCauley...................... 33 Vice President -- Telesales
Thomas G. Minthorn..................... 47 Vice President -- Advertising
Scott A. Reedy......................... 32 Vice President -- Mac Merchandising
Glynda J. Smith........................ 37 Vice President -- Database Marketing
Marc J. Williams....................... 41 Vice President -- New Business
Development
</TABLE>

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

EXECUTIVE OFFICERS AND DIRECTORS

Victor J. Melfi, Jr. was appointed President and Chief Executive Officer
and elected to the Company's Board of Directors in March 1996. He previously
held various positions with the Company, serving as Executive Vice
President -- Marketing and Chief Operating Officer from September 1995 to March
1996, Senior Vice President -- Marketing from May 1995 to September 1995 and
Vice President -- Database Marketing from October 1994 to May 1995. From 1991 to
1994, Mr. Melfi was the Associate Director of CIMS Marketing at The Reader's
Digest Association, Inc., with responsibility for re-engineering its database
marketing selection process, which included development of a visual selection
language used to segment the database, develop quantitative models and select
names for mailings. From 1988 to 1991, he was an associate in the
Strategy/Marketing Department at the management consulting firm of Booz - Allen
and Hamilton in New York, with a focus on publishing, technology industries and
consumer marketing. Mr. Melfi began his career as an applications developer and
technology product manager in positions with Xerox Corporation and National
Computer, a reseller of microcomputer products.

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<PAGE> 33

Bruce S. Martin was appointed Co-President and Chief Operating Officer in
March 1996. He joined the Company as Executive Vice President -- Merchandising
and Sales in October 1995. From 1994 to 1995, he was Senior Vice President of
Merchandising and Operations at Intelligent Electronics, Inc., a distributor and
reseller of microcomputer products, with responsibility for marketing,
purchasing and administrative operations. Previously, he held various positions
with Ingram Micro, serving as Senior Vice President of Worldwide Purchasing and
Products from 1991 to 1994, with responsibility for purchasing, product
strategies and vendor relations, and as Vice President of Purchasing from 1986
to 1991.

Sadrudin J. Kabani, founder of the Company, has been Chairman of the Board
since its inception in 1988. From 1988 to March 1996, he also served as
President and Chief Executive Officer of the Company.

Peter J. Biere was appointed Senior Vice President -- Finance and Chief
Financial Officer in October 1995. He joined the Company as Controller in 1993
and served as Vice President -- Finance, Controller and Treasurer from 1994
until his promotion. From 1989 to 1992, he held various management and finance
positions with Plum Creek Timber Company, L.P., whose general partner was
Burlington Resources Inc., a natural resource company.

Judith A. Roseth has served as Senior Vice President -- Sales since April
1996. From 1991 to 1996, she was the sole proprietor of Roseth-Harrel Consulting
& Training, a consulting and training company specializing in the development
and training of sales organizations for clients in the microcomputer products
industry. From 1988 to 1991, Ms. Roseth was Vice President -- National Major
Accounts Division for Merisel, Inc., an international distributor and reseller
of microcomputer products. From 1985 to 1988, she was National Director of Sales
and Major Accounts for Ingram Micro.

John H. Bauer has served as director of the Company since March 1996. Since
1994, Mr. Bauer has been Executive Vice President of Nintendo of America Inc., a
manufacturer and distributor of video games and products. From 1979 to 1994, he
served as Managing Partner of the Northwest Group and the Seattle office of
Coopers & Lybrand, a public accounting and consulting firm.

John T. Carleton has served as a director of the Company since November
1995, as a designee of the holders of the Series B Preferred Stock. Since
October 1995, he has been a Senior Vice President of Benaroya Capital Company,
L.L.C. ("Benaroya"), a private investment company. From 1993 to 1995, he was a
Senior Vice President of GE Capital Equity Capital Group, Inc., a private equity
investor, and from 1987 to 1993 was Vice President -- Acquisitions of the
Dyson-Kissner-Moran Corporation, a private investment company. Mr. Carleton also
serves as a director of Redhook Ale Brewery, Incorporated.

John E. DeFeo has served as a director of the Company since April 1996.
Since 1994, he has been President and Chief Executive Officer of U.S. Airwaves
Inc., an early stage wireless telecommunications company. From 1985 to 1994, Mr.
DeFeo was President and Chief Executive Officer of U.S. West New Vector Group,
the domestic cellular communications subsidiary of U.S. West, Inc.

Firoz H. Lalji has served as a director of the Company since 1990. Since
1981, Mr. Lalji has been President and Chief Executive Officer of Kits Cameras,
Inc. ("Kits Cameras"), which operates over 125 camera specialty stores in eight
western states. In addition, since 1985, he has been President and Chief
Executive Officer of Fana Group of companies, which owns real estate and hotels
in the United States and Canada.

Carol L. Miltner has served as a director of the Company since 1995. Since
1991, she has been President of Motivation by Miltner, which provides management
consulting and motivation seminars for many companies in the microcomputer
products industry, including InaCom, Kingston Technologies, Comp USA and Tech
Data. From 1993 to 1995, she was Executive Vice President of Sales and Marketing
at AmeriQuest Technologies, a computer products distributor that is now a U.S.
subsidiary of Computer 2000. From 1989 to 1991, she was Senior Vice President of
Sales of Merisel, Inc. From 1985 to 1989, she was Vice President of Sales and
then Senior Vice President of Sales of Ingram Micro. From 1973 to 1985, Ms.
Miltner held sales and management positions with IBM, Xerox and Apple. Ms.
Miltner also serves as a director of Q Logic Corporation.

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<PAGE> 34

Paul E. Monson has served as a director of the Company since 1993. Since
1991, he has been Chairman of the Board, President and Chief Executive Officer
of Back Technologies Inc., which manufactures and markets back therapy
equipment. He has also served since 1984 as Chairman of the Board of Pacific
Regency Care Management, an operator of long-term health care facilities.

Steve Sarich, Jr. has served as a director of the Company since 1993. He
has served as President of several companies, including 321 Investment Company,
Arctic Ventures and C.S.S. Management Company. He is a director of Cyclo(3)pss
Corporation, a developer of ozone technology for medical sterilization units and
textile washing systems, Wall Data, Incorporated, a developer of connectivity
software, and Omega Environmental, Inc., an environment remediation company.

Directors of the Company serve one-year terms or until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors, subject to the terms of any employment
agreements with the Company.

The Board of Directors has a standing Audit Committee and Compensation
Committee. The Audit Committee, currently composed of Ms. Miltner and Messrs.
Bauer, Carleton and Lalji, reviews the Company's internal accounting procedures
and consults with and reviews the services provided by the Company's independent
accountants. The Compensation Committee, currently composed of Messrs. DeFeo,
Kabani, Monson and Sarich, reviews and makes recommendations to the full Board
of Directors with respect to the compensation and benefits to be provided to the
Company's officers and directors and general policy matters relating to employee
compensation and benefits.

Mr. Kabani is a member of the Ismaili faith. In January 1989, due to his
leadership position in his local religious community, Mr. Kabani was entrusted
with approximately $1.1 million of cash tithes contributed by members of his
faith, and was requested to deliver them to Ismaili officials in Canada. Upon
being questioned as to the origin of the funds by U.S. Customs officers, Mr.
Kabani made false statements designed to conceal their religious nature.
Although he did so in keeping with his faith's long-standing traditions of
anonymity, Mr. Kabani pled guilty in January 1990 to the felony of making a
false statement to a U.S. Customs official, and was sentenced to two-years'
probation (including three months of work release) and a $5,000 fine. The
Company's Board of Directors has examined the facts surrounding this incident
and has concluded that it has no bearing on Mr. Kabani's business integrity or
his fitness to serve as an officer and director of the Company.

OTHER KEY EMPLOYEES

Ramona A. Agin joined the Company as Vice President -- Academic Division in
January 1996. From 1995 to January 1996, Ms. Agin was Northwest Regional Sales
Manager of Mindscape, an entertainment software developer. From 1988 to 1995,
she held various positions at Ingram Micro, serving most recently as Director of
Purchasing for the Consumer Markets Division.

Phillip M. Arcidiacono joined the Company as Vice President -- Purchasing
in July 1995. From 1992 to 1995, he held various positions with Ingram Micro,
serving most recently as the Purchasing Manager for its major vendor group. From
1991 to 1992, Mr. Arcidiacono served as Director of Sales and Marketing for Kent
Marsh Ltd., a developer of security software.

