FULCRUM DIRECT INC, S-1, 1997-03-10

FULCRUM DIRECT INC
S-1, 1997-03-10

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997

REGISTRATION NO. 333-

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

FULCRUM DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 05-0482699 5961
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER)
</TABLE>

4321 FULCRUM WAY NE
RIO RANCHO, NM 87124-8447
TELEPHONE: 505-867-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. MICHAEL G. LEDERMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FULCRUM DIRECT, INC.
4321 FULCRUM WAY NE
RIO RANCHO, NM 87124-8447
TELEPHONE: 505-867-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

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<S> <C>
FREDERICK TANNE, ESQ. JULIA L. DAVIDSON, ESQ.
KIRKLAND & ELLIS COOLEY GODWARD LLP
153 EAST 53RD STREET 5 PALO ALTO SQUARE, 4TH FLOOR
NEW YORK, NEW YORK 10022 PALO ALTO, CA 94306
TELEPHONE: 212-446-4800 TELEPHONE: 415-857-0663
</TABLE>

------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE

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===========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share............ 2,875,000 Shares $12.00 $34,500,000 $10,455
===========================================================================================================================
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(1) Includes 375,000 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT REFERRING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MARCH 10, 1997

PROSPECTUS
- ----------------

2,500,000 SHARES

[LOGO]

FULCRUM DIRECT, INC.

COMMON STOCK

All of the shares of Common Stock offered hereby are being offered by the
Company.

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion relating to the factors to be considered in determining the initial
public offering price. The Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol FLCM.

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

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," COMMENCING ON PAGE 7.

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

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.

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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share......................... $ $ $
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Total(3).......................... $ $ $
=================================================================================================
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $650,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT& QUIST

PAINEWEBBER INCORPORATED

ROBERTSON, STEPHENS & COMPANY

, 1997
<PAGE> 3

[PICTURES TO COME]

The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

After the Stork(R), Playclothes(TM), Little Feet(TM), SunSkins(TM) and
Discount Direct(TM) are trademarks of the Company. Trade names and trademarks of
other companies appearing in this Prospectus are the property of their
respective holders.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors." The Company uses a 52- to
53-week fiscal year ending the Saturday nearest to December 31, and all
references in this Prospectus to "fiscal year" refer to the year ended on that
day. The fiscal years ended December 28, 1996 and December 30, 1995 both include
52 weeks. The fiscal year ended December 31, 1994 refers to the period from
inception on March 16, 1994 through December 31, 1994.

Fulcrum Direct, Inc. ("Fulcrum" or the "Company") is a leading direct
marketer of proprietary children's apparel brands, including After the Stork,
Playclothes, Little Feet, SunSkins and Discount Direct. Fulcrum's strategy is to
continue to rapidly increase its market penetration by building a portfolio of
brands targeting distinct segments of the children's apparel market. Fulcrum
seeks to maximize the potential of each of its brands, introduce new brands and
pursue strategic acquisitions in the fragmented and consolidating children's
apparel catalog market. Fulcrum believes its housefile of 3.0 million names,
including 1.2 million active customers as of January 1997 is the largest among
children's apparel catalog companies in the U.S. Since the Company's inception
in 1994 on a compounded annual basis, catalog circulation has increased by
18.4%, while net revenues have grown by 67.9%.

In 1994, Fulcrum acquired, remerchandised and repositioned the After the
Stork brand, which provides basic clothing made primarily of natural fibers. In
Spring 1995, the Company developed its Sunskins brand of sun protective clothing
and introduced its Discount Direct liquidation catalog. In Fall 1996, the
Company introduced its Little Feet brand, which offers children's shoes and
hosiery. In December 1996, the Company acquired the Playclothes brand from The
Walt Disney Company. Playclothes is designed to appeal to customers who want to
add fashionable outfits to their children's wardrobes. The Company has
remerchandised and repositioned the Playclothes catalog for its first mailing in
January 1997. With the acquisition of Playclothes, the Company expects to more
than double its fiscal 1996 catalog mailings to 35 million in fiscal 1997.

Fulcrum markets its products to well-educated, middle to upper dual-income
parents with children six months to 12 years old. The large population of 51
million children under 13 years old and an increasing population of
time-constrained working mothers have created significant demand for children's
catalogs. The Company believes that children's apparel catalog customers have
been underserved and undermailed in the fragmented children's apparel catalog
market. In 1996, only 2.9% of the $26.9 billion children's apparel purchases
were made by catalog, as compared to 9.6% of women's apparel purchases. Since
women are largely responsible for children's apparel purchases, the Company
believes that the penetration of children's apparel catalog sales should grow to
more closely approximate the percentage of women's apparel catalog purchases.

Fulcrum believes that its large and growing housefile, combined with its
portfolio of leading children's apparel brands and advanced statistical modeling
techniques, have positioned Fulcrum to capitalize on the significant opportunity
in the children's apparel catalog market. Furthermore, the Company believes that
its focus on total customer satisfaction, supported by its significant
investment in facilities, systems and employee training, will enable it to
increase market penetration, attract new customers, build customer loyalty and,
ultimately, increase customer lifetime value.

The predecessor of the Company was incorporated in Delaware in March 1994
and is a successor by asset purchase and merger to a business founded in 1980.
The Company's executive offices are located at 4321 Fulcrum Way NE, Rio Rancho,
New Mexico 87124-8447. Fulcrum's telephone number is (505) 867-7000, and its
order number is (800) 830-6422.

3
<PAGE> 5

THE OFFERING

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Common Stock offered by the Company.......... 2,500,000 shares
Common Stock to be outstanding after the
Offering................................... 8,916,953 shares(1)
Use of proceeds.............................. To repay $3.0 million principal amount of
subordinated debt, plus accrued interest, to
purchase trademarks in connection with certain
of the Company's brands for approximately
$1.75 million, to purchase the Company's
headquarters, call center and distribution
center for approximately $2.5 million in cash,
plus assumed liabilities, to fund potential
acquisitions and for working capital and
general corporate purposes. See "Certain
Relationships and Related Transactions."
Proposed Nasdaq National Market symbol....... FLCM
</TABLE>

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

(1) Based on the number of shares outstanding as of February 28, 1997. Excludes
(i) 765,000 shares of Common Stock reserved for issuance under the Company's
Management Team Equity Plan (the "Option Plan"), of which 404,350 shares
were subject to options outstanding as of February 28, 1997 at a weighted
average exercise price of $5.23 per share and (ii) warrants to purchase
1,126,810 shares of Common Stock outstanding as of February 28, 1997 at a
weighted average exercise price per share of $1.42. See "Capitalization,"
"Management -- Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements.

4
<PAGE> 6

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

<TABLE>
<CAPTION>
PERIOD OF MARCH 16,
1994 (INCEPTION) FISCAL YEAR ENDED
THROUGH ---------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
-------------------- ----------------- -----------------
<S> <C> <C> <C>

CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues..................... $ 11,997 $28,581 $36,457
Gross profit..................... 6,910 15,370 20,891
Income from operations........... 293 1,057 1,181
Net income....................... $ 91 $ 320 $ 614
Net income per common and common
equivalent share(1)(2)......... $ 0.02 $ 0.05 $ 0.00
Weighted average number of common
and common equivalent shares
outstanding.................... 4,382 5,121 7,050
SUPPLEMENTAL FINANCIAL INFORMATION:
Net income per share before
preferred stock dividends...... $ 0.02 $ 0.06 $ 0.08
CONSOLIDATED SELECTED OPERATING DATA:
Total catalogs mailed............ 11,083(3) 14,841 15,544(4)
Net revenues per catalog
($ per catalog)................ $ 1.17(3) $ 1.93 $ 2.35
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1994 JANUARY 12, 1996 JANUARY 1, 1997
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Housefile names(5)............... 710 1,021 2,969
Active customers(6).............. 347 471 1,247(7)
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<CAPTION>
DECEMBER 28, 1996
--------------------------
ACTUAL AS ADJUSTED(8)
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CONSOLIDATED BALANCE SHEET DATA:

Cash and cash equivalents...................................... $ 140 $ 17,815
Working capital................................................ 10,272 27,947
Total assets................................................... 25,903 47,828
Long-term debt, net of current portion......................... 11,754 14,354
Total stockholders' equity..................................... 8,131 32,485
</TABLE>

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

(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income per common and
common equivalent share.

(2) Calculated after deducting Preferred Stock dividends of $60 and $583 for
fiscal 1995 and fiscal 1996, respectively. Prior to December 28, 1996, all
shares of Preferred Stock were called or converted to Common Stock.

(3) Includes catalogs mailed by, and net revenues (unaudited) of, the Company's
predecessor for the period January 1, 1994 through March 15, 1994. Net
revenues during this period were $934.

(4) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.

(5) Housefile names include both historical purchasers and catalog inquirors.

(6) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.

(7) Active customers excluding Playclothes customers would have been 469.

(8) As adjusted to reflect the sale of 2,500 shares of Common Stock offered
hereby (the "Offering") at an assumed initial public offering price of
$11.00 per share and application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."

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

Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Description of Capital
Stock," "Underwriting" and Notes to Consolidated Financial Statements.

5
<PAGE> 7

RECENT DEVELOPMENTS

Playclothes Acquisition. In December 1996, the Company completed the
acquisition of the Playclothes brand name and related customer information (the
"Playclothes Acquisition") from a subsidiary of The Walt Disney Company ("The
Walt Disney Company"). The assets acquired as part of the Playclothes
Acquisition include (i) all proprietary rights in the Playclothes brand name,
(ii) the Playclothes customer list, (iii) a Canadian wholesale and license
agreement, (iv) the right to mail Fulcrum's catalogs to The Disney Catalog's
customers during 1997 and (v) certain immaterial inventory and fixed assets. In
January 1997, the Company mailed its first version of the remerchandised and
repositioned Playclothes catalog, which contained products specifically designed
by the Company's design team. The Company believes that the remerchandised and
repositioned Playclothes catalog is substantially different from the Playclothes
catalog as distributed by the prior owners in that it does not contain any of
the products previously offered. The success of the Playclothes Acquisition will
depend primarily on the Company's ability to develop and market the Playclothes
brand and product line, which will be largely dependent on the Company's ability
to understand the needs and predict the response of the existing customers of
Playclothes, as well as its ability to attract new customers and to integrate
the Playclothes product line into the Company's facilities and distribution
systems. See "Risk Factors -- Development of Playclothes Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Consolidated Financial Statements.

Fulcrum Brands and Fulcrum Properties Purchase. Immediately following
consummation of the Offering, the Company will exercise an option to purchase
from Fulcrum Brands L.P., a Delaware limited partnership ("Brands"), certain of
the brand trademarks used by the Company for aggregate consideration totaling
approximately $1.75 million. A portion of the net proceeds of the Offering will
be utilized to fund such purchase. In addition, subject to the consummation of
the Offering, the Company plans to use a portion of the net proceeds of the
Offering to purchase the headquarters, call center and distribution center owned
by Fulcrum Properties L.P., a Delaware limited partnership ("Properties"), for
aggregate consideration totaling approximately $2.5 million plus the assumption
of $5.6 million of secured debt and related interest rate swaps. See "Use of
Proceeds" and "Certain Relationships and Related Transactions."

6
<PAGE> 8

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as those discussed elsewhere in this
Prospectus.

Development of the Playclothes Acquisition. In December 1996, the Company
completed the Playclothes Acquisition. In January 1997, the Company mailed its
first version of the remerchandised and repositioned Playclothes catalog. The
success of the Playclothes Acquisition will depend primarily on the Company's
ability to develop and market the Playclothes product line, which will be
largely dependent on the Company's ability to understand the needs and predict
the response of the existing customers of Playclothes, as well as its ability to
attract new customers and to integrate the Playclothes product line into the
Company's facilities and distribution systems. The Company made a significant
investment during the third and fourth quarters of 1996 to expand its call
center and distribution center, and hired additional employees in advance of
publishing and mailing its first Playclothes catalog. There can be no assurance
that the Company can develop and market a successful Playclothes catalog,
attract new customers or successfully integrate the Playclothes brand into its
current operations. Any failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.

Seasonal and Quarterly Fluctuations. The Company's business is subject to
seasonal fluctuations. Given the Company's historical seasonality, management
anticipates that the majority of the Company's net revenues will be derived from
the Fall and Holiday seasons and a smaller portion will be derived from the
Spring and Summer seasons. As a result, the Company expects its sales and
results of operations generally to be lower in the first and second quarters
than in the third and fourth quarters of each fiscal year, which include the
back-to-school and holiday purchases. The Company's quarterly results may
fluctuate as a result of numerous factors, including the timing, quantity and
cost of catalog mailings, the response rates to such mailings, the timing of
merchandise deliveries, market acceptance of the Company's merchandise
(including new merchandise categories or products introduced), the mix, pricing
and presentation of products offered and sold, the hiring and training of
additional personnel, the timing of inventory writedowns, other operating costs
and factors beyond the Company's control, such as general economic conditions
and actions of competitors. Accordingly, the results of operations in any
quarter will not necessarily be indicative of the results that may be achieved
for a full fiscal year or any future quarter. There can be no assurance the
Company will maintain profitability in any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Fixed Cost Structure. The Company believes that its success depends
predominately on the success of its catalog operations. Catalog mailings entail
substantial paper, postage, merchandise acquisition and human resource costs,
including costs associated with catalog development and increased inventories,
virtually all of which are incurred prior to the mailing of each catalog. As a
result, the Company is not able to adjust the costs being incurred in connection
with a particular mailing to reflect the actual performance of the catalog. In
addition, the Company continues to expand its facilities and operations based on
planned growth. Response rates to the Company's mailings, and sales generated by
such mailings, can be affected by factors such as customer preferences, economic
conditions, the timing and mix of catalog mailings, the proportion of prospect
mailing, and changes in the merchandise mix, some of which may be outside the
Company's control. The Company has historically experienced fluctuations in the
response rates to its catalog mailings and expects to continue to experience
such fluctuations in the future. Any inability of the Company to accurately
target the appropriate segment of its market or to achieve adequate response
rates could result in lower sales and lower margins. If, for any reason, the
Company were to experience a significant shortfall in anticipated revenue from a
particular mailing or growth does not occur as planned, the Company's business,
financial condition and results of operations

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<PAGE> 9

would be disproportionately and adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Fashion Trends and Industry Risks. The Company believes that its success
depends, in part, on the Company's ability to anticipate the fashion tastes of
its customers and to offer merchandise that appeals to their preferences on a
timely and affordable basis. The fashion tastes of the Company's customers are
expected to change frequently, and the failure of the Company to anticipate,
identify or react to changes in styles, trends or brand preferences of its
customers could lead to, among other things, excess inventories and price
markdowns. In addition, merchandising misjudgments could adversely affect the
Company's image with its customers. Any of these factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Merchandising and Product Design."

Merchandise Returns. As part of its customer service commitment, the
Company maintains an unconditional merchandise return policy which allows
customers to return any merchandise, virtually at any time and for any reason,
regardless of merchantable condition. The Company makes allowances in its
financial statements for anticipated merchandise returns based on historical
return rates. Because the Company's allowances are based on historical return
rates, there can be no assurance that the introduction of new merchandise in
existing catalogs, the introduction of new catalogs, changes in the merchandise
mix, the introduction of catalogs in international markets, introduction of new
distribution channels or other factors, will not cause actual returns to exceed
return allowances. Prior to March 1997, Japanese customers who wished to return
merchandise had to ship such merchandise to the Company in New Mexico. Effective
March 1997, Japanese customers who wish to return merchandise may ship such
merchandise to the Company's third-party return center in Tokyo, Japan. The
Company believes that this will result in an increased merchandise return rate
for Japanese sales. Any significant increase in merchandise returns or
merchandise returns that exceed the Company's allowance could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Ability to Manage and Sustain Growth; Possible Future Acquisitions. The
recent growth in the Company's revenue and operating income has resulted largely
from increases in the volume of catalogs the Company mails and the number of
products included in its catalogs, as well as increases in response rates and
the introduction and acquisitions of new brands. This growth has placed
significant demands on the Company's management, administrative, operational and
financial resources and has required the Company to devote substantial
management and financial resources to building its infrastructure. The continued
growth of the Company, if any, is dependent in large part on its ability to
acquire new customers at a reasonable cost. There can be no assurance that the
Company will continue to grow or effectively manage growth, if any. The Company
may, when and if the opportunity arises, acquire other businesses involved in
activities or having service and product lines that are compatible with the
Company's business, although the Company has no understanding, agreement or
arrangement to make any such acquisitions currently. Any acquisition
opportunities will require the devotion of substantial management resources and,
potentially, capital expenditures. Furthermore, any such acquisitions will be
subject to the many risks inherent in the integration of new business
enterprises into the Company's existing operations. There can be no assurance
that any acquisition opportunities will be realized within the time frames and
budgets contemplated or at all. If any acquisitions are not realized within the
planned time frames and budgets, it could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that any acquisitions completed will be successfully integrated
into the Company's operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Catalog Distribution. The Company attempts to deliver its catalogs to its
customers at timely seasonal intervals. The distribution of such catalogs is
performed by the Company's third-party printers. As a result, the timely
distribution of such catalogs may be affected by factors beyond the Company's
control. In the past, the Company has experienced disruptions in the mailing of
catalogs and minor postal delays, which resulted in revenue shortfalls. The
Company may realize such delays and disruptions in the future. Failure of the
Company to deliver catalogs on a timely basis could affect

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<PAGE> 10

the demand for the Company's products and could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Order Fulfillment. The Company's ability to provide exceptional customer
service and successfully fulfill orders depends, to a large extent, on the
efficient and uninterrupted operation of its call center, distribution center,
management information systems and on the timely performance of third parties,
including shipping companies and the U.S. Postal Service. In early 1997, the
Company changed its provider of shipping services from United Parcel Service to
the U.S. Postal Service. There can be no assurance that the Company will receive
an adequate level of service from the U.S. Postal Service. Any material
disruption or slowdown in the Company's order processing or fulfillment systems
resulting from telephone down times, electrical outages, mechanical problems,
human error or accidents, strikes, work slowdowns, fire, natural disasters or
comparable events could cause delays in the Company's ability to receive and
distribute orders and could cause orders to be lost or to be shipped or
delivered late. As a result, customers may cancel orders or refuse to receive
goods due to late shipments, which could result in a reduction of net revenues
and could mean increased administrative and shipping costs as well as increased
inventory. Disruption in the Company's ability to fulfill its orders on a timely
basis could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Customer Service and
Fulfillment."

Fluctuations in Postage and Paper Expenses. While the Company has
historically passed on to customers the costs of overnight and ground delivery
of merchandise, it has not, and does not intend to, pass on the costs of catalog
mailings and paper to its customers. Material increases in paper or catalog
delivery costs or the inability to pass on the costs of overnight and ground
delivery of merchandise could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Suppliers and Raw Materials."

Dependence on Key Personnel. The Company believes that its success depends
upon the efforts and abilities of its senior management team including Michael
G. Lederman, the Company's Chairman and Chief Executive Officer, and Scott A.
Budoff, the Company's President and Chief Operating Officer. The loss of one or
more of its key employees could have a material adverse effect on the Company.
Several of the Company's key employees have working relationships with Messrs.
Lederman and Budoff that predate their tenure with the Company. The departure of
either of Mr. Lederman or Mr. Budoff could result in the departure of additional
key employees. The Company has entered into employment agreements with Messrs.
Lederman and Budoff which provide for, among other things, the Company to be a
beneficiary of $1.0 million of life insurance benefits with respect to each of
Messrs. Lederman and Budoff. See "Management -- Employment Agreements." In
addition, the direct marketing and apparel experience of a significant number of
the Company's senior management personnel is limited to their experience with
the Company. The Company's future success will depend on the ability of the
Company's management to both retain key managers and to employ additional
qualified senior management. There can be no assurance that the Company will be
successful in attracting or retaining qualified senior management.

Competition. The children's apparel market is highly competitive with few
barriers to entry, and the Company expects competition in this market to
increase. The Company's competitors include other children's apparel catalogers,
as well as traditional apparel manufacturers and retailers of children's
clothing, such brands as The Gap (including its Baby Gap, Gap Kids and Old Navy
brands), Gymboree, L.L. Bean, Lands' End and OshKosh B'Gosh. Many of the
Company's competitors are larger, have longer operating histories, substantially
greater financial, distribution and marketing resources and significantly
greater name recognition than the Company. Increased competition could result in
pricing pressures, unexpected marketing expenditures and loss of market share,
and could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to maintain or increase market share in the future.

The Company expects that the direct marketing industry will be affected by
technological changes in distribution and marketing methods, such as on-line
catalogs, retail kiosks and Internet shopping. The Company believes its success
will depend, in part, on its ability to adapt to new technologies and

9
<PAGE> 11

to respond to competitors' actions in these areas. Adapting to new technologies
could require significant capital expenditures by the Company. There can be no
assurance that the Company will remain competitive in response to technological
changes. See "Business -- Competition."

Dependence on Management Information Systems. The Company depends on its
management information systems to process orders, provide rapid response to
customer inquiries, manage inventory and accounts receivable collections,
purchase and efficiently sell and ship products on a timely basis and maintain
cost-efficient operations. The Company has recently replaced and upgraded its
systems. It is common for system defects, shutdowns, slowdowns or other problems
to occur in connection with conversion or otherwise, to new data-processing
equipment. While the Company has taken a number of precautions against certain
events that could disrupt the operation of its management information systems,
including in connection with the systems upgrades, there can be no assurance
that the Company will not experience systems failures or interruptions, which
could have a material adverse effect on its business, financial condition and
results of operations. The Company also depends on statistical models developed
to measure the effectiveness of its marketing programs and on its employees who
are knowledgeable about such models. The loss of employees knowledgeable about
the Company's statistical models or a disruption in the Company's direct
marketing operations could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Information Systems."

Reliance on Unaffiliated Manufacturers. The Company currently relies on
approximately 50 unaffiliated manufacturers to produce substantially all of its
products, with no such manufacturer producing more than 5.0% of the Company's
products in fiscal 1996. The Company has no long-term contracts with its
manufacturing sources and competes with other companies for production
facilities and import quota capacity. In the event any of the Company's key
manufacturers were unable or unwilling to continue to manufacture the Company's
products, the Company would have to rely on other current manufacturing sources
or identify and qualify new unaffiliated manufacturers. In such event, there can
be no assurance that the Company would be able to qualify such manufacturers for
existing or new products in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate supplies of
its products from its current or alternative sources could materially and
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that these manufacturers will continue to
produce products that are consistent with the Company's standards. In this
regard, the Company has occasionally received, and may in the future continue to
receive, shipments of product from unaffiliated manufacturers that fail to
conform to the Company's quality control standards. In such event, unless the
Company is able to obtain replacement products in a timely manner, the Company
risks the loss of revenue resulting from the sale of such products and related
increased administrative and shipping costs. The failure of any key unaffiliated
manufacturer to supply products that conform to the Company's standards could
materially and adversely affect the Company's business, financial condition and
results of operations and its reputation in the marketplace. Although the
Company believes that it has good relationships with its principal manufacturing
sources, the Company's future success is substantially dependent upon its
ability to maintain such relationships. If the Company experiences significant
increased demand, which cannot be assured, or if an existing unaffiliated
manufacturer needs to be replaced, the Company will need to significantly expand
its manufacturing capacity, both from current and new manufacturing sources.
There can be no assurance that such additional manufacturing capacity will be
available when required on terms that are acceptable to the Company. See
"Business -- Manufacturing" and "-- Suppliers and Raw Materials."

International Operations. The Company recently introduced its catalogs to
the Japanese market. Net revenues from Japan accounted for 10.1% and 24.7% of
net revenues in fiscal 1995 and fiscal 1996, respectively. The Company intends
to increase its catalog mailings in Japan and may consider entering other
international markets as well. However, the Company expects net revenues from
Japan as a percentage of net revenues to fluctuate from period to period in the
future. The Company's business is subject to risks generally associated with
doing business abroad, such as foreign government regula-

10
<PAGE> 12

tions, economic conditions, currency fluctuations, duties and taxes, political
unrest and disruptions or delays in shipments. These factors, among others,
could influence the Company's ability to sell its merchandise in international
markets. If any such factors were to render the conduct of the business in a
particular country undesirable or impracticable, there could be a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the majority of the Company's sales are derived from
the U.S., and most of the Company's current information on buying patterns and
customer preferences are based on its customers in the U.S. As a result,
predicting foreign consumer demand may be more difficult for the Company than
predicting U.S. consumer preferences. There can be no assurance that the
Company's merchandise or marketing efforts will be successful in foreign
markets. Further, fluctuations causing the relative value of the U.S. dollar to
increase relative to foreign currency could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Growth Strategy."

International Suppliers. During fiscal 1996, the Company purchased 33.6%
of its merchandise directly from international vendors, and the Company expects
that it will continue to purchase merchandise from international suppliers in
the future. Accordingly, the Company's operations are subject to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, export duties, quotas, work stoppages and, in certain parts of the
world, political instability.

Accounting for Customer Acquisition. The direct costs of customer
acquisition programs, which consist primarily of costs related to customer name
acquisition (excluding product advertising costs), are deferred and amortized
over a period of up to five years as part of customer acquisition costs. The
Company establishes amortization rates for these capitalized assets based on the
anticipated attrition rate of its customers. Rates of amortization are compared
from time to time with actual attrition rates in order to assess whether the
amortization rates appropriately match the direct costs of customer acquisition
with the related sales. If the Company were to experience a material increase in
customer attrition, it could be required to accelerate the rate of amortization
of capitalized customer acquisition expenditures. An increase in attrition rates
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Government Regulation. The Company's direct mail operations are subject to
regulation by the U.S. Postal Service, the Federal Trade Commission and various
state, local and private consumer protection and other regulatory authorities.
In general, these regulations govern the manner in which orders may be
solicited, the form and content of advertisements, information which must be
provided to prospective customers, the time within which orders must be filled,
obligations to customers if orders are not shipped within a specified period of
time and the time within which refunds must be paid if the ordered merchandise
is unavailable or returned. From time to time, the Company has modified its
methods of doing business and its marketing operations in response to such
regulation. To date, such changes have not had an adverse effect on the
Company's business, financial condition or results of operations. However, there
can be no assurance that future regulatory requirements or actions will not do
so in the future. See "Business -- Environmental Issues."

Dependence on Intellectual Property. There can be no assurance that the
actions taken by the Company to establish and protect its trademarks and other
proprietary rights will prevent imitation of its products and services or
infringement of its intellectual property rights by others. In addition, there
can be no assurance that others will not claim infringement by the Company or
seek to block sales of the Company's products as violative of their trademark
and other proprietary rights. See "Business -- Fulcrum's Portfolio of Brands"
and "Business -- Intellectual Property."

List Development and Maintenance. The Company mails catalogs to names in
its proprietary housefile and to potential customers whose names are obtained
from purchased and rented lists. In fiscal 1996, 50.8% of the Company's catalogs
were mailed to prospective customers and 49.2% were mailed to existing
customers. The Company anticipates that it will not materially increase the
percentage of prospect names mailed. Names derived from purchased or rented
lists have historically generated lower response rates than names derived from
word-of-mouth requests. Accordingly, the Company anticipates that overall
response rates would decline if it increased its use of purchased and

11
<PAGE> 13

rented lists relative to its use of names in its housefile. However, the Company
must also constantly update its mailing lists to identify prospective new
customers. Failure to maintain an appropriate balance between mailing to
prospective customers and maintaining response rates could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Marketing."

State Sales and Use Tax. Many states impose taxes on the sale or use of
products and the sale of certain services within the taxing state's borders. To
the extent a seller of taxable products or services is subject to the
jurisdiction of a taxing state, the state may impose a sales tax directly on the
seller or may impose a duty on the seller to collect a sales or use tax from the
seller's customers. A seller is generally considered subject to the jurisdiction
of a taxing state for sales or use tax purposes when the seller has an in-state
presence that is beyond de minimis. An in-state presence can include
solicitation of orders for sales in the taxing state either in-person or through
an employee or other agent. The Company currently collects and pays sales tax
only with respect to shipments to the state of New Mexico. The Company has
structured its operations so as to minimize the likelihood that it has more than
a de minimis physical presence in any state other than New Mexico. However, if a
state taxing authority determines that the Company has established more than a
de minimis physical presence in that particular state, the Company could be
obligated to collect a sales or use tax (or pay a sales tax in states that
impose a tax on the seller) on some sales of its services and products. Should
the Company be found liable by a state taxing authority for unpaid historical
sales and use taxes, such liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations. From time
to time, legislation has been introduced in the U.S. Congress that, if enacted
into law, would impose a state sales or use tax collection obligation on
out-of-state mail-order companies such as the Company. Enactment of any such
legislation, or other changes in the basis on which sales and use taxes are
applied, could have a material adverse effect on the Company's business,
financial condition and results of operations.

Control by Principal Stockholders. Based on shares of Common Stock
outstanding as of February 28, 1997, upon completion of the Offering Michael G.
Lederman, the Chairman and Chief Executive Officer of the Company, will
indirectly control 60.6% of the outstanding Common Stock, including the right to
vote and dispose of such shares (63.2% assuming exercise of options and warrants
to purchase Common Stock), and as a result, will control the election of
directors of the Company and the outcome of all issues requiring a majority vote
of stockholders of the Company. Based on shares of Common Stock outstanding as
of February 28, 1997, upon completion of the Offering all officers and directors
as a group will directly or indirectly control 69.4% of the Common Stock (72.9%
assuming exercise of options and warrants to purchase Common Stock), and as a
result, will control all issues submitted to a vote of the stockholders of the
Company. The foregoing, may make it more difficult for a third party to acquire,
and may discourage acquisition bids for, the Company and could limit the price
that certain investors might be willing to pay for shares of Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."

Anti-Takeover Provisions. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation and By-laws may make it more difficult for
a third party to acquire, or may discourage acquisition bids for, the Company
and could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. These provisions, among other
things, (i) provide for a classified board of directors, (ii) require the
affirmative vote of the holders of at least 66 2/3% of the shares to remove a
director, and even then, only for cause (as defined in the Amended and Restated
Certificate of Incorporation), (iii) require the affirmative vote of the holders
of at least 66 2/3% of the shares to amend or repeal certain provisions of the
Amended and Restated Certificate of Incorporation, (iv) require the affirmative
vote of the holders of at least 66 2/3% of the shares or two-thirds of the
members of the board of directors (the "Board") to amend or repeal the By-laws
of the Company, (v) prohibit stockholders from taking action by written consent
in lieu of a meeting, (vi) provide that meetings of stockholders may be called
only pursuant to a resolution adopted by a majority of the Board or by the
Chairman of the Board and (vii) establish an advance notice procedure before
stockholder proposals may be brought before an annual meeting of the

12
<PAGE> 14

stockholders of the Company, including proposed nominations of persons for
election to the Board. In addition, the rights of holders of Common Stock will
be subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future without stockholder approval
and that may be senior to the rights of the holders of Common Stock. Under
certain conditions, Section 203 of the General Corporation Law of the State of
Delaware could prohibit the Company from engaging in a "business combination"
with an "interested stockholder" (in general, a stockholder owning 15% or more
of the Company's outstanding voting stock) for a period of three years. See
"Description of Capital Stock."

Absence of Prior Public Market; Possible Volatility of Stock Price. There
has been no public market for the Common Stock prior to the Offering, and there
can be no assurance an active public market for the Common Stock will develop or
continue after the Offering. The initial public offering price for the Common
Stock will be determined by negotiations among the Company and the
representatives of the Underwriters (the "Representatives"). There can be no
assurance the market price of the Common Stock will not decline below the
initial public offering price. The Company believes factors such as
announcements by the Company and its competitors, quarterly variations in
results of operations, changes in economic market conditions, changes in
analysts' estimates and fluctuations in the stock market could cause the market
price of the Common Stock to fluctuate significantly. Further, the stock market
has historically experienced volatility that sometimes has been unrelated to
operating performance. In addition, future sales of Common Stock by the
Company's existing stockholders following the completion of the Offering and the
expiration of the 180-day lock-up period applicable to all existing stockholders
of the Company could have an adverse effect on the market price of the Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."

Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have 8,916,953 shares of Common Stock outstanding. The 2,500,000
shares of Common Stock sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless held by an "affiliate" of the Company, as that
term is defined under Rule 144 of the Securities Act, which shares will be
subject to certain resale limitations of Rule 144. In addition, certain existing
stockholders, including holders of restricted Common Stock, have registration
rights with respect to Common Stock held by them. In connection with the
Offering, existing stockholders holding in the aggregate 6,416,953 shares (or
72.0% of total outstanding shares) have agreed not to dispose of any shares for
a period of 180 days from the date of this Prospectus, subject to certain
limited exceptions, and the Company has agreed not to dispose of any shares
(other than shares sold by the Company in the Offering or issuances by the
Company of certain employee stock options and shares pursuant to exercise
thereof) for a period of 180 days from the date of this Prospectus, without the
prior written consent of Hambrecht & Quist LLC. Upon expiration of such 180-day
period, 6,410,885 of these shares of Common Stock (and options to purchase 3,252
shares) will be eligible for sale subject, in certain cases, to certain volume
and other limitations of Rule 144 under the Securities Act applicable to
"affiliates" of the Company. In addition, the Company intends to file a
registration statement on Form S-8 under the Securities Act to register the sale
of the 765,000 shares of Common Stock reserved for issuance under the Management
Team Equity Plan (as defined). As a result, any shares issued upon exercise of
stock options granted under such plans will be available, subject to limitations
on sales by affiliates under Rule 144, for resale in the public market after the
effective date of such registration statement, subject to applicable lock-up
arrangements. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price of the Common Stock from time to time.
The sale of a substantial number of shares held by the existing stockholders,
whether pursuant to a subsequent public offering or otherwise, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities. See "Shares Eligible for
Future Sale" and "Underwriting."

Dilution. Investors in the Offering will incur an immediate dilution in
net tangible book value per share of Common Stock of $8.12 (based on an assumed
initial public offering price of $11.00). See "Dilution."

13
<PAGE> 15

USE OF PROCEEDS

The net proceeds to be received from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial offering price of $11.00 per
share are estimated to be $24,925,000 ($28,761,250 if the Underwriters'
over-allotment option is exercised in full.) The Company intends to use the net
proceeds (i) to repay $3.0 million principal amount of subordinated debt, plus
accrued interest, (ii) to purchase trademarks in connection with certain of the
Company's brands for approximately $1.75 million, (iii) to purchase the
Company's headquarters, call center and distribution center for approximately
$2.5 million in cash plus assumed liabilities, (iv) to fund potential
acquisitions and (v) for working capital and general corporate purposes.
Approximately $3.2 million of the net proceeds will be paid to certain officers
and directors of the Company, and entities affiliated with them, in connection
with the purchase by the Company of the trademarks and its headquarters, call
center and distribution center. See "Certain Relationships and Related
Transactions." The Company currently has no understandings, agreements or
arrangements to make acquisitions. Pending the application of the net proceeds
as described above, such net proceeds will be placed in short-term
interest-bearing investment grade securities.

DIVIDEND POLICY

Since its inception, the Company has not declared or paid any cash or other
dividends on its Common Stock and does not expect to pay dividends for the
foreseeable future. The Company anticipates that for the foreseeable future,
earnings, if any, will be reinvested in the business. The Company's existing
loan agreements with its lenders generally restrict the Company's ability to pay
dividends or make other distributions on its Common Stock. The Company
anticipates that any future credit facility or other indebtedness that the
Company may enter into or incur may contain a similar restriction. The
declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors of the Company (the "Board"). Any future
determination to pay dividends will depend on the Company's results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed relevant by the Board.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company (i) on an actual basis and (ii) as adjusted to give effect to the sale
of the 2,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share and the application of the estimated
proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 28, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion.................................. $ 11,754 $14,354
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 200,000 shares
authorized;
none issued or outstanding....................................... -- --
Common Stock, par value $0.01 per share; 10,000,000 shares
authorized;
6,416,953 shares issued and outstanding, actual; 8,916,953 shares
issued and outstanding, as adjusted(1)........................... 64 89
Additional paid-in capital......................................... 7,685 32,585
Retained earnings.................................................. 382 (189)
-------- --------
Total stockholders' equity.................................... 8,137 32,485
======== ========
Total capitalization........................................ $ 19,885 $46,839
======== ========
</TABLE>

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

(1) Based on the number of shares outstanding as of February 28, 1997. Excludes
(i) 765,000 shares of Common Stock reserved for issuance under the Option
Plan, of which 404,350 shares were subject to options outstanding as of
February 28, 1997 at a weighted average exercise price of $5.23 per share
and (ii) warrants to purchase 1,126,810 shares of Common Stock outstanding
as of February 28, 1997 at a weighted average exercise price per share of
$1.42. See "Management -- Stock Option Plan" and Note 5 of Notes to
Consolidated Financial Statements.

15
<PAGE> 17

DILUTION

As of December 28, 1996, the Company had a net tangible book value of
approximately $750,000, or $0.12 per share of common stock. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in the net tangible book value
after December 28, 1996, other than to give effect to the receipt by the Company
of the net proceeds from the sale of the 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per share,
the pro forma net tangible book value of the Company as of December 28, 1996
would have been approximately $25,675,000, or $2.88 per share. This represents
an immediate increase in net tangible book value of $2.76 per share to the
existing stockholders and an immediate dilution of $8.12 per share to new
investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 11.00
Net tangible book value per share before the Offering... $ 0.12
Increase per share attributable to new investors........ 2.76
--------
Pro forma net tangible book value per share after the
Offering................................................... 2.88
Dilution per share to new investors.......................... $ 8.12
</TABLE>

The following table summarizes, on a pro forma basis as of December 28,
1996, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 6,410,885 71.9% $ 7,278,736 20.9% $ 1.14
New investors............. 2,500,000 28.1 27,500,000 79.1 11.00
--------- ----- ---------- -----
Total........... 8,910,885 100.0% $34,778,736 100.0%
========= ===== ========== =====
</TABLE>

The foregoing computations assume no exercise of stock options and warrants
after December 28, 1996. As of December 28, 1996, there were outstanding stock
options and warrants to purchase an aggregate of 1,502,060 shares of Common
Stock at a weighted average exercise price of approximately $2.32 per share. If
all of the foregoing options had been exercised at December 28, 1996, the net
tangible book value per share of Common Stock at such date would have been $0.53
and the pro forma net tangible book value per share after giving effect to the
Offering would have been $2.80, representing an immediate dilution to new
investors of $8.20 per share and an immediate increase in net tangible book
value of $2.27 per share attributable to the Offering.

16
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below have been derived
from the financial statements of the Company set forth elsewhere in this
Prospectus (except Consolidated Selected Operating Data), which have been
prepared in accordance with generally accepted accounting principles. The
following selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus. The data at December 30, 1995 and December 28, 1996 and for each of
the fiscal periods ended December 31, 1994, December 30, 1995 and December 28,
1996 are derived from the Company's Consolidated Financial Statements which have
been audited by Arthur Andersen LLP, independent public accountants, which
Consolidated Financial Statements are included elsewhere herein.

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH -------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $11,997 $28,581 $36,457
Gross profit...................................... 6,910 15,370 20,891
Income from operations............................ 293 1,057 1,181
Net income........................................ $ 91 $ 320 $ 614
Net income per common and common
equivalent share(1)(2)......................... $ 0.02 $ 0.05 $ --
Weighted average number of common and
common equivalent shares
outstanding.................................... 4,382 5,121 7,050
SUPPLEMENTAL FINANCIAL DATA:
Net income per share before preferred
stock dividends................................ $ 0.02 $ 0.06 $ 0.08
CONSOLIDATED SELECTED OPERATING DATA:
Total catalogs mailed............................. 11,083(3) 14,841 15,544(4)
Net revenues per catalog.......................... $ 1.17(3) $ 1.93 $ 2.35
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1994 JANUARY 12, 1996 JANUARY 1, 1997
-------------------- ---------------- -----------------
<S> <C> <C> <C>
Housefile names(5)........................... 710 1,021 2,969
Active customers(6).......................... 347 471 1,247(7)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
-------------------- ----------------- -----------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 112 $ 196 $ 140
Working capital............................ 900 3,227 10,272
Total assets............................... 5,023 14,860 25,903
Long-term debt, net of current
portion................................. 39 702 11,754
Total stockholders' equity................. 2,190 5,817 8,131
</TABLE>

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

(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income per share.

(3) Includes catalogs mailed by, and net revenues (unaudited) of, the Company's
predecessor for the period January 1, 1994 through March 15, 1994. Net
revenues during this period were $934.

(4) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.

(5) Housefile names include both historical purchasers and catalog inquirors.

(6) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.

(7) Active customers excluding Playclothes customers would have been 469.

17
<PAGE> 19

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

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors," as well as those discussed elsewhere in this
Prospectus.

OVERVIEW

Fulcrum is a leading direct marketer of proprietary children's apparel
brands, including After the Stork, Playclothes, Little Feet, SunSkins and
Discount Direct. The Company's innovative marketing techniques and focus on
total customer satisfaction have resulted in an increase in net revenues, both
domestically and internationally, in each year since its inception.

In March 1994, Fulcrum acquired the After the Stork brand and, by fiscal
year-end 1994, returned the catalog to profitability. Growth and profitability
were achieved by remerchandising and repositioning the catalog to target
customers seeking high quality products priced to provide recognizable value.
The Company hired a new designer in November 1994 to develop proprietary branded
merchandise and began taking steps to broaden merchandise mix and improve
quality. The effects of these changes were first reflected in the Company's
Fall/Winter 1995 catalog. Simultaneously with remerchandising and repositioning
After the Stork, the Company began employing sophisticated housefile regression
modeling techniques to improve its housefile and prospect response rates and
increased its investment in customer prospecting and reactivation. As a result
of these efforts and the Playclothes Acquisition, from December 31, 1994 through
January 1, 1997, the Company's housefile grew from 709,771 names to 3.0 million
names, and the number of active customers (customers who have made a purchase
from one of the Company's brands within the preceding 24-month period) grew from
347,042 to 1.2 million.

In Spring 1995, Fulcrum developed its SunSkins line of sun protective
clothing and developed other revenue enhancing programs, such as integrated
marketing programs with well-known consumer products companies whereby Fulcrum
sells advertising space in its catalogs. In Summer 1995, Fulcrum introduced the
After the Stork brand in Japan. In Spring 1996, Fulcrum introduced Discount
Direct, a catalog liquidation vehicle for each of its brands, and purchased the
OshKosh B'Gosh catalog active customer list, which consisted of 92,750 customers
from the discontinued OshKosh B'Gosh mail order catalog. In Fall 1996, Fulcrum
introduced its Little Feet brand in the U.S. and Japan. The Company believes
Little Feet is the only national footwear catalog exclusively for children.
Depending on market performance, the Company may expand circulation in the
second half of fiscal 1997.

Fulcrum signed an agreement with The Walt Disney Company in June 1996 to
acquire the Playclothes brand name and related customer information effective
December 31, 1996. During the second half of 1996, Fulcrum began to
remerchandise and reposition Playclothes. The Company increased its design
staff, refreshed and updated the planned merchandise assortment and expanded its
call center and distribution center to support the integration of Playclothes.
In January 1997, the Company mailed its first issue of Playclothes in the U.S.
and Japan. Under Playclothes' previous owner, historical net revenues related to
the Playclothes brand for 1994, 1995 and 1996 were $36.6 million, $33.3 million
and $28.8 million, respectively. Fulcrum acquired certain specific assets rather
than an ongoing business, and any future revenues will be largely dependent on
the Company's ability to understand the needs and predict the response of the
existing customers of Playclothes, as well as its ability to attract new
customers and to integrate the Playclothes product line into the Company's

18
<PAGE> 20

facilities and distribution systems. As a result, historical net revenues
generated by the Playclothes catalog may not be indicative of future net
revenues.

The Company plans to continue to grow its portfolio of brands by expanding
its brands' presence in existing markets and developing new markets and
channels. Net revenues from Japan accounted for 10.1% and 24.7% of net revenues
in fiscal 1995 and fiscal 1996, respectively. However, the Company expects net
revenues from Japan as a percentage of net revenues to fluctuate from period to
period in the future. The Company believes that its Japanese customers want a
Japanese language catalog that presents a branded offering reflecting American
styles. The Company is firmly committed to growing its presence in Japan by
customizing its branded offering for the Japanese customer. Such measures
include partnering with a call and return center in Tokyo, Japan in the first
half of 1997, increasing the amount of Japanese text in its catalogs with a goal
of mailing a fully translated catalog during the second half of 1997, increasing
its advertising efforts to further build brand awareness in Japan and developing
products specifically for introduction to the Japanese market in 1998. The
Company believes that the opening of a third-party Japanese return center will
result in higher merchandise return rates for Japanese sales in future periods,
and the Company expects to adjust its reserves with respect to Japanese returns
to conform to historical U.S. return rates. However, any increase beyond those
historically experienced in the U.S. could have a material adverse effect on the
Company's business, financial condition and results of operations.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items
from the Company's statement of operations expressed as a percentage of net
revenues. Any trends reflected by the following table may not be indicative of
future results.

<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
------------------------------------------------
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH -----------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Net revenues....................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 42.4 46.2 42.7
------ ------ ------
Gross profit....................................... 57.6 53.8 57.3

Selling, general and administrative expenses....... 55.2 50.1 54.1
------ ------ ------
Income from operations............................. 2.4 3.7 3.2

Other income....................................... 0.5 0.6 2.4
Interest expense................................... (0.5) (2.7) (2.2)
Other expense...................................... (0.9) -- (0.7)
------ ------ ------

Income before income taxes......................... 1.5 1.6 2.7
Income tax expenses................................ 0.7 0.5 1.0
------ ------ ------
Net income......................................... 0.8 1.1 1.7
====== ====== ======
Net income applicable to common stockholders....... 0.8% 0.9% 0.1%
====== ====== ======
</TABLE>

COMPARISON OF FISCAL YEARS 1995 AND 1996

Net revenues. Net revenues increased 27.6%, from $28.6 million in fiscal
1995 to $36.5 million in fiscal 1996. Net revenues increased primarily due to
increases in average order size and response rates. Average order size increased
9.3%, which was primarily attributable to changes in merchandise mix, select
price increases as well as to an increase in the proportion of Japanese orders
(which historically have had a higher average order size than domestic orders).
Response rates increased 11.4%, which

19
<PAGE> 21

was primarily attributable to the use of housefile regression modeling
techniques to refine mailings, as well as to an increase in Japanese circulation
(which historically has had higher response rates than domestic circulation).
Notably, while net revenues increased by 27.6%, circulation increased by only
5.4% from 14.8 million in fiscal 1995 to 15.5 million in fiscal 1996, increasing
the net revenue per catalog by 21.8% from $1.93 to $2.35, respectively. Net
revenues were also positively affected by the introduction of the Company's
Discount Direct and Little Feet catalogs in Spring and Fall 1996, respectively.

Gross margin. Gross margin, which is net of merchandise cost, inbound
freight, and design, development, manufacturing and production costs, among
other things, increased from 53.8% in fiscal 1995 to 57.3% in fiscal 1996. This
increase was due primarily to the Company's ability to spread certain fixed
costs over a larger revenue base. Additionally, by bringing the management of
the manufacturing process in-house in fiscal 1995, the Company has over time
been able to reduce merchandise costs, improve inventory controls, improve
product quality (which reduces return rates) and reduce inbound freight rates.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 37.8%, from $14.3 million in fiscal 1995 to
$19.7 million in fiscal 1996. Selling, general and administrative expenses as a
percentage of net revenues increased from 50.1% in fiscal 1995 to 54.1% in
fiscal 1996. This increase was due to the Company's decision to invest in
infrastructure in order to take advantage of its opportunities for future growth
in new markets and channels, as well as to integrate new brands. As a result in
fiscal 1995 and fiscal 1996, the Company made a substantial investment in
infrastructure. This investment in infrastructure has positioned the Company to
grow modularly. The Company believes that this investment will reduce
significant disruption to the business in the foreseeable future. Operating
expenses also increased in fiscal 1996 as the Company added management personnel
and infrastructure to certain design, development, merchandising, manufacturing
and production departments in anticipation of the integration of the Playclothes
brand. The Playclothes brand did not begin to generate revenues for the Company
until January 1997. Also contributing to increased operating expenses as a
percentage of net revenues in fiscal 1996 were certain external events. See
"-- Selected Quarterly Results of Operations."

Other income. Other income includes income from training grants and, in
fiscal 1996, the realization of a gain on the disposition of marketable
securities. Other income increased from $177,000 in fiscal 1995 to $866,000 in
fiscal 1996. This increase was primarily attributable to a full year's
utilization of the State of New Mexico's Department of Education In-Plant Job
Training Program and a one-time gain attributable to the sale of marketable
securities.

Interest expense. Interest expense increased 7.6%, from $762,000 in fiscal
1995 to $820,000 in fiscal 1996, primarily as a result of the issuance of $10.0
million principal amount of subordinated debt in October 1996 and increases in
the Company's credit facilities and capitalized lease obligations, partially
offset by reduced interest rates on the Company's revolving credit facility.

Other expense. Other expenses consist primarily of relocation expenses.
Other expenses increased from $1,000 in fiscal 1995 to $253,000 in fiscal 1996.

COMPARISON OF MARCH 16, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994 AND FISCAL
YEAR 1995

Net revenues. Net revenues increased 138.3%, from $12.0 million in fiscal
1994 to $28.6 million in fiscal 1995. Net revenues increased primarily due to
increases in average order size, response rates and circulation. Average order
size increased 43.7% from the calendar year 1994, which was primarily
attributable to changes in product mix and select price increases. Response
rates increased 14.6% from the calendar year 1994, which was primarily
attributable to the use of housefile regression modeling techniques to refine
mailing. Circulation increased 33.3% from 11.1 million catalogs in calendar 1994
to 14.8 million catalogs in fiscal 1995, which was attributable to the Company's
investments in new customer lists and increased mailings to existing customers.
The Company increased circulation based on its belief that its housefile had
previously been under mailed. Net revenues were also positively

20
<PAGE> 22

affected by the introduction of the Company's SunSkins brand and the
introduction of catalog mailings in Japan in Spring and Summer 1995,
respectively.

Gross margin. Gross margin decreased from 57.6% in fiscal 1994 to 53.8% in
fiscal 1995. This decrease was primarily attributable to increased investment in
infrastructure made by the Company in connection with its decision to bring the
management of the manufacturing process in-house, and to clearance programs
undertaken in an effort to improve inventory mix. The decrease was partially
offset by the remerchandising and repositioning of the After the Stork
Fall/Winter catalog, which reduced merchandise costs and return rates.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 116.7%, from $6.6 million in fiscal 1994 to
$14.3 million in fiscal 1995. Selling, general and administrative expenses as a
percentage of net revenues declined from 55.2% in fiscal 1994 to 50.1% in fiscal
1995. This decrease primarily reflected the Company's ability to spread certain
fixed costs over a larger revenue base, partially offset by higher customer
service and distribution costs attributed to the Company's commitment to improve
customer satisfaction following the acquisition of After the Stork.
Additionally, the Company began to make substantial investments in new systems
and facilities in fiscal 1995, of which the full year impact was not recognized
until fiscal 1996.

Other income. Other income increased from $52,000 in fiscal 1994 to
$177,000 in fiscal 1995. This increase was partially attributable to dividend
income from marketable securities acquired in fiscal 1995 and the Company's
commencement of the State of New Mexico In-Plant Job Training Program.

Interest expense. Interest expense increased from $63,000 in fiscal 1994
to $762,000 in fiscal 1995 primarily as a result of increased outstanding debt
balances.

Other expense. Other expense decreased from $112,000 in fiscal 1994 to
$1,000 in fiscal 1995.

21
<PAGE> 23

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited statements of operations
data for the eight quarters ended December 28, 1996, as well as such data
expressed as a percentage of the Company's net revenues for the periods
indicated. This data has been derived from unaudited financial statements that,
in the opinion of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for fair presentation of such
information when read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 28,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................. $3,995 $5,411 $ 7,370 $11,805 $7,157 $9,658 $ 7,223 $12,419
Cost of goods sold............ 1,962 2,734 3,121 5,394 3,383 4,065 3,154 4,964
----- ----- ----- ------ ----- ----- ----- ------
Gross profit.................. 2,033 2,677 4,249 6,411 3,774 5,593 4,069 7,455
Selling, general and
administrative expenses..... 2,379 2,541 3,897 5,496 3,865 5,904 3,859 6,082
----- ----- ----- ------ ----- ----- ----- ------
Income from operations........ (346) 136 352 915 (91) (311) 210 1,373

Other income.................. 1 14 20 142 116 513 129 108
Interest expense.............. (50) (117) (342) (253) (231) (181) (150) (258)
Other expense................. -- -- -- (1) (3) (250) 3 (3)
----- ----- ----- ------ ----- ----- ----- ------

Income before income taxes.... (395) 33 30 803 (209) (229) 192 1,220
Income tax
benefit/(expense)........... 127 (11) (10) (257) 89 67 (56) (460)
----- ----- ----- ------ ----- ----- ----- ------
Net income.................... $ (268) $ 22 $ 20 $ 346 $ (120) $ (162) $ 136 $ 760
===== ===== ===== ====== ===== ===== ===== ======
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0% 100.0 %
Cost of goods sold............. 49.1 50.5 42.3 45.7 47.3 42.1 43.7 40.0
----- ----- ----- ------ ----- ----- ----- ------
Gross profit................... 50.9 49.5 57.7 54.3 52.7 57.9 56.3 60.0
Selling, general and
administrative expenses...... 59.5 47.0 52.9 46.6 54.0 61.1 53.4 49.0
----- ----- ----- ------ ----- ----- ----- ------
Income from operations......... (8.6) 2.5 4.8 7.7 (1.3) (3.2) 2.9 11.0
Other income................... 0.0 0.3 0.3 1.2 1.6 5.3 1.8 0.9
Interest expense............... (1.3) (2.2) (4.6) (2.1) (3.2) (1.9) (2.1) (2.1)
Other expense.................. -- -- -- -- -- (2.6) -- --
----- ----- ----- ------ ----- ----- ----- ------
Income before income taxes..... (9.9) 0.6 0.5 6.8 (2.7) (2.4) 2.6 9.8
Income tax benefit/(expense)... 3.2 -- -- (2.2) 1.2 0.7 (0.8) (3.7)
----- ----- ----- ------ ----- ----- ----- ------
Net income..................... (6.7)% 0.6% 0.5% 4.6 % (1.7)% (1.7)% 1.8% 6.1 %
===== ===== ===== ====== ===== ===== ===== ======
</TABLE>

The Company's business is subject to seasonal fluctuations. Given the
Company's historical results, management anticipates that the majority of the
Company's net revenues will be derived from the Fall and Holiday seasons. As a
result, the Company expects its sales and results of operations generally to be
lower in the first and second quarters than in the third and fourth quarters of
each fiscal year, which include back-to-school and holiday purchases. The
Company believes that this seasonality will continue in the future. The
Company's quarterly results may fluctuate as a result of numerous factors,
including the timing, quantity and cost of catalog mailings, the response rates
to such mailings, the timing of merchandise deliveries, the merchandise mix,
pricing and presentation of products offered and sold, market acceptance of the
Company's merchandise (including new merchandise categories or products
introduced), the hiring and training of additional personnel, the timing of
inventory writedowns, the incurrence of other operating costs and factors beyond
the Company's control, such as general economic conditions and actions of
competitors. Accordingly, results of

22
<PAGE> 24

operations in any quarter will not necessarily be indicative of the results that
may be achieved for a full fiscal year or any future quarters. The Company
maintains a policy of deferring the recognition of costs of mailings and
amortizing those costs over the seasons in which associated revenues will be
recognized. Results of operations are affected not only by the seasonality of
the Company's net revenues, but also by seasonal variations in product mix, the
fixed portion of the Company's operating expenses and the building of additional
infrastructure in anticipation of the Company's growth plans.

The relatively constant net revenues in the third and fourth quarters of
fiscal 1996 over the comparable quarters in fiscal 1995, were the result of a
number of factors, including (i) the retail slowdown in July and the shift in
summer vacations to August caused by the Olympics, (ii) the "wear now" consumer
trend in the U.S. resulting in the delay of back-to-school purchases from August
until after Labor Day, (iii) an unexpected mailing delay in November caused by
production problems at one of the Company's third-party printers, coupled with a
post office delay caused by the U.S. presidential elections and (iv) the shorter
Holiday season between Thanksgiving and Christmas in fiscal 1996 as compared to
fiscal 1995.

The Company capitalizes a portion of selling, general and administrative
expenses including: catalog development, printing, paper and catalog mailing
expenses; and amortizes these expenses in relation to catalog revenues from each
catalog mailing. The Company's selling, general, and administrative expenses are
also affected by toll-free telephone expense and outbound shipping costs which
are also related to revenues. As a result, the variable portion of selling,
general and administrative expense has and may continue to fluctuate in
conjunction with net revenues.

LIQUIDITY AND CAPITAL RESOURCES

Fulcrum has historically funded its operations through a combination of
funds generated from operations, bank credit facilities and the private sales of
debt and equity securities. Working capital requirements generally precede the
realization of net revenues. The Company draws on its working capital line to
produce its catalogs and increase inventory levels in anticipation of future
demand and to help ensure faster fulfillment of customer orders. A portion of
the Company's working capital needs for inventory and services are met by
increased accounts payable, extended payment terms and the establishment of
trade credit arrangements.

Net cash used by operating activities was $3.8 million in fiscal 1995 and
was $2.6 million during fiscal 1996. This decrease was primarily due to
increased cash flow generated by operations partially offset by increased
investment in infrastructure and customer name acquisition.

Purchases of assets were approximately $6.5 million in fiscal 1996. These
expenditures were primarily related to investments in the Company's
headquarters, call center, distribution center and information systems. The
Company plans to make capital expenditures of approximately $5.0 million during
fiscal 1997.

In October 1996, Fulcrum privately placed $10.0 million in subordinated
debt (the "J.H. Whitney Note") and $2.0 million in Common Stock with the Whitney
Subordinated Debt Fund and the Whitney Equity Fund, respectively, to fund
working capital. The J.H. Whitney Note bears interest at a rate of 10.101% and
has a seven-year balloon payment. However, $3.0 million is required to be repaid
within five days of an initial public offering, and such prepayment is therefore
specified as a use of proceeds of the Offering. The Company will incur an
extraordinary loss of approximately $200,000 in connection with debt
extinguishment in the period in which such amount is repaid. See Note 3 of Notes
to Consolidated Financial Statements.

In December 1996, the Company entered into an agreement with SunWest Bank
of Albuquerque, now a subsidiary of NationsBank, to expand its credit facility
effective January 1, 1997. The $10.0 million credit facility bears interest at a
rate of 0.5% over the bank's corporate base rate or 3.1% above LIBOR, at the
Company's election. The Company has elected to use the bank's corporate base
rate plus 0.5%, through June 30, 1997, which was 8.75% as of February 28, 1997.
This credit facility also

23
<PAGE> 25

includes the right to borrow up to $2 million for the purpose of issuing standby
and commercial letters of credit and is secured by the assets of the Company.
The line of credit expires May 1998. As of December 28, 1996, the Company had
outstanding $1.7 million under this line of credit.

The Company believes that its existing lines of credit, available cash
(including the net proceeds of the Offering) and cash flow from operations will
be sufficient to support its capital requirements through at least fiscal 1998.
The Company may be required to seek additional sources of funds in the future,
and there can be no assurance that such funds will be available on satisfactory
terms or at all. Failure to obtain such financing on a timely basis could have a
material adverse effect the Company's business, financial condition and results
of operations.

NET OPERATING LOSSES

For tax purposes, customer acquisition expenditures are expensed as
incurred, thereby allowing the Company to defer tax liabilities. As of December
28, 1996, on a tax basis, the Company had net operating losses of $2.5 million,
which may be used to reduce the Company's future income taxes. The Internal
Revenue Service has issued a ruling, which the Company is currently appealing.
This ruling would have the effect of reducing the Company's net operating losses
by up to approximately $500,000. Until such time as the net operating losses are
fully utilized, a higher percentage of cash generated from operations will be
available than would be available if the Company were unable to use the net
operating losses to reduce its taxable income. See Note 8 of Notes to
Consolidated Financial Statements.

INFLATION

Results of operations have not been significantly affected by inflation
since inception. The Company, in the normal course of business, has been able to
offset the impact of increased costs through operating efficiencies and selected
price increases.

24
<PAGE> 26

BUSINESS

OVERVIEW

Fulcrum is a leading direct marketer of proprietary children's apparel
brands, including After the Stork, Playclothes, Little Feet, SunSkins and
Discount Direct. The Company's strategy is to capitalize on the significant
growth opportunity in the children's apparel catalog market by building a
portfolio of distinct brands. Fulcrum markets its portfolio of brands primarily
through full-color catalogs developed by the Company to target well-educated,
middle to upper dual-income households with children from six months to 12 years
old. The Company seeks to differentiate itself from other retail and catalog
companies by understanding the needs of its target customers, promising a
superior shopping experience, offering a broad assortment of merchandise to
complete all wardrobing needs and delivering total customer satisfaction. After
the Stork offers a broad assortment of basic clothing primarily made of natural
fibers. Playclothes offers fashionable outfits that add something special to a
child's wardrobe. Little Feet, which the Company believes is the only national
footwear catalog for children, offers customers a broad selection of mid-priced,
basic and fashion footwear. The Company's SunSkins brand of clothing, designed
to protect against the sun's harmful UV rays, is marketed through its catalogs,
other direct marketing channels and wholesale channels. In addition, Discount
Direct is a direct mail liquidation vehicle for each of the Company's brands.