Timothy J. Carroll joined the Company as Vice President -- Investor
Relations in March 1996. From 1989 to 1996, he served as Vice President of
Public Reporting and Investor Relations of The Hillhaven Corporation, a
diversified healthcare provider. From 1981 to 1989, Mr. Carroll was Senior Vice
President and Treasurer of Shoreline Savings Bank, a financial institution.

John J. Convery was promoted to Vice President -- Corporate, Education and
Governmental Sales in April 1996. He joined the Company as Director of Business,
Education and Government in July 1995. From 1992 to 1995, Mr. Convery was
Western Regional Manager Sales for MicroWarehouse, Inc., a direct marketer of
microcomputer products. From 1986 to 1992, Mr. Convery was Mid-West Regional
Sales Manager for the Information Systems Division of BASF Corporation, a
manufacturer of computer media products.

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<PAGE> 35

Robert L. Hines, Jr. has served as General Counsel and Secretary since
joining the Company in 1995. From 1990 to 1995, he served as General Counsel for
Gary Merlino Construction Co., a general contractor and real estate developer.
From 1986 to 1990, he was an attorney at the law firm of Bogle & Gates in
Seattle.

Bruce W. Koenigsberg has served as Vice President -- PC Merchandising since
1994. From 1979 to 1994, he held various positions with Fretter, Inc., a
consumer electronics retailer, serving most recently as a Senior Merchandising
Manager.

Mark C. Maliwauki was promoted to Vice President -- International Business
Development in 1995. He joined the Company as Director of International Business
in March 1994. From 1989 to 1993, he served in various positions, including
Director of Marketing at Telemart, a microcomputer product mail-order company.

David R. McCauley was promoted to Vice President -- Telesales in April
1996. From 1993 to April 1996, he served initially as the Company's Telesales
Manager and recently as Director of Telesales. From 1989 to 1993, Mr. McCauley
held various positions with The Kern County Museum.

Thomas G. Minthorn has served as Vice President -- Advertising since 1995.
From 1993 to 1995, he served as the Company's Vice President -- Creative
Services. From 1988 to 1993, he held various positions with Manus Direct, a
direct response marketing agency, first as Vice President and most recently as
Senior Vice President.

Scott A. Reedy has served as Vice President -- Mac Merchandising since
joining the Company in March 1995. From 1994 to 1995, he was the Director of
Hardware Product Marketing at AmeriQuest Technologies. From 1990 to 1994, he
held various positions with Ingram Micro, serving most recently as the Senior
Marketing Manager for its Mac Division.

Glynda J. Smith joined the Company as Vice President -- Database Marketing
in January 1996. From 1991 to 1995, she held various positions with Institute
for International Research, a producer of business seminars and conferences in
London, England, serving most recently as International Marketing Consultant.
From 1990 to 1991, Ms. Smith was Marketing Controller for Colleagues Direct
Marketing, a direct marketing agency.

Marc J. Williams has served as Vice President -- New Business Development
since April 1995. He joined the Company as Vice President -- Merchandising and
New Business Development in 1992. From 1990 to 1992, he was Vice President of
Product Procurement for MicroWarehouse, Inc.

DIRECTOR COMPENSATION

All directors of the Company are reimbursed for out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
Outside directors receive a fee of $1,000 for each meeting attended. Ms. Miltner
also receives a quarterly retainer of $2,500. In connection with their joining
the Board of Directors, Ms. Miltner, Mr. Bauer and Mr. DeFeo were each granted
an option to acquire 7,500 shares of Common Stock at $4.00, $6.67 and $12.67 per
share, respectively. Each of these options has a term of ten years and vests 25%
for each full year of service on the Board of Directors. The Company has entered
into agreements with all directors to indemnify them against certain claims and
liabilities arising out of their service as directors and to advance expenses to
defend claims subject to indemnification.

35
<PAGE> 36

EXECUTIVE COMPENSATION

Compensation Summary. The following table sets forth information regarding
compensation earned during 1995 by all of the Company's executive officers
employed by the Company during that year (the "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#) COMPENSATION($)(2)
- ----------------------------------------- ------------ -------- ------------ ------------------
<S> <C> <C> <C> <C>
Victor J. Melfi, Jr...................... $120,481 $130,000 67,500 --
President and Chief Executive Officer
Bruce S. Martin(3)....................... 21,269 -- 90,000 --
Co-President and Chief Operating
Officer
Sadrudin J. Kabani....................... 250,000 -- -- $200
Chairman of the Board
Peter J. Biere........................... 93,474 10,000 15,000 200
Senior Vice President -- Finance and
Chief Financial Officer
</TABLE>

- ---------------
(1) The current annual base salaries for Messrs. Melfi, Martin, Kabani and Biere
are $250,000, $240,000, $300,000 and $130,000, respectively. See
"-- Employment Agreements."

(2) Amounts shown represent matching contributions under the Company's 401(k)
Plan.

(3) Mr. Martin commenced employment with the Company in October 1995.

Option Grants. The following table shows information concerning stock
options granted to the named executive officers in 1995.

OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------------ RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) IN 1995 ($/SHARE)(2) DATE 5%($) 10%($)
- ----------------------- ------------- ------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Victor J. Melfi, Jr.... 15,000 4.6% $ 4.00 2/14/05 $ 37,734 $ 95,625
52,500 16.0 5.33 10/11/05 175,980 445,969
Bruce S. Martin........ 90,000 27.6 5.33 10/22/05 301,681 764,518
Sadrudin J. Kabani..... -- -- -- -- -- --
Peter J. Biere......... 15,000 4.6 4.00 2/14/05 37,734 95,625
</TABLE>

- ---------------
(1) All of the options granted in 1995 were 10-year incentive stock options, the
vesting of which accrues at the rate of 20% per year from their respective
dates of grant, subject to a condition that no actual vesting will occur
until six months after the consummation of the offering. Vesting of certain
of these options was accelerated following their grant. See "-- Employment
Agreements."

(2) The exercise price of each option was the estimated fair value of the Common
Stock on the date of grant.

(3) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective
annual rates of stock appreciation shown. Potential gains are net of the
exercise price but before taxes associated with the exercise. The 5% and 10%
assumed annual rates of compounded stock appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of the Common Stock.
Actual gains, if any, on stock option exercises are dependent on the future
financial

36
<PAGE> 37

performance of the Company and overall market conditions. The actual value
realized may be greater or less than the potential realizable value set forth in
the table.

Year-End Option Values. The following table sets forth certain information
regarding the number and value of unexercised options held by the named
executive officers at December 31, 1995.

YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Victor J. Melfi, Jr...................... -- 90,000 -- $ 732,750
Bruce S. Martin.......................... -- 90,000 -- 600,300
Sadrudin J. Kabani....................... -- -- -- --
Peter J. Biere........................... -- 30,000 -- 295,050
</TABLE>

- ---------------
(1) Does not include options granted in 1996. See "-- Employment Agreements."

(2) Represents the value of the shares of Common Stock subject to outstanding
options, based on an assumed value of $12.00 per share, less the aggregate
option exercise price.

Compensation Committee Interlocks and Insider Participation

John E. DeFeo, Sadrudin J. Kabani, Paul E. Monson and Steve Sarich, Jr.
currently serve as members of the Compensation Committee of the Board of
Directors.

Messrs. Kabani, Lalji, Monson and Sarich have guaranteed a portion of the
Company's revolving line of credit with U.S. Bank of Washington, National
Association. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

In June 1993, the Company sold 625,000 shares of Series A Preferred Stock
at a price of $3.20 per share, of which Mr. Sarich and Paul E. and Teryl L.
Monson purchased 312,500 and 168,750 shares, respectively. Each share of Series
A Preferred Stock converted into three shares of Common Stock in October 1995
and all material contractual covenants of the Company in connection with that
financing terminated. See "Principal Shareholders," "Shares Eligible for Future
Sale" and Note 11 of Notes to Consolidated Financial Statements.

EMPLOYMENT AGREEMENTS

Effective in April 1996, the Company entered into employment agreements
with Messrs. Melfi, Martin and Kabani under which they are entitled to annual
base salaries of $250,000, $240,000 and $300,000, respectively. The term of each
agreement ends on December 31, 1998, unless certain events, such as a change in
control of the Company, occur after July 1, 1997, in which case the termination
date will be 18 months following such event. In addition, if the employment of
one of these executive officers is terminated by the Company without cause prior
to the end of the term, or if the executive officer resigns following a change
in control due to a material reduction in his responsibilities or certain other
reasons amounting to constructive termination by the Company, the executive
officer is entitled to continue to receive his base salary for a period of two
years following the termination. Each executive officer has also agreed not to
compete with the Company for a period of two years following termination of the
agreement for any reason other than constructive termination by the Company
following a change in control.