In Spring 1994, the Company acquired After the Stork, which it believes is
the oldest children's apparel catalog, originally published in 1980. In Fall
1994, the Company began to remerchandise and reposition the After the Stork
brand. In Spring 1995, the Company developed its line of SunSkins clothing, and
in Fall 1996, it introduced its Little Feet brand. In Summer 1996, the Company
agreed to acquire the Playclothes brand name and related customer list and
focused immediately on remerchandising and repositioning the catalog. The
Company mailed the first edition of its Playclothes catalog in January 1997.

Net revenues grew 27.6% from $28.6 million in fiscal 1995, the Company's
first full fiscal year of operations, to $36.5 million in fiscal 1996. With the
acquisition of the Playclothes brand, which generated net revenues of $28.8
million in 1996 under its previous owner, the Company believes that its
housefile is the largest among children's apparel catalog companies in the U.S.,
with 3.0 million names as of January 1, 1997, including more than 1.2 million
active customers that have purchased from one of the Company's brands during the
last 24-months. The Company mailed 15.5 million catalogs in fiscal 1996 and
expects to mail more than 35 million catalogs in fiscal 1997.

THE CHILDREN'S APPAREL CATALOG MARKET

As members of the Baby Boom generation have reached their peak
child-bearing years, their families have created a demographic bulge commonly
referred to as the Echo Boom. According to the U.S. Commerce Department Bureau
of the Census (the "U.S. Census Bureau"), the Echo Boom has caused the
population of children under 13 years old to grow from 42.2 million in 1975 to
an estimated 51.0 million in 1996, an increase of nearly 21%. This demographic
group is expected to grow slightly as the U.S. Census Bureau estimates the
annual birth rates will remain constant at approximately 3.9 million new births
each year until at least 2010.

The U.S. Census Bureau has reported a significant increase in dual-income
families. In 1994, 61.7% of married women with children under age six and 75.5%
of married women with children aged six to 13, worked (as compared with 36.7%
and 51.8%, respectively, in 1975). The trend of more births to time-constrained
working mothers has resulted in increased demand for children's direct marketing
companies that can provide convenient shopping at home or work, 24 hours a day,
365 days a year.

According to NPD Research, Inc. ("NPD"), in 1996, women's apparel catalog
purchases represented 9.6% of total women's apparel purchases, or $8.2 billion,
while U.S. children's apparel catalog purchases represented only 2.9% of total
children's apparel purchases of $26.9 billion. Since women are largely
responsible for children's apparel purchase decisions, the Company believes
that, as more women seek to take advantage of the benefits offered by children's
apparel catalog shopping for

25
<PAGE> 27

children's apparel, the penetration rate for children's apparel catalog sales
should grow to more closely approximate the percentage of women's apparel
catalog purchases.

BUSINESS STRATEGY

The Company believes that the children's apparel catalog customer has been
underserved and undermailed due to the limited circulation of children's apparel
catalogs in the fragmented children's apparel catalog market. The Company's
strategy is to capitalize on this significant growth opportunity by (i)
understanding its target customer, (ii) using its substantial understanding of
the target customer to build a portfolio of proprietary children's apparel
brands that promise a superior product and shopping experience, (iii)
consistently delivering exceptional customer service and fulfillment, (iv)
continuously measuring and analyzing the performance of its branded offerings
and (v) refining and improving the product and shopping experience. The Company
believes that if its customers are totally and consistently satisfied with their
shopping experience, that market penetration, customer lifetime value and the
intrinsic value of each of the Company's brands will be increased. The following
diagram illustrates the Fulcrum Formula for building brand value:

LOGO

Understand the Customer. The Company believes that by understanding its
target customer, it can provide the most relevant branded offering to improve
response rates, average order size and purchase frequency. The Company regularly
refines its understanding of the target customer's needs and expectations by
using sophisticated statistical modeling and segmentation techniques to develop
composite profiles of its target customers. The Company talks with and solicits
feedback from its customers and performs detailed market research, focus group
studies and surveys. By thoroughly understanding its customers' needs and
expectations, the Company strives to continuously improve its branded offerings,
increase the efficiency of its mailings through targeted marketing and identify
new product and market opportunities for brand extension and new brand
development.

Promise a Superior Product and Shopping Experience. The Company believes
that its targeted branded offerings create in the mind of the customer the
expectation of a superior product and shopping experience. The Company targets
specific segments of the children's apparel market with distinctive branded
offerings. Each brand has its own voice that is communicated to the target
customer through all elements of the catalog, including merchandise selection,
price points, product quality, layout, lifestyle photography, catalog production
quality, copy and service policies.

26
<PAGE> 28

Deliver Exceptional Customer Service and Fulfillment. The Company believes
that exceeding customer expectations is the key to increasing customer loyalty,
attracting new customers and increasing customer lifetime value. The Company
strives to provide each customer with prompt, knowledgeable and courteous
customer service, and rapid order fulfillment. The Company's employee training
programs, call center, telephone and management information systems, as well as
its order fulfillment and unconditional return policy, are all designed to carry
out this strategy through adherence to strict operating procedures. All
employees initially undergo an extensive three-month training program and
receive ongoing training. The Company believes that continuous training at all
levels throughout the Company significantly improves the overall shopping
experience and reduces operating costs.

Measure and Analyze Performance. The Company devotes substantial time and
resources to data collection and measurement and analysis of performance. The
Company uses advanced statistical models to evaluate customer feedback, product
performance, sales trends, customer demand, performance histories, current
inventory positions, return rates and the projected success of each item. The
Company also conducts ongoing analyses of its competitors. These analyses are
used to make mailing and merchandise decisions and to test new products and
brand extensions.

Refine and Improve the Product and Shopping Experience. The Company
believes that continuous refinement of the shopping experience is required in
order to provide the highest level of customer satisfaction. Based on the
Company's ongoing measurement and analysis of performance, it regularly refines
its catalog mailing plans and merchandise mix.

GROWTH STRATEGY

Fulcrum is committed to capitalizing on the substantial growth
opportunities in the children's apparel catalog market by maximizing the
potential of its portfolio of brands, introducing new brands and pursuing
strategic acquisitions. Key components of the Company's growth strategy include
the following:

Mail Smarter. The Company pursues an aggressive mailing strategy based on
housefile regression modeling techniques to increase response rates from each
segment of its housefile. The Company intends to continue its customer name
acquisition and cross-mailing programs, which include the rental of other
catalog customer lists. The Company's overall mailing strategy is to increase
circulation while maintaining a positive contribution to operating results from
each segment mailed.

Expand and Refine the Merchandise Offer. The Company believes there is an
opportunity to generate additional sales from existing customers and higher
average transaction sizes by adding new merchandise categories and refining
merchandise assortments. The Company regularly evaluates new merchandise
categories in an effort to increase the appeal of its merchandise offerings. For
example, the Company has expanded its existing categories of basics, boys
clothing and swimwear and has added new categories of counter-seasonal items,
outerwear and special event wear.

Target Selected International Markets. The Company seeks to continue to
develop selected international markets. For example, the Company introduced in
Japan its After the Stork brand in 1995, its Little Feet brand in 1996 and its
Playclothes brand in 1997. Net revenues from Japanese sales increased from $2.9
million in fiscal 1995 to $9.0 million in fiscal 1996, representing 10.1% and
24.7% of net revenues in fiscal 1995 and fiscal 1996, respectively. The Company
also offers its catalogs through internationally published catalogs-of-catalogs
in an effort to identify other viable markets. The Company expects to continue
selectively testing additional international markets in fiscal 1997 and 1998.

Develop New Distribution Channels. The Company believes that by extending
certain brands and product lines to select wholesale channels in the U.S.,
Fulcrum can increase its brand visibility and overall product distribution by
exposing non-catalog shoppers to its branded products. The Company believes that
by exposing potential customers to its products in a retail setting, such
customers will be

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more receptive to the Company's branded offerings presented in its catalogs. In
Spring 1997, Fulcrum has begun to build its wholesale business by introducing
its SunSkins brand in specialty retail shops and select department stores. The
Company is also beginning to establish wholesale distribution in Canada and
Japan with selected partners. Additionally, the Company plans to develop the
Internet as an important vehicle for brand building and eventually expects it to
be an important product distribution channel.

Introduce New Catalog Brands. The Company intends to periodically develop
new catalog brands that feature merchandise concepts designed to further
penetrate distinct segments of the children's apparel catalog market and other
markets that can be served efficiently by the Company's substantial housefile.
The Company's goal is to create new catalog brands that leverage information
gathered by the Company to capture distinct and increasingly discrete segments
of the market. For example, the Company identified an opportunity for a branded
specialty catalog offering children's shoes and hosiery, which resulted in the
introduction of Little Feet in Fall 1996. The Company is currently evaluating
other potential merchandise categories and related customer segments that have
the potential to support new catalog brand introductions.

Invest Proactively in Infrastructure. The Company believes that its
scalable, state-of-the-art facilities and systems provide it with significant
operating leverage, which is a key to the continued success of the Company.
Fulcrum's $8.5 million state-of-the-art headquarters, call center and
distribution center in Rio Rancho, New Mexico, was designed to be scaleable and
expand as the Company grows. In addition, during fiscal 1995 and fiscal 1996 the
Company invested an aggregate of $7.8 million in infrastructure, including
computer hardware and software upgrades, a new telephone system and operating
equipment.

Pursue Strategic Acquisitions. The Company regularly evaluates strategic
acquisitions as the fragmented children's apparel market continues to
consolidate. The Company's goal is to pursue strategic acquisitions that
leverage management, marketing and operating assets to increase net revenues and
improve operating results over time. For example, in December 1996, the Company
acquired the Playclothes brand from The Walt Disney Company. Playclothes has
enabled the Company to enter a more fashion-oriented segment of the children's
apparel market, which the Company did not previously serve.

FULCRUM'S PORTFOLIO OF BRANDS

Fulcrum primarily markets its After the Stork, Playclothes, Little Feet and
Discount Direct brands through full-color catalogs. Additionally, Fulcrum
markets its SunSkins brand of sun protective clothing in its catalogs as well as
through other direct marketing and wholesale channels. The Company's brands
target well-educated, middle to upper, dual-income households with children from
six months to 12 years old. A critical element of the Company's merchandising
strategy is its dynamic product assortment and one-stop shopping focus. The
Company's brands cover a broad range of children's apparel merchandise
categories, including sweaters, shirts, pants, dresses, jumpers, underwear,
hosiery, shoes, sleepwear, swimwear, outerwear, accessories, personal care
products, costumes and bedding.

Each of the Company's brands has a dedicated creative team made up of the
Company's in-house team of merchants, marketers, catalog creative staff and
graphic artists, and independent creative staff for art direction, photography
and copy-writing. The Company's team approach helps to ensure a fresh
presentation of its products from season to season, while at the same time
maintaining the consistent and distinctive voice of each brand. The following is
a brief overview of each of the Company's brands:

After the Stork, which was first published in 1980, presents a high
quality, value-priced, branded offering to customers interested in purchasing
basic clothing made primarily of natural fibers. After the Stork products are
durable, most are 100% cotton, many are unisex and are generally available in
broad color assortments across a broad range of traditional merchandise
categories. The Company's demographic surveys indicate that the typical After
the Stork customer is a college-educated 25 to 44 year old married female with a
household income over $50,000 and children six months to 12 years old. Most

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After the Stork customers reside in urban areas, and in rural regions where
retail choices are limited. The Company mailed 15.2 million After the Stork
catalogs in fiscal 1996 in 17 different editions.

Playclothes, which was first published in 1991 by The Walt Disney Company,
presents a high quality, value-priced, branded offering of outfits designed to
appeal to customers who are looking to add fashionable clothing to their child's
wardrobe. Boys and girls apparel is clearly differentiated, and the merchandise
selection is directed more toward girls than boys. The Company believes that the
novelty look of much of the Playclothes merchandise is especially appealing to
specialty store and boutique shoppers. The Company's demographic surveys
indicate that the typical Playclothes customer is a 25 to 40 year old married
female residing in suburban areas with a household income over $40,000 and
children two to 12 years old. Currently, there is relatively little duplication
between the After the Stork and Playclothes housefiles (less than 25% overlap at
the end of fiscal 1996), which provides the Company with a large cross-mailing
opportunity. The Walt Disney Company, the prior owner of Playclothes, mailed
18.2 million Playclothes catalogs in 1996. The Company mailed its first edition
of the Playclothes catalog in January 1997 to prospective customers in the U.S.
and Japan. The Company's first Playclothes catalog featured a remerchandised and
repositioned offering. The Company plans to mail 10 additional editions in
fiscal 1997.

Little Feet, which the Company believes is the only national footwear
catalog exclusively for children, was first published in Fall 1996. Little Feet
offers a broad, mid-priced selection of basic and fashion styles, plus a small
number of coordinating hosiery, outerwear and apparel items. The Company's
demographic surveys indicate that the typical Little Feet customer is a 25 to 44
year old married female with children six months to 12 years old. The Company
believes that Little Feet appeals to both After the Stork and Playclothes
customers, as well as to the customers of other children's catalogs. Following
an introductory mailing of 384,713 catalogs in fiscal 1996, the Company plans to
continue preliminary mailings of Little Feet in the first half of fiscal 1997.
Depending on market acceptance, the Company may expand circulation in the second
half of fiscal 1997.

The SunSkins line, made from Solarweave fabric, blocks in excess of 97% of
the sun's harmful UV rays. The SunSkins line was developed by the Company in
1995 in recognition of the consumers' desire to protect their families from the
sun. With skin cancer rates on the rise, federal agencies have issued strong
warnings to parents to protect their children from even routine daily exposure
to the sun. The Company markets SunSkins through its own catalogs, as well as
through other direct marketing channels and select U.S. and international
wholesale channels.

Discount Direct, the Company's "Warehouse Sale by Mail," was first
published in Spring 1996 and serves as a direct mail liquidation vehicle for
each of its brands. The Company also liquidates merchandise through clearance
versions of its other branded catalogs. Discount Direct offers the Company's
customers reduced prices on discontinued merchandise and ranges in format from a
full catalog to inserts in its full-price catalogs and in packages shipped to
customers. The Company mails Discount Direct as it determines appropriate to
manage inventory.

THE COMPANY'S CULTURE

Fulcrum's culture focuses on delivering total customer satisfaction, a goal
shared by all employees at all levels of the Company. The Company believes that
its most important asset is its people. The Company also believes that it is
management's role to give responsibility to front-line employees, provide them
with appropriate training and support, and thereby empower them to serve the
Company's customers and achieve excellence. Only through employing the highest
quality people, who care about and want to serve its customers, can the Company
provide a superior shopping experience and build the value of its brands. The
Company's goal is to instill in each employee a strong sense of each
individual's contribution to the customer's total satisfaction. Cross-training
within and

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outside of each department is encouraged by management and provided broadly
throughout the Company. The Company believes that its culture is best stated in
its corporate belief statement:

WE BELIEVE . . .

OUR CUSTOMERS MUST BE SATISFIED, TOTALLY!

EACH OF OUR FELLOW EMPLOYEES MUST BE TREATED WITH RESPECT
We are dedicated to fostering a work environment where team harmony,
individual growth opportunities and the dignity of every employee are paramount
concerns.

WE MUST ACHIEVE EXCELLENCE
We are dedicated to being the best we can be.
We will constantly redefine excellence and strive to achieve it.
We will not settle for less.

THE QUALITY OF OUR FUTURE DEPENDS ON CONTINUED INVESTMENT IN OUR BUSINESS
We are dedicated to profitable growth.
To create opportunities for our Company, we must invest ourselves in the
business every day.

OUR SUPPLIERS ARE OUR PARTNERS
We are dedicated to fostering mutually beneficial relationships with our
suppliers.
We understand that our futures are linked.

WE MUST SUPPORT OUR COMMUNITIES
We are dedicated to sharing our talents and resources
to improve the communities in which we live and work.

MARKETING

A principal component of the Company's success is its ability to build and
maintain its housefile in order to obtain new customers, retain existing
customers and build brand recognition. The following paragraphs describe the
Company's principal marketing activities.

"Mining" the Housefile. The Company's marketing efforts are focused on its
housefile of 3.0 million customers as of January 1, 1997, with over 1.2 million
active customers who have purchased from one of the Company's brands in the last
24 months. The Company believes its housefile is the largest of any children's
apparel catalog company. Fulcrum's housefile contains detailed information on
each customer, including purchase history, and demographic, geographic and
psychographic data. This data is used in the Company's proprietary housefile
regression model to rank each customer segment's likelihood of responding to a
given offer, with the goal of maximizing the potential of each catalog mailing
plan. The Company believes that its advanced statistical modeling and customer
segmentation techniques used in preparing future mailings, provide it with a
competitive advantage. The Company believes that these techniques will allow it
to continue to improve response rates and net revenues per catalog mailed.

Obtaining New Customers. The Company's primary method for obtaining new
customers is to mail catalogs to segmented lists that are determined likely to
provide a positive contribution to operating results. The Company obtains the
names of prospective customers through a variety of sources, including (i)
customer lists of other children's product catalogs, (ii) compiled and
participatory databases, (iii) customers lists of adult apparel or other
relevant lifestyle catalogs and (iv) subscribers of children and family-related
magazines. The use of these outside sources for names of prospective customers
has been and is expected to continue to be a key component of the Company's
efforts to attract new customers. Names derived from purchased or rented lists
have historically generated lower response rates than names derived from
word-of-mouth requests. Accordingly, the Company anticipates that overall
response rates would decline if the Company increased its

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use of purchased and rented lists relative to its use of names in its housefile.
However, the Company must also constantly update its mailing lists to identify
new prospective customers.

The Company obtains prospect names either by renting them or by exchanging
its own names for prospect names on a market value basis. The Company believes
it has excellent list exchange relationships. During fiscal 1996, Fulcrum mailed
15.5 million catalogs, of which 50.8% were mailed to prospective customers, and
49.2% were mailed to existing customers. In addition, by acquiring the
Playclothes brand, Fulcrum gained the right to model and mail to The Disney
Catalog's customer list without additional cost during fiscal 1997.

Customer Retention Programs. Fulcrum currently offers customers who have
met certain purchase levels a specialized customer service program called the
"Preferred Shopper Program." Services provided under the Preferred Shopper
Program include a personal shopper, personalized follow-up letters and telephone
calls and special promotions. The Company believes that this program, coupled
with the Company's other customer service strategies, promotes greater customer
loyalty and higher retention rates. The Company intends to continue to test new
customer retention programs and strategies.

Brand Building Efforts. The Company promotes its brands by providing
editorial material to key print media, conducting ongoing direct media
communications, providing the media with brand-specific press kits, conducting
special promotional programs, and participating in new media, such as the
Internet and direct response space advertising. The Company publishes Stork
News, a newsletter that provides information, services and promotional
opportunities to customers and activities and contests for their children.
Fulcrum is also testing its After the Stork web site as a means of building
brand awareness.

Integrated Marketing Programs. Another aspect of the Company's marketing
strategy is to sell advertising space in its catalogs to well-known consumer
product brands. These programs bring advertising and merchandising together in a
single format, providing the Company with advertising revenue while at the same
time closely associating the Company's brands with well-known consumer product
brands, such as All, BeechNut, Cheer, Dannon and Snuggle.

MERCHANDISING AND PRODUCT DESIGN

The merchandising process starts with a detailed analysis of the Company's
sales history and establishment of projected sales levels and gross margin
targets. Fulcrum's marketing and merchandising groups work closely together to
forecast gross merchandise dollars by merchandise category. The merchandise and
design teams develop merchandise lines by using a variety of sources and
techniques to gather fashion and product information including, reviewing
competitor catalogs, visiting retail stores, surveying trend magazines,
evaluating fabric lines and attending industry shows to determine trends in
color and pattern. Direction for new products is also derived from analyses of
prior season's merchandise offerings (including both catalog and non-catalog
competitors) and customer and merchandiser suggestions. From these sources,
trends and color themes are developed, fabric and prints are selected and
products are designed.

The Company's brands consist of a broad assortment of children's apparel
merchandise categories, including sweaters, shirts, pants, dresses, jumpers,
underwear, hosiery, shoes, sleepwear, swimwear, outerwear, accessories, personal
care products, costumes and bedding. By providing a broad merchandise
assortment, and by regularly adding fresh merchandise and refining existing
merchandise categories, the Company's brands seek to promote additional
purchases to increase average order size and retention rates by promptly
responding to customers' changing preferences. The Company designs most of its
own products, but also purchases branded products from other companies for
inclusion in its catalogs. The Company may increase the page counts of its
catalogs to accommodate the introduction of new, related or similar merchandise
and merchandise categories.

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The Company regularly collects product improvement and merchandise mix
ideas from its customers. Customer service representatives solicit feedback and
comments from the Company's customers on customer reaction forms that are
distributed to senior management, marketing, merchandising and production for
review. The Company uses sophisticated models to evaluate customer feedback,
product performance, sales trends, customer demand, performance histories,
current inventory positions, return rates and the projected success of each
item. These analyses are used to make merchandise placement and promotion
decisions, as well as to plan the introduction and testing of new products.
Consequently, the Company's merchandise mix is analyzed and refined throughout
each season as new items are introduced, remerchandised and ultimately replaced
if they do not meet the Company's performance standards.

INVENTORY MANAGEMENT

The Company currently offers a broad assortment of children's apparel that
is carefully controlled through sophisticated inventory management techniques.
As of February 28, 1997, the Company's inventory management system contained
over 21,000 SKUs. Sales estimates are determined by merchandise category which
starts the purchasing process. The purchasing plan is forecasted down to the SKU
level using the Company's forecasting system, which takes into account
historical seasonality models, market expectations, product and raw material
lead times and overall category assortment. The Company believes that its
centralized inventory, which is managed by its integrated warehouse management
system, provides the Company with the ability to maintain high levels of
inventory accuracy and to continuously measure and analyze inventory levels and
compare them against demand. This helps the Company to lower inventory levels,
increase turns, maintain high fill rates, reduce markdowns and increase GMROI
(gross margin return on investment). If an overstock position develops, the
Company acts quickly to dispose of such inventory at the highest possible margin
by moving the product through several promotional distribution channels,
including price promotions in current season catalogs, end-of-season clearance
catalogs, Discount Direct and sale flyers in outbound packages.

MANUFACTURING

Fulcrum manages most aspects of the manufacturing supply chain but does not
invest in sewing operations, electing instead to contract cutting and sewing
functions to qualified factories. The Company believes that outsourcing reduces
investments in fixed assets and provides flexibility to source on a worldwide
basis to achieve lower prices and higher quality. In fiscal 1996, the Company
outsourced 66.4% of its manufacturing to suppliers in the U.S. and 33.6% to
international suppliers. Fulcrum currently works with approximately 50
contractors, with no supplier exceeding 5.0% of total supplier purchases.

Once production has begun, members of Fulcrum's quality assurance team
inspect product lines to help ensure that Fulcrum garments are manufactured to
the Company's quality specifications. The team also monitors working conditions
for safety and fairness. Fulcrum requires contractors to certify that all
applicable labor laws are being followed. Fulcrum believes that continuous
communication is critical to the success of its manufacturing process and, as
such, suppliers are reviewed periodically to identify opportunities to
strengthen relationships and improve communications. Fulcrum evaluates factories
on an ongoing basis. In 1997, Fulcrum plans to implement a formal supplier
communication program with more frequent and structured feedback, and to pursue
electronic data interchange and Internet e-mail opportunities with certain of
its suppliers. See "Risk Factors -- Reliance on Unaffiliated Manufacturers" and
"-- International Suppliers."

CUSTOMER SERVICE AND FULFILLMENT

Fulcrum strives to provide exceptional customer service by fulfilling the
needs of its customers in a timely and efficient manner. The Company's daily
service operations revolve around three areas: the call center, the distribution
center and the returns department.

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Customer Service. Fulcrum maintains a highly efficient, state-of-the-art
call center at its corporate headquarters in Rio Rancho, New Mexico. Once a call
is received by the Company, it is routed to the first available customer service
representative by the Company's scalable telephone system that is expandable to
2,000 stations. As of February 28, 1997, the Company had 135 customer service
representative stations installed in its call center and 186 trained customer
service representatives on staff. The Company closely tracks forecasted demand
and hires and trains new customer service representatives and seasonal customer
service representatives as required to maintain its service standards. All of
the Company's employees undergo a three-month training program and receive
ongoing training. The Company currently receives training grants from the State
of New Mexico to partially offset training costs.

The Company's telephone system keeps customer service representatives
abreast of order volume on a real-time basis through lighted message boards. The
message boards display to all customer service representatives the current
status of calls waiting, longest wait time and the number of representatives
logged into the phone system. Customer service representatives are empowered to
change work assignments to meet customer demand. Customer service
representatives take orders via the Company's order entry system, which is
programmed to guide the customer through a unique, carefully designed call
program and are empowered to resolve most customer inquiries without supervisor
involvement. For out-of-stock items, the customer service representative can
quote availability directly from purchase order information on a real-time basis
and can instantly recognize all available in-stock alternatives for the item in
question by looking at a matrix of substitute items. Items received into the
Company's distribution center, through a real-time receiving system, are
instantly available to customer service representatives for sale. Online
information is also available to provide customer service representatives with
information on coordinating outfits, thereby supporting cross-selling
opportunities.

To serve customers and provide redundancy 24 hours a day, 365 days a year,
Fulcrum has contracted with a remote call center, which provides overflow, off
hours and disaster customer service. On a daily basis Fulcrum uploads, via modem
to its remote call center inventory availability, product descriptions and
specifications. The Company also downloads customer orders taken by its remote
call center. The Company's goal is to answer at least 98% of all domestic calls
at its primary call center. The Company also accepts orders by mail, fax and
e-mail and payment by credit card, personal check and money order.

To provide the highest level of customer service to its Japanese customers,
Fulcrum has recently contracted with a third-party call center in Tokyo to take
orders and provide customer service and returns processing in Japan. This center
will open in the first half of 1997 and will have a real-time connection to the
Company's computer system. Japanese customer service representatives will be
trained by the Company and will follow the same customer service standards as
representatives in the Company's U.S. call center.

Fulfillment. All order information is processed through the Company's
computer system and linked to its distribution center, which generally allows it
to ship each order within 24 to 48 hours. During each phase of the shipping
process, the system is updated with the exact status of the customer's order,
enabling the call center to provide real-time information regarding the
customer's order. Before leaving the warehouse, each package is scanned by a
manifesting system, which is integrated with the order entry and fulfillment
system. The manifesting system records the exact time that the order left the
building and the method of shipment. This information is immediately available
to the customer by calling customer service. The customer's credit card is
billed upon shipment, and the Company typically receives funds within two to
three business days. Disruption in the Company's ability to fulfill its orders
on a timely basis could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Order Fulfillment."

Returns. The Company has an unconditional return policy for all of its
merchandise, under which a customer can return any item for any reason at any
time with no questions asked. The

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Company makes allowances in its financial statements for anticipated merchandise
returns based on historical return rates. Because the Company's allowances are
based on historical return rates, there can be no assurance that the
introduction of new merchandise in existing catalogs, the introduction of new
catalogs, changes in the merchandise mix or the introduction of new catalogs in
international markets, introduction of new distribution channels or other
factors, will not cause actual returns to exceed return allowances. The Company
expects to open a return processing center in Japan in the first half of 1997 to
provide the same level of service to its Japanese customers as provided in the
U.S. The Company believes that this will result in an increased merchandise
return rate for Japanese sales. See "Risk Factors -- Merchandise Returns."

INFORMATION SYSTEMS

The Company is committed to ongoing investment in information systems to
increase operating efficiency, provide exceptional customer service and maximize
its growth potential. The Company believes that investing in information systems
in anticipation of customer and sales growth allows it to maintain operational
flexibility to capture strategic or market opportunities, including increased
sales volumes and shifts in customer preferences. The Company further believes
that data capture and continuous analysis is central to the competitive success
of the Company's business. The Company's information systems strategy team,
which includes all members of senior management, identifies business challenges
and adopts the most appropriate technology solution. Importantly, such solutions
are designed to ensure tight integration of all existing systems and provide
company-wide communication.

The Company has made, and continues to make, significant investments in
systems which support marketing, merchandising, forecasting, customer service,
inventory management, fulfillment, and financial control and reporting. These
systems enable the Company to monitor, on a real-time basis, customer demand,
customer orders, gross margins, inventory and shipping. Specific investments
made in the last 24 months to upgrade Fulcrum's information systems
infrastructure include (i) upgraded computer hardware, (ii) upgraded telephone
hardware, (iii) investments in warehouse efficiency, including bar coding
hardware and software, new conveyor systems and facility expansion and (iv) new
marketing, forecasting, call center, distribution center, MRP and accounting
software.

The Company uses data warehousing to ensure consistent and timely data
collection and analysis. The Company also utilizes a sophisticated marketing
database, which aids in the collection of transaction information, cross checks
such information for consistency, and enables the Company to perform analysis
and regression modeling.

Disaster Recovery. In order to provide exceptional customer service, all
of the Company's call center and distribution center are supported by numerous
disaster recovery protocols. The Company has installed an emergency generator
that provides the electricity needed to continue all operations during a power
failure. In addition, each integral system within the Company's operations is
directly connected to battery powered back-up systems and each critical system
is backed up to maintain the Company's ability to take orders and ship orders in
accordance with the Company's service standards. There can be no assurance that
the Company's precautions will be sufficient to prevent a delay in operations
and any significant delay could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Dependence on Management Information Systems."

SUPPLIERS AND RAW MATERIALS

Fulcrum's raw material needs consist primarily of fabrics and trims for
garments and paper for catalogs. Fulcrum remains flexible in its relationships
and agreements with vendors. Agreements are typically for one season and are
only active when service standards are met. The Company's growth has required
its vendors to perform at a consistently high level. Fulcrum shares analyses and
other information with its vendors in order for them to understand the goals of
the Company and to realize

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they are an integral part of Fulcrum's success. Fulcrum is not currently a party
to any long-term supply contracts (other then a three-year contract for "800"
service from AT&T), but may enter such contracts in the future. The Company has
not taken any steps to hedge commodity price fluctuations. Fulcrum's growth has
strengthened its leverage with suppliers and has helped minimize raw material
cost increases. In the future, Fulcrum may consider bulk purchases of commodity
materials.

Fulcrum prints its catalogs with third-party catalog printers that provide
printing and mailing services. The Company separately negotiates for paper
purchases on a quarterly basis directly with paper mills. While paper prices
experienced significant increases in 1995, the Company's overall print costs
were not materially affected, as compared to 1994, as a result of cost
containment measures instituted by the Company in the print area subsequent to
the March 1994 acquisition of After the Stork. Paper prices have now receded
from 1995 levels; however, the Company is continuously looking for ways to
control and reduce paper and printing costs. In late 1996, in anticipation of
the additional 1997 volume from internal growth and the Playclothes acquisition,
the Company hired senior level catalog production and catalog creative directors
dedicated to managing these activities. While the Company has historically
passed on to customers the costs of overnight and ground delivery of
merchandise, it has not, and does not intend to pass on, the costs of catalog
mailings and paper to its customers. Material increases in paper or catalog
delivery costs or the inability to pass on the costs of overnight and ground
delivery of merchandise could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Fluctuations in Postage and Paper Expenses."

COMPETITION

The children's apparel market is highly competitive with few barriers to
entry, and the Company expects competition in this market to increase. The
Company's competitors include other children's apparel catalogers, as well as
traditional apparel manufacturers and retailers of children's clothing, such
brands as The Gap (including its Baby Gap, Gap Kids and Old Navy brands),
Gymboree, L.L. Bean, Lands' End and OshKosh B'Gosh. Many of the Company's
competitors are larger, have longer operating histories, substantially greater
financial, distribution and marketing resources and significantly greater name
recognition than the Company.

The Company believes that the principal competitive factors in the
children's apparel market are strength of brand image, quality, style, price,
selection, convenience, product availability, and customer service and
fulfillment. While the Company believes that it has been able to compete
successfully on the basis of these factors, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. In
addition, the Company expects that the direct marketing industry will continue
to be affected by technological changes in distribution and marketing methods,
such as on-line catalogs, retail kiosks and Internet shopping. The Company
believes its success will depend, in part, on its ability to adapt to new
technologies and to respond to competitors' actions in these areas. See "Risk
Factors -- Competition."

EMPLOYEES AND LABOR RELATIONS

As of February 28, 1997, the Company had 565 employees, of whom 105 were
salaried, 411 were hourly and 49 were part-time. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes that it
provides employees a competitive and attractive salary and benefits packages and
that the general labor market conditions in Rio Rancho, New Mexico and the
surrounding areas are favorable, with the existence of a relatively
well-educated and sizable labor pool. The Company considers its relationship
with its employees to be excellent.

PROPERTIES

The Company's 145,000 square foot headquarters building is leased from
Fulcrum Properties L.P., a Delaware limited partnership ("Properties"), pursuant
to a ten-year lease. The headquarters building

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also houses the call center and distribution center. The Company has agreed to
purchase all of Properties' rights in the headquarters building (including
Property Bond Purchaser, Inc. and the County Lease, as defined below) upon
completion of the Offering. In 1996, the Company entered into an arrangement
with the City of Rio Rancho whereby the Company is permitted to make certain
payments in lieu of property taxes otherwise due. In order to effect such
arrangements, the Industrial Development Board of Rio Rancho, New Mexico issued
industrial development revenue bonds due 2006 to Property Bond Purchaser, Inc.,
a New Mexico corporation which is a wholly owned subsidiary of Properties (the
"Bonds"), and used the proceeds of the Bonds to obtain record title to the
headquarters building used by Fulcrum. The headquarters building is leased to
Properties pursuant to an industrial development revenue bond lease (the "County
Lease") and, in turn, sub-leased to the Company. See "Certain Relationships and
Related Transactions." The Company believes its facilities are well-maintained
and in good operating condition.

INTELLECTUAL PROPERTY

The Company's After the Stork trademark is registered with the U.S. Patent
and Trademark Office and the Company currently has applications for registration
of certain of its additional trademarks pending in the U.S., Japan and Canada.
The Company is not aware of any pending conflicts concerning its use of its
trademarks. See "Risk Factors -- Dependence on Intellectual Property."

ENVIRONMENTAL ISSUES

The Company's activities are subject to various environmental and worker
safety laws. The Company has expended resources, both financial and managerial,
in an effort to comply with applicable environmental and worker safety laws in
its operations and at its facilities, and the Company anticipates that it will
continue to do so in the future. Compliance with environmental laws has not
historically had a material effect on the Company's business, financial
condition or results of operations. There can be no assurance, however, that
future compliance with environmental laws will not have a material adverse
effect on the Company's business, financial condition and results of operations
in the future. See "Risk Factors -- Government Regulation."

36
<PAGE> 38

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Executive officers, directors and key employees of the Company and their
ages as of February 28, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Michael G. Lederman.............. 43 Chairman of the Board and Chief Executive Officer
Scott A. Budoff.................. 32 President, Chief Operating Officer, Secretary and
Director
Gregory L. Anapol................ 28 Vice President, Operations
Katherine S. Batson.............. 40 Vice President, Merchandising and Catalog Creative
Marc Benjamin.................... 32 Vice President, Market Development
Carrie K. Cole................... 33 Vice President, Finance and Accounting, Chief Financial
Officer and Treasurer
Rona S. Palmer................... 44 Vice President, Brand Management
John J. De Oliveira.............. 32 Executive Director, Information Services
Sean T. Linn..................... 27 Executive Director, Manufacturing and Inventory Control
Arnold Greenberg(1).............. 64 Director
Ray E. Newton, III(2)............ 32 Director
Patrick K. Sullivan, M.D.(2)..... 43 Director
Howard Unger(1).................. 36 Director
</TABLE>

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

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

Michael G. Lederman has served as Chairman of the Board and Chief Executive
Officer since the Company's inception in March 1994. Since August 1993, Mr.
Lederman has also been Managing Partner of Fulcrum Capital Partners L.P. ("FCP")
and Fulcrum Capital L.P. ("FC"). From 1990 to June 1993, Mr. Lederman was a
general partner of Japonica Partners, L.P., an investment partnership
("Japonica"), during its acquisition of Sunbeam Corporation ("Sunbeam") from
bankruptcy. Mr. Lederman served on Sunbeam's board of directors and, prior to
leaving Sunbeam, was its most senior officer. He also previously served as a
Vice President for Goldman, Sachs & Company, where he co-founded the firm's
reorganization group. He was previously an attorney with Sidley & Austin and
Shearman & Sterling.

Scott A. Budoff has served as President, Chief Operating Officer, Secretary
and a director of the Company since the Company's inception in March 1994. Since
September 1993, Mr. Budoff has also been a Principal of FCP and FC. From June
1993 to January 1994, Mr. Budoff was Vice President and Group Counsel of
Sunbeam. Before joining Sunbeam, Mr. Budoff was an attorney with Shearman &
Sterling from 1989 to May 1993, specializing in mergers and acquisitions and
corporate finance.

Gregory L. Anapol joined Fulcrum in June 1994, and since January 1996, has
been Vice President, Operations. He previously served as Director, Operations
and as an Operations Analyst of the Company. Prior to joining Fulcrum, Mr.
Anapol was a divisional Group Manager of Sunbeam Household Products from 1991 to
June 1994.

Katherine S. Batson joined Fulcrum in November 1994 as Vice President,
Merchandising and Catalog Creative. Prior to joining Fulcrum, Ms. Batson was the
head designer for Flapdoodles, a children's clothing company, from 1991 to
October 1994. She was previously a designer for J.G. Hook, Winsome Togs and The
Eagle's Eye.

Marc Benjamin joined Fulcrum in March 1994, and since January 1996, has
been Vice President, Market Development. He previously served the Company as
Vice President, Marketing and Circulation. Prior to joining Fulcrum, Mr.
Benjamin worked as a Finance and Business Development Associate

37
<PAGE> 39

for Japonica and Manager, Business Development of Sunbeam from 1991 to February
1994. Mr. Benjamin previously worked for J. Walter Thompson in New York.

Carrie K. Cole joined Fulcrum in August 1995 as Vice President, Finance and
Accounting, Chief Financial Officer and Treasurer. From 1982 to August 1995, Ms.
Cole served in a variety of positions at Sunbeam, including most recently as
Manager of Financial Analysis and Investor Relations.

Rona S. Palmer joined Fulcrum in April 1994, and since January 1996, has
served as Vice President, Brand Management. She previously served the Company as
Director, Marketing and Circulation and Manager, Marketing. Prior to joining
After the Stork, Ms. Palmer was self-employed in the music industry and served
in various positions at Physio-Control Corp., a manufacturer of medical devices
and Wall Data Incorporated, a business software developer.

John J. De Oliveira joined Fulcrum in June 1994, and since January 1997,
has served as Executive Director, Information Services. Prior to joining
Fulcrum, Mr. De Oliveira was a systems analyst with Bank of Bermuda Ltd. and a
programmer/analyst at Stratus Computer, Inc., a manufacturer of computer systems
and software, and Genigraphics, a computer graphics company, from 1987 to July
1993.

Sean T. Linn joined Fulcrum in July 1995, and since January 1995, has been
Executive Director, Manufacturing and Inventory Control. He previously served
the Company as Director of Manufacturing and Manager of Fulfillment. Prior to
joining Fulcrum, Mr. Linn was a divisional manager of Sunbeam Household Products
from August 1992 to May 1995.

Arnold Greenberg has served as a director for the Company since May 1995.
Mr. Greenberg co-founded The Snapple Beverage Corporation, where he served as
its Vice Chairman and Chief Operating Officer from its inception in 1972 until
its sale in 1994.

Ray E. Newton, III has served as a director of the Company since October
1996. Mr. Newton joined J.H. Whitney & Co., a New York limited partnership
("Whitney") in 1989 and has been a General Partner since May 1992. Prior to
joining Whitney, he was employed by Morgan Stanley & Co. Incorporated, an
investment banking firm, where he was in the Merchant Banking Group. Mr. Newton
is also a director of Brothers Gourmet Coffees, Inc. and The North Face, Inc.

Patrick K. Sullivan, MD has served as a director of the Company since June
1996. He has been the Director of the Craniofacial Service at Rhode Island
Hospital for over five years.

Howard Unger. Mr. Unger has served as a director of the Company since June
1996. Mr. Unger formed Saw Mill Capital, a private investment firm, in 1996.
From 1989 to 1996, Mr. Unger was a Managing Director and founding partner of
Chase Capital, the private equity division of The Chase Manhattan Bank, N.A.
From 1983 through 1989, Mr. Unger was employed by Citibank, N.A. as a Vice
President in the Leveraged Capital Group. Mr. Unger serves as a director for a
number of private companies.

No executive officer or director of the Company has any relationship by
blood, marriage or adoption to any other executive officer or director.

BOARD COMMITTEES

Audit Committee. In June 1996, the Board established an audit committee,
whose members are directors who are not employees of the Company. The audit
committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls.

Compensation Committee. In June 1996, the Board established a compensation
committee, whose members are directors who are not employees of the Company. The
compensation committee

38
<PAGE> 40

approves the salaries and other benefits of the executive officers of the
Company and administers certain compensation plans of the Company. In addition,
the compensation committee consults with the Company's management regarding
pension and other benefit plans and compensation policies and practices of the
Company.

BOARD OF DIRECTORS

There are currently six members of the Board and one vacancy. The Board is
divided into three classes. Directors of each class are elected at the annual
meeting of stockholders held in the year in which the term for the class expires
and will serve thereafter for three years. The terms of each of the current
directors of the Company is as follows: term expiring in 1998, Patrick K.
Sullivan; term expiring in 1999, Arnold Greenberg and Howard Unger; and term
expiring in 2000, Michael G. Lederman, Scott A. Budoff and Ray Newton, III. See
"Description of Capital Stock -- Anti-Takeover Effect of Provisions of the
Amended and Restated Certificate of Incorporation and By-laws."

DIRECTOR COMPENSATION

The Company intends to reimburse all non-employee directors for their
reasonable out-of-pocket expenses incurred in connection with Board meetings.

EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE

The following summarizes the principal components of compensation of the
Company's Chairman and Chief Executive Officer and each other officer whose
compensation exceeded $100,000 for fiscal 1996. The compensation set forth below
fully reflects compensation for work performed on behalf of the Company.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
FISCAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY (#)
- ------------------------------------------------------------ ------ --------- ------------
<S> <C> <C> <C>
Michael G. Lederman......................................... 1996 $ 170,126 105,000
Chairman of the Board and Chief Executive Officer
Scott A. Budoff............................................. 1996 $ 108,895 35,000
President and Chief Operating Officer
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following discloses options granted during fiscal 1996 for the named
executives in the compensation table above.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES
---------------------------------------------------- OF STOCK PRICE
% OF TOTAL
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM(2)
UNDERLYING EMPLOYEES IN EXERCISE
OPTIONS FISCAL YEAR OR BASE EXPIRATION ---------------------
NAME GRANTED(#) (%) PRICE($)(1) DATE 5% 10%
- ---------------------------- ---------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Lederman......... 105,000 28.0 5.00 10/18/06 855,170 1,361,715
Scott A. Budoff............. 35,000 9.3 5.00 10/18/06 285,057 453,906
</TABLE>

39
<PAGE> 41

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

(1) The exercise price of all options is the fair market value on the date of
grant. Options granted during each year vest annually on January 10, of each
year following the year of grant at a rate of 10%, 20%, 20%, 25% and 25%,
respectively.

(2) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the option
and that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following summarizes exercises of stock options (granted in prior
years) by the named executives in the past year, as well as the number and value
of all unexercised options held by the named officers as of December 28, 1996.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES ------------ ---------------
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Michael G. Lederman................. -- -- 0/0 0/0
Scott A. Budoff..................... -- -- 0/0 0/0
</TABLE>

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

(1) Value is based upon the fair market value of the stock as of December 28,
1996 ($5.00), minus the exercise price ($5.00) (the "Fair Market Value").
Fair Market Value has been determined in good faith by the Board of
Directors based upon historical and projected financial performance.

EMPLOYMENT AGREEMENTS

Each of Messrs. Lederman and Budoff has an employment agreement with the
Company, dated as of October 21, 1996, which expires on December 31, 2001,
subject to automatic one year renewals thereafter unless notice of non-renewal
is given by either the Company or Messrs. Lederman and Budoff as the case may
be. Such agreements provide for Mr. Lederman's employment as Chairman and Chief
Executive Officer at a base salary of at least $180,000 and Mr. Budoff's
employment as President and Chief Operating Officer at a base salary of at least
$110,000. Messrs. Lederman and Budoff received an increase in compensation in
1997 to $225,000 and $135,000, respectively. Messrs. Lederman's and Budoff's
employment agreements provide that the Board will review annually the
executive's compensation and that the Board may increase such compensation if it
deems appropriate. In addition, each of Messrs. Lederman's and Budoff's
employment agreements provides that the Board will annually determine the
amount, if any, of a bonus to be paid to the executive. In addition, the
employment agreements provide for life and disability insurance for Messrs.
Lederman and Budoff of $6.0 million and $4.0 million, respectively, $1.0 million
of which is payable in each case to the Company as beneficiary. Messrs.
Lederman's and Budoff's employment may be terminated by each of them
individually or by the Company with 90 days' notice. Notwithstanding the
preceding sentence, Messrs. Lederman and Budoff may not be terminated without
Cause (as defined therein) except on a Change of Control (as defined therein).
In the event the Company were to terminate Messrs. Lederman or Budoff for other
than Cause or if one of them terminates his employment as a result of an
unacceptable change in his duties or for other "Good Reason" (as defined
therein), he would be entitled to severance payments equal to the product of (A)
his respective annual base salary as of the date of such termination plus the
amount of the last bonus paid or payable and (B) 1.5, for a

40
<PAGE> 42

period of the remaining term of the Employment Agreement, including any one year
extension period, as well as certain other benefits related to his supplemental
retirement payment. Messrs. Lederman and Budoff's employment agreements provide
that they will not compete with the Company during the employment term and for a
period of one year following termination.

STOCK OPTION PLAN

The Board and the Company's stockholders adopted the Management Team Equity
Plan (the "Option Plan") in October 1996. A total of 765,000 shares of Common
Stock are reserved for issuance upon exercise of options granted under the
Option Plan. The purpose of the Option Plan is to attract and retain qualified
personnel and to provide additional incentive to executive and other key
employees of the Company.

The Option Plan provides for the granting to executives and other key
employees of the Company of non qualified stock options ("NQOs"). The Option
Plan is administered by the Compensation Committee which determines the terms of
the options granted under the Option Plan, including the exercise price, number
of shares subject to the option and exercisability. Generally, unless the
Compensation Committee otherwise determines, no option may be transferred by the
optionee other than by will or the laws of descent or distribution. Each option
may be exercised, during the lifetime of the optionee, only by the optionee. The
exercise price of all NQOs issued under the Option Plan was equal to $5.00 per
share through December 31, 1996 and will be the Fair Market Value (as defined in
the Option Plan) for any period thereafter. The Compensation Committee may issue
options in any given year only to the extent that the number of shares of Common
Stock which may be purchased upon the exercise of such options taken in the
aggregate with the number of shares which may be purchased upon the exercise of
all other options pursuant to the Option Plan granted during such year does not
exceed 765,000 shares.

The Option Plan authorizes the Compensation Committee to permit a
participant in whole or in part, and participants may elect to net exercise.

Except as otherwise provided by the Company at the time of grant, if a
participant's employment terminates for any reason, all options, whether vested
or not, granted within the past two (2) years pursuant to the Option Plan
terminate as of such termination date.

As of February 28, 1997, options to purchase 404,350 shares of Common Stock
were outstanding under the Option Plan at a weighted average exercise price of
$5.23 per share.

EMPLOYEE BENEFIT PLANS

The Company maintains a qualified defined contribution plan (the "401(k)
Plan"), under the provisions of Section 401(k) of the Internal Revenue Code of
1986, as amended, covering substantially all employees. Under the terms of the
401(k) Plan, eligible employees may make contributions equal to up to 10% of
their pay, subject to statutory limitations. The Company may, at its discretion,
make matching contributions. Employee contributions are always fully vested.
Company contributions vest 20% for each completed year of service, becoming
fully vested after five years of service. Matching contributions in the
Company's 401(k) Plan were negligible.

41
<PAGE> 43

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ownership. Based on shares outstanding as of February 28, 1997, upon
completion of the Offering, Fulcrum Capital Partners L.P., a Delaware limited
partnership ("FCP"), and Fulcrum Capital L.P., a Delaware limited partnership
("FC"), will own, on an aggregate basis, 60.6% of Fulcrum's Common Stock, (63.1%
assuming exercise of all options and warrants held by them). The general
partners of FCP and FC are corporations owned by Michael G. Lederman, Chairman
of the Board and Chief Executive Officer of Fulcrum, and Scott A. Budoff,
President, Chief Operating Officer and a director of Fulcrum, respectively.
Messrs. Lederman and Budoff and their respective families are the sole limited
partners of FC. Mr. Lederman is Managing Partner of FC and FCP and, pursuant to
the partnership agreements of FC and FCP, maintains the exclusive ability to
direct the voting and disposition of the shares of Common Stock owned by such
partnerships. FCP has also issued options to acquire limited partnership
interests in FCP to Fulcrum's other executive officers.

Real Estate Ownership. The Company's headquarters, call center and
distribution center is leased from Fulcrum Properties L.P., a Delaware limited
partnership ("Properties") (an entity whose partners include certain directors
and officers of the Company and which is indirectly controlled by Mr. Lederman),
pursuant to a ten-year lease. The Company has entered into an agreement to
purchase all of Properties' rights in the headquarters building (including
Property Bond Purchaser, Inc. and the County Lease) upon completion of the
Offering for an aggregate consideration of approximately $2.5 million, plus
assumption of approximately $5.6 million of mortgage financing and related
interest rate swap agreements. The purchase price was negotiated by Messrs.
Lederman and Budoff on behalf of Properties and a committee composed of certain
disinterested members of the Board on behalf of the Company. A portion of the
net proceeds of the Offering will be utilized to fund such purchase. Mr.
Lederman (and entities and persons affiliated with him) will receive $358,286 of
the proceeds of such sale. Mr. Budoff (and persons affiliated with him) will
receive $88,819 of the proceeds of such sale. Mr. Greenberg (and entities
affiliated with him) will receive $808,652 of the proceeds of such sale. Carrie
K. Cole, Vice President Finance and Accounting, Chief Financial Officer and
Treasurer will receive $73,514 of the proceeds of such sale.

Trademark Option. Certain of the Company's trademarks and trademark
applications are held by Fulcrum Brands L.P., a Delaware limited partnership
("Brands"), an entity indirectly controlled by Mr. Lederman. Subject to the
consummation of the Offering, the Company will exercise an option (the
"Trademark Option"), which is contained in the Amended and Restated Trademark
License and Option Agreement by and between Brands and Fulcrum dated October 21,
1996 (the "Trademark Agreement"), to purchase from Brands certain of the
trademarks and trademark applications used by Fulcrum for $1.75 million, less
royalties paid under the Trademark Agreement, which are not expected to be
material. A portion of the net proceeds of the Offering will be utilized to fund
such purchase. Mr. Lederman (and entities controlled by him) will receive
$1,561,000 of the proceeds of such sale. Mr. Budoff (and entities controlled by
him) will receive $189,000 of the proceeds of such sale. Pursuant to the
Trademark Agreement, which will terminate upon exercise of the Trademark Option,
to pay Brands an annual fee ("Royalty Payment") equal to .05% of the Net
Revenues (as defined in the Agreement) of Fulcrum in return for the exclusive
right to use the trademarks and licenses owned by Brands.

Advisory Agreement. FCP entered into an advisory agreement with the
Company dated April 1, 1994, as amended. The Advisory Agreement will continue
until December 31, 2005. Pursuant to this exclusive Advisory Agreement, FCP
professional services, including strategic financial advisory services such as
identifying business units for acquisition by the Company through a merger, sale
of assets, tender or exchange offer, sales of a majority interest of the
Company's outstanding voting securities, liquidation or any such other
transaction. The Advisory Agreement provides for payment of an advisory fee to
FCP equal to the greater of (i) $50,000 or (ii) 2% of the aggregate
consideration payable by the Company, or to the Company or the Company's
stockholders in connection with the applicable transaction (the "Fair Value");
provided, however, that if the Fair Value exceeds $20 million, the Advisory
Agreement provides that the fee shall be equal to the sum of $400,000 plus 1% of
the

42
<PAGE> 44

difference between the Fair Value and $20 million. In addition, pursuant to the
Advisory Agreement, the Company has retained the option to defer amounts due
under the Advisory Agreement, with the principal amount equal to the amount due
under the Advisory Agreement, plus a quarterly interest payment of 12.0% per
annum. Amounts owed under the Advisory Agreement may be paid in cash or Common
Stock, at the Company's sole discretion. In connection with the Playclothes
Acquisition, FCP received $50,000 for services rendered to the Company, which
was paid in 6,068 shares of Common Stock (based on a value of $8.24 per share as
of December 28, 1996). FCP will not receive any fee in connection with the
Offering. The Company believes that the fees received for the professional
services rendered are at least as favorable to the Company as those that could
be negotiated with an unaffiliated third party.

Retail Option. Fulcrum Retail, Inc., a New Mexico corporation ("Fulcrum
Retail") and a wholly owned subsidiary of FCP, operates two retail stores
(located in Albuquerque, New Mexico and East Brunswick, New Jersey) that
distribute certain of the Company's discontinued or damaged inventory. The
Company and Fulcrum Retail intend to execute a Trademark License Agreement prior
to completion of the Offering, pursuant to which Fulcrum Retail will agree to
pay the Company a royalty to be added to the cost of any goods Fulcrum Retail
purchases from the Company for the right to use the Company's trademarks. In
addition, the Company retains the option to purchase Fulcrum Retail in its
entirety under certain conditions. In addition, as part of the Whitney
Investment, WEP and Fulcrum Retail entered into a Retail Option Agreement dated
October 21, 1996 pursuant to which WEP acquired an option to purchase 10.5% of
the stock of Fulcrum Retail (on a fully diluted basis when exercised) for an
aggregate price of $105,000. Such option may be exercised only after Fulcrum
Retail's annual sales exceed $5.0 million and on or before the earlier of (i) a
merger or consolidation of the Company (or a direct or indirect wholly owned
subsidiary of the Company) and Fulcrum Retail, or (ii) December 31, 2006. Sales
of Fulcrum Retail have historically been below $5.0 million.

Lederman Loan and Guarantees. The Fulcrum Group, Inc., a corporation
controlled by Mr. Lederman, made available to the Company a line of credit for
working capital needs of up to $3.0 million beginning April 1, 1994 and ending
December 31, 1995, at an interest rate of 12.0% per annum. An aggregate of
$819,600 in principal and accrued interest was converted into 8,196 shares of
Series B Preferred Stock on January 1, 1996. In addition, since April 1, 1994,
Mr. Lederman has guaranteed an aggregate of up to $6 million at any one time of
indebtedness of the Company to its senior lenders and certain equipment lessors,
which guarantees have been or will be released upon completion of the Offering.

Budoff Guarantees. Mr. Budoff, has guaranteed an aggregate of up to $6
million at any one time of indebtedness of the Company to its senior lenders and
certain equipment lessors, which guarantees have been or will be released upon
completion of the Offering.

FCP and FC Guarantees. FCP and FC have guaranteed an aggregate of up to $6
million at any one time of indebtedness of the Company to its senior lenders and
certain equipment lessors, which guarantees have been, or will be released upon
consummation of the Offering.

Greenberg Loan. Pursuant to a secured loan agreement between the Company
and Mr. Greenberg and affiliated entities dated June 1, 1995, Fulcrum borrowed
$4.0 million under a line of credit from Mr. Greenberg, a director of the
Company. Under the terms of the agreement, Mr. Greenberg made a short-term loan
at an interest rate of 18.0% to the Company to be used to fund working capital.
The line of credit was repaid in full on May 6, 1996.

Preferred Stock Investments

During fiscal 1995 and fiscal 1996, the Company sold Series A Preferred
Stock and Series B Preferred Stock to certain purchasers, including certain
officers, directors and affiliates of the Company to finance working capital.
All outstanding shares of preferred stock were converted to Common Stock or
redeemed in October 1996. The follow tables set forth the details of such
transactions. See "Principal Stockholders."

43
<PAGE> 45

Series A Preferred Stock

<TABLE>
<CAPTION>
NUMBER OF
AGGREGATE NUMBER OF CONVERSION REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES SHARES AMOUNT
- ------------------------------------------- -------------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
Fulcrum Capital L.P. $3,000,000 30,000(1) 1,800,000 $ 0
Arnold Greenberg(2) 774,825 7,665 275,940 0
Howard Unger 150,000 1,500(3) 54,000 0
Patrick Sullivan 500,000 5,000(3) 54,000 350,000(4)
</TABLE>

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

(1) Converted into shares of Common Stock on October 21, 1996 at a ratio of one
share of Series A Preferred Stock for each 60 shares of Common Stock.

(2) Includes shares held by The Greenberg Family Fund LLC and Mr. Greenberg's
wife.

(3) Includes 1,500 shares that were converted into shares of Common Stock on
October 21, 1996 at a ratio of one share of Series A Preferred Stock for
each 36 shares of Common Stock.

(4) Includes 3,500 shares of Series A Preferred Stock that were redeemed by the
Company on October 21, 1996 for 100% of the aggregate purchase price, after
paying dividends accrued at a rate of 12.0% per annum and a redemption
premium of 8.0% per annum through October 21, 1996.

The differential conversion rates were based upon the value of the Company
at the time of such investment.

Series B Preferred Stock

<TABLE>
<CAPTION>
AGGREGATE NUMBER OF REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES AMOUNT(1)
- ----------------------------------------------- -------------- ---------------- -----------------
<S> <C> <C> <C>
Fulcrum Group, Inc. $1,918,307 19,182 $ 1,918,307
Arnold Greenberg(2) 1,289,925 12,285 1,289,925
</TABLE>

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

(1) All shares of Series B Preferred Stock were redeemed by the Company on
October 21, 1996 for 100% of the aggregate purchase price, after paying
dividends accrued at a rate of 12.0% per annum through October 21, 1996.

(2) Includes shares held by The Greenberg Family Fund LLC.

FCP Warrant

In January 1996, the Company issued to Fulcrum Capital Partners L.P., a
warrant to purchase 600,000 shares of Common Stock at an exercise price equal to
$1.00 per share at any time through January 1, 2006.

Related Party Accounts

FCP, FC, Brands, Retail, Properties and Fulcrum Group Inc. (the "Affiliated
Entities") have provided certain financing and services and made inventory and
fixed asset transfers to and from the Company during fiscal 1995 and fiscal
1996. During fiscal 1995, the Company made aggregate payments to the Affiliated
Entities of $81,415 primarily for administrative expenses for Retail, royalty
payments to Brands and transfers of fixed assets. During fiscal 1995, the
Company received payments from the Affiliated Entities of $1,149,013 primarily
for inventory transfers, restructuring costs, merger and acquisition expenses,
loans, administrative expenses and professional fees. During fiscal 1996, the
Company made aggregate payments to the Affiliated Entities of $2,219,880
primarily for loans, administrative expenses and royalty payments. During fiscal
1996, the Company received payments from the Affiliated Entities of $1,465,004
primarily for inventory transfers, professional fees and merger and acquisition
expenses.

The Board has adopted a policy that all future material transactions with
affiliates will be on terms no less favorable to the Company than those
available from unaffiliated third parties and will be approved by a majority of
the disinterested members of the Board.

44
<PAGE> 46

PRINCIPAL STOCKHOLDERS

The table below sets forth certain information regarding ownership of
Common Stock as of February 28, 1997 assuming exercise of options exercisable
within sixty days of such date by (i) each person or entity who owns of record
or beneficially 5% or more of the Common Stock, (ii) each director and named
executive officer and (iii) all executive officers and directors as a group.
Except as indicated, each of such stockholders is assumed to have sole voting
and dispositive power as to the shares shown.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE OF SHARES
OWNED OUTSTANDING
------------------- --------------------------------
NAME NUMBER(1) BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Michael G. Lederman(2)(3)......................... 6,016,568 85.6% 63.2%
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Fulcrum Capital Partners L.P.(3)(4)............... 4,206,068 59.9 44.2
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Fulcrum Capital L.P.(3)........................... 1,800,000 28.1 20.2
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Ray E. Newton III(5).............................. 921,195 13.3 9.8
177 Broad Street
Stamford, CT 06091
Whitney Equity Partners, L.P.(5).................. 515,735 7.9 5.7
177 Broad Street
Stamford, CT 06091
Whitney Subordinated Debt Fund, L.P.(5) .......... 405,460 5.9 4.4
177 Broad Street
Stamford, CT 06091
Arnold Greenberg(6)............................... 275,940 4.3 3.1
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Howard Unger...................................... 54,000 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Patrick K. Sullivan, M.D.......................... 54,000 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Scott A. Budoff(3)(7)............................. 3,500 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
All directors and executive officers as a group
(13 persons)(2)(8).............................. 7,336,603 96.9 72.9
</TABLE>

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

* Represents less than 1%.

(1) Beneficial ownership is determined in accordance with rule of the Securities
and Exchange Commission (the "SEC"). In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of February 28, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.

(2) Includes 3,606,068 shares held by FCP, 1,800,000 shares held by FC, a
warrant to purchase 600,000 shares of Common Stock held by FCP and an option
to purchase 10,500 shares of Common Stock held by Mr. Lederman exercisable
within 60 days of February 28, 1997.

45
<PAGE> 47

(3) The general partners of FCP and FC are corporations owned by Messrs.
Lederman and Budoff. FC is the sole limited partner of FCP. Mr. Lederman,
Mr. Budoff and their respective families are the sole limited partners of
FC. Mr. Lederman is Managing Partner of FC and FCP and, pursuant to the
partnership agreements of FC and FCP, maintains the exclusive ability to
direct the voting and disposition of the shares of Common Stock owned by
such partnerships.

(4) Includes a warrant to purchase 600,000 shares of Common Stock exercisable
within 60 days of February 28, 1997.

(5) Includes, with respect to the Whitney Subordinated Debt Fund, L.P. ("WSDF"),
a warrant to purchase 405,460 shares of Common Stock held by WSDF and, with
respect to Whitney Equity Partners, L.P. ("WEP"), a warrant to purchase
121,350 shares of Common Stock held by WEP each exercisable within 60 days
of February 28, 1997. WEP and WSDF are limited partnerships in which Ray E.
Newton, III is a general partner. Mr. Newton disclaims beneficial ownership
of the securities held by such partnerships, except to the extent of his
respective ownership interests in such partnerships.

(6) Includes 239,940 shares held by The Greenberg Family Fund LLC. Mr.
Greenberg, a director of the Company, is President of The Greenberg Family
Fund LLC and maintains the exclusive ability to direct the voting and
disposition of the shares of Common Stock held by The Greenberg Family Fund
LLC. Also includes 36,000 shares held by Mr. Greenberg's wife as to which
Mr. Greenberg disclaims beneficial ownership.

(7) Includes an option to purchase 3,500 shares of Common Stock exercisable
within 60 days of February 28, 1997.

(8) Includes options to purchase an aggregate of 1,152,210 shares of Common
Stock exercisable within 60 days of February 28, 1997.

46
<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock having a par value of $.01 per share and 200,000 shares of
Preferred Stock having a par value of $.01 per share.

The following description of the Company's capital stock and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws is qualified in its entirety by the provisions of the Amended and
Restated Certificate of Incorporation and By-laws (which are included as
exhibits to the Registration Statement of which this Prospectus is a part) and
the General Corporation Law of the State of Delaware.

COMMON STOCK

There will be 8,916,953 shares of Common Stock outstanding upon completion
of the Offering. In addition, an aggregate of 1,891,810 shares of Common Stock
are reserved for issuance under the Company's stock option plan, the FCP Option
Agreement and the Whitney Warrants (as defined below).

All outstanding shares of Common Stock are, and the shares offered hereby
will be, fully paid and nonassessable. The holders of Common Stock are entitled
to one vote for each share held of record on all matters voted upon by
stockholders and may not cumulate votes. Thus, the owners of a majority of the
Common Stock outstanding may elect all of the directors if they choose to do so,
and the owners of the balance of such shares would not be able to elect any
directors. Subject to the rights of holders of any future series of undesignated
Preferred Stock that may be designated, each share of outstanding Common Stock
is entitled to participate equally in any distribution of net assets made to the
stockholders in a liquidation, dissolution or winding up of the Company and is
entitled to participate equally in dividends as and when declared by the Board.
There are no redemption, sinking fund, conversion or preemptive rights with
respect to the shares of Common Stock. All shares of Common Stock have equal
rights and preferences.

PREFERRED STOCK

The Board is authorized, subject to certain limitations prescribed by law,
without further stockholder approval, to issue from time to time up to an
aggregate of 200,000 shares of Preferred Stock in one or more series with such
designations and such powers, preferences and rights, and such qualifications,
limitations or restrictions (which may differ with respect to each series) as
the Board may fix by resolution.

The Board is empowered to set the terms of such shares (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences). Accordingly, the Board, without
stockholder approval, may issue shares of Preferred Stock with terms (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences) that could adversely
affect the voting power and other rights of holders of Common Stock.

At present, no shares of Preferred Stock are outstanding, and the Company
has no present plans to issue any shares of Preferred Stock.

The undesignated Preferred Stock may have the effect of discouraging an
attempt, through the acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger, sale
or exchange of assets or a similar transaction. For example, the Board could
issue such shares as a dividend to holders of Common Stock or place such shares
privately with purchasers who may side with the Board in opposing a takeover
bid. The anti-takeover effects of the undesignated Preferred Stock may deny
stockholders the receipt of a premium on their Common Stock and may also have a
depressive effect on the market price of the Common Stock.

47
<PAGE> 49

WARRANTS

As part of the Whitney Investment the Company issued to (i) WSDF a warrant
(the "WSDF warrant") to purchase 405,460 shares of Common Stock at an exercise
price equal to $.01 per share and (ii) WEP a warrant (the "WEP warrant") to
purchase 121,350 shares of Common Stock at an exercise price equal to $8.24 per
share (collectively, the "Whitney Warrants"). The WSDF warrant is exercisable by
WSDF at any time after the earliest to occur of (a) October 21, 1998, (b)
consummation of certain registered public offerings (including the Offering),
(c) a Change of Control (as defined in the WSDF warrant) and (d) receipt by WSDF
of an Outside Sale Notice (as defined in the WSDF warrant). The WEP warrant is
exercisable by WEP at any time. The Whitney Warrants each contain provisions
that may cause an adjustment of the exercise price upon the occurrence of
certain equity issuances specified therein.

STOCKHOLDERS' AGREEMENT; REGISTRATION RIGHTS

All of the existing holders of the Company's Common Stock and options to
purchase Common Stock are parties to a Stockholders' Agreement dated October 21,
1996 (the "Stockholders' Agreement") which, except to the extent described in
the next paragraph, will terminate upon the completion of the Offering. The
Stockholders' Agreement (i) provides that the stockholders have certain
preemptive rights upon certain equity issuances by the Company, (ii) imposes
certain conditions of the sale, transfer or disposal of shares of Common Stock
and (iii) provides that WEP may designate a person to serve on the Board. The
Stockholders' Agreement terminates as to any party thereto upon the earliest to
occur of (i) the transfer of all shares owned by such party, (ii) immediately
prior to the effectiveness of certain registered public offerings (including the
Offering) and (iii) the tenth anniversary of the date of the Stockholders'
Agreement.

The Stockholders Agreement provides that in the event the Company registers
any of its securities for sale to the public, any holder of Restricted Stock (as
defined therein) may request to have such Restricted Stock included in the sale
at the Company's expense, subject to certain limitations. In the event such
offering is an underwritten public offering, the Restricted Stock will be sold
on the same terms and conditions as the shares of Common Stock otherwise being
sold. The number of shares of Restricted Stock which may be included in an
offering may be reduced if and to the extent the managing underwriter determines
that such inclusion of Restricted Stock would adversely affect the marketing of
the securities to be sold by the Company. In addition, each holder of Restricted
Stock agrees to refrain from selling such Restricted Stock during the period of
distribution of an offering and for a period until the 180th day after the
effective date of the registration. As of February 28, 1996, there were
5,794,385 shares subject to registration rights, the holders of which have been
asked to waive their registration rights in connection with the Offering.

CERTAIN PROVISIONS OF DELAWARE LAW

The Company is subject to the provisions of section 203 of the General
Corporation Law of the State of Delaware. Subject to certain exceptions, section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board or unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, assets sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock.

ANTI-TAKEOVER EFFECT OF PROVISIONS OF THE AMENDED AND RESTATED
CERTIFICATION OF INCORPORATION AND BY-LAWS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws could discourage potential acquisition proposals and
could delay or prevent a change in control of

48
<PAGE> 50

the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board and in the policies
formulated by the Board and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company, such as an
unsolicited acquisition proposal. Because these provisions could have the effect
of discouraging a third party from acquiring control of the Company, they may
inhibit fluctuations in the market price of shares of Common Stock that could
otherwise result from actual or rumored takeover attempts and, therefore could
deprive stockholders of an opportunity to realize a takeover premium. These
provisions also may have the effect of limiting the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock
and of preventing changes in the management of the Company.

Election and Removal of Directors. The Company's Board is dividend into
three classes of directors serving staggered terms. One class of directors will
be elected at each annual meeting of stockholders for a three-year term. At
least two annual meetings of stockholders, instead of one, generally will be
required to change the majority of the Company's Board. Any director may be
removed for cause at any time by the affirmative vote of the holders of at least
66 2/3% of the shares entitled to vote at a special meeting of stockholders
called for that purpose. The vacancies thus created may be filled at that same
meeting by the affirmative vote of the holders of at least 66 2/3% of the shares
entitled to vote at such meeting. Ordinary vacancies in the Board may be filled
by the affirmative vote of the Board members then in office.

Vote Required to Amend or Repeal Certain Provisions of the Amended and
Restated Certificate of Incorporation and By-laws. The General Corporation Law
of the State of Delaware provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's Amended and Restated Certificate of Incorporation or By-laws,
unless a corporation's Amended and Restated Certificate of Incorporation or
By-laws, as the case may be, requires a greater percentage. The Company's
Amended and Restated Certificate of Incorporation requires the affirmative vote
of the holders of at least 66 2/3% of the shares entitled to vote in the
election of directors to amend or repeal certain of its provisions. A vote of
not fewer than 66 2/3% of the holders of shares entitled to vote in the election
of directors is required to amend or repeal the Company's By-laws. The By-laws
may also be amended or repealed by a vote of not fewer than 66 2/3% of the
Board, provided that the Board may not amend or repeal any bylaw adopted by the
stockholders of the Company. Any such vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
Preferred Stock that might be outstanding at the time any such amendments are
submitted to stockholders.

Stockholder Consent. The Amended and Restated Certificate of Incorporation
provides that stockholder action can be taken only at an annual or special
meeting of stockholders and cannot be taken by written consent in lieu of a
meeting. In addition, the Amended and Restated Certificate of Incorporation
provides that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board or by the Chairman of the Board. Stockholders will not be permitted
to call a special meeting or to require the Board to call a special meeting.

Advance Notice. The Amended and Restated Certificate of Incorporation
establishes an advance notice procedure for stockholder proposals to be brought
before an annual meeting of the stockholders of the Company, including proposed
nominations of persons for election to the Board.

Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the Amended and Restated Certificate of Incorporation does not
give the Board the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at a special or
annual

49
<PAGE> 51

meeting, the Amended and Restated Certificate of Incorporation may have the
effect of precluding the conduct of certain business at a meeting if the proper
procedures are not followed or may discourage or defer a potential acquiror from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock will be determined
prior to the completion of the Offering.

50
<PAGE> 52

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Offering because of certain contractual and legal restrictions
on resale described below, sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.

Upon completion of the Offering, the Company will have outstanding an
aggregate of 8,916,953 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
based upon the number of shares outstanding as of February 28, 1997. Of these
shares, all of the 2,500,000 shares sold in the Offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Affiliates"). The remaining
6,416,953 shares of Common Stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below.

The Company, and the executive officers, directors and stockholders who own
in the aggregate 6,416,953 shares of Common Stock have agreed that, subject to
certain exceptions, they will not, without the prior written consent of
Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire shares of Common Stock owned by them during the 180-day period
commencing on the date of this Prospectus. The Company may, however, issue
shares of Common Stock upon the exercise of stock options that are currently
outstanding, and may grant additional options under the Option Plan, provided
that, without the prior written consent of Hambrecht & Quist LLC, such
additional options shall not be exercisable during such period.

Upon expiration of the lock-up period, no shares of Common Stock held by
existing stockholders will be eligible for sale without restriction under Rule
144(k) or Rule 701, while 6,178,325 shares held by existing stockholders will be
eligible for sale subject to the volume and other restrictions of Rule 144. The
remaining 6,068 shares held by existing stockholders will become eligible for
sale pursuant to Rule 144 upon expiration of applicable holding periods. In
addition, as of February 28, 1997, 1,531,160 shares were subject to outstanding
options and warrants. All of those shares are subject to lock-up agreements.
Upon expiration of lock-up agreements, 32,525 shares subject to such options and
warrants will be vested, and could be exercised and sold.

In general, under Rule 144 (effective April 29, 1997), beginning 90 days
after the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an Affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least 2 years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above.

51
<PAGE> 53

Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to the Offering.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Option Plan.
Based on the number of options outstanding and shares reserved for issuance
under the Option Plan at February 28, 1997, such registration statement would
cover approximately 765,000 shares. Such registration statement is expected to
be filed and to become effective as soon as practicable after the date of this
Prospectus. Shares registered under such registration statement will, subject to
Rule 144 volume limitations applicable to Affiliates, be available for sale in
the open market, unless such shares are subject to vesting restrictions with the
Company or the lock-up agreements described above. See "Management."

In addition, pursuant to the Stockholders' Agreement, certain stockholders
holding 5,794,385 shares of Common Stock after the Offering have certain rights
to have such shares registered for resale under the Securities Act. The number
of shares sold in the public market could increase if registration rights are
exercised. See "Description of Capital Stock -- Stockholders' Agreement."

52
<PAGE> 54

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC,
PaineWebber Incorporated and Robertson, Stephens & Company LLC (collectively,
the "Representatives"), have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Hambrecht & Quist LLC.............................................
PaineWebber Incorporated..........................................
Robertson, Stephens & Company LLC.................................

-----
Total............................................................. 2,500,000
=====
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives. The Representatives
have informed the Company that the Underwriters do not intend to confirm sales
of Common Stock offered hereby to any accounts over which they have
discretionary authority.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including labilities under the Securities Act, and to contribute to
payments the Underwriters may be required to make in respect thereof.

All current stockholders of the Company, including the executive officers
and directors, who will own in the aggregate 6,416,953 shares of Common Stock
upon completion of the Offering based on shares outstanding as of February 28,
1997, have agreed that they will not, without the prior written

53
<PAGE> 55

consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exercisable for or convertible into shares of Common Stock owned by
them during the 180-day period following the effective date of this Prospectus.
The Company has agreed that it will not, without prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period following the effective date of this Prospectus, except that the Company
may grant options under its stock plans and issue securities under, or pursuant
to the exercise of options granted under, its stock plans. Hambrecht & Quist LLC
in its sole discretion may release any of the shares subject to the lock-up at
any time without notice. See "Shares Eligible for Future Sale."

Prior to the Offering, there has been no public market for the Company
Stock. The initial public offering price of the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, sales and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of market
conditions and other factors.

Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis, New York, New York. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Cooley Godward LLP, Palo
Alto, California.

EXPERTS

The consolidated financial statements included in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.

54
<PAGE> 56

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to such Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or 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 without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at 7 World Trade Center, Suite 1300, New York, New York
10048, and the Chicago Regional Office located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and copies of all or any part thereof may be
obtained at prescribed rates from the Commission's Public Reference Section at
its principal office. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's World Wide Web site is http://www.sec.gov.

55
<PAGE> 57

FULCRUM DIRECT, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
-------
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and December 31, 1996.............. F-3
Consolidated Statements of Operations for the fiscal periods 1994, 1995 and 1996.... F-4
Consolidated Statements of Stockholders' Equity for the fiscal periods 1994, 1995
and 1996.......................................................................... F-5
Consolidated Statements of Cash Flows for the fiscal periods 1994, 1995 and 1996.... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>

F-1
<PAGE> 58

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of Fulcrum Direct, Inc.:

We have audited the accompanying consolidated balance sheets of FULCRUM
DIRECT, INC., (a Delaware corporation) AND SUBSIDIARY (collectively, the
"Company") as of December 30, 1995 and December 28, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from March 16, 1994 (inception) through December 31, 1994 and for
each of the two years in the period ended December 28, 1996 and December 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of the Company as of December
30, 1995 and December 28, 1996, and the results of their consolidated operations
and their cash flows for the period from March 16, 1994 (inception) through
December 31, 1994 and for each of the two years in the period ended December 30,
1995 and December 28, 1996, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
February 28, 1997

F-2
<PAGE> 59

FULCRUM DIRECT, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 196 $ 140
Marketable securities.......................................... 1,543 --
Receivables.................................................... 1,677 1,057
Inventories.................................................... 7,037 12,532
Deferred income taxes.......................................... 202 29
Deferred catalog costs......................................... 621 1,315
Other current assets........................................... 258 1,087
------- -------
Total current assets................................... 11,534 16,160
FURNITURE, FIXTURES AND EQUIPMENT, NET........................... 1,249 3,355
INTELLECTUAL AND PROPRIETARY PROPERTY, NET....................... 1,872 4,421
RECEIVABLE UNDER LICENSING AGREEMENT............................. -- 1,110
OTHER ASSETS..................................................... 205 857
------- -------
TOTAL ASSETS........................................... $14,860 $25,903
======= =======
</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Lines of credit................................................ $ 4,820 $ --
Accounts payable............................................... 2,719 4,307
Current portion of long-term debt.............................. 129 426
Reserve for returns............................................ 158 514
Other accrued liabilities...................................... 481 641
------- -------
Total current liabilities.............................. 8,307 5,888
LONG-TERM DEBT, net of current portion........................... 702 11,754
DEFERRED INCOME TAXES............................................ 34 130
------- -------
Total liabilities...................................... 9,043 17,772
------- -------
COMMITMENTS AND CONTINGENCIES....................................
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares authorized,
30,000 shares Series A Preferred Stock designated, issued
and outstanding as of December 30, 1995; 200,000 shares
authorized, 52,000 shares of Series A Preferred Stock
designated, none issued or outstanding, and 35,000 shares of
Series B Preferred Stock designated, none issued or
outstanding as of December 28, 1996......................... -- --
Common stock, $0.01 par value; 3,600,000 shares authorized,
issued and outstanding as of December 30, 1995; 10,000,000
shares authorized, 6,410,885 issued and outstanding as of
December 28, 1996........................................... 36 64
Additional paid-in capital..................................... 5,293 7,685
Unrealized gain on marketable securities, net of deferred
tax......................................................... 137 --
Retained earnings.............................................. 351 382
------- -------
Total stockholders' equity............................. 5,817 8,131
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $14,860 $25,903
======= =======
</TABLE>

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

F-3
<PAGE> 60

FULCRUM DIRECT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

COST OF GOODS SOLD................................. 5,087 13,211 15,566
---------- ---------- ----------
GROSS PROFIT....................................... 6,910 15,370 20,891

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 6,617 14,313 19,710
---------- ---------- ----------

INCOME FROM OPERATIONS............................. 293 1,057 1,181

OTHER INCOME....................................... 52 177 866

INTEREST EXPENSE................................... (63) (762) (820)

OTHER EXPENSE...................................... (112) (1) (253)
---------- ---------- ----------

INCOME BEFORE INCOME TAXES......................... 170 471 974

INCOME TAX EXPENSE................................. 79 151 360
---------- ---------- ----------

NET INCOME......................................... $ 91 $ 320 $ 614
========== ========== ==========

NET INCOME......................................... $ 91 $ 320 $ 614

PREFERRED STOCK DIVIDENDS.......................... -- 60 583
---------- ---------- ----------

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS....... $ 91 $ 260 $ 31
========== ========== ==========

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING.................... 4,381,647 5,121,373 7,049,506
========== ========== ==========

NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE............................................ $ 0.02 $ 0.05 $ --
========== ========== ==========
</TABLE>

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

F-4
<PAGE> 61

FULCRUM DIRECT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON
STOCK, ADDITIONAL TOTAL
$0.01 PAID-IN UNREALIZED RETAINED STOCKHOLDERS'
PAR VALUE CAPITAL GAIN EARNINGS EQUITY
--------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' INVESTMENT AT MARCH
16, 1994 (inception).............. $-- $ -- $ -- $ -- $ --

Capital investment at March 31,
1994.............................. 36 2,705 -- -- 2,741

Distribution of assets to
stockholder....................... -- (642) -- -- (642)

Net income.......................... -- -- -- 91 91
--- ------- ----- ----- -------

BALANCE, DECEMBER 31, 1994.......... 36 2,063 -- 91 2,190

Net income.......................... -- -- -- 320 320

Issuance of Series A Preferred
Stock............................. -- 3,000 -- -- 3,000

Additional capital contributions.... -- 1,773 -- -- 1,773

Return of capital................... -- (1,543) -- -- (1,543)

Unrealized gain on marketable
securities, net of deferred tax... -- -- 137 -- 137

Preferred stock dividends (12% per
annum)............................ -- -- -- (60) (60)
--- ------- ----- ----- -------

BALANCE, DECEMBER 30, 1995.......... 36 5,293 137 351 5,817

Net income.......................... -- -- -- 614 614

Net change of unrealized gain on
marketable securities, net of
tax............................... -- -- (137) -- (137)

Issuance of Series A Preferred
Stock............................. -- 2,123 -- -- 2,123

Issuance of Series B Preferred
Stock............................. -- 3,173 -- -- 3,173

Return of capital................... -- (2,274) -- -- (2,274)

Conversion of Series A Preferred
Stock............................. 24 (24) -- -- --

Call Series A Preferred Stock....... -- (400) -- -- (400)

Call Series B Preferred Stock....... -- (3,208) -- -- (3,208)

Sale of common stock and warrants... 4 1,846 -- -- 1,850

Issuance of warrants................ -- 1,156 -- -- 1,156

Preferred stock dividends (12% per
annum)............................ -- -- -- (583) (583)
--- ------- ----- ----- -------

BALANCE, DECEMBER 28, 1996.......... $64 $ 7,685 $ -- $ 382 $ 8,131
=== ======= ===== ===== =======
</TABLE>

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

F-5
<PAGE> 62

FULCRUM DIRECT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 91 $ 320 $ 614
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization.............................. 176 469 1,050
Net changes in current assets and liabilities:
Receivables.............................................. (485) (1,038) 620
Inventories.............................................. 41 (5,143) (5,425)
Deferred catalog costs................................... (203) (154) (694)
Other current assets..................................... 498 24 (829)
Accounts payable......................................... (173) 1,670 1,588
Reserve for returns...................................... 67 66 5
Other accrued liabilities................................ 105 (120) 160
Deferred income taxes...................................... 79 151 360
Other long-term liabilities................................ (618) (50) --
------ ------ ------
Net cash used by operating activities................. (422) (3,805) (2,551)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of assets, net...................................... (613) (2,576) (5,253)
Net cash paid in the purchase of Playclothes assets........... -- -- (1,271)
Net cash paid in the purchase of NewStork, Inc................ (2,341) -- --
Sale (purchase) of marketable securities, net................. -- (1,316) 1,316
------ ------ ------
Net cash used by investing activities................. (2,954) (3,892) (5,208)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on lines of credit.................. 917 4,269 (3,500)
Payments of debt obligations.................................. (322) (160) (625)
Long-term borrowings.......................................... 152 502 13,130
Deferred financing costs...................................... -- -- (663)
Preferred stock dividends paid................................ -- (60) (222)
Proceeds from issuance of common stock........................ -- -- 2,000
Proceeds from issuance of preferred stock..................... -- 3,000 3,465
Redemption of preferred stock................................. -- -- (3,608)
Investment (return) of capital................................ 2,741 230 (2,274)
------ ------ ------
Net cash provided by financing activities............. 3,488 7,781 7,703
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 112 84 (56)
CASH AND CASH EQUIVALENTS, beginning of period.................. -- 112 196
------ ------ ------
CASH AND CASH EQUIVALENTS, end of period........................ $ 112 $ 196 $ 140
====== ====== ======
CASH PAID FOR INTEREST.......................................... $ 94 $ 757 $ 1,198
====== ====== ======
SUMMARY OF NON-CASH TRANSACTIONS:
Assignment of intangible assets to stockholder................ $ 642 $ -- $ --
====== ====== ======
Unrealized gain on marketable securities, net of deferred
tax........................................................ $ -- $ 137 ($ 137)
====== ====== ======
Effect of reduction in deferred tax asset valuation allowance
on purchase accounting..................................... $ 329 $ 160 $ (11)
====== ====== ======
Series A and B Preferred Stock issued for debt................ $ -- $ -- $ 1,320
====== ====== ======
Series B Preferred Stock issued for dividends................. $ -- $ -- $ 361
====== ====== ======
Conversion of Preferred Stock to Common Stock................. $ -- $ -- $ 24
====== ====== ======
</TABLE>

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

F-6
<PAGE> 63

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 16, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994,
AND THE FISCAL YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

(1) DESCRIPTION AND HISTORY OF COMPANY:

Fulcrum Direct, Inc. ("Fulcrum" or the "Company"), a Delaware corporation,
is a leading direct marketer of proprietary children's apparel brands, including
After the Stork, Playclothes, Little Feet, SunSkins and Discount Direct. Fulcrum
markets its portfolio of brands primarily through full-color catalogs developed
by the Company to target well-educated, middle to upper dual-income households
with children from six months to 12 years old. After the Stork offers a broad
assortment of basic clothing primarily made of natural fibers. Playclothes
offers fashionable children's outfits. Little Feet offers a broad selection of
mid-priced, basic and fashion footwear for children. The Company's SunSkins
brand of clothing, designed to protect against the sun's harmful UV rays, is
marketed through its catalogs, other direct marketing channels and wholesale
channels. In addition, Discount Direct is a direct mail liquidation vehicle for
all the Company's brands. The Company's 145,000 square foot headquarters, call
center and distribution center is located in Rio Rancho, New Mexico.

In February 1993, NewStork purchased the business and assets, and assumed
certain liabilities, of After the Stork, Inc., a New Mexico corporation and a
manufacturer and catalog retailer of natural fiber children's clothing which was
founded in 1980. On March 31, 1994, all of the outstanding stock of NewStork,
Inc. a New Mexico corporation ("NewStork"), was acquired by FCP Direct, Inc., a
Delaware corporation ("FCP Direct") and a wholly owned subsidiary of Fulcrum
Capital Partners L.P., a Delaware limited partnership ("FCPLP"), for cash
consideration. In March 1995, FCPLP contributed to Fulcrum all common shares of
FCP Direct. On December 30, 1995, to simplify Fulcrum's structure, NewStork was
merged into FCP Direct, and FCP Direct was merged into Fulcrum.

During 1994, After the Stork was returned to profitability. During 1995,
Fulcrum developed its SunSkins brand and introduced the After the Stork brand in
Japan and developed other revenue enhancing programs. In Spring 1996, Fulcrum
introduced Discount Direct and purchased the OshKosh B'Gosh catalog customer
list. In Fall 1996, Fulcrum introduced its Little Feet brand in the U.S. and
Japan. Net revenues in Japan were $2,900 and $9,000 in fiscal years 1995 and
1996, respectively.

On December 31, 1996, the Company acquired, for cash consideration, certain
assets relating to the Playclothes brand, previously part of a portfolio of
several brands marketed by a subsidiary of The Walt Disney Company ("Disney").
Net revenues of the Playclothes catalog were $28,900 in 1996 (unaudited). Assets
acquired included (i) all proprietary rights in the Playclothes brand name, (ii)
the Playclothes customer list, (iii) a Canadian wholesale and license agreement,
(iv) the right to mail Fulcrum's catalogs in 1997 to customers of The Disney
Catalog and (v) certain immaterial inventory and fixed assets. Under the
Canadian wholesale and license agreement, the Company is entitled to receive
guaranteed payments through December 2000 with an aggregate present value
totalling $1,110. The Company allocated the $1,600 purchase price in the
accompanying fiscal year 1996 consolidated balance sheet as follows: (i) $1,110
to receivable under licensing agreement, (ii) $349 to tradename and (iii) $60 to
customer list. The Company incurred costs of $338 relating to the incremental
training of its workforce, the hiring and relocation of creative and
merchandising professionals and additional travel regarding due diligence and
new vendor selection and certifications. Accordingly, the Company capitalized
and will amortize these costs to expense over the 1997 fiscal year when revenue
will be recognized from Fulcrum's remerchandised and repositioned Playclothes
catalog.

In January 1997, the Company mailed its first version of the remerchandised
and repositioned Playclothes catalog, which contained products specifically
designed by the Company's new design team. The Company believes that the
remerchandised and repositioned Playclothes catalog is substan-

F-7
<PAGE> 64

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

tially different from the Playclothes catalog as distributed by the prior owners
in that it does not contain any of the products previously offered. The Company
also believes that the prospects of the Playclothes brand name will be largely
dependent on the Company's ability to develop and market new products for the
Playclothes brand name and to integrate the Playclothes product line into the
Company's facilities, distribution systems and sales force.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Equipment Bond Purchaser, Inc., a
New Mexico corporation, formed solely to administer the Company's Industrial
Revenue Bonds. All material intercompany transactions and balances have been
eliminated.

b. Presentation of Fiscal Periods

The Company uses a 52 to 53 week fiscal year ending the Saturday nearest to
December 31. The 1994 financial statements represent the period from March 16,
1994 (inception) to December 31, 1994. The fiscal years ending December 30, 1995
and December 28, 1996 both included 52 weeks.

c. Fair Value of Financial Instruments

The carrying amounts of all financial instruments, excluding marketable
securities, are believed to approximate fair market value based upon the
following methods and assumptions:

Cash and Cash Equivalents -- The carrying value of cash and cash
equivalents is assumed to approximate fair value due to the short-term maturity
of these instruments.

Marketable Securities -- The fair value of marketable securities
available-for-sale is based upon fair market value. See Note 2e. -- Summary of
Significant Accounting Policies -- Marketable Securities.

Lines of Credit -- The carrying values of the lines of credit are assumed
to approximate fair value due to the secured nature of these instruments, their
floating interest rates and their short-term nature.

Long-term Debt -- The carrying value of the Company's long-term debt
approximates fair value after allocation of the estimated fair value of the debt
to the warrants issued in connection with subordinated debt.

Letters of Credit -- The Company utilizes stand-by and commercial letters
of credit for certain domestic and imported purchases. The contract amounts of
the letters of credit approximate their fair value because of the short-term
nature.

d. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks and
investments with original maturities of three months or less. The Company's cash
management system provides for the daily replenishment of major bank accounts
for check clearing requirements. Accordingly, outstanding checks of $839 and
$1,200 of December 30, 1995 and December 28, 1996, respectively, that had not
yet been paid by the bank are reflected in cash and accounts payable in the
accompanying consolidated balance sheets.

F-8
<PAGE> 65

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

e. Marketable Securities

Marketable securities include marketable equity securities carried as
available-for-sale and are stated at fair market value and unrealized gains or
losses on such securities are reflected, net of tax, in stockholders' equity, in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities.

f. Inventories

Inventories are stated at the lower of fair market value or purchase cost
principally determined by the first-in, first-out ("FIFO") method. The elements
of finished goods include purchased goods and raw materials, inbound freight,
labor and overhead.

g. Deferred Catalog Costs

The Company accounts for catalog costs in accordance with AICPA Statement
of Position ("SOP") 93-7, Reporting on Advertising Costs. SOP 93-7 requires that
the amortization of capitalized advertising costs be the amount computed using
the ratio that current period revenues for the catalog cost pool bear to the
total of current and estimated future period revenues for that catalog cost
pool. Catalog production and distribution costs are capitalized and amortized
over the periods in which the related revenues are generated, which is
approximately three months from the date catalogs are mailed.

h. Acquisition, Organizational and Start-Up Costs

Non-recurring and incremental expenditures directly related to acquisition
and organization of new business activities are deferred and amortized
straight-line over one year. These costs are included in other current assets in
the accompanying consolidated balance sheets.

i. Furniture, Fixtures and Equipment, Net

Furniture, fixtures and equipment, net are stated at cost. The Company
provides for depreciation using the straight-line method in amounts that
allocate the cost of furniture, fixtures and equipment over their estimated
useful lives ranging from three to seven years. Costs of routine repair and
maintenance are expensed as incurred. The Company capitalized $124 in
implementation and program instruction costs as part of the implementation of
$1,200 fully integrated operations systems. Assets under capital leases were
$453 and $1,190 as of December 30, 1995 and December 28, 1996, respectively.

j. Intellectual and Proprietary Property, Net

Intellectual and proprietary property, net is amortized using the
straight-line method over the estimated useful lives of the assets. Categories
of this property and their estimated useful lives include: trademarks - fifteen
years; customer lists - five years; and copyrighted artwork and patterns - three
years. Effective January 1, 1996, the Company, based on independent study,
revised its estimate of the useful life of customer lists from four years to
five years, which more appropriately reflects the useful life over which the
economic benefits are expected to be received from these assets. The effect of
this change to the fiscal year 1996 consolidated statement of operations was $89
after taxes.

k. Asset Impairment

The carrying value of tangible and intangible assets is periodically
reviewed by the Company and impairments are recognized when the undiscounted
value of projected future cash flows less interest is

F-9
<PAGE> 66

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

less than their carrying value, in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

l. Excess of Cost Over Fair Value of Net Assets Acquired

The excess of the cost of the NewStork acquisition at March 31, 1994, over
the fair value of the net assets acquired is being amortized using the
straight-line method over twenty years.

m. Revenue Recognition

The Company recognizes sales and the related costs of goods sold at the
time merchandise is shipped to customers. Shipping and handling fees charged to
customers and list rental income are reflected as components of net revenues,
respectively, in the accompanying consolidated statements of operations.

n. Reserve for Returns

At the time of sale, the Company provides a reserve equal to the gross
profit on projected merchandise returns, based on its historical returns
experience.

o. Income Tax Expense

Income tax expense includes Federal and state income taxes currently
payable and those deferred or prepaid because of temporary differences between
financial statement and tax bases of assets and liabilities. Deferred income
taxes represent temporary differences relating to current and non-current assets
and liabilities.

p. Net Income per Common and Common Equivalent Share

Primary earnings per common and common equivalent share are computed by
dividing net income, after deducting preferred stock dividends, by the weighted
average number of common shares outstanding during each period, plus, for all
periods presented, the incremental shares that would have been outstanding upon
the assumed exercise of dilutive stock options and warrants issued during fiscal
year 1996, using the treasury stock method as follows:

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH --------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Weighted average shares of common stock
outstanding..................................... 2,860,274 3,600,000 5,596,638
Common equivalent shares calculated using treasury
stock method.................................... 1,521,373 1,521,373 1,452,868
---------- ---------- ----------
Total shares for income per share calculation..... 4,381,647 5,121,373 7,049,506
========== ========== ==========
</TABLE>

Net income per common and common equivalent share on a fully diluted basis is
only applicable in fiscal year 1996, and such calculation does not change net
income on a primary basis.

q. Financial Statement Preparation and Presentation

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

F-10
<PAGE> 67

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assets and liabilities, the 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. For additional information, see "Risk Factors" included elsewhere in
this Prospectus.

Certain amounts in the prior periods have been reclassified to conform to
the current year consolidated financial statement presentation.

r. Accounting for Stock-Based Compensation

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Management Team Equity Plan ("the Option Plan"). SFAS No. 123
was issued by the Financial Accounting Standards Board in 1995 and, if fully
adopted, changes the methods for recognition of cost on plans similar to those
of the Company. The Company has adopted the disclosure - only provisions of SFAS
No. 123. See Note 5 -- Employee Benefits. Stock options granted under the Option
Plan have been issued at or above fair market value of the Company's common
stock at the date of grant. Accordingly, no compensation expense has been
recognized with respect to the Option Plan.

s. Seasonal and Quarterly Fluctuations

t. Accounting Pronouncements Not Yet Adopted

The FASB issued SFAS No. 128 Earnings Per Share which is effective for
calendar years beginning December 15, 1997 at which time it will require
restatement of prior year earnings per share calculations. The Company has not
yet determined or quantified the effect of SFAS No. 128. The Company does not
anticipate that there will be a material difference between fully diluted
earnings per share as presented and diluted earnings per share calculated in
accordance with SFAS No. 128.

(3) LINES OF CREDIT AND LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER DECEMBER
30, 28,
1995 1996
----------- -----------
<S> <C> <C>
Subordinated debt, net of discount, effective interest at 12.5%,
due October 2003, $3,000 principal repayment due upon completion
of an initial public offering................................... $ -- $ 8,868
Line of credit, variable interest, due May 1998, secured by assets
of the Company and guaranteed by a related party................ 366 1,661
Capitalized lease obligations with interest at 6.9% to 11.7%, due
1999 to 2001 secured by certain assets and in certain instances,
guaranteed by related parties and officers of the Company....... 465 1,416
8.25% leasehold improvement note, due August 2001, secured by
assets of the Company and guaranteed by a related party......... -- 235
----- ------
831 12,180
Less: Current portion of long-term debt........................... (129) (426)
----- ------
Total long-term debt.............................................. $ 702 $11,754
===== ======
</TABLE>

F-11
<PAGE> 68

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At December 30, 1995 and December 28, 1996, there were $4,820 and $0 of
short-term borrowings outstanding, respectively, comprised of lines of credit
payable to related parties and a bank. The weighted average interest rate in
1995 was 13.4%.

On October 21, 1996, the Company entered into a subordinated debt agreement
with Whitney Subordinated Debt Fund, L.P. ("WSDF") for $10,000 in outstanding
principal, a stated interest rate of 10.101%, due October 21, 2003. A $3,000
principal repayment must be made within five days of completion of an initial
public offering by the Company. A warrant valued at $1,156 was issued in
connection with the subordinated debt, resulting in an effective interest rate
on the subordinated debt of 12.5%.

On December 28, 1996, the Company entered into an agreement with a bank to
expand its credit facility, effective January 1, 1997. The $10,000 credit
facility, which may be increased to $15,000 and extended to May 1999, at the
bank's discretion, provides for a secured line of credit which can be used to
borrow against or for the purpose of issuing standby and commercial letters of
credit and is secured by assets of the Company. The secured line expires May
1998, and bears interest rates of 0.5% over the bank's corporate base rates or
3.1% above LIBOR. As of December 28, 1996, outstanding borrowings on the line of
credit were $1,700 and outstanding letters of credit totaled $1,000. The maximum
amount of this facility that may be used for letters of credit is $2,000.

The credit facility and subordinated debt agreement contain restrictions
which, among other things, require maintenance of certain financial ratios
(which are effective for fiscal year 1997 and change quarterly), restrict
encumbrance of assets and creation of other indebtedness.

Scheduled maturities of long-term debt and capitalized lease obligations
are as follows:

<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------------
<S> <C>
1997............................................................... $ 426
1998............................................................... 2,132
1999............................................................... 443
2000............................................................... 251
2001............................................................... 60
After 2001......................................................... 10,000
------
13,312
Less: unamortized original issue discount on subordinated debt..... (1,132)
------
$12,180
======
</TABLE>

(4) COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company leases its recently expanded headquarters, call center and
distribution center under an operating lease expiring December 31, 2006 with a
related party. The Company intends to use net proceeds from the proposed initial
public offering to purchase its headquarters, call center and distribution
center. See Note 12 -- Subsequent Events (Unaudited). A summary of commitments
for all noncancellable minimum rental payments as of December 28, 1996 are as
follows:

F-12
<PAGE> 69

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------------
<S> <C>
1997............................................................... $ 1,217
1998............................................................... 1,259
1999............................................................... 1,226
2000............................................................... 1,030
2001............................................................... 863
After 2001......................................................... 3,343
------
$ 8,938
======
</TABLE>

Rental expense for the period from March 16, 1994 (inception) through
December 31, 1994 and for the fiscal years ended December 30, 1995 and December
28, 1996 was $124, $189 and $520, respectively.

The Company has an agreement commencing September 1996 with AT&T to
purchase certain communication services through September 1999, which agreement
may be renegotiated or terminated by the Company upon a third-party offer to
provide such services at a lower cost.

(5) EMPLOYEE BENEFITS:

The Company has a 401(k) plan for eligible employees. This plan allows
eligible employees to defer portions of their current compensation up to 10%.
The Company then matches up to 6% of the employee's deferred compensation.
Employee contributions are vested immediately. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of five years. The
Company's contributions for the period from March 16, 1994 (inception) through
December 31, 1994 and for the years ended December 30, 1995 and December 28,
1996 were not significant.

The Company adopted its non-qualified Option Plan on October 18, 1996. A
total of 765,000 shares of common stock are reserved for issuance of options
under the Option Plan. A total of 375,250 options were outstanding under the
Option Plan as of December 28, 1996. The exercise price of all stock options
granted through December 28, 1996 is $5.00 per share. Such options expire in ten
years from date of grant and vest over a five-year period. None of these options
were vested at December 28, 1996. The effect on income of these options
calculated in accordance with SFAS No. 123. was immaterial in fiscal year 1996.

(6) SUPPLEMENTARY CONSOLIDATED BALANCE SHEET DATA:

a. Receivables

Receivables consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Credit card....................................... $ 194 $ 328
Integrated programs............................... -- 250
Customer list rental.............................. 148 138
Related companies, net (See Note 10 -- Related
Party Transactions)............................. 1,225 185
Other............................................. 110 156
------ -------
$1,677 $ 1,057
====== =======
</TABLE>

F-13
<PAGE> 70

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

b. Inventories

Inventories consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Finished goods.................................... $4,296 $ 10,037
Work in process................................... 564 594
Raw materials..................................... 2,177 1,901
------ -------
$7,037 $ 12,532
====== =======
</TABLE>

c. Other Current Assets

Other current assets consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Japanese advertising costs........................ $ -- $ 450
Playclothes acquisition, organizational and
start-up costs.................................. -- 338
Inventory deposits................................ 126 75
Prepaid expenses and other........................ 132 224
---- ------
$258 $1,087
==== ======
</TABLE>

The Company is in the process of negotiating a joint venture with a
Japanese partner to develop a wholesale business in Japan. Advertising costs to
increase brand awareness were incurred in 1996 to positively impact the start-up
of the Japan wholesale business in fiscal 1997. These costs have been
capitalized and are expected to be amortized over a period of no longer than 12
months or may become part of the Japanese joint venture capitalization, of which
final terms have not yet been finalized.

d. Furniture, Fixtures and Equipment, Net

Furniture, fixtures and equipment, net consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Computer equipment................................ $ 762 $1,579
Computer software................................. 219 958
Furniture and equipment........................... 273 790
Leasehold improvements............................ 9 300
------ ------
1,263 3,627
Less: Accumulated depreciation and amortization... (304) (759)
Add: Assets not yet in service.................... 290 487
------ ------
$1,249 $3,355
====== ======
</TABLE>

F-14
<PAGE> 71

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

e. Intellectual and Proprietary Property, Net

Intellectual and proprietary property, net consists of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Customer lists.................................... $2,190 $4,214
Trademarks........................................ -- 349
Copyrighted artwork and patterns.................. 29 89
------- ------
2,219 5,352
Less: Accumulated amortization.................... (347) (931)
------- ------
$1,872 $4,421
======= ======
</TABLE>

f. Other Assets

Other assets include deferred financing costs relating to the Company's
subordinated debt issuance and the excess of cost over fair value of net assets
acquired, net of amortization related to the purchase of NewStork. Other assets
consist of:

<TABLE>
<CAPTION>
DECEMBER DECEMBER
30, 28,
1995 1996
----------- -----------
<S> <C> <C>
Deferred financing costs.......................... $ -- $ 663
Excess of cost over fair value of net assets
acquired........................................ 235 235
Less: Accumulated amortization.................... (30) (41)
--- ---
$ 205 $ 857
=== ===
</TABLE>

(7) SUPPLEMENTARY STATEMENTS OF OPERATIONS DATA:

a. Other Income

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
State job training program
incentives........................... $ -- $ 90 $500
Gain on sale of marketable
securities........................... -- 9 347
Dividend income........................ -- 60 15
Miscellaneous income................... 52 18 4
---- ---- ---
$ 52 $177 $866
==== ==== ===
</TABLE>

The State of New Mexico granted to the Company more than $2,000 for
training of new employees through December 1997. The Company utilized $32 and
$500 in fiscal years 1995 and 1996, respectively. The Company has $1,123 of the
grant available for use in fiscal year 1997.

In May 1996, the Company sold marketable securities for $1,650, resulting
in a realized gain of $347.

F-15
<PAGE> 72

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

b. Other Expenses

(8) INCOME TAXES:

Income tax expense on income consists of the following:

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH -----------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal.......................... $ -- $ -- $ --
State............................ -- -- --
--
--- ---
Total current.................... -- -- --
--
--- ---
Deferred:
Federal.......................... 67 129 340
State............................ 12 22 20
--
--- ---
Total deferred................... 79 151 360
--
--- ---
Total income tax expense........... $ 79 $151 $360
=== === ==
</TABLE>

Actual tax expense differs from the "expected" tax expense on income
computed by applying the Federal corporate income tax rate of 34%, to pretax net
income of the Company as follows:

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED
THROUGH -----------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense.... $ 58 $160 $331
Adjustments in income taxes
resulting from:
Amortization of goodwill......... 7 4 3
State income taxes............... 12 22 20
Adjustment of deferred income
taxes......................... -- (35) --
Other............................ 2 -- 6
--
--- ---
Income tax expense................. $ 79 $151 $360
=== === ==
</TABLE>

F-16
<PAGE> 73

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred tax (liabilities) assets were comprised of the following:

<TABLE>
<CAPTION>
DECEMBER DECEMBER
30, 28,
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserve for returns............................. $ 136 $ 211
Inventory reserves.............................. 158 375
Net operating loss.............................. 730 988
Other........................................... 71 4
----- -----
Total gross deferred tax assets................. 1,095 1,578
----- -----
Less valuation allowance:
Federal......................................... -- --
State........................................... (29) (18)
----- -----
Total valuation allowance....................... (29) (18)
----- -----
Deferred tax assets, net.......................... 1,066 1,560
----- -----
Deferred tax liabilities:
Basis differences in furniture, fixtures and
equipment and intellectual and proprietary
property..................................... (769) (1,633)
Unrealized gain on available-for-sale marketable
securities under SFAS No. 115................ (90) --
Other........................................... (39) (28)
----- -----
Total gross deferred tax liabilities............ (898) (1,661)
----- -----
Deferred tax (liability) assets, net.............. $ 168 $ (101)
===== =====
</TABLE>

The Company had net tax operating loss carryforwards ("NOLs") of $2,499
(none for financial reporting purposes), at December 28, 1996. These NOLs expire
as follows:

<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------------
<S> <C>
2006 $ 243
2007 160
2008 375
2009 53
2010 782
2011 886
$2,499
</TABLE>

The Company is currently appealing an IRS ruling that, if the appeal is
unsuccessful, would reduce the Company's NOLs by no more than approximately
$500.

(9) STOCKHOLDERS' EQUITY:

As of December 30, 1995, the Company had 1,000 shares common stock, $0.01
par value per share, authorized, issued and outstanding. On October 17, 1996,
the Company amended its Certificates of Incorporation to increase the number of
shares of common stock from 1,000 shares to 10,000,000 shares. On October 18,
1996, the Company's common stock was split at a ratio of 3,600:1. This stock
split has been reflected in the accompanying consolidated financial statements
on a retroactive basis for all periods presented.

F-17
<PAGE> 74

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 30, 1995, the Company had 100,000 shares of preferred stock,
$0.01 par value per share, authorized, of which 30,000 shares had been
designated Series A Preferred Stock ("Series A Preferred Stock") and were issued
and outstanding. The Series A Preferred Stock, with a fixed dividend of 12.0%
per annum, was convertible into common stock at negotiated conversion rates and
was, subject to certain restrictions, callable by the Company and puttable by
the holders. On December 31, 1995, the Board of Directors designated an
additional 22,000 shares of the Series A Preferred Stock, bringing total
authorized Series A Preferred Stock to 52,000 shares, and designated 35,000
shares of Series B Preferred Stock ("Series B Preferred Stock"). The Series B
Preferred Stock, with a fixed dividend of 12.0% per annum, was also callable by
the Company.

In 1995, the Company sold 30,000 shares of Series A Preferred Stock to a
related party for $100 per share. In 1996, the Company converted the entire
amount of the debt related to the 12.0% line of credit due to a related party to
8,196 shares, and sold an additional 10,986 shares, of Series B Preferred Stock
for $100 per share. In May 1996, the Company also converted $500 of debt related
to the 18% line of credit due to a related party to 5,000 shares of Series A
Preferred Stock for $100 per share. See Note 3 -- Lines of Credit and Long-Term
Debt. In 1996, the Company also sold an additional 16,125 shares of Series A
Preferred Stock at $100 and $105 per share, as the case may be, to certain
related parties and other individuals and sold 12,285 shares of the Series B
Preferred Stock for $105 per share. Of the shares of preferred stock, 4000
shares of Series A Preferred Stock and all shares of the Series B Preferred
Stock were called on October 21, 1996. The remaining 17,125 shares of Series A
Preferred Stock were converted into common stock on October 21, 1996 at
conversion rates of 60:1 or 36:1, as the case may be. Quarterly dividends were
declared and paid through October 21, 1996 for both the Series A Preferred Stock
and the Series B Preferred Stock. Total dividends paid in fiscal year 1995 and
1996 were $60 and $583, respectively.

On January 1, 1996, the Company granted a warrant to purchase 600,000
shares of the Company's common stock to FCPLP. Senior management of the Company
own, or have options to purchase, the partnership interests of FCPLP. On October
21, 1996, this warrant agreement was amended and restated, to give effect to the
stock split, with the principal terms unchanged. This warrant expires on
December 31, 2005 and may be exercised at $1.00 per share at the earlier of (i)
October 21, 1998 or (ii) completion of an initial public offering.

Effective October 21, 1996, Whitney Equity Partners, L.P. ("WEP") purchased
from the Company 394,385 shares of common stock and a warrant to purchase
121,350 shares of the Company's common stock. This warrant is exercisable
immediately at $8.24 per share, expires October 21, 2006 and was valued at $347
(the "WEP Warrant"). WEP also received an option to purchase a 10.5% interest in
Fulcrum Retail, Inc., a related party, which was valued at $150. Additionally,
on October 21, 1996, the Company granted to WSDF, in connection with the
subordinated debt, a warrant expiring October 21, 2006, to purchase 405,460
shares of the Company's common stock (the "WSDF Warrant"). The WSDF Warrant may
be exercised at $0.01 per share at the earlier of (i) October 21, 1998 or (ii)
completion of an initial public offering. This warrant was estimated to have a
fair value at date of issuance of $1,156 which was recorded to additional
paid-in capital and as original issue discount on the related subordinated debt.

Additional paid-in capital of $2,274 was returned by the Company to FCPLP
during fiscal year 1996.

F-18
<PAGE> 75

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) RELATED PARTY TRANSACTIONS:

a. Receivables

As of December 30, 1995 and December 28, 1996, the Company had net
receivables from related parties of $1,225 and $335, respectively, resulting
from the sale by Fulcrum of certain discontinued inventory or damaged inventory
for retail sale or liquidation and miscellaneous operating charges paid by
Fulcrum and billed to the appropriate related entity. The Company's policy is to
sell such inventory at a price that the Company believes is fair market value,
which generally ranges from 50% to 100% of cost, and is to be paid within
standard industry terms. Sales of such inventory totaled $484 and $547 during
fiscal years 1995 and 1996, respectively. There were no sales to the related
retail company in 1994. During fiscal year 1996, the Company reduced related
party receivables by $1,752, which was accounted for as a return of capital.

b. Tradenames

Immediately after the purchase of NewStork in March, 1994, ownership of the
After the Stork brand name and various other trademarks were assigned to FCPLP
at book value as a return of capital and contributed to Fulcrum Brands L.P., a
Delaware limited partnership and a related party ("Brands"). The Company has
agreed to pay Brands an annual fee equal to .05% of the Company's net revenues,
as defined, as a license fee for use of the trademarks owned by Brands. Payments
made to Brands relating to the trademark fees in fiscal periods 1994, 1995 and
1996 were not significant. All of the Company's trademarks and trademark
applications are held by Brands, except for those related to Playclothes. Upon
completion of the proposed initial public offering, the Company expects to
exercise an option to purchase from Brands all of the trademarks and trademark
applications used by Fulcrum for $1,750, less royalties paid under the trademark
agreement. See Note 12 -- Subsequent Events (Unaudited).

c. Facility

The Company leases its 145,000 square foot headquarters, call center and
distribution center from Fulcrum Properties L.P., a Delaware limited partnership
and a related party ("Properties"). This operating lease was effective January
1, 1996 and expires December 31, 2005. Rent expense for fiscal year 1996 was
$455, which related to the lease of the 80,000 square feet then in existence.
The building has since been expanded to meet Fulcrum's growth. The Company
expects to enter into a purchase agreement with Properties pursuant to which,
upon completion of the proposed initial public offering, the Company will
purchase all of Properties' rights in the facility for anticipated aggregate
consideration of $2,500 plus assumption of $5,600 of mortgage financing and
related interest rate swap agreements. See Note 12 -- Subsequent Events
(Unaudited).

d. Advisory Agreement

FCPLP entered into an advisory agreement with the Company dated April 1,
1994, as amended January 1, 1996 (the "Advisory Agreement"). The Advisory
Agreement, which expires December 31, 2005, provides for an advisory fee to be
paid by the Company to FCPLP for professional strategic advisory services. The
fee is the greater of (i) $50 or (ii) 2% of the consideration paid for an
acquisition, as adjusted, as defined in the Advisory Agreement. On December 31,
1996, the Company received, in connection with the Playclothes acquisition, $50
for services rendered to the Company, which was paid in 6,068 shares of common
stock (valued at $8.24 per share, estimated fair value as of December 31, 1996).
No fees were paid during fiscal periods 1994, 1995 and 1996.

F-19
<PAGE> 76

FULCRUM DIRECT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) LITIGATION:

The Company is a party to litigation in the normal course of business.
Management, on the advice of counsel, believes that a material adverse outcome
of any pending litigation is unlikely.

(12) SUBSEQUENT EVENTS (UNAUDITED):

The Company is contemplating filing a registration statement in
anticipation of an initial public offering. As of February 28, 1997, proceeds
from the proposed offering are unknown.

The Company intends to use the net proceeds from any such offering to (i)
repay $3,000 principal amount of subordinated debt, (ii) purchase certain
intellectual property owned by Brands for approximately $1,750, (iii) purchase
certain real estate owned by Properties for approximately $2,500 in cash, plus
assumed liabilities, (iv) fund potential acquisitions and (v) provide working
capital and for general corporate purposes.

F-20
<PAGE> 77

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

NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS 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 THE SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON 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
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Recent Developments...................... 6
Risk Factors............................. 7
Use of Proceeds.......................... 15
Dividend Policy.......................... 15
Capitalization........................... 16
Dilution................................. 17
Selected Consolidated Financial Data..... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 19
Business................................. 26
Management............................... 38
Certain Relationship and Related
Transactions........................... 44
Principal Stockholders................... 47
Description of Capital Stock............. 49
Shares Eligible for Future Sale.......... 53
Underwriting............................. 55
Legal Matters............................ 56
Experts.................................. 56
Additional Information................... 57
Index to Consolidated Financial
Statements............................. F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN 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.
=========================================================

============================================================
2,500,000 SHARES
[LOGO]
FULCRUM DIRECT, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------

HAMBRECHT & QUIST

PAINEWEBBER INCORPORATED

ROBERTSON, STEPHENS & COMPANY
, 1997
=========================================================
<PAGE> 78

PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:

<TABLE>
<S> <C>
SEC registration fee.............................................. $ 10,455
NASD filing fee................................................... 3,950
Nasdaq National Market original listing fee....................... 17,500
Blue sky fees and expenses (including attorneys' fees and
expenses)....................................................... 10,000
Printing and engraving expenses................................... 75,000
Transfer agent's fees and expenses................................ 15,000
Accounting fees and expenses...................................... 75,000
Legal fees and expenses........................................... 250,000
Miscellaneous expenses............................................ 193,095
----------
Total................................................... $650,000
==========
</TABLE>

All amounts are estimated except for the SEC registration fee and the NASD
filing fee.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is, or
is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.

The Company's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors and officers of the Company to the fullest
extent permitted by Section 145.

In that regard, the Amended and Restated Certificate of Incorporation
provides that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of such corporation, or is or was
serving at the request of such corporation as a director, officer or member of
another corporation, partnership, joint venture, trust or other enter-

II-1
<PAGE> 79

prise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in consideration of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Over the past three years, the Company has sold shares of its capital stock
as follows in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.

SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE

Shares of Series A Preferred Stock were sold to certain officers, directors
and affiliates of the Company and certain other individuals (fewer than 20
persons) on the following dates:

<TABLE>
<CAPTION>
AGGREGATE
DATE NUMBER OF SHARES PURCHASE PRICE
- ----------------- ---------------- --------------
<S> <C> <C>
October 1, 1995 20,000(1) $2,000,000
November 1, 1995 10,000(1) 1,000,000
January 1, 1996 3,000(2) 300,000
January 1, 1996 1,500(2) 150,000
May 1, 1996 5,000(2) 500,000
May 1, 1996 600(2) 60,000
June 1, 1996 1,000(2) 100,000
June 1, 1996 1,665(2) 174,825
June 1, 1996 335(2) 35,175
June 1, 1996 1,000(2) 100,000
June 1, 1996 1,500(2) 150,000
July 1, 1996 2,500(2) 250,000
July 1, 1996 500(2) 50,000
July 1, 1996 1,000(2) 100,000
July 1, 1996 400(2) 40,000
July 1, 1996 500(2) 50,000
July 1, 1996 250(2) 25,000
July 1, 1996 125(2) 12,500
July 1, 1996 125(2) 12,500
July 1, 1996 125(2) 12,500
</TABLE>

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

(1) Converted into shares of Common Stock on October 21, 1996 at a ratio of 60
shares of Common Stock to one share of Series A Preferred Stock.

(2) Converted into shares of Common Stock on October 21, 1996 at a ratio of 36
shares of Common Stock to one share of Series A Preferred Stock.

II-2
<PAGE> 80

SERIES B PREFERRED STOCK, PAR VALUE $0.01 PER SHARE

Shares of Series B Preferred Stock were sold to 2 affiliates of the Company
on the following dates:

<TABLE>
<CAPTION>
AGGREGATE
DATE NUMBER OF SHARES PURCHASE PRICE
- ----------------- ---------------- --------------
<S> <C> <C>
January 1, 1996 8,196 $ 819,618.59
March 1, 1996 5,029 502,948.39
July 1, 1996 12,285 1,289,925.00
September 1, 1996 5,957 595,739.77
</TABLE>

All shares of Series B Preferred Stock were redeemed by the Company on
October 21, 1996.

COMMON STOCK

On October 21, 1996, the Company issued to Fulcrum Capital Partners L.P.
("FCP") a warrant to purchase 600,000 shares of Common Stock at an exercise
price equal to $1.00 per share at any time until January 1, 2006. In addition on
December 31, 1996, the Company issued 6,068 shares of its Common Stock to FCP as
payment for a $50,000 fee owed to FCP in connection with certain advisory
services.

On October 21, 1996, the Company sold to Whitney Equity Partners, L.P.
394,385 shares of Common Stock and a warrant to purchase 121,350 shares of
Common Stock for an aggregate price of $2,000,000.