In addition, the Company accelerated the vesting of options to acquire
43,500, 18,750 and 30,000 shares of Common Stock held by Messrs. Melfi, Martin
and Biere, respectively. In addition, the Company granted Messrs. Melfi, Martin
and Biere, additional options to acquire 225,000, 120,000 and 75,000 shares of
Common Stock, respectively, at a price of $12.67 per share, which vested 20%
upon grant and will vest an additional 20% on each anniversary of the date of
grant.

37
<PAGE> 38

The Company has entered into agreements with all of its executive officers
to indemnify them against certain claims and liabilities arising out of their
service as officers, to advance expenses to defend claims subject to
indemnification, and to release them from certain liabilities to the Company
that would otherwise arise out of such service.

BENEFIT PLANS

Stock Options. The Company's 1993 Stock Incentive Plan (the "Plan")
permits options to purchase up to an aggregate of 1,650,000 shares of Common
Stock to be granted to employees of and consultants to the Company. The Plan is
administered by the Compensation Committee, which generally has the authority to
select individuals who are to receive options and to specify the terms and
conditions of each option so granted, including the number of shares covered by
the option, the type of option (incentive stock option or nonqualified option),
the exercise price (which, in the case of an incentive stock option, must be at
least 100% of the fair market value of the Common Stock), vesting provisions,
and the overall option term. At June 27, 1996, options to purchase an aggregate
of 1,073,500 shares of Common Stock were outstanding under the Plan, in addition
to options to purchase 52,500 shares of Common Stock granted outside of the
Plan.

Management Incentive Plan. The Company has adopted a Management Incentive
Plan (the "MIP") that covers all officers, division directors and managers of
the Company. Under the MIP, participants are eligible to receive a bonus based
on Company performance in 1996 and, in the case of participants other than
executive officers, individual performance criteria. The maximum potential bonus
under the MIP for executive officers is 150% of base salary.

401(k) Plan. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors. Under the 401(k) portion of the
plan, eligible employees may make pre-tax elective contributions of up to 10% of
their compensation, subject to maximum limits on contributions prescribed by
law. The Company currently matches 10% of the first $2,000 of each participant's
annual contributions.

Employee Stock Purchase Plan. The Company has adopted an Employee Stock
Purchase Plan (the "ESPP"), which became effective on the date of this
Prospectus. The ESPP is intended to qualify for favorable tax treatment under
Section 423 of the Internal Revenue Code of 1986. Under the ESPP, 450,000 shares
of Common Stock are reserved for issuance to eligible non-officer employees of
the Company, who may elect to apply up to 10% of their compensation to the
purchase of such shares. The ESPP is administered on the basis of purchase
periods corresponding to calendar quarters (except for the initial purchase
period, which begins on the date of this Prospectus and ends on September 30,
1996). The purchase price for shares sold to participants is 85% of the fair
market value of the Common Stock on either the first day or the last day of the
purchase period, whichever is lower. Employees of the Company's subsidiaries are
not eligible to participate in the ESPP.

CERTAIN TRANSACTIONS

Benaroya-Bessemer Financing. In October 1995, the Company sold 612,476
shares of Series B Preferred Stock at a price of $11.43 per share to Benaroya,
Bessemer Venture Partners III, L.P. ("Bessemer"), John T. Carleton and twelve
other investors. Benaroya, Bessemer and Mr. Carleton purchased 311,050, 245,518
and 34,561 shares, respectively. All shares of Series B Preferred Stock will
automatically convert into 918,711 shares of Common Stock upon consummation of
the offering. Prudential Securities Incorporated served as placement agent in
this financing and received cash compensation and a warrant to purchase up to
45,310 shares of Common Stock at $7.62 per share. The Company has granted
certain registration rights for the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and exercise of the warrant. The
holders of the Series B Preferred Stock have designated John T. Carleton, a
Senior Vice President of Benaroya, to serve as a director of the Company. In
addition, Benaroya and Bessemer will have, for three years following the
offering, the right to designate an observer at meetings of the Board of

38
<PAGE> 39

Directors. The holders of the Series B Preferred Stock hold preemptive rights to
maintain their percentage ownership interest in the Company in the event of
certain issuances of its capital stock, which rights were waived in connection
with the issuance of the shares offered hereby. The preemptive rights and all
material contractual covenants of the Company in connection with that financing,
other than the registration rights and observer rights, will terminate upon
consummation of the offering. See "Shares Eligible for Future Sale --
Outstanding Registration Rights" and Note 10 of Notes to Consolidated Financial
Statements.

Related-Party Transactions. In 1992, the Company advanced $125,000 to
Sadrudin J. Kabani, which was forgiven by the Company as part of his 1994
compensation package.

In October 1993, the Company produced and distributed a catalog in which it
tested the feasibility of selling photographic equipment via inbound
telemarketing. In connection with this test, the Company purchased from Kits
Cameras, a company controlled by Mr. Lalji, approximately $192,000 of
photographic equipment for resale, of which $43,000 was paid for and the balance
was returned. In addition, during 1995, the Company sold approximately $216,000
of microcomputer products to Kits Cameras.

During 1993, 1994 and 1995, the Company purchased approximately $2.0
million, $3.5 million and $882,000, respectively, of memory modules from LLB
Habitat, a business owned by Mr. Kabani's wife, at prices that the Company
believes were equivalent to or better than those available in arm's-length
transactions. The Company discontinued purchases from LLB Habitat in April 1995.

In consideration for certain consulting services to be provided over a
twelve-month period commencing in February 1996, the Company has agreed to pay
Carol L. Miltner $54,000 plus expenses.

The Company has adopted a policy prohibiting transactions with its
directors, officers or controlling shareholders or their affiliates other than
those that result from competitive bidding or that a majority of the Company's
disinterested directors conclude are expected to benefit the Company and are on
terms no less favorable to the Company than could be obtained in arm's-length
transactions with unaffiliated third parties. See "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."

39
<PAGE> 40

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1996, and as adjusted to reflect the
sale of shares of Common Stock offered hereby, for (i) each person known to the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's named executive officers, and
(iv) all of the Company's executive officers and directors as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OUTSTANDING SHARES
OF SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Sadrudin J. Kabani(2).................................. 3,750,000 36.4% 30.0%
Almas S. Kabani
Firoz H. Lalji(2)...................................... 3,750,000 36.4 30.0
Najma Lalji
Steve Sarich, Jr.(2)................................... 937,500 9.1 7.5
Paul E. Monson......................................... 451,875 4.4 3.6
Teryl L. Monson
John H. Bauer.......................................... -- -- --
John T. Carleton(3).................................... 51,841 * *
Victor J. Melfi, Jr.(4)................................ 88,500 * *
Peter J. Biere (5)..................................... 45,000 * *
Bruce S. Martin (6).................................... 42,750 * *
John E. DeFeo.......................................... -- -- --
Carol L. Miltner....................................... -- -- --
All directors and executive officers
as a group (12 persons)(7)........................... 9,117,466 87.1 72.0
</TABLE>

- ---------------
* Less than 1%.

(1) Shares subject to an option are not deemed outstanding for purposes of
computing the percentage ownership of any person other than the person
holding the option. Shares shown for Messrs. Melfi, Biere and Martin
represent shares subject to options exercisable within 60 days after May 31,
1996.

(2) The address for each of these shareholders is 15815 S.E. 37th Street,
Bellevue, Washington 98006-1800.

(3) Mr. Carleton serves as a director by designation of holders of the Series B
Preferred Stock. See "Management -- Certain Transactions."

(4) Excludes 271,500 shares subject to options that become exercisable more than
60 days after May 31, 1996.

(5) Excludes 60,000 shares subject to options that become exercisable more than
60 days after May 31, 1996.

(6) Excludes 212,000 shares subject to options that become exercisable more than
60 days after May 31, 1996.

(7) Includes 176,250 shares subject to options exercisable within 60 days of May
31, 1996.

40
<PAGE> 41

DESCRIPTION OF CAPITAL STOCK

Upon completion of the offering, the authorized capital stock of the
Company will consist of 45,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock.