SUBORDINATED DEBT

On October 21, 1996, the Company sold to Whitney Subordinated Debt Fund,
L.P. a senior subordinated promissory note due 2003 in the principal amount of
$10,000,000 for a price of $9,500,000 and a warrant to purchase 405,460 shares
of Common Stock for a price of $500,000.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Restated Certificate of Incorporation of Fulcrum Direct, Inc.*
3.2 -- By-Laws of Fulcrum Direct, Inc.*
4.1 -- Form of certificate representing the shares of Common Stock*
5.1 -- Opinion of Kirkland & Ellis*
10.1 -- Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Michael G. Lederman
10.2 -- Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Scott A. Budoff
10.3 -- Revolving Credit Facility Agreement, dated as of January 1, 1997, among Fulcrum
Direct, Inc. and Sunwest Bank
10.4 -- Securities Purchase Agreement, dated as of October 21, 1996, among Fulcrum Direct,
Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P.
10.5 -- Side Letter Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Whitney Subordinated Debt Fund, L.P.
10.6 -- Senior Subordinated Promissory Note, dated as of October 21, 1996, between Fulcrum
Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.
</TABLE>

II-3
<PAGE> 81

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
10.7 -- Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.
10.8 -- Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Equity Partners, L.P.
10.9 -- Common Stock Purchase Warrant, dated as of January 1, 1996, between Fulcrum
Direct, Inc. and Fulcrum Capital Partners, L.P.
10.10 -- Management Team Equity Plan, adopted as of October 21, 1996, by Fulcrum Direct,
Inc., including related form of option agreement.*
10.11 -- Stockholders' Agreement, dated as of October 21, 1996, by and among Fulcrum
Direct, Inc. and certain of its Stockholders
10.12 -- Advisory Agreement, dated as of April 1, 1994, as amended, by and between Fulcrum
Direct, Inc. and Fulcrum Capital Partners L.P.
10.13 -- Fulcrum Retail Option Agreement, dated as of October 21, 1996, between Whitney
Equity Partners, L.P. and Fulcrum Retail, Inc.*
10.14 -- Amended and Restated Trademark License and Option Agreement, dated as of October
21, 1996, by and between Fulcrum Brands L.P. and Fulcrum Direct, Inc.
10.15 -- Greenberg Loan Agreement, dated as of June 31, 1995, by and among Arnold
Greenberg, and Herbert Greenberg (as trustees for Michael Greenberg, Susan
Greenberg and Robin Greenberg) as lenders and NewStork, Inc. as borrower
10.16 -- Industrial Revenue Bond Property Lease, dated as of December 27, 1995, by and
between the city of Rio Rancho, New Mexico and Property Bond Purchaser, Inc.*
10.17 -- Industrial Revenue Bond Property Lease, dated as of December 23, 1996, by and
between the city of Rio Rancho, New Mexico and Property Bond Purchaser, Inc.*
10.18 -- Lease Agreement, dated as of December 27, 1995, by and between the city of Rio
Rancho, New Mexico and Fulcrum Properties L.P.*
10.19 -- Lease and Option Agreement, dated as of August 11, 1995, by and between Fulcrum
Direct, Inc. and Fulcrum Properties L.P.*
10.20 -- Fulcrum Direct, Inc. Employees Savings Trust 401(K) profit sharing plan.*
10.21 -- Playclothes Acquisition Agreement, dated as of June 30, 1996, by and between
Fulcrum Direct, Inc., and Childcraft, Inc.
10.22 -- Catalog Agreement, dated April 25, 1995, by and between Regal Greetings & Gifts
Inc. and Childcraft, Inc.
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Kirkland & Ellis (to be included in the opinion to be filed as Exhibit
5.1)*
24.1 -- Powers of Attorney (included on the signature page of this Part II)
27.1 -- Financial Data Schedule
</TABLE>

- ------------------------------
* To be filed by amendment.

II-4
<PAGE> 82

(b) FINANCIAL STATEMENT SCHEDULES:

Not applicable

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offerings of such securities at
that time shall be deemed to be the initial bona fide offerings thereof.

II-5
<PAGE> 83

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rio Rancho, State of New
Mexico on March 10, 1997.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN

------------------------------------
Name: Michael G. Lederman
Title: Chairman and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Lederman and Scott A. Budoff, his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of Fulcrum
Direct, Inc.), to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed on March 10, 1997,
by the following persons in the capacities indicated with respect to Fulcrum
Direct, Inc.:

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ -----------------------------------------------
<C> <S>

/s/ MICHAEL G. LEDERMAN Chairman, Chief Executive Officer and Director
- ------------------------------------------ (Principal Executive Officer)
Michael G. Lederman

/s/ SCOTT A. BUDOFF President, Chief Operating Officer, Secretary
- ------------------------------------------ and Director
Scott A. Budoff

/s/ CARRIE K. COLE Chief Financial Officer and Vice President
- ------------------------------------------ (Principal Financial and Accounting Officer)
Carrie K. Cole

/s/ ARNOLD GREENBERG Director
- ------------------------------------------
Arnold Greenberg

/s/ RAY E. NEWTON, III Director
- ------------------------------------------
Ray E. Newton, III

/s/ PATRICK K. SULLIVAN, M.D. Director
- ------------------------------------------
Patrick K. Sullivan, M.D.

/s/ HOWARD UNGER Director
- ------------------------------------------
Howard Unger
</TABLE>

II-6

<PAGE> 1
EXHIBIT 10.1

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT made and effective as of this 21st day of October,
1996, between FULCRUM DIRECT, INC., a Delaware corporation (the "Company"), and
Michael G. Lederman (the "Executive").

The Board of Directors of the Company (the "Board"), in the best
interest of the Company and its shareholders, desires to provide for the
continuous employment of the Executive as the Company's Chairman and Chief
Executive Officer. The Executive is willing to commit himself to serve the
Company, on the terms and conditions herein provided, and the Executive
represents to the Company, that he is under no contractual restraints (including
non-competition agreements) or any physical or mental impairment which might
preclude him from performing fully the duties required of him under this
Agreement.

In order to effect the foregoing, the Company and the Executive wish to
enter into this employment agreement on the terms and conditions set forth below
(the "Agreement"). Accordingly, in consideration of the premises and the
respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:

1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to serve the Company, on the terms and conditions
set forth herein during the Term.

2. Term. This Agreement will commence on the date hereof and end on
December 31, 2001 (the "Term") unless terminated earlier pursuant to Section 6
hereof. If the Executive shall remain in the employ of the Company beyond the
Term, in the absence of any other express agreement between the parties, this
Agreement shall renew on a year to year basis as of December 31st (the "Renewal
Date"), unless terminated as of the Renewal Date by the Company or the Executive
with at least 90 days prior notice thereof.

3. Position and Duties. For the Term of the Agreement, the Executive
shall serve as Chairman of the Board and Chief Executive Officer of the Company
and shall have such responsibilities, duties and authority that are consistent
with such positions and such other duties as may from time to time be assigned
to the Executive by the Board; provided, that the Executive shall at all times
possess the full authority and decision making power customarily granted to the
Chairman and Chief Executive Office of a corporation of the size and nature of
the Company and shall not be assigned any duties inconsistent with such
positions. The Executive shall report solely to the Board. The failure to assign
the Executive duties consistent with those provided for in this Section 3 shall
constitute a material breach of this Agreement. The Executive shall devote a
substantial amount of his working time and efforts to the business and affairs
of the Company; provided, that the Executive shall have flexibility in
determining his work schedule and shall not be required to work in the Company's
headquarters a fixed number of hours during any particular day, week or month;
provided, further, that consistent with the performance of the foregoing duties,
the Executive may also serve on the boards of directors or act as the trustee,
and act as an officer or partner of any other

<PAGE> 2
companies, partnerships and/or organizations as the Executive in his sole
discretion deems appropriate. The Executive agrees that he will not divert from
the Company, or appropriate for himself or any other person or entity, any
business opportunity which is similar in content to the Company's business and
results from, arises out of, or is in any way connected with, his employment by
the Company.

4. Compensation and Related Matters.

(a) Salary. (i) The Company shall pay Executive a base salary
during the period of the Executive's employment hereunder, which shall be at an
initial rate of one hundred and eighty thousand dollars ($180,000) per annum
(the "Base Salary"). The Base Salary shall be paid in substantially equal
bi-weekly installments, in arrears ("Base Salary Payments"). During the period
of the Executive's employment hereunder, the Board shall make an annual review
of the Executive's compensation, beginning as of December 31, 1996; provided,
that in no event shall such review result in a reduction of the Base Salary; and
(ii) Compensation of the Executive by the Base Salary Payments shall not be
deemed exclusive and shall not prevent the Executive from participating in any
other compensation or benefit plan of the Company. The Base Salary Payments
hereunder shall not in any way limit or reduce any other obligation of the
Company hereunder, and no other compensation, benefit or payment hereunder shall
in any way limit or reduce the obligation of the Company to pay the Executive's
Base Salary hereunder.

(b) Bonus. (i) Not later than ninety (90) days following the close of
each fiscal year, the Board shall determine the amount, if any, of bonus to be
paid to the Executive, which the Board, in its sole discretion, determines
appropriate (such amount being "Bonus"). In determining the amount of Bonus
granted to the Executive, the Board shall evaluate all factors it deems
appropriate including, without limitation, (i) the financial performance of the
Company; (ii) the performance of the Executive as Chairman and CEO of the
Company; (iii) the execution and success of the Company's strategic plans; (iv)
the Executive's Base Salary and Bonus as compared to the compensation provided
by similarly situated corporations; and (v) extraordinary risk taken on behalf
of the Company (such as by providing a personal guaranty for any obligation of
the Company or providing short term unsecured financing for the Company). The
Bonus shall be made either in cash or the Company's Stock (at the election of
the Board) as promptly as possible following declaration of the Bonus by the
Board.

(c) Benefit Plans. The Executive shall be entitled to participate in or
receive benefits under any "employee benefit plan" (as defined in section 3(3)
of the Employee Retirement Security Act of 1974, as amended from time to time
("ERISA") or employee benefit arrangement made available by the Company now or
during the period of the Executive's employment hereunder, to its executives and
key management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements; provided,
however, that there shall be no duplication of the benefits or compensation
elements created by this Agreement. Nothing paid to the Executive under any plan
or arrangement presently in effect or made available in the future shall be
deemed to be in lieu of the Base Salary payable to the Executive pursuant to
Section 4(a) hereof.

-2-
<PAGE> 3
(d) Life and Disability Insurance. (i) The Executive shall purchase a
term life insurance policy on the life of the Executive, with a lump sum death
benefit at least equal to $6 million dollars ($6,000,000). The Company shall pay
the Executive in the first pay period of each fiscal year an amount equal to the
premium on such insurance policy plus the amount necessary to provide for all
Federal, state and local taxes on such payment; provided, that the Executive
shall select the Company as the beneficiary of at least one million dollars
($1,000,000) of the life insurance proceeds. The Executive is hereby authorized
to select, in his sole discretion, the beneficiary(s) to which the remainder of
such policy shall be paid upon his death.

(ii) The Company shall provide the Executive with reasonable
and customary disability insurance providing for the
Executive to receive 100% of his Base Salary during any
period of disability.

(e) Moving Expenses. If the headquarters of the Company shall relocate
more than 100 miles from Rio Rancho, New Mexico, then the Company shall, at the
request of the Executive, purchase from the Executive, at the average price of
three appraisals conducted by independent real estate appraisers, his home
located in New Mexico. The Company shall also reimburse the Executive for all of
his (and his immediate family's) out-of-pocket expenses related to moving to the
new headquarters location and the purchase of a new home in such location
(excluding the actual purchase price of such home).

(f) Expenses. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder, including all expenses of travel, entertainment and living
expenses while away from home on business or at the request of and in the
service of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by the Company.

(g) Other. In the event that any payment hereunder results in excise
tax pursuant to Sections 280(G) and 4999 of the Code, or any successor or
similar provision thereto, or comparable state or local tax laws, the Company
shall pay to the Executive such additional compensation as is necessary (after
taking into account all Federal, state and local income and excise taxes payable
by the Executive as a result of the receipt of such compensation) to place the
Executive in the same after-tax position he would have been in had no such
excise tax (or any interest or penalties thereon) been paid or incurred. The
amount of such payment shall be determined by the independent accounting firm
serving as the Company's outside auditor.

5. Offices. At the reasonable request of the Company, the Executive
agrees to serve without additional compensation as a director of any of the
Company's subsidiaries and in one or more executive offices of any of the
Company's subsidiaries.

6. Termination.

-3-
<PAGE> 4
(a) Termination by the Company. The Executive's employment
hereunder may be terminated, without such termination constituting a breach of
this Agreement, only under the following circumstances:

(i) Death. The Executive's employment hereunder shall terminate
upon his death.

(ii) Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, the Executive shall have been
absent from his duties hereunder on a full-time basis for
one-hundred-eighty (180) days during any period of three-hundred
sixty-five (365) days, the Company may terminate the Executive's
employment hereunder.

(iii) Cause. The Company may terminate the Executive's employment
hereunder for "Cause." For purposes of this Agreement, the
Company shall have "Cause" to terminate the Executive's
employment hereunder upon (x) the Executive's continuous,
intentional refusal to substantially perform his duties hereunder
(other than any such failure resulting from the Executive's
incapacity due to physical or mental illness or a termination of
this Agreement by the Executive for "Good Reason", as defined in
Section 6(c)(iii) hereof), after demand for substantial
performance is delivered by the Company that specifically
identifies the manner in which the Company believes the Executive
has not substantially performed his duties, (y) the engaging by
the Executive in substantial misconduct which is materially
injurious to the Company, monetarily or otherwise, or (z)
material breach by the Executive of any of the material terms or
conditions of this Agreement coupled with failure to correct such
breach within sixty (60) days after notice from the Company
specifying the breach. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause
without (x) thirty (30) days prior notice to the Executive
setting forth the reasons for the Company's intention to
terminate for Cause, (y) an opportunity for the Executive,
together with his counsel, to be heard before the Board, and (z)
delivery to the Executive of a Notice of Termination, as defined
in Section 6(e) hereof, from the Board finding that, in the good
faith opinion of two-thirds of the Board, the Executive was
guilty of conduct set forth above in clause (x), (y) or (z) of
the second sentence of this Section 6(a)(iii), and specifying the
particulars thereof in detail.

(b) Termination by the Company Without Cause. (i) The Board may not
terminate the employment of the Executive without Cause except upon a Change of
Control. Such termination shall be effective by providing the Executive with a
written Notice of Termination.

(ii) For the purposes of this Agreement, a "Change of Control"
shall mean (i) any transaction or series of transactions in which
any Person (as such term is defined in Section 13(d)(3) of the
Exchange Act) or group, other than Michael G. Lederman and/or
Scott A. Budoff, becomes the direct or indirect beneficial owner
(as such term is defined in Rule 13d-3 promulgated under the
Exchange Act) of more of the then outstanding Common Stock than
that beneficially owned in the aggregate, directly or indirectly
by Michael G. Lederman and Scott A. Budoff, (ii) any transaction
or series of transactions

-4-
<PAGE> 5
in which Michael G. Lederman and Scott A. Budoff together cease
to be the direct or indirect beneficial owners of at least 25% of
the then outstanding Common Stock, (iii) the sale of or
substantially all of the Company's assets, (iv) the liquidation
of the Company, (v) the election of a majority of the members of
the Board of Directors, who were not placed in nomination for
that office by the Board of Directors, or (vi) the combination of
the Company with another company, as a result of which the
shareholders of the Company hold less that 50.01% of the total of
all voting shares outstanding or the Company's directors
constitute less than a majority of the Board of Directors of the
combined entity.

(i) The Executive may terminate his employment hereunder without
specifying a reason, by providing the Company with a Written
Notice of Termination at least 90 days prior to the effective
date of such termination. At any time thereafter, the Company
shall have the right to relieve the Executive of all rights,
duties and obligations, including replacing the Executive as
Chairman of the Board and Chief Executive Officer of the Company;
provided, however, that all other terms of this Agreement shall
remain in full force and effect until terminated pursuant to
Section 6(e)(iv) hereof. If the Executive terminates his
employment under this Section 6(c) other than for Good Reason (as
deemed below, the Company shall have no further obligation to pay
the Base Salary or declare a Bonus or to provide any other
employee benefits hereunder except for (i) any Base Salary, Bonus
or other benefits that have fully accrued and vested but not been
paid as of the effective date of such termination and (ii) any
expenses as to which the Executive is entitled to reimbursement
pursuant to Section 4(f) hereof.

(ii) The Executive may terminate his employment hereunder for
Good Reason upon giving 48 hours written notice to the Company.

(iii) For purposes of this Agreement, "Good Reason" shall mean
any of the following: (x) the assignment to the Executive of any
duties materially inconsistent with the Executive's status as the
Chief Executive Officer of the Company, or a substantial adverse
alteration in the nature or status of the Executive's
responsibilities from those in effect on the date hereof, which
assignment or alteration has not been cured within thirty (30)
days after notice of such an assignment or alteration has been
given by the Executive to the Company, (y) the failure by the
Company, without the Executive's written consent, to pay to the
Executive any portion of the Executive's compensation within ten
(10) days of the date the Executive gives notice to the Company
of a failure to pay such compensation when it became due, or (z)
a failure by the Company to comply with any other provision of
this Agreement which has not been cured within ten (10) days
after notice of such noncompliance has been given by the
Executive to the Company.

-5-
<PAGE> 6
(d) Any termination of the Executive's employment by the Company or by
the Executive (other than termination pursuant to Section 6(a)(i) hereof) shall
be communicated by written Notice of Termination to the other party hereto in
accordance with Section 12 hereof. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the fact; and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.

(e) "Date of Termination" shall mean the following: (i) if the
Executive's employment is terminated by his death pursuant to section 6(a)(i)
hereby, the date of his death; (ii) if the Executive's employment is terminated
pursuant to Section 6(a)(ii) hereof, thirty (30) days after the Notice of
Termination is given; (iii) if the Executive's employment is terminated pursuant
to Section 6(a)(iii) hereof, the date specified in the Notice of Termination;
(iv) if the Executive's employment is terminated pursuant to Section 6(b)(i)
hereof, thirty (30) days after the Notice of Termination is given or if
terminated pursuant to Section 6(c)(i) hereof, ninety (90) days after the Notice
of Termination is given provided, however, the Company reserves the right to
remove the Executive as Chairman of the Board and Chief Executive Officer of the
Company at any time after the Executive provides the Notice of Termination
pursuant to Section 6(c)(i)); and (v) if the Executive's employment is
terminated pursuant to Section 6(c)(ii) hereof, 48 hours after the Notice of
Termination is given. Notwithstanding the immediately preceding sentence, if
within thirty (30) days after any Notice of Termination is given the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date
finally determined (i) by mutual written agreement of the parties, or (ii) by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected).

7. Compensation Upon Termination or During Disability.

(a) During any period that the Executive fails to perform his
duties hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his Base Salary
at the rate then in effect for such period until his employment is terminated
pursuant to Section 6(a)(ii) hereof, provided that payments so made to the
Executive shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under disability benefit
plans of the Company or under the Social Security disability insurance program,
and which amounts were not previously applied to reduce any such payment.

(b) If the Executive's employment is terminated by his death, the
Company shall pay, in accordance with Section 10(b) hereof, any amounts due to
the Executive under Section 4 hereof through the date of his death.

(c) If the Executive's employment shall be terminated by the
Company for Cause, pursuant to section 6(a)(iii) the Company shall pay the
Executive (i) his Base Salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given; (ii) any Bonus declared

-6-
<PAGE> 7
and payable pursuant to Section 4(b) hereof and (iii) any expense reimbursements
due the Executive pursuant to Section 4(f) hereof. Following such payments the
Company shall have no further obligations to the Executive under this Agreement.

(d) If (i) the Company shall terminate the Executive's employment
pursuant to Section 6(b) hereof, (ii) the Executive shall terminate his
employment for Good Reason pursuant to Section 6(c)(ii), then:

(x) the Company shall pay the Executive his Base Salary through
the Date of Termination at the rate in effect at the time Notice
of Termination is given, any previously declared and payable
Bonus for any fiscal year completed prior to the Date of
Termination, and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under this
Agreement or any compensation plan or program of the Company, at
the time such payments are due including expense reimbursements
due the Executive pursuant to Section 4(f) hereof and accrued or
fully vested payments pursuant to employee benefit plans
described in Section 4(c) hereof.

(y) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall
pay as damages to the Executive (in a lump sum without discount)
an amount equal to the product of (A) the sum of the Executive's
annual base salary rate in effect as of the Date of Termination
plus the amount of the last Bonus paid or payable to the
Executive, and (B) 1.5; and

(z) The Company shall maintain in full force and effect, for the
continued benefit of the Executive for 1.5 years, each "employee
welfare benefit plan" (as defined in section 3(l) of ERISA) in
which the Executive was entitled to participate immediately prior
to the Date of Termination, provided that the Executive's
continued participation is possible under the general terms and
provisions of such plans. In the event that the Executive's
participation in any such plan is barred, the Company shall
arrange to provide the Executive with benefits substantially
similar to those which the Executive would otherwise have been
entitled to receive under the plan from which his continued
participation is barred.

8. Confidentiality and Noncompetition.

(a) The Executive will not, during or after the Term, disclose to
any entity or person any information (including, but not limited to, information
about customers or about the design, manufacture or marketing of products or
services) which is treated as confidential by the Company and to which the
Executive gains access by reason of his position as an employee or director of
the Company other than information which becomes publicly available through a
source other than the Executive.

(b) While the Executive continues to be an employee of the
Company and, for at least

-7-
<PAGE> 8
the one-year period immediately following his Date of Termination, the Executive
shall not, except as permitted by the Company upon its prior written consent:
(i) enter, directly or indirectly, into the employ of or render or engage in,
directly or indirectly, any services to any person, firm or corporation which is
engaged in distribution of children's products in the United States or any other
geographic areas in which the Company is then selling its products (a
"Competitor"); (ii) become interested, directly or indirectly, in any such
Competitor as an individual, partner, shareholder, creditor, director, officer,
principal, agent, employee, trustee, consultant, advisor or in any other
relationship or capacity, provided, that the ownership of up to five percent
(5%) of any class of the outstanding securities of any publicly traded
corporation, even though such corporation may be a Competitor, shall not he
deemed as constituting an interest in such Competitor which violates clause (ii)
of the immediately preceding sentence; and (iii) employ, solicit, assist in
employing any present or former or future employee, officer or agent of the
Company or any of its subsidiaries.

(c) Any violation by the Executive of Section 8(a) or 8(b) hereof
shall he deemed a violation of a material term of this Agreement under Section
6(a)(iii) hereof, and the Executive's compensation and benefits thereupon shall
be governed by Section 7(c) hereof. Additionally, the Company shall have the
right and remedy to have the provisions of this Section 8 specifically enforced,
including by temporary and/or permanent injunction, without necessity of bond,
it being acknowledged and agreed that any such violation will cause irreparable
injury to the Company and that money damages will not provide an adequate remedy
to the Company.

9. Independence and Severability of Section 8 Provisions. Each of the
rights and remedies enumerated in Section 8 shall be independent of the others
and shall be severally enforceable and all of such rights and remedies shall be
in addition to, and not in lieu of, any other rights and remedies available to
the Company under law or in equity. If any of the covenants contained in Section
8 or if any of the rights or remedies enumerated in Section 8, or any part of
any of them, is hereafter construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants or rights or
remedies which shall be given full effect without regard to the invalid
portions. If any of the covenants contained in Section 8 is held to be
unenforceable because of the duration of such provision or the area covered
thereby, the parties agree that the court making such determination shall have
the authority to reduce the duration and/or area of such provision, and in its
reduced form said provision shall then be enforceable.

10. Successors: Binding Agreement.

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<PAGE> 9
for Good Reason pursuant to section 6(c)(iii) except that for purposes of
implementing the foregoing, the date on which any such Change of Control becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean the Company as herein before defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 10 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.

(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.

11. Indemnification. The Company shall, to the fullest extent permitted
by law, and its Articles of Incorporation and Bylaws, indemnify and hold
harmless the Executive against any and all claims, including all expenses in
connection with the defense thereof, related to his performance of the duties
specified in Sections 3 and 5 hereof.

12. Notice.

(a) For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall he in writing and
shall he addressed as follows:

If to the Executive:

Michael G. Lederman
5101 Los Poblanos Lane NW
Albuquerque, New Mexico 87107
Telephone No. (505) 343-1988

If to the Company:

Fulcrum Direct, Inc.
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Attention: Company Counsel
Telephone Number: (505) 867-7000
Facsimile Number: (505) 867-7100

or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

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<PAGE> 10
(b) Notices and communications given in accordance with the
foregoing shall conclusively be deemed to have been received and to be effective
on the day on which delivered in person, or, if sent by United States certified
or registered mail, postage prepaid, on the fifth business day after the day on
which mailed, provided that a telecopy or cable of identical content has been
sent o the relevant address specified above within two days after the posting
date of such mail. "Business day" shall mean any day not a Saturday, Sunday or a
legal holiday for nongovernment employees in the State of New York.

13. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representation,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York without regard
to its conflicts of law principles. To the extent that the obligations under
this Agreement of the parties hereto and their successors, as such obligations
are described herein, may require performance after the termination or
expiration of this Agreement, such obligations shall survive the Term of this
Agreement: and shall be fully enforceable thereafter.

14. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

16. Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein, supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto or thereto in respect of the subject matter contained herein or therein
is hereby terminated and canceled.

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<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.

FULCRUM DIRECT, INC.

By: /s/ SCOTT A. BUDOFF
--------------------------------------
Name: Scott A. Budoff
Title: President and Chief Operating Officer

EXECUTIVE

By: /s/ MICHAEL G. LEDERMAN
--------------------------------------
Name: Michael G. Lederman

WITNESS:

/s/ CARRIE COLE
Name:
Date:

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<PAGE> 1
EXHIBIT 10.2

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT made and effective as of this 21st day of
October, 1996, between FULCRUM DIRECT, INC., a Delaware corporation (the
"Company"), and Scott A. Budoff (the "Executive").

The Board of Directors of the Company (the "Board"), in the
best interest of the Company and its shareholders, desires to provide for the
continuous employment of the Executive as the Company's President and Chief
Operating Officer. The Executive is willing to commit himself to serve the
Company, on the terms and conditions herein provided, and the Executive
represents to the Company that he is under no contractual restraints (including
non-competition agreements) or any physical or mental impairment which might
preclude him from performing fully the duties required of him under this
Agreement.

In order to effect the foregoing, the Company and the
Executive wish to enter into this employment agreement on the terms and
conditions set forth below (the "Agreement"). Accordingly, in consideration of
the premises and the respective covenants and agreements of the parties herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:

1. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company on the terms and
conditions set forth herein during the Term.

2. Terms. This Agreement will commence on the date hereof and
end on December 31, 2001 (the "Term") unless terminated earlier pursuant to
Section 6 hereof. If the Executive shall remain in the employ of the Company
beyond the Term, in the absence of any other express agreement between the
parties, this Agreement shall renew on a year to year basis as of December 31st
(the "Renewal Date"), unless terminated as of the Renewal Date by the Company or
the Executive with at least 90 days prior notice thereof.

3. Position and Duties. For the Term of the Agreement, the
Executive shall serve as President and Chief Operating Officer of the Company
and shall have such responsibilities, duties and authority that are consistent
with such positions and such other duties as may from time to time be assigned
to the Executive by the Chairman and Chief Executive Officer. The Executive
shall report to the Chairman and Chief Executive Officer of the Company. The
Executive shall devote a substantial amount of his working time and efforts to
the business and affairs of the Company; provided, however, the Executive shall
have flexibility in determining his work schedule and shall not be required to
work in the Company's headquarters a fixed number of hours during any particular
day, week or month; provided, further, that consistent with the performance of
the foregoing duties, the Executive may also serve on the boards of directors or
act as the trustee, and act as an officer or partner of any other companies,
partnerships and/or organizations as the Executive in his sole discretion deems
appropriate. The Executive agrees that he will not divert from the Company, or
appropriate for himself or any other person or entity, any business opportunity
which is similar in
<PAGE> 2
content to the Company's business and results from, arises out of, or is in any
way connected with, his employment by the Company.

4. Compensation and Related Matters.

(a) Salary.

(i) The Company shall pay Executive a base
salary during the period of the Executive's employment
hereunder, which shall be at an initial rate of one hundred
and ten thousand dollars ($110,000) per annum (the "Base
Salary"). The Base Salary shall be paid in substantially equal
bi-weekly installments, in arrears ("Base Salary Payments").
During the period of the Executive's employment hereunder, the
Board shall make an annual review of the Executive's
compensation, beginning as of December 31, 1996; provided,
that in no event shall such review result in a reduction of
the Base Salary; and

(ii) Compensation of the Executive by the
Base Salary Payments shall not be deemed exclusive and shall
not prevent the Executive from participating in any other
compensation or benefit plan of the Company. The Base Salary
Payments hereunder shall not in any way limit or reduce any
other obligation of the Company hereunder, and no other
compensation, benefit or payment hereunder shall in any way
limit or reduce the obligation of the Company to pay the
Executive's Base Salary hereunder.

(b) Bonus. Not later than ninety (90) days following
the close of each fiscal year, the Board shall determine the amount, if any, of
bonus to be paid to the Executive, which the Board, in its sole discretion,
determines appropriate (such amount being "Bonus"). In determining the amount of
Bonus granted to the Executive, the Board shall evaluate all factors it deems
appropriate including, without limitation, (i) the recommendation of the
Chairman and CEO; (ii) the financial performance of the Company; (iii) the
performance of the Executive as President and COO of the Company; (iv) the
execution and success of the Company's strategic plans; (v) the Executive's Base
Salary and Bonus as compared to the compensation provided by similarly situated
corporations; and (vi) extraordinary risk taken on behalf of the Company (such
as by providing a personal guaranty for any obligation of the Company or
providing short term unsecured financing for the Company). The Bonus shall be
made either in cash or the Company's Stock (at the election of the Board) as
promptly as possible following declaration of the Bonus by the Board.

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<PAGE> 3
provided, however, that there shall be no duplication of the benefits or
compensation elements created by this Agreement. Nothing paid to the Executive
under any plan or arrangement presently in effect or made available in the
future shall be deemed to be in lieu of the Base Salary payable to the Executive
pursuant to Section 4(a) hereof.

(d) Life and Disability Insurance.

(i) The Executive shall purchase a term life
insurance policy on the life of the Executive, with a lump sum
death benefit at least equal to $4 million dollars
($4,000,000). The Company shall pay the Executive in the first
pay period of each fiscal year an amount equal to the premium
on such insurance policy plus the amount necessary to provide
for all Federal, state and local taxes on such payment;
provided, that the Executive shall select the Company as the
beneficiary of at least one million dollars ($1,000,000) of
the life insurance proceeds. The Executive is hereby
authorized to select, in his sole discretion, the
beneficiary(s) to which the remainder of such policy shall be
paid upon his death.

(ii) The Company shall provide the Executive
with reasonable and customary disability insurance providing
for the Executive to receive 100% of his Base Salary during
any period of disability.

(e) Moving Expenses. If the headquarters of the
Company shall relocate more than 100 miles from Rio Rancho, New Mexico, then the
Company shall, at the request of the Executive, purchase from the Executive, at
the average price of three appraisals conducted by independent real estate
appraisers, his home located in New Mexico. The Company shall also reimburse the
Executive for all of his (and his immediate family's) out-of-pocket expenses
related to moving to the new headquarters location and the purchase of a new
home in such location (excluding the actual purchase price of such home).

(f) Expenses. During the period of the Executive's
employment hereunder, the Executive shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder, including all expenses of travel,
entertainment and living expenses while away from home on business or at the
request of and in the service of the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.

(g) Other. In the event that any payment hereunder
results in excise tax pursuant to Sections 280(G) and 4999 of the Code, or any
successor or similar provision thereto, or comparable state or local tax laws,
the Company shall pay to the Executive such additional compensation as is
necessary (after taking into account all Federal, state and local income and
excise taxes payable by the Executive as a result of the receipt of such
compensation) to place the Executive in the same after-tax position he would
have been in had no such excise tax (or any interest or

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<PAGE> 4
penalties thereon) been paid or incurred. The amount of such payment shall be
determined by the independent accounting firm serving as the Company's outside
auditor.

5. Offices. At the reasonable request of the Company,
the Executive agrees to serve without additional compensation as a director of
any of the Company's subsidiaries and in one or more executive offices of any of
the Company's subsidiaries.

6. Termination.

(a) Termination by the Company. The Executive's
employment hereunder may be terminated, without such termination constituting a
breach of this Agreement, only under the following circumstances:

(i) Death. The Executive's employment
hereunder shall terminate upon his death.

(ii) Disability. If, as a result of the
Executive's incapacity due to physical or mental illness, the
Executive shall have been absent from his duties hereunder on
a full-time basis for one-hundred-eighty (180) days during any
period of three-hundred sixty-five (365) days, the Company may
terminate the Executive's employment hereunder.

(iii) Cause. The Company may terminate the
Executive's employment hereunder for "Cause". For purposes of
this Agreement, the Company shall have "Cause" to terminate
the Executive's employment hereunder upon (x) the Executive's
continuous, intentional refusal to substantially perform his
duties hereunder (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness
or a termination of this Agreement by the Executive for "Good
Reason", as defined in Section 6(c)(iii) hereof), after demand
for substantial performance is delivered by the Company that
specifically identifies the manner in which the Company
believes the Executive has not substantially performed his
duties, (y) the engaging by the Executive in substantial
misconduct which is materially injurious to the Company,
monetarily or otherwise, or (z) material breach by the
Executive of any of the material terms or conditions of this
Agreement coupled with failure to correct such breach within
sixty (60) days after notice from the Company specifying the
breach. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for Cause without (x) thirty
(30) days prior notice to the Executive setting forth the
reasons for the Company's intention to terminate for Cause,
(y) an opportunity for the Executive, together with his
counsel, to be heard before the Board, and (z) delivery to the
Executive of a Notice of Termination, as defined in Section
6(e) hereof, from the Board finding that, in the good faith
opinion of two-thirds of the Board, the Executive was guilty
of conduct set forth above in

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<PAGE> 5
clause (x), (y) or (z) of the second sentence of this Section
6(a)(iii), and specifying the particulars thereof in detail.

(b) Termination by the Company Without Cause.

(i) The Board may not terminate the
employment of the Executive without Cause except upon a Change
of Control. Such termination shall be effective by providing
the Executive with a written Notice of Termination.

(ii) For the purposes of this Agreement, a
"Change of Control" shall mean (A) any transaction or series
of transactions in which any Person (as such term is defined
in Section 13(d)(3) of the Exchange Act) or group, other than
Michael G. Lederman and/or Scott A. Budoff, becomes the direct
or indirect beneficial owner (as such term is defined in Rule
13d-3 promulgated under the Exchange Act) of more of the then
outstanding Common Stock than that beneficially owned in the
aggregate, directly or indirectly by Michael G. Lederman and
Scott A. Budoff, (B) any transaction or series of transactions
in which Michael G. Lederman and Scott A. Budoff together
cease to be the direct or indirect beneficial owners of at
least 25% of the then outstanding Common Stock, (C) the sale
of all or substantially all of the Company's assets, (D) the
liquidation of the Company, (E) the election of a majority of
the members of the Board of Directors, who were not placed in
nomination for that office by the Board of Directors, or (F)
the combination of the Company with another company, as a
result of which the shareholders of the Company hold less that
50.01% of the total of all voting shares outstanding or the
Company's directors constitute less than a majority of the
Board of Directors of the combined entity.

(i) The Executive may terminate his
employment hereunder without specifying a reason, by providing
the Company with a written Notice of Termination at least 90
days prior to the effective date of such termination. At any
time thereafter, the Company shall have the right to relieve
the Executive of all rights, duties and obligations, including
replacing the Executive as Chairman of the Board and Chief
Executive Officer of the Company; provided, however, that all
other terms of this Agreement shall remain in full force and
effect until terminated pursuant to Section 6(e)(iv) hereof.
If the Executive terminates his employment under this Section
6(c) other than for Good Reason (as defined below), the
Company shall have no further obligation to pay the Base
Salary or declare a Bonus or to provide any other employee
benefits hereunder except for (i) any Base Salary, Bonus or
other benefits that have fully accrued and vested but not been
paid as of the effective date of such termination and (A) any
expenses as to which the Executive is entitled to
reimbursement pursuant to Section 4(f) hereof.

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<PAGE> 6
(ii) The Executive may terminate his
employment hereunder for Good Reason upon giving 48 hours
written notice to the Company.

(iii) For purposes of this Agreement, "Good
Reason" shall mean any of the following: (x) the assignment to
the Executive of any duties materially inconsistent with the
Executive's status as the President and COO of the Company, or
a substantial adverse alteration in the nature or status of
the Executive's responsibilities from those in effect on the
date hereof, which assignment or alteration has not been cured
within thirty (30) days after notice of such an assignment or
alteration has been given by the Executive to the Company, (y)
the failure by the Company, without the Executive's written
consent, to pay to the Executive any portion of the
Executive's compensation within ten (10) days of the date the
Executive gives notice to the Company of a failure to pay such
compensation when it became due, or (z) a failure by the
Company to comply with any other provision of this Agreement
which has not been cured within ten (10) days after notice of
such noncompliance has been given by the Executive to the
Company.

(d) Any termination of the Executive's employment by
the Company or by the Executive (other than termination pursuant to Section
6(a)(i) hereof) shall be communicated by written Notice of Termination to the
other party hereto in accordance with Section 12 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.

(e) "Date of Termination" shall mean the following:
(i) if the Executive's employment is terminated by his death pursuant to section
6(a)(i) hereby, the date of his death; (ii) if the Executive's employment is
terminated pursuant to Section 6(a)(ii) hereof, thirty (30) days after the
Notice of Termination is given; (iii) if the Executive's employment is
terminated pursuant to Section 6(a)(iii) hereof, the date specified in the
Notice of Termination; (iv) if the Executive's employment is terminated pursuant
to Section 6(b)(i) hereof, thirty (30) days after the Notice of Termination is
given or if terminated pursuant to Section 6(c)(i) hereof, ninety (90) days
after the Notice of Termination is given (provided, however, the Company
reserves the right to remove the Executive as Chairman of the Board and Chief
Executive Officer of the Company at any time after the Executive provides the
Notice of Termination pursuant to Section 6(c)(i)); and (v) if the Executive's
employment is terminated pursuant to Section 6(c)(ii) hereof, 48 hours after the
Notice of Termination is given. Notwithstanding the immediately preceding
sentence, if within thirty (30) days after any Notice of Termination is given
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date finally determined (A) by mutual written agreement of the parties, or (B)
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected).

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<PAGE> 7
7. Compensation Upon Termination or During Disability.

(a) During any period that the Executive fails to
perform his duties hereunder as a result of incapacity due to physical or mental
illness ("Disability Period"), the Executive shall continue to receive his Base
Salary at the rate then in effect for such period until his employment is
terminated pursuant to Section 6(a)(ii) hereof, provided that payments so made
to the Executive shall be reduced by the sum of the amounts, if any, payable to
the Executive at or prior to the time of any such payment under disability
benefit plans of the Company or under the Social Security disability insurance
program, and which amounts were not previously applied to reduce any such
payment.

(b) If the Executive's employment is terminated by
his death, the Company shall pay, in accordance with Section 10(b) hereof, any
amounts due to the Executive under Section 4 hereof through the date of his
death.

(c) If the Executive's employment shall be terminated
by the Company for Cause, pursuant to Section 6(a)(iii) the Company shall pay
the Executive (i) his Base Salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given; (ii) any Bonus declared and
payable pursuant to Section 4(b) hereof and (iii) any expense reimbursement due
the Executive pursuant to Section 4(f) hereof. Following such payments the
Company shall have no further obligations to the Executive under this Agreement.

(d) If (i) the Company shall terminate the
Executive's employment pursuant to Section 6(b) hereof, (ii) the Executive shall
terminate his employment for Good Reason pursuant to Section 6(c)(ii), then:

(x) the Company shall pay the Executive his
Base Salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given, any
previously declared and payable Bonus for any fiscal year
completed prior to the Date of Termination, and all other
unpaid amounts, if any, to which the Executive is entitled as
of the Date of Termination under this Agreement or any
compensation plan or program of the Company, at the time such
payments are due including expense reimbursements due the
Executive pursuant to Section 4(f) hereof and accrued or fully
vested payments pursuant to employee benefit plans described
in Section 4(c) hereof.

(y) in lieu of any further salary payments
to the Executive for periods subsequent to the Date of
Termination, the Company shall pay as damages to the Executive
(in a lump sum without discount) an amount equal to the
product of (A) the sum of the Executive's annual base salary
rate in effect as of the Date of Termination plus the amount
of the last Bonus paid or payable to the Executive, and (B)
1.5; and

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<PAGE> 8
(z) The Company shall maintain in full force
and effect, for the continued benefit of the Executive for 1.5
years, each "employee welfare benefit plan" (as defined in
section 3(l) of ERISA) in which the Executive was entitled to
participate immediately prior to the Date of Termination,
provided that the Executive's continued participation is
possible under the general terms and provisions of such plans.
In the event that the Executive's participation in any such
plan is barred, the Company shall arrange to provide the
Executive with benefits substantially similar to those which
the Executive would otherwise have been entitled to receive
under the plan from which his continued participation is
barred.

8. Confidentiality and Noncompetition.

(a) The Executive will not, during or after the Term,
disclose to any entity or person any information (including, but not limited to,
information about customers or about the design, manufacture or marketing of
products or services) which is treated as confidential by the Company and to
which the Executive gains access by reason of his position as an employee or
director of the Company other than information which becomes publicly available
through a source other than the Executive.

(b) While the Executive continues to be an employee
of the Company and, for at least the one-year period immediately following his
Date of Termination, the Executive shall not, except as permitted by the Company
upon its prior written consent: (i) enter, directly or indirectly, into, the
employ of or render or engage in, directly or indirectly, any services to any
person, firm or corporation which is engaged in distribution of children's
products in the United States or any other geographic areas in which the
(Company is then selling its products (a "Competitor"); (ii) become interested,
directly or indirectly, in any such Competitor as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity, provided, that the
ownership of up to five percent (5%) of any class of the outstanding securities
of any publicly traded corporation, even though , such corporation may be a
Competitor, shall not he deemed as constituting an interest in such Competitor
which violates clause (ii) of the immediately preceding sentence; and (iii)
employ, solicit or assist in employing any present or former or future employee,
officer or agent of the Company or any of its subsidiaries.

(c) Any violation by the Executive of Section 8(a) or
8(b) hereof shall be deemed a violation of a material term of this Agreement
under Section 6(a)(iii) hereof, and the Executive's compensation and benefits
thereupon shall be governed by Section 7(c) hereof. Additionally, the Company
shall have the right and remedy to have the provisions of this Section 8
specifically enforced, including by temporary and/or permanent injunction,
without necessity of bond, it being acknowledged and agreed that any such
violation will cause irreparable injury to the Company and that money damages
will not provide an adequate remedy to the Company.

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<PAGE> 9
9. Independence and Severability of Section 8 Provisions. Each
of the rights and remedies enumerated in Section 8 shall be independent of the
others and shall be severally enforceable and all of such rights and remedies
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company under law or in equity. If any of the covenants
contained in Section 8 or if any of the rights or remedies enumerated in Section
8, or any part of any of them, is hereafter construed to be invalid or
unenforceable, the same shall not affect the remainder of the covenant or
covenants or rights or remedies which shall be given full effect without regard
to the invalid portions. If any of the covenants contained in Section 8 is held
to be unenforceable because of the duration of such provision or the area
covered thereby, the parties agree that the court making such determination
shall have the authority to reduce the duration and/or area of such provision,
and in its reduced form said provision shall then be enforceable.

10. Successors: Binding Agreement.

(a) This Agreement shall be binding upon any
successor to the Company by way of a Change of Control. The Company will require
any successor to control of the Company, by agreement in form and substance
reasonably satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such Change of Control had taken
place. Failure of the Company to obtain such assumption and agreement within 30
days following a Change of Control shall be a breach of this Agreement and shall
entitle the Executive to compensation from the Company in the same amount and on
the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason pursuant to Section 6(c)(iii) except that for
purposes of implementing the foregoing, the date on which any such Change of
Control becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as herein before defined and
any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 10 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.

(b) This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still he payable to him hereunder if he had continued to live, all
such amounts unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.

11. Indemnification. The Company shall, to the fullest extent
permitted by law, and its Articles of Incorporation and Bylaws, indemnify and
hold harmless the Executive against any and all claims, including all expenses
in connection with the defense thereof, related to his performance of the duties
specified in Sections 3 and 5 hereof.

12. Notice.

- 9 -
<PAGE> 10
(a) For the purposes of this Agreement, notices,
demands and all other communications provided for in this Agreement shall he in
writing and shall he addressed as follows:

If to the Executive:

Scott A. Budoff
14025 La Mesita Road
Albuquerque, New Mexico 87112
Telephone No.: (505) 292-1033

If to the Company:

Fulcrum Direct, Inc.
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Attention: Company Counsel
Telephone No.: (505) 867-7000
Facsimile No.: (505) 867-7100

or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

(b) Notices and communications given in accordance
with the foregoing shall conclusively be deemed to have been received and to be
effective on the day on which delivered in person, or, if sent by United States
certified or registered mail, postage prepaid, on the fifth business day after
the day on which mailed, provided that a telecopy or cable of identical content
has been sent to the relevant address specified above within two days after the
posting date of such mail. "Business day" shall mean any day not a Saturday,
Sunday or a legal holiday for nongovernment employees in the State of New York.

13. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of the Company as
may be specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York without regard
to its conflicts of law principles. To the extent that the obligations under
this Agreement of the parties hereto and their successors, as such obligations
are described herein, may require performance after the termination or
expiration of

- 10 -
<PAGE> 11
this Agreement, such obligations shall survive the Term of this Agreement and
shall be fully enforceable thereafter.

14. Validity. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.

15. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.

16. Entire Agreement. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein, supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, try any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto or thereto in respect of the subject matter contained
herein or therein is hereby terminated and canceled.

* * * * *

- 11 -
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date and year first above written.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
---------------------------------------------
Name: Michael G. Lederman
Title: Chairman and Chief Executive Officer

EXECUTIVE

By: /s/ SCOTT A. BUDOFF
---------------------------------------------
Name: Scott A. Budoff

WITNESS:

/s/ CARRIE COLE
- ------------------------------
Name:
Date:

- 12 -

<PAGE> 1
EXHIBIT 10.3

LOAN AGREEMENT

BETWEEN

FULCRUM DIRECT, INC.

AND

SUNWEST BANK OF ALBUQUERQUE, N.A.

DATED AS OF JANUARY 1, 1997

<PAGE> 2

TABLE OF CONTENTS

ARTICLE 1
DEFINITIONS. . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms; Financial Statements . . . . . . . . . . . . 15

ARTICLE 2
CREDIT. . . . . . . . . . . . . . 16

2.1 Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 General Terms . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.5 Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ARTICLE 3
LETTERS OF CREDIT . . . . . . . . . . . 18
3.2 LC Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3 LC Issuance . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.4 LC Reimbursement Agreement . . . . . . . . . . . . . . . . . . 20

ARTICLE 4
FEES . . . . . . . . . . . . . . 20

4.1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE 5
COLLATERAL. . . . . . . . . . . . . 21

5.1 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ARTICLE 6
BORROWING BASE. . . . . . . . . . . . 22

6.1 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE 7
GUARANTY . . . . . . . . . . . . . 22

ARTICLE 8
CONDITIONS TO FUNDING . . . . . . . . . . 24

8.1 Representations and Warranties . . . . . . . . . . . . . . . . 24
8.2 Compliance with this Agreement . . . . . . . . . . . . . . . . 24

<PAGE> 3

ARTICLE 9
REPRESENTATIONS AND WARRANTIES OF THE BORROWER. . . . 24

9.1 Corporate Existence and Power . . . . . . . . . . . . . . . . 24
9.2 Corporate Authorization; No Contravention . . . . . . . . . . 25
9.3 Governmental Authorization; Third Party Consents . . . . . . . 25
9.5 No Legal Bar . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.7 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 27
9.8 No Default or Breach . . . . . . . . . . . . . . . . . . . . . 27
9.9 Title to Properties . . . . . . . . . . . . . . . . . . . . . 27
9.10 Use of Real Property . . . . . . . . . . . . . . . . . . . . . 27
9.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.12 Financial Conditions . . . . . . . . . . . . . . . . . . . . . 29
9.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 30

(a) Agreement and Other Documents Are True . . . . . . . 30
(b) No Material Adverse Effect . . . . . . . . . . . . . 30
9.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . 30
9.16 Investment Borrower/Government Regulations . . . . . . . . . . 32
9.17 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.18 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . 32
9.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 33
9.20 Patents, Trademarks, Etc. . . . . . . . . . . . . . . . . . . 33
9.21 Trade Relations . . . . . . . . . . . . . . . . . . . . . . . 35
9.22 Material Contracts . . . . . . . . . . . . . . . . . . . . . . 36
9.23 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.24 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.25 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.26 Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . 37

ARTICLE 10
AFFIRMATIVE COVENANTS . . . . . . . . . . 37

10.1 Financial Statements and Other Information . . . . . . . . . . 38
10.2 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.3 Preservation of Corporate Existence . . . . . . . . . . . . . 40
10.4 Payment of Obligations . . . . . . . . . . . . . . . . . . . . 41
10.5 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 42
10.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10.7 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10.8 Payment of Note . . . . . . . . . . . . . . . . . . . . . . . 43
10.9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 43
10.10 Books and Records . . . . . . . . . . . . . . . . . . . . . . 43
10.11 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 44
10.12 Partnership Agreement . . . . . . . . . . . . . . . . . . . . 44

ii
<PAGE> 4

ARTICLE 11
NEGATIVE COVENANTS . . . . . . . . . . . 44
11.1 Consolidations, Mergers and Investments . . . . . . . . . . . 44
11.2 Transactions with Affiliates . . . . . . . . . . . . . . . . . 45
11.3 No Inconsistent Agreements . . . . . . . . . . . . . . . . . . 47
11.4 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . 47
11.5 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . 48
11.6 Dispositions of Assets . . . . . . . . . . . . . . . . . . . . 48
11.7 Financial Covenants . . . . . . . . . . . . . . . . . . . . . 49
(a) EBITDA . . . . . . . . . . . . . . . . . . . . . . . 49
(b) Cash Flow Coverage Ratio . . . . . . . . . . . . . . 49
(c) Leverage Ratio . . . . . . . . . . . . . . . . . . . 50
(d) Shareholders Equity . . . . . . . . . . . . . . . . . 51
11.8 Limitation on Business of the Borrower . . . . . . . . . . . . 51

ARTICLE 12
DEFAULT. . . . . . . . . . . . . . 51
12.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ARTICLE 13
MISCELLANEOUS . . . . . . . . . . . . 55
13.1 Survival of Representations and Warranties . . . . . . . . . . 55
13.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
13.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 56
13.4 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . 56
13.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 57
13.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
13.7 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 57
13.8 JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . 57
13.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 58
13.10 Rules of Construction . . . . . . . . . . . . . . . . 58
13.11 Entire Agreement . . . . . . . . . . . . . . . . . . 58
13.12 Certain Expenses . . . . . . . . . . . . . . . . . . 59
13.13 Publicity . . . . . . . . . . . . . . . . . . . . . . 59
13.14 Further Assurances . . . . . . . . . . . . . . . . . 59
13.15 Commitment . . . . . . . . . . . . . . . . . . . . . 60
13.16 Jury Trial Waiver . . . . . . . . . . . . . . . . . . 60
13.17 Agreement Governs . . . . . . . . . . . . . . . . . . 60

iii
<PAGE> 5
LOAN AGREEMENT

This Loan Agreement is entered into as of January 1, 1997 by and
between FULCRUM DIRECT, INC. (the "Borrower"), a Delaware corporation, and
SUNWEST BANK OF ALBUQUERQUE, N.A., a national banking association (the "Bank").

RECITALS

A. Bank and Borrower entered into a Restated Loan Agreement dated
as of December 28, 1995 which was amended from time to time and under which
Bank provided Borrower a revolving line of credit.

B. In October of 1996, Borrower entered into a Securities
Purchase Agreement among Fulcrum Direct, Inc., Whitney Subordinated Debt Fund,
L.P. and Whitney Equity Partners, L.P. pursuant to which Fulcrum executed and
delivered a Senior Subordinated Promissory Note (the "Subordinated Note"). The
Subordinated Note is subordinate to the note described in the Restated Loan
Agreement as amended.

C. Borrower has requested Bank to increase its line of credit and
to revise certain of the terms and conditions stated in the Restated Loan
Agreement and replace it with this Agreement.

D. Bank has agreed to Borrower's request.

It is therefore agreed as follows.

ARTICLE 1

DEFINITIONS

1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:

<PAGE> 6

"AGREEMENT" means this Agreement, including the exhibits and schedules
attached hereto, as the same may be amended, supplemented or modified in
accordance with the terms hereof.

"BUDOFF" means Scott A. Budoff.

"BUDOFF EMPLOYMENT AGREEMENT" means the Employment Agreement between
Borrower and Budoff dated October 21, 1996.

"BORROWING BASE" shall have the meaning ascribed to it in Section 6.1
hereof.

"BUSINESS DAY" means any day other than a Saturday, Sunday or other
day on which commercial banks in the State of New Mexico are authorized or
required by law or executive order to close.

"BYLAWS" means the Bylaws of the Borrower as in effect on the Closing
Date.

"CAPITAL EXPENDITURES" means the aggregate expenditures (whether or
not financed) made by the Borrower and its Subsidiaries for fixed or capital
assets or improvements (including, without limitation, capitalized intellectual
and proprietary property), or for replacements, substitutions or additions
thereto, that have an anticipated useful service life of at least one year or
more at the time the asset is acquired by the Borrower or one of its
Subsidiaries, and are used in the production, distribution and/or the sale of
the goods or services or offered for sale by the Borrower or one of its
Subsidiaries, all as determined in accordance with GAAP.

"CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are

2
<PAGE> 7

required to be classified and accounted for as capital leases on a balance
sheet of such Person under GAAP and, for the purposes of this Agreement, the
amount of such obligations at any time shall be the capitalized amount thereof
at such time determined in accordance with GAAP consistently applied.

"CASH" shall mean currency of the United States of America.

"CASH FLOW COVERAGE RATIO" means, with respect to the Borrower and its
Subsidiaries on a consolidated basis as of the end of any fiscal quarter, the
ratio of (a) EBITDA for such fiscal quarter and the three preceding fiscal
quarters (treated as a single accounting period) less Capital Expenditures for
such period to (b) Cash Interest Expense.

"CASH INTEREST EXPENSE" means, with respect to the Borrower and its
Subsidiaries on a consolidated basis, Interest Expense less the sum of (a)
pay-in-kind Interest Expense, (b) the amortization of debt discounts, if any,
(c) the amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense and (d) any other
expense classified under GAAP as interest expense that is not paid or payable
in Cash.

"CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereof.

"COMMON STOCK" means the common stock, $.01 par value of the
Borrower, or any other capital stock of the Borrower into which such stock is
reclassified or reconstituted.

3
<PAGE> 8
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability of that Person with respect to any Indebtedness, lease,
dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
whether or not contingent, (a) to purchase, repurchase or otherwise acquire
such primary obligations or any property constituting direct or indirect
security therefor, or (b) to advance or provide funds (i) for the payment or
discharge or any such primary obligation, or (ii) to maintain working capital
or equity capital of the primary obligor or otherwise to maintain the net worth
or solvency of any balance sheet item, level of income or financial condition
of the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to perform in respect
thereof. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof.

"CONTRACTUAL OBLIGATIONS" means as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument to which such Person is
a party or by which it or any of its property is bound.

4
<PAGE> 9

"DEFINED BENEFIT PLAN" means a defined benefit plan within the meaning
of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded or
unfunded, qualified or non-qualified (whether or not subject to ERISA or the
Code).

"EBITDA" means, with respect to the Borrower and its Subsidiaries on a
consolidated basis for any period, the sum of (a) Net Income for such period,
(b) Interest Expense for such period, (c) Federal, state and local income and
franchise taxes deducted from revenue in determining such Net Income, (d)
depreciation and amortization deducted form revenue in determining such Net
Income.

"ELIGIBLE SECURITIES" shall mean marketable securities acceptable to
the Bank that (a) are pledged by the Borrower or pledged by related parties of
the Borrower to Bank, and (b) are held in Bank's possession.

"ELIGIBLE ACCOUNTS RECEIVABLE" shall mean the gross amount of the
Borrower's accounts receivable that conform to the following and at all times
continue to be acceptable to Bank in the exercise of its reasonable business
judgment and which is customary either in the commercial finance industry or in
the lending practices of Bank inclusive of: i) customer credit card receivables
from any national or international credit card company; ii) receivables (less
reserves) for integrated advertising programs with the Borrower; iii)
receivables for rentals of the Borrower's customer list; iv) receivables from
any customer approved by Bank in advance, for wholesale purchases from the
Borrower; v) receivables from the State of New Mexico Industrial Development
Training Program; less, without duplication, the sum of a) any returns,
discounts, claims, credits and allowances of any nature (whether issued, owing,

5
<PAGE> 10

granted or outstanding), b) any receivable from any customer of Borrower not
located in the United States, other than receivables x) secured by stand-by or
commercial letters of credit (in form and substance reasonably satisfactory to
Bank) issued or confirmed by, and payable at, banks having a place of business
in the United States of America and payable in United States currency, or y)
from customers of Borrower not located in the United States to whom credit has
been authorized by Bank; c) accounts that remain unpaid more than ninety (90)
days from invoice date; d) contras; e) sales to any subsidiary or to any
company affiliated with the Borrower in any way; f) bill and hold (deferred
shipment) or consignments sales; g) sales to any customer which is i)
insolvent, ii) the debtor in any bankruptcy, insolvency, arrangements,
reorganization, receivership or similar proceedings under any federal or state
law, iii) negotiating, or has called a meeting of its creditors for purposes of
negotiating, a compromise of its debts or iv) financially unacceptable to Bank
in the good faith exercise of its reasonable business judgment or has a credit
rating unacceptable to Bank in the exercise of its reasonable business
judgment; h) all sales to any customer if fifty percent (50%) or more of either
i) all outstanding invoices or ii) the aggregate dollar amount of all
outstanding invoices, are unpaid more than ninety (90) days from invoice date;
i) any other reason deemed necessary by Bank in its reasonable business
judgment and which is customary either in the commercial finance industry or in
the lending practices of Bank; j) sales to the United States of America or to
any agency, department or division thereof; and k) without duplication, an
amount representing a

6
<PAGE> 11

reserve calculated on a historical basis for returns, discounts, claims,
credits and allowances.

"ELIGIBLE INVENTORY" shall mean 1) Inventory (as defined below) and 2)
raw materials and finished goods ordered by the Borrower with a Bank issued
Letter of Credit, which at all times is acceptable to Bank in the exercise of
its reasonable business judgment and which is customary either in the
commercial finance industry or in the lending practices of Bank, less any: (a)
work-in-process; (b) supplies (other than raw material); (c) Inventory not
present in the United States of America (other than Inventory ordered by the
Borrower under a Bank issued Letter of Credit Guaranty); (d) finished goods
returned or rejected by the Borrower's customers other than finished goods that
are undamaged and resalable in the normal course of business; (e) Inventory to
be returned to the Borrower's suppliers; (f) Inventory in transit to third
parties (other than the Borrower's agents or warehouses), provided that the
Borrower has title to such in-transit Inventory, has possession of all delivery
and warehouse receipts, and all insurance and shipping documentation relating
thereto is reasonably satisfactory to Bank; (g) Overhead Capitalization (as
defined below) in excess of thirteen percent (13%) of Inventory; and (h) any
reserves required by Bank in its reasonable discretion, including for special
order goods, market value declines and bill and hold (deferred shipment),
consignment sales amounts due by the Borrower to freight forwarder(s) for any
applicable customs, duties and taxes, and any royalty payments pursuant to any
applicable licensing agreements.

7
<PAGE> 12

"ENVIRONMENTAL LAWS" means any Federal, state, territorial, provincial
or local law, common law doctrine, rule, order, decree, judgment, injunction,
license, permit or regulation relating to environmental matters, including
those pertaining to land use, air, soil, surface, water, ground water
(including the protection, cleanup, removal, remediation or damage thereof),
public or employee health or safety or any other environmental matter, together
with any other laws (Federal, state, territorial, provincial or local) relating
to emissions, discharges, releases or threatened releases of any pollutant or
contaminant including, without limitation, medical, chemical, biological,
biohazardous or radioactive waste and materials, into ambient air, land,
surface water, groundwater, personal property or structures, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transportation, discharge or handling of any contaminant, including,
without limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. 9601 et seq.), the Hazardous Material Transportation
Act (49 U.S.C. 1801 et seq.), the Resource Conservation and Recovery Act (42
U.S.C. 6901 et seq.) the Federal Water Pollution Control Act (33 U.S.C. 1251 et
seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), and the
Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as such laws have
been, or are, amended, modified or supplemented heretofore or from time to time
hereafter and any analogous future Federal, or present or future state or local
laws, statutes and regulations promulgated thereunder.

8
<PAGE> 13

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

"ERISA AFFILIATE" means any Person that is treated as a single
employer with the Borrower or any of its Subsidiaries under Section 414(b),
(c), (m) or (o) of the Code.

"EVENT OF DEFAULT" has the meaning assigned to such term in Section
12.1.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder.

"FULCRUM BRANDS TRADEMARK LICENSE AGREEMENT" means the Trademark
License and Option Agreement between the Borrower and Fulcrum Brands, L.P.,
dated April 1, 1994, as amended.

"FULCRUM PROPERTIES LEASE" means the lease between Fulcrum Properties,
L.P. and the Borrower, dated August 11, 1995, as amended.

"FULCRUM RETAIL OPTION AGREEMENT" means the agreement between Fulcrum
Retail, Inc. and WEP dated October 21, 1996.

"GAAP" means generally accepted accounting principles in effect on the
date hereof within the United States.

"GOVERNMENTAL AUTHORITY" means the government of any nation, state,
city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.

9
<PAGE> 14

"HAZARDOUS MATERIALS" means those substances which are regulated by or
form the basis of liability under any Environmental Laws.

"INDEBTEDNESS" means as to any Person (a) all obligations of such
Person for borrowed money (including, without limitation, reimbursement and all
other obligations with respect to surety bonds, letters of credit and bankers'
acceptances, whether or not matured), (b) all obligations of such Person
evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business, (d) all interest rate
and currency swaps, caps, collars and similar agreements or hedging devices
under which payments are obligated to be made by such Person, whether
periodically or upon the happening of a contingency, (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even though the
rights and remedies of the seller or lender under such agreement in the event
of default are limited to repossession or sale of such property), (f) all
obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than
leases included in clause (f) on any property or asset owned or held by that
Person regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is non- recourse to the credit of that Person, and
(h) any Contingent Obligation of such Person.

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<PAGE> 15

"INTEREST EXPENSE" shall mean, with respect to the Borrower and its
Subsidiaries on a consolidated basis for any period, the sum of (a) gross
interest expense of the Borrower and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP consistently
applied, including (i) the amortization of debt discounts, (ii) the
amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense, (iii) the portion of
any payments or accruals with respect to Capital Lease Obligations allocable to
interest expense and (iv) all commissions paid to factors during such period,
and (b) any other capitalized interest of the Borrower and its Subsidiaries for
such period determined on a consolidated basis in accordance with GAAP
consistently applied.

"INVENTORY" shall mean all of the Borrower's present and hereafter
acquired inventory as defined in the UCC (including, without limitation, any
and all clothing, apparel, accessories, merchandise and goods, and all
additions, substitutions and replacement thereof, wherever located, together
with all goods wherever located, and materials used or usable in manufacturing,
processing, packaging or shipping same); in all states of production, from raw
materials through work-in-process to finished goods, and all proceeds thereof
of whatever sort, together with applicable freight and Overhead Capitalization
and less a reserve for obsolescence of not less than one-half of one percent
(.05%) of Inventory, as presented on the Borrower's Balance Sheet.

"LEDERMAN" means Michael G. Lederman.

"LEDERMAN EMPLOYMENT AGREEMENT" means the Employment Agreement between
the Borrower and Lederman dated October 21, 1996.

11
<PAGE> 16

"LEVERAGE RATIO" means, with respect to the Borrower and its
Subsidiaries on a consolidated basis as of the end of any fiscal quarter, the
ratio of (a) the aggregate Indebtedness of the Borrower and its Subsidiaries as
of the end of such fiscal quarter to (b) EBITDA for such fiscal quarter and the
three immediately preceding fiscal quarters (treated as a single accounting
period).

"LIBOR" means London Interbank Offering Rate as published in the Wall
Street Journal for the date of determination.

"LIEN" means any mortgage, deed of trust, pledge, hypothecation,
assignment, encumbrance, lien (statutory or other) or preference, priority,
right or other security interest or preferential arrangement of any kind or
nature whatsoever (excluding preferred stock and equity related preferences)
including, without limitation, those created by, arising under or evidenced by
any conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, or any financing lease having
substantially the same economic effect as any of the foregoing.

"LOAN DOCUMENTS" shall mean collectively this Agreement, the Note, the
Guarantee, the Security Agreements and Financing Statement executed pursuant
hereto.

"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (i)
the results of operations, business or financial condition of the Borrower,
(ii) the rights of the Bank pursuant to the Loan Documents, or (iii) the
legality, validity or enforceability of, the Loan Documents.

12
<PAGE> 17

"NET INCOME" shall mean, for any period, the net income (or loss) of
the Borrower and its Subsidiaries on a consolidated basis for such period, as
determined in accordance with GAAP consistently applied, but excluding any
extraordinary or nonrecurring charges, expenses, gains or losses and any
insurance proceeds received by the Borrower or any of its Subsidiaries.

"NOTE" means the note evidencing the Loan described in Section 2.1
hereof in the form attached hereto as EXHIBIT A.

"OUTSTANDING BORROWINGS" means all Indebtedness of the Borrower and
its Subsidiaries for money borrowed that is outstanding at the relevant time of
determination.

"OVERHEAD CAPITALIZATION" means overhead relating to the purchasing
and production of Inventory (including, without limitation, expenses relating
to designs, production, finishing, inventory management and quality control),
as recorded on Borrower's Balance Sheet in accordance with GAAP.

"PURCHASE AGREEMENT" means the Securities Purchase Agreement referred
to in Recital B hereof.

"PERSON" means any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
Governmental Authority or other entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.

"REQUIREMENTS OF LAW" means as to any Person, the Certificate of
Incorporation and Bylaws or other organizational or governing documents of such
Person, and any

13
<PAGE> 18

law, treaty, rule, regulation, right, privilege, qualification, license or
franchise or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable or binding upon such Person or any of its
property or to which such Person or any of its property is subject or
pertaining to any or all of the transactions contemplated or referred to
herein.

"RESTRICTED PAYMENT" means (a) any dividend or other distribution on
any share of the Borrower's capital stock (except dividends payable solely in
shares of its capital stock) or (b) any payment by the Borrower or any
Subsidiary on account of the direct or indirect purchase, redemption (other
than pursuant to existing or future repurchase agreements with employees other
than Lederman and Budoff), retirement or other acquisition of (i) any shares of
the Borrower's capital stock (except shares acquired upon the conversion
thereof into other shares of its capital stock), (ii) any shares of any
Subsidiary's capital stock from any Person other than the Borrower, of (iii)
any option, warrant or other right to acquire shares of the Borrower's or any
Subsidiary's capital stock.

"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.

"SOLVENT" means, with respect to the Borrower and its Subsidiaries
considered as a whole, based on the Pro Forma Balance Sheet, (i) the assets and
the property of the Borrower and its Subsidiaries, considered as a whole,
exceed the aggregate liabilities (including contingent and unliquidated
liabilities) of the Borrower and its Subsidiaries, considered as a whole, (ii)
after giving effect to the transactions

14
<PAGE> 19

contemplated by this Agreement, the Borrower and its Subsidiaries, considered
as a whole, will not be left with unreasonably small capital, and (iii) after
giving effect to the transactions contemplated by this Agreement, the Borrower
and its Subsidiaries, considered as a whole, are able to both serve and pay
their liabilities as they mature. In computing the amount of contingent or
unliquidated liabilities at any time, such liabilities will be computed as the
amount that, in light of all the facts and circumstances existing at such time,
represents the amount that is likely to become an actual or matured liability.

"SUBORDINATED NOTE" means the senior subordinated promissory note
referred to in Recital B hereof.

"SUBSIDIARY" means, with respect to any Person, a corporation or other
entity of which 50% or more of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person. Unless
otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in
this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

1.2 Accounting Terms; Financial Statements. All accounting terms
used herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting practice. The term
"sound accounting practice" shall mean such accounting practice as, in the
opinion of the independent certified public accountant regularly retained by
the Borrower, conforms at the time to GAAP applied on a consistent basis except
for changes with which such accountants concur. If any changes in accounting
principles are hereafter occasioned

15
<PAGE> 20

by promulgation of rules, regulations, pronouncements of opinions of or are
otherwise required by, the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants (or successors thereto or agencies
with similar functions), and any of such changes results in a change in the
method of calculation of, or affects the results of such calculation of, any of
the financial covenants, standards or terms found herein, then the parties
hereto agree to enter into and diligently pursue negotiations in order to amend
such financial covenants, standards or terms so as to reflect fairly and
equitably such changes, with the desired result that the criteria for
evaluating the Borrower's financial condition and results of operations shall
be the same after such changes as if such changes had not been made. In
computing the financial covenants set forth in Section 11.7 hereof, the
historical positive earnings from acquisitions (other than the acquisition of
the Playclothes catalogue and other related assets from a subsidiary of the
Disney Company as of December 31, 1996) that are not "Significant Acquisitions"
(as defined in the Subordinated Note) shall be taken into account.

ARTICLE 2

CREDIT

2.1 Credit. Bank shall provide Borrower a revolving line of
credit (the "Loan") in the amount of Ten Million and No/100 Dollars
($10,000,000.00) which shall be evidenced by a promissory note (the "Note") in
the form of EXHIBIT A attached hereto.

2.2 General Terms. The Loan is a revolving line of credit under
which Borrower shall be permitted to borrow, repay and reborrow for the term of
the Note.

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<PAGE> 21

2.3 Interest.

2.3.1 Interest shall accrue on the outstanding balance of
the Loan at one of the following rates. A per annum rate equal to one-half
percent (0.5%) over the corporate base rate as announced from time to time by
Sunwest Bank of Albuquerque, N.A. or its successor (Interest Option 1); or a
per annum rate equal to three and one-tenth percent (3.10%) over the one (1)
month LIBOR rate as published in the Wall Street Journal on the last business
day of each month (Interest Option 2); or a per annum rate equal to three and
one-fifth percent (3.20%) over the three (3) month LIBOR rate as published in
the Wall Street Journal on the last business day of each month (Interest Option
3). For Interest Option 1, the interest rate shall be adjusted coincident with
any change in Bank's corporate base rate. For Interest Options 2 or 3, the
interest rate shall be adjusted monthly on the first business day of each
month.

2.3.2 Borrower shall elect, on or before January 1, 1997
the initial interest rate option it wishes to use.

2.3.3 Borrower may elect a different interest rate option
by notifying Bank of its election fifteen (15) days prior to the end of each
calendar quarter. Upon receipt of such notice, the Bank shall adjust the
interest rate to the option elected by Borrower effective on the first day of
the first quarter following such notice. Such interest rate option shall be in
effect until such time as Borrower shall notify Bank in accordance with this
Agreement of its election to again change the interest rate option.

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<PAGE> 22

2.4 Repayment. Interest only shall be due and payable on the
first day of each month beginning February 1, 1997 and continuing on the same
day of each month thereafter until the Note is paid in full. The entire
principal balance plus all accrued unpaid interest shall be due and payable in
full May 31, 1998. Bank shall review Borrower's performance hereunder and its
financial condition and business plans prior to May 31, 1997 and shall
thereafter advise Borrower whether, and subject to what conditions, Bank shall
extend the term of the Loan from May 31, 1998 to May 31, 1999 and/or increase
the amount of the Loan to Fifteen Million and No/100 Dollars ($15,000,000.00).
If Bank grants an extension of the maturity of the Loan to May 31, 1999, Bank
shall not charge Borrower an extension fee or any type of facility fee for such
extension; however, Borrower shall, at Bank's request, reimburse Bank for any
costs associated with the extension, including, without limitation, legal fees
for document preparation or review.

2.5 Use. Proceeds from the Loan shall be used for working capital
or for letters of credit ("LCs").

2.6 Amount. At any given time the outstanding principal balance
of the Loan plus all issued and outstanding LCs (including any unreimbursed
amounts drawn under LCs) shall not exceed the Borrowing Base.

ARTICLE 3

LETTERS OF CREDIT

3.1 LC Sub-Line. The maximum amount of the Loan that may be used
for letters of credit (commercial or standby) (the "LC Maximum") shall be
$2,000,000.00.

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<PAGE> 23

Bank shall adjust the LC Maximum at Borrower's request at the beginning of any
calendar quarter upon the following conditions:

3.1.1 the Loan is not in default; and

3.1.2 the LC Maximum when added to the outstanding
principal balance of the Loan does not exceed the Borrowing Base (as
hereinafter defined); and

3.1.3 Bank received Borrower's written request to adjust
the LC Maximum at least fifteen (15) days before the end of the calendar
quarter preceding the calendar quarter for which the adjustment is requested.

3.2 LC Term. Bank shall issue standby or commercial letters of
credit under the Loan for the account of Borrower (each an "LC") from time to
time during the period commencing on the date of the Agreement and ending on
May 31, 1998, unless extended by prior written agreement of the parties in an
aggregate amount (including any amounts drawn against LCs) which shall not, in
the aggregate, exceed the LC Maximum. No LC shall have an expiration date more
than one year after its issue date; provided, however, an LC may have an
expiration date which is more than one year after its issue date if by the
terms of the LC, the LC may be canceled at the option of the issuer at the end
of each anniversary of its issue date.

3.3 LC Issuance. To request the issuance of an LC, Borrower shall
complete page 1 of the standard Letter of Credit Agreement for Standby or
Commercial Letter of Credit (copies of which are attached hereto as EXHIBITS B
AND C, respectively), as appropriate, and shall sign such page 1 and deliver it
to Bank. The issuance of the LC by Bank shall be evidence that Borrower has
agreed to all the terms and conditions of

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<PAGE> 24

this Agreement and the standard Letter of Credit Contract for Standby or
Commercial Letters of Credit, as appropriate.

3.4 LC Reimbursement Agreement. The obligation of Borrower to
reimburse Bank for all draws on LCs shall be evidenced by the Note and Bank's
standard Letter of Credit Contract for a Standby or a Commercial Letter of
Credit. Borrower's obligation to reimburse Bank for all draws on existing and
future LCs shall be governed by the terms of this Agreement, the Note and the
standard Contract for a Standby or Commercial Letter of Credit, as appropriate,
provided, however, if there is any conflict between the terms of the Note, any
such standard Agreement and this Agreement, the terms of this Agreement shall
control.

ARTICLE 4

FEES

4.1 Fees. Borrower shall pay Bank the following fees: (a)
facility fee of $75,000.00 coincident with the execution of this Agreement; (b)
a standby LC fee equal to one and one-half percent (1.5%) per annum of the
amount of a standby LC coincident with its issuance with a minimum fee of $100
for each standby LC issued; and (c) a commercial LC fee equal to one-half
percent (.05%) per ninety days or any portion thereof of the amount of the
commercial LC coincident with its issuance and a payment fee of 0.125% of the
amount for each commercial LC issued with a maximum of $100.00. The LC fee
shall be based on a 360 day year and as to standby LCs the actual number of
days elapsed. Any other fees relating to the issuance of an LC shall be the
usual charges according to Bank published schedules.

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<PAGE> 25
ARTICLE 5

COLLATERAL

5.1 Collateral. Borrower's performance of this Agreement, the
repayment of the Note and the obligation of Borrower to reimburse Bank for all
draws on LCs shall be secured as follows: (a) a first and prior exclusive
security interest in present and future accounts receivable, Inventory,
trademarks, patents, customer lists and general intangibles of Borrower and the
proceeds thereof, and in Eligible Securities (on an as needed basis, first in,
first out) (collectively, "Collateral"). As used herein, the terms "accounts
receivable" and "proceeds" shall have the same meanings as they do under GAAP.
(b) a junior lien, subject only to purchase money security interests or leases
(where applicable), on all Borrower's present and future equipment, furniture,
fixtures and proceeds thereof.

All instruments evidencing the Bank's encumbrance of the Collateral
shall be in form and substance satisfactory to Bank. Upon the last to occur of
(i) the termination of this Agreement, (ii) the expiration of Bank's
obligations under all issued LCs or, (iii) at such time as Bank has been
reimbursed for all advances made, Bank shall release its interest in all the
Collateral. Upon termination of this Agreement, if the conditions described in
(ii) and (iii) have not been met, Bank shall retain Collateral with a market
value equal to 133.33% of the amount of all issued LCs which have expiration
dates after May 31, 1998 plus 133.33% of the amount of all draws on LCs which
have not been reimbursed. Bank shall release its interest in Collateral in
excess of said 133.33% and all other Collateral as such conditions are
satisfied.

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ARTICLE 6

BORROWING BASE

6.1 Borrowing Base. At any given time, the outstanding LCs plus
the principal balance of Loan shall not exceed the Borrowing Base which shall
be the lesser of:

6.1.1 $10,000,000.00, or

6.1.2 The sum of eighty percent (80%) of the market value
of Eligible Securities, plus sixty percent (60%) of Eligible Inventory, plus
eighty percent (80%) of Eligible Accounts Receivable.

(Such amounts specified in clauses (a) and (b), being the "Borrowing Base".)
If at any time the Borrower is out of compliance with this Section 6.1,
Borrower shall immediately reduce the outstanding principal balance of the Loan
or provide Bank additional collateral acceptable to Bank to cause Borrower to
be in compliance with this Section 6.1.

ARTICLE 7

GUARANTY

7.1 The repayment of the Loan and the performance of this
Agreement shall be guaranteed by the unlimited guaranty of Fulcrum Capital
Partners, L.P. ("Guarantor"), which shall be in form and substance acceptable
to Bank, which shall guarantees repayment of the Loan, reimbursement of draws
against the LCs and performance of the provisions of this Loan Agreement.

7.2 The Guarantor shall cause to be furnished to Bank:

22
<PAGE> 27
7.2.1 Annually on or before one hundred twenty (120) days
after Guarantor's fiscal year end, or, if Borrower is in default of this
Agreement, more frequently upon request of Bank, an unaudited management
balance sheet, income statement, and cash flow statement which shall be
certified by Guarantor's general partner as being true and correct.

7.2.2 Within thirty (30) days after filing, copies of
Guarantor's federal income tax returns, or, if such return(s) are not filed on
or before their due date, a copy of the appropriate IRS extension form
reflecting IRS approval of the request for extension, if required.

7.2.3 Guarantor shall keep accurate and complete records of
its business operations and, Bank shall have the right, at Borrower's expense,
without hindrance, during normal business hours and with 48 hours prior notice
to orderly inspect, audit, review and make abstracts of the records at
intervals determined by Bank.

7.2.4 Guarantor shall maintain with financially sound and
reputable insurers, insurance with respect to its properties and business
against such liabilities, casualties, risk and contingencies and in such types
and amounts as are acceptable to Bank.

7.2.5 Guarantor shall, upon the discovery of the existence
of any event of default hereunder, immediately furnish Bank written
notification thereof.

7.2.6 The Loan shall be secured by a pledge (first and
prior) of stock of Borrower owned by Guarantor and all other assets of
Guarantor.

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<PAGE> 28
7.3 If no Event of Default has occurred and is continuing, upon
consummation and receipt of proceeds of not less than $20,000,000.00 from an
initial public offering of Borrower's equity, the Guaranty shall be released.

ARTICLE 8

CONDITIONS TO FUNDING

The obligation of Bank to make advances under the Loan shall be
subject to the satisfaction as determined by, or waiver by Bank of the
following conditions:

8.1 Representations and Warranties. The representations and
warranties of the Borrower contained in Article 9 hereof shall be true and
correct at and as of the date hereof.

8.2 Compliance with this Agreement. The Borrower shall have
performed and complied with all of its agreements and conditions set forth or
contemplated herein that are required to be performed or complied with by the
Borrower.

ARTICLE 9

REPRESENTATIONS AND WARRANTIES OF THE BORROWER

The Borrower hereby represents and warrants to the Bank, after giving
effect to the transactions contemplated by this Agreement, as follows:

9.1 Corporate Existence and Power. The Borrower: (a) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation; (b) has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged; (c) is, duly

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<PAGE> 29
qualified as a foreign corporation, licensed and in good standing under the
laws of each jurisdiction where its ownership, lease or operation of property
or the conduct of its business requires such qualification, except to the
extent that the failure to do so would not have a Material Adverse Effect; and
(d) has the corporate power and authority to execute, deliver and perform its
obligations under each Loan Document to which it is or will be a party and to
borrow hereunder.

9.2 Corporate Authorization; No Contravention. The execution,
delivery and performance by the Borrower of each Loan Document to which it is a
party and the consummation of the transactions contemplated hereby and thereby
(a) has been duly authorized by all necessary corporate, and if required,
stockholder action; (b) does not contravene the terms of the Borrower's
certificate of incorporation or bylaws, or any amendment thereof; and (c) will
not violate, conflict with or result in any breach or contravention of or the
creation of any Lien under, any Contractual Obligation of the Borrower or any
Requirement of Law applicable to the Borrower, except where such violation,
conflict or result could not reasonably be expected to have a Material Adverse
Effect.

9.3 Governmental Authorization; Third Party Consents. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by (including, without limitation, the payment of
interest on the Note), or enforcement

25
<PAGE> 30

against, the Borrower of the Loan Documents to which it is a party or the
consummation of the transactions contemplated hereby or thereby, except where
the failure to comply with such Requirement of Law could not reasonably be
expected to have a Material Adverse Effect.

9.4 Binding Effect. Each of the Loan Documents to which it is a
party has been duly executed and delivered by the Borrower, and constitutes the
legal, valid and binding obligation of the Borrower enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
relating to enforceability.

9.5 No Legal Bar. Neither the execution, delivery and performance
of the Loan Documents nor the performance of the terms of the Note will violate
any Requirement of Law or any Contractual Obligation of the Borrower, except
where such violation could not reasonably be expected to have a Material
Adverse Effect. The Borrower has not previously entered into any agreement
which is currently in effect or to which the Borrower is currently bound,
granting any rights to any Person which are inconsistent with the rights to be
gained by the Borrower in the Loan Documents.

9.6 Litigation. Except as set forth on Schedule 9.6 of the
Purchase Agreement, there are no legal actions, suits, proceedings, claims or
disputes pending or, to the Borrower's knowledge, threatened, at law, in
equity, in arbitration or before any Governmental Authority against or
affecting the Borrower. No injunction, writ, temporary restraining order,
decree or any order of any nature has been issued by any

26
<PAGE> 31

court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of the Loan Documents.

9.7 Compliance with Laws. The Borrower is in compliance with all
Requirements of Law, except where the failure to so comply could not reasonably
be expected to have a Material Adverse Effect.

9.8 No Default or Breach. No event has occurred and is continuing
or would result from the incurring of obligations by the Borrower under the
Loan Documents which constitutes or, with the giving of notice or lapse of time
or both, would constitute an Event of Default. The Borrower is not in default
under or with any Contractual Obligation, except where such default could not
reasonably be expected to have a Material Adverse Effect.

9.9 Title to Properties. The Borrower does not own any real
property.

9.10 Use of Real Property. The leased real properties used in
connection with the business of the Borrower, are used and operated in
compliance and conformity with all applicable leases, contracts, commitments,
licenses and permits, except to the extent that the failure so to conform could
not reasonably be expected to have, in the aggregate, a Material Adverse
Effect. The Borrower has not received notice of violation of any applicable
zoning or building regulation, ordinance or other law, order, regulation or
requirement relating to the operations of the Borrower; and there is no such
violation, except where such violation could not reasonably be expected to have
a Material Adverse Effect. All plants and other buildings that are covered by
leases used in connection with the business of the Borrower substantially
conform with all

27
<PAGE> 32

applicable ordinances, codes, regulations and requirements except where the
failure to so conform could not reasonably be expected to have a Material
Adverse Effect, and no law or regulation presently in effect or condition
precludes or materially restricts continuation of the present use of such
properties. The Borrower holds interests as lessees under leases in full force
and effect in all real property used in connection with its business. The
Fulcrum Properties Lease is in full force and effect and the Borrower enjoys
peaceful and undisturbed possession thereunder. There is no default on the
part of the Borrower or Fulcrum Properties L.P. or event or condition which
with notice or lapse of terms, or both, would constitute a default on the part
of the Borrower or Fulcrum Properties L.P. under such lease.

9.11 Taxes. The Borrower and each of its Subsidiaries have filed
or caused to be filed, or have properly filed extensions for, all tax returns
which are required to be filed and have paid or caused to be paid all taxes
required to be paid by them and all assessments received by them to the extent
that such taxes have become due, except taxes the validity or amount of which
is being contested in good faith by appropriate proceedings and with respect to
which adequate reserves have been set aside. The Borrower and each of its
Subsidiaries have paid or caused to be paid, or have established reserves that
the Borrower reasonably believes to be adequate in all material respects, for
all tax liabilities applicable to the Borrower and its Subsidiaries for all
fiscal years which have not been examined and reported on by the taxing
authorities (or closed by applicable statutes).

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<PAGE> 33
9.12 Financial Conditions.

(a) The Borrower has delivered to Bank true and complete
copies of (i) the audited consolidated balance sheets of the Borrower and its
Subsidiaries as of December 30, 1995 and December 31, 1994 and the related
consolidated statements of operations and cash flows, together with the notes
thereto, of the Borrower and its Subsidiaries for the years ended December 30,
1995 and December 31, 1994 (the "Audited Financial Statements"), and (ii) the
unaudited consolidated balance sheets of the Borrower and its Subsidiaries as
of November 23, 1996 and the related consolidated statements of operations and
cash flows, together with the notes thereto, of the Borrower and its
Subsidiaries for the period ended November 23, 1996 (the "1996 Financial
Statements"). The Audited Financial Statements and the 1996 Financial
Statements fairly present, in all material respects, the financial position of
the Borrower and the results of operations and cash flows of the Borrower as of
the respective dates or for the respective periods set forth therein, except
that the 1996 Financial Statements are subject to normal year-end audit
adjustments. The Audited Financial Statements were prepared in conformity with
GAAP consistently applied during the periods involved, except as otherwise set
forth in the notes thereto. The 1996 Financial Statements were prepared by the
Borrower consistent with past practice.

9.13 ERISA. The execution and delivery of the Loan Documents and
the consummation of the transactions contemplated hereby and thereby will not
result in

29
<PAGE> 34

any prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Code.

9.14 Disclosure.

(a) Agreement and Other Documents Are True. This
Agreement, together with all exhibits and schedules hereto, and the agreements,
certificates and other documents furnished to the Bank by the Borrower at the
Closing, do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were
made, not misleading.

(b) No Material Adverse Effect. There is no fact known
to the Borrower, which the Borrower has not disclosed to the Bank in writing
which would have a Material Adverse Effect.

9.15 Environmental Matters.

(a) The property, assets and operations of the Borrower
are and have been in compliance with all applicable Environmental Laws; there
are no Hazardous Materials stored or otherwise located in, on or under any of
the property or assets of the Borrower including the groundwater except in
compliance with applicable Environmental Laws; and to the Borrower's knowledge,
there have been no releases or threatened releases of Hazardous Materials in,
on or under any property adjoining any of the property or assets of the
Borrower which have not been remediated to the satisfaction of the appropriate
Governmental Authorities.

30
<PAGE> 35
(b) None of the property, assets or operations of the
Borrower is the subject of any Federal, state or local investigation evaluating
whether (i) any remedial action is needed to respond to a release or threatened
release of any Hazardous Materials into the environment or (ii) any release or
threatened release of any Hazardous Materials into the environment is in
contravention of any Environmental Law.

(c) The Borrower has not received any notice or claim,
nor are there pending, threatened or reasonably anticipated, lawsuits or
proceedings against any of them with respect to violations of an Environmental
Law or in connection with the presence of or exposure to any Hazardous
Materials in the environment or any release or threatened release of any
Hazardous Materials into the environment, and the Borrower is not and has not
been the owner or operator of any property which (i) pursuant to any
Environmental Law has been placed on any list of Hazardous Materials disposal
sites, including, without limitation, the "National Priorities List" or
"CERCLIS List", (ii) has, or had, any subsurface storage tanks located thereon,
or (iii) has ever been used as or for a waste disposal facility, a mine, a
gasoline service station, or other than for petroleum products storage
facility.

(d) The Borrower does not have any present or contingent
liability in connection with the presence either on or off the property or
assets of the Borrower of any Hazardous Materials in the environment or any
release or threatened release of any Hazardous Materials into the environment.

31
<PAGE> 36

9.16 Investment Borrower/Government Regulations. The Borrower is
not an "investment company" within the meaning of the Investment Borrower Act
of 1940, as amended. The Borrower is not subject to regulation under the
Public Utility Holding Borrower Act of 1935, as amended, the Federal Power Act,
the Interstate Commerce Act, or any federal or state statute or regulation
limiting its ability to incur Indebtedness.

9.17 Subsidiaries. The Borrower has no Subsidiaries other than
Equipment Bond Purchaser, Inc., a New Mexico corporation. Equipment Bond
Purchaser, Inc. is wholly owned by the Borrower and has no operations and is
only used by the Borrower as a passthrough entity in connection with the
Borrower's industrial revenue bond financing. Except for shares of Equipment
Bond Purchaser, Inc., the Borrower does not own of record or beneficially,
directly or indirectly, (i) any shares of outstanding capital stock or
securities convertible into capital stock of any other corporation, or (ii) any
participating interest in any partnership, joint venture or other non-corporate
business enterprises.

9.18 Labor Relations. The Borrower has not committed and is not
engaged in any unfair labor practice with respect to its employees. There is
(a) no unfair labor practice complaint pending or threatened against the
Borrower before the National Labor Relations Board and no grievance or
arbitration proceeding arising out of or under collective bargaining agreements
is so pending or threatened, (b) no strike, labor dispute, slowdown or stoppage
pending or threatened against the Borrower, and (c) no union representation
question existing with respect to the employees of the

32
<PAGE> 37

Borrower and no union organizing activities are taking place. The Borrower is
not a party to any collective bargaining agreement.

9.19 Employee Benefit Plans. Neither the Borrower nor any ERISA
Affiliate has any actual or contingent, direct or indirect, liability in
respect of any employee benefit plan (as defined in Section 3(3) of ERISA) or
other employee benefit arrangement, other than as listed on SCHEDULE 5.23 to
the Purchase Agreement (collectively, the "Plans"). All of the Plans are in
substantial compliance with all applicable Requirements of Law. Except as set
forth on SCHEDULE 5.23 to the Purchase Agreement, no "prohibited transaction",
as defined in Section 406 of ERISA and Section 4975 of the Code, has occurred
in respect of any of the Plans, and no civil or criminal action brought
pursuant to Part 5 of Title I of ERISA is pending or, to the best of the
Borrower's knowledge, is threatened against any fiduciary of any such Plan.
Except as set forth on SCHEDULE 5.23 to the Purchase Agreement, no Plan: (i) is
subject to Title IV of ERISA, or is otherwise a Defined Benefit Plan, or is a
multiple employer plan (within the meaning of Section 413(c) of the Code); or
(ii) provides for post-retirement welfare benefits or a "parachute payment"
(within the meaning of Section 280G(b) of the Code).

9.20 Patents, Trademarks, Etc. The Borrower owns or is licensed or
otherwise has the right to use all patents, trademarks, service marks, trade
names, copyrights, licenses, franchises and other rights (collectively, the
"Rights") being used to conduct its business as now operated (a complete list
of licenses or other contracts relating to the Borrower's Rights and of
registrations of patents, trademarks, service marks and

33
<PAGE> 38

copyrights including any applications therefor constituting such Rights, is
attached hereto as SCHEDULE 5.24 to the Purchase Agreement). The Borrower's
use of the registered trademark "After the Stork" in the United States does not
infringe upon the Rights that are owned by others. The Borrower is the
exclusive licensee of the trademarks "After the Stork", "Little Feet",
"Sunskins" and "Discount Direct" under the Fulcrum Brands Trademark License
Agreement, which agreement is in full force and effect. Fulcrum Brands L.P. is
the owner of the trademarks "After the Stork", "Little Feet", "Sunskins" and
"Discount Direct" in the United States. "After the Stork" is a valid and
subsisting trademark in the United States and is registered with the U.S.
Patent and Trademark Office under U.S. Registration No. 1,435,045, which
registration is in full force and effect. "Little Feet", "Sunskins" and
"Discount Direct" are valid and subsisting trademarks in the United States and
applications for registration therefor with the U.S. Patent and Trademark
Office are pending. To the Borrower's knowledge, no Right including, without
limitation, the trademarks "Little Feet", "Sunskins" and "Discount Direct", or
product, process, method, substance or other material presently sold by or
employed by the Borrower, or which the Borrower contemplates selling or
employing, infringes upon the Rights are owned by others. No litigation is
pending and no claim has been made against the Borrower or, to the Borrower's
knowledge, is threatened, contesting the right of the Borrower to sell or use
any Right or product, process, method, substance or other material presently
sold by or employed by the Borrower. The Borrower is not currently asserting
any claim of infringement, misappropriation or misuse by any Person of any
Rights owned by the

34
<PAGE> 39

Borrower or to which is has exclusive use. No employee, officer or consultant
of the Borrower has any proprietary, financial or other interest in any Rights
owned or used by the Borrower in its business, except for the Fulcrum Brands
Trademark License Agreement. Except as set forth on SCHEDULE 5.24 to the
Purchase Agreement, to the Borrower's knowledge, the Borrower does not have any
obligation to compensate any Person for the use of any Rights and the Borrower
has not granted any license or other right to use any of the Rights of the
Borrower, whether requiring the payment of royalties or not. The Borrower has
taken all reasonable measures to protect and preserve the security,
confidentiality and value of its Rights, including trade secrets and other
confidential information except where the failure to so protect and preserve
could not reasonably be expected to have a Material Adverse Effect. To the
Borrower's knowledge, all trade secrets and other confidential information of
the Borrower are presently valued and predictable and are not part of the
public domain or knowledge, nor have they been used, divulged or appropriated
for the benefit of any Person other than the Borrower or otherwise to the
detriment of the Borrower. To the Borrower's knowledge, no employee or
consultant of the Borrower has used any trade secrets or other confidential
information of any other person in the course of his work for the Borrower. To
the Borrower's knowledge, no patent, invention, device, principle or any
statute, law, rule, regulation, standard or code is pending or proposed which
would restrict the Borrower's ability to use any of the Rights.

9.21 Trade Relations. The Borrower has no supplier, customer or
group of customers, the loss of which would have a Material Adverse Effect. To
the

35
<PAGE> 40

Borrower's knowledge, all suppliers of other Borrower are readily replaceable
by the Borrower.

9.22 Material Contracts. The Borrower is not a party to any
Contractual Obligation, and is not subject to any charge, corporate
restriction, judgment, injunction, decree, or Requirement of Law, which could
reasonably be expected to have a Material Adverse Effect. SCHEDULE 5.28 to the
Purchase Agreement lists all contracts, agreements and commitments of the
Borrower as of the Closing Date, whether written or oral, other than (a) any
other contracts, agreements and commitments of the Borrower that do not extend
beyond one year and involve the receipt or contractual obligation of the
Borrower to pay not more than $100,000. Each of the contracts, agreements and
commitments of the Borrower set forth on Schedule 5.28 to the Purchase
Agreement is in full force and effect.

9.23 Insurance. SCHEDULE 5.29 to the Purchase Agreement accurately
summarizes all of the insurance policies or programs of the Borrower in effect
as of the date hereof, and indicates the insurance broker's name, amount of
coverage, type of coverage, and also indicates any self-insurance program that
is in effect. All such policies are in full force and effect, are underwritten
by reputable insurers and are sufficient for all applicable requirements of
law. All such policies will remain in full force and effect and will not in
any way be affected by, or terminate or lapse by reason of any of the
transactions contemplated hereby.

9.24 Solvency. The Borrower is Solvent.

36
<PAGE> 41

9.25 Inventories. The inventory of the Borrower reflected on the
latest balance sheet of the Borrower included in the 1996 Financial Statements,
are carried at not in excess of the lower of cost or net realizable value, and
do to include any inventory which is obsolete, surplus or not usable or
saleable in the lawful and ordinary course of business of the Borrower as
heretofore conducted, in each case net of reserves provided therefor on such
balance sheet. No more than $90,000 of all inventory acquired by the Borrower
since the latest balance sheet date included in the 1996 Financial Statements
and prior to the Closing Date is obsolete or surplus inventory. As used
herein, "obsolete inventory" is inventory which, at the balance sheet date or
in the case of the preceding sentence, one day prior to the Closing Date, was
not usable or saleable, because of legal restrictions, failure to meet
specifications, loss of market, damage, physical deterioration or for any other
cause; and "surplus inventory" is inventory that, at the balance sheet date,
exceeded known or anticipated requirements in the reasonable business judgment
of the Seller.

9.26 Beneficial Owners. Lederman and Budoff, directly or
indirectly, are the beneficial owners of at least eighty-five percent (85%) of
the partnership interests in each of Fulcrum Capital Partners L.P. and Fulcrum
Capital L.P.

ARTICLE 10

AFFIRMATIVE COVENANTS

Until the payment by the Borrower of all principal of and interest on
the Note and all other amounts due at the time of payment of such principal and
interest to Bank under this Agreement, including, without limitation, all fees,
expenses and

37
<PAGE> 42

amounts due, Borrower hereby covenants and agrees with the Bank as set forth
below.

10.1 Financial Statements and Other Information. The Borrower
shall deliver to the Bank, in form satisfactory to the Bank:

(a) commencing with the fiscal year ending on December
31, 1996, as soon as available, but not later than one hundred five (105) days
after the end of each fiscal year of the Borrower, a copy of the audited
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the end of such year and the related consolidated and
consolidating statements of operations and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the previous
year, all in reasonable detail and accompanied by a management summary and
analysis of the operations of the Borrower and its Subsidiaries for such fiscal
year and by the opinion of Arthur Anderson LLP (or any successor thereto) or
another nationally recognized independent certified public accounting firm
which report shall state without qualification that such consolidated and
consolidating financial statements present fairly the financial condition as of
such date and results of operations and cash flows for the periods indicated in
conformity with GAAP applied on a consistent basis;

(b) not later than forty-five (45) days after the end of
each month, the unaudited consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries, and the related consolidated and consolidating
statements of operations and cash flows for such month and for the period
commencing on the first day of the

38
<PAGE> 43

fiscal year and ending on the last day of such month, all certified by an
appropriate officer of the Borrower as presenting fairly in all material
respects the financial condition as of such date and results of operations and
cash flows for the periods indicated on a consistent basis, subject to normal
year-end audit adjustments and the absence of footnotes required by GAAP;

(c) the Borrower's flash closing report with respect to
each month, as soon as available, but in any event not later than thirty (30)
days after the end of each such month;

(d) annual budgets, including twelve month forecasts for
balance sheet, income statement and cash flow statement, and such other
financial and operating date of the Borrower and its Subsidiaries, as the Bank
may reasonably request from time to time; and

(e) contemporaneously with each submission of a filing, a
copy of any report, registration statement, proxy statement, financial
statement, notice of other document, whether periodic or otherwise, submitted
to the shareholders of the Borrower; or submitted to or filed by the Borrower
with any governmental authority involving or affecting (i) any registration of
the Borrower or its securities, or (ii) any of the transactions contemplated in
this Agreement, including, without limitation, those submitted or filed
pursuant to the Securities Act, as amended, the Securities Exchange Act of
1934, as amended, any state securities, blue sky or other applicable laws, the
rules and regulations or any securities exchange or organization with or on

39
<PAGE> 44

which any of its securities are used or quoted, the National Labor Relations
Act, as amended, or any other applicable laws respecting the rights of
employees or unions.

10.2 Certificates. The Borrower shall deliver to the Bank:

(a) concurrently with the delivery of the financial
statements referred to in Section 10.1, a certificate of the Borrower's Chief
Financial Officer stating that to his or her knowledge no Event of Default
shall have occurred during the period covered thereby, except as specified in
such certificate; and

(b) concurrently with the delivery of the financial
statements referred to in Section 10.1, a certificate of an officer of the
Borrower including calculations set forth in reasonable detail showing the
Borrower's compliance with the financial covenants contained herein.

(c) no later than thirty (30) days after each month end a
Borrowing Base compliance certificate which shall include, without limitation,
a disclosure of the monthly Overhead Capitalization, which shall be in form
reasonably acceptable to Bank.

10.3 Preservation of Corporate Existence. The Borrower shall, and
shall cause each of its Subsidiaries to:

(a) preserve and maintain in full force and effect its
corporate existence, except as otherwise permitted in Section 11.1;

40
<PAGE> 45

replacements of its properties (except to the extent that any of such
properties are obsolete or are being replaced) so that the efficiency of its
business operations shall be fully maintained and preserved; and

10.4 Payment of Obligations. The Borrower shall, and shall cause
each of its Subsidiaries to, pay and discharge as the same shall become due and
payable, all their respective obligations and liabilities, including without
limitation:

(a) all tax liabilities, assessments and governmental
charges or levies upon it or its properties or assets, unless the same are
being contested in good faith by appropriate proceedings and adequate reserves
in accordance with GAAP are being maintained by the Borrower or such
Subsidiary;

(b) all lawful claims which the Borrower, and each of its
Subsidiaries is obligated to pay, which are due and which, if unpaid, might by
law become a Lien upon its property, unless the same are being contested in
good faith by appropriate proceedings and adequate reserves in accordance with
GAAP are being maintained by the Borrower or such Subsidiary; and

41
<PAGE> 46

10.5 Compliance with Laws. The Borrower shall comply, and shall
cause each of its Subsidiaries to comply, with all Requirements of Law and with
the directions of any Governmental Authority having jurisdiction over them or
their business or property (including all applicable Environmental Laws),
except where the failure to so comply could not reasonably be expected to have
a Material Adverse Effect.

10.6 Notices. Within five (5) days of obtaining knowledge of the
Borrower of the events described below, the Borrower shall give written notice
to the Bank:

(a) of the occurrence of any Event of Default or any
event that, after notice of lapse of time or both, would become an Event of
Default;

(b) of any (i) material default or event of default under
any material Contractual Obligation of the Borrower or any of its Subsidiaries,
or (ii) material dispute, litigation, investigation, proceeding or suspension
which may exist at any time between the Borrower or any of its Subsidiaries and
any Governmental Authority or third party; and

Each notice pursuant to this Section 10.6 shall be accompanied by an
officer's certificate signed by the Chief Executive Officer, President or Chief
Financial Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the Borrower proposes to take with
respect thereto.

10.7 Inspection. The Borrower shall permit, and shall cause each
of its Subsidiaries to permit, representatives of the Bank to visit and inspect
any of their

42
<PAGE> 47

properties, to examine their corporate, financial and operating records and
systems and make copies thereof or abstracts therefrom, and to discuss their
affairs, finances and accounts with their respective directors, officers and
independent public accountants, all at such reasonable times during normal
business hours and as often as may be reasonably requested, upon advance notice
of at least 48 hours. Notwithstanding the foregoing, the Bank agrees to use
reasonable best efforts to (a) avoid disruption of the Borrower's business and
(b) maintain the confidentiality of any confidential information obtained by
the Bank through such inspections, examinations and discussions.

10.8 Payment of Note. The Borrower shall pay the principal of,
interest on and other amounts due in respect of, the Note on the dates and in
the manner provided in the Note.

10.9 Insurance. The Borrower and each of its Subsidiaries shall
maintain insurance with insurance companies or associations with a rating of
"BBB" or better as established by Best's Rating Guide (or an equivalent rating
with such other publication of a similar nature as shall be in current use) in
such amounts and covering such risks as are usually and customarily carried
with respect to similar business according to their respective locations.

10.10 Books and Records. The Borrower shall, and shall cause each
of its Subsidiaries to, keep proper books of record and account, in which full
and correct entries shall be made of all financial transactions and the assets
and business of the

43
<PAGE> 48

Borrower and each of its Subsidiaries in accordance with GAAP consistently
applied to the Borrower and its Subsidiaries taken as a whole.

10.11 Bank Accounts. The Borrower shall maintain all its depository
and demand bank accounts at Bank.

10.12 Partnership Agreement. Guarantor shall provide Bank a copy of
its partnership agreement and a filed copy of its certificate of limited
partnership on or before March 31, 1997.

ARTICLE 11

NEGATIVE COVENANTS

Until the payment by the Borrower of all principal of and interest on
the Note and all other amounts due to the Bank under this Agreement, the
Borrower hereby covenants and agrees with the Bank as follows:

11.1 Consolidations, Mergers and Investments. The Borrower shall
not merge (other than with or into a wholly-owned Subsidiary), consolidate with
or into, or convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whenever acquired) or liquidate except for a merger, consolidation,
disposition, sale or liquidation in which the Borrower or its shareholders, as
the case may be, receives consideration equal to or more than $5.068 per share
(in cash and/or securities). If the Borrower wishes to complete a merger,
consolidation, disposition, sale or liquidation wherein the consideration to be
received will be less than $5.068 per share, it shall notify the Bank of the
proposed consideration and the other terms and conditions thereof. Within ten

44
<PAGE> 49

(10) days of the receipt of such notice, the Bank shall either (i) consent to
such transaction, in which event the Borrower will have the right to consummate
such transaction within ninety (90) days of its receipt of such consent for the
consideration and the other terms and conditions set forth in its notice or
(ii) object to such transaction, in which event the Borrower will have the
right to consummate such transaction within one hundred eighty (180) days of
its receipt of such objection for the consideration and the other terms and
conditions set forth in its notice provided that simultaneous with the closing
of such transaction, the Borrower repays the Loan in full. Except for the
proposed joint venture with Yamon Associates, the Borrower shall not form or
invest in a Subsidiary unless it is wholly-owned by the Borrower.

11.2 Transactions with Affiliates.

(a) The Borrower shall not, and shall not permit any of
its Subsidiaries to, (i) enter into any transaction or agreement with, or make
any payment to, Lederman, Budoff or any of their respective Affiliates (other
than pursuant to agreements existing on the date hereof or subsequently
approved by the Bank including without limitation, the (aa) Advisory Agreement,
dated April 1, 1994, as amended January 1, 1996, between the Borrower and
Fulcrum Capital Partners, L.P., (bb) Fulcrum Retail Option Agreement, (cc)
Fulcrum Brands Trademark License Agreement, (dd) Lederman Employment Agreement,
and (ee) Budoff Employment Agreement, (ii) amend or terminate any existing
agreement with Lederman, Budoff or any of their respective Affiliates,
including, without limitation, the Fulcrum Brands Trademark License Agreement
and the Fulcrum Properties Lease, (iii) purchase from

45
<PAGE> 50

or provide to Lederman, Budoff or any of their respective Affiliates any
selling, general, management or administrative services (other than services
having an aggregate fair market value not in excess of $125,000 in any single
fiscal year), (iv) directly or indirectly make any sales to or purchases from
Lederman, Budoff or any of their respective Affiliates (other than purchases
made under the same terms offered to other employees of the Borrower), (v)
amend either the Lederman Employment Agreement or Budoff Employment Agreement,
or (iv) purchase any trademarks being licensed to the Borrower under the
Fulcrum Brands Trademark License Agreement (other than a purchase of such
trademarks by the Borrower contemporaneously with or immediately following an
Initial Public Offering).

(b) Notwithstanding Section 11.2(a), the Borrower may
continue to sell to Fulcrum Retail, Inc. in accordance with past practice, any
inventory which is obsolete or not useable or saleable in the ordinary course
of business of the Borrower and its Subsidiaries as heretofore conducted so
long as (i) the Borrower's aggregate revenues from such sales do not exceed
$5,000,000 in any single fiscal year, (ii) the Borrower sells such inventory on
average at no less than 50% of the cost of such inventory (on net 60 day
terms), and (iii) Fulcrum Retail, Inc. provides annual financial statements
revised by Arthur Anderson, LLP (or any successor thereto), to the Bank within
one hundred five (105) days after the end of each fiscal year and unaudited
quarterly financial statements to the Bank within forty-five (45) days after
the end of each fiscal quarter. The Borrower may pay the costs associated with
preparation of Fulcrum Retail, Inc.'s financial statements.

46
<PAGE> 51

11.3 No Inconsistent Agreements. Neither the Borrower nor any of
its Subsidiaries shall enter into any Contractual Obligation or enter into any
amendment or other modification to any currently existing Contractual
Obligation of the Borrower, or any of its Subsidiaries, which by its terms
restricts or prohibits the ability of the Borrower to pay the principal of or
interest on the Note.

11.4 Limitation on Indebtedness. The Borrower shall not, and shall
not cause, suffer or permit any of its Subsidiaries to, directly or indirectly,
collectively and in the aggregate, issue, assume or otherwise incur any
Indebtedness, other than: (a) Indebtedness under the Subordinated Note; (b) the
Loan; (c) Indebtedness to others not exceeding $5,000,000.00 which is
subordinate to the Loan and does not cause a default under this Agreement; (d)
non-current liabilities for post-employment healthcare and other insurance
benefits; (e) trade payables and accrued expenses, in each case arising in the
ordinary course of business; (f) Indebtedness secured by a Lien permitted under
Section 11.5; (g) refinancings, refundings or extensions of the foregoing;
provided, that any such refinancings, refundings or extensions shall not (i)
exceed the principal amount refinanced, refunded or extended, (ii) shorten the
maturity (or weighted average life to maturity) of such Indebtedness, (iii)
increase the interest rate applicable to such Indebtedness, (iv) facilitate the
exercise or enforcement of any remedies of any obligee of such Indebtedness in
respect of any default or event of default thereunder, or (v) result in any
amendments or modifications of any of the subordination provisions applicable to
such Indebtedness; and (h) Indebtedness existing at the time of acquisition on
assets or a company acquired by the Borrower.

47
<PAGE> 52

11.5 Limitation on Liens. The Borrower shall not, and shall not
permit, cause or suffer any of its Subsidiaries to, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
other than: (a) Liens securing the Loan, (b) Liens for taxes, statutory Liens
of landlords and Liens of carriers, warehousemen, mechanics and materialmen, in
each case only to the extent the obligations thereto are not yet due or are
being contested in good faith by appropriate proceedings diligently pursued;
(c) Liens to secure performance of tenders, bids, statutory obligations or
government contracts, and similar Liens not securing Indebtedness and arising
in the ordinary course of business; (d) Liens existing at the time of
acquisition on assets or a company acquired by it; and (e) any Lien on
equipment or real property securing Indebtedness (including Capital Lease
Obligations) incurred or assumed for the sole purpose of financing all or part
of the cost of acquiring such equipment or real property, provided that such
Lien (i) attaches to such asset concurrently with or within ten (10) days after
the acquisition thereof, (ii) the Indebtedness secured thereby does not
encumber any other property of the Borrower or its Subsidiaries and (iii) does
not exceed the purchase price of such asset.

11.6 Dispositions of Assets. The Borrower shall not, and shall not
permit any of its Subsidiaries to, sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions) all or any part of their
assets or properties or any of the capital stock of any of its Subsidiaries,
other than (a) assets or properties sold, leased or rented in the ordinary
course of business consistent with past practice, (b) assets or properties,
including obsolete assets (other than inventory), sales of which do not

48
<PAGE> 53

exceed in the aggregate $100,000 in any 12-month period, and (c) sales of
inventory to Fulcrum Retail, Inc. in accordance with Section 11.2.(b).

11.7 Financial Covenants.

(a) EBITDA. As of the end of each fiscal quarter
specified below, the Borrower shall not permit EBITDA (for such fiscal quarter
and the three immediately preceding fiscal quarters treated as a single
accounting period) to be less than the corresponding amount set forth below:

<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Fiscal Year 1997
----------------
First Quarter $5,000,000
Second Quarter $7,000,000
Third Quarter $7,500,000
Fourth Quarter $8,000,000

Fiscal Year 1998
----------------
First Quarter $8,500,000
Second Quarter $9,000,000
Third Quarter $9,000,000
Fourth Quarter $10,000,000

Each Fiscal Quarter Thereafter $10,000,000
------------------------------
</TABLE>
(b) Cash Flow Coverage Ratio. As of the end of each
fiscal quarter specified below, the Borrower shall not permit the Cash Flow
Coverage Ratio to be less than the corresponding ratio set forth below:

49
<PAGE> 54
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1997
----------------
First Quarter 1.25 to 1.0
Second Quarter 1.75 to 1.0
Third Quarter 1.75 to 1.0
Fourth Quarter 2.0 to 1.0

Fiscal Year 1998
----------------
First Quarter 2.25 to 1.0
Second Quarter 2.75 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 3.5 to 1.0

Each Fiscal Quarter Thereafter 3.5 to 1.0
------------------------------
</TABLE>

(c) Leverage Ratio. As of the end of each fiscal quarter
specified below, the Borrower shall not permit the Leverage Ratio to be more
than the corresponding ratio set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1997
----------------
First Quarter 4.0 to 1.0
Second Quarter 3.0 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 2.5 to 1.0

Fiscal Year 1998
----------------
First Quarter 2.25 to 1.0
Second Quarter 2.0 to 1.0
Third Quarter 2.0 to 1.0
Fourth Quarter 2.0 to 1.0

Each Fiscal Quarter Thereafter 2.0 to 1.0
------------------------------
</TABLE>

50
<PAGE> 55

(d) Shareholders Equity. Borrower shall not permit its
shareholder's equity plus subordinated debt to be less than $17,250,000.00 as of
the end of any reporting period.

11.8 Limitation on Business of the Borrower. The Borrower shall
not engage in any business other than the manufacturing and distribution of
children's consumer products; provided, however, that the Borrower may engage in
the manufacturing and distribution of adult consumer products to the extent that
no more than twenty-five percent (25%) of the Borrower's revenues are derived
from the sale of adult consumer products.

ARTICLE 12

DEFAULT

12.1 Events of Default. Each of the following shall be an Event of
Default:

12.1.1 Default in the payment of any installment of
principal of, or any interest on, any note executed and delivered pursuant to
the terms of this Agreement or any renewal or extension thereof which continues
uncured for ten (10) days after oral or written notice thereof; or

12.1.2 Default in the due observance or performance in a
material respect of any material affirmative covenant contained in any security
agreement, mortgage or any other document executed and delivered pursuant to
the terms of this Agreement, and such default shall continue unremedied for a
period of thirty (30) days after oral or written notice thereof; or

51
<PAGE> 56

12.1.3 Default in the due observance or performance in any
material respect of any negative covenant contained in this Agreement, which
shall continue unremedied for thirty (30) days after oral or written notice
thereof; or

12.1.4 Any material warranty or representation made herein
by Borrower or Guarantor to the Bank is untrue or misleading in any material
respect as of the date such warranty or representation is made or any material
certificate, statement, or writing furnished by Borrower or any of the
Guarantors to the Bank is untrue in any material respect on the date as of
which the fact set forth are stated or certified; or

12.1.5 Borrower discontinues its business; or

12.1.6 Borrower or Guarantor becomes insolvent or admits in
writing its inability to pay its debts as they mature, or makes an assignment
for the benefit of creditors, or applies for, consents to or acquiesces in the
appointment of a trustee or receiver for Borrower or Guarantor or any of its
property; or, in the absence of such application, consent or acquiescence,
proceedings for the appointment of a trustee or receiver for Borrower or
Guarantor or for a substantial part of its property is authorized or instituted
by or against Borrower or Guarantor; or any bankruptcy, reorganization, debt
arrangement or other proceedings under any bankruptcy or insolvency law or any
dissolution or liquidation proceeding is instituted by or against Borrower or
Guarantor; or provided that if any bankruptcy, receivership, liquidation or
similar proceedings are instituted otherwise than by Borrower or Guarantor, such
an

52
<PAGE> 57

occurrence will not constitute an event of default if such proceedings are
dismissed within sixty (60) days of their commencement; or

12.1.7 A final money judgment (after appeal, if any, has
been decided adversely to Borrower or Guarantor, or after the time to appeal
therefrom shall have expired) which has a Material Adverse Effect shall be
entered against Borrower or any of the Guarantors and the same shall remain
unsatisfied for more than sixty (60) days; or

12.1.8 The occurrence of a Change of Control. For the
purposes hereof, "Change of Control" means (i) any transaction or series of
transactions in which any Person (as such terms is defined in Section 13(d)(3)
of the Exchange Act) or group, other than Michael G. Lederman and/or Scott A.
Budoff, becomes the direct or indirect beneficial owner (as such term is
defined in Rule 13d-3 promulgated under the Exchange Act) of more of the then
outstanding Common Stock beneficially owned in the aggregate by Michael G.
Lederman and Scott A. Budoff, (ii) any transaction or series of transactions in
which Michael G. Lederman and Scott A. Budoff together cease to be the direct
or indirect beneficial owners of at least 25% of the then outstanding Common
Stock, (iii) the sale of all or substantially all of the Borrower's assets,
(iv) the liquidation of the Borrower, (v) the election of a majority of the
members of the Board of Directors who were not placed in nomination for that
office by the Board of Directors, or (vi) the combination of Borrower with
another company, as a result of which the shareholders of Borrower hold less
than 50.01% of the total

53
<PAGE> 58

of all voting shares outstanding or Borrower's directors constitute less than a
majority of the Board of Directors of the combined entity; or

12.1.9 A draw is made under any LC which causes the
outstanding balance of the Loan to exceed the Borrowing Base and Borrower fails
to reduce the outstanding balance to comply with the Borrowing Base within
thirty (30) days after oral or written notice thereof; or

12.1.10 If an event of default shall occur under the
Subordinated Note or the holder of the Subordinated Note shall issue a Remedy
Notice to Bank.

12.2 Remedies. If any one or more Events of Default occurs and is
continuing, the Bank may, at its option, declare all reimbursement obligations
or other indebtedness incurred hereunder immediately due and payable and the
Bank shall be under no other or further obligation to make further advances or
to issue additional letters of credit under the terms of this Agreement. Upon
such declaration, the Bank may then proceed to enforce payment or collection of
said indebtedness and to exercise any or all of the rights and remedies afforded
and provided for in this Agreement, in any of the Loan Documents, or available
at law in equity, including, without limitation, the right to set off amounts
owed by Borrower to Bank against amounts owed by Bank to Borrower, anything in
said documents to the contrary notwithstanding, or the Bank may pursue any other
remedy available to it, whether in law or in equity. If Bank elects to
liquidate Collateral to satisfy the obligations

54
<PAGE> 59

of Borrower to Bank, Bank may liquidate the Collateral in any order it deems
appropriate. Bank shall only liquidate so much Collateral as is sufficient to
satisfy the obligations of Borrower to Bank and shall, subject to the provision
of Section 5.1 hereof, release its interest in the remaining Collateral, if
any. All of the above rights and remedies are cumulative, and no delay on the
part of the Bank in exercising any right, power or privilege shall operate as a
waiver of such rights, power or privilege, nor will the partial exercise
thereof operate as a waiver of such right, power or privilege.

ARTICLE 13

MISCELLANEOUS

13.1 Survival of Representations and Warranties. All of the
representations and warranties made herein shall survive the execution and
delivery of the Note and this Agreement, but such representations and
warranties shall terminate on the earlier to occur of (a) payment by the
Borrower of all principal and interest on the Note and all other amounts due at
the time of payment of such principal and interest to the Bank under this
Agreement, including, without limitation, all fees and expenses or (b) the
termination of this Agreement.

13.2 Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopies,
courier service or personal delivery:

(a) if to Sunwest Bank of Albuquerque, N.A.:

Sunwest Bank of Albuquerque, N.A.
303 Roma N.W.
P.O. Box 25500
Albuquerque, New Mexico 87125-0500
Attention: Paul Sowards
Facsimile No.: (505) 282-4441

55
<PAGE> 60

(b) if to the Borrower:

Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
Facsimile No.: (505) 867-7100

with a copy to:

Kirkland & Ellis
153 East 53rd Street, 39th Floor
New York, New York 10022
Attention: Frederick Tanne, Esq.
Facsimile No. (212) 446-4900

All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; five Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged, if telecopied.

13.3 Successors and Assigns. All covenants and agreements in this
Agreement contained by or on behalf of the parties hereto shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto.

13.4 Amendment and Waiver.

(a) No failure or delay on the part of any of the parties
hereto in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law, in equity or otherwise.

56
<PAGE> 61

(b) Any amendment, supplement or modification of or to
any provision of this Agreement, any waiver of any provision of this Agreement,
and any consent to any departure by any party from the terms of any provision
of this Agreement, shall be effective (i) only if it is made or given in
writing and signed by all of the parties hereto, and (ii) only in the specific
instance and of the specific purpose for which made or given. Except where
notice is specifically required by this Agreement, no notice to or demand on
the Borrower in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.

13.5 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.

13.6 Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.

13.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW MEXICO WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.

13.8 JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY
AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, THE NOTE, OR ANY OTHER AGREEMENTS OR TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW MEXICO OR
OF THE UNITED STATES OF

57
<PAGE> 62

AMERICA FOR THE DISTRICT OF NEW MEXICO AND HEREBY EXPRESSLY SUBMITS TO THE
PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND
EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE
AN INCONVENIENT FORUM, EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 13.2, SUCH SERVICE TO
BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING.

13.9 Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision in every the respect and of the
remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair
the benefits of the remaining provisions hereof.

13.10 Rules of Construction. Unless the context otherwise requires,
"or" is not exclusive, and references to sections or subsections refer to
sections or subsections of this Agreement.

13.11 Entire Agreement. This Agreement, together with the exhibits
and schedules hereto and the other Loan Documents, is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject

58
<PAGE> 63

matter contained herein and therein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein or
therein. This Agreement, together with the exhibits and schedules hereto, and
the other Loan Documents supersede all prior agreements and understandings
between the parties with respect to such subject matter.

13.12 Certain Expenses. The Borrower will pay all reasonable
expenses of the Bank (including reasonable fees, charges and disbursements of
outside counsel) in connection with any amendment, supplement, modification or
waiver of or to any provision of this Agreement, the Note, or consent to any
departure by the Borrower from the terms of any provision of this Agreement or
the Note.

13.13 Publicity. Except as may be required by applicable law, none
of the parties hereto shall issue a publicity release or announcement or
otherwise make any public disclosure concerning this Agreement or the
transactions contemplated hereby, without prior approval by the other party
hereto. If any announcement is required by law to be made by any party hereto,
prior to making such announcement such party will deliver a draft of such
announcement to the other parties and shall give the other parties an
opportunity to comment thereon.

13.14 Further Assurances. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority
or any other Person) as may

59
<PAGE> 64

be reasonably required or desirable to carry out or perform the provisions of
this Agreement.

13.15 Commitment. Borrower acknowledges that a contract, promise or
commitment to loan money or to grant, extend or renew credit or any
modification thereof, in an amount greater than Twenty-Five Thousand Dollars
($25,000), not primarily for personal, family or household purposes, made by a
financial institution shall not be enforceable unless in writing and signed by
the party to be charged or that party's authorized representative.