COMMON STOCK

As of May 31, 1996, 10,293,710 shares of Common Stock were outstanding,
held of record by 29 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of the shareholders. Holders
of Common Stock will not have the right to cumulate votes with respect to
elections of directors. Accordingly, holders of a majority of the shares of
Common Stock voting in any election of directors will have the ability to elect
all of the directors standing for election. All directors hold office until the
next annual meeting of shareholders and until their successors have been duly
elected and qualified. Directors may be removed only for cause and only by the
holders of a majority of the outstanding shares of Common Stock.

Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of legally available
funds, subject to any preferences that may be afforded to any outstanding
preferred stock. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding preferred stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. All of the outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
consummation of the offering will be, when issued and paid for, fully paid and
nonassessable. The Company's Articles of Incorporation and Bylaws provide for
release and indemnification of the Company's directors and officers as to
certain liabilities arising from their actions in such capacities to the fullest
extent permitted by law.

PREFERRED STOCK

The Board of Directors has the authority to issue 5,000,000 shares of
preferred stock in one or more series and to fix the relative rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and number of
shares constituting any series, without any further vote or action by the
Company's shareholders. The market price for the Common Stock, and the voting
and other rights of the holders thereof, may be adversely affected by the
rights, preferences and privileges accorded to any preferred stock issued by the
Company. Issuances of preferred stock in certain circumstances may have the
effect of delaying, deferring or preventing a change in control of the Company,
or discouraging bids for the Company's Common Stock at a premium over the market
price. Upon consummation of the offering, the Company will have no shares of
preferred stock outstanding. The Company has no present plans to issue any
preferred stock.

CERTAIN VOTING AND OTHER MATTERS

Under the Washington Business Corporation Act (the "Act"), shareholder
approval is required in order for the Company to participate in certain mergers
and share exchanges or to sell substantially all of its assets. Within certain
limits, the Act permits a corporation's articles of incorporation to specify the
level of shareholder approval required for such transactions. The Company's
Articles of Incorporation generally require any such transaction to be approved
by the holders of a majority of the outstanding shares of Common Stock. However,
unless approved by a majority of the directors who are currently members of the
Board of Directors or who are subsequently nominated for election to the Board
of Directors by a majority of the current directors, such transaction must be
approved by a two-thirds vote of each outstanding series or class of stock
voting as a separate class.

Under the Company's Articles of Incorporation, special meetings of the
shareholders may be called only by the Board of Directors, the Chairman of the
Board or the President, or the holders of at least 25% of the outstanding shares
of Common Stock. Amendments to the Articles of Incorporation must generally be
approved by the Board of Directors and the holders of a majority of the
outstanding shares of Common Stock.

41
<PAGE> 42

However, unless approved by a majority of the directors who are currently
members of the Board of Directors or who are subsequently nominated for election
to the Board of Directors by a majority of the current directors, amendments
relating to requirements for calling a special meeting of shareholders, election
and removal of directors and approval of certain significant transactions must
be approved by a two-thirds vote of each outstanding series or class of stock
voting as a separate class.

The Company's Bylaws provide that shareholders seeking to bring business
before, or to nominate directors at, any meeting of shareholders must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company not less than 70 days prior to the date of the meeting, or the tenth day
after notice of the meeting is first given to shareholders, whichever is later.
The Bylaws also contain specific requirements for the form of a shareholder's
notice. These provisions may preclude some shareholders from bringing matters
before the shareholders or from making nominations for directors. The Bylaws may
be amended or repealed by the Board of Directors or by the majority of the
holders of the outstanding shares of Common Stock.

Holders of shares of preferred or other capital stock hereafter issued by
the Company may also be entitled to vote in connection with the matters
described above, and separate approval may be required to the extent of any
class voting rights accorded to the holders of such other stock. It is possible
that the provisions of the Company's Articles of Incorporation and Bylaws
described above may have the effect of delaying, deterring or preventing a
change in control of the Company.

ANTITAKEOVER RESTRICTIONS

Washington law contains certain provisions that may have the effect of
delaying, deferring or preventing a hostile takeover or change of control of the
Company. Chapter 23B.19 of the Act prohibits the Company, with certain
exceptions, from engaging in certain significant business transactions with an
"acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. These statutory and organic provisions may have the effect of
delaying, deferring or preventing a change in control of the Company.

LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY

As permitted by Section 23B.08.320 of the Act, Article VI, Section 6.6 of
the Company's Articles eliminates in certain circumstances the personal
liability of the Company's directors to the Company or its shareholders for
monetary damages resulting from their conduct as an officer or director. This
provision does not eliminate the liability of directors for (i) acts or
omissions that involve intentional misconduct or a knowing violation of law,
(ii) improper declarations of dividends, or (iii) transactions from which a
director received an improper personal benefit.

The Company's Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by Washington law, including under
circumstances in which indemnification is otherwise discretionary. The Company
intends to obtain officers' and directors' liability insurance for members of
its Board of Directors and key employees.

The Company has entered into agreements with all of its directors and
executive officers to indemnify them against certain claims and liabilities
arising out of their service as directors and officers and to advance expenses
to defend claims subject to indemnification.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.

42
<PAGE> 43

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, 12,493,710 shares of Common Stock will be
outstanding (12,823,710 shares if the Underwriters' over-allotment option is
exercised in full), of which the 2,200,000 shares offered hereby (2,530,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act, except to the extent such shares are held by an
affiliate of the Company. The remaining 10,293,710 shares of Common Stock were
issued and sold by the Company in private transactions, and public sale thereof
is restricted except to the extent they are registered under the Securities Act
or sold in accordance with an exemption from such registration. The Company and
the holders of all of these remaining shares have entered into Lock-up
Agreements with the Underwriters not to sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase, or otherwise transfer or
dispose of any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 180 days after the
date of this Prospectus without the prior written consent of Dain Bosworth
Incorporated. Upon expiration of the 180-day period, 9,374,999 of these
remaining 10,293,710 shares will be eligible for immediate public sale under
Rule 144 as currently in effect and the remaining shares of Common Stock will
not be eligible for public sale until October 1997 unless earlier registered
under the Securities Act pursuant to certain contractual registration rights. At
June 27, 1996, options and warrants for 1,171,310 shares of Common Stock were
outstanding, of which options for 230,250 shares will be exercisable upon
consummation of the offering and the shares issued upon exercise will be
potentially eligible for public sale 90 days after the date of this Prospectus
pursuant to Rule 701 under the Securities Act; of these shares, 200,250 shares
are subject to Lock-up Agreements.

In general, Rule 144 as currently in effect provides that any person who
has beneficially owned shares for at least two years, including an "affiliate"
(as defined in Rule 144), is generally entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the shares
of Common Stock then outstanding or the reported average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is sent to the Securities and Exchange
Commission (the "SEC"). Sales under Rule 144 are subject to certain manner of
sale restrictions, notice requirements and availability of current public
information concerning the Company. A person who is not an affiliate of the
Company, and who has not been an affiliate within three months prior to the
sale, generally may sell shares without regard to the limitations of Rule 144
provided that the person has held such shares for a period of at least three
years. The SEC has proposed to reduce the two-year and three-year holding
periods under Rule 144 to one and two years, respectively. Adoption of such
proposal would have a material effect on the timing of when certain shares of
Common Stock become eligible for resale.

Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.

Prior to the offering, there has been no public market for the Common Stock
of the Company and no prediction can be made of the effect, if any, that the
sale or availability for sale of shares of Common Stock will have on the market
price of the Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market could adversely affect the market price of the
Common Stock.

OUTSTANDING REGISTRATION RIGHTS

Pursuant to a registration rights agreement with the Company, holders of
612,476 shares of Series B Preferred Stock that will convert into 918,711 of
shares of Common Stock upon consummation of the offering and the holder of a
warrant to purchase 45,310 shares of Common Stock (the shares of Common Stock
issuable upon such conversion and exercise will be referred to as the
"Registrable Shares") have certain rights with respect to the registration of
the Registrable Shares under the Securities Act. Under the terms of the

43
<PAGE> 44

agreement, if the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of others, such holders
are entitled to include Registrable Shares therein, subject to any limitation by
the underwriters in the offering on the number of shares included in such
registration. In addition, holders of not less than 33% of the Registrable
Shares may require the Company, on not more than two occasions, to file a
registration statement under the Securities Act at the Company's expense with
respect to any Registrable Shares they desire to include in such registration,
provided that the anticipated aggregate price of the shares to be registered
exceeds $5,000,000. Also, any holder of Registrable Shares who holds 1 1/2% or
more of the Company's outstanding Common Stock may require the Company, not more
than twice in any twelve-month period, to file a registration statement on Form
S-3, at the expense of the holder, for a public offering of Registrable Shares.
The Company is required to use its best efforts to effect all such
registrations, subject to certain conditions and limitations.