13.16 Jury Trial Waiver. BORROWER AND BANK HEREBY WAIVE THE RIGHT
TO A JURY TRIAL ON ANY ISSUE ARISING OUT OF OR RELATING, DIRECTLY OR
INDIRECTLY, TO THIS AGREEMENT, THE NOTE, THE GUARANTY, OR ANY DOCUMENT EXECUTED
AND DELIVERED PURSUANT TO THIS AGREEMENT.

13.17 Agreement Governs. This Agreement is being executed together
with the Loan Documents referred to herein. In the event that the terms of
this Agreement are inconsistent with the terms of any Loan Documents, the terms
of this Agreement shall control and govern, and all other such documents shall
not, in any material respect, change, alter, or enlarge the rights and
obligations of the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their respective officers hereunto duly authorized
as of the date first above written.

60
<PAGE> 65
DATED: December 27, 1996

FULCRUM DIRECT, INC.

By: /s/ Scott Budoff
-----------------------------------
Name: Scott Budoff
Title: President & COO

SUNWEST BANK OF ALBUQUERQUE, N.A.

By: /s/ Paul Sowards
-----------------------------------
Paul Sowards, Executive Vice President

<PAGE> 1
EXHIBIT 10.4

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

SECURITIES PURCHASE AGREEMENT

AMONG

FULCRUM DIRECT, INC.,

WHITNEY SUBORDINATED DEBT FUND, L.P.

AND

WHITNEY EQUITY PARTNERS, L.P.

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

Dated as of October 21, 1996

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

- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1

DEFINITIONS........................... 1
1.1 Definitions..................................................... 1
1.2 Accounting Terms: Financial Statements.......................... 9
1.3 Knowledge of the Company........................................ 9

ARTICLE 2

PURCHASE AND SALE OF NOTE, WARRANTS AND SHARES.......... 9
2.1 Purchase and Sale of Note by WSDF............................... 9
2.2 Purchase and Sale of WSDF Warrant............................... 9
2.3 Purchase and Sale of the Shares by WEP.......................... 9
2.4 Purchase and Sale of WEP Warrant................................ 10
2.5 Fees............................................................ 10
2.6 Closing......................................................... 10
2.7 Financial Accounting Positions; Tax Reporting................... 10

ARTICLE 3

CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE..... 10
3.1 Representations and Warranties.................................. 11
3.2 Compliance with this Agreement.................................. 11
3.3 Secretary's Certificates........................................ 11
3.4 Documents....................................................... 11
3.5 Purchase of Securities Permitted by Applicable Laws............. 11
3.6 Opinion of Counsel.............................................. 12
3.7 Approval of Counsel to the Purchasers........................... 12
3.8 Consents and Approvals.......................................... 12
3.9 Stockholders' Agreement......................................... 12
3.10 Certificate of Incorporation and Bylaws......................... 12
3.11 No Material Judgment or Order................................... 12
3.12 Pro Forma Balance Sheet......................................... 12
3.13 Goodstanding Certificates....................................... 13
3.14 Conversion of Series A Preferred Stock.......................... 13
3.15 Redemption of Series B Preferred Stock.......................... 13
3.16 Amendment to Fulcrum Brands Trademark License Agreement......... 13
3.17 Fulcrum Retail Option Agreement................................. 13
3.18 Lederman Employment Agreement................................... 13
3.19 Budoff Employment Agreement..................................... 13
3.20 Employee Option Pool............................................ 13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 4

CONDITIONS TO THE OBLIGATION................... 13
4.1 Representations and Warranties.................................. 14
4.2 Compliance with this Agreement.................................. 14

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......... 14
5.1 Corporate Existence and Power................................... 14
5.2 Corporate Authorization; No Contravention....................... 14
5.3 Governmental Authorization; Third Party Consents................ 14
5.4 Binding Effect.................................................. 15
5.5 No Legal Bar.................................................... 15
5.6 Litigation...................................................... 15
5.7 Compliance with Laws............................................ 15
5.8 No Default or Breach............................................ 15
5.9 Title to Properties............................................. 15
5.10 Use of Real Property............................................ 15
5.11 Taxes........................................................... 16
5.12 Financial Condition............................................. 16
5.13 ERISA........................................................... 17
5.14 Disclosure...................................................... 17
5.15 Absence of Certain Changes or Events............................ 17
5.16 Environmental Matters........................................... 18
5.17 Investment Company/Government Regulations....................... 18
5.18 Subsidiaries.................................................... 18
5.19 Capitalization.................................................. 19
5.20 Private Offering................................................ 19
5.21 Broker's, Finder's or Similar Fees.............................. 20
5.22 Labor Relations................................................. 20
5.23 Employee Benefit Plans.......................................... 20
5.24 Patents, Trademarks, Etc........................................ 20
5.25 Potential Conflicts of Interest................................. 21
5.26 Trade Relations................................................. 22
5.27 Outstanding Borrowings.......................................... 22
5.28 Material Contracts.............................................. 22
5.29 Insurance....................................................... 22
5.30 Solvency........................................................ 22
5.31 Inventories..................................................... 22
5.32 Beneficial Owners............................................... 23
</TABLE>

ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 6

REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS................... 23
6.1 Authorization; No Contravention................................. 23
6.2 Binding Effect.................................................. 23
6.3 No Legal Bar.................................................... 23
6.4 Purchase for Own Account........................................ 23
6.5 ERISA........................................................... 24
6.6 Broker's, Finder's or Similar Fees.............................. 24
6.7 Governmental Authorization; Third Party Consent................. 24

ARTICLE 7

INDEMNIFICATION......................... 24
7.1 Indemnification................................................. 24
7.2 Notification.................................................... 25
7.3 Registration Rights............................................. 26
7.4 Environmental Liabilities....................................... 26

ARTICLE 8

AFFIRMATIVE COVENANTS...................... 26
8.1 Financial Statements and Other Information...................... 26
8.2 Certificates.................................................... 28
8.3 Preservation of Corporate Existence............................. 28
8.4 Payment of Obligations.......................................... 28
8.5 Compliance with Laws............................................ 29
8.6 Notices......................................................... 29
8.7 Reservation of Shares........................................... 29
8.8 Inspection...................................................... 30
8.9 Payment of Note................................................. 30
8.10 Insurance....................................................... 30
8.11 Books and Records............................................... 30
8.12 Use of Proceeds................................................. 30
8.13 Appointment of WEP's Nominee to Board........................... 30
8.14 Line of Credit.................................................. 31

ARTICLE 9

NEGATIVE COVENANTS........................ 31
9.1 Consolidations, Mergers and Investments......................... 31
9.2 Transactions with Affiliates.................................... 32
</TABLE>

iii
<PAGE> 5
<TABLE>
<S> <C>
9.3 No Inconsistent Agreements...................................... 32
9.4 Limitation on Indebtedness...................................... 32
9.5 Limitation on Liens............................................. 33
9.6 Limitations on Restricted Payments.............................. 33
9.7 Dispositions of Assets.......................................... 33
9.8 Financial Covenants............................................. 34
9.9 Limitation on Business of the Company........................... 35

ARTICLE 10

PREPAYMENT............................ 36
10.1 Optional Prepayment............................................. 36
10.2 Mandatory Prepayment............................................ 36

ARTICLE 11

MISCELLANEOUS.......................... 36
11.1 Survival of Representations and Warranties...................... 36
11.2 Notices......................................................... 36
11.3 Successors and Assigns.......................................... 38
11.4 Amendment and Waiver............................................ 38
11.5 Counterparts.................................................... 39
11.6 Headings........................................................ 39
11.7 GOVERNING LAW................................................... 39
11.8 Determinations, Request or Consents............................. 39
11.9 JURISDICTION.................................................... 39
11.10 Severability.................................................... 39
11.11 Rules of Construction........................................... 40
11.12 Entire Agreement................................................ 40
11.13 Certain Expenses................................................ 40
11.14 Publicity....................................................... 40
11.15 Further Assurances.............................................. 40

EXHIBITS

A. Note
B. WSDF Warrant
C. WEP Warrant
D. Stockholders Agreement
E. Fulcrum Retail Option Agreement
F. Lederman Employment Agreement
G. Budoff Employment Agreement
H. Fulcrum Direct, Inc. Management Team Equity Plan
I. List of Prohibited Investors
</TABLE>

iv
<PAGE> 6
SCHEDULES

5.6 Litigation
5.12A Financial Statements
5.12B Pro Forma Balance Sheet
5.15 Absence of Certain Changes or Events
5.19 Capitalization
5.23 Employee Benefit Plans
5.24 Patents, Trademarks, Etc.
5.25 Potential Conflicts of Interest
5.27 Outstanding Borrowings
5.28 Material Contracts
5.29 Insurance

v
<PAGE> 7
SECURITIES PURCHASE AGREEMENT

AGREEMENT, dated as of October 21, 1996, among FULCRUM DIRECT,
INC. (the "Company"), a Delaware corporation, WHITNEY SUBORDINATED DEBT FUND,
L.P. ("WSDF"), a Delaware limited partnership, and WHITNEY EQUITY PARTNERS,
L.P., a Delaware limited partnership ("WEP" and together with WSDF, the
"Purchasers").

W I T N E S S E T H:

WHEREAS, the Company wishes to sell to WSDF, and WSDF wishes
to purchase from the Company (i) a senior subordinated promissory note (the
"Note") due October 21, 2003 in the principal amount of $10,000,000, and (ii) a
warrant (the "WSDF Warrant") to purchase 405,460 shares of common stock, $.01
par value per share, of the Company (the "Common Stock"), in each case upon the
terms and subject to the conditions hereinafter set forth; and

WHEREAS, the Company wishes to sell to WEP, and WEP wishes to
purchase from the Company (i) 394,385 shares of Common Stock (the "Shares") for
an aggregate purchase price of $2,000,000, and (ii) a warrant (the "WEP Warrant"
and together with the WSDF Warrant, the "Warrants") to purchase 121,350 shares
of Common Stock, in each case upon the terms and subject to the conditions
hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:

ARTICLE 1

DEFINITIONS

1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:

"Affiliate" of any specified Person means any other Person who
is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, except with respect to the Company and its Subsidiaries
such term shall not include the Purchasers or any of their respective
"affiliates" (as defined in such rule).

"Agreement" means this Agreement, including the exhibits and
schedules attached hereto, as the same may be amended, supplemented or modified
in accordance with the terms hereof.

"Budoff" means Scott A. Budoff.

"Budoff Employment Agreement" means the Employment Agreement
between the Company and Budoff substantially in the form attached hereto as
Exhibit G.
<PAGE> 8
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.

"By-laws" means the By-laws of the Company as in effect on the
Closing Date.

"Capital Expenditures" means the aggregate expenditures
(whether or not financed) made by the Company and its Subsidiaries for fixed or
capital assets or improvements (including, without limitation, capitalized
intellectual and proprietary property), or for replacements, substitutions or
additions thereto, that have an anticipated useful service life of at least one
year or more at the time the asset is acquired by the Company or one of its
Subsidiaries, and are used in the production, distribution and/or the sale of
the goods or services or offered for sale by the Company or one of its
Subsidiaries, all as determined in accordance with GAAP.

"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP consistently applied.

"Cash" shall mean currency of the United States of America.

"Cash Flow Coverage Ratio" means, with respect to the Company
and its Subsidiaries on a consolidated basis as of the end of any fiscal
quarter, the ratio of (a) EBITDA for such fiscal quarter and the three preceding
fiscal quarters (treated as a single accounting period) less Capital
Expenditures for such period to (b) Cash Interest Expense.

"Cash Interest Expense" means, with respect to the Company and
its Subsidiaries on a consolidated basis, Interest Expense less the sum of (a)
pay-in-kind Interest Expense, (b) the amortization of debt discounts, if any,
(c) the amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense and (d) any other
expense classified under GAAP as interest expense that is not paid or payable in
Cash.

"Certificate of Incorporation" means the Certificate of
Incorporation of the Company as in effect on the Closing Date.

"Closing" has the meaning assigned to that term in Section
2.6.

"Closing Date" means the date specified in Section 2.6.

"Code" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto.

2
<PAGE> 9
"Commission" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.

"Common Stock" has the meaning assigned to that term in the
second Whereas clause hereof, or any other capital stock of the Company into
which such stock is reclassified or reconstituted.

"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability of that Person with respect to any Indebtedness,
lease, dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to perform in respect
thereof. The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determinable amount of the primary obligation in respect
of which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof.

"Contractual Obligations" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.

"Defined Benefit Plan" means a defined benefit plan within the
meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded
or unfunded, qualified or non-qualified (whether or not subject to ERISA or the
Code).

"EBITDA" means, with respect to the Company and its
Subsidiaries on a consolidated basis for any period, the sum of (a) Net Income
for such period, (b) Interest Expense for such period, (c) Federal, state and
local income and franchise taxes deducted from revenue in determining such Net
Income, (d) depreciation and amortization deducted from revenue in determining
such Net Income.

"Environmental Laws" means any Federal, state, territorial,
provincial or local law, common law doctrine, rule, order, decree, judgment,
injunction, license, permit or regulation relating to environmental matters,
including those pertaining to land use, air, soil, surface water, ground water
(including the protection, cleanup, removal, remediation or damage thereof),
public or employee health or safety or any other environmental matter, together
with any other laws (Federal, state, territorial, provincial or local) relating
to emissions, discharges, releases or threatened releases

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<PAGE> 10
of any pollutant or contaminant including, without limitation, medical,
chemical, biological, biohazardous or radioactive waste and materials, into
ambient air, land, surface water, groundwater, personal property or structures,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, discharge or handling of any
contaminant, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. 9601 et seq.), the
Hazardous Material Transportation Act (49 U.S.C. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C.
1251 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), and
the Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as such laws
have been, or are, amended, modified or supplemented heretofore or from time to
time hereafter and any analogous future Federal, or present or future state or
local laws, statutes and regulations promulgated thereunder.

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

"ERISA Affiliate" means any Person that is treated as a single
employer with the Company or any of its Subsidiaries under Section 414(b), (c),
(m) or (o) of the Code.

"Event of Default" has the meaning assigned to such term in
the Note.

"Exercisable Shares" has the meaning assigned to that term in
Section 8.7 hereof.

"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.

"Fulcrum Brands Trademark License Agreement" means the
Trademark License and Option Agreement between the Company and Fulcrum Brands,
L.P., dated April 1, 1994, as amended.

"Fulcrum Properties Lease" means the lease between Fulcrum
Properties, L.P. and the Company, dated August 11, 1995, as amended.

"Fulcrum Retail Option Agreement" means the agreement between
Fulcrum Retail, Inc. and WEP substantially in the form attached hereto as
Exhibit E.

"GAAP" means generally accepted accounting principles in
effect on the date hereof within the United States.

"Governmental Authority" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.

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<PAGE> 11
"Hazardous Materials" means those substances which are
regulated by or form the basis of liability under any Environmental Laws.

"Indebtedness" means as to any Person (a) all obligations of
such Person for borrowed money (including, without limitation, reimbursement and
all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business, (d) all interest rate
and currency swaps, caps, collars and similar agreements or hedging devices
under which payments are obligated to be made by such Person, whether
periodically or upon the happening of a contingency, (e) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (f) all obligations of
such Person under leases which have been or should be, in accordance with GAAP,
recorded as capital leases, (g) all indebtedness secured by any Lien (other than
Liens in favor of lessors under leases other than leases included in clause (f))
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is
non-recourse to the credit of that Person, and (h) any Contingent Obligation of
such Person.

"Initial Public Offering" means the sale by either the Company
or any of its Subsidiaries of its capital stock pursuant to a registration
statement on Form S-1 or otherwise under the Securities Act in which the Company
or any of its Subsidiaries receives at least $20,000,000 of Net Cash Proceeds.

"Interest Expense" shall mean, with respect to the Company and
its Subsidiaries on a consolidated basis for any period, the sum of (a) gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP consistently applied, including
(i) the amortization of debt discounts, (ii) the amortization of all fees
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense, (iii) the portion of any payments or accruals with respect
to Capital Lease Obligations allocable to interest expense and (iv) all
commissions paid to factors during such period, and (b) any other capitalized
interest of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP consistently applied.

"Lederman" means Michael G. Lederman.

"Lederman Employment Agreement" means the Employment Agreement
between the Company and Lederman substantially in the form attached hereto as
Exhibit F.

"Leverage Ratio" means, with respect to the Company and its
Subsidiaries on a consolidated basis as of the end of any fiscal quarter, the
ratio of (a) the aggregate Indebtedness of the Company and its Subsidiaries as
of the end of such fiscal quarter to (b) EBITDA for such fiscal

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<PAGE> 12
quarter and the three immediately preceding fiscal quarters (treated as a single
accounting period).

"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or preferential arrangement of any
kind or nature whatsoever (excluding preferred stock and equity related
preferences) including, without limitation, those created by, arising under or
evidenced by any conditional sale or other title retention agreement, the
interest of a lessor under a Capital Lease Obligation, or any financing lease
having substantially the same economic effect as any of the foregoing.

"Material Adverse Effect" shall mean a material adverse effect
on (i) the results of operations, business or financial condition of the
Company, (ii) the Rights of the Company, or (iii) the legality, validity or
enforceability of, the Transaction Documents.

"Net Cash Proceeds" means (X) the cash proceeds received by
the Company or any of its Subsidiaries from an Initial Public Offering minus (Y)
reasonable brokerage commissions or underwriting fees and other reasonable fees
and expenses (including, without limitation, reasonable fees, charges and
disbursements of counsel and accountants and reasonable fees and expenses of
investment bankers) relating to an Initial Public Offering.

"Net Income" shall mean, for any period, the net income (or
loss) of the Company and its Subsidiaries on a consolidated basis for such
period, as determined in accordance with GAAP consistently applied, but
excluding any extraordinary or nonrecurring charges, expenses, gains or losses
and any insurance proceeds received by the Company or any of its Subsidiaries.

"Note" means the senior subordinated promissory note referred
to in the first Whereas clause hereof and substantially in the form attached
hereto as Exhibit A.

"Outstanding Borrowings" means all Indebtedness of the Company
and its Subsidiaries for money borrowed that is outstanding at the relevant time
of determination.

"Permitted Investor" shall mean any Person other than (i) the
Persons listed on Exhibit I annexed hereto, (ii) Persons and their Affiliates
who have initiated hostile takeovers, proxy contests or other change of control
transactions, (iii) Persons and their Affiliates who are in the business of
acquiring distressed equity or debt (e.g., vulture investors), (iv) Persons and
their Affiliates who are in the business of purchasing claims in bankruptcy and
(v) hedge funds and their Affiliates formed for the purpose of engaging in the
activities described in clauses (ii) through (iv) above.

"Person" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, Governmental Authority or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.

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<PAGE> 13
"Plans" has the meaning assigned to that term in Section 5.23
of this Agreement.

"Playclothes Acquisition" means the acquisition by the Company
from Childcraft Inc., a subsidiary of The Walt Disney Company, of the business
and customer information related to the Playclothes brand.

"Pro Forma Balance Sheet" means the pro forma consolidated
balance sheet of the Company and its Subsidiaries delivered pursuant to Section
3.14.

"Proposed Joint Venture" shall mean the proposed joint venture
between the Company and Yamano Associates.

"Requirements of Law" means as to any Person, the Certificate
of Incorporation and By-laws or other organizational or governing documents of
such Person, and any law, treaty, rule, regulation, right, privilege,
qualification, license or franchise or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable or binding upon such
Person or any of its property or to which such Person or any of its property is
subject or pertaining to any or all of the transactions contemplated or referred
to herein.

"Restricted Payment" means (a) any dividend or other
distribution on any share of the Company's capital stock (except dividends
payable solely in shares of its capital stock) or (b) any payment by the Company
or any Subsidiary on account of the direct or indirect purchase, redemption
(other than pursuant to existing or future repurchase agreements with employees
other than Lederman and Budoff), retirement or other acquisition of (i) any
shares of the Company's capital stock (except shares acquired upon the
conversion thereof into other shares of its capital stock), (ii) any shares of
any Subsidiary's capital stock from any Person other than the Company, or (iii)
any option, warrant or other right to acquire shares of the Company's or any
Subsidiary's capital stock.

"Securities" means, collectively, the Note, the Warrants and
the Shares.

"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.

"Senior Indebtedness" means all Indebtedness of the Company
currently outstanding or incurred in the future pursuant to any borrowing by the
Company from any bank or institutional lender not affiliated with Lederman,
Budoff or the Company and any renewals, extensions, refinancings or refundings
thereof.

"Shares" has the meaning assigned to that term in the second
Whereas clause.

"Solvent" means, with respect to the Company and its
Subsidiaries considered as a whole, based on the Pro Forma Balance Sheet, (i)
the assets and the property of the Company and its Subsidiaries, considered as a
whole, exceed the aggregate liabilities (including contingent and

7
<PAGE> 14
unliquidated liabilities) of the Company and its Subsidiaries, considered as a
whole, (ii) after giving effect to the transactions contemplated by this
Agreement, the Company and its Subsidiaries, considered as a whole, will not be
left with unreasonably small capital, and (iii) after giving effect to the
transactions contemplated by this Agreement, the Company and its Subsidiaries,
considered as a whole, are able to both service and pay their liabilities as
they mature. In computing the amount of contingent or unliquidated liabilities
at any time, such liabilities will be computed as the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that is likely to become an actual or matured liability.

"Subsidiary" means, with respect to any Person, a corporation
or other entity of which 50% or more of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of
the Company.

"Stockholders Agreement" means the Stockholders Agreement
substantially in the form attached hereto as Exhibit D.

"Transaction Documents" means collectively, this Agreement,
the Note, the Warrants, the Fulcrum Retail Option Agreement, the Stockholders'
Agreement and the Certificate of Incorporation and the By-laws of the Company as
in effect on the Closing Date.

"Warrants" means the WSDF Warrant and the WEP Warrant.

"WEP Warrant" means the warrant referred to in the second
Whereas clause hereof, which warrant is substantially in the form attached
hereto as Exhibit C.

"WSDF Warrant" means the warrant referred to in the first
Whereas clause hereof, which warrant is substantially in the form attached
hereto as Exhibit B.

1.2 Accounting Terms: Financial Statements. All accounting
terms used herein not expressly defined in this Agreement shall have the
respective meanings given to them in accordance with sound accounting practice.
The term "sound accounting practice" shall mean such accounting practice as, in
the opinion of the independent certified public accountants regularly retained
by the Company, conforms at the time to GAAP applied on a consistent basis
except for changes with which such accountants concur. If any changes in
accounting principles are hereafter occasioned by promulgation of rules,
regulations, pronouncements or opinions of or are otherwise required by, the
Financial Accounting Standards Board or the American Institute of Certified
Public Accountants (or successors thereto or agencies with similar functions),
and any of such changes results in a change in the method of calculation of, or
affects the results of such calculation of, any of the financial covenants,
standards or terms found herein, then the parties hereto agree to enter into and
diligently pursue negotiations in order to amend such financial covenants,
standards or terms so as to reflect fairly and equitably such changes, with the
desired result that the criteria for evaluating the Company's financial
condition and results of operations shall be the same after such changes as if
such changes had not been made. In computing the financial covenants set forth
in

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<PAGE> 15
Section 9.8 hereof, the historical positive earnings from acquisitions (other
than the Playclothes Acquisition) that are not "Significant Acquisitions" (as
defined in the Note) shall be taken into account.

1.3 Knowledge of the Company. All references to the knowledge
of the Company or to facts known by the Company shall mean actual knowledge or
notice of Lederman or Budoff.

ARTICLE 2

PURCHASE AND SALE OF NOTE, WARRANTS AND SHARES

2.1 Purchase and Sale of Note by WSDF. Subject to the terms
and conditions herein set forth, the Company agrees that it will issue to WSDF,
and WSDF agrees that it will acquire from the Company on the Closing Date, the
Note substantially in the form attached hereto as Exhibit A, appropriately
completed in conformity herewith. The purchase price of the Note shall be
$9,500,000.

2.2 Purchase and Sale of WSDF Warrant. Subject to the terms
and conditions herein set forth, the Company agrees that it will issue to WSDF,
and WSDF agrees that it will acquire from the Company on the Closing Date, the
WSDF Warrant substantially in the form attached hereto as Exhibit B,
appropriately completed in conformity herewith. The purchase price for the WSDF
Warrant shall be $500,000.

2.3 Purchase and Sale of the Shares by WEP. Subject to the
terms and conditions herein set forth, the Company agrees that it will issue to
WEP and WEP agrees that it will acquire from the Company on the Closing Date,
the Shares. The purchase price for the Shares shall be $5.068 per share for an
aggregate purchase price of $1,998,743.10.

2.4 Purchase and Sale of WEP Warrant. Subject to the terms and
conditions herein set forth, the Company agrees that it will issue to WEP and
WEP agrees that it will acquire from the Company on the Closing Date, the WEP
Warrant substantially in the form attached hereto as Exhibit C, appropriately
completed in conformity herewith. The purchase price for the WEP Warrant shall
be $1,256.90.

2.5 Fees. Concurrently with the execution hereof, the Company
shall pay to WSDF a debt placement fee of $200,000, and shall reimburse all of
the Purchasers' reasonable out-of-pocket expenses (including lawyer's fees,
charges and direct disbursements) incurred in connection with the transactions
contemplated by this Agreement, which payments shall be made by wire transfer of
immediately available funds to an account or accounts designated by the
Purchasers.

2.6 Closing. The purchase and issuance of the Securities shall
take place at the closing (the "Closing") to be held at the offices of Morrison
Cohen Singer & Weinstein, LLP, 750

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<PAGE> 16
Lexington Avenue, New York, New York 10022 at 10:00 a.m., Eastern Standard Time,
on October 21, 1996, or at such other time and place as the Company and the
Purchasers may agree in writing (the "Closing Date"). At the Closing, the
Company shall deliver: (a) the Note to WSDF against delivery by WSDF to the
Company of the purchase price therefor by wire transfer of immediately available
funds, (b) the WSDF Warrant to WSDF against delivery by WSDF to the Company of
the purchase price therefor by wire transfer of immediately available funds, (c)
the Shares to WEP against delivery by WEP to the Company of the purchase price
therefor by wire transfer of immediately available funds, and (d) the WEP
Warrant to WEP against delivery by WEP to the Company of the purchase price
therefor by wire transfer of immediately available funds.

2.7 Financial Accounting Positions; Tax Reporting. Each of the
parties hereto agrees to take reporting and other positions with respect to the
Securities which are consistent with the purchase price of the Securities set
forth herein for all financial accounting purposes, unless otherwise required by
applicable GAAP or Commission rules (in which case the parties agree only to
take positions inconsistent with the purchase price of the Securities set forth
herein provided that the Purchasers have consented thereto, which consent shall
not be unreasonably withheld). Each of the parties to this Agreement agrees to
take reporting and other positions with respect to the Securities which are
consistent with the purchase price of the Securities set forth herein for all
other purposes, including without limitation, for all Federal, state and local
tax purposes.

ARTICLE 3

CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE

The obligation of the Purchasers to purchase the Securities,
to pay the purchase prices therefor at the Closing and to perform any
obligations hereunder shall be subject to the satisfaction as determined by, or
waiver by, the Purchasers of the following conditions on or before the Closing
Date. WSDF shall not be obligated to purchase the Note unless the purchase and
sale of the WSDF Warrant, the Shares and the WEP Warrant occurs simultaneously
therewith and shall not be obligated to purchase the WSDF Warrant unless the
purchase and sale of the Note, the Shares and the WEP Warrant occurs
simultaneously therewith. WEP shall not be obligated to purchase the Shares
unless the purchase and sale of the Note, the WSDF Warrant and the WEP Warrant
occurs simultaneously therewith and shall not be obligated to purchase the WEP
Warrant unless the purchase and sale of the Note, the WSDF Warrant and the
Shares occurs simultaneously therewith.

3.1 Representations and Warranties. The representations and
warranties of the Company contained in Article 5 hereof shall be true and
correct at and as of the Closing Date as if made at and as of such date.

3.2 Compliance with this Agreement. The Company shall have
performed and complied with all of its agreements and conditions set forth or
contemplated herein that are required to be performed or complied with by the
Company on or before the Closing Date.

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<PAGE> 17
3.3 Secretary's Certificates. The Purchasers shall have
received certificates from the Company, dated the Closing Date and signed by the
Secretary or an Assistant Secretary of the Company, certifying (a) that the
attached copies of the Certificate of Incorporation and By-laws of the Company,
and resolutions of the Board of Directors of the Company, approving the
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, are all true, complete and correct and remain unamended and
in full force and effect, and (b) as to the incumbency and specimen signature of
each officer of the Company executing any Transaction Document to which it is a
party or any other document delivered in connection herewith on behalf of the
Company.

3.4 Documents. The Purchasers shall have received true,
complete and correct copies of such agreements, schedules, exhibits,
certificates, documents, financial information and filings as they may request
in connection with or relating to the transactions contemplated hereby, all in
form and substance satisfactory to the Purchasers.

3.5 Purchase of Securities Permitted by Applicable Laws. The
acquisition of and payment for the Securities to be acquired by the Purchasers
hereunder and the consummation of the transactions contemplated hereby and by
the Transaction Documents (a) shall not be prohibited by any Requirement of Law,
(b) shall not subject the Purchasers to any penalty or other onerous condition
under or pursuant to any Requirement of Law, and (c) shall be permitted by all
Requirements of Law to which the Purchasers or the transactions contemplated by
or referred to herein or in the Transaction Documents are subject; and the
Purchasers shall have received such certificates or other evidence as they may
reasonably request to establish compliance with this condition.

3.6 Opinion of Counsel. The Purchasers shall have received an
opinion of outside counsel to the Company, dated the Closing Date, relating to
the transactions contemplated by or referred to herein, in form and substance
acceptable to the Purchasers.

3.7 Approval of Counsel to the Purchasers. All actions and
proceedings hereunder and all agreements, schedules, exhibits, certificates,
financial information, filings and other documents required to be delivered by
the Company hereunder or in connection with the consummation of the transactions
contemplated hereby, and all other related matters, shall have been in form and
substance acceptable to Morrison Cohen Singer & Weinstein, LLP, counsel to the
Purchasers, in its reasonable judgment (including, without limitation, the
opinion of counsel referred to in Section 3.6 hereof).

3.8 Consents and Approvals. All consents, exemptions,
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Company necessary,
desirable, or required in connection with the execution, delivery or performance
(including, without limitation, the payment of interest on the Note and the
issuance of Common Stock upon the exercise of the Warrants) by the Company, or
enforcement against the Company, of the Transaction Documents to which it is a
party shall have been obtained and be in full force and

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<PAGE> 18
effect, and the Purchasers shall have been furnished with appropriate evidence
thereof, and all waiting periods shall have lapsed without extension or the
imposition of any conditions or restrictions.

3.9 Stockholders' Agreement. The Stockholders' Agreement
shall have been duly executed and delivered by all of the parties thereto.

3.10 Certificate of Incorporation and By-laws. The Company
shall have amended its certificate of incorporation and by-laws, in form and
substance satisfactory to the Purchasers.

3.11 No Material Judgment or Order. There shall not be on the
Closing Date any judgment or order of a court of competent jurisdiction or any
ruling of any Governmental Authority or any condition imposed under any
Requirement of Law which, in the judgment of the Purchasers, would prohibit the
purchase of the Securities hereunder or subject the Purchasers to any penalty or
other onerous condition under or pursuant to any Requirement of Law if the
Securities were to be purchased hereunder.

3.12 Pro Forma Balance Sheet. The Company shall have delivered
to the Purchasers as of the Closing Date a pro forma consolidated balance sheet
of the Company, certified by the chief financial officer of the Company that it
fairly presents in all material respects the pro forma adjustments reflecting
the consummation of the transactions contemplated in this Agreement, including
all material fees and expenses in connection therewith.

3.13 Goodstanding Certificates. The Company shall have
delivered to the Purchasers as of the Closing Date, goodstanding certificates
for the Company for its jurisdiction of incorporation and all other
jurisdictions where it does business.

3.14 Conversion of Series A Preferred Stock. All the
outstanding shares of the Company's Series A Preferred Stock, par value $.01 per
share, shall have been converted into shares of Common Stock, in accordance with
the Certificate of Incorporation, or redeemed. All accrued and unpaid dividends
payable thereon through the date of such conversion or redemption shall have
been declared and will be paid by October 31, 1996.

3.15 Redemption of Series B Preferred Stock. All the
outstanding shares of the Company's Series B Preferred Stock, par value $.01 per
share, together with all accrued and unpaid dividends payable thereon through
the date of redemption, shall have been redeemed by the Company for an aggregate
redemption price of $1,336,575.

3.16 Amendment to Fulcrum Brands Trademark License Agreement.
The Company shall have amended the terms of the Fulcrum Brand Trademark License
Agreement, in form and substance acceptable to the Purchasers.

3.17 Fulcrum Retail Option Agreement. Fulcrum Retail, Inc.
shall have duly executed and delivered the Fulcrum Retail Option Agreement.

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<PAGE> 19
3.18 Lederman Employment Agreement. Each of the Company and
Lederman shall have duly executed and delivered the Lederman Employment
Agreement.

3.19 Budoff Employment Agreement. Each of the Company and
Budoff shall have duly executed and delivered the Budoff Employment Agreement.

3.20 Employee Option Pool. The Company shall have duly adopted
the Fulcrum Direct, Inc. Management Team Equity Plan (being a 10% unallocated
employee option pool) in the form annexed hereto as Exhibit H.

ARTICLE 4

CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO CLOSE

The obligations of the Company to issue and sell the
Securities and to perform its other obligations hereunder shall be subject to
the satisfaction as determined by, or waiver by, the Company of the following
conditions on or before the Closing Date:

4.1 Representations and Warranties. The representations and
warranties of the Purchasers contained in Article 6 hereof shall be true and
correct at and as of the Closing Date as if made at and as of such date.

4.2 Compliance with this Agreement. The Purchasers shall have
performed and complied with all of their respective agreements and conditions
set forth or contemplated herein that are required to be performed or complied
with by the Purchasers on or before the Closing Date.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Purchasers,
after giving effect to the transactions contemplated by this Agreement, as
follows:

5.1 Corporate Existence and Power. The Company: (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation; (b) has all requisite corporate power
and authority to own and operate its property, to lease the property it operates
as lessee and to conduct the business in which it is currently, or is currently
proposed to be, engaged; (c) is, duly qualified as a foreign corporation,
licensed and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to do so
would not have a Material Adverse Effect; and (d) has the corporate power and
authority to

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<PAGE> 20
execute, deliver and perform its obligations under each Transaction Document to
which it is or will be a party and to borrow hereunder.

5.2 Corporate Authorization; No Contravention. The execution,
delivery and performance by the Company of each Transaction Document to which it
is a party and the consummation of the transactions contemplated hereby and
thereby, including without limitation the issuance of the Securities: (a) has
been duly authorized by all necessary corporate, and if required, stockholder
action; (b) does not contravene the terms of the Company's certificate of
incorporation or by-laws, or any amendment thereof; and (c) will not violate,
conflict with or result in any breach or contravention of or the creation of any
Lien under, any Contractual Obligation of the Company or any Requirement of Law
applicable to the Company, except where such violation, conflict or result could
not reasonably be expected to have a Material Adverse Effect.

5.3 Governmental Authorization; Third Party Consents. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by (including, without limitation, the payment of
interest on the Note and the issuance of Common Stock upon the exercise of the
Warrants), or enforcement against, the Company of the Transaction Documents to
which it is a party or the consummation of the transactions contemplated hereby
or thereby, except where the failure to comply with such Requirement of Law
could not reasonably be expected to have a Material Adverse Effect.

5.4 Binding Effect. Each of the Transaction Documents to which
it is a party has been duly executed and delivered by the Company, and
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors' rights generally and by general principles of
equity relating to enforceability.

5.5 No Legal Bar. Neither the execution, delivery and
performance of the Transaction Documents nor the issuance of or performance of
the terms of the Securities will violate any Requirement of Law or any
Contractual Obligation of the Company, except where such violation could not
reasonably be expected to have a Material Adverse Effect. The Company has not
previously entered into any agreement which is currently in effect or to which
the Company is currently bound, granting any rights to any Person which are
inconsistent with the rights to be granted by the Company in the Transaction
Documents.

5.6 Litigation. Except as set forth on Schedule 5.6, there are
no legal actions, suits, proceedings, claims or disputes pending or, to the
Company's knowledge, threatened, at law, in equity, in arbitration or before any
Governmental Authority against or affecting the Company. No injunction, writ,
temporary restraining order, decree or any order of any nature has been issued
by any court or other Governmental Authority purporting to enjoin or restrain
the execution, delivery or performance of the Transaction Documents.

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<PAGE> 21
5.7 Compliance with Laws. The Company is in compliance with
all Requirements of Law, except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect.

5.8 No Default or Breach. No event has occurred and is
continuing or would result from the incurring of obligations by the Company
under the Transaction Documents which constitutes or, with the giving of notice
or lapse of time or both, would constitute an Event of Default. The Company is
not in default under or with respect to any Contractual Obligation, except where
such default could not reasonably be expected to have a Material Adverse Effect.

5.9 Title to Properties. The Company does not own any real
property.

5.10 Use of Real Property. The leased real properties used in
connection with the business of the Company, are used and operated in compliance
and conformity with all applicable leases, contracts, commitments, licenses and
permits, except to the extent that the failure so to conform could not
reasonably be expected to have, in the aggregate, a Material Adverse Effect. The
Company has not received notice of violation of any applicable zoning or
building regulation, ordinance or other law, order, regulation or requirement
relating to the operations of the Company; and there is no such violation,
except where such violation could not reasonably be expected to have a Material
Adverse Effect. All plants and other buildings that are covered by leases used
in connection with the business of the Company substantially conform with all
applicable ordinances, codes, regulations and requirements except where the
failure to so conform could not reasonably be expected to have a Material
Adverse Effect, and no law or regulation presently in effect or condition
precludes or materially restricts continuation of the present use of such
properties. The Company holds interests as lessees under leases in full force
and effect in all real property used in connection with its business. The
Fulcrum Properties Lease is in full force and effect and the Company enjoys
peaceful and undisturbed possession thereunder. There is no default on the part
of the Company or Fulcrum Properties L.P. or event or condition which with
notice or lapse of terms, or both, would constitute a default on the part of the
Company or Fulcrum Properties L.P. under such lease.

5.11 Taxes. The Company and each of its Subsidiaries have
filed or caused to be filed, or have properly filed extensions for, all tax
returns which are required to be filed and have paid or caused to be paid all
taxes required to be paid by them and all assessments received by them to the
extent that such taxes have become due, except taxes the validity or amount of
which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside. The Company and each of
its Subsidiaries have paid or caused to be paid, or have established reserves
that the Company reasonably believes to be adequate in all material respects,
for all tax liabilities applicable to the Company and its Subsidiaries for all
fiscal years which have not been examined and reported on by the taxing
authorities (or closed by applicable statutes).

5.12 Financial Condition.

(a) The Company has attached hereto as Exhibit 5.12A
true and complete copies of (i) the audited consolidated balance sheets of the
Company and its Subsidiaries as of December 30, 1995 and December 31, 1994 and
the related consolidated statements of operations

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<PAGE> 22
and cash flows, together with the notes thereto, of the Company and its
Subsidiaries for the years ended December 30, 1995 and December 31, 1994 (the
"Audited Financial Statements"), and (ii) the unaudited consolidated balance
sheets of the Company and its Subsidiaries as of August 24, 1996 and the related
consolidated statements of operations and cash flows, together with the notes
thereto, of the Company and its Subsidiaries for the period ended August 24,
1996 (the "1996 Financial Statements"). The Audited Financial Statements and the
1996 Financial Statements fairly present, in all material respects, the
financial position of the Company and the results of operations and cash flows
of the Company as of the respective dates or for the respective periods set
forth therein, except that the 1996 Financial Statements are subject to normal
year-end audit adjustments. The Audited Financial Statements were prepared in
conformity with GAAP consistently applied during the periods involved, except as
otherwise set forth in the notes thereto. The 1996 Financial Statements were
prepared by the Company consistent with past practice.

(b) The Company has attached hereto as Exhibit 5.12B
the Pro Forma Balance Sheet which sets forth, as of August 24, 1996, the assets
and liabilities of the Company on a pro forma basis after taking into account
the consummation of the transactions contemplated in this Agreement. The Pro
Forma Balance Sheet has been prepared by the Company consistent with past
practice and, in the opinion of management, fairly presents in all material
respects the assets and liabilities of the Company, reflecting the consummation
of the transactions contemplated in this Agreement and based on the assumptions
set forth therein.

5.13 ERISA. The execution and delivery of the Transaction
Documents, the purchase and sale of the Securities hereunder and the
consummation of the transactions contemplated hereby and thereby will not result
in any prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Code.

5.14 Disclosure.

(a) Agreement and Other Documents Are True. This
Agreement, together with all exhibits and schedules hereto, and the agreements,
certificates and other documents furnished to the Purchasers by the Company at
the Closing, do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained herein
or therein, in the light of the circumstances under which they were made, not
misleading.

(b) No Material Adverse Effect. There is no fact
known to the Company, which the Company has not disclosed to the Purchasers in
writing which would have a Material Adverse Effect.

5.15 Absence of Certain Changes or Events. Since August 24,
1996, except as set forth on Schedule 5.15, the Company has not (i) issued any
stock, bonds or other corporate securities, (ii) borrowed any amount or incurred
any liabilities (absolute or contingent), other than in the ordinary course of
business, in excess of $10,000, (iii) discharged or satisfied any lien or
incurred or paid any obligation or liability (absolute or contingent), other
than in the ordinary course of business, in excess of $10,000, (iv) declared or
made any payment or distribution to stockholders

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<PAGE> 23
or purchased or redeemed any shares of its capital stock or other securities,
(v) mortgaged, pledged or subjected to lien any of its assets, tangible or
intangible, (vi) sold, assigned or transferred any of its tangible assets, or
cancelled any debts or claims other than in the ordinary course of business,
(vii) sold, assigned or transferred any patents, trademarks, trade names,
copyrights, trade secrets or other intangible assets, other than in the ordinary
course of business, (viii) suffered any losses of property, or waived any rights
of substantial value, (ix) suffered any Material Adverse Effect, (x) granted any
bonuses or extraordinary salary increases, (xi) entered into any transaction
involving consideration in excess of $50,000 except as otherwise contemplated
hereby, other than in the ordinary course of business or (xii) entered into any
agreement or transaction, or amended or terminated any agreement with an
Affiliate, except to the extent contemplated hereunder. To the knowledge of the
Company, no Material Adverse Effect is threatened or reasonably likely to occur.

5.16 Environmental Matters.

(a) The property, assets and operations of the
Company are and have been in compliance with all applicable Environmental Laws;
there are no Hazardous Materials stored or otherwise located in, on or under any
of the property or assets of the Company including the groundwater except in
compliance with applicable Environmental Laws; and to the Company's knowledge,
there have been no releases or threatened releases of Hazardous Materials in, on
or under any property adjoining any of the property or assets of the Company
which have not been remediated to the satisfaction of the appropriate
Governmental Authorities.

(b) None of the property, assets or operations of the
Company is the subject of any Federal, state or local investigation evaluating
whether (i) any remedial action is needed to respond to a release or threatened
release of any Hazardous Materials into the environment or (ii) any release or
threatened release of any Hazardous Materials into the environment is in
contravention of any Environmental Law.

(c) The Company has not received any notice or claim,
nor are there pending, threatened or reasonably anticipated, lawsuits or
proceedings against any of them, with respect to violations of an Environmental
Law or in connection with the presence of or exposure to any Hazardous Materials
in the environment or any release or threatened release of any Hazardous
Materials into the environment, and the Company is not and has not been the
owner or operator of any property which (i) pursuant to any Environmental Law
has been placed on any list of Hazardous Materials disposal sites, including,
without limitation, the "National Priorities List" or "CERCLIS List," (ii) has,
or had, any subsurface storage tanks located thereon, or (iii) has ever been
used as or for a waste disposal facility, a mine, a gasoline service station or,
other than for petroleum substances stored in the ordinary course of business, a
petroleum products storage facility.

(d) The Company does not have any present or
contingent liability in connection with the presence either on or off the
property or assets of the Company of any Hazardous Materials in the environment
or any release or threatened release of any Hazardous Materials into the
environment.

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5.17 Investment Company/Government Regulations. The Company is
not an "investment company" within the meaning of the Investment Company Act of
1940, as amended. The Company is not subject to regulation under the Public
Utility Holding Company Act of 1935, as amended, the Federal Power Act, the
Interstate Commerce Act, or any federal or state statute or regulation limiting
its ability to incur Indebtedness.

5.18 Subsidiaries. The Company has no Subsidiaries other than
Equipment Bond Purchaser, Inc., a New Mexico corporation. Equipment Bond
Purchaser, Inc. is wholly owned by the Company and has no operations and is only
used by the Company as a pass-through entity in connection with the Company's
industrial revenue bond financing. Except for shares of Equipment Bond
Purchaser, Inc., the Company does not own of record or beneficially, directly or
indirectly, (i) any shares of outstanding capital stock or securities
convertible into capital stock of any other corporation, or (ii) any
participating interest in any partnership, joint venture or other non-corporate
business enterprises.

5.19 Capitalization.

(a) As of the Closing Date, the authorized capital
stock of the Company consists of 200,000 shares of Preferred Stock and
10,000,000 shares of Common Stock. As of the Closing Date, there were (i) no
shares of Preferred Stock issued and outstanding, (ii) 6,410,885 shares of
Common Stock issued and outstanding, (iii) 405,460 shares of Common Stock
reserved for issuance upon exercise of the WSDF Warrant, (iv) 121,350 shares of
Common Stock reserved for issuance upon exercise of the WEP Warrant, and (v)
1,315,000 shares of Common Stock reserved for issuance pursuant to stock options
("Management Options") granted to certain employees of the Company identified on
Schedule 5.19 and Fulcrum Capital Partners L.P. The Warrants, the Management
Options and all outstanding shares of capital stock of the Company have been
duly authorized by all necessary corporate action. All outstanding shares of
Series A Preferred Stock, par value $.01 per share, have been converted into
shares of Common Stock in accordance with the Certificate of Incorporation or
redeemed. All accrued and unpaid dividends payable with respect to the Series A
Preferred Stock through the date of such conversion have been declared and are
payable by October 31, 1996. The aggregate redemption price of the redeemed
Series A Preferred Stock did not exceed $400,000 and the dividends to be paid on
the Series A Preferred Stock shall not exceed $170,778.90. All outstanding
shares of Series B Preferred Stock, par value $.01 per share, together with all
accrued and unpaid dividends payable thereon through the date of such
redemption, have been redeemed by the Company for an aggregate redemption price
of $1,336,575. All outstanding shares of capital stock of the Company are, and
the shares of Common Stock issuable upon exercise of the Warrants and the
Management Options when issued will be, validly issued, fully paid and
nonassessable. Schedule 5.19 provides an accurate list of (A) all stockholders
owning the issued and outstanding Common Stock, together with the number held by
each, and (B) all of the holders of warrants, options, rights and securities
convertible into Common Stock of the Company, together with the number of shares
of Common Stock to be issued upon the exercise or conversion of such warrants,
options, rights and convertible securities.

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(b) On the Closing Date, except for the Warrants and
the Management Options, there will be no outstanding securities convertible into
or exchangeable for capital stock of the Company or options, warrants or other
rights to purchase or subscribe to capital stock of the Company or contracts,
commitments, agreements, understandings or arrangements of any kind to which the
Company is a party relating to the issuance of any capital stock of the Company,
any such convertible or exchangeable securities or any such options, warrants or
rights.

5.20 Private Offering. No form of general solicitation or
general advertising was used by the Company or its representatives in connection
with the offer or sale of the Securities. No registration of the Securities or
Common Stock issuable upon the exercise of the Warrants pursuant to the
provisions of the Securities Act or the state securities or "blue sky" laws will
be required by the offer, sale or issuance of the Securities pursuant to this
Agreement or of the Common Stock issuable upon the exercise of the Warrants.

5.21 Broker's, Finder's or Similar Fees. Except as provided in
Section 2.5, there are no brokerage commissions, finder's fees or similar fees
or commissions payable in connection with the transactions contemplated hereby
based on any agreement, arrangement or understanding with the Company, or any
action taken by any such entity, other than a fee of $310,000 and reasonable
expenses payable by the Company jointly to SPP Hambro & Co., LLC and Boatmen's
Capital Markets.

5.22 Labor Relations. The Company has not committed and is not
engaged in any unfair labor practice with respect to its employees. There is (a)
no unfair labor practice complaint pending or threatened against the Company
before the National Labor Relations Board and no grievance or arbitration
proceeding arising out of or under collective bargaining agreements is so
pending or threatened, (b) no strike, labor dispute, slowdown or stoppage
pending or threatened against the Company, and (c) no union representation
question existing with respect to the employees of the Company and no union
organizing activities are taking place. The Company is not a party to any
collective bargaining agreement.

5.23 Employee Benefit Plans. Neither the Company nor any ERISA
Affiliate has any actual or contingent, direct or indirect, liability in respect
of any employee benefit plan (as defined in Section 3(3) of ERISA) or other
employee benefit arrangement, other than as listed on Schedule 5.23
(collectively, the "Plans"). The Company has delivered to the Purchasers
accurate and complete copies of all of the Plans. All of the Plans are in
substantial compliance with all applicable Requirements of Law. Except as set
forth on Schedule 5.23, no "prohibited transaction," as defined in Section 406
of ERISA and Section 4975 of the Code, has occurred in respect of any of the
Plans, and no civil or criminal action brought pursuant to Part 5 of Title I of
ERISA is pending or, to the best of the Company's knowledge, is threatened
against any fiduciary of any such Plan. Except as set forth on Schedule 5.23, no
Plan: (i) is subject to Title IV of ERISA, or is otherwise a Defined Benefit
Plan, or is a multiple employer plan (within the meaning of Section 413(c) of
the Code); or (ii) provides for post-retirement welfare benefits or a "parachute
payment" (within the meaning of Section 280G(b) of the Code).

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<PAGE> 26
5.24 Patents, Trademarks, Etc. The Company owns or is licensed
or otherwise has the right to use all patents, trademarks, service marks, trade
names, copyrights, licenses, franchises and other rights (collectively, the
"Rights") being used to conduct its business as now operated (a complete list of
licenses or other contracts relating to the Company's Rights and of
registrations of patents, trademarks, service marks and copyrights including any
applications therefor constituting such Rights, is attached hereto as Schedule
5.24). The Company's use of the registered trademark "After the Stork" in the
United States does not infringe upon the Rights that are owned by others. The
Company is the exclusive licensee of the trademarks "After the Stork", "Little
Feet", "Sunskins" and "Discount Direct" under the Fulcrum Brands Trademark
License Agreement, which agreement is in full force and effect. Fulcrum Brands
L.P. is the owner of the trademarks "After the Stork", "Little Feet", Sunskins"
and "Discount Direct" in the United States. "After the Stork" is a valid and
subsisting trademark in the United States and is registered with the U.S. Patent
and Trademark Office under U.S. Registration No. 1,435,045, which registration
is in full force and effect. "Little Feet", "Sunskins" and "Discount Direct" are
valid and subsisting trademarks in the United States and applications for
registration therefor with the U.S. Patent and Trademark Office are pending. To
the Company's knowledge, no Right including, without limitation, the trademarks
"Little Feet", "Sunskins" and "Discount Direct", or product, process, method,
substance or other material presently sold by or employed by the Company, or
which the Company contemplates selling or employing, infringes upon the Rights
that are owned by others. No litigation is pending and no claim has been made
against the Company or, to the Company's knowledge, is threatened, contesting
the right of the Company to sell or use any Right or product, process, method,
substance or other material presently sold by or employed by the Company. The
Company is not currently asserting any claim of infringement, misappropriation
or misuse by any Person of any Rights owned by the Company or to which it has
exclusive use. No employee, officer or consultant of the Company has any
proprietary, financial or other interest in any Rights owned or used by the
Company in its business, except for the Fulcrum Brands Trademark License
Agreement. Except as set forth on Schedule 5.24, to the Company's knowledge, the
Company does not have any obligation to compensate any Person for the use of any
Rights and the Company has not granted any license or other right to use any of
the Rights of the Company, whether requiring the payment of royalties or not.
The Company has taken all reasonable measures to protect and preserve the
security, confidentiality and value of its Rights, including trade secrets and
other confidential information except where the failure to so protect and
preserve could not reasonably be expected to have a Material Adverse Effect. To
the Company's knowledge, all trade secrets and other confidential information of
the Company are presently valued and predictable and are not part of the public
domain or knowledge, nor have they been used, divulged or appropriated for the
benefit of any Person other than the Company or otherwise to the detriment of
the Company. To the Company's knowledge, no employee or consultant of the
Company has used any trade secrets or other confidential information of any
other Person in the course of his work for the Company. To the Company's
knowledge, no patent, invention, device, principle or any statute, law, rule,
regulation, standard or code is pending or proposed which would restrict the
Company's ability to use any of the Rights.

5.25 Potential Conflicts of Interest. Except as set forth on
Schedule 5.25, neither Lederman nor Budoff: (a) owns, directly or indirectly,
any interest in (excepting less than 5% stock holdings for investment purposes
in securities of publicly held and traded companies), or is an

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officer, director, employee, partner or consultant of, any Person that is, or is
engaged in business as, a competitor, lessor, lessee, supplier, distributor,
sales agent or customer of, or lender to or borrower from, the Company; (b)
owns, directly or indirectly, in whole or in part, any tangible or intangible
property that the Company uses in the conduct of its business; or (c) has any
cause of action or other claim whatsoever against, or owes any amount to, or is
owed any amount by, the Company, except for claims in the ordinary course of
business such as for accrued vacation pay, accrued benefits under employee
benefit plans, and similar matters and agreements existing on the date hereof.

5.26 Trade Relations. The Company has no supplier, customer or
group of customers, the loss of which would have a Material Adverse Effect. To
the Company's knowledge, all suppliers of the Company are readily replaceable by
the Company.

5.27 Outstanding Borrowings. Schedule 5.27 lists (i) the
amount of all Outstanding Borrowings of the Company (other than Indebtedness
under this Agreement) as of the closing of the transactions contemplated hereby,
(ii) the Liens that relate to such Outstanding Borrowings and that encumber the
assets of the Company and (iii) the name of each lender thereof.

5.28 Material Contracts. The Company is not a party to any
Contractual Obligation, and is not subject to any charge, corporate restriction,
judgment, injunction, decree, or Requirement of Law, which could reasonably be
expected to have a Material Adverse Effect. Schedule 5.28 lists all contracts,
agreements and commitments of the Company as of the Closing Date, whether
written or oral, other than (a) the Transaction Documents, (b) purchase orders
in the ordinary course of business, and (c) any other contracts, agreements and
commitments of the Company that do not extend beyond one year and involve the
receipt or contractual obligation of the Company to pay not more than $100,000.
Each of the contracts, agreements and commitments of the Company set forth on
Schedule 5.28 is in full force and effect.

5.29 Insurance. Schedule 5.29 accurately summarizes all of the
insurance policies or programs of the Company in effect as of the date hereof,
and indicates the insurance broker's name, amount of coverage, type of coverage,
and also indicates any self-insurance program that is in effect. All such
policies are in full force and effect, are underwritten by reputable insurers
and are sufficient for all applicable requirements of law. All such policies
will remain in full force and effect and will not in any way be affected by, or
terminate or lapse by reason of any of the transactions contemplated hereby.

5.30 Solvency. The Company is Solvent.

5.31 Inventories. The inventory of the Company reflected on
the latest balance sheet of the Company included in the 1996 Financial
Statements, are carried at not in excess of the lower of cost or net realizable
value, and do not include any inventory which is obsolete, surplus or not usable
or saleable in the lawful and ordinary course of business of the Company as
heretofore conducted, in each case net of reserves provided therefor on such
balance sheet. No more than $90,000 of all inventory acquired by the Company
since the latest balance sheet date included in the 1996 Financial Statements
and prior to the Closing Date is obsolete or surplus inventory. As used

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herein and in Section 9.2, "obsolete inventory" is inventory which, at the
balance sheet date or in the case of the preceding sentence, one day prior to
the Closing Date, was not usable or saleable, because of legal restrictions,
failure to meet specifications, loss of market, damage, physical deterioration
or for any other cause; and "surplus inventory" is inventory that, at the
balance sheet date, exceeded known or anticipated requirements in the reasonable
business judgment of the Seller.

5.32 Beneficial Owners. Lederman and Budoff, directly or
indirectly, are the beneficial owners of at least eighty-five percent (85%) of
the partnership interests in each of Fulcrum Capital Partners L.P. and Fulcrum
Capital L.P.

ARTICLE 6

REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS

Each Purchaser hereby represents and warrants as to itself as
follows:

6.1 Authorization; No Contravention. The execution, delivery
and performance by it of this Agreement: (a) is within its power and authority
and has been duly authorized by all necessary action; (b) does not contravene
the terms of its organizational documents or any amendment thereof; and (c) will
not violate, conflict with or result in any breach or contravention of any of
its Contractual Obligations, or any order or decree directly relating to it.

6.2 Binding Effect. This Agreement has been duly executed and
delivered by it and this Agreement constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally or by equitable
principles relating to enforceability.

6.3 No Legal Bar. The execution, delivery and performance of
this Agreement by it will not violate any Requirement of Law applicable to it.

6.4 Purchase for Own Account. The Securities to be acquired
by it pursuant to this Agreement are being or will be acquired for its own
account and with no intention of distributing or reselling such securities or
any part thereof in any transaction that would be in violation of the securities
laws of the United States of America, or any state, without prejudice, however,
to its right at all times to sell or otherwise dispose of all or any part of the
Note or the WSDF Warrant, in the case of WSDF, or the Shares or the WEP Warrant
in the case of WEP, under an effective registration statement under the
Securities Act, or under an exemption from such registration available under the
Securities Act, and subject, nevertheless, to the disposition of its property
being at all times within its control. If a Purchaser should in the future
decide to dispose of the Note, the Shares or a Warrant, such Purchaser
understands and agrees that it may do so only in compliance with the Securities
Act and applicable state securities laws, as then in effect. It agrees

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<PAGE> 29
to the imprinting of a legend on certificates representing the Note, the Shares
and the Warrants to the following effect: "THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS."

6.5 ERISA. No part of the funds used by it to purchase the
Securities hereunder constitutes assets of any "employee benefit plan" (as
defined in Section 3(3) of ERISA) or "plan" (as defined in Section 4975 of the
Code) listed on Schedule 5.23.

6.6 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable in connection
with the transactions contemplated hereby based on any agreement, arrangement or
understanding with it or any action taken by it.

6.7 Governmental Authorization; Third Party Consent. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by it or enforcement against it of this Agreement or the
transactions contemplated hereby.

ARTICLE 7

INDEMNIFICATION

7.1 Indemnification. In addition to all other sums due
hereunder or provided for in this Agreement, the Company agrees to indemnify and
hold harmless the Purchasers and their respective Affiliates and each of their
respective officers, directors, agents, employees, subsidiaries, partners,
attorneys, accountants and controlling persons (each, an "Indemnified Party") to
the fullest extent permitted by law from and against any and all losses, claims,
damages, expenses (including, without limitation, reasonable fees, disbursements
and other charges of counsel incurred by an Indemnified Party in any action or
proceeding between the Company and such Indemnified Party (or Indemnified
Parties) or between an Indemnified Party (or Indemnified Parties) and any third
party or otherwise) or other liabilities (collectively, "Liabilities") resulting
from or arising out of any breach of any representation or warranty, covenant or
agreement of the Company in this Agreement, the Certificate of Incorporation,
the Registration Rights Agreement, the Stockholders' Agreement, the Note, or the
Warrants, including without limitation, the failure to make payment when due of
amounts owing pursuant to the Note on the due date thereof (whether at the
scheduled maturity, by acceleration or otherwise) or any legal, administrative
or other actions (including actions brought

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<PAGE> 30
by either of the Purchasers, the Company, its Subsidiaries or any equity holders
of the Company or derivative actions brought by any Person claiming through or
in the Company's name), proceedings or investigations (whether formal or
informal), or written threats thereof, based upon, relating to or arising out of
the Transaction Documents, the transactions contemplated thereby, or any
Indemnified Party's role therein or in the transactions contemplated thereby;
provided, however, that the Company shall not be liable under this Section 7.1
to an Indemnified Party: (a) for any amount paid by the Indemnified Party in
settlement of claims by the Indemnified Party without the Company's consent
(which consent shall not be unreasonably withheld), (b) to the extent that it is
finally judicially determined that such Liabilities resulted primarily from the
willful misconduct or gross negligence of such Indemnified Party or (c) to the
extent that it is finally judicially determined that such Liabilities resulted
primarily from the breach by such Indemnified Party of any representation,
warranty, covenant or other agreement of such Indemnified Party contained in
this Agreement; provided, further, that if and to the extent that such
indemnification is unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of such Liabilities which
shall be permissible under applicable laws. In connection with the obligation of
the Company to indemnify for expenses as set forth above, the Company further
agrees, upon presentation of appropriate invoices containing reasonable detail,
to reimburse each Indemnified Party for all such expenses (including fees,
disbursements and other charges of counsel incurred by an Indemnified Party in
any action or proceeding between the Company and such Indemnified Party (or
Indemnified Parties) or between an Indemnified Party (or Indemnified Parties)
and any third party or otherwise) as they are incurred by such Indemnified
Party; provided, however, that if an Indemnified Party is reimbursed hereunder
for any expenses, such reimbursement of expenses shall be refunded to the extent
it is finally judicially determined that the Liabilities in question resulted
primarily from (i) the willful misconduct or gross negligence of such
Indemnified Party or (ii) the breach by such Indemnified Party of any
representation, warranty, covenant or other agreement of such Indemnified Party
contained in this Agreement or any other Transaction Document.