44
<PAGE> 45

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Dain Bosworth Incorporated and Furman Selz
LLC are acting as representatives (the "Representatives"), have severally agreed
to purchase from the Company the shares of Common Stock offered hereby. Each
Underwriter will purchase the number of shares set forth opposite its name
below, and will purchase such shares at the price to public, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Dain Bosworth Incorporated........................................... 613,000
Furman Selz LLC...................................................... 612,000
Alex, Brown & Sons Incorporated...................................... 50,000
Dean Witter Reynolds Inc............................................. 50,000
Dillon, Read & Co. Inc............................................... 50,000
Donaldson, Lufkin & Jenrette Securities Corporation.................. 50,000
Hambrecht & Quist LLC................................................ 50,000
Lazard Freres & Co. LLC.............................................. 50,000
Montgomery Securities................................................ 50,000
Oppenheimer & Co., Inc............................................... 50,000
PaineWebber Incorporated............................................. 50,000
Prudential Securities Incorporated................................... 50,000
Rauscher Pierce Refsnes, Inc......................................... 50,000
Robertson, Stephens & Company LLC.................................... 50,000
Advest, Inc.......................................................... 25,000
Robert W. Baird & Co. Incorporated................................... 25,000
William Blair & Company L.L.C........................................ 25,000
J.C. Bradford & Co................................................... 25,000
The Chicago Corporation.............................................. 25,000
Interstate/Johnson Lane Corporation.................................. 25,000
Janney Montgomery Scott Inc.......................................... 25,000
Morgan Keegan & Company, Inc......................................... 25,000
Needham & Company, Inc............................................... 25,000
Pacific Crest Securities, Inc........................................ 25,000
Piper Jaffray Inc.................................................... 25,000
Principal Financial Securities, Inc.................................. 25,000
Ragen Mackenzie Incorporated......................................... 25,000
Tucker Anthony Incorporated.......................................... 25,000
Unterberg Harris, L.P................................................ 25,000
-------
Total...................................................... 2,200,000
=======
</TABLE>

The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if the Underwriters purchase any
shares. The Representatives have advised the Company that the several
Underwriters may offer the shares of Common Stock directly to the public at the
price to public set forth on the cover page of this Prospectus and to certain
dealers at the price to public less a concession not exceeding $.47 per share.
The Underwriters may allow, and such dealers may reallow, a concession not
exceeding $.10 per share to other dealers. After the shares of Common Stock are
released for sale to the public, the Representatives may change the initial
price to public and other selling terms.

45
<PAGE> 46

The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
330,000 additional shares of Common Stock, at the same price per share as the
initial shares. The Underwriters may purchase these shares solely to cover
over-allotments, if any, in connection with the sale of Common Stock offered
hereby. If the Underwriters exercise the over-allotment option, the Underwriters
will purchase additional shares in approximately the same proportion as those in
the above table.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

The Company and all of its officers, directors and shareholders have agreed
not to sell, offer to sell, solicit an offer to buy, contract to sell, grant an
option to purchase, or otherwise transfer or dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Dain Bosworth Incorporated.

Prior to the offering, there has been no public market for the Common
Stock. The initial price to public was determined by agreement between the
Company and the Representatives. In determining the initial price to public, the
Company and the Representatives considered, among other things, the history of
and prospects for the industry in which the Company operates, past and present
operations and earnings of the Company and the trend of such earnings, the
qualifications of the Company's management, the general condition of the
securities markets at the time of the offering and the market prices for other
publicly traded companies.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP, Seattle, Washington. John M. Steel, a
principal of this firm, holds an option to acquire 7,500 shares of Common Stock
for $1,275. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Orrick, Herrington & Sutcliffe, San Francisco,
California.

EXPERTS

The consolidated balance sheets at December 31, 1994 and 1995 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995 included in this
Prospectus and in the Registration Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.

46
<PAGE> 47

ADDITIONAL INFORMATION

The Company intends to furnish to its shareholders of record annual reports
containing financial statements audited and reported upon by independent public
accountants and quarterly reports containing unaudited financial information for
each of the first three quarters of each fiscal year.

The Company has filed with the SEC a Registration Statement (the
"Registration Statement") on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits thereto on file with the SEC pursuant to
the Securities Act and the rules and regulations of the SEC thereunder.
Statements contained in this Prospectus concerning the provisions or contents of
any contract or other document referred to in this Prospectus are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the Public Reference Section maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies may be obtained at the prescribed rates from the Public
Reference Section of the SEC at its principal office in Washington, D.C.

47
<PAGE> 48

MULTIPLE ZONES INTERNATIONAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996...... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1995 and 1996............................ F-4
Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1996..................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1995 and 1996............................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 49

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Multiple
Zones International, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Multiple Zones
International, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Seattle, Washington
June 3, 1996

F-2
<PAGE> 50

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- ----------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 513,789 $ 1,214,581 $ 994,123
Receivables, net........................................... 8,263,197 23,111,478 31,096,859
Inventories, net........................................... 13,140,813 42,030,676 47,822,422
Prepaids................................................... 1,185,942 6,292,209 4,382,947
Deferred income taxes...................................... 362,687 695,060 961,732
----------- ----------- -----------
Total current assets............................... 23,466,428 73,344,004 85,258,083
Property and equipment, net.................................. 2,162,540 4,518,555 4,651,154
Other assets................................................. 76,050 1,529,605 2,792,243
----------- ----------- -----------
Total assets....................................... $25,705,018 $79,392,164 $92,701,480
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit....................................... $ 3,277,080 $12,034,890 $12,260,275
Accounts payable........................................... 16,371,709 46,594,671 54,943,943
Accrued liabilities and other.............................. 2,690,765 5,155,322 7,053,674
Current portion of capital lease obligations............... 340,168 722,558 709,618
Income taxes payable....................................... 261,809 1,086,223 1,792,711
----------- ----------- -----------
Total current liabilities.......................... 22,941,531 65,593,664 76,760,221
Capital lease obligations, net of current portion............ 791,481 1,664,553 1,496,879
Deferred income taxes........................................ 189,520 295,482 257,239
Other........................................................ 401,940 505,995
----------- ----------- -----------
Total liabilities.................................. 23,922,532 67,955,639 79,020,334
----------- ----------- -----------
Minority interest............................................ 77,246 239,415 284,882
----------- ----------- -----------
Commitments and contingencies
Series B Redeemable Convertible Preferred Stock, no par
value, $11.43 per share liquidation preference, 612,476
shares authorized, issued and outstanding at December 31,
1995 and March 31, 1996.................................... 6,461,096 6,690,727
----------- ----------- -----------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized:
Series A Convertible Preferred Stock, no par value,
$3.20 per share liquidation preference; 625,000 shares
authorized,
issued and outstanding................................ 2,000,000
Common stock, no par value, 45,000,000 shares authorized;
issued and outstanding 9,374,999 shares at March 31,
1996 and December 31, 1995 and 7,500,000 shares at
December 31, 1994, respectively......................... 750,000 2,750,000 2,750,000
Retained earnings (deficit)................................ (1,050,713) 1,987,736 3,931,166
Foreign currency translation adjustment.................... 5,953 (1,722) 24,371
----------- ----------- -----------
Total shareholders' equity......................... 1,705,240 4,736,014 6,705,537
----------- ----------- -----------
Total liabilities and shareholders' equity......... $25,705,018 $79,392,164 $92,701,480
========== ========== ==========
</TABLE>

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

F-3
<PAGE> 51

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $80,515,472 $113,455,563 $242,586,898 $46,228,186 $100,927,034
Cost of sales................. 69,298,000 98,210,972 211,036,693 39,926,899 86,963,556
----------- ------------ ------------ ----------- ------------
Gross profit................ 11,217,472 15,244,591 31,550,205 6,301,287 13,963,478
Selling, general and
administrative expenses..... 10,586,785 14,410,275 25,425,306 5,758,204 10,077,954
----------- ------------ ------------ ----------- ------------
Income from operations...... 630,687 834,316 6,124,899 543,083 3,885,524
----------- ------------ ------------ ----------- ------------
Other (income) expense:
Interest expense............ 213,423 276,744 1,148,939 166,717 504,027
Other income................ (44,475) (77,514) (132,246) (26,619) (85,318)
Minority interest........... 7,800 16,154 69,569 26,308 49,511
----------- ------------ ------------ ----------- ------------
176,748 215,384 1,086,262 166,406 468,220
----------- ------------ ------------ ----------- ------------
Income before income taxes.... 453,939 618,932 5,038,637 376,677 3,417,304
Provision for income taxes.... 2,618 206,779 1,847,100 143,070 1,244,243
----------- ------------ ------------ ----------- ------------
Net income............... $ 451,321 $ 412,153 $ 3,191,537 $ 233,607 $ 2,173,061
=========== ============ ============ =========== ============
Pro forma earnings per share
(unaudited)................. $ 0.31 $ 0.02 $ 0.21
============ =========== ============
Shares used in computation of
pro forma earnings per share
(unaudited)................. 10,143,542 10,122,555 10,136,610
============ =========== ============
</TABLE>

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

F-4
<PAGE> 52

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOREIGN
PREFERRED STOCK COMMON STOCK RETAINED CURRENCY
---------------------- ---------------------- EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT (DEFICIT) ADJUSTMENT TOTAL
-------- ----------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........... $ 7,500,000 $ 750,000 $(1,914,187) $ $(1,164,187)
Issuance of Series A Convertible
Preferred Stock.................. 625,000 2,000,000 2,000,000
Net income......................... 451,321 451,321
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1993......... 625,000 2,000,000 7,500,000 750,000 (1,462,866) 1,287,134
Net income......................... 412,153 412,153
Translation adjustment............. 5,953 5,953
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1994......... 625,000 2,000,000 7,500,000 750,000 (1,050,713) 5,953 1,705,240
Conversion of Series A Convertible
Preferred Stock to common
stock............................ (625,000) (2,000,000) 1,874,999 2,000,000
Accretion of Series B Redeemable
Convertible Preferred Stock...... (153,088) (153,088)
Net income......................... 3,191,537 3,191,537
Translation adjustment............. (7,675) (7,675)
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1995......... 9,374,999 2,750,000 1,987,736 (1,722) 4,736,014
Accretion of Series B Redeemable
Convertible Preferred Stock
(unaudited)...................... (229,631) (229,631)
Net income (unaudited)............. 2,173,061 2,173,061
Translation adjustment
(unaudited)...................... 26,093 26,093
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, March 31, 1996
(unaudited)...................... $ 9,374,999 $2,750,000 $ 3,931,166 $24,371 $ 6,705,537
======== ========== ========= ========== =========== ======= ===========
</TABLE>

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

F-5
<PAGE> 53

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 451,321 $ 412,153 $ 3,191,537 $ 233,607 $ 2,173,061
Adjustments to reconcile net income to net
cash used in operating activities:
Allowance for doubtful accounts and
returns................................. (5,529) 235,964 177,647 (93,991) 379,461
Inventory valuation allowance............. 138,000 62,000 300,000 (48,473) 356,702
Depreciation and amortization............. 426,864 650,844 1,000,646 203,336 343,201
Deferred income taxes..................... (35,032) (138,135) (226,411) 189,804 (304,915)
Minority interest......................... 7,800 16,154 69,569 26,308 49,511
Foreign currency translation adjustment... (5,953) (7,675) (19,227) 26,093
Changes in assets and liabilities:
Accounts receivable..................... (1,633,826) (3,117,109) (12,464,835) (3,396,147) (7,433,607)
Inventory............................... (2,411,936) (3,940,469) (28,217,690) (3,228,198) (5,781,017)
Prepaids and other assets............... (80,637) (751,611) (5,689,140) (1,541,620) 1,224,908
Accounts payable........................ 1,505,311 236,068 24,267,853 3,539,821 5,527,071
Accrued liabilities..................... 487,052 1,705,133 2,400,818 (496,718) 716,605
Income taxes payable.................... 37,650 224,159 802,283 (134,411) 621,604
----------- ------------ ------------ ------------ ------------
Net cash used in operating
activities.......................... (1,112,962) (4,410,802) (14,395,398) (4,765,909) (2,101,322)
----------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment................................. 36,523 12,947
Purchases of property and equipment......... (314,671) (538,188) (1,397,289) (304,063) (433,017)
Repayment of loan to shareholder............ 125,000
Acquisitions of subsidiaries................ (689,720)
----------- ------------ ------------ ------------ ------------
Net cash used in investing
activities.......................... (314,671) (376,665) (2,074,062) (304,063) (433,017)
----------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings under line of credit agreement... 8,575,000 25,745,800 65,408,357 12,905,374 29,205,385
Payments under line of credit agreement..... (9,430,000) (23,488,720) (56,665,000) (10,255,000) (28,980,000)
Net change in book overdrafts............... 685,529 3,017,362 2,754,389 2,358,745 2,165,055
Payments on capital leases.................. (176,914) (288,802) (548,868) (119,450) (180,614)
Proceeds from sale of preferred stock....... 2,000,000 7,000,000
Preferred stock issuance costs.............. (691,992)
Other....................................... (69,800) 21,171 (86,634) (189,500) 104,055
----------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities.......................... 1,583,815 5,006,811 17,170,252 4,700,169 2,313,881
----------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. 156,182 219,344 700,792 (369,803) (220,458)
Cash and cash equivalents at beginning of
period...................................... 138,263 294,445 513,789 513,789 1,214,581
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period.... $ 294,445 $ 513,789 $ 1,214,581 $ 143,986 $ 994,123
=========== ============ ============ ============ ============
Supplemental cash flow information:
Cash paid during the period for interest.... $ 213,422 $ 239,470 $ 1,111,213 $ 203,991 $ 473,004
=========== ============ ============ ============ ============
Cash paid for income taxes.................. $ 100,000 $ 1,251,382 $ 315,000 $ 996,952
============ ============ ============ ============
Noncash investing and financing activity:
Capital leases to finance purchases of
equipment............................... $ 769,032 $ 405,304 $ 1,804,330 $ 593,961
=========== ============ ============ ============
Investment in subsidiary.................. $ 500,000
============
Accretion of Series B Redeemable
Convertible Preferred Stock............. $ 153,088 $ 229,631
============ ============
</TABLE>

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

F-6
<PAGE> 54

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

1. DESCRIPTION OF BUSINESS:

Multiple Zones International, Inc. and its majority owned subsidiaries
(collectively the "Company") are international direct marketers of microcomputer
hardware, software, peripherals and accessories for users of Apple
Macintosh-compatible ("Mac") and IBM-compatible ("PC") personal computers. The
Company has licensed its trade name to independent licensees which operate in a
number of countries world-wide.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

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

Interim Financial Information

The consolidated financial statements and related notes thereto for the
three months ended March 31, 1995 and 1996 are unaudited and have been prepared
on the same basis as the audited financial statements included herein. In the
opinion of management, such unaudited financial statements include all
adjustments necessary to present fairly the information set forth therein. These
adjustments are solely of a normal, recurring nature. The results of operations
for such interim periods are not necessarily indicative of results for the full
year.

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, and has not experienced
significant credit losses.

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, 1994 and 1995 and March 31, 1996 are net of
allowances of approximately $300,000, $600,000 and $957,000, 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,
generally 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.

F-7
<PAGE> 55

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

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. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized.

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

Computation of Earnings Per Share

Historical Earnings Per Share

Historical earnings per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options and warrants. Fully
diluted earnings per share assumes the conversion of the Series B Redeemable
Convertible Preferred Stock ("Series B Preferred Stock"). For those periods
prior to the offering date, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalents shares issued at
prices below the public offering price during the 12 months immediately
preceding the offering date have been included in the calculation as if they
were outstanding for all periods presented. The calculation uses the treasury
stock method in determining the resulting incremental weighted average
equivalent shares outstanding.

F-8
<PAGE> 56

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

The following table presents historical earnings per share and shares used
in the computations:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Primary earnings per share....... $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.20
======= ======= ======= ======= =======
Shares used in computation of
primary earnings per share..... 8,946,834 9,763,277 9,808,212 9,787,224 9,801,280
======= ======= ======= ======= =======
Fully diluted earnings per
share.......................... $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.21
======= ======= ======= ======= =======
Shares used in computation of
fully diluted earnings per
share.......................... 9,282,164 10,098,608 10,143,542 10,122,555 10,136,610
======= ======= ======= ======= =======
</TABLE>

Pro Forma Earnings Per Share

The calculation of pro forma earnings per share as reflected on the
accompanying consolidated statements of operations includes the effect of all
outstanding convertible redeemable preferred stock and stock options and
warrants. The accretion related to the preferred stock carrying value is not
deducted from income in the calculation of pro forma earnings per share.
Pursuant to the rules of the Securities and Exchange Commission, common and
common equivalent shares issued during the twelve months immediately preceding
the initial filing of the Company's registration statement on Form S-1 related
to the initial public offering of its common stock have been included in the
calculation of the weighted average common and common equivalent shares
outstanding. The calculation uses the treasury stock method in determining the
resulting incremental weighted average equivalent shares outstanding.