7.2 Notification. Each Indemnified Party under this Article 7
will, promptly after the receipt of notice of the commencement of any action,
investigation, claim or other proceeding against such Indemnified Party in
respect of which indemnity may be sought from the Company under this Article 7,
notify the Company in writing of the commencement thereof. The omission of any
Indemnified Party so to notify the Company of any such action shall not relieve
the Company from any liability which it may have to such Indemnified Party (a)
other than pursuant to this Article 7 or (b) under this Article 7 unless, and
only to the extent that, such omission results in the Company's forfeiture of
substantive rights or defenses or other damage. In case any such action, claim
or other proceeding shall be brought against any Indemnified Party and it shall
notify the Company of the commencement thereof, the Company shall be entitled to
assume the defense thereof at its own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action, claim
or proceeding in which the Company, on the one hand, and an Indemnified Party,
on the other hand, is, or is reasonably likely to become, a party, such
Indemnified Party shall have the right to employ separate counsel at the
Company's expense and to control its own defense of such action, claim or
proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a
conflict or potential

24
<PAGE> 31
conflict exists between the Company, on the one hand, and such Indemnified
Party, on the other hand, that would make such separate representation
advisable; provided, however, that in no event shall the Company be required to
pay fees and expenses under this Article 7 for more than one firm of attorneys
in any jurisdiction in any one legal action or group of related legal actions.
The Company agrees that it will not, without the prior written consent of the
Purchasers, settle, compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated hereby (if any Indemnified Party is a party thereto or has been
actually threatened to be made a party thereto) unless such settlement,
compromise or consent includes an unconditional release of the Purchasers and
each other Indemnified Party from all liability arising or that may arise out of
such claim, action or proceeding. The Company shall not be liable for any
settlement of any claim, action or proceeding effected against an Indemnified
Party without its written consent, which consent shall not be unreasonably
withheld. The rights accorded to Indemnified Parties hereunder shall be in
addition to any rights that any Indemnified Party may have at common law, by
separate agreement or otherwise.

7.3 Registration Rights. Notwithstanding anything to the
contrary in this Article 7, the indemnification and contribution set forth in
the Stockholders Agreement shall govern any claim made with respect to
registration statements filed pursuant thereto or sales made thereunder.

7.4 Environmental Liabilities. Notwithstanding anything to the
contrary in this Section 7, the Company shall not be liable for the first
$50,000 in the aggregate of amounts for which it otherwise would be responsible
to Purchasers as a result of breaches of the representations and warranties
contained in subsection 5.16(a) hereof.

ARTICLE 8

AFFIRMATIVE COVENANTS

Until the payment by the Company of all principal of and
interest on the Note and all other amounts due at the time of payment of such
principal and interest to Purchasers under this Agreement, including, without
limitation, all fees, expenses and amounts due at such time in respect of
indemnity obligations under Article 7, the Company hereby covenants and agrees
with the Purchasers as set forth in Sections 8.1 through 8.6, Sections 8.8
through 8.12 and Section 8.14; provided, however, that upon consummation of an
Initial Public Offering, the Company shall no longer be obligated to comply with
Sections 8.1, 8.13 and 8.14. So long as a Purchaser remains the beneficial owner
of either Warrant, the Company hereby covenants and agrees with the Purchasers
as set forth in Section 8.7.

8.1 Financial Statements and Other Information. The Company
shall deliver to the Purchasers, in form satisfactory to the Purchasers:

(a) commencing with the fiscal year ending on
December 31, 1996, as soon as available, but not later than one hundred five
(105) days after the end of each fiscal year of

25
<PAGE> 32
the Company, a copy of the audited consolidated and consolidating balance sheets
of the Company and its Subsidiaries as of the end of such year and the related
consolidated and consolidating statements of operations and cash flows for such
fiscal year, setting forth in each case in comparative form the figures for the
previous year, all in reasonable detail and accompanied by a management summary
and analysis of the operations of the Company and its Subsidiaries for such
fiscal year and by the opinion of Arthur Andersen LLP (or any successor thereto)
or another nationally recognized independent certified public accounting firm
which report shall state without qualification that such consolidated and
consolidating financial statements present fairly the financial condition as of
such date and results of operations and cash flows for the periods indicated in
conformity with GAAP applied on a consistent basis;

(b) commencing with the fiscal period ending on
September 30, 1996, as soon as available, but in any event not later than
forty-five (45) days after the end of each of the first three fiscal quarters of
each year, the unaudited consolidated and consolidating balance sheets of the
Company and its Subsidiaries, and the related consolidated and consolidating
statements of operations and cash flows for such quarter and for the period
commencing on the first day of the fiscal year and ending on the last day of
such quarter, all certified by an appropriate officer of the Company as
presenting fairly in all material respects the financial condition as of such
date and results of operations and cash flows for the periods indicated applied
on a consistent basis, subject to normal year-end audit adjustments and the
absence of footnotes required by GAAP;

(c) commencing with the fiscal period ending on
September 30, 1996, as soon as available, but in any event not later than
forty-five (45) days after the end of each month (other than January and
February so long as the fiscal year end is December 31) and simultaneous with
the delivery of the financial statements pursuant to subsection 8.1(a) with
respect to January and February, the unaudited consolidated and consolidating
balance sheets of the Company and its Subsidiaries, and the related consolidated
and consolidating statements of operations and cash flows for such month and for
the period commencing on the first day of the fiscal year and ending on the last
day of such month, all certified by an appropriate officer of the Company as
presenting fairly in all material respects the financial condition as of such
date and results of operations and cash flows for the periods indicated on a
consistent basis, subject to normal year-end audit adjustments and the absence
of footnotes required by GAAP;

(d) the Company's flash closing report with respect
to each month, as soon as available, but in any event not later than thirty (30)
days after the end of each such month;

(e) annual budgets and such other financial and
operating data of the Company and its Subsidiaries, as the Purchasers may
reasonably request from time to time; and

(f) contemporaneously with each submission of a
filing, a copy of any report, registration statement, proxy statement, financial
statement, notice of other document, whether periodic or otherwise: submitted to
the shareholders of the Company; or submitted to or filed by the Company with
any governmental authority involving or affecting (i) any registration of the
Company or its securities, or (ii) any of the transactions contemplated in this
Agreement,

26
<PAGE> 33
including, without limitation, those submitted or filed pursuant to the
Securities Act, as amended, the Securities Exchange Act of 1934, as amended, any
state securities, blue sky or other applicable laws, the rules and regulations
or any securities exchange or organization with or on which any of its
securities are listed or quoted, the National Labor Relations Act, as amended,
or any other applicable laws respecting the rights of employees or unions.

8.2 Certificates. The Company shall deliver to the Purchasers:

(a) concurrently with the delivery of the financial
statements referred to in Section 8.1(a), a certificate of the Company's Chief
Financial Officer stating that to his or her knowledge no Event of Default shall
have occurred during the period covered thereby, except as specified in such
certificate; and

(b) concurrently with the delivery of the financial
statements referred to in Sections 8.1(a) and (b), a certificate of an officer
of the Company including calculations set forth in reasonable detail showing the
Company's compliance with the financial covenants contained herein.

8.3 Preservation of Corporate Existence. The Company shall,
and shall cause each of its Subsidiaries to:

(a) preserve and maintain in full force and effect
its corporate existence, except as otherwise permitted by Section 9.1;

(b) conduct its business in accordance with sound
business practices, keep its properties in good working order and condition
(normal wear and tear excepted), and from time to time make all needed repairs
to, renewals of or replacements of its properties (except to the extent that any
of such properties are obsolete or are being replaced) so that the efficiency of
its business operations shall be fully maintained and preserved; and

(c) file or cause to be filed in a timely manner all
reports, applications, estimates and licenses that shall be required by a
Governmental Authority, except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect (it being acknowledged
that for purposes of this Section 8.3(c), a Material Adverse Effect shall be
deemed to occur upon any failure to make a timely filing with the Securities and
Exchange Commission, which failure restricts the ability of a Purchaser to sell
shares of Common Stock pursuant to Rule 144 promulgated under the Securities
Act).

8.4 Payment of Obligations. The Company shall, and shall cause
each of its Subsidiaries to, pay and discharge as the same shall become due and
payable, all their respective obligations and liabilities, including without
limitation:

(a) all tax liabilities, assessments and governmental
charges or levies upon it or its properties or assets, unless the same are being
contested in good faith by appropriate

27
<PAGE> 34
proceedings and adequate reserves in accordance with GAAP are being maintained
by the Company or such Subsidiary;

(b) all lawful claims which the Company, and each of
its Subsidiaries is obligated to pay, which are due and which, if unpaid, might
by law become a Lien upon its property, unless the same are being contested in
good faith by appropriate proceedings and adequate reserves in accordance with
GAAP are being maintained by the Company or such Subsidiary; and

8.5 Compliance with Laws. The Company shall comply, and shall
cause each of its Subsidiaries to comply, with all Requirements of Law and with
the directions of any Governmental Authority having jurisdiction over them or
their business or property (including all applicable Environmental Laws), except
where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.

8.6 Notices. Within 5 days of obtaining knowledge of the
Company of the events described below, the Company shall give written notice to
the Purchasers:

(a) of the occurrence of any Event of Default or any
event that, after notice or lapse of time or both, would become an Event of
Default;

(b) of any (i) material default or event of default
under any material Contractual Obligation of the Company or any of its
Subsidiaries, or (ii) material dispute, litigation, investigation, proceeding or
suspension which may exist at any time between the Company or any of its
Subsidiaries and any Governmental Authority or third party; and

Each notice pursuant to this Section 8.6 shall be accompanied
by an officer's certificate signed by the Chief Executive Officer, President or
Chief Financial Officer of the Company setting forth details of the occurrence
referred to therein and stating what action the Company proposes to take with
respect thereto.

8.7 Reservation of Shares. The Company shall at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance or delivery upon exercise of the Warrants and the Management
Options, the maximum number of shares of capital stock that may be issuable or
deliverable upon such exercise (the "Exercisable Shares"). The Exercisable
Shares shall, when issued or delivered in accordance with the Warrants or the
Management Options, as the case may be, be duly and validly issued and fully
paid and non-assessable. The Company shall issue such capital stock in
accordance with the provisions of the

28
<PAGE> 35
Warrants or the Management Options, as the case may be, and shall otherwise
comply, in each case, with the terms thereof.

8.8 Inspection. The Company will permit, and will cause each
of its Subsidiaries to permit, representatives of the Purchasers to visit and
inspect any of their properties, to examine their corporate, financial and
operating records and make copies thereof or abstracts therefrom, and to discuss
their affairs, finances and accounts with their respective directors, officers
and independent public accountants, all at such reasonable times during normal
business hours and as often as may be reasonably requested, upon advance notice
of at least 48 hours. Notwithstanding the foregoing, the Purchasers agree to use
reasonable best efforts to (a) avoid disruption of the Company's business and
(b) maintain the confidentiality of any confidential information obtained by the
Purchasers through such inspections, examinations and discussions.

8.9 Payment of Note. The Company shall pay the principal of,
interest on and other amounts due in respect of, the Note on the dates and in
the manner provided in the Note.

8.10 Insurance. The Company and each of its Subsidiaries shall
maintain insurance with insurance companies or associations with a rating of
"BBB" or better as established by Best's Rating Guide (or an equivalent rating
with such other publication of a similar nature as shall be in current use) in
such amounts and covering such risks as are usually and customarily carried with
respect to similar businesses according to their respective locations.

8.11 Books and Records. The Company shall, and shall cause
each of its Subsidiaries to, keep proper books of record and account, in which
full and correct entries shall be made of all financial transactions and the
assets and business of the Company and each of its Subsidiaries in accordance
with GAAP consistently applied to the Company and its Subsidiaries taken as a
whole.

8.12 Use of Proceeds. The Company shall use the proceeds of
the sale of Securities hereunder only as follows: (a) $1.0 million to fund the
balance of the purchase price of the Playclothes Acquisition, (b) $1.6 million
to redeem and pay accrued dividends on the Company's Preferred Stock, (c) $2.1
million to repay the $2.1 million loan from The Fulcrum Group, Inc. to the
Company, (d) $2.5 million to repay the $2.5 million bridge loan from Sunwest
Bank and (e) the balance for working capital and general corporate purposes and
for the payment of fees and expenses in connection with the transactions
contemplated hereunder and in the Transaction Documents.

8.13 Appointment of WEP's Nominee to Board. The Company shall
use its best efforts to have a nominee designated by WEP elected to the
Company's Board of Directors. The Company shall provide to such director the
same information concerning the Company and its Subsidiaries, and access
thereto, provided to other members of the Company's Board of Directors. The
reasonable travel expenses incurred by any such director in attending any such
meetings shall be reimbursed by the Company to the extent consistent with the
Company's then existing policy of reimbursing directors generally for such
expenses.

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<PAGE> 36
8.14 Line of Credit. The Company shall use its reasonable
efforts to increase its line of credit (which shall have a term of at least one
year) to at least $10,000,000 on or prior to December 31, 1996.

ARTICLE 9

NEGATIVE COVENANTS

Until the payment by the Company of all principal of and
interest on the Note and all other amounts due at the time of payment of such
principal and interest to the Purchasers under this Agreement, including,
without limitation, all fees, expenses and amounts due at such time in respect
of indemnity obligations under Article 7, the Company hereby covenants and
agrees with the Purchasers as set forth in Sections 9.1 through 9.9; provided,
however, that upon consummation of an Initial Public Offering, the Company shall
no longer be obligated to comply with Sections 9.1 and 9.6 So long as the
Purchasers remain the beneficial owners of 5% of the Common Stock on a fully
diluted basis (assuming the Warrants are fully exercised), the Company hereby
covenants and agrees with the Purchasers as set forth in Sections 9.1 and 9.2.

9.1 Consolidations, Mergers and Investments. The Company
shall not merge (other than with or into a wholly-owned Subsidiary), consolidate
with or into, or convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whenever acquired) or liquidate except for a merger, consolidation,
disposition, sale or liquidation in which the Company or its shareholders, as
the case may be, receives consideration equal to or more than $5.068 per share
(in cash and/or securities). If the Company wishes to complete a merger,
consolidation, disposition, sale or liquidation wherein the consideration to be
received will be less than $5.068 per share, it shall notify the Purchasers of
the proposed consideration and pursuant to the other terms and conditions
thereof. Within ten (10) days of the receipt of such notice, the Purchasers
shall either (i) consent to such transaction, in which event the Company will
have the right to consummate such transaction within ninety days of its receipt
of such consent for the consideration and the other terms and conditions set
forth in its notice or (ii) object to such transaction, in which event the
Company will have the right to consummate such transaction within one hundred
eighty (180) days of its receipt of such objection for the consideration and the
other terms and conditions set forth in its notice provided that simultaneous
with the closing of such transaction, the Company purchases all the Shares
beneficially owned by the Purchasers at such time for $5.068 in cash per share.
Except for the Proposed Joint Venture, the Company shall not form or invest in a
Subsidiary unless it is wholly-owned by the Company.

9.2 Transactions with Affiliates.

(a) The Company shall not, and shall not permit any
of its Subsidiaries to, (i) enter into any transaction or agreement with, or
make any payment to, Lederman, Budoff or any of their respective Affiliates
(other than pursuant to agreements existing on the date hereof or subsequently
approved by the Purchasers including without limitation, the (aa) Advisory
Agreement, dated April 1, 1994, as amended January 1, 1996, between the Company
and Fulcrum Capital

30
<PAGE> 37
Partners, L.P., (bb) Fulcrum Retail Option Agreement, (cc) Fulcrum Brands
Trademark License Agreement, (dd) Lederman Employment Agreement, and (ee) Budoff
Employment Agreement), (ii) amend or terminate any existing agreement with
Lederman, Budoff or any of their respective Affiliates, including without
limitation the Fulcrum Brands Trademark License Agreement and the Fulcrum
Properties Lease, (iii) purchase from or provide to Lederman, Budoff or any of
their respective Affiliates any selling, general, management or administrative
services (other than services having an aggregate fair market value not in
excess of $125,000 in any single fiscal year), (iv) directly or indirectly make
any sales to or purchases from Lederman, Budoff or any of their respective
Affiliates (other than purchases made under the same terms offered to other
employees of the Company), (v) amend either the Lederman Employment Agreement or
Budoff Employment Agreement, or (vi) purchase any trademarks being licensed to
the Company under the Fulcrum Brands Trademark License Agreement (other than a
purchase of such trademarks by the Company contemporaneously with or immediately
following an Initial Public Offering).

(b) Notwithstanding Sections 9.2(a) and 9.7, the
Company may continue to sell to Fulcrum Retail, Inc. in accordance with past
practice, any inventory which is obsolete or not useable or saleable in the
ordinary course of business of the Company and its Subsidiaries as heretofore
conducted so long as (i) the Company's aggregate revenues from such sales do not
exceed $5,000,000 in any single fiscal year, (ii) the Company sells such
inventory on average at no less than 50% of the cost of such inventory (on net
60 day terms), and (iii) Fulcrum Retail, Inc. provides audited annual financial
statements to the Purchasers within one-hundred-five (105) days after the end of
each fiscal year and unaudited quarterly financial statements to the Purchasers
within forty-five (45) days after the end of each fiscal quarter. The Company
shall pay the costs associated with preparation of Fulcrum Retail, Inc.'s
audited financial statements.

9.3 No Inconsistent Agreements. Neither The Company nor any of
its Subsidiaries shall enter into any Contractual Obligation or enter into any
amendment or other modification to any currently existing Contractual Obligation
of the Company, or any of its Subsidiaries, which by its terms restricts or
prohibits the ability of the Company to pay the principal of or interest on the
Note.

9.4 Limitation on Indebtedness. The Company shall not, and
shall not cause, suffer or permit any of its Subsidiaries to, directly or
indirectly, collectively and in the aggregate, issue, assume or otherwise incur
any Indebtedness, other than: (a) Indebtedness under the Transaction Documents;
(b) Senior Indebtedness, up to an aggregate principal amount of $15,000,000, or
other Indebtedness, up to an aggregate principal amount of $5,000,000; provided,
however, that Senior Indebtedness may exceed an aggregate principal amount of
$15,000,000 if the ratio of total Indebtedness to total share capital (including
retained earnings) of the Company as reflected on the Company's most recent
quarterly balance sheet, is less than 2.5 to 1.0; and, provided, further, that
under no circumstances shall Senior Indebtedness exceed $30,000,000; (c)
Indebtedness listed on Schedule 5.27; (d) non-current liabilities for
post-employment healthcare and other insurance benefits; (e) trade payables and
accrued expenses, in each case arising in the ordinary course of business; (f)
Indebtedness secured by a Lien permitted under Section 9.5; (g) refinancings,
refundings or extensions of the foregoing; provided, that any such refinancings,
refundings or

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<PAGE> 38
extensions shall not (i) exceed the principal amount refinanced, refunded or
extended, (ii) shorten the maturity (or weighted average life to maturity) of
such Indebtedness, (iii) increase the interest rate applicable to such
Indebtedness, (iv) facilitate the exercise or enforcement of any remedies of any
obligee of such Indebtedness in respect of any default or event of default
thereunder, or (v) result in any amendments or modifications of any of the
subordination provisions applicable to such Indebtedness; and (h) Indebtedness
existing at the time of acquisition on assets or a company acquired by the
Company.

9.5 Limitation on Liens. The Company shall not, and shall not
permit, cause or suffer any of its Subsidiaries to, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
other than: (a) Liens securing the Senior Indebtedness (b) Liens existing on the
date of this Agreement and disclosed on Schedule 5.27, (c) Liens for taxes,
statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and
materialmen, in each case only to the extent the obligations thereto are not yet
due or are being contested in good faith by appropriate proceedings diligently
pursued; (d) Liens to secure performance of tenders, bids, statutory obligations
or government contracts, and similar Liens not securing Indebtedness and arising
in the ordinary course of business; (e) Liens existing at the time of
acquisition on assets or a company acquired by it; and (f) any Lien on equipment
or real property securing Indebtedness (including Capital Lease Obligations)
incurred or assumed for the sole purpose of financing all or part of the cost of
acquiring such equipment or real property, provided that such Lien (i) attaches
to such asset concurrently with or within 10 days after the acquisition thereof,
(ii) the Indebtedness secured thereby does not encumber any other property of
the Company or its Subsidiaries and (iii) does not exceed the purchase price of
such asset.

9.6 Limitations on Restricted Payments. The Company shall not,
and shall not permit any of its Subsidiaries to declare, or make any Restricted
Payment, other than to pay dividends that have already been declared on shares
of Series A Preferred Stock in an aggregate amount not to exceed $170,778.90.

9.7 Dispositions of Assets. The Company shall not, and shall
not permit any of its Subsidiaries to, sell, transfer, lease or otherwise
dispose of (in one transaction or in a series of transactions) all or any part
of their assets or properties or any of the capital stock of any of its
Subsidiaries, other than (a) assets or properties sold, leased or rented in the
ordinary course of business consistent with past practice, (b) assets or
properties, including obsolete assets (other than inventory), sales of which do
not exceed in the aggregate $100,000 in any 12-month period, and (c) sales of
inventory to Fulcrum Retail, Inc. in accordance with Section 9.2(b).

9.8 Financial Covenants.

(a) EBITDA. As of the end of each fiscal quarter
specified below, the Company shall not permit EBITDA (for such fiscal quarter
and the three immediately preceding fiscal quarters treated as a single
accounting period) to be less than the corresponding amount set forth below:

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<PAGE> 39
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Fiscal Year 1997

First Quarter $ 5,000,000
Second Quarter $ 7,000,000
Third Quarter $ 7,500,000
Fourth Quarter $ 8,000,000

Fiscal Year 1998

First Quarter $ 8,500,000
Second Quarter $ 9,000,000
Third Quarter $ 9,000,000
Fourth Quarter $10,000,000

Each Fiscal Quarter Thereafter $10,000,000
</TABLE>

(b) Cash Flow Coverage Ratio. As of the end of each
fiscal quarter specified below, the Company shall not permit the Cash Flow
Coverage Ratio to be less than the corresponding ratio set forth below:

<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1997

First Quarter 1.25 to 1.0
Second Quarter 1.75 to 1.0
Third Quarter 1.75 to 1.0
Fourth Quarter 2.0 to 1.0

Fiscal Year 1998

First Quarter 2.25 to 1.0
Second Quarter 2.75 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 3.5 to 1.0

Each Fiscal Quarter Thereafter 3.5 to 1.0
</TABLE>

(c) Leverage Ratio. As of the end of each fiscal
quarter specified below, the Company shall not permit the Leverage Ratio to be
more than the corresponding ratio set forth below:

33
<PAGE> 40
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1997

First Quarter 4.0 to 1.0
Second Quarter 3.0 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 2.5 to 1.0

Fiscal Year 1998

First Quarter 2.25 to 1.0
Second Quarter 2.0 to 1.0
Third Quarter 2.0 to 1.0
Fourth Quarter 2.0 to 1.0

Each Fiscal Quarter Thereafter 2.0 to 1.0
</TABLE>

9.9 Limitation on Business of the Company. The Company shall
not engage in any business other than the manufacturing and distribution of
children's consumer products; provided,however, that the Company may engage in
the manufacturing and distribution of adult consumer products to the extent that
no more than twenty-five percent (25%) of the Company's revenues are derived
from the sale of adult consumer products.

ARTICLE 10

PREPAYMENT

10.1 Optional Prepayment. The Company may prepay outstanding
principal (together with accrued interest) on the Note only if the Note is
prepaid in accordance with the "Optional Prepayment" provisions set forth in
Section 3 of the Note.

10.2 Mandatory Prepayment. Subject to Section 7 of the Note,
the Company shall prepay outstanding principal (together with accrued interest)
on the Note in accordance with the "Mandatory Prepayment" provisions set forth
in Section 3 of the Note.

ARTICLE 11

MISCELLANEOUS

11.1 Survival of Representations and Warranties. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation

34
<PAGE> 41
by or on behalf of the Purchasers, acceptance of the Securities and payment
therefor, or termination of this Agreement, but such representations and
warranties shall terminate on the earlier to occur of (a) the consummation of an
Initial Public Offering and payment by the Company of all principal and interest
on the Note and all other amounts due at the time of payment of such principal
and interest to the Purchasers under this Agreement, including, without
limitation, all fees, expenses and amounts due at such time in respect of
indemnity obligations under Article 7, or (b) June 30, 1998.

11.2 Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier,
courier service or personal delivery:

(a) if to WSDF:

Whitney Subordinated Debt Fund, L.P.
177 Broad Street
Stanford, Connecticut 06901
Telecopier No.: (203) 973-1422
Attention: Mr. Daniel J. O'Brien

with a copy to:

Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: David A. Scherl, Esq.

(b) if to WEP:

Whitney Equity Partners, L.P.
177 Broad Street
Stamford, Connecticut 06901
Telecopier No.: (203) 973-1422
Attention: Mr. Daniel J. O'Brien

with a copy to:

Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: David A. Scherl, Esq.

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<PAGE> 42
(c) if to the Company:

Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, New Mexico 87124
Telecopier: (505) 867-7100
Attention: Michael G. Lederman
Scott A. Budoff

with a copy to:

Kirkland & Ellis
153 East 53rd Street, 39th Floor
New York, New York 10022
Telecopier: (212) 446-4900
Attention: Frederick A. Tanne, Esq.

All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; when delivered
by courier, if delivered by commercial overnight courier service; five Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged, if telecopied.

11.3 Successors and Assigns. All covenants and agreements in
this Agreement contained by or on behalf of the parties hereto shall inure to
the benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws and this Section 11.3, the
Purchasers may assign any of their respective rights under any of the
Transaction Documents to any Person. So long as the Note,either Warrant, Fulcrum
Retail Option Agreement or the Common Stock acquired hereunder, as the case may
be, has not been registered under the Securities Act, the Purchasers (and any
subsequent transferees) may not transfer the Note, such Common Stock, Fulcrum
Retail Option Agreement or either Warrant, as the case may be, to any Person
other than to a Permitted Investor (upon providing the Company with 30 days
prior written notice of such transfer) or to a limited partner of a Purchaser
(upon providing the Company with ten (10) days prior written notice of such
transfer, provided that such ten (10) day notice need not be given after an
Initial Public Offering). The Purchasers agree to provide the Company with a
list of their respective limited partners and to update such lists periodically.
Upon registration of the Note, either Warrant, Fulcrum Retail Option Agreement
or the Common Stock acquired hereunder, as the case may be, under the Securities
Act, the holder thereof may transfer any such Note, Warrant, Fulcrum Retail
Option Agreement or Common Stock to any other Person without restriction.
Notwithstanding the foregoing, any holder of such Note, Warrant, Fulcrum Retail
Option Agreement or Common Stock, as the case may be, may transfer such Note,
Warrant, Fulcrum Retail Option Agreement or Common Stock pursuant to Rule 144 as
promulgated under the Securities Act, without restriction, other than those
contained in the securities laws. The Company may not assign any of

36
<PAGE> 43
its rights under this Agreement without the prior written consent of the
Purchasers. Except as provided in Article 7, no Person other than the parties
hereto and their successors and permitted assigns is intended to be a
beneficiary of any of the Transaction Documents.

11.4 Amendment and Waiver.

(a) No failure or delay on the part of any of the
parties hereto in exercising any right, power or remedy hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law, in equity or otherwise.

(b) Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective (i) only if it is made or given
in writing and signed by all of the parties hereto, and (ii) only in the
specific instance and for the specific purpose for which made or given. Except
where notice is specifically required by this Agreement, no notice to or demand
on the Company in any case shall entitle the Company to any other or further
notice or demand in similar or other circumstances.

11.5 Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.

11.6 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

11.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.

11.8 Determinations, Request or Consents. All determinations,
requests, consents, waivers or amendments to be made by the Purchasers in their
respective opinions or judgments or with their approval or otherwise pursuant to
the Transaction Documents shall be made (i) with respect to the Note, by the
holder of the Note, (ii) with respect to the WSDF Warrant by the holder of the
WSDF Warrant, and (iii) with respect to the WEP Warrant by the holder of the WEP
Warrant.

11.9 JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE NOTE, THE SHARES, THE WARRANTS OR ANY AGREEMENTS
OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY BE BROUGHT IN THE COURTS OF
THE STATE OF NEW YORK OR OF THE UNITED

37
<PAGE> 44
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND HEREBY EXPRESSLY
SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES
THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH
COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 11.2, SUCH SERVICE TO
BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.

11.10 Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.

11.11 Rules of Construction. Unless the context otherwise
requires, "or" is not exclusive, and references to sections or subsections refer
to sections or subsections of this Agreement.

11.12 Entire Agreement. This Agreement, together with the
exhibits and schedules hereto and the other Transaction Documents, is intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement, together with
the exhibits and schedules hereto, and the other Transaction Documents supersede
all prior agreements and understandings between the parties with respect to such
subject matter.

11.13 Certain Expenses. The Company will pay all reasonable
expenses of the Purchasers (including reasonable fees, charges and disbursements
of counsel) in connection with any amendment, supplement, modification or waiver
of or to any provision of this Agreement, the Note or the Warrants, or consent
to any departure by the Company from, the terms of any provision of this
Agreement, the Note or the Warrants.

11.14 Publicity. Except as may be required by applicable law,
none of the parties hereto shall issue a publicity release or announcement or
otherwise make any public disclosure concerning this Agreement or the
transactions contemplated hereby, without prior approval by the other party
hereto. If any announcement is required by law to be made by any party hereto,
prior to making such announcement such party will deliver a draft of such
announcement to the other parties and shall give the other parties an
opportunity to comment thereon.

38
<PAGE> 45
11.15 Further Assurances. Each of the parties shall execute
such documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.

39
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
-------------------------------
Name: Michael G. Lederman
Title: Chairman & CEO

WHITNEY SUBORDINATED DEBT FUND, L.P.

By: /s/ RAY E. NEWTON, III
-------------------------------
Name: Ray E. Newton, III
A General Partner

WHITNEY EQUITY PARTNERS, L.P.

By: /s/ RAY E. NEWTON, III
-------------------------------
Name: Ray E. Newton, III
Member

<PAGE> 1
Exhibit 10.5

FULCRUM DIRECT, INC.
4321 FULCRUM WAY NE
RIO RANCHO, NM 87124

October 21, 1996

Whitney Subordinated Debt Fund, L.P.
177 Broad Street
Stamford, CT 06901

Re: Subordination Provisions

Ladies and Gentlemen:

In connection with that certain Securities Purchase Agreement,
dated as of the date hereof (the "Securities Purchase Agreement") between you
and us ("Fulcrum") Fulcrum issued to you a 10.01% Senior Subordinated
Promissory Note (the "Subordinated Note") dated the date hereof which contains
provisions relating to subordination of such debt to Senior Indebtedness (as
defined in the Subordinated Note). You and we acknowledge that such
subordination provisions may not be acceptable to a senior lender in the event
of a refinancing or refunding of the currently existing Senior Indebtedness.

Accordingly, you agree that in order to facilitate such a
refinancing or refunding, at the request of the Company you will enter into a
subordination agreement containing "market terms." You further agree that the
following terms shall constitute "market terms" as of the date hereof.

The indebtedness under the Subordinated Note (the "Subordinated Debt")
will be subordinated in right of payment to Senior Indebtedness (as
defined in the Subordinated Note) upon customary terms and conditions,
including, without limitation the following:

there shall be no payments or distributions in respect of the
Subordinated Debt (i) out of any insolvency or bankruptcy
proceeding of Fulcrum, or any dissolution or liquidation of
Fulcrum unless and until the Senior Indebtedness is paid in
full in cash, (ii) at such time as the holder of Senior
Indebtedness shall have accelerated its debt, (iii) during
any "payment" default under the Senior Indebtedness, provided
that the blockage period arising out of a payment default shall
expire following 360 days and (iv) during any "non-payment"
default under the Senior Indebtedness, provided that

<PAGE> 2
Whitney Subordinated Debt Fund, L.P.
October 21, 1996
Page 2

the blockage period arising out of a non-payment default shall
expire following 179 days and shall only apply once during each
12-month period. The Subordination provisions will include other
usual and customary terms, including subrogation to Senior
Indebtedness, payments held in trust, etc.

You further agree that if the foregoing does not constitute
"market terms" as of the date of such refinancing or refunding you shall
negotiate in good faith with the provider of such debt in order to agree
to "market" subordination provisions.

Each of us further agree not to disclose the terms contained
in or the existence of this letter agreement to any holder or
prospective holder of Senior Indebtedness.

By your execution in the space provided below, each of you
hereby agrees to the terms set forth herein.

Very truly yours,

FULCRUM DIRECT, INC.

By: /s/ Michael Lederman
------------------------------------
Name:
Title:

Agreed this 21st day of October, 1996

WHITNEY SUBORDINATED DEBT FUND, L.P.

By: /s/ RAY E. NEWTON
---------------------------------
Name:
A General Partner

<PAGE> 1
EXHIBIT 10.6

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THE SALE
OR OTHER TRANSFER OF THIS NOTE IS ALSO SUBJECT TO THE RESTRICTIONS
ON TRANSFER SET FORTH IN SECTION 11.3 OF THE "PURCHASE AGREEMENT"
(AS HEREINAFTER DEFINED).

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT, AS SUCH
TERM IS DEFINED IN SECTION 1271 ET SEQ. OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. UPON INQUIRY MADE BY ANY HOLDER HEREOF,
ADDRESSED TO FULCRUM DIRECT, INC., 4321 FULCRUM WAY, RIO RANCHO,
NEW MEXICO 87124, ATTENTION: SCOTT A. BUDOFF, FULCRUM DIRECT, INC.
WILL PROVIDE A STATEMENT SETTING FORTH THE ISSUE PRICE, THE AMOUNT
OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE AND THE YIELD TO
MATURITY WITH RESPECT TO THE NOTE HELD BY SUCH HOLDER.

FULCRUM DIRECT, INC.

10.101% SENIOR SUBORDINATED PROMISSORY NOTE
DUE OCTOBER 21, 2003

$10,000,000 New York, New York
October 21, 1996

FOR VALUE RECEIVED, the undersigned, FULCRUM DIRECT, INC., a
Delaware corporation (the "Borrower"), hereby promises to pay to the order of
WHITNEY SUBORDINATED DEBT FUND, L.P. or its registered assigns (the "Holder"),
the principal sum of TEN MILLION DOLLARS ($10,000,000) on October 21, 2003 (the
"Maturity Date"), with interest thereon from time to time as provided herein.

1. Purchase Agreement. This Senior Subordinated Promissory Note
(the "Note") is issued by the Borrower pursuant to the Securities Purchase
Agreement, dated as of the date hereof, between the Borrower, Whitney
Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P. (the "Purchase
Agreement"), and the Holder is entitled to the benefits of this Note and the
Purchase
<PAGE> 2
Agreement, as it relates to the Note, and may enforce the agreements of the
Borrower contained herein and therein and exercise the remedies provided for
hereby and thereby or otherwise available in respect hereto and thereto.
Capitalized terms used herein without definition are used herein with the
meanings ascribed to such terms in the Purchase Agreement.

2. Interest. The Borrower promises to pay interest on the principal
amount of this Note at the rate of 10.101% per annum. The Borrower shall pay
accrued interest quarterly on each March 31, June 30, September 30 and December
31 of each year or, if any such date shall not be a Business Day, on the next
succeeding Business Day to occur after such date (each date upon which interest
shall be so payable, an "Interest Payment Date" ), beginning on December 31,
1996. Interest on this Note shall be paid by wire transfer of immediately
available funds to an account at a bank designated by the Holder. Interest on
this Note shall accrue from the date of issuance until repayment of the
principal and payment of all accrued interest in full. Interest shall accrue and
be computed on the basis of a 360-day year of twelve 30-day months.
Notwithstanding the foregoing provisions of this Section 2, but subject to
applicable law, any overdue principal of and overdue interest on this Note shall
bear interest, payable on demand in immediately available funds, for each day
from the date payment thereof was due to the date of actual payment, at a rate
equal to the rate of interest otherwise in effect pursuant to the first sentence
of this Section 2 plus 2% per annum, and, upon and during the occurrence of an
Event of Default (as hereinafter defined), this Note shall bear interest, from
the date of the occurrence of such Event of Default until such Event of Default
is cured or waived, payable on demand in immediately available funds, at a rate
equal to the rate of interest otherwise in effect pursuant to the first sentence
of this Section 2 plus 2% per annum. Subject to applicable law, any interest
that shall accrue on overdue interest on this Note as provided in the preceding
sentence and shall not have been paid in full on or before the next Interest
Payment Date to occur after the Interest Payment Date on which the overdue
interest became due and payable shall itself be deemed to be overdue interest on
this Note to which the preceding sentence shall apply.

3. Mandatory Prepayment.

(a) Initial Public Offering.

(i) Subject to the subordination provisions of Section
7(b) hereof, upon the consummation of an Initial Public Offering (as hereinafter
defined), the Borrower shall prepay this Note (together with interest accrued
thereon), in an amount equal to the lesser of (A) the Net Cash Proceeds (as
hereinafter defined) received from the Initial Public Offering, and (B) three
million dollars ($3,000,000), within 5 Business Days after receipt by either the
Borrower or any of its Subsidiaries of the proceeds of such Initial Public
Offering.

(ii) Subject to the subordination provisions of Section
7(b) hereof and notwithstanding Section 3(a)(i) hereof, in the event that the
Borrower does not acquire all of the trademarks and the goodwill pertaining
thereto being licensed to the Company under the Fulcrum Brands Trademark License
Agreement, within 60 days after consummation of an Initial Public

2
<PAGE> 3
Offering, the Borrower shall immediately prepay this Note, in an amount equal to
the total outstanding principal amount of this Note, together with interest
accrued thereon.

For the purposes hereof, "Initial Public Offering" means the
sale by either the Borrower or any of its Subsidiaries of its capital stock
pursuant to a registration statement on Form S-1 or otherwise under the
Securities Act in which the Borrower or any of its Subsidiaries receives at
least $20,000,000 in Net Cash Proceeds.

For the purposes hereof, "Net Cash Proceeds" means (X) the
cash proceeds received by the Borrower or any of its Subsidiaries from an
Initial Public Offering minus (Y) reasonable brokerage commissions or
underwriting fees and other reasonable fees and expenses (including, without
limitation, reasonable fees, charges and disbursements of counsel and
accountants and reasonable fees and expenses of investment bankers) relating to
such Initial Public Offering.

(b) Change of Control. Subject to the subordination
provisions of Section 7(b) hereof, upon a Change of Control (as hereinafter
defined), the Borrower shall prepay the outstanding principal amount of this
Note (together with interest accrued thereon), within 5 Business Days after the
occurrence of a Change of Control.

For the purposes hereof, "Change of Control" means (i) any
transaction or series of transactions in which any Person (as such term is
defined in Section 13(d)(3) of the Exchange Act) or group, other than Michael G.
Lederman and/or Scott A. Budoff, becomes the direct or indirect beneficial owner
(as such term is defined in Rule 13d-3 promulgated under the Exchange Act) of
more of the then outstanding Common Stock than that beneficially owned in the
aggregate by Michael G. Lederman and Scott A. Budoff, (ii) any transaction or
series of transactions in which Michael G. Lederman and Scott A. Budoff together
cease to be the direct or indirect beneficial owners of at least 25% of the then
outstanding Common Stock, (iii) the sale of all or substantially all of the
Borrower's assets, (iv) the liquidation of the Borrower, (v) the election of a
majority of the members of the Board of Directors who were not placed in
nomination for that office by the Board of Directors, or (vi) the combination of
Borrower with another company, as a result of which the shareholders of Borrower
hold less than 50.01% of the total of all voting shares outstanding or
Borrower's directors constitute less than a majority of the Board of Directors
of the combined entity.

(c) Significant Acquisitions. If the Borrower wishes to
acquire (whether in one transaction or in a series of transactions) assets
(other than inventory in the ordinary course of business) from or securities in
any Person and if the revenues derived from such acquired assets or securities
for the trailing twelve month period at the time of such acquisition will
represent more than 30% of the total revenues of the Borrower on a pro forma
basis after giving effect to such acquisition (each such acquisition being a
"Significant Acquisition"), the Borrower shall notify the Holder of the proposed
Significant Acquisition, describing in detail the purchase price and the other
terms and conditions thereof. Within ten (10) days of the receipt of such
notice, the Holder shall either (i) consent in writing to such Significant
Acquisition, in which event the Borrower will have

3
<PAGE> 4
the right to consummate such Significant Acquisition within ninety (90) days of
its receipt of such consent for the purchase price and other terms and
conditions set forth in its notice or (ii) object in writing to such Significant
Acquisition, in which event the Borrower will have the right to consummate such
Significant Acquisition within 180 days of its receipt of such objection for the
purchase price and other terms and conditions set forth in its notice and
simultaneous with the closing of such Significant Acquisition the outstanding
principal amount of this Note together with the interest accrued thereon shall
become immediately due and payable.

(d) Notice. The Borrower shall give written notice to the
Holder of any mandatory prepayment pursuant to this Section 3 at least 3
Business Days prior to the date of such prepayment. Such notice shall be given
in the manner specified in Section 12.2 of the Purchase Agreement.

4. Optional Prepayment.

(a) Upon notice given to the Holder as provided in Section
4(b), the Borrower, at its option, may prepay all or any portion of this Note at
any time, by paying an amount equal to the outstanding principal amount of this
Note, or the portion of this Note called for prepayment, together with interest
accrued and unpaid thereon to the date fixed for prepayment, together with costs
and expenses (including, without limitation, reasonable fees, charges and
disbursements of counsel), if any, associated with such prepayment, without
penalty or premium; provided, however, each prepayment of less than the full
outstanding principal balance of the Note shall be in an aggregate principal
amount of $500,000 or a whole multiple thereof, and provided, further, that
unless this Note shall be paid in full, the aggregate principal balance of this
Note outstanding at any time shall be at least $3,500,000.

(b) The Borrower may give written notice of prepayment of
this Note or any portion thereof not less than 10 nor more than 60 days prior to
the date fixed for such prepayment. Such notice of prepayment shall be given in
the manner specified in Section 11.2 of the Purchase Agreement. Upon notice of
prepayment being given by the Borrower, the Borrower covenants and agrees that
it will prepay, on the date therein fixed for prepayment, this Note or the
portion hereof so called for prepayment, at the outstanding principal amount
thereof or the portion thereof so called for prepayment together with interest
accrued and unpaid thereon to the date fixed for such prepayment, together with
the costs and expenses referred to in Section 4(a).

(c) All prepayments under Section 3 and Section 4 shall
include payment of accrued interest on the principal amount so prepaid and shall
be applied first to all costs, expenses and indemnities payable under the
Purchase Agreement, then to payment of default interest, if any, then to payment
of accrued interest, and thereafter to principal.

5. Amendment. Amendments and modifications of this Note may be made
only in the manner provided in Section 11.4 of the Purchase Agreement.

6. Defaults and Remedies.

4
<PAGE> 5
(a) Events of Default. An "Event of Default" shall occur if:

(i) the Borrower shall default in the payment of the
principal of this Note, when and as the same shall become due and payable,
whether at maturity or at a date fixed for prepayment or by acceleration or
otherwise; or

(ii) the Borrower shall default in the payment of any
installment of interest on this Note according to its terms, when and as the
same shall become due and payable and such default shall continue for a period
of 10 days; or

(iii) the Borrower shall default in the due observance
or performance of any covenant to be observed or performed pursuant to Section
8.3(a), 8.6(a), 8.12, 9.1, 9.2, 9.3, 9.6 or 9.7 of the Purchase Agreement; or

(iv) the Borrower or any of its Subsidiaries shall
default in the due observance or performance of any other covenant, condition or
agreement on the part of the Borrower or any of its Subsidiaries to be observed
or performed pursuant to the terms hereof or pursuant to the terms of the
Purchase Agreement or any of the Transaction Documents (other than those
referred to in clauses (i), (ii) or (iii) of this Section 6(a)), and such
default shall continue for 45 days after the earliest of (A) the date the
Borrower is required to give notice thereof to the Holder (whether or not such
notice is actually given) or (B) the date of written notice thereof, specifying
such default and, if such default is capable of being remedied, requesting that
the same be remedied, shall have been given to the Borrower by the Holder; or

(v) any representation, warranty or certification made
by or on behalf of the Borrower or its Subsidiaries in the Purchase Agreement,
this Note, the Transaction Documents or in any certificate or other document
delivered pursuant hereto or thereto shall have been incorrect on the date as of
which made, the result of which could reasonably be expected to have a Material
Adverse Effect; or

(vi) any event or condition shall occur that results in
the acceleration of the maturity of any Indebtedness of Borrower or any of its
Subsidiaries, in a principal amount aggregating $250,000 or more; or

(vii) any uninsured damage to or loss, theft or
destruction of any assets of the Borrower or any of its Subsidiaries shall occur
that is in excess of $500,000; or

(viii) an involuntary proceeding shall be commenced or
an involuntary petition shall be filed in a court of competent jurisdiction
seeking (a) relief in respect of the Borrower or any of its Subsidiaries, or of
a substantial part of their property or assets, under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal or
state bankruptcy, insolvency, receivership or similar law, (b) the appointment
of a receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any of its Subsidiaries, or for a substantial part of their
property or assets, or (c) the winding up or liquidation

5
<PAGE> 6
of either the Borrower or any of its Subsidiaries; and such proceeding or
petition shall continue undismissed for 60 days, or an order or decree approving
or ordering any of the foregoing shall be entered; or

(ix) the Borrower or any of its Subsidiaries shall (a)
voluntarily commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code, as now constituted or hereafter amended, or
any other Federal or state bankruptcy, insolvency, receivership or similar law,
(b) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described in
paragraph (viii) of this Section 6(a), (c) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any of its Subsidiaries, or for a
substantial part of their property or assets, (d) file an answer admitting the
material allegations of a petition filed against it in any such proceeding, (e)
make a general assignment for the benefit of creditors, (f) become unable, admit
in writing its inability or fail generally to pay its debts as they become due
or (g) take any action for the purpose of effecting any of the foregoing; or

(x) one or more judgments for the payment of money in
an aggregate amount in excess of $250,000 (to the extent not covered by
insurance) shall be rendered against the Borrower or any of its Subsidiaries and
the same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to levy upon assets or properties of the Borrower or any
of its Subsidiaries to enforce any such judgment; or

(xi) the Playclothes Acquisition is not consummated on
or prior to February 15, 1997.

For purposes hereof, the term "Material Adverse Effect" shall have
the meaning assigned to that term in the Purchase Agreement.

(b) Acceleration. If an Event of Default occurs under
Section 6(a)(viii) or (ix), then the outstanding principal of and all accrued
interest on this Note shall automatically become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived. If any other Event of Default occurs and is continuing
the Holder, by written notice to the Borrower, may declare the principal of and
accrued interest on this Note to be due and payable immediately. Upon such
declaration, such principal and interest shall become immediately due and
payable. The Holder may rescind an acceleration and its consequences if all
existing Events of Default have been cured or waived, except nonpayment of
principal or interest that has become due solely because of the acceleration,
and if the rescission would not conflict with any judgment or decree. Any notice
or rescission shall be given in the manner specified in Section 11.2 of the
Purchase Agreement.

7. Subordination. Subject to the limitations set forth in Section
7(p) below, this Note shall at all times be wholly subordinate and junior in
right of payment to all Senior Indebtedness to the extent and in the manner
provided in this Section 7.

6
<PAGE> 7
(a) Definitions. As used in this Section 7, the following
terms shall have the following meanings:

"Indebtedness" shall have the meaning assigned to that term in the
Purchase Agreement.

"Senior Covenant Default" shall mean any event of default as
defined under any agreement pertaining to Senior Indebtedness of the Borrower,
other than a Senior Payment Default.

"Senior Indebtedness" means all Indebtedness of the Borrower
currently outstanding or incurred in the future pursuant to any borrowing by the
Borrower from any bank or institutional lender which is not an Affiliate of
Lederman, Budoff or the Company, and any renewals, extensions, refinancings or
refundings thereof; provided, however, that the aggregate principal amount of
Senior Indebtedness shall not exceed $15,000,000 unless the ratio of total
Indebtedness to total share capital (including retained earnings) of the
Company, as reflected on the Company's most recent balance sheet, is less than
2.5 to 1.0; provided further, however, that in no event shall the aggregate
principal amount of Senior Indebtedness exceed $30,000,000.

"Senior Default" shall mean a Senior Payment Default or a Senior
Covenant Default.

"Senior Payment Default" shall mean any default in the payment of
any Senior Indebtedness.

"Subordinated Indebtedness" shall mean (i) the principal of and
interest on this Note; and (ii) any other obligations of the Borrower arising
out of or in connection with the Purchase Agreement or this Note.

(b) General. Upon the maturity of any Senior Indebtedness by
lapse of time, acceleration, required prepayment or otherwise, all Senior
Indebtedness shall first be paid in full, or such payment duly provided for in
cash or in a manner satisfactory to the holders of such Senior Indebtedness,
before any payment is made on account of the Subordinated Indebtedness or by the
Borrower to acquire this Note, except that (i) the Borrower may prepay this Note
in accordance with the provisions of Section 3 or Section 4 so long as no Senior
Default has occurred and is continuing and (ii) the Holder may receive any
distributions provided for in Section 7(e)(ii) or 7(e)(iv) hereof.

(i) Upon receipt by the Borrower and the Holder of a
Blockage Notice (as defined below), then unless and until (1) all Senior
Defaults that gave rise to the Blockage Notice shall have been remedied or
effectively waived or shall have ceased to exist, or (2) the Senior Indebtedness
in respect of which such Senior Defaults shall have occurred shall have been
paid in full, no direct or indirect payment (in cash, property, securities or by
set-off or otherwise) of or on account of the principal of or interest on this
Note or as a sinking fund for this Note or in respect of

7
<PAGE> 8
any redemption, retirement, purchase or other acquisition of this Note shall be
made during any period prior to the expiration of the Blockage Period (as
defined below).

(ii) For purposes of this Section 7, a "Blockage
Notice" is a notice of a Senior Default that in fact has occurred and is
continuing, given to the Borrower and the Holder by the holders of a majority in
principal amount of the Senior Indebtedness then outstanding (or their
authorized agent); provided, however, that no such notice of a Senior Covenant
Default shall be effective as a Blockage Notice if an effective Blockage Notice
based on a Senior Covenant Default shall have been given within 360 days prior
thereto; and provided further, however, that no Senior Default on which a
Blockage Notice is based shall be used as the basis of any subsequent Blockage
Notice unless the same shall have ceased to exist for a period of at least 90
consecutive days.

(iii) For purposes of this Section 7, a "Blockage
Period" with respect to a Blockage Notice is the period commencing upon the
Borrower's receipt of such Blockage Notice and having a duration as follows:

(1) 179 days if the Senior Default to which the
Blockage Notice refers is a Senior Payment Default; or

(2) 89 days if the Senior Default to which the Blockage
Notice refers is a Senior Covenant Default.

(d) Limitation on Remedies. As long as any Senior
Indebtedness remains outstanding, upon the occurrence of an Event of Default
under this Note, the Holder shall not declare or join in any declaration of this
Note to be due and payable by reason of such Event of Default or otherwise take
any action against the Borrower (including, without limitation, commencing any
legal action against the Borrower or filing or joining in the filing of any
insolvency petition against the Borrower) prior to the expiration of 30 days
after the written notice of intention to accelerate on account of the occurrence
of such Event of Default (a "Remedy Notice") shall have been given by the Holder
to the Borrower and the holders of the Senior Indebtedness (a "Remedy Standstill
Period") unless the holders of any Senior Indebtedness shall have caused such
Senior Indebtedness to become due prior to its stated maturity or any Event of
Default pursuant to Section 6(a)(viii) or (ix) of this Note shall have
commenced; provided, however, that such Remedy Standstill Period shall be
extended (i) to 89 days from the date of such Remedy Notice if, at the time the
Remedy Standstill Period would otherwise expire, there exists any Senior
Covenant Default and (ii) to 179 days from the date of such Remedy Notice if, at
the time the Remedy Standstill Period would otherwise expire, there exists any
Senior Payment Default and if, in any case, an effective Blockage Notice is
given in accordance with, and subject to the limitations of, Section 7(c)(ii).

Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(a)(viii) or (ix) shall have occurred. In addition, any Blockage Period shall
cease to be effective if at any time during such period: (i) substantial assets
of the Borrower or its Subsidiaries are sold or otherwise disposed of outside of
the ordinary course of business for less than fair value or (ii) payment or any
distribution of any

8
<PAGE> 9
character, whether in cash, securities or other property of the Borrower or its
Subsidiaries shall be made to or received by any creditor on any Indebtedness
which is on the same level of priority with or junior and subordinate in right
of payment to this Note.

Upon the expiration or termination of any Blockage Period, the
Holder shall be entitled to exercise any of its rights with respect to this Note
other than any right to accelerate the maturity date of this Note based upon the
occurrence of any Event of Default in respect thereto which has been cured or
otherwise remedied during the Blockage Period.

(e) Subordination Upon Certain Events. Upon the occurrence
of any Event of Default with respect to the Borrower (but not its Subsidiaries)
under Sections 6(a)(viii) or (ix) of this Note:

(i) Upon any payment or distribution of assets of the
Borrower to creditors of such Borrower, holders of Senior Indebtedness shall be
entitled to receive indefeasible payment in full of all obligations with respect
to the Senior Indebtedness before the Holder shall be entitled to receive any
payment in respect of the Subordinated Indebtedness.

(ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Holder would be entitled but for this Section 7 shall
be made to the holders of Senior Indebtedness, as their interests may appear,
except that the Holder may, pursuant to a plan of reorganization under Chapter
11 of the Bankruptcy Code of 1978, as amended, or any similar provision of any
successor legislation thereto, receive securities that are subordinate to the
Senior Indebtedness to at least the same extent as this Note if pursuant to such
plan the distributions to the holders of the Senior Indebtedness in the form of
cash, securities or other property, by set-off or otherwise, provide for payment
of the full amount of the allowed claim of the holders of the Senior
Indebtedness.

(iii) For purposes of this Section 7, a distribution
may consist of cash, securities or other property, by set-off or otherwise.

(iv) Notwithstanding the foregoing provisions of
Section 7(b),(c) or (e), if payment or delivery by the Borrower of cash,
securities or other property to the Holder is authorized by an order or decree
giving effect, and stating in such order or decree that effect is given, to the
subordination of this Note to the Senior Indebtedness, and made by a court of
competent jurisdiction in a proceeding under any applicable bankruptcy or
reorganization law, payment or delivery by such Borrower of such cash,
securities or other property shall be made to the Holder in accordance with such
order or decree.

(f) Payments and Distributions Received. If the Holder shall
have received any payment from or distribution of assets of the Borrower in
respect of the Subordinated Indebtedness in contravention of the terms of this
Section 7 before all Senior Indebtedness is paid in full, then and in such event
such payment or distribution shall be received and held in trust for and

9
<PAGE> 10
shall be promptly paid over or delivered to the holders of Senior Indebtedness
to the extent necessary to pay all such Senior Indebtedness in full.

(g) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 6(a)(viii) or (ix) of this Note
occurs with respect to the Borrower (but not its Subsidiaries), the Holder shall
duly and promptly take such action as any holder of Senior Indebtedness may
reasonably request to collect any payment with respect to this Note for the
account of the holders of the Senior Indebtedness and to file appropriate claims
or proofs of claim in respect of this Note. Upon the failure of the Holder to
take any such action, each holder of Senior Indebtedness is hereby irrevocably
authorized and empowered (in its own name or otherwise), but shall have no
obligation, to demand, sue for, collect and receive every payment or
distribution referred to in respect of this Note and to file claims and proofs
of claim and take such other action as it may deem necessary or advisable for
the exercise or enforcement of any of the rights or interests of the holder with
respect to this Note.

(h) Subrogation. After all amounts payable under or in
respect of Senior Indebtedness are paid in full, the Holder shall be subrogated
to the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Holder have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 7 to a holder of Senior
Indebtedness which otherwise would have been made to the Holder is not, as
between the Borrower and the Holder, a payment by the Borrower on Senior
Indebtedness.

(i) Relative Rights. This Section defines the relative
rights of the Holder and the holders of Senior Indebtedness. Nothing in this
Section shall: (1) impair, as between the Borrower and the Holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of and interest (including default interest) on this Note in
accordance with its terms; (2) affect the relative rights of the Holder and
creditors of the Borrower other than holders of Senior Indebtedness or (3)
prevent the Holder from exercising its available remedies upon a default or
Event of Default, subject to the rights, if any, under this Section 7 of holders
of Senior Indebtedness.

(j) Subordination May Not Be Impaired by the Borrower. No
right of any holder of any Senior Indebtedness to enforce the subordination of
the Indebtedness evidenced by this Note shall be impaired by any failure to act
by the Borrower or such holder of Senior Indebtedness or by the failure of the
Borrower or such holder to comply with this Note. The provisions of this Section
7 shall continue to be effective or be reinstated, as the case may be, if at any
time any payment of any of the Senior Indebtedness is rescinded or must
otherwise be returned by any holder of Senior Indebtedness as a result of the
insolvency, bankruptcy or reorganization of the Borrower or any of its
Subsidiaries or otherwise, all as though such payment had not been made.

(k) Payments. A payment with respect to principal of or
interest on the Subordinated Indebtedness shall include, without limitation,
payment of principal of, and interest on this Note, any depositing of funds for
the defeasance of the Subordinated Indebtedness, any

10
<PAGE> 11
sinking fund and any payment on account of mandatory prepayment or optional
prepayment provisions.

(l) Section Not to Prevent Events of Default. The failure to
make a payment on account of principal of or interest on or other amounts
constituting Subordinated Indebtedness by reason of any provision of this
Section 7 shall not be construed as preventing the occurrence of an Event of
Default under Section 6.

(m) Subordination Not Impaired: Benefit of Subordination.
The Holder agrees and consents that without notice to or assent by such Holder,
and without affecting the liabilities and obligations of the Borrower and the
rights and benefits of the holders of the Senior Indebtedness set forth in this
Section 7:

(i) The obligations and liabilities of the Borrower and
any other party or parties for or upon the Senior Indebtedness may, from time to
time, be increased, renewed, refinanced, extended, modified, amended, restated,
compromised, supplemented, terminated, waived or released, except as prohibited
by Section 9.3 or 9.4 of the Purchase Agreement;

(ii) The holders of Senior Indebtedness, and any
representative or representatives acting on behalf thereof, may exercise or
refrain from exercising any right, remedy or power granted by or in connection
with any agreements relating to the Senior Indebtedness; and

(iii) Any balance or balances of funds with any holder
of Senior Indebtedness at any time outstanding to the credit of the Borrower
may, from time to time, in whole or in part, be surrendered or released;

all as the holders of the Senior Indebtedness, and any representative or
representatives acting on behalf thereof, may deem advisable, and all without
impairing, abridging, diminishing, releasing or affecting the subordination of
the Subordinated Indebtedness to the Senior Indebtedness provided for herein.

(n) Modification of Section 7. The provisions of this
Section 7 are for the benefit of the holders from time to time of Senior
Indebtedness and, so long as any Senior Indebtedness remains unpaid, may not be
modified, rescinded or canceled in whole or in part without the prior written
consent thereto of all holders of Senior Indebtedness.

(o) Covenants of Holder. Until all of the Senior
Indebtedness has been fully paid:

(i) The Holder shall not hereafter give any
subordination in respect of this Note.

(ii) Upon the occurrence and during the continuance of
a Senior Default, the Holder shall not release, exchange, extend the time of
payment of, compromise, set off

11
<PAGE> 12
or otherwise discharge any part of this Note or modify or amend this Note;
provided, however, that at such time or times as the actions referred to in this
Section 7(o)(ii) may be taken by the Holder, such Holder shall give the Lender
five Business Days prior written notice before taking any of such actions.

(iii) The Holder hereby undertakes and agrees for the
benefit of the holders of Senior Indebtedness that, upon the occurrence and
during the continuance of a Senior Default, it shall take any actions reasonably
requested by any holder of Senior Indebtedness to effectuate the full benefit of
the subordination contained herein.