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, 1995 and
March 31, 1996, $3,753,666 and $2,020,873, respectively, of capitalized
advertising costs were included with prepaids. The Company receives market
development revenues 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 $1,774,783 for the year ended December 31, 1995.

F-9
<PAGE> 57

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

The Company adopted Statement of Position 93-7 "Reporting on Advertising
Costs" (SOP 93-7) effective January 1, 1995. Management believes that if SOP
93-7 had been adopted in prior years, it would not have had a material impact on
the Company's financial position or results of operations.

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.

Reclassifications

Certain reclassifications have been made to the 1993, 1994 and 1995
financial statements to conform to the March 31, 1996 presentation. Such
reclassifications had no effect on net income.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS:

For certain financial instruments, including cash, cash equivalents and
bank lines of credit, the carrying value approximates fair value.

Management considers the fair value of the Series B Preferred Stock to
approximate its carrying value.

4. RECEIVABLES:

Receivables consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Trade........................................ $6,478,240 $16,204,425 $22,351,527
Co-op advertising............................ 777,267 3,194,886 2,839,380
Licensees.................................... 261,123 665,522 646,100
Returns, rebates and other................... 1,175,349 3,653,074 6,245,742
---------- ----------- -----------
8,691,979 23,717,907 32,082,749
Less allowances.............................. (428,782) (606,429) (985,890)
---------- ----------- -----------
$8,263,197 $23,111,478 $31,096,859
========== =========== ===========
</TABLE>

F-10
<PAGE> 58

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

5. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Equipment................................... $ 1,638,464 $ 2,351,015 $ 2,844,153
Computer hardware and software under capital
leases.................................... 1,750,720 3,621,598 3,621,598
Computer software........................... 213,558 773,300 752,832
Furniture and fixtures...................... 136,628 265,884 268,875
Leasehold improvements...................... 39,472 155,975 155,975
------------ ------------ ------------
3,778,842 7,167,772 7,643,433
Less accumulated depreciation and
amortization.............................. (1,616,302) (2,649,217) (2,992,279)
------------ ------------ ------------
Property and equipment, net....... $ 2,162,540 $ 4,518,555 $ 4,651,154
============ ============ ============
</TABLE>

Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1994 and 1995 and
March 31, 1996 of $685,547, $1,246,279 and $1,403,301, respectively.

6. BANK LINES OF CREDIT:

At December 31, 1995, the Company had a $20.0 million bank line of credit
expiring June 14, 1996 (in May 1996, the line of credit was increased to $25.0
million and its expiration date was extended to December 31, 1996). Interest is
charged at the prime lending rate plus 3/4% (9 1/4% at December 31, 1995). At
December 31, 1995 and March 31, 1996, $11,575,000 and $11,790,000, respectively,
was borrowed on the line. The line is collateralized by the Company's accounts
receivable and inventories, and a portion is guaranteed by certain of the
Company's shareholders.

The line of credit agreement contains certain covenants and restrictions
requiring, among other things, a minimum tangible net worth, limitations on
capital expenditures and certain other financial ratios and restrictions. At
December 31, 1995, the Company was not in compliance with one of these
covenants. The covenant was modified in April 1996, and the bank has waived
violation of the covenant through the expiration date of the line of credit. At
March 31, 1996, the Company would have been in compliance with the modified
covenant.

Bank lines of credit also included $459,890 and $470,275 of borrowings by
the Company's foreign subsidiaries at December 31, 1995 and March 31, 1996,
respectively.

At December 31, 1994, the Company had $3,275,000 outstanding under a
$7,000,000 line of credit which bore interest at the prime lending rate plus
3/4% (8 3/4% at December 31, 1994). Bank lines of credit at December 31, 1994
also included $2,080 of borrowings by the Company's foreign subsidiaries.

The lines of credit are used by the Company under its cash management
system to cover checks presented for payment in excess of cash balances. As of
December 31, 1994 and 1995 and March 31, 1996, the Company had book overdrafts
of $3,473,925, $6,228,314 and $8,572,753, respectively, which are included with
accounts payable.

F-11
<PAGE> 59

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

7. TRADE CREDIT ARRANGEMENT:

In 1996, the Company entered into security agreements with Deutsche
Financial Services ("Deutsche") to facilitate the purchase of inventory from
various suppliers under certain terms and conditions. The agreement allows a
collateralized position in inventory financed by Deutsche up to an aggregate of
$25.0 million. At March 31, 1996, accounts payable included $16.4 million owed
to Deutsche, of which $8.1 million was for inventory in transit. Amounts
purchased under these agreements generally require payment within a period of 45
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:

As of June 5, 1993, the Company terminated its S Corporation status. As an
S Corporation, a portion of 1993 earnings and losses were reported on the
personal tax returns of the shareholders. If the Company had been subject to
federal income taxes for all of 1993 at the statutory rates in effect for that
year, its pro forma income tax expense and net income for 1993 would have been
$154,339 and $299,600, respectively.

The income tax provision consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
-------- --------- ----------
<S> <C> <C> <C>
Current.......................................... $ 37,650 $ 344,914 $2,073,511
Deferred......................................... 54,365 (138,135) (226,411)
Change in tax status............................. (89,397)
-------- --------- ----------
$ 2,618 $ 206,779 $1,847,100
======== ========= ==========
</TABLE>

The components of deferred taxes were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Assets:
Allowance for doubtful accounts............................ $ 145,786 $ 192,699
Inventory allowances....................................... 102,000 204,000
Deferred advertising revenue............................... 170,000 10,700
Inventory capitalization................................... 19,005 58,152
Accrued liabilities and other.............................. 68,360 263,509
--------- ---------
Total.............................................. $ 505,151 $ 729,060
--------- ---------
Liabilities:
Deferred catalog costs..................................... $(142,464) $
Property and equipment depreciation........................ (94,771) (185,891)
Other...................................................... (94,749) (143,591)
--------- ---------
$(331,984) $(329,482)
--------- ---------
Net deferred tax asset..................................... $ 173,167 $ 399,578
========= =========
</TABLE>

F-12
<PAGE> 60

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

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

<TABLE>
<S> <C> <C>
Current deferred tax asset................................. $ 362,687 $ 695,060
Non-current deferred income tax liability.................. (189,520) (295,482)
--------- ---------
Net deferred tax asset....................................... $ 173,167 $ 399,578
========= =========
</TABLE>

Although realization is not assured, management believes it is more likely
than not that all of the net deferred asset will be realized through future
taxable income or taxable loss carrybacks.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Statutory rate................................................ 34.0% 34.0% 34.0%
Change in tax status:
Effect of earnings attributable to S corporation
shareholders............................................. (15.0)
Effect of establishment of deferred taxes................... (19.7)
State income tax (net of federal income tax benefit).......... 1.5
Other......................................................... 1.3 (0.6) 1.2
----- ---- ----
Effective tax rate............................................ 0.6% 33.4% 36.7%
===== ==== ====
</TABLE>

9. COMMITMENTS AND CONTINGENCIES:

Operating Leases

The Company leases its office and returns warehouse space under
noncancelable operating leases which expire through June 30, 1999. Under the
terms of the leases, the Company is responsible for its share of taxes,
insurance and common area charges. At December 31, 1995, future minimum payments
under operating leases were as follows:

<TABLE>
<S> <C>
1996............................................................. $ 568,762
1997............................................................. 428,512
1998............................................................. 412,662
1999............................................................. 208,497
----------
Total.................................................. $1,618,433
==========
</TABLE>

Rental expense totaled $411,373, $472,796 and $607,973 for the years ended
December 31, 1993, 1994 and 1995, respectively.

F-13
<PAGE> 61

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

Obligations Under Capital Leases

The Company leases equipment and software under long-term capital leases.
Future lease payments as of December 31, 1995 were as follows:

<TABLE>
<S> <C>
1996..................................................................... $ 912,737
1997..................................................................... 792,107
1998..................................................................... 629,574
1999..................................................................... 423,368
2000..................................................................... 49,542
----------
Total future minimum lease payments...................................... 2,807,328
Less amount representing interest........................................ (420,217)
----------
Present value of net minimum lease payments.............................. 2,387,111
Less current portion..................................................... (722,558)
----------
Noncurrent portion....................................................... $1,664,553
==========
</TABLE>

Distribution Center

The Company has contracted with a freight company to provide and operate
its primary distribution center under a contract which expires March 31, 1998.
Under this contract, the Company pays a flat rate for each order filled.

Letters of Credit

The Company had unused letters of credit totaling $2,800,000 at March 31,
1996.

10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK:

On October 27, 1995, the Company completed a sale of 612,476 shares of
Series B Preferred Stock for $7,000,000. Each share of Series B Preferred Stock
is entitled to a cumulative annual dividend of $1.142902 per share, payable only
to the extent that dividends are declared to common shareholders. Rights to
accrued but unpaid dividends terminate upon conversion of the Series B Preferred
Stock. Voluntary and involuntary liquidation value of each preferred share is
$11.42902 plus accrued and unpaid dividends. Offering costs related to the sale
were $691,992. In connection with the offering, the Company also issued a
warrant for the purchase of 45,310 shares of common stock exercisable at
$7.61935 per share. At the option of the holder and automatically upon an
underwritten public offering with an aggregate offering price of not less than
$20 million based upon a preoffering Company valuation of at least $100 million,
the shares convert at a rate of three shares of common for two shares of Series
B Preferred Stock. If an underwritten public offering is not completed by
December 31, 1998, the holders of the Series B Preferred Stock have the option
to require the Company to redeem the Series B Preferred Stock at a price equal
to the greater of the fair market value of the Series B Preferred Stock at
December 31, 1998 or $11.42902 per share, as adjusted for stock splits or other
recapitalization events, plus accrued and unpaid dividends payable to holders of
Series B Preferred Stock.

The difference between the issuance price, net of offering costs, of the
Series B Preferred Stock and the redemption value is being accreted periodically
through the redemption date by a charge to retained earnings. The carrying value
of the Series B Preferred Stock has also been increased for accrued but unpaid
dividends.

F-14
<PAGE> 62

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

11. SHAREHOLDERS' EQUITY:

Common Stock

In June 1993, the Company increased the number of authorized shares of
common stock to 25,000,000 and declared a common stock split which had the
effect of increasing the shares issued and outstanding to 2,500,000. In February
1994, the Company declared a common stock split which had the effect of
increasing the shares issued and outstanding to 5,000,000. On January 2, 1996,
the number of authorized shares of common stock was increased to 45,000,000. On
June 3, 1996, the Company declared a common stock split which had the effect of
increasing the shares issued and outstanding to 9,374,999. All share amounts
have been restated to give effect to these stock splits.

Preferred Stock

The Company has 5,000,000 shares of preferred stock authorized. During
1993, the Company issued 625,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") for $2,000,000. The shares have no par value and
have full voting rights. In October 1995, all shares of Series A Convertible
Preferred Stock were converted at a rate of two shares of common stock for one
share of preferred stock. This conversion had the effect of increasing the
common shares issued and outstanding to 9,374,999.

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 employees. Stock options are
granted solely at the discretion of the Board of Directors and are 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 upon the earlier of the seventh anniversary of the date
of grant, six months after an initial public offering, or upon a greater than
75% change 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 750,000 at December 31, 1995 and was increased to 1,650,000
in April 1996.

In addition to options granted under the Plan, the Company has granted
options to outside consultants. Options granted to these individuals for a total
of 37,500 shares were outstanding at December 31, 1995 at option prices of
$0.17 - $5.33 per share.

F-15
<PAGE> 63

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

Stock option activity for 1993, 1994 and 1995 and the three months ended
March 31, 1996 is summarized as follows:

<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-----------------------------
NUMBER OPTION
OF SHARES PRICE RANGE
--------- ---------------
<S> <C> <C>
Balance, January 1, 1993
Granted.................................................. 159,000 $0.17
Canceled................................................. (7,500) 0.17
------- --------------
Balance, December 31, 1993................................. 151,500 0.17
Granted.................................................. 37,500 0.33
Canceled................................................. (67,500) 0.17
------- --------------
Balance, December 31, 1994................................. 121,500 0.17 - 0.33
Granted.................................................. 335,250 4.00 - 5.33
Canceled................................................. (750) 4.00
------- --------------
Balance, December 31, 1995................................. 456,000 0.17 - 5.43
Granted.................................................. 265,500 5.33 - 6.67
Canceled................................................. (42,000) 0.17 - 4.00
------- --------------
Balance, March 31, 1996.................................... 679,500 $0.17 - $6.67
======= ==============
</TABLE>

No options were exercisable during 1993, 1994 or 1995. At December 31,
1995, options for 373,500 shares of common stock were available for grant. At
March 31, 1996, options for 69,000 shares were exercisable upon completion of an
underwritten public offering.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (the "Statement"). The Statement encourages, but does not require,
accounting for stock compensation awards granted to employees based on their
fair value at the date the awards are granted. Companies may elect to continue
to apply current accounting requirements for employee stock compensation awards,
which generally will result in no compensation cost for most fixed stock option
plans, such as the Plan. The expense measurement provisions of the Statement
apply to all equity instruments issued for goods and services provided by
persons other than employees. All companies are required to comply with the
disclosure requirements of the Statement. The Company will adopt the Statement
in the year ending December 31, 1996. The Company expects to continue accounting
for employee stock compensation awards using current accounting requirements.

Employee Stock Purchase Plan

In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which will be effective upon the completion of an underwritten
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.

12. DEFERRED INCOME 401(K) PLAN:

During 1994, the Company began offering a deferred income 401(k) plan to
substantially all full time employees with a minimum of one year of service.
Participants may make tax-deferred contributions of up to

F-16
<PAGE> 64

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

10% of annual compensation subject to certain limitations specified by the
Internal Revenue Code. The Company recognized expense, related to the Company
match, of approximately $10,200 and $24,700 for the years ended December 31,
1994 and 1995, respectively.

13. RELATED PARTY TRANSACTIONS:

Related party transactions for 1993, 1994 and 1995 were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales to licensees............................. $1,178,867 $1,340,836 $1,274,142
Sales to affiliates............................ 18,608 20,355 87,564
Purchases from affiliates...................... 2,150,663 3,510,200 881,857
Amounts payable to affiliates.................. 30,817 291,134 20,986
Accounts receivable from affiliates............ 17,258
</TABLE>

14. ACQUISITIONS:

During the year ended December 31, 1995, $689,720 was expended relating to
acquisitions of additional businesses, which includes amounts related to an
acquisition completed in January 1996.

Certain of the purchase agreements relating to the Company's acquisitions
allow the minority owners to sell their remaining interests to the Company at
the end of three years. The purchase price for the remaining interests is based
on a multiple of the subsidiaries' net income during the three year period.

15. OPERATIONS BY GEOGRAPHIC AREA:

The Company operates primarily in one industry segment, the distribution of
computer hardware and software. Information about the Company's operations in
different geographic areas for 1994 and 1995 is presented below. International
operations in 1993 were nominal. International activities are principally
concentrated in Europe. Corporate assets consist of cash held by the
international subsidiaries.

F-17
<PAGE> 65

MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(Information for the three months ended March 31, 1995 and 1996 is unaudited)

A summary of the Company's operations by geographic area follows:

<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATIONS TOTAL
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Net sales...................... $ 101,920,063 $ 11,535,500 $ $113,455,563
Income from operations......... 787,808 46,508 834,316
Identifiable assets............ $ 25,572,490 $ 3,150,940 $ (3,532,201) $ 25,191,229
Corporate assets............... 513,789
------------
Total assets......... $ 25,705,018
============
YEAR ENDED DECEMBER 31, 1995
Net sales...................... $ 216,261,197 $ 26,325,701 $ $242,586,898
Income from operations......... 5,575,361 549,538 6,124,899
Identifiable assets............ $ 71,358,809 $ 8,734,995 $ (1,916,221) $ 78,177,583
Corporate assets............... 1,214,581
------------
Total assets......... $ 79,392,164
============
</TABLE>

F-18
<PAGE> 66

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Capitalization........................ 12
Dividend Policy....................... 12
Dilution.............................. 13
Selected Consolidated Financial and
Operating Data...................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 22
Management............................ 32
Principal Shareholders................ 40
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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

UNTIL JULY 22, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,200,000 SHARES

MULTIPLE ZONES

INTERNATIONAL, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------

LOGO

FURMAN SELZ

JUNE 27, 1996

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