(p) Covenant of the Borrower; Limitation on Senior
Indebtedness. Until all Subordinated Indebtedness shall have been paid in full,
the Borrower shall not, and shall not cause, suffer or permit any of its
Subsidiaries to, directly or indirectly, collectively and in the aggregate,
issue, assume or otherwise incur Senior Indebtedness in an aggregate principal
amount which is in excess of $15,000,000 or other Indebtedness in an aggregate
principal amount which is in excess of $5,000,000 provided, however, that Senior
Indebtedness may exceed an aggregate principal amount of $15,000,000 if the
ratio of total Indebtedness to total share capital (including retained earnings)
of the Company, as reflected on the Company's most recent balance sheet, is less
than 2.5 to 1.0; and provided, further that under no circumstances shall Senior
Indebtedness exceed $30,000,000.

(q) Miscellaneous.

(i) To the extent permitted by applicable law, the
Holder and the Borrower hereby waives (1) notice of acceptance hereof by the
holders of the Senior Indebtedness, and (2) all diligence in the collection or
protection of or realization upon the Senior Indebtedness.

(ii) The Borrower and the Holder hereby expressly agree
that the holders of Senior Indebtedness may enforce any and all rights derived
herein by suit, either in equity or law, for specific performance of any
agreement contained in this Section 7 or for judgment at law and any other
relief whatsoever appropriate to such action or procedure.

(iii) The Holder acknowledges and agrees that the
foregoing subordination provisions are, and are intended to be, an inducement
and a consideration to each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the issuance of this
Agreement, and each holder of Senior Indebtedness shall be deemed conclusively
to have relied upon such subordination provisions in acquiring and continuing to
hold such Senior Indebtedness.

8. Use of Proceeds. The Borrower shall use the principal from this
Note (a) for the payment of fees and expenses in connection with the
transactions contemplated in the Transaction Documents, and (b) for general
corporate purposes.

9. Suits for Enforcement.

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<PAGE> 13
(a) Subject to Section 7, upon the occurrence of any one or
more Events of Default, the Holder of this Note may proceed to protect and
enforce its rights hereunder by suit in equity, action at law or by other
appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in the Purchase Agreement or this Note or in aid of the
exercise of any power granted in the Purchase Agreement or this Note, or may
proceed to enforce the payment of this Note, or to enforce any other legal or
equitable right of the Holders of this Note.

(b) In case of any default under this Note, the Borrower
will pay to the Holder such amounts as shall be sufficient to cover the costs
and expenses of such Holder due to such default, as provided in Article 7 of the
Purchase Agreement.

10. Remedies Cumulative. No remedy herein conferred upon the Holder
is intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.

11. Remedies Not Waived. No course of dealing between the Borrower
and the Holder or any delay on the part of the Holder in exercising any rights
hereunder shall operate as a waiver of any right.

12. Transfer.

(a) The term "Holder" as used herein shall also include any
transferee of this Note whose name has been recorded by the Borrower in the Note
Register. Each transferee of this Note acknowledges that this Note has not been
registered under the Securities Act, and may be transferred only pursuant to an
effective registration under the Securities Act or pursuant to an applicable
exemption from the registration requirements of the Securities Act, subject to
the restrictions on transfer set forth in Section 11.3 of the Purchase
Agreement.

(b) The Borrower shall maintain a register (the "Note
Register") in its principal offices for the purpose of registering the Note and
any transfer thereof, which register shall reflect and identify, at all times,
the ownership of any interest in the Note. Upon the issuance of this Note, the
Borrower shall record the name of the initial purchaser of this Note in the Note
Register as the first Holder. Upon surrender for registration of transfer or
exchange of this Note at the principal offices of the Borrower, the Borrower
shall, at its expense, execute and deliver one or more new Notes of like tenor
and of denominations of at least $500,000 (except as may be necessary to reflect
any principal amount not evenly divisible by $500,000) of a like aggregate
principal amount, registered in the name of the Holder or a transferee or
transferees. Every Note surrendered for registration of transfer or exchange
shall be duly endorsed, or be accompanied by written instrument of transfer duly
executed by the Holder of such Note or such holder's attorney duly authorized in
writing.

13. Replacement of Note. On receipt by the Borrower of an affidavit
of an authorized representative of the Holder stating the circumstances of the
loss, theft, destruction or

13
<PAGE> 14
mutilation of this Note (and in the case of any such mutilation, on surrender
and cancellation of such Note), the Borrower, at its expense, will promptly
execute and deliver, in lieu thereof, a new Note of like tenor. If required by
the Borrower, such Holder must provide an indemnity bond or other indemnity
sufficient in the judgment of the Borrower to protect the Borrower from any loss
which it may suffer if a lost, stolen or destroyed Note is replaced.

14. Covenants Bind Successors and Assigns. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Borrower shall bind its successors and assigns, whether so expressed or not.

15. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.

16. Headings. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
------------------------------------
Name: Michael G. Lederman
Title: Chairman & CEO

<PAGE> 1
EXHIBIT 10.7

October 21, 1996

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THE SALE
OR OTHER TRANSFER OF THIS WARRANT IS ALSO SUBJECT TO THE RESTRICTIONS
ON TRANSFER SET FORTH IN SECTION 11.3 OF THE "PURCHASE AGREEMENT" (AS
HEREINAFTER DEFINED).

No. A-2 Warrant to Purchase 405,460
Shares of Common Stock

FULCRUM DIRECT, INC.

COMMON STOCK PURCHASE WARRANT

Void after October 21, 2006

FULCRUM DIRECT, INC. (the "Company"), a Delaware corporation, hereby
certifies that for value received, WHITNEY SUBORDINATED DEBT FUND, L.P., a
Delaware limited partnership, or assigns (the "Holder"), is entitled to
purchase, subject to the terms and conditions hereinafter set forth, an
aggregate of 405,460 fully paid and nonassessable shares of Common Stock (as
hereinafter defined) of the Company, at an exercise price of $.01 per share (the
"Purchase Price"), subject to adjustment as provided herein, at any time or from
time to time beginning on the date hereof and prior to 5:00 P.M., New York City
time, on October 21, 2006 (the "Expiration Date").

This Warrant is issued pursuant to the Securities Purchase Agreement
(the "Purchase Agreement"), dated as of the date hereof, among the Company,
Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P., and is
subject to the terms thereof. Capitalized terms used herein and not otherwise
defined shall have the meanings assigned such terms in the Purchase Agreement.
The Holder is entitled to the rights and subject to the obligations contained in
the Purchase Agreement and the Stockholders Agreement relating to this Warrant
and the shares of Common Stock issuable upon exercise of this Warrant.

1. Definitions. For the purposes of this Warrant, the following terms
shall have the meanings indicated:
<PAGE> 2
"Applicable Price" shall mean the higher of (a) the Current
Market Price per share of Common Stock on the applicable record or other
relevant date and (b) the Dilution Price.

"Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law or executive order to close.

"Change of Control" means (i) any transaction or series of
transactions in which any Person (as such term is defined in Section 13(d)(3) of
the Exchange Act) or group, other than Lederman and/or Budoff, becomes the
direct or indirect beneficial owner (as such term is defined in Rule 13d-3 as
promulgated under the Exchange Act) of more of the then outstanding Common Stock
than that beneficially owned in the aggregate by Lederman and Budoff, (ii) any
transaction or series of transactions in which Lederman and Budoff together
cease to be the direct or indirect beneficial owners of at least 25% of the then
outstanding Common Stock, (iii) the sale of all or substantially all of the
Borrower's assets, (iv) the liquidation of the Borrower, (v) the election of a
majority of the Board of Directors who were not placed in nomination for that
office by the Board of Directors, or (vi) the combination of Borrower with
another company, as a result of which the shareholders of Borrower hold less
than 50.01% of the total of all voting shares outstanding or Borrower's
directors constitute less than a majority of the Board of Directors of the
combined entity.

"Cancellation Portion" has the meaning ascribed to such term
in Subsection 2(b).

"Closing Price" shall mean, with respect to each share of
Common Stock for any day, (a) the last reported sale price regular way or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices regular way, in either case as reported on the principal national
securities exchange on which the Common Stock is listed or admitted for trading
or (b) if the Common Stock is not listed or admitted for trading on any national
securities exchange, the last reported sale price or, in case no such sale takes
place on such day, the average of the highest reported bid and the lowest
reported asked quotation for the Common Stock, in either case as reported on the
NASDAQ or a similar service if NASDAQ is no longer reporting such information.

"Common Stock" means the common stock, par value $.01 per
share, of the Company, and any class of stock resulting from successive changes
or reclassification of such Common Stock.

"Company" has the meaning ascribed to such term in the first
paragraph of this Warrant.

"Current Market Price" shall be determined in accordance with
Subsection 3(e).

"Dilution Price" shall mean, with respect to each share of
Common Stock, $4.82, subject to appropriate adjustment for events described in
Subsection 3(a).

"Exercise Date" has the meaning ascribed to such term in
Subsection 2(d).

2
<PAGE> 3
"Expiration Date" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Holder" has the meaning ascribed to such term in the first
paragraph of this Warrant.

"NASDAQ" shall mean the Automatic Quotation System of the
National Association of Securities Dealers, Inc.

"Net Cash Proceeds" means (X) the cash proceeds received by
the Borrower or any of its Subsidiaries from an Initial Public Offering minus
(Y) reasonable brokerage commissions or underwriting fees and other reasonable
fees and expenses (including, without limitation, reasonable fees, charges and
disbursements of counsel and accountants and reasonable fees and expenses of
investment bankers) relating to an Initial Public Offering.

"Note" shall mean the Senior Subordinated Promissory Note,
dated the date hereof, in the principal amount of $10,000,000, with the Company
as the maker thereof, and the Holder as the payee thereof.

"Person" shall mean any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision thereof)
or other entity of any kind, and shall include any successor (by merger or
otherwise) of such entity.

"Purchase Agreement" has the meaning ascribed to such term in
the second paragraph of this Warrant.

"Purchase Price" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Stockholders Agreement" means the Stockholders Agreement
substantially in the form attached to the Purchase Agreement as Exhibit D.

"Subsidiary" shall mean, with respect to any Person, a
corporation or other entity of which 50% or more of the voting power of the
voting equity securities or equity interests is owned, directly or indirectly,
by such Person.

"Warrant" shall mean this Warrant and any subsequent Warrant
issued pursuant to Subsection 2(c).

3
<PAGE> 4
"Warrant Register" has the meaning ascribed to such term in
Subsection 10(d).

2. Exercise of Warrant.

(a) Exercise. This Warrant may be exercised, in whole or in
part, at any time or from time to time during the period beginning on the
earliest to occur of (i) two years from the date hereof, (ii) consummation of an
Initial Public Offering, (iii) a Change of Control, and (iv) the Holder
receiving an "Outside Sale Notice" (as such term is defined in subsection 3(c)
of the Stockholders Agreement) to the extent such Holder has the right to
participate in the sale of Shares (as such term is defined in Section 1 of the
Stockholders Agreement), and ending on the Expiration Date, by surrendering to
the Company at its principal office this Warrant, with the form of Election to
Purchase Shares (the "Election to Purchase Shares") attached hereto as Exhibit A
duly executed by the Holder and accompanied by payment of the Purchase Price for
the number of shares of Common Stock specified in such form.

(b) Delivery of Shares; Payment of Purchase Price. As soon as
practicable after surrender of this Warrant and receipt of payment, the Company
shall promptly issue and deliver to the Holder a certificate or certificates for
the number of shares of Common Stock set forth in the Election to Purchase
Shares, in such name or names as may be designated by such Holder, along with a
check for the amount of cash to be paid in lieu of issuance of fractional
shares, if any. Payment of the Purchase Price may be made as follows (or by any
combination of the following): (i) in United States currency by cash or delivery
of a certified check, bank draft or postal or express money order payable to the
order of the Company, (ii) by assigning to the Company all or any part of the
unpaid principal amount of the Note held by the Holder in a principal amount
equal to the Purchase Price, (iii) by surrender of a number of shares of Common
Stock held by the Holder equal to the quotient obtained by dividing (A) the
Purchase Price payable with respect to the portion of this Warrant then being
exercised by (B) the Current Market Price per share of Common Stock on the
Exercise Date, or (iv) by cancellation of any portion of this Warrant (the
"Cancellation Portion") with respect to the number of shares of Common Stock
equal to the quotient obtained by dividing (A) the sum of the Purchase Price
payable with respect to the portion of this Warrant then being exercised by
cancellation of the Cancellation Portion and the Purchase Price that would be
payable with respect to the Cancellation Portion if such portion was being
exercised rather than canceled by (B) the Current Market Price per share of
Common Stock on the Exercise Date.

(c) Partial Exercise. If this Warrant is exercised for less
than all of the shares of Common Stock purchasable under this Warrant, the
Company shall cancel this Warrant upon surrender hereof and shall execute and
deliver to the Holder a new Warrant of like tenor for the balance of the shares
of Common Stock purchasable hereunder.

4
<PAGE> 5
Stock shall be issuable upon such exercise, as provided in Subsection 2(b),
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.

(e) Continued Validity. A Holder of shares of Common Stock
issued upon the exercise of this Warrant, in whole or in part, shall continue to
be entitled to all of the rights and subject to all of the obligations set forth
in Section 10.

3. Adjustment of Purchase Price and Number of Shares. The Purchase
Price and the number of shares of Common Stock issuable upon exercise of this
Warrant shall be adjusted from time to time upon the occurrence of the following
events:

(a) Dividend, Subdivision, Combination or Reclassification of
Common Stock. If the Company shall, at any time or from time to time, (i)
declare a dividend on the Common Stock payable in shares of its capital stock
(including Common Stock), (ii) subdivide the outstanding Common Stock into a
larger number of shares of Common Stock, (iii) combine the outstanding Common
Stock into a smaller number of shares of its Common Stock, or (iv) issue any
shares of its capital stock in a reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then in each such case, the Purchase
Price in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date shall be
proportionately adjusted so that the Holder of any Warrant exercised after such
date shall be entitled to receive, upon payment of the same aggregate amount as
would have been payable before such date, the aggregate number and kind of
shares of capital stock which, if such Warrant had been exercised immediately
prior to such date, such Holder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. Any such adjustment shall become effective immediately after
the record date of such dividend or the effective date of such subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur. If a dividend is declared and such
dividend is not paid, the Purchase Price shall again be adjusted to be the
Purchase Price in effect immediately prior to such record date.

(b) Issuance of Rights to Purchase Common Stock Below Current
Market Price or Dilution Price. If the Company shall, at any time or from time
to time, fix a record date for the issuance of rights, options or warrants to
all holders of Common Stock entitling them (for a period expiring within 45
calendar days after such record date) to subscribe for or purchase Common Stock,
or securities convertible into Common Stock at a price per share of Common Stock
or having a conversion price per share of Common Stock if a security is
convertible into Common Stock (determined in either such case by dividing (x)
the total consideration payable to the Company upon exercise, conversion or
exchange of such rights, options, warrants or other securities convertible into
Common Stock by (y) the total number of shares of Common Stock covered by such
rights, options, warrants or other securities convertible into Common Stock)
lower than either the Current Market Price per share of Common Stock on such
record date (or, if an ex-dividend date has been established for such record
date, on the day next preceding such ex-dividend date) or the Dilution Price,
then, the Purchase Price shall be reduced to the price determined by multiplying
the Purchase

5
<PAGE> 6
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock so to be offered (or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at the Applicable Price
and the denominator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such price for
subscription or purchase may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration shall be
determined in good faith by the Board of Directors of the Company. Any such
adjustment shall become effective immediately after the record date for such
rights or warrants. Such adjustment shall be made successively whenever such a
record date is fixed. If such rights, options or warrants are not so issued, the
Purchase Price shall be adjusted to the Purchase Price in effect immediately
prior to such record date.

(c) Certain Distributions. If the Company shall, at any time
or from time to time, fix a record date for the distribution to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing corporation) of
evidences of indebtedness, assets or other property (other than regularly
scheduled cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in capital stock for which
adjustment is made under Subsection 3(a)) or subscription rights, options or
warrants (excluding those referred to in Subsection 3(b)), then the Purchase
Price shall be reduced to the price determined by multiplying the Purchase Price
in effect immediately prior to such record date by a fraction (which shall in no
event be less than zero), the numerator of which shall be the Current Market
Price per share of Common Stock on such record date (or, if an ex-dividend date
has been established for such record date, on the next day preceding such
ex-dividend date), less the fair market value (as determined in good faith by
the Board of Directors of the Company) of the portion of the assets, evidences
of indebtedness, other property, subscription rights or warrants so to be
distributed applicable to one share of Common Stock and the denominator of which
shall be such Current Market Price per share of Common Stock. Any such
adjustment shall become effective immediately after the record date for such
distribution. Such adjustments shall be made successively whenever such a record
date is fixed. In the event that such distribution is not so made, the Purchase
Price shall be adjusted to the Purchase Price in effect immediately prior to
such record date.

(d) Issuance of Common Stock Below Current Market Price or
Dilution Price. If the Company shall, at any time and from time to time, after
the date hereof, directly or indirectly, sell or issue shares of Common Stock
(regardless of whether originally issued or from the Company's treasury), or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock (excluding shares
issued (i) in any of the transactions described in Subsections 3(a), (b) and (c)
hereof, (ii) upon exercise of this Warrant, (iii) upon the exercise or
conversion of options, warrants or any other securities convertible into or
exchangeable for shares of Common Stock outstanding as of the date hereof, and
(iv) to the Company's or its Subsidiaries' employees under bona fide employee
benefit plans approved

6
<PAGE> 7
or adopted by the Company's Board of Directors which, in the aggregate, shall
not be convertible or exercisable into more than five percent (5%) of the fully
diluted capital stock of the Company (and provided that the same shall be
exercisable at the then Current Market Price), and (v) in any arm's length
institutional financing of debt and equity to persons other than Budoff,
Lederman or their Affiliates in which shares of Common Stock or rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock are issued as part of a unit,
if such shares would otherwise be included in this Section 3(d)) at a price per
share of Common Stock (determined, in the case of rights, options, warrants or
convertible or exchangeable securities, by dividing (x) the total consideration
received or receivable by the Company in consideration of the sale or issuance
of such rights, options, warrants or convertible or exchangeable securities,
plus the total consideration payable to the Company upon exercise or conversion
or exchange thereof, by (y) the total number of shares of Common Stock covered
by such rights, options, warrants or convertible or exchangeable securities)
lower than either the Current Market Price per share of Common Stock or the
Dilution Price immediately prior to such sale or issuance, then the Purchase
Price shall be reduced to a price determined by multiplying the Purchase Price
in effect immediately prior thereto by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding immediately prior
to such sale or issuance plus the number of shares of Common Stock which the
aggregate consideration received (determined as provided below) for such sale or
issuance would purchase at the Applicable Price and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such sale or issuance. Such adjustment shall be made successively whenever
such sale or issuance is made. For the purposes of such adjustments, the shares
of Common Stock which the holder of any such rights, options, warrants, or
convertible or exchangeable securities shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of such
sale or issuance and the consideration "received" by the Company therefor shall
be deemed to be the consideration actually received or receivable by the Company
(plus any underwriting discounts or commissions in connection therewith) for
such rights, options, warrants or convertible or exchangeable securities, plus
the consideration stated in such rights, options, warrants or convertible or
exchangeable securities to be payable to the Company for the shares of Common
Stock covered thereby. If the Company shall sell or issue shares of Common Stock
for a consideration consisting, in whole or in part, of property other than cash
or its equivalent, then in determining the "price per share of Common Stock" and
the "consideration" received or receivable by or payable to the Company for
purposes of the first sentence and the immediately preceding sentence of this
Subsection 3(d), the fair value of such property shall be determined in good
faith by the Board of Directors of the Company. The determination of whether any
adjustment is required under this Subsection 3(d) by reason of the sale and
issuance of rights, options, warrants or convertible or exchangeable securities
and the amount of such adjustment, if any, shall be made only at the time of
such issuance or sale and not at the subsequent time of issuance of shares of
Common Stock upon the exercise of such rights to subscribe or purchase.

7
<PAGE> 8
trading days before such date. If on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, then the Company, on the one hand, and
WSDF on the other hand, shall each promptly appoint as an appraiser an
individual who shall be a member of a nationally recognized investment banking
firm. Each appraiser shall be instructed to, within 30 days of appointment,
determine the Current Market Price per share of Common Stock which shall be
deemed to be equal to the fair market value per share of Common Stock as of such
date. If the two appraisers are unable to agree on the Current Market Price per
share of Common Stock within such 30 day period, then the two appraisers, within
10 days after the end of such 30 day period shall jointly select a third
appraiser. The third appraiser shall, within 30 days of its appointment,
determine, in good faith, the Current Market Price per share of Common Stock and
such determination shall be controlling. If any party fails to appoint an
appraiser or if one of the two initial appraisers fails after appointment to
submit its appraisal within the required period, the appraisal submitted by the
remaining appraiser shall be controlling. The cost of the foregoing appraisals
shall be shared one-half by the Company and one-half by WSDF, provided, however,
in the event a third appraiser is utilized and one of the two initial appraisals
(but not the other initial appraisal) is greater than or less than the appraisal
by such third appraiser by 10% or more, then the cost of all of the foregoing
appraisals shall be borne by the party who appointed the appraiser who made such
initial appraisal.

(f) De Minimis Adjustments. No adjustment in the Purchase
Price shall be made if the amount of such adjustment would result in a change in
the Purchase Price per share of less than $0.05, but in such case any adjustment
that would otherwise be required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment, which
together with any adjustment so carried forward, would result in a change in the
Purchase Price of $0.05 per share or more. If the Company shall, at any time or
from time to time, issue Common Stock by way of dividends on any stock of the
Company or subdivide or combine the outstanding shares of the Common Stock, such
amount of $0.05 (as theretofore increased or decreased, if such amounts shall
have been adjusted in accordance with the provisions of this clause) shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or stock dividend so as appropriately to reflect
the same. Notwithstanding the provisions of the first sentence of this
Subsection 3(f), any adjustment postponed pursuant to this Subsection 3(f) shall
be made no later than the earlier of (i) three years from the date of the
transaction that would, but for the provisions of the first sentence of this
Section 3(f), have required such adjustment, (ii) an Exercise Date or (iii) the
Expiration Date.

(g) Adjustments to Other Shares. In the event that at any
time, as a result of an adjustment made pursuant to Subsection 3(a), the Holder
shall become entitled to receive, upon exercise of this Warrant, any shares of
capital stock of the Company other than shares of Common Stock, the number of
such other shares so receivable upon exercise of this Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in Subsections 3(a), (b), (c) and (d), inclusive, and the provisions
of Sections 2, 5, 6 and 7 with respect to the shares of Common Stock shall apply
on like terms to any such other shares.

8
<PAGE> 9
(h) Adjustment of Number of Shares Issuable Upon Exercise.
Upon each adjustment of the Purchase Price as a result of the calculations made
in Subsections 3(a), (b), (c) or (d), this Warrant shall thereafter evidence the
right to receive, at the adjusted Purchase Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth) obtained by dividing (x)
the product of the aggregate number of shares of Common Stock covered by this
Warrant immediately prior to such adjustment and the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price by (y) the Purchase
Price in effect immediately after such adjustment of the Purchase Price.

4. Reorganization, Reclassification, Merger and Sale of Assets. If
there occurs any capital reorganization or any reclassification of the Common
Stock of the Company, the consolidation or merger of the Company with or into
another Person (other than a merger or consolidation of the Company in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of its Common Stock) or the
sale or conveyance of all or substantially all of the assets of the Company to
another Person, then the Holder will thereafter be entitled to receive, upon the
exercise of this Warrant in accordance with the terms hereof, the same kind and
amounts of securities (including shares of stock) or other assets, or both,
which were issuable or distributable to the holders of outstanding Common Stock
of the Company upon such reorganization, reclassification, consolidation,
merger, sale or conveyance, in respect of that number of shares of Common Stock
then deliverable upon the exercise of this Warrant if this Warrant had been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or conveyance; and, in any such case, appropriate
adjustments (as determined in good faith by the Board of Directors of the
Company) shall be made to assure that the provisions hereof (including
provisions with respect to changes in, and other adjustments of, the Purchase
Price) shall thereafter be applicable, as nearly as reasonably may be
practicable, in relation to any securities or other assets thereafter
deliverable upon exercise of this Warrant.

5. Certificate as to Adjustments. Whenever the Purchase Price and the
number of shares of Common Stock issuable, or the securities or other property
deliverable, upon the exercise of this Warrant shall be adjusted pursuant to the
provisions hereof, the Company shall promptly give written notice thereof to the
Holder, in accordance with Section 14, in the form of a certificate signed by
the Chairman of the Board, President or one of the Vice Presidents of the
Company, and by the Chief Financial Officer, Treasurer or one of the Assistant
Treasurers of the Company, stating the adjusted Purchase Price, the number of
shares of Common Stock issuable, or the securities or other property
deliverable, upon exercise of the Warrant calculated to the nearest cent or the
nearest one-hundredth of a share and setting forth in reasonable detail the
method of calculation and the facts requiring such adjustment and upon which
such calculation is based. Each adjustment shall remain in effect until a
subsequent adjustment is required.

9
<PAGE> 10
may make payment to the Holder, at the time of exercise of this Warrant as
herein provided, of an amount in cash equal to such fraction multiplied by the
greater of the Current Market Price of a share of Common Stock on the Exercise
Date and the Dilution Price.

7. Notice of Proposed Actions. In case the Company shall propose at any
time or from time to time (a) to declare or pay any dividend payable in stock of
any class to the holders of Common Stock or to make any other distribution to
the holders of Common Stock (other than a regularly scheduled cash dividend),
(b) to offer to the holders of Common Stock rights or warrants to subscribe for
or to purchase any additional shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) to effect any
reclassification of its Common Stock, (d) to effect any consolidation, merger or
sale, transfer or other disposition of all or substantially all of the property,
assets or business of the Company which would, if consummated, adjust the
Purchase Price or the securities issuable upon exercise of the Warrants, (e) to
effect the liquidation, dissolution or winding up of the Company, or (f) to take
any other action that would require a vote of the Company's stockholders, then,
in each such case, the Company shall give to the Holder, in accordance with
Section 14, a written notice of such proposed action, which shall specify (i)
the record date for the purposes of such stock dividend, distribution of rights
or warrants or vote of the stockholders of the Company, or if a record is not to
be taken, the date as of which the holders of shares of Common Stock of record
to be entitled to such dividend, distribution of rights or warrants, or vote is
to be determined, or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, disposition, liquidation, dissolution or
winding up is expected to become effective, and such notice shall be so given as
promptly as possible but in any event at least ten (10) Business Days prior to
the applicable record, determination or effective date specified in such notice.

8. No Dilution or Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on the exercise of this Warrant above the amount payable therefor on
such exercise, (b) will at all times reserve and keep available the maximum
number of its authorized shares of Common Stock, free from all preemptive rights
therein, which will be sufficient to permit the full exercise of this Warrant,
and (c) will take all such action as may be necessary or appropriate in order
that all shares of Common Stock as may be issued pursuant to the exercise of
this Warrant will, upon issuance, be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.

9. Replacement of Warrants. On receipt by the Company of an affidavit
of an authorized representative of the Holder stating the circumstances of the
loss, theft, destruction or mutilation of this Warrant (and in the case of any
such mutilation, on surrender and cancellation of such Warrant), the Company at
its expense will promptly execute and deliver, in lieu thereof, a new Warrant of
like tenor.

10
<PAGE> 11
10. Restrictions on Transfer.

(a) The term "Holder" as used herein shall also include any
transferee of this Warrant whose name has been recorded by the Company in the
Warrant Register (as hereinafter defined). Each transferee of this Warrant or
the Common Stock issuable upon the exercise thereof acknowledges that this
Warrant or the Common Stock issuable upon the exercise thereof has not been
registered under the Securities Act and may be transferred only pursuant to an
effective registration under the Securities Act or pursuant to an applicable
exemption from the registration requirements of the Securities Act, subject to
the restrictions on transfer set forth in this Section 10 and in Section 11.3 of
the Purchase Agreement.

(b) With respect to a transfer that should occur prior to the
time that the Warrant or the Common Stock issuable upon the exercise thereof is
registered under the Securities Act, such Holder shall request an opinion of
counsel (which shall be rendered by counsel reasonably acceptable to the
Company) that the proposed transfer may be effected without registration or
qualification under any Federal or state securities or blue sky law. Counsel
shall, as promptly as practicable, notify the Company and the Holder of such
opinion and of the terms and conditions, if any, to be observed in such
transfer, whereupon the Holder shall be entitled to transfer this Warrant or
such shares of Common Stock (or portion thereof), subject to any other
provisions and limitations of this Warrant. In the event this Warrant shall be
exercised as an incident to such transfer, such exercise shall relate back and
for all purposes of this Warrant be deemed to have occurred as of the date of
such notice regardless of delays incurred by reason of the provisions of this
Section 10 which may result in the actual exercise on any later date.

(c) The Company shall maintain a register (the "Warrant
Register") in its principal office for the purpose of registering the Warrant
and any transfer thereof, which register shall reflect and identify, at all
times, the ownership of any interest in the Warrant. Upon the issuance of this
Warrant, the Company shall record the name of the initial purchaser of this
Warrant in the Warrant Register as the first Holder. Upon surrender for
registration of transfer or exchange of this Warrant together with a properly
executed Form of Assignment attached hereto as Exhibit B at the principal office
of the Company, the Company shall, at its expense, execute and deliver one or
more new Warrants of like tenor which shall be exercisable for a like aggregate
number of shares of Common Stock, registered in the name of the Holder or a
transferee or transferees.

11. No Rights or Liability as a Stockholder. This Warrant does not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provisions hereof, in the absence of affirmative action by
the Holder hereof to purchase Common Stock, and no enumeration herein of the
rights or privileges of the Holder shall give rise to any liability of such
Holder as a stockholder of the Company.

12. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder hereof for any issue

11
<PAGE> 12
or transfer tax, or other incidental expense, in respect of the issuance or
delivery of such certificates or the securities represented thereby, all of
which taxes and expenses shall be paid by the Company.

13. Amendment or Waiver. This Warrant and any term hereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the Holder.

14. Notices. Any notice or other communication (or delivery) required
or permitted hereunder shall be made in writing and shall be by registered mail,
return receipt requested, telecopier, courier service or personal delivery to
the Company at its principal office as specified in Section 11.2 of the Purchase
Agreement and to the Holder at its address as it appears in the Warrant
Register. All such notices and communications (and deliveries) shall be deemed
to have been duly given: when delivered by hand, if personally delivered; when
delivered by courier, if delivered by commercial overnight courier service; five
Business Days after being deposited in the mail, postage prepaid, if mailed; and
when receipt is acknowledged, if telecopied.

15. Certain Remedies. The Holder shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Warrant and to enforce
specifically the terms and provisions of this Warrant in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which such Holder may be entitled at law or in equity.

16. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the state of New York, without regard to the
principles of conflicts of law of such State.

17. Headings. The headings in this Warrant are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
------------------------------
Name: Michael G. Lederman
Title: Chairman & CEO

12
<PAGE> 13
Exhibit A to Common
Stock Purchase Warrant

[FORM OF]
ELECTION TO PURCHASE SHARES

The undersigned hereby irrevocably elects to exercise the
Warrant to purchase _____ shares of Common Stock, par value $____ per share
("Common Stock"), of FULCRUM DIRECT, INC. (the "Company") and hereby [makes
payment of $_______ therefor] [or] [makes payment therefor by assignment to the
Company pursuant to Section 2(b)(ii) of the Warrant of $_____________ aggregate
principal amount of Note (as defined in the Warrant)] [or] [makes payment
therefore by surrendering pursuant to Section 2(b)(iii) _____ shares of Common
Stock of the Company] [or] [makes payment therefor by cancellation pursuant to
Section 2(b)(iv) of a portion of the Warrant with respect to _________ shares of
Common Stock]. The undersigned hereby requests that certificates for such shares
be issued and delivered as follows:

ISSUE TO: ______________________________________________________________________
(NAME)

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)

DELIVER TO: ____________________________________________________________________
(NAME)

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

If the number of shares of Common Stock purchased hereby is
less than the number of shares of Common Stock covered by the Warrant, the
undersigned requests that a new Warrant representing the number of shares of
Common Stock not purchased be issued and delivered as follows:

ISSUE TO: ______________________________________________________________________
(NAME OF HOLDER(1))

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

DELIVER TO: ____________________________________________________________________
(NAME OF HOLDER1)

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

Dated: ________________________ [NAME OF HOLDER(1)]

By: ______________________________
Name:
Title:

- ---------

(1) Name of Holder must conform in all respects to name of Holder as specified
on the face of the Warrant.

13
<PAGE> 14
Exhibit B to Common
Stock Purchase Warrant

[FORM OF] ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned to
purchase Common Stock, par value $___ per share ("Common Stock"), of FULCRUM
DIRECT, INC. represented by the Warrant, with respect to the number of shares of
Common Stock set forth below:

<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
<S> <C> <C>
</TABLE>

and does hereby irrevocably constitute and appoint ____________________________
Attorney to make such transfer on the books of FULCRUM DIRECT, INC. maintained
for that purpose, with full power of substitution in the premises.

Dated: ________________________ [NAME OF HOLDER(1)]

By: ______________________________
Name:
Title:

- ----------

(1) Name of Holder must conform in all respects to name of Holder as specified
on the face of the Warrant.

<PAGE> 1
EXHIBIT 10.8

October 21, 1996

No. A-3 Warrant to Purchase 121,350
Shares of Common Stock

FULCRUM DIRECT, INC.

COMMON STOCK PURCHASE WARRANT

Void after October 21, 2006

FULCRUM DIRECT, INC. (the "Company"), a Delaware corporation, hereby
certifies that for value received, WHITNEY EQUITY PARTNERS, L.P., a Delaware
limited partnership, or assigns (the "Holder"), is entitled to purchase, subject
to the terms and conditions hereinafter set forth, an aggregate of 121,350 fully
paid and nonassessable shares of Common Stock (as hereinafter defined) of the
Company, at an exercise price of $8.24 per share (the "Purchase Price"), subject
to adjustment as provided herein, at any time or from time to time beginning on
the date hereof and prior to 5:00 P.M., New York City time, on October 21, 2006
(the "Expiration Date").

"Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law or executive order to close.

"Cancellation Portion" has the meaning ascribed to such term
in Subsection 2(b).

"Common Stock" means the common stock, par value $.01 per
share, of the Company, and any class of stock resulting from successive changes
or reclassification of such Common Stock.

"Company" has the meaning ascribed to such term in the first
paragraph of this Warrant.

"Current Market Price" shall be determined in accordance with
Subsection 3(e).

"Dilution Price" shall mean, with respect to each share of
Common Stock, $8.24, subject to appropriate adjustment for events described in
Subsection 3(a).

"Exercise Date" has the meaning ascribed to such term in
Subsection 2(d).

"Expiration Date" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Holder" has the meaning ascribed to such term in the first
paragraph of this Warrant.

"NASDAQ" shall mean the Automatic Quotation System of the
National Association of Securities Dealers, Inc.

2
<PAGE> 3
"Purchase Agreement" has the meaning ascribed to such term in
the second paragraph of this Warrant.

"Purchase Price" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Stockholders Agreement" means the Stockholders Agreement
substantially in the form attached to the Purchase Agreement as Exhibit D.

"Warrant" shall mean this Warrant and any subsequent Warrant
issued pursuant to Subsection 2(c).

"Warrant Register" has the meaning ascribed to such term in
Subsection 10(d).

2. Exercise of Warrant.

(a) Exercise. This Warrant may be exercised, in whole or in
part, at any time or from time to time during the period beginning on the date
hereof and ending on the Expiration Date, by surrendering to the Company at its
principal office this Warrant, with the form of Election to Purchase Shares (the
"Election to Purchase Shares") attached hereto as Exhibit A duly executed by the
Holder and accompanied by payment of the Purchase Price for the number of shares
of Common Stock specified in such form.

(b) Delivery of Shares; Payment of Purchase Price. As soon as
practicable after surrender of this Warrant and receipt of payment, the Company
shall promptly issue and deliver to the Holder a certificate or certificates for
the number of shares of Common Stock set forth in the Election to Purchase
Shares, in such name or names as may be designated by such Holder, along with a
check for the amount of cash to be paid in lieu of issuance of fractional
shares, if any. Payment of the Purchase Price may be made as follows (or by any
combination of the following): (i) in United States currency by cash or delivery
of a certified check, bank draft or postal or express money order payable to the
order of the Company, (ii) by surrender of a number of shares of Common Stock
held by the Holder equal to the quotient obtained by dividing (A) the Purchase
Price payable with respect to the portion of this Warrant then being exercised
by (B) the Current Market Price per share of Common Stock on the Exercise Date,
or (iii) by cancellation of any portion of this Warrant (the "Cancellation
Portion") with respect to the number of shares of Common Stock equal to the
quotient obtained by dividing (A) the sum of the Purchase Price payable with
respect to the portion of this Warrant then being exercised by cancellation of
the Cancellation Portion and the Purchase Price that would be payable with
respect to the Cancellation Portion if such portion was being exercised rather
than canceled by (B) the Current Market Price per share of Common Stock on the
Exercise Date.

3
<PAGE> 4
(c) Partial Exercise. If this Warrant is exercised for less
than all of the shares of Common Stock purchasable under this Warrant, the
Company shall cancel this Warrant upon surrender hereof and shall execute and
deliver to the Holder a new Warrant of like tenor for the balance of the shares
of Common Stock purchasable hereunder.

(d) When Exercise Effective. The exercise of this Warrant
shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is surrendered to and the
Purchase Price is received by the Company as provided in this Section 2 (the
"Exercise Date") and the Person in whose name any certificate for shares of
Common Stock shall be issuable upon such exercise, as provided in Subsection
2(b), shall be deemed to be the record holder of such shares of Common Stock for
all purposes on the Exercise Date.

4
<PAGE> 5
or securities convertible into Common Stock at a price per share of Common Stock
or having a conversion price per share of Common Stock if a security is
convertible into Common Stock (determined in either such case by dividing (x)
the total consideration payable to the Company upon exercise, conversion or
exchange of such rights, options, warrants or other securities convertible into
Common Stock by (y) the total number of shares of Common Stock covered by such
rights, options, warrants or other securities convertible into Common Stock)
lower than either the Current Market Price per share of Common Stock on such
record date (or, if an ex-dividend date has been established for such record
date, on the day next preceding such ex-dividend date) or the Dilution Price,
then, the Purchase Price shall be reduced to the price determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock which the aggregate offering price of the total number of
shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at the
Applicable Price and the denominator of which shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). In case
such price for subscription or purchase may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be determined in good faith by the Board of Directors of the Company. Any
such adjustment shall become effective immediately after the record date for
such rights or warrants. Such adjustment shall be made successively whenever
such a record date is fixed. If such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to the Purchase Price in effect
immediately prior to such record date.

5
<PAGE> 6
(d) Issuance of Common Stock Below Current Market Price or
Dilution Price. If the Company shall, at any time and from time to time, after
the date hereof, directly or indirectly, sell or issue shares of Common Stock
(regardless of whether originally issued or from the Company's treasury), or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock (excluding shares
issued (i) in any of the transactions described in Subsections 3(a), (b) and (c)
hereof, (ii) upon exercise of this Warrant, (iii) upon the exercise or
conversion of options, warrants or any other securities convertible into or
exchangeable for shares of Common Stock outstanding as of the date hereof, (iv)
to the Company's or its Subsidiaries' employees under bona fide employee benefit
plans approved or adopted by the Company's Board of Directors which, in the
aggregate, shall not be convertible or exercisable into more than five percent
(5%) of the fully diluted capital stock of the Company (and provided that the
same shall be exercisable at the then Current Market Price), and (v) in any
arm's length institutional financing of debt and equity to persons other than
Budoff, Lederman or their Affiliates in which shares of Common Stock or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase shares of Common Stock are issued as part of a
unit, if such shares would otherwise be included in this Section 3(d)) at a
price per share of Common Stock (determined, in the case of rights, options,
warrants or convertible or exchangeable securities, by dividing (x) the total
consideration received or receivable by the Company in consideration of the sale
or issuance of such rights, options, warrants or convertible or exchangeable
securities, plus the total consideration payable to the Company upon exercise or
conversion or exchange thereof, by (y) the total number of shares of Common
Stock covered by such rights, options, warrants or convertible or exchangeable
securities) lower than either the Current Market Price per share of Common Stock
or the Dilution Price immediately prior to such sale or issuance, then the
Purchase Price shall be reduced to a price determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such sale or issuance plus the number of shares of Common
Stock which the aggregate consideration received (determined as provided below)
for such sale or issuance would purchase at the Applicable Price and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale or issuance. Such adjustment shall be
made successively whenever such sale or issuance is made. For the purposes of
such adjustments, the shares of Common Stock which the holder of any such
rights, options, warrants, or convertible or exchangeable securities shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale or issuance and the consideration
"received" by the Company therefor shall be deemed to be the consideration
actually received or receivable by the Company (plus any underwriting discounts
or commissions in connection therewith) for such rights, options, warrants or
convertible or exchangeable securities, plus the consideration stated in such
rights, options, warrants or convertible or exchangeable securities to be
payable to the Company for the shares of Common Stock covered thereby. If the
Company shall sell or issue shares of Common Stock for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then in determining the "price per share of Common Stock" and the
"consideration" received or receivable by or payable to the Company for purposes
of the first sentence and the immediately preceding sentence of this Subsection
3(d), the fair value of such property shall be determined in good faith by the
Board of Directors of the Company. The determination of whether any adjustment
is required

6
<PAGE> 7
under this Subsection 3(d) by reason of the sale and issuance of rights,
options, warrants or convertible or exchangeable securities and the amount of
such adjustment, if any, shall be made only at the time of such issuance or sale
and not at the subsequent time of issuance of shares of Common Stock upon the
exercise of such rights to subscribe or purchase.

(e) Determination of Current Market Price. For the purpose of
any computation under Subsections (b), (c) or (d) of this Section 3 or any other
provision of this Warrant, the Current Market Price per share of Common Stock on
any date shall be deemed to be the average of the daily Closing Prices per share
of Common Stock for the 10 consecutive trading days commencing 15 trading days
before such date. If on any such date the shares of Common Stock are not listed
or admitted for trading on any national securities exchange or quoted by NASDAQ
or a similar service, then the Company, on the one hand, and WEP on the other
hand, shall each promptly appoint as an appraiser an individual who shall be a
member of a nationally recognized investment banking firm. Each appraiser shall
be instructed to, within 30 days of appointment, determine the Current Market
Price per share of Common Stock which shall be deemed to be equal to the fair
market value per share of Common Stock as of such date. If the two appraisers
are unable to agree on the Current Market Price per share of Common Stock within
such 30 day period, then the two appraisers, within 10 days after the end of
such 30 day period shall jointly select a third appraiser. The third appraiser
shall, within 30 days of its appointment, determine, in good faith, the Current
Market Price per share of Common Stock and such determination shall be
controlling. If any party fails to appoint an appraiser or if one of the two
initial appraisers fails after appointment to submit its appraisal within the
required period, the appraisal submitted by the remaining appraiser shall be
controlling. The cost of the foregoing appraisals shall be shared one-half by
the Company and one-half by WEP, provided, however, in the event a third
appraiser is utilized and one of the two initial appraisals (but not the other
initial appraisal) is greater than or less than the appraisal by such third
appraiser by 10% or more, then the cost of all of the foregoing appraisals shall
be borne by the party who appointed the appraiser who made such initial
appraisal.

(f) De Minimis Adjustments. No adjustment in the Purchase
Price shall be made if the amount of such adjustment would result in a change in
the Purchase Price per share of less than $0.08, but in such case any adjustment
that would otherwise be required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment, which
together with any adjustment so carried forward, would result in a change in the
Purchase Price of $0.08 per share or more. If the Company shall, at any time or
from time to time, issue Common Stock by way of dividends on any stock of the
Company or subdivide or combine the outstanding shares of the Common Stock, such
amount of $0.08 (as theretofore increased or decreased, if such amounts shall
have been adjusted in accordance with the provisions of this clause) shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or stock dividend so as appropriately to reflect
the same. Notwithstanding the provisions of the first sentence of this
Subsection 3(f), any adjustment postponed pursuant to this Subsection 3(f) shall
be made no later than the earlier of (i) three years from the date of the
transaction that would, but for the provisions of the first sentence of this
Section 3(f), have required such adjustment, (ii) an Exercise Date or (iii) the
Expiration Date.

7
<PAGE> 8
(g) Adjustments to Other Shares. In the event that at any
time, as a result of an adjustment made pursuant to Subsection 3(a), the Holder
shall become entitled to receive, upon exercise of this Warrant, any shares of
capital stock of the Company other than shares of Common Stock, the number of
such other shares so receivable upon exercise of this Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in Subsections 3(a), (b), (c) and (d), inclusive, and the provisions
of Sections 2, 5, 6 and 7 with respect to the shares of Common Stock shall apply
on like terms to any such other shares.

(h) Adjustment of Number of Shares Issuable Upon Exercise.
Upon each adjustment of the Purchase Price as a result of the calculations made
in Subsections 3(a), (b), (c) or (d), this Warrant shall thereafter evidence the
right to receive, at the adjusted Purchase Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth) obtained by dividing (x)
the product of the aggregate number of shares of Common Stock covered by this
Warrant immediately prior to such adjustment and the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price by (y) the Purchase
Price in effect immediately after such adjustment of the Purchase Price.

8
<PAGE> 9
other property deliverable, upon exercise of the Warrant calculated to the
nearest cent or the nearest one-hundredth of a share and setting forth in
reasonable detail the method of calculation and the facts requiring such
adjustment and upon which such calculation is based. Each adjustment shall
remain in effect until a subsequent adjustment is required.

6. Fractional Shares. Notwithstanding an adjustment pursuant to Section
3(h) in the number of shares of Common Stock covered by this Warrant or any
other provision of this Warrant, the Company shall not be required to issue
fractions of shares upon exercise of this Warrant or to distribute certificates
which evidence fractional shares. In lieu of fractional shares, the Company may
make payment to the Holder, at the time of exercise of this Warrant as herein
provided, of an amount in cash equal to such fraction multiplied by the greater
of the Current Market Price of a share of Common Stock on the Exercise Date and
the Dilution Price.

9
<PAGE> 10
that all shares of Common Stock as may be issued pursuant to the exercise of
this Warrant will, upon issuance, be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.

10. Restrictions on Transfer.

10
<PAGE> 11
11. No Rights or Liability as a Stockholder. This Warrant does not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provisions hereof, in the absence of affirmative action by
the Holder hereof to purchase Common Stock, and no enumeration herein of the
rights or privileges of the Holder shall give rise to any liability of such
Holder as a stockholder of the Company.

12. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder hereof for any issue or transfer tax, or other incidental expense, in
respect of the issuance or delivery of such certificates or the securities
represented thereby, all of which taxes and expenses shall be paid by the
Company.

13. Amendment or Waiver. This Warrant and any term hereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the Holder.

16. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the state of New York, without regard to the
principles of conflicts of law of such State.

17. Headings. The headings in this Warrant are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
-----------------------------------
Name: Michael G. Lederman
Title: Chairman & CEO

11
<PAGE> 12
Exhibit A to Common
Stock Purchase Warrant

[FORM OF]
ELECTION TO PURCHASE SHARES

ISSUE TO: ______________________________________________________________________
(NAME)

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)

DELIVER TO: ____________________________________________________________________
(NAME)

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

ISSUE TO: ______________________________________________________________________
(NAME OF HOLDER(1))

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

DELIVER TO: ____________________________________________________________________
(NAME OF HOLDER(1))

________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)

Dated:________________________ [NAME OF HOLDER(1)]

By: ___________________________
Name:
Title:

- ---------

(1) Name of Holder must conform in all respects to name of Holder as specified
on the face of the Warrant.

12
<PAGE> 13
Exhibit B to Common
Stock Purchase Warrant

[FORM OF] ASSIGNMENT

<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
<S> <C> <C>
</TABLE>

Dated:________________________ [NAME OF HOLDER(1)]

By: ___________________________
Name:
Title:

- --------

(1) Name of Holder must conform in all respects to name of Holder as specified
on the face of the Warrant.

<PAGE> 1
EXHIBIT 10.9

October 21, 1996

No. A-1 Warrant to Purchase 600,000
Shares of Common Stock

FULCRUM DIRECT, INC.

COMMON STOCK PURCHASE WARRANT

Void after January 1, 2006

FULCRUM DIRECT, INC. (the "Company"), a Delaware corporation, hereby
certifies that for value received, FULCRUM CAPITAL PARTNERS L.P. a Delaware
limited partnership, or assigns (the "Holder"), is entitled to purchase, subject
to the terms and conditions hereinafter set forth, an aggregate of 600,000 fully
paid and nonassessable shares of Common Stock (as hereinafter defined) of the
Company, at an exercise price of $1.00 per share (the "Purchase Price"), subject
to adjustment as provided herein, at any time or from time to time beginning on
the date hereof and prior to 5:00 P.M., New York City time, on January 1, 2006
(the "Expiration Date").

This Warrant Common Stock Purchase Warrant amends and restates the
Common Stock Purchase Warrant dated January 1, 1996 between the Company and the
Holder. The Holder is entitled to the rights and subject to the obligations
contained in the Stockholders Agreement relating to this Warrant and the shares
of Common Stock issuable upon exercise of this Warrant.

<PAGE> 2
1. Definitions. For the purposes of this Warrant, the following terms
shall have the meanings indicated:

"Applicable Price" shall mean the higher of (a) the Current Market
Price per share of Common Stock on the applicable record or other relevant date
and (b) the Dilution Price.

"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.

"Change of Control" means (i) any transaction or series of transactions
in which any Person (as such term is defined in Section 13(d)(3) of the Exchange
Act) or group, other than Lederman and/or Budoff, becomes the direct or indirect
beneficial owner (as such term is defined in Rule 13d-3 as promulgated under the
Exchange Act) of more of the then outstanding Common Stock than that
beneficially owned in the aggregate by Lederman and Budoff, (ii) any transaction
or series of transactions in which Lederman and Budoff together cease to be the
direct or indirect beneficial owners of at least 25% of the then outstanding
Common Stock, (iii) the sale of all or substantially all of the Borrower's
assets, (iv) the liquidation of the Borrower, (v) the election of a majority of
the Board of Directors who were not placed in nomination for that office by the
Board of Directors, or (vi) the combination of Borrower with another company, as
a result of which the shareholders of Borrower hold less than 50.01% of the
total of all voting shares outstanding or Borrower's directors constitute less
than a majority of the Board of Directors of the combined entity.

"Cancellation Portion" has the meaning ascribed to such term in
Subsection 2(b).

"Closing Price" shall mean, with respect to each share of Common Stock
for any day, (a) the last reported sale price regular way or, in case no such
sale takes place on such day, the average of the closing bid and asked prices
regular way, in either case as reported on the principal national securities
exchange on which the Common Stock is listed or admitted for trading or (b) if
the Common Stock is not listed or admitted for trading on any national
securities exchange, the last reported sale price or, in case no such sale takes
place on such day, the average of the highest reported bid and the lowest
reported asked quotation for the Common Stock, in either case as reported on the
NASDAQ or a similar service if NASDAQ is no longer reporting such information.

"Common Stock" means the common stock, par value $.01 per share, of the
Company, and any class of stock resulting from successive changes or
reclassification of such Common Stock.

"Company" has the meaning ascribed to such term in the first paragraph
of this Warrant.

"Current Market Price" shall be determined in accordance with
Subsection 3(e).

"Dilution Price" shall mean, with respect to each share of Common
Stock, $4.82, subject to appropriate adjustment for events described in
Subsection 3(a).

<PAGE> 3
"Exercise Date" has the meaning ascribed to such term in
Subsection 2(d).

"Expiration Date" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Holder" has the meaning ascribed to such term in the first
paragraph of this Warrant.

"NASDAQ" shall mean the Automatic Quotation System of the
National Association of Securities Dealers, Inc.

"Purchase Price" has the meaning ascribed to such term in the
first paragraph of this Warrant.

"Stockholders Agreement" means the Stockholders Agreement
dated as of the date hereof, among the Company, the Holder, Fulcrum Capital
L.P., Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P.

"Warrant" shall mean this Warrant and any subsequent Warrant
issued pursuant to Subsection 2(c).

"Warrant Register" has the meaning ascribed to such term in
Subsection 10(d).

<PAGE> 4
2. Exercise of Warrant.

(b) Delivery of Shares; Payment of Purchase Price. As soon as
practicable after surrender of this Warrant and receipt of payment, the Company
shall promptly issue and deliver to the Holder a certificate or certificates for
the number of shares of Common Stock set forth in the Election to Purchase
Shares, in such name or names as may be designated by such Holder, along with a
check for the amount of cash to be paid in lieu of issuance of fractional
shares, if any. Payment of the Purchase Price may be made as follows (or by any
combination of the following): (i) in United States currency by cash or delivery
of a certified check, bank draft or postal or express money order payable to the
order of the Company, (ii) by surrender of a number of shares of Common Stock
held by the Holder equal to the quotient obtained by dividing (A) the Purchase
Price payable with respect to the portion of this Warrant then being exercised
by (B) the Current Market Price per share of Common Stock on the Exercise Date,
or (iii) by cancellation of any portion of this Warrant (the "Cancellation
Portion") with respect to the number of shares of Common Stock equal to the
quotient obtained by dividing (A) the sum of the Purchase Price payable with
respect to the portion of this Warrant then being exercised by cancellation of
the Cancellation Portion and the Purchase Price that would be payable with
respect to the Cancellation Portion if such portion was being exercised rather
than canceled by (B) the Current Market Price per share of Common Stock on the
Exercise Date.

<PAGE> 5
(e) Continued Validity. A Holder of shares of Common Stock
issued upon the exercise of this Warrant, in whole or in part, shall continue to
be entitled to all of the rights and subject to all of the obligations set forth
in Section 10.

5
<PAGE> 6
shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at the
Applicable Price and the denominator of which shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). In case
such price for subscription or purchase may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be determined in good faith by the Board of Directors of the Company. Any
such adjustment shall become effective immediately after the record date for
such rights or warrants. Such adjustment shall be made successively whenever
such a record date is fixed. If such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to the Purchase Price in effect
immediately prior to such record date.

6
<PAGE> 7
arm's length institutional financing of debt and equity to persons other than
Budoff, Lederman or their Affiliates in which shares of Common Stock or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase shares of Common Stock are issued as part of a
unit, if such shares would otherwise be included in this Section 3(d)) at a
price per share of Common Stock (determined, in the case of rights, options,
warrants or convertible or exchangeable securities, by dividing (x) the total
consideration received or receivable by the Company in consideration of the sale
or issuance of such rights, options, warrants or convertible or exchangeable
securities, plus the total consideration payable to the Company upon exercise or
conversion or exchange thereof, by (y) the total number of shares of Common
Stock covered by such rights, options, warrants or convertible or exchangeable
securities) lower than either the Current Market Price per share of Common Stock
or the Dilution Price immediately prior to such sale or issuance, then the
Purchase Price shall be reduced to a price determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such sale or issuance plus the number of shares of Common
Stock which the aggregate consideration received (determined as provided below)
for such sale or issuance would purchase at the Applicable Price and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale or issuance. Such adjustment shall be
made successively whenever such sale or issuance is made. For the purposes of
such adjustments, the shares of Common Stock which the holder of any such
rights, options, warrants, or convertible or exchangeable securities shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale or issuance and the consideration
"received" by the Company therefor shall be deemed to be the consideration
actually received or receivable by the Company (plus any underwriting discounts
or commissions in connection therewith) for such rights, options, warrants or
convertible or exchangeable securities, plus the consideration stated in such
rights, options, warrants or convertible or exchangeable securities to be
payable to the Company for the shares of Common Stock covered thereby. If the
Company shall sell or issue shares of Common Stock for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then in determining the "price per share of Common Stock" and the
"consideration" received or receivable by or payable to the Company for purposes
of the first sentence and the immediately preceding sentence of this Subsection
3(d), the fair value of such property shall be determined in good faith by the
Board of Directors of the Company. The determination of whether any adjustment
is required under this Subsection 3(d) by reason of the sale and issuance of
rights, options, warrants or convertible or exchangeable securities and the
amount of such adjustment, if any, shall be made only at the time of such
issuance or sale and not at the subsequent time of issuance of shares of Common
Stock upon the exercise of such rights to subscribe or purchase.

7
<PAGE> 8
an appraiser an individual who shall be a member of a nationally recognized
investment banking firm. Each appraiser shall be instructed to, within 30 days
of appointment, determine the Current Market Price per share of Common Stock
which shall be deemed to be equal to the fair market value per share of Common
Stock as of such date. If the two appraisers are unable to agree on the Current
Market Price per share of Common Stock within such 30 day period, then the two
appraisers, within 10 days after the end of such 30 day period shall jointly
select a third appraiser. The third appraiser shall, within 30 days of its
appointment, determine, in good faith, the Current Market Price per share of
Common Stock and such determination shall be controlling. If any party fails to
appoint an appraiser or if one of the two initial appraisers fails after
appointment to submit its appraisal within the required period, the appraisal
submitted by the remaining appraiser shall be controlling. The cost of the
foregoing appraisals shall be shared one-half by the Company and one-half by
WSDF, provided, however, in the event a third appraiser is utilized and one of
the two initial appraisals (but not the other initial appraisal) is greater than
or less than the appraisal by such third appraiser by 10% or more, then the cost
of all of the foregoing appraisals shall be borne by the party who appointed the
appraiser who made such initial appraisal.

8
<PAGE> 9
number of shares of Common Stock (calculated to the nearest one-hundredth)
obtained by dividing (x) the product of the aggregate number of shares of Common
Stock covered by this Warrant immediately prior to such adjustment and the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price by (y) the Purchase Price in effect immediately after such adjustment of
the Purchase Price.

9
<PAGE> 10
7. Notice of Proposed Actions. In case the Company shall propose at any
time or from time to time (a) to declare or pay any dividend payable in stock of
any class to the holders of Common Stock or to make any other distribution to
the holders of Common Stock (other than a regularly scheduled cash dividend),
(b) to offer to the holders of Common Stock rights or warrants to subscribe for
or to purchase any additional shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) to effect any
reclassification of its Common Stock, (d) to effect any consolidation, merger or
sale, transfer or other disposition of all or substantially all of the property,
assets or business of the Company which would, if consummated, adjust the
Purchase Price or the securities issuable upon exercise of the Warrants, (e) to
effect the liquidation, dissolution or winding up of the Company, or (f) to take
any other action that would require a vote of the Company's stockholders, then,
in each such case, the Company shall give to the Holder, in accordance with
Section 14, a written notice of such proposed action, which shall specify (i)
the record date for the purposes of such stock dividend, distribution of rights
or warrants or vote of the stockholders of the Company, or if a record is not to
be taken, the date as of which the holders of shares of Common Stock of record
to be entitled to such dividend, distribution of rights or warrants, or vote is
to be determined, or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, disposition, liquidation, dissolution or
winding up is expected to become effective, and such notice shall be so given as
promptly as possible but in any event at least ten (10) Business Days prior to
the applicable record, determination or effective date specified in such notice.

10. Restrictions on Transfer.

10
<PAGE> 11
(a) The term "Holder" as used herein shall also include any
transferee of this Warrant whose name has been recorded by the Company in the
Warrant Register (as hereinafter defined). Each transferee of this Warrant or
the Common Stock issuable upon the exercise thereof acknowledges that this
Warrant or the Common Stock issuable upon the exercise thereof has not been
registered under the Securities Act and may be transferred only pursuant to an
effective registration under the Securities Act or pursuant to an applicable
exemption from the registration requirements of the Securities Act, subject to
the restrictions on transfer set forth in this Section 10.

13. Amendment or Waiver. This Warrant and any term hereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the Holder.

11
<PAGE> 12
14. Notices. Any notice or other communication (or delivery) required
or permitted hereunder shall be made in writing and shall be by registered mail,
return receipt requested, telecopier, courier service or personal delivery to
the Company at its principal office located at 4321 Fulcrum Way, Albuquerque,
New Mexico 87124 and to the Holder at its address as it appears in the Warrant
Register. All such notices and communications (and deliveries) shall be deemed
to have been duly given: when delivered by hand, if personally delivered; when
delivered by courier, if delivered by commercial overnight courier service; five
Business Days after being deposited in the mail, postage prepaid, if mailed; and
when receipt is acknowledged, if telecopied.

16. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the state of New York, without regard to the
principles of conflicts of law of such State.

17. Headings. The headings in this Warrant are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

FULCRUM DIRECT, INC.

By: /s/ MICHAEL G. LEDERMAN
------------------------------
Name: Michael G. Lederman
Title: Chairman & CEO

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Exhibit A to Common
Stock Purchase Warrant

[FORM OF]
ELECTION TO PURCHASE SHARES

The undersigned hereby irrevocably elects to exercise the
Warrant to purchase _____ shares of Common Stock, par value $____ per share
("Common Stock"), of FULCRUM DIRECT, INC. (the "Company") and hereby [makes
payment of $_______ therefor][or] [makes payment therefore by surrendering
pursuant to Section 2(b)(iii) _____ shares of Common Stock of the Company] [or]
[makes payment therefor by cancellation pursuant to Section 2(b)(iv) of a
portion of the Warrant with respect to _________ shares of Common Stock]. The
undersigned hereby requests that certificates for such shares be issued and
delivered as follows: