FULCRUM DIRECT INC, S-1/A, 1997-08-27

FULCRUM DIRECT INC
S-1/A, 1997-08-27
CATALOG & MAIL-ORDER HOUSES

Previous: SELIGMAN VALUE FUND SERIES INC, NSAR-A, 1997-08-27

Next: NOTIFY CORP, SB-2/A, 1997-08-27

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997

REGISTRATION NO. 333-23021

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 2 TO

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

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

<TABLE>
<S> <C> <C>
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:

<TABLE>
<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]

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

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 AUGUST 26, 1997

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

3,000,000 SHARES

[FULCRUM DIRECT LOGO]

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 $8.00 and $10.00 per share. See "Underwriting" for a
discussion relating to the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol FLCM, subject to notice of issuance.

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

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $900,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 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 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."

Fulcrum Direct(TM), After the Stork(R), Playclothes(TM), Storybook
Heirlooms(R), zoe(TM), Little Feet(TM), SunSkins(R), Just for Kids(R) 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.

2
<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. As used herein, the term
"pro forma" gives effect to the Storybook Acquisition (as defined herein).

THE COMPANY

Fulcrum Direct, Inc. ("Fulcrum" or the "Company") is a leading catalog
retailer of branded apparel, shoes and accessories for children, teens and young
women up to 24 years of age. The Company's strategy is to capitalize on the
large opportunity in the children's and teen apparel catalog markets by building
a portfolio of distinct brands targeting discrete market segments. The Company
believes that its portfolio of brands combined with strong customer
relationships, provide unique cross marketing opportunities that allow the
Company to increase customer lifetime value and decrease customer acquisition
costs. As of June 30, 1997, the Company's housefile included 4.4 million names
of which 1.4 million had made at least one purchase from one of the Company's
brands in the last 24 months.

Since 1994, Fulcrum has introduced eight brands through in-house
development, acquisition or strategic alliance. Each of these brands target
specific style and price point segments of the children's and teen apparel
markets. The Company's first brand, After the Stork, offers value priced, basic
children's apparel made primarily of natural fibers. In contrast, the
Playclothes brand presents value priced, everyday children's novelty outfits
targeting specialty store shoppers. The Company's most recent acquisition,
Storybook Heirlooms, presents an upscale array of dressy outfits and accessories
for girls up to age 12. The Company's other children's brands include Little
Feet, a catalog offering a wide assortment of shoes and hosiery, SunSkins, a
line of sun protective clothing, Discount Direct, the Company's direct mail
liquidation vehicle for all of its brands, and a test catalog with Sears Roebuck
and Co. ("Sears"). In August 1997, the Company entered the teen market with zoe,
which offers popular teen branded apparel to Generation Y girls and young women,
ages 10 to 24 years.

Fulcrum intends to continue growing its portfolio of distinct children's
and teen brands by: maximizing the potential of its brands through targeted
marketing, mailing and merchandising strategies; developing new brands that
appeal to its growing customer base through in-house brand creation and
strategic alliances; developing new markets and product categories that leverage
the Company's large housefile and build strong customer relationships; and
pursuing strategic acquisitions. Since 1995, the Company has made significant
investments in its management team and infrastructure, which it believes
position the Company to support substantial growth.

Fulcrum markets its products to the large U.S. population of 95 million
children, teens and young adults up to age 24 who account for more than
one-third of the U.S. population. Because less than 3% of the $27 billion
children's apparel purchases were made by catalog, as compared to nearly 10% of
the $85 billion women's apparel purchases, the Company believes that the
children's apparel catalog market has been underserved and undermailed.
Furthermore, the Company believes that since women are largely responsible for,
or significantly influence, children's and teen apparel purchase decisions, the
penetration for children's and teen apparel catalog sales should, over time,
grow to more closely approximate the penetration of women's catalog apparel
purchases.

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, its
toll-free order number is (888) 563-FLCM (563-3526), and its e-mail address is
[email protected].

3
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................... 11,076,648 shares(1)
Use of proceeds.............................. To repay $10.0 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.
Proposed Nasdaq National Market symbol....... FLCM
</TABLE>

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

(1) Based on the number of shares outstanding as of June 30, 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 June 30, 1997 at a weighted
average exercise price of $5.50 per share and (ii) warrants to purchase
1,576,810 shares of Common Stock outstanding as of June 30, 1997 at a
weighted average exercise price per share of $2.32. See "Capitalization,"
"Management -- Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements.

PROCEEDS OF THE OFFERING

Approximately $3.2 million of the estimated $24.2 million net proceeds of
the Offering 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, as a return of capital invested in Fulcrum
Properties L.P. and Fulcrum Brands L.P. and gains associated therewith. Of this
amount, $1.9 million will be paid to Michael G. Lederman (and entities and
Persons affiliated with him), the Company's Chairman and Chief Executive
Officer, $278,000 will be paid to Scott A. Budoff (and entities and Persons
affiliated with him), the Company's President and Chief Operating Officer,
$809,000 will be paid to Arnold Greenberg (and entities affiliated with him), a
director of the Company, $147,000 will be paid to Patrick K. Sullivan (and
entities and Persons affiliated with him) a director of the Company, and $74,000
will be paid to Carrie K. Cole, Vice President, Finance and Accounting and Chief
Financial Officer. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."

4
<PAGE> 6

SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND PER CATALOG DATA)

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16, FISCAL YEAR ENDED SIX MONTHS ENDED
(INCEPTION) ------------------------------------------ --------------------------------------
THROUGH PRO FORMA PRO FORMA
DECEMBER 31, DECEMBER 30, DECEMBER 28, DECEMBER 28, JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996 1996(1) 1996 1997 1997(1)
------------ ------------ ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................ $ 11,997 $ 28,581 $ 36,457 $67,405 $16,815 $ 23,111 $38,074
Gross profit................ 6,910 15,370 20,891 36,730 9,290 13,661 21,630
Income (loss)from
operations................ 293 1,057 843(2) 1,870(2) (402) (4,915)(2) (5,195)(2)
Income (loss) before
cumulative effect of
change in accounting
principle................. 91 320 406 310 (280) (5,124) (5,886)
Cumulative effect of change
in accounting
principle(3).............. -- -- -- -- -- (1,802) (1,802)
Net income (loss)(3)........ $ 91 $ 320 $ 406(2) $ 310(2) $ (280) $ (6,926)(2) $(7,688)(2)
======= ======= ======== ======= ======= ======== =======
Pro forma net loss(3)....... $ (41) $ (189) $ (755)(2) $ (851)(2) $ (590) $ (6,926)(2) $(7,688)(2)
======= ======= ======== ======= ======= ======== =======
Net income (loss) per common
and common equivalent
share before cumulative
effect of change in
accounting
principle(3)(5)........... $ 0.02 $ 0.04 $ (0.02)(2) $ (0.03)(2) $ (0.07) $ (0.62)(2) $ (0.59)(2)
======= ======= ======== ======= ======= ======== =======
Cumulative effect of change
in accounting principle
per common and common
equivalent share(3)....... -- -- -- -- -- $ (0.22) $ (0.18)
Net income (loss) per common
and common equivalent
share(3)(5)(6)............ $ 0.02 $ 0.04 $ (0.02)(2) $ (0.03)(2) $ (0.07) $ (0.84)(2) $ (0.77)(2)
======= ======= ======== ======= ======= ======== =======
Pro forma net loss per
common and common
equivalent share(3)(5).... $ (0.01) $ (0.03) $ (0.16)(2) $ (0.14)(2) $ (0.11) $ (0.84)(2) $ (0.77)(2)
======= ======= ======== ======= ======= ======== =======
Weighted average number of
common and common
equivalent shares
outstanding(4)............ 5,476 5,781 8,266 9,931 7,708 8,294 9,959
CONSOLIDATED SUMMARY
OPERATING DATA:
Total catalogs mailed..... 11,083(6) 14,841 15,544(7) 24,657 6,078 14,051(2) 20,963(2)
Net revenues per catalog
($ per catalog)........ $ 1.08(6) $ 1.93 $ 2.35 $ 2.73 $ 2.77 $ 1.64(2) $ 1.82(2)
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DECEMBER 31, JANUARY 12, JANUARY 1, JANUARY 1, JUNE 30,
1994 1996 1997 1997(1) 1997(1)
--------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Housefile names(8)..... 710 1,021 3,040 4,228 4,388
Active customers(9).... 347 471 1,049 1,320 1,395
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(10)
----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents............................................................ $ 4,727 $14,687
Working capital...................................................................... 15,212 25,172
Total assets......................................................................... 59,874 76,923
Long-term debt, net of current portion............................................... 30,915 28,129
Total stockholders' equity........................................................... 13,190 33,793
</TABLE>

- ---------------
(1) Pro forma combined financial and operating information was derived from the
Unaudited Pro Forma Statements of Operations of the Company and gives
effect to the Storybook Acquisition and the June Whitney Investment (as
hereinafter defined), as if such transactions had occurred at the beginning
of the period presented. See "Unaudited Pro Forma Statements of
Operations."
(2) Includes nonrecurring Playclothes start up expenses of $338 and $2,116
before taxes for the fiscal year ended December 28, 1996 and the six months
ended June 30, 1997, respectively. Specifically, a significant portion of
the 1997 expenses relate to the mailing of approximately 3.9 million
catalogs mailed to test the Playclothes housefile. Such catalogs have been
excluded here for purposes of comparison. See Note 2.p. of Notes to
Consolidated Financial Statements.
(3) As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs in connection with the Storybook Acquisition. Storybook
has historically followed a policy of expensing such costs as incurred and,
while practices may vary, the Company has decided to conform to Storybook's
practices and expense such costs as incurred. The pro forma net loss and
net loss per common and common equivalent share represent those amounts as
if the new accounting policy had been applied in all the periods presented.
See Note 2.i. of Notes to Consolidated Financial Statements.
(4) 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.
(5) 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.
(6) 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.
(7) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.
(8) Housefile names include both historical customers and catalog inquirers,
but excludes the Just for Kids list of 3.4 million names (which has not
been validated by the Company or added to its housefile).
(9) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.
(10) As adjusted to reflect the sale of 3,000 shares of Common Stock offered
hereby (the "Offering") at an assumed initial public offering price of
$9.00 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' overallotment option. See "Description of Capital
Stock," "Underwriting" and Notes to Consolidated Financial Statements.

5
<PAGE> 7

RECENT DEVELOPMENTS

As part of Fulcrum's strategy to build a portfolio of brands it has
recently developed new brands, completed a series of acquisitions and financings
and is testing a strategic alliance, as described below.

zoe. In August 1997, the Company mailed its first zoe catalog targeting
Generation Y girls, ages 10 to 24. zoe features a broad assortment of popular
branded basic and fashionable apparel and accessories. The Company believes that
zoe will leverage the Company's existing customer relationships and provide
significant growth opportunities. See "Risk Factors -- Brand Development and
Strategic Alliance Risks."

Sears Strategic Alliance. In June 1997, the Company and Sears arranged to
test market during the remainder of 1997 certain of the Company's brands to
select individuals from the Sears 20 million name customer file, who are not
existing customers of the Company. Pursuant to this arrangement, the Sears
catalogs mailed by the Company will be substantially similar to the Company's
catalogs, but will have a distinct cover with the Sears logo. Contributions to
operating profits, if any, after deducting all expenses related to the test,
will be shared equally by the Company and Sears. Pending the results of such
test, the Company and Sears may enter into a definitive strategic alliance,
although there can be no assurance that such tests will be successful or that
the Company and Sears will enter into any such strategic alliance. See "Risk
Factors -- Brand Development and Strategic Alliance Risks."

Storybook Acquisition. In June 1997, the Company completed the acquisition
of substantially all of the capital stock of Storybook Heirlooms, Inc.
("Storybook") for $15.0 million (the "Storybook Acquisition"), resulting in $9.3
million of goodwill. Pursuant to the Storybook Acquisition, the Company also
acquired the Just For Kids brand and customer list, which it may test in 1998.
The success of the Storybook Acquisition will depend primarily on the Company's
ability to successfully integrate and consolidate Storybook, which will require
substantial management, financial and other resources and may pose risks with
respect to sales, customer service and market share. See "Risk
Factors -- Integration of Storybook Acquisition" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Whitney Financing. In June 1997, the Company completed a private placement
(the "June Whitney Investment") of $10.0 million in subordinated debt with the
Whitney Subordinated Debt Fund ("WSDF") and affiliates of Arnold Greenberg and
Patrick K. Sullivan, directors of the Company, and $10.0 million of Common Stock
with Whitney Equity Partners ("WEP") and affiliates of Messrs. Greenberg and
Sullivan. The private placement also included the sale of warrants to purchase
200,000 shares of Common Stock to WSDF and affiliates of Messrs. Greenberg and
Sullivan. Additionally, the Company is obligated to issue warrants to purchase
up to 200,000 additional shares of Common Stock to such parties in the event
that the subordinated debt is not repaid in full as of certain dates through
December 1998.

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") for $1.2 million plus the assumption of customer return
liabilities estimated at $350,000. The assets acquired as part of the
Playclothes Acquisition included (i) all proprietary rights in the Playclothes
brand name, (ii) the Playclothes customer list, (iii) a Canadian license
agreement (which is currently the subject of litigation, see "Business -- Legal
Proceedings"), (iv) the right to mail Fulcrum's catalogs to The Disney Catalog's
customers during 1997 and (v) certain immaterial inventory and fixed assets. The
Company will have no right to mail its catalogs to The Disney Catalog customer
list after 1997, but may continue to mail its catalogs to those customers that
have made purchases from the Company and are therefore included in the Company's
housefile. 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. Additionally,
the

6
<PAGE> 8

remerchandised and repositioned Playclothes catalog reflects numerous pricing
and style changes implemented by the Company. 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 Playclothes customers, as well as its ability to attract new customers
and to integrate the Playclothes product line into the Company's facilities and
distribution system. In addition, all expenses incurred by the Company in the
repositioning of the Playclothes brand and the reactivation of Playclothes
customers, have been expensed by the Company as incurred, which may result in
certain expenses being recognized in advance of related revenues. See "Risk
Factors -- Development and Integration of the 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 Purchases. Immediately following
consummation of the Offering, the Company will exercise an option to purchase
all of the assets of Fulcrum Brands L.P., a Delaware limited partnership
indirectly controlled by Mr. Lederman, the Company's Chairman and Chief
Executive Officer ("Brands"), consisting of 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 whose partners include certain
directors and officers of the Company and is indirectly controlled by Mr.
Lederman ("Properties"), for aggregate consideration totaling approximately $2.5
million plus the assumption of $5.6 million of secured debt and related interest
rate swaps. The partners of Properties include Messrs. Lederman, Budoff, and Ms.
Cole, executive officers of the Company, and affiliates of Messrs. Sullivan and
Greenberg, directors of the Company. The option and purchase prices for Brands
and Properties were negotiated and determined by disinterested members of the
Board (Messrs. Newton, Unger, Sullivan and Greenberg as they relate to Brands,
and Messrs. Unger and Newton as they relate to Properties). The option price for
Brands was determined based upon revenues generated by each brand for the
periods fiscal 1994, fiscal 1995 and estimated fiscal 1996; and the purchase
price for Properties was based upon an independent appraisal. See "Use of
Proceeds" and "Certain Relationships and Related Transactions."

7
<PAGE> 9

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.

Integration of Storybook Acquisition. The integration and consolidation of
Storybook will require substantial management, financial and other resources and
may pose risks with respect to sales, customer service and market share. For
example, the Company will need to successfully relocate its call center and
distribution center to Rio Rancho, New Mexico. The Storybook Acquisition is
significantly larger than any acquisition the Company has previously made, and
there can be no assurance in this regard or that the Company will not experience
difficulties with customers, personnel or other factors. Additionally, there can
be no assurance that the anticipated benefits of the Storybook Acquisition,
including without limitation, expected cost savings, revenue enhancement and
margin improvement, will be realized or that a combination of the Company and
Storybook will be successful. See "Recent Developments -- Storybook
Acquisition."

Development and Integration 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 continue 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. In addition, all expenses incurred by the Company in the
repositioning of the Playclothes brand and the reactivation of Playclothes
customers, shall be expensed by the Company as incurred, which may result in
certain expenses being recognized in advance of the related revenues. In
connection with the Playclothes Acquisition, the Company made investments of
$610,000 during the second half of 1996 and of $2,449,000 during the first half
of 1997, respectively, in consideration of publishing and mailing its first
Playclothes catalog. In addition, the Company's landlord, Fulcrum Properties
L.P., made investments of $1,920,000 and $1,140,000 during the second half of
1996 and first half of 1997, respectively, to expand the facilities leased by
the Company. 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. See "Recent Developments -- Playclothes Acquisition."

Brand Development and Strategic Alliance Risks. The Company has recently
launched a catalog under the zoe brand name and has arranged with Sears to test
catalogs under the Sears brand name. The creation and development of new brands
and the launch of new catalogs through strategic alliances require substantial
management, financial and other resources and may pose risks with respect to
sales, customer service and market share. There can be no assurance that such
tests will be successful or will result in any catalog launches, and there can
be no assurance that any such launches will be successful or result in enhanced
revenues or operating results. The Company expects significantly lower gross
margins will be associated with revenues from zoe as it consists of popular
third-party branded products, which are typically associated with lower margins
than the proprietary branded products primarily sold in the Company's other
catalogs. Third party brands currently carried in the zoe catalog include Urban
Outfitters, 26 Red Sugar, Dollhouse and Adidas. In addition to the Sears
arrangement, the Company intends to test catalogs under other brand names
through strategic alliances. There can be no assurance that the Company will
identify suitable strategic partners, that any tests of catalogs under new
brands will be successful, that the Company will be able to enter into
definitive agreements for strategic alliances or that the Company's partners
will perform their obligations under any such agreements. See
"Business -- Fulcrum's Portfolio of Brands."

Seasonal and Quarterly Fluctuations. The Company's business is subject to
seasonal fluctuations. Given the historical seasonality of the Company's
business, the Company anticipates that a significant

8
<PAGE> 10

portion of its net revenues will be derived from the first and fourth quarters
of each fiscal year. As a result, the Company expects its sales and results of
operations generally to be lower in the second and third quarters than in the
first and fourth quarters of each fiscal year, which include Easter, 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 other revenues such as integrated program and mail list
revenues, the timing of inventory writedowns, currency rate fluctuations,
integration of acquisitions and related expenses, the incurrence of other
operating costs and factors beyond the Company's control, such as general
economic conditions and actions of suppliers and 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 that the Company will achieve or 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 Rate Fluctuations. 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. For example,
in the first half of fiscal 1997, response rates decreased by 42.4% from the
second half of 1996 partially as a result of the Company's decision to circulate
widely the remerchandised and repositioned Playclothes catalog to test the newly
acquired Playclothes customer list and to expand the After the Stork customer
base. 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 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 return policy which allows customers to
return any children's merchandise, at any time and for any reason, regardless of
merchantable condition. The Company is developing its return policy for zoe. The
Company maintains reserves consistent with historical experience in its
financial statements for anticipated merchandise returns. Because the Company's
reserves 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

9
<PAGE> 11

cause actual returns to exceed return reserves. Merchandise returns have not had
a material adverse effect on the Company's business, financial condition and
results of operations to date. However, 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, increases in response rates, the introduction
and acquisition of new brands and strategic alliances. 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 Company's
future growth, 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. 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, or that they will yield anticipated benefits. If any acquisitions are
not realized within the planned time frames and budgets, or do not yield
anticipated benefits, they 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."

International Operations. The Company recently introduced its catalogs to
the Japanese market. Gross revenues from Japan accounted for 8.0%, 18.6% and
10.3% of gross revenues in fiscal 1995, fiscal 1996 and the six months ended
June 30, 1997, respectively, and gross revenues from Japan, on a pro forma basis
reflecting the Storybook Acquisition, accounted for 19.1% and 11.4% of gross
revenues in fiscal 1996 and the six months ended June 30, 1997, respectively.
Fluctuations causing the value of the U.S. dollar to increase relative to
foreign currency have in the past and may in the future have a material adverse
effect on the Company's business, financial condition and results of operations.
During the six months ended June 30, 1997, the Company experienced a decline in
net revenues from Japan, which was primarily the result of adverse Japanese
currency fluctuations. Over the long term, the Company intends to increase its
catalog mailings in Japan and may consider entering other international markets
as well. The Company expects net revenues from Japan as a percentage of net
revenues to continue to fluctuate from period to period in part as a result of
currency fluctuations. The Company's business is subject to risks generally
associated with doing business abroad, such as foreign government regulations,
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 demands. There can be no assurance that the Company's
merchandise or marketing efforts will be successful in foreign markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Growth Strategy."

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

10
<PAGE> 12

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 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."

Other Revenue Risk. The Company currently derives significant revenues from
integrated programs through which the Company distributes the marketing and
promotional materials of other companies to its customers. In addition, the
Company rents its customer lists to other catalog and consumer product
companies. There are no significant incremental costs associated with such
revenues, which directly result in improved operating results for the Company.
There can be no assurance that the Company will continue its integrated programs
or that the Company will continue to rent its customer lists. The failure to
continue such programs could result in a decline in revenues and have a
disproportionate impact on the Company's operating results.

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 consolidated the majority of its outbound shipping with the U.S. Postal
Service, but the Company also continues to utilize several private shippers as
well. There can be no assurance that the Company will receive adequate service
from the U.S. Postal Service or such private shipping services. 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 passed on, 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 and teen 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 such as Biobottoms, Children's Wear Digest, Hanna

11
<PAGE> 13

Andersson and The Wooden Soldier, as well as traditional apparel manufacturers
and retailers of children's clothing, including such brands as The Gap
(including its Baby Gap, Gap Kids and Old Navy brands), Gymboree, L.L. Bean,
Lands' End, OshKosh B'Gosh and J.C. Penney. With the introduction of zoe, the
Company will also compete with teen apparel catalogers and retailers, including
The Limited, Gadzooks, Delia's, The WetSeal, Urban Outfitters, Buckle and
Charlotte Russe. 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 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. During Summer 1996, the Company replaced and upgraded
its systems and continuously makes certain changes and upgrades. 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 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 147 unaffiliated factories and suppliers to produce its products,
with no one factory or supplier responsible for more than 5.0% of the Company's
products in fiscal 1996 on a pro forma basis. 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
receive, shipments of products 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, as well as 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

12
<PAGE> 14

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 Suppliers. During the past 18 months, 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 Acquired Customer Lists. The direct costs of acquired
customer lists are deferred and amortized over a period of up to five years. 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 acquired customer
lists 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 acquired customer lists 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
national, 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 and the six months ended June
30, 1997, 50.8% and 41.0%, respectively, of the Company's catalogs were mailed
to prospective customers and 49.2% and 59.0%, respectively, were mailed to names
derived from the Company's housefile. Names derived from purchased or rented
lists have historically generated lower response rates than names derived from
the Company's housefile. Accordingly, the Company anticipates that overall
response rates would decline if it increased its use of purchased and rented
lists relative to its use of names from 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

13
<PAGE> 15

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 June 30, 1997, upon completion of the Offering, Michael G.
Lederman, the Chairman and Chief Executive Officer of the Company, will
beneficially own, on an aggregate basis, 49.3% of Fulcrum Common Stock (53.0%
assuming exercise of all options and warrants beneficially owned by him) and, as
a result, will effectively 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 June 30, 1997, upon
completion of the Offering all officers and directors as a group will
beneficially own, on an aggregate basis 70.5% of Fulcrum Common Stock, (74.2%
assuming exercise of all options and warrants beneficially owned by them) 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
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 that 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

14
<PAGE> 16

representatives of the Underwriters. There can be no assurance that 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 11,076,648 shares of Common Stock outstanding. The 3,000,000
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 8,076,648 shares (or
72.9% of total outstanding shares after the Offering) 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, 6,416,953 of these shares of Common Stock 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 $7.35 (based on an assumed
initial public offering price of $9.00). See "Dilution."

15
<PAGE> 17

THE COMPANY

Fulcrum is a leading direct retailer of branded apparel, shoes and
accessories for children, teens and young women up to 24 years of age. The
Company's portfolio of brands includes After the Stork, Playclothes, Storybook
Heirlooms, zoe, Little Feet, SunSkins, Discount Direct and a test of a strategic
alliance with Sears.

In January 1993, NewStork, Inc. a New Mexico corporation ("NewStork"),
purchased the business and assets, and assumed certain liabilities, of After the
Stork, Inc., a New Mexico corporation and a wholly owned subsidiary of Specialty
Catalog Corp., a Delaware corporation. After the Stork, Inc. was founded in
1980.

On March 31, 1994, all of the outstanding stock of 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
("FCP"), for cash consideration of $2.7 million. The After the Stork brand name
was distributed to FCP as a return of $642,000 of invested capital as of April
1, 1994. Fulcrum was incorporated in February 1995 and in March 1995, FCP
contributed to Fulcrum all common shares of FCP Direct. On December 30, 1995, to
simplify Fulcrum's ownership structure, NewStork was merged into FCP Direct, and
FCP Direct was merged into Fulcrum. See "Certain Relationships and Related
Transactions."

In Spring 1995, Fulcrum developed its SunSkins brand and introduced the
After the Stork brand in Japan. In Spring 1996, Fulcrum introduced Discount
Direct and purchased a catalog customer list of 93,000 names from OshKosh
B'Gosh. In Fall 1996, Fulcrum introduced its Little Feet brand in the U.S. and
Japan.

On December 31, 1996, the Company acquired, for $1.2 million plus the
assumption of $350,000 of customer returns liabilities, certain assets relating
to the Playclothes brand, previously part of a portfolio of brands marketed by
The Walt Disney Company. Assets acquired included (i) all proprietary rights in
the Playclothes brand name, (ii) the Playclothes customer list, (iii) a Canadian
license agreement (which is currently the subject of litigation, see
"Business -- Legal Proceedings"), (iv) the right to mail Fulcrum's catalogs to
The Disney Catalog's customers in 1997 and (v) certain immaterial inventory and
fixed assets.

In March 1997, the Company acquired a catalog list of 30,000 names from
Gymboree Corporation. In June 1997, the Company acquired for $15.0 million,
substantially all of the outstanding common stock of Storybook, a catalog
retailer of girls' clothing, and the owner of the Just For Kids brand name and
the Just For Kids housefile of 3.4 million names (which has not yet been
validated by the Company or added to its housefile). In addition, the Company
entered into an arrangement with Sears to test market the Company's brands to
individuals from the Sears 20 million name housefile.

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, its
toll-free order number is (888) 526-FLCM (526-3526) and its e-mail address is
[email protected].

16
<PAGE> 18

USE OF PROCEEDS

The net proceeds to be received from the sale of the 3,000,000 shares of
Common Stock offered hereby at an assumed initial offering price of $9.00 per
share are estimated to be $24,210,000 ($27,976,500 if the Underwriters'
over-allotment option is exercised in full.) The Company intends to use the net
proceeds (i) to repay $10.0 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 and (iii) to purchase the
Company's headquarters, call center and distribution center for approximately
$2.5 million in cash plus assumed liabilities. The Company intends to use
approximately one-half of the remainder of the net proceeds to fund its growth
strategy and approximately one-half to develop its existing and new brands. In
addition, if suitable opportunities arise, the Company may use a portion of the
net proceeds identified to fund growth and develop new brands, to instead fund
potential acquisitions. 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. Approximately $1.4
million of the net proceeds out of the $10.0 million used to repay subordinated
debt will be paid to directors of the Company with respect to debt owed to them.
See "Prospectus Summary -- Proceeds of the Offering" and "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.

The proceeds of the subordinated debt issued in October 1996 were used to
fund the Playclothes Acquisition and for working capital and general corporate
purposes, and the proceeds of the subordinated debt issued in June 1997 were
used to fund the Storybook Acquisition. The $10.0 million principal amount of
subordinated debt, plus accrued interest, being repaid out of the net proceeds
of the Offering represents a portion of the subordinated debt issued in October
1996 and in June 1997. Such subordinated debt bears interest at a rate of
10.101% and matures on October 21, 2003.

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 without the prior
approval of its lenders. 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.

17
<PAGE> 19

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 3,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share and the application of the estimated
proceeds therefrom. See "Use of Proceeds." 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>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................ $ 2,000 $ 2,000
Current portion of long-term debt...................... 399 399
Long-term debt, net of current portion(1).............. 30,915 28,129
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
5,000,000 shares authorized; none issued or
outstanding..................................... -- --
Common Stock, par value $0.01 per share;
25,000,000 shares authorized; 8,076,648 shares
issued and outstanding, actual; 11,076,648
shares issued and outstanding, as adjusted(2)... 81 111
Additional paid-in capital........................ 20,035 41,915
Accumulated deficit(3)............................ (6,926) (8,233)
------- -------
Total stockholders' equity...................... 13,190 33,793
------- -------
Total capitalization......................... $46,504 $64,321
======= =======
</TABLE>

- ---------------
(1) The long-term debt, net of current portion, as adjusted, reflects the
payment of the $10.0 million principal amount of subordinated debt (net of
discount of $1.6 million) and the assumption of $5.6 million of liabilities
in connection with the Company's purchase of its headquarters, call center
and distribution center.

(2) Based on the number of shares outstanding as of June 30, 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 June 30,
1997 at a weighted average exercise price of $5.50 per share and (ii)
warrants to purchase 1,576,810 shares of Common Stock outstanding as of June
30, 1997 at a weighted average exercise price per share of $2.32. See
"Management -- Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements. Includes, as adjusted, the sale of 3,000,000 shares of
Common Stock.

(3) The accumulated deficit, as adjusted, reflects the effect of an
extraordinary item representing the write-off of unamortized debt discount
of $1.0 million, net of taxes, the write-off of deferred financing costs of
$0.3 million, net of taxes, and the differences between the fair market
values and historical costs of the purchases from related parties of
trademarks of $1.1 million and the Company's headquarters of $1.2 million.

18
<PAGE> 20

DILUTION

As of June 30, 1997, the Company had a net tangible book value of approximately
$(5,937,000), or $(0.74) 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 June 30, 1997,
other than to give effect to the receipt by the Company of the net proceeds from
the sale of the 3,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $9.00 per share, the pro forma net tangible
book value of the Company as of June 30, 1997 would have been approximately
$18,273,000, or $1.65 per share. This represents an immediate increase in net
tangible book value of $2.39 per share to the existing stockholders and an
immediate dilution of $7.35 per share to new investors. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $9.00
Net tangible book value per share before the Offering.......... $(0.74)
Increase per share attributable to new investors............... 2.39
------
Pro forma net tangible book value per share after the Offering...... 1.65
-----
Dilution per share to new investors................................. $7.35
=====
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1997,
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.... 8,076,648 72.9% $20,116,000 42.7% $ 2.49
New investors............ 3,000,000 27.1 27,000,000 57.3 9.00
---------- ----- ----------- -----
Total.......... 11,076,648 100.0% $47,116,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing computations assume no exercise of stock options and warrants
after June 30, 1997. As of June 30, 1997, there were outstanding stock options
and warrants to purchase an aggregate of 1,981,160 shares of Common Stock at a
weighted average exercise price of approximately $2.97 per share. If all of the
foregoing options had been exercised at June 30, 1997, the net tangible book
value per share of Common Stock at such date would have been $(0.01) and the pro
forma net tangible book value per share after giving effect to the Offering
would have been $1.85, representing an immediate dilution to new investors of
$7.15 per share and an immediate increase in net tangible book value of $1.86
per share attributable to the Offering.

19
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below has been derived
from the financial statements of the Company set forth elsewhere in this
Prospectus (except Consolidated Selected Operating Data), which has 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 31, 1993, December 31, 1994, December 30, 1995
and December 28, 1996 and for each of the fiscal periods ended December 31,
1993, 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
PERIOD OF MARCH 16,
JANUARY 27, 1993 1994
(INCEPTION) (INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH THROUGH -------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1993 (PREDECESSOR) 1994 1995 1996 1996 1997
------------------ ------------ ------------ ------------ ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Net revenues.......................... $ 11,532 $ 11,997 $ 28,581 $ 36,457 $16,815 $23,111
Gross profit.......................... 5,431 6,910 15,370 20,891 9,290 13,661
Income (loss) from operations......... (1,380) 293 1,057 843(2) (402) (4,915)(2)
Income (loss) before cumulative effect
of change in accounting principle... (989) 91 320 406(2) (280) (5,124)(2)
Cumulative effect of change in
accounting principle(3)............. -- -- -- -- -- (1,802)
Net income (loss)(3).................. $ (989) $ 91 $ 320 $ 406(2) $ (280) $(6,926)(2)
======= ======= ======= ======= ======= =======
Pro forma net loss(3)................. $ -- $ (41) $ (189) $ (755)(2) $ (590) $(6,926)(2)
======= ======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share before
cumulative effect of change in
accounting principle(3)(5).......... $ (1.32) $ 0.02 $ 0.04 $ (0.02)(2) $ (0.07) $ (0.62)(2)
======= ======= ======= ======= ======= =======
Cumulative effect of change in
accounting principle per common and
common equivalent share(3).......... -- -- -- -- -- $ (0.22)
Net income (loss) per common and
common equivalent share(3)(5)....... $ (1.32) $ 0.02 $ 0.04 $ (0.02)(2) $ (0.07) $ (0.84)(2)
======= ======= ======= ======= ======= =======
Pro forma net loss per common and
common equivalent share(3)(5)....... $ -- $ (0.01) $ (0.03) $ (0.16)(2) $ (0.11) $ (0.84)(2)
======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares
outstanding(4)...................... 750 5,476 5,781 8,266 7,708 8,294
CONSOLIDATED SELECTED OPERATING DATA(1):
Total catalogs mailed................. --(6) 11,083(7) 14,841 15,544(8) 6,078 14,051(2)
Net revenues per catalog.............. --(6) $ 1.08(7) $ 1.93 $ 2.35 $ 2.77 $ 1.64(2)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 12, JANUARY 1,
1994 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Housefile names(9).................... 710 1,021 3,040
Active customers(10).................. 347 471 1,049
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30,
1993 (PREDECESSOR) 1994 1995 1996 1997
------------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash and cash equivalents............. $ 477 $ 112 $ 196 $ 140 $ 4,727
Working capital....................... 1,525 900 3,227 9,934 15,212
Total assets.......................... 3,426 5,023 14,860 25,565 59,874
Long-term debt, net of current
portion............................. 713 39 702 11,754 30,915
Total stockholders' equity............ 784 2,190 5,817 7,923 13,190
</TABLE>

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

(1) Financial information relating to the fiscal periods prior to January 27,
1993, relate to Specialty Catalog Corp. (the "SC Information"), the owner
of the After the Stork brand name prior to NewStork Inc. NewStork, Inc. was
a New Mexico corporation formed on January 27, 1993 and was a predecessor
to the Company. The Company is not authorized to reprint the SC Information
herein, however such information may be obtained by potential investors as
part of the public securities filings of Specialty Catalog Corp. The
Company does not incorporate such information herein and makes no claims
regarding the accuracy or completeness of such information. See "The
Company."

(2) Includes nonrecurring Playclothes start up expenses of $338 and $2,116
before taxes for the fiscal year ended December 28, 1996, and the six
months ended June 30, 1997, respectively. Specifically, a significant
portion of the fiscal 1997 expenses relate to the mailing of approximately
3.9 million catalogs to test the Playclothes housefile. Such catalogs have
been excluded herein for purposes of comparison. See Note 2.p. of Notes to
Consolidated Statements.
(3) As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs in connection with the Storybook Acquisition. Storybook
has historically followed a policy of expensing such costs as incurred and,
while practices may vary, the Company has decided to conform to Storybook's
practices and expense such costs as incurred. The pro forma net loss and
net loss per common and common equivalent share represent those amounts as
if the new accounting policy had been applied in all the periods presented.
See Note 2.i. of Notes to Consolidated Financial Statements.
(4) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income per share.
(5) Calculated after deducting Preferred Stock dividends of $60, $583 and $291
for fiscal 1995, fiscal 1996 and for the six month period ended June 30,
1996, respectively. Prior to December 28, 1996, all shares of Preferred
Stock were called or converted to Common Stock.
(6) Not available.
(7) 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.
(8) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.
(9) Housefile names include both historical purchasers and catalog inquirers
but exclude the Just For Kids list of 3.4 million names (which has not been
validated by the Company or added to its housefile).
(10) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.

20
<PAGE> 22

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

The following unaudited pro forma statements of operations have been
prepared by combining the historical consolidated financial statements of the
Company for the fiscal year ended December 28, 1996 and the six months ended
June 30, 1997 with the historical statements of operations of Storybook for the
fiscal year ended December 28, 1996 and the six months ended June 27, 1997,
respectively, and give effect to the Storybook Acquisition and the related
financing which were completed as of June 27, 1997 and June 30, 1997,
respectively.

The Company believes that the pro forma adjustments give appropriate effect
to the assumptions described in the notes to the unaudited pro forma financial
statements and that the adjustments are properly applied in the pro forma
financial statements, and provide a reasonable basis for presenting all the
significant effects of the Storybook Acquisition by the Company. The acquisition
related adjustments include (i) inclusion of the historical statements of
operations of Storybook, (ii) the allocation of the purchase price for the
Storybook Acquisition and (iii) the impact of the financing related to the
Storybook Acquisition.

The unaudited pro forma statements of operations have been prepared based
upon available information and on the assumptions described in the notes thereto
and include assumptions relating to the allocation of the consideration paid for
the assets and liabilities of Storybook based on preliminary estimates of fair
value. The Company expects that the significant assets in the final allocation
will be goodwill, trademarks, inventory and customer lists and that there will
be no significant additional liabilities.

The unaudited pro forma statements of operations should be read in
conjunction with the respective financial statements of the Company and
Storybook and notes thereto included elsewhere in this Prospectus. Certain
reclassifications among line items have been made to Storybook's historical
income statements and balance sheets to conform with Fulcrum's financial
statement presentation. The unaudited pro forma condensed statements of
operations are not necessarily indicative of what the consolidated statement of
operations actually would have been had the transactions occurred at January 1,
1996, nor are they indicative of the results of future operations of the
Company.

21
<PAGE> 23

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 28, 1996
------------------------------------------------------------------
FULCRUM STORYBOOK
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------- ------------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues................................................... $ 36,457 $30,948 $ -- $ 67,405
Cost of goods sold............................................. 15,566 15,109 -- 30,675
---------- ------- ------- ----------
Gross profit................................................... 20,891 15,839 -- 36,730
Advertising and catalog costs.................................. 7,089 6,246 -- 13,335
General and administrative expenses............................ 12,621 7,547 1,019(a)(b)(c) 21,187
Nonrecurring Playclothes start up costs........................ 338 -- -- 338
---------- ------- ------- ----------
Income (loss) from operations.................................. 843 2,046 (1,019) 1,870
Other income................................................... 866 278 -- 1,144
Interest expense............................................... (820) (153) (1,010)(d) (1,983)
Other expense.................................................. (253) -- -- (253)
---------- ------- ------- ----------
Income (loss) before income taxes.............................. 636 2,171 (2,029) 778
Income tax expense (benefit)................................... 230 766 (528)(e) 468
---------- ------- ------- ----------
Net income (loss).............................................. $ 406 $ 1,405 $ (1,501) $ 310
========== ======= ======= ==========
Net income (loss) applicable to common stockholders............ $ (177)(f) $ 1,405 $ (1,501) $ (273)(f)
========== ======= ======= ==========
Pro forma net income (loss) applicable to common
stockholders................................................. $ (755)(c)(g) $ 1,405 $ (1,501) $(851)(c)(f)(g)
========== ======= ======= ==========
Weighted average number of common and common equivalent shares
outstanding.................................................. 8,266 9,931
========== ==========
Net loss per common and common equivalent shares............... $ (0.02) $ (0.03)
========== ==========
Pro forma net loss per common and common equivalent shares..... $ (0.16)(c)(g) $ (0.14)(c)(g)
========== ==========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------
FULCRUM STORYBOOK
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.................................................... $ 23,111 $14,963 $ -- $ 38,074
Cost of goods sold.............................................. 9,450 6,994 -- 16,444
---------- ------- ------- ----------
Gross profit.................................................... 13,661 7,969 -- 21,630
Advertising and catalog costs................................... 7,303 3,700 -- 11,003
General, and administrative expenses............................ 9,157 4,039 510(a)(b)(c) 13,706
Non recurring Playclothes start up costs........................ 2,116 -- -- 2,116
---------- ------- ------- ----------
Income (loss) from Operations................................... (4,915) 230 (510) (5,195)
Other Income.................................................... 371 -- -- 371
Interest expense................................................ (1,022) (70) (505)(d) (1,597)
Other expense................................................... -- (179) -- (179)
---------- ------- ------- ----------
Loss before income taxes and cumulative effect of change in
accounting principle.......................................... (5,566) (19) (1,015) (6,600)
Income tax benefit.............................................. (442) (3) (269)(e) (714)
---------- ------- ------- ----------
Loss before cumulative effect of change in accounting
principle..................................................... $ (5,124) $ (16) $ (746) $ (5,886)
========== ======= ======= ==========
Pro forma net loss before cumulative effect of change in
accounting principle.......................................... $ (5,124) $ (16) $ (746) $ (5,886)
========== ======= ======= ==========
Weighted average number of common and common equivalent shares
outstanding................................................... 8,294 9,959
========== ==========
Loss per common and common equivalent shares before cumulative
effect of change in accounting principle...................... $ (0.62) $ (0.59)
========== ==========
Pro forma net loss per common and common equivalent share before
cumulative effect of change in accounting principle........... $ (0.62) $ (0.59)
========== ==========
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS

(a) Represents amortization of a trademark which is being amortized using the
straight-line method over 15 years.
(b) Represents goodwill amortization of $9,264 on a straight-line basis over 20
years.
(c) Represents amortization of customer lists of $626 on a straight line basis
over five years. As of December 29, 1996, the Company changed its policy of
capitalizing list rental costs in connection with the Storybook Acquisition.
Storybook has historically followed a policy of expensing such costs as
incurred and, while practices may vary the Company has decided to conform to
Storybook's practices and expense such costs as incurred.
(d) Represents interest expense incurred as a result of the June Whitney
Investment.
(e) Reflects the impact of pro forma adjustments at applicable statutory tax
rates and goodwill amortization on a straight-line basis of $9,264.
(f) Calculated after deducting Preferred Stock dividends of $583.
(g) The pro forma net loss and net loss per common and common equivalent share
represent those amounts as if the new accounting policy had been applied in
all the periods presented. See Note 2.i. of Notes to Consolidated Financial
Statements.

22
<PAGE> 24

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 and will differ materially as a result of the Storybook
Acquisition. 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

Since 1994, Fulcrum has introduced eight brands through in-house
development and acquisition, and expanded its business by entering new
geographic markets, testing a strategic alliance and adding new customer names
through list acquisition and rental. In March 1994, Fulcrum acquired the After
the Stork brand and, by fiscal year-end 1994, remerchandised and repositioned
the catalog. Simultaneously with repositioning After the Stork, the Company
began employing sophisticated housefile regression modeling techniques to
improve its housefile and prospect response rates and increase its investment in
customer prospecting and reactivation. In Spring 1995, Fulcrum developed its
SunSkins line of sun protective clothing and introduced the After the Stork
brand in Japan. In Spring 1996, Fulcrum introduced Discount Direct, a catalog
liquidation vehicle for its children's brands, and purchased the OshKosh B'Gosh
catalog customer list, which consisted of 93,000 names. In Fall 1996, Fulcrum
also introduced its Little Feet brand in the U.S. and Japan.

In December 1996, Fulcrum acquired the Playclothes brand name and related
customer information and other assets from a subsidiary of The Walt Disney
Company for $1.2 million plus the assumption of customer return liabilities
estimated at $350,000. During the second half of 1996, Fulcrum began to
remerchandise and reposition Playclothes which included increasing its design
staff, and expanding its call center and distribution center. 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
facilities and distribution systems. As a result, historical net revenues
generated by the Playclothes catalog may not be indicative of future net
revenues.

In June 1997, the Company completed the acquisition of substantially all of
the capital stock of Storybook Heirlooms, Inc., a catalog retailer of girls'
clothing and the owner of the Just for Kids brand name and the Just for Kids
customer list of 3.4 million names (which have not yet been validated by the
Company or added to its housefile). The Company plans to integrate Storybook by:
(i) eliminating redundant corporate staff including select executives and
accounting, human resources, and marketing and manufacturing staffs, (ii)
consolidating duplicate distribution center and call center facilities primarily
into Fulcrum's Rio Rancho, New Mexico facility and the closing of the Foster
City, California facility; and (iii) consolidating corporate printing, freight,
toll-free phone service and credit card processing contracts, manufacturing and
merchandising. The success of the Storybook Acquisition will depend primarily on
the Company's ability to successfully integrate and consolidate Storybook, which
will require substantial management, financial and other resources and may pose
risks with respect to sales, customer service and market share. See "Risk
Factors -- Integration of Storybook Acquisition."

In addition, the Company has also recently acquired a catalog list of
30,000 names from Gymboree Corporation and entered into an arrangement with
Sears to test market the Company's brands during the second half of 1997 to
select individuals from the over 20 million customer file of Sears.

23
<PAGE> 25

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 SIX MONTHS ENDED
THROUGH --------------------------- ---------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
-------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... 42.4 46.2 42.7 44.8 40.9
----- ----- -----
Gross profit......................... 57.6 53.8 57.3 55.2 59.1
Advertising and catalog costs........ 38.7 18.0 19.4 21.1 31.6
General and administrative
expenses........................... 16.5 32.1 34.7 36.5 39.6
Nonrecurring Playclothes start up
costs.............................. -- -- 0.9 -- 9.2
----- ----- -----
Income (loss) from operations........ 2.4 3.7 2.3 (2.4) (21.3)
Other income......................... 0.4 0.6 2.4 3.7 1.6
Interest expense..................... (0.5) (2.7) (2.2) (2.5) (4.4)
Other expense........................ (0.9) -- (0.7) (1.5) --
----- ----- -----
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............... 1.4 1.6 1.7 (2.6) (24.1)
Income tax expense (benefit)......... 0.7 0.5 0.6 (0.9) (1.9)
----- ----- -----
Net income (loss) before cumulative
effect of change in accounting
principle.......................... 0.8 1.1 1.1 (1.7) (22.2)
===== ===== =====
Cumulative effect of change in
accounting principle, net of tax
benefit............................ -- -- -- -- (7.8)
----- ----- -----
Net income (loss).................... 0.8 1.1 1.1 (1.7) (30.0)
===== ===== =====
Net income (loss) applicable to
common stockholders................ 0.8% 0.9% (0.5)% (3.4)% (30.0)%
===== ===== =====
</TABLE>

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997

Net revenues. Net revenues increased 37.4% from $16.8 million in the first
six months of fiscal 1996 to $23.1 million in the first six months of fiscal
1997. Net revenues increased as a result of (i) the Company's introduction of a
newly merchandised and positioned Playclothes brand, (ii) the roll out of Little
Feet and (iii) an increase in domestic circulation for After the Stork. The
increase in net revenues was partially offset by a decrease in net revenues from
Japan due largely to adverse currency exchange rate fluctuations. Despite the
increase in net revenues, net revenues per catalog mailed decreased 40.8% from
$2.77 to $1.64 (after reducing circulation by 3.9 million catalogs mailed to
test the newly acquired Playclothes customer list) primarily due to lower
response rates than experienced in the prior year due to test mailing the
Playclothes catalog, expansion of After the Stork circulation and the decline in
Japanese order volume due to adverse currency exchange rate fluctuations.

Gross profit. Gross profit, which is net of merchandise cost, inbound
freight and design, development, manufacturing and production costs, among other
things, increased 47.1% from $9.3 million in the first six months of fiscal 1996
to $13.7 million in the first six months of fiscal 1997 while gross margin
increased from 55.2% to 59.1% for the same periods. This increase was due
primarily to a shift in product mix towards higher margin merchandise and
improved management of the manufacturing process. This increase was partially
offset by the decrease in net revenues in Japan, where products are

24
<PAGE> 26

sold at higher retail prices. The Company expects that lower gross margins will
be associated with revenues from zoe, as it consists of popular third-party
branded products, which are typically associated with lower margins than the
proprietary branded products primarily sold in the Company's other catalogs.

Advertising and catalog costs. Advertising and catalog costs, which
consist of all direct mail costs, including printing, paper, postage, fixed
catalog creative costs, list rental expense and other advertising expenses
increased by 105.7% from $3.6 million in the first six months of fiscal 1996 to
$7.3 million in the first six months of 1997. This increase was primarily a
result of the change in accounting for list rental expense, investments made to
expand its customer base through increased domestic circulation of After the
Stork and an advertising campaign launched in Japan to acquire new customer
names for the After the Stork and Playclothes catalogs and to refine the
Playclothes database. These costs were partially offset by a decrease in catalog
production costs per book as a result of economies of scale and improved
management. The Company does not believe that the increase in advertising and
catalog costs as a percentage of revenues represents a material trend.

General and administrative expenses. General and administrative expenses,
which consist of distribution center, facilities, order entry, customer service
and staffing and administrative overhead costs associated with brand management,
marketing and analytical services, information services, finance, accounting and
human resources, increased 49.1%, from $6.1 million in the first six months of
fiscal 1996 to $9.2 million in the first six months of fiscal 1997. This
increase was due to investments in management, training, facilities, and systems
to support expansion of the Company's portfolio of brands and initiation of the
Company's wholesale operations, which are expected to commence operations in
fiscal 1998. Partially offsetting the increase in fixed costs were (i) an
improvement in variable cost pricing per package primarily attributable to lower
shipping costs and (ii) variable cost efficiency gains achieved by shipping
fewer packages per order. These improvements represent the benefits experienced
from the investment in management, infrastructure and systems. The Company does
not believe that the increase in general and administrative expenses represents
a material trend.

Non-recurring Playclothes start-up costs. The Company incurred start up
costs for the Playclothes Acquisition of $2.1 million in the first six months of
fiscal 1997. The Walt Disney Company ceased operations relating to the
Playclothes brand prior to the acquisition of the Playclothes assets, and as a
result, significant costs were incurred to restaff, improve the assets and start
up the Playclothes business. This amount in the first six months of 1997
included the costs of recruiting, training and moving employees and other costs
associated with the start up of the Playclothes operation. Also included were
expenses which represented list testing costs. These costs were additional costs
related to advertising and catalogs used to establish detailed prospecting
history and confirm customer response rates contained in the purchased customer
list.

Other income. Other income includes state training grants and interest
income from marketable securities. Other income decreased from $629,000 in the
first six months of fiscal 1996 to $371,000 in the first six months of fiscal
1997, primarily as a result of a $347,000 gain attributable to the sale of
marketable securities in the first six months of fiscal 1996.

Interest expense. Interest expense increased from $412,000 in the first
six months of fiscal 1996 to $1.0 million in the first six months of fiscal
1997. This increase was primarily a result of the issuance of $10.0 million
principal amount of subordinated debt in October 1996 and increases in amounts
outstanding under the Company's credit facility and capitalized lease
obligations, partially offset by lower interest rates.

Other expense. Other expense of $253,000 in the first six months of fiscal
1996 consisted primarily of relocation expenses of the Company's operations. In
the first six months of fiscal 1997, there were no other expenses.

Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased from a benefit of $158,000 in the first six months of fiscal 1996 to a
benefit of $442,000 in the first six months of fiscal 1997 due to operating
losses incurred by the Company largely associated with non-recurring expenses
and a valuation adjustment to the Company's net operating loss carry forwards.

25
<PAGE> 27

Cumulative effect of change in accounting principle, net of tax
benefit. Effective as of January 1, 1997, the Company has changed its policy of
capitalizing list rental costs. This change was made in accordance with
Storybook's policy of expensing such costs as incurred. Furthermore, while
practices vary, the Company has decided to expense these costs as incurred. The
cumulative effect of the change was recorded as of December 29, 1996 and
approximated $(1.8 million) or $(0.22) per share, net of tax benefit of $1.2
million.

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 as a
result of (i) changes in merchandise mix, (ii) select price increases and an
increase in the proportion of Japanese orders which historically have had a
higher average order size than domestic orders and (iii) use of housefile
regression modeling techniques to refine mailings and an increase in Japanese
circulation. Notably, while net revenues increased by 27.6%, circulation
increased by only 4.7% from 14.8 million in fiscal 1995 to 15.5 million in
fiscal 1996, increasing net revenue per catalog mailed 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 profit. Gross profit increased 35.9% from $15.4 million in fiscal
1995 to $20.9 million in fiscal 1996, while gross margin increased from 53.8% to
57.3% in the same period. 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.

Advertising and catalog costs. Advertising and catalog costs, which consist
of all direct mail costs, including printing, paper, postage and fixed catalog
creative costs, increased by 37.9% from $5.1 million in fiscal 1995 to $7.1
million in fiscal 1996. This increase was primarily a result of increased
circulation in Japan and an unexpected mailing delay caused by a third-party
printer. The Company does not believe that the increase in advertising and
catalog costs as a percentage of revenues represents a material trend.

General and administrative expenses. General and administrative expenses
increased by 37.6%, from $9.2 million in fiscal 1995 to $12.6 million 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 possible
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. Operating expenses also increased in fiscal 1996
as the Company added management personnel and infrastructure to its marketing,
design, development, merchandising, manufacturing and production departments in
anticipation of the introduction of its Playclothes and zoe brands. The Company
does not believe that the increase in general and administrative expenses
represents a material trend.

Non-recurring Playclothes start-up costs. The Company incurred start up
costs for the Playclothes Acquisition of $338,000 in the last six months of
1996. The Walt Disney Company ceased operations relating to the Playclothes
brand prior to the Playclothes Acquisition and as a result, significant costs
were incurred to restaff, improve the assets and start up the Playclothes
business. This entire amount represents the costs of recruiting, training and
moving employees and other costs associated with the start up of the Playclothes
operation.

Other income. Other income includes income from state 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 $869,000 in
fiscal 1996. This increase was primarily attributable to a full year's
utilization of the state training grants and a one-time gain attributable to the
sale of marketable securities.

Interest expense. Interest expense increased from $762,000 in fiscal 1995
to $820,000 in fiscal 1996. This increase was primarily a result of the issuance
of $10.0 million principal amount of subordinated

26
<PAGE> 28

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 expense increased from $1,000 in fiscal 1995 to
$256,000 in fiscal 1996. Other expense consisted primarily of operations
relocation expenses.

Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased from an expense of $151,000 in fiscal 1995 to an expense of $230,000
in fiscal 1996 primarily due to increased profit before income taxes.

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

Net revenues. Net revenues increased 138.2%, from $12.0 million in fiscal
1994 to $28.6 million in fiscal 1995. Net revenues increased primarily due to
increases in catalog productivity and in circulation, as well as the inclusion
of a full year of results, the introduction of the Company's SunSkins brand and
the introduction of catalog mailings in Japan in Spring and Summer 1995,
respectively. Net revenues per catalog mailed increased 78.7% from $1.08 to
$1.93 in calendar year 1994, primarily as a result of changes in product mix,
select price increases and 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, as well as the inclusion of a full year of results. The
Company increased circulation based on its belief that its housefile had
previously been undermailed.

Gross profit. Gross profit increased by 122.4% from $6.9 million in fiscal
1994 to $15.4 million in fiscal 1995, while gross margins decreased from 57.6%
to 53.8%. 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 1994 catalog, which reduced merchandise costs and return rates.

Advertising and catalog costs. Advertising and catalog costs, which consist
of all direct mail costs, printing, paper, postage and fixed catalog creative
costs, increased by 10.9% from $4.6 million in fiscal 1994 to $5.1 million in
fiscal 1995 but decreased as a percentage of net revenues from 38.7% in fiscal
1994 to 18.0% in fiscal 1995. The dollar increase in costs was due to increased
circulation, partially offset by a decrease in paper prices and more efficient
shipping and distribution processes, while the decrease as a percentage of net
revenues was the result of the ability to spread costs over a larger revenue
base.

General and administrative expenses. General and administrative expenses
increased by 363.4%, from $2.0 million in fiscal 1994 to $9.2 million in fiscal
1995. This increase was the result of 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 benefits from
state training grants, as well as the inclusion of a full year of results.

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, as well as the inclusion of a full year of results.

Provision (benefit) for income taxes. Provision for income taxes increased
from an expense of $79,000 in fiscal 1994 to an expense of $151,000, due to
increased profit before income taxes.

27
<PAGE> 29

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited statements of operations
data for the ten quarters ended June 30, 1997, 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 a fair presentation of such information when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
------------------------------------------ ------------------------------------------ -------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 28, MAR. 29, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <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 $13,006 $10,105
Cost of goods
sold............ 1,962 2,734 3,121 5,394 3,421 4,104 3,213 4,828 5,481 3,969
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Gross profit...... 2,033 2,677 4,249 6,411 3,736 5,554 4,010 7,591 7,525 6,136
Advertising and
catalog costs... 1,037 744 1,631 1,730 1,407 2,143 1,353 2,186 2,912 4,391
General and
administrative
expenses........ 1,342 1,797 2,266 3,766 2,420 3,722 2,447 4,032 4,176 4,981
Nonrecurring
Playclothes
start up
costs........... -- -- -- -- -- -- -- 338 353 1,763
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss) from
operations...... (346) 136 352 915 (91) (311) 210 1,035 (916) (5,499)
Other income...... 1 14 20 142 116 513 132 108 185 186
Interest
expense......... (50) (117) (342) (253) (231) (181) (150) (258) (503) (519)
Other expense..... -- -- -- (1) (3) (250) -- (3) -- --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes and
cumulative
effect of change
in accounting
principle....... (395) 33 30 803 (209) (229) 192 882 (1,234) (4,332)
Income tax benefit
(expense)....... 134 (11) (10) (264) 75 83 (69) (319) 90 352
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net Income (loss)
before
cumulative
effect of change
in accounting
principle....... $ (261) $ 22 $ 20 $ 539 $ (134) $ (146) $ 123 $ 563 $(1,144) (3,980)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
Cumulative effect
of change in
accounting
principle, net
of tax
benefit......... -- -- -- -- -- -- -- -- (1,802) --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... $ (261) $ 22 $ 20 $ 539 $ (134) $ (146) $ 123 $ 563 $(2,946) $(3,980)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======

PERCENTAGE OF NET REVENUES
------
Net revenues...... 100.0% 100.0% 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 47.8 42.5 44.5 38.9 42.2 39.3
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Gross profit...... 50.9 49.5 57.7 54.3 52.2 57.5 55.5 61.1 57.8 60.7
Advertising and
catalog costs... 26.0 13.8 22.1 14.7 19.7 22.2 18.7 17.6 22.4 43.5
General and
administrative
expenses........ 33.6... 33.2 30.8 31.9 33.8 38.5 33.9 32.5 39.7 39.4
Nonrecurring
Playclothes
start up
costs........... -- -- -- -- -- -- -- 2.7 2.7 17.4
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss) from
operations...... (8.7) 2.5 4.8 7.7 (1.3) (3.2) 2.9 8.3 (7.0) (39.6)
Other income...... 0.1 0.3 0.2 1.2 1.6 5.3 1.9 0.9 1.4 1.8
Interest
expense......... (1.3) (2.2) (4.6) (2.1) (3.2) (1.9) (2.1) (2.1) (3.9) (5.1)
Other expense..... -- -- -- -- -- (2.6) -- -- -- --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes and
cumulative
effect of change
in accounting
principle....... (9.9) 0.6 0.4 6.8 (2.9) (2.4) 2.7 7.1 (9.5) (42.9)
Income tax benefit
(expense)....... 3.4 (0.2) (0.1) (2.2) 1.0 0.9 (1.0) (2.6) 0.7 3.5
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income (loss)
before
cumulative
effect of change
in accounting
principle....... (6.5) 0.4 0.3 4.6 (1.9) (1.5) 1.7 4.5 (8.8) (39.4)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
Cumulative effect
of change in
accounting
principle, net
of tax
benefit......... -- -- -- -- -- -- -- -- (13.8) --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... (6.5)% 0.4% 0.3% 4.6 % (1.9)% (1.5)% 1.7% 4.5 % (22.6)% (39.4)%
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
</TABLE>

28
<PAGE> 30

The Company's business is subject to seasonal fluctuations. Given the
Company's historical results, and the historical strength of Storybook's first
quarter results, management anticipates that the majority of the Company's net
revenues will be derived from the first and fourth quarters. As a result, the
Company expects its sales and results of operations generally to be lower in the
second and third quarters than in the first and fourth quarters of each fiscal
year, which include Easter, 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, 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 other revenues such
as integrated program and mail list rental revenues, 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 suppliers
and competitors. Accordingly, 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. 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 decrease in net revenues and gross profits, and the increased operating
loss in the second quarter of fiscal 1997 compared with the first quarter of
fiscal 1997 were primarily the result of decreased catalog productivity due to
broad circulation of the remerchandised and repositioned Playclothes catalog
required to test the Playclothes database and a decrease in net revenues from
Japan due to adverse currency rate fluctuations to which the Company responded
by decreasing Japanese catalog circulation. Net revenues also declined due to
seasonal fluctuations. The increase in advertising and catalog production costs
and general and administrative expenses as a percentage of net revenues in the
second quarter of fiscal 1997 compared with the first quarter of fiscal 1997 was
primarily the result of increased expenses resulting from brand start-up costs
that are expensed as incurred, and spread over lower net revenues. Additionally,
effective as of January 1, 1997, the Company has changed its policy of
capitalizing list rental costs. This change was made in accordance with
Storybook's policy of expensing such costs as incurred. Furthermore, while
practices vary, the Company has decided to expense these costs as incurred. The
cumulative effect of the change was recorded as of December 29, 1996 and
approximated $3.0 million or $0.38 per share, net of tax benefit of $1.2
million. The net loss for the first quarter of fiscal 1997, as compared with net
income for the fourth quarter of fiscal 1996 was primarily the result of
increased expenses supporting the start-up of the Company's remerchandised and
repositioned Playclothes brand and new zoe brand.

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 advertising and catalog costs
including: catalog development, printing, paper and catalog mailing expenses,
and amortizes these expenses in relation to catalog revenues from each catalog
mailing, generally over 12 weeks. The Company's 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
advertising and catalog costs and general and administrative expense has and may
continue to fluctuate with net revenues.

29
<PAGE> 31

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 $5.7 million, $5.3 million and
$8.2 million, in fiscal 1995, fiscal 1996 and the six months ended June 30,
1997, respectively. The decrease in fiscal 1996 compared with fiscal 1995 was
primarily due to increased cash flow generated by operations partially offset by
increased investment in management personnel, training and customer name
acquisition. The increase for the six months ended June 30, 1997 was primarily
due to non-recurring Playclothes start-up costs, additional advertising programs
than in the prior year and an increase in inventory relating to Fall
circulation.

Purchases of certain assets were $800,000, $2.5 million and $4.2 million in
fiscal 1995, fiscal 1996 and for the six month period ended June 30, 1997,
respectively. These expenditures were primarily related to investments in the
Company's facilities leased from Fulcrum Properties L.P. for its headquarters,
call center, distribution center and information systems.

In June 1997, the Company completed a private placement of $10.0 million in
subordinated debt (the "1997 Notes") with WSDF and affiliates of Arnold
Greenberg and Patrick K. Sullivan, directors of the Company, and $10.0 million
of Common Stock with WEP and affiliates of Messrs. Greenberg and Sullivan. The
June Whitney Investment was completed in connection with the Storybook
Acquisition. The 1997 Notes bear interest at a rate of 10.101% and have a
seven-year balloon payment. However, $7.0 million is required to be repaid
within five days of the Offering. See "Use of Proceeds." The Company will incur
an extraordinary expense of approximately $946,000 in connection with debt
extinguishment in the period in which such amount is repaid. See Note 3 of Notes
to Consolidated Financial Statements.

In October 1996, Fulcrum completed a private placement of $10.0 million in
subordinated debt (the "J.H. Whitney Note") and $2.0 million in Common Stock,
and warrants to purchase common stock with the Whitney Subordinated Debt Fund,
and the Whitney Equity Fund affiliate and two directors of the Company 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 expense of approximately $668,000 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, a subsidiary of NationsBank, to expand its credit facility
effective January 1, 1997, and subsequently amended on April 7, 1997 to increase
the borrowing limit from $10.0 million to $15.0 million. The Company's credit
facility bears interest at either 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 3.1% above LIBOR through September 30, 1997, which was 5.63% as of August 1,
1997. This credit facility also includes the right to borrow up to $2.0 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 31, 1999.
As of June 30, 1997, the Company had outstanding $9.6 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

30
<PAGE> 32

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 on the Company's business, financial
condition and results of operations.

NET OPERATING LOSSES

As of June 30, 1997, on a tax basis, the Company had net operating losses
of $2.8 million, which may be used to reduce the Company's future income taxes.
Of this amount $800,000 relates to the periods prior to the acquisition of
NewStork, Inc. by FCP Direct, Inc., the successor to the Company by merger. 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
pre-acquisition 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.

31
<PAGE> 33

BUSINESS

OVERVIEW

Fulcrum is a leading catalog retailer of branded apparel, shoes and
accessories for children, teens and young women up to 24 years of age. The
Company's strategy is to capitalize on the large opportunity in the children's
and teen apparel catalog market by building a portfolio of distinct brands
targeting discrete market segments. The Company's portfolio of brands includes
After the Stork, Playclothes, Storybook Heirlooms, Little Feet, zoe, SunSkins,
Discount Direct, and a test of a new strategic alliance with Sears. The Company
believes that its portfolio of brands combined with its strong customer
relationships provide unique cross marketing opportunities that allow the
Company to increase customers' lifetime value and decrease customer acquisition
costs. As of June 30, 1997, the Company's housefile included 4.4 million names
of which 1.4 million had made at least one purchase from one of the Company's
brands in the last 24 months. See also "The Company."

Fulcrum intends to continue growing its portfolio of brands by: maximizing
the potential of its brands through targeted marketing, mailing and
merchandising strategies; developing new brands that appeal to its growing
customer base through in-house brand creation and strategic alliances;
developing new markets and product categories that leverage the Company's large
database and strong customer relationships; and pursuing strategic acquisitions.
Since 1995, the Company has made significant investments in its management team
and infrastructure platform, which it believes positions the Company to support
substantial growth.

The Company derives a portion of its net revenues from selling advertising
space in its catalogs and distributing the marketing and promotional materials
of other companies to the Company's customers. Such revenues constituted 1.3%,
2.4% and 2.4% of the Companies net revenues in fiscal 1995, fiscal 1996 and the
six month period ended June 30, 1997 respectively. There are no significant
incremental costs associated with such revenues, which directly result in
improved operating results for the Company. There can be no assurance that the
Company will continue its integrated programs or that the Company will continue
to rent its customer lists. The failure to continue such programs could result
in a decline in revenues and have a disproportionate impact on the Company's
operating results.

THE CHILDREN'S AND TEEN APPAREL CATALOG MARKET

With the large "baby boom" generation maturing and having children, the
younger segments of the U.S. population have increased in numbers in recent
years. According to the U.S. Bureau of the Census, this "echo boom" generation
of children, teens and young adults up to age 24 was projected to be at 95
million in 1997 and is anticipated to grow to over 100 million by 2005. The echo
boom generation comprises more than one-third of the total U.S. population.
Furthermore, the U.S. Bureau of the Census estimates annual birth rates will
remain constant at the historically high level of approximately 3.8 million new
births each year until at least 2005.

The U.S. Bureau of Census 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 ages 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, U.S. children and teen
apparel catalog purchases represented only 2.9% or $791.0 million of total
children's and teen apparel purchases of $26.9 billion, which compares to
women's apparel catalog purchases of 9.6% of total women's apparel purchases of
$85.1 billion. Since women are largely responsible for, or significantly
influence, children and teen apparel purchase decisions, the Company believes
that over time, the penetration for children's and teen catalog sales should
grow to more closely approximate the percentage of women's apparel catalog
purchases.

32
<PAGE> 34

GROWTH STRATEGY

The Company's strategy is to build on its strong customer relationships by
offering a broad portfolio of branded apparel, shoes and accessories targeting
children's and teen apparel markets. The following are key elements of this
strategy:

Maximize Each Brand. The Company strives to maximize the potential of each
of its brands by developing strong customer relationships and by cross marketing
across multiple brands. The Company employs the Fulcrum Formula, a unique brand
management philosophy, to build these relationships. See "-- Brand Management
Philosophy."

Develop New Brands. The Company develops targeted brands designed to appeal
to newly defined and evolving segments of its strong customer base through
in-house brand creation and strategic alliances. Recent examples include the
Company's creation and roll-out of Little Feet and zoe and a test of a strategic
alliance with Sears. See "-- Fulcrum's Portfolio of Brands."

Develop New Markets. The Company is constantly evaluating new geographic
markets, distribution channels and product categories to leverage and extend its
strong customer relationships. Recent examples include the testing and
introduction of several of the Company's brands in Japan, in new wholesale
channels and retail outlets and on the Internet. The Company is also evaluating
new product categories such as costumes, dolls, cosmetics and bedding.

Pursue Strategic Acquisitions. As part of the Company's portfolio strategy,
it continuously evaluates the strategic fit of potential acquisition candidates
to leverage its customer relationships and grow its housefile. Recent examples
include the Playclothes Acquisition and the Storybook Acquisition.

BRAND MANAGEMENT PHILOSOPHY

The Company builds strong relationships with its customers and their
families through execution of the Fulcrum Formula. The Company believes that
through consistent execution of the Fulcrum Formula, it increases customer
satisfaction, market penetration, customer lifetime value and the intrinsic
value of each of its Company's brands. Key elements of the Fulcrum Formula are
to (i) understand the Company's target customer, (ii) promise a superior product
and shopping experience, (iii) deliver exceptional customer service and
fulfillment, (iv) measure and analyze the performance of the Company's branded
offerings and (v) refine and improve the product and shopping experience.

[THE FULCRUM FORMULA GRAPHIC]

33
<PAGE> 35

Understand the Customer. By thoroughly understanding customers' needs and
expectations, Fulcrum 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 extensions and new brand
development. The Company regularly refines its understanding of customers' needs
and expectations by using sophisticated statistical modeling and segmentation
techniques; soliciting feedback from its customers; and performing detailed
market research, focus group studies and surveys.

Promise a Superior Product and Shopping Experience. The Company targets
specific segments of the children's and teen catalog 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, such that a
highly relevant convenient shopping experience is expected.

Deliver Exceptional Customer Service and Fulfillment. The Company believes
that exceeding customer expectations is the key to building customers
relationships, attracting new customers, increasing customer lifetime value and
reducing operating costs. 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, systems,
order fulfillment, unconditional return policy and strict operating procedures
are designed to carry out this strategy.

Measure and Analyze Performance. The Company devotes substantial time and
resources to data collection and measurement and analysis of performance. The
Company uses advanced systems to evaluate historical offer performance, customer
feedback, product performance, sales trends, customer demand, inventory
positions, customer returns and projected sales. The Company also conducts
ongoing analyses of its competitors. These analyses are used to make mailing and
merchandise decisions and to test new product categories 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. The Company
continuously refines its catalog mailing plans and merchandise mix based on
ongoing measurement and analysis of performance.

OPERATING STRATEGY

The Company believes that focused execution is critical to its success.
Following are key elements of Fulcrum's operating strategy:

Mail Smarter. The Company's overall mailing strategy is to increase
circulation while improving each brand's contribution to operating results. The
Company's housefile contains detailed information on each customer, including
purchase history and demographic, geographic and psychographic data. This data
is used by the Company in its proprietary statistical models to rank each
customer's likelihood of reponding to a given offer, with the goal of increasing
the contribution to operating results of each catalog mailing. The Company also
intends to lower the investment per new customer acquired by utilizing its
proprietary models and entering into strategic alliances to prospect for new
customers.

Expand and Refine the Merchandise Offer. The Company regularly evaluates
and refines merchandise categories in order to generate additional sales per
order. 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, special event wear, costumes, dolls and accessories.

Expand Geographic Reach. The Company seeks to continue to develop select
international markets, which to date have included the introduction of After the
Stork, Playclothes, Storybook Heirlooms, zoe and Little Feet in Japan. The
Company also offers its catalogs through internationally published
catalogs-of-catalogs to identify new geographic markets.

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 awareness and

34
<PAGE> 36

overall product distribution. For example, the Company recently introduced its
SunSkins brand into select retail channels and is evaluating the potential for
distribution of its other brands through select wholesale channels. The Company
also plans to utilize the Internet as a vehicle for brand building, to
communicate with existing customers by e-mail, to identify new customers and to
provide a convenient shopping forum.

Leverage New Infrastructure. Since 1995, the Company has made significant
investments in its call center, distribution center, management information
systems and operating equipment. In addition, the Company's landlord, Fulcrum
Properties L.P., has made significant investments to expand the facilities
leased by the Company for its headquarters, call centers and distribution
center. Fulcrum believes that its infrastructure is capable of supporting
substantial growth and delivering significant operating leverage and
efficiencies. Furthermore, Fulcrum's facilities are modularly expandable to
provide the Company with the flexibility to accommodate future growth.

FULCRUM'S PORTFOLIO OF BRANDS

Fulcrum was founded in 1994 to build a portfolio of brands to capitalize on
the significant growth opportunity in the children's apparel catalog market.
Fulcrum's investments in its portfolio of brands, housefile, management team and
infrastructure were made to provide the Company with significant operating
leverage. The Company's portfolio approach enables it to leverage its customer
relationships by cross mailing a broad base of brands targeting specific
customers' fashion and price point needs. Each of the Company's brands has a
dedicated brand team comprised of a brand manager, brand merchandise manager and
a catalog creative manager. The Company's brand team approach ensures a fresh,
relevant presentation of its products from season to season, while at the same
time maintaining the consistent and distinctive voice of each brand.

The Company's brands target well-educated, middle to upper, dual-income
parents with children up to 12 years old and girls ages 10 to 24 years old. The
Company's brands cover a broad range of children and teen apparel merchandise
categories, including sweaters, shirts, pants, dresses, jumpers, underwear,
hosiery, shoes, sleepwear, swimwear, outerwear, accessories, personal care
products, costumes, bedding, dolls and related accessories. During fiscal 1995,
fiscal 1996 and the six month period ended June 30, 1997, apparel sales
represented 86.7, 84.2% and 79.9%, respectively, of net revenues, and shoe sales
represented 13.3, 15.8% and 20.1%, respectively, of net revenues. The following
is a brief overview of each of the Company's brands and its test of a new
strategic alliance:

After the Stork. After the Stork, first published in 1980, presents a high
quality, value-priced, brand to customers interested in purchasing basic and
classically styled clothing made primarily of natural fibers. After the Stork
products are durable and most are 100% cotton, unisex and are generally
available in broad color assortments. The Company's demographic surveys indicate
that the typical After the Stork customer is a college-educated 25 to 44 year
old married woman with a household income over $50,000 and children up to 10
years old. Most After the Stork customers reside either in urban areas or in
rural regions where retail choices are more limited. The Company mailed 15.2
million After the Stork catalogs in fiscal 1996 in 17 distinct editions.

Playclothes. Playclothes, 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 want to add fashionable, every day clothing
to their children's wardrobes. 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 woman with a household income over $40,000 and children two to
12 years old. Most Playclothes customers reside in suburban areas and are
specialty store and boutique shoppers. As of January 1997, the addition of
Playclothes to the Fulcrum portfolio created a large cross mailing opportunity
as less than 25% of the Playclothes housefile names overlapped with the
Company's existing house file. The Walt Disney Company mailed 18.2 million
Playclothes catalogs in twelve editions in 1996. The Company mailed its first
edition of the Playclothes catalog in January 1997 to prospective customers in
the U.S. and Japan.

35
<PAGE> 37

Storybook Heirlooms. Storybook Heirlooms mailed its first catalog in
September 1990 and was acquired by the Company in June 1997. Storybook Heirlooms
presents an array of fashionable and dressy, upscale outfits and accessories for
girls ages two to 12 years. The goal of the Storybook Heirlooms catalog is to
"make little girls' dreams come true" through the presentation of unique,
feminine specialty dresses and accessorized outfits in a romanticized setting.
The Storybook Heirlooms brand is designed to offer special occasion outfits for
events including holiday parties and costume days, weddings and communions.
Storybook Heirlooms' typical customer is a 25 to 55 year old working mother with
a household income of $92,000; however, over 34% of Storybook Heirlooms customer
base extends to customers who have household incomes of less than $45,000.
Storybook Heirlooms mailed 10.4 million catalogs in fiscal 1996 in 14 distinct
editions.

zoe. zoe, which the Company recently developed and first mailed in August
1997, presents a broad assortment of popular branded basic and fashionable
outfits and accessories for Generation Y girls, ages 10 to 24. The Company
believes that zoe provides the Company an attractive opportunity to target a
new, older age segment of its market that can significantly leverage its
customer relationships with mothers. zoe merchandise is sourced primarily from
leading designers. Pending the results of zoe's test mailing, the Company may
expand its mailing of the zoe catalog in 1998. See "Risk Factors -- Brand
Development and Strategic Alliance Risks."

Little Feet. Little Feet was first published in Fall 1996. The Company
believes Little Feet is the only national footwear catalog exclusively for
children. Little Feet offers a broad, mid-priced selection of basic and fashion
shoe styles and a limited selection 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 woman with children ages six
months to 12 years. The Company believes that Little Feet appeals to a broad
cross section of Fulcrum customers, as well as to the customers of other
children's catalogs. Following an introductory mailing of approximately 400,000
catalogs in fiscal 1996, the Company is expanding circulation of Little Feet in
fiscal 1997.

SunSkins. The SunSkins line was developed by the Company in 1995 in
recognition of its customers' desire to protect their families from the sun. The
SunSkins line is made from a fabric which blocks in excess of 97% of the sun's
harmful UV rays. 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. Discount Direct, the Company's "Warehouse Sale by Mail,"
was first published in Spring 1996 and serves as a direct mail liquidation
vehicle for its brands. Discount Direct offers the Company's customers reduced
prices on discontinued merchandise and is circulated in a variety of formats
including a full size catalog, inserts in the Company's full-price catalogs and
as inserts in packages shipped to customers. The Company mails Discount Direct
as it determines appropriate to manage inventory. The Company also liquidates
merchandise through clearance versions of its other branded catalogs.

Sears. The Company and Sears have arranged to test market certain of the
Company's brands to select individuals from the over 20 million name customer
file of Sears, who are not existing customers of the Company. The catalogs will
be substantially similar to the Company's catalogs, but have a distinct cover
with the Sears logo. Pending the results of this test, the Company may enter
into a definitive strategic alliance with Sears. See "Risk Factors -- Brand
Development and Strategic Alliance Risks."

Just For Kids. In connection with the Storybook Acquisition, the Company
acquired the Just For Kids brand and the Just For Kids customer list of 3.4
million names (which the Company has not yet validated or added to its
housefile). The Just For Kids brand was acquired by Storybook from The Walt
Disney Company in 1996. The Just for Kids brand is expected to present costumes,
dolls and games catering to the year-round dress up and imagination play market.
The Company is evaluating the Just For Kids brand to test the viability of this
concept. Pending the results of test mailings, the Company may expand
circulation of the Just For Kids brand.

36
<PAGE> 38

COMPANY 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 people are its most important asset. The Company also believes that it is
management's role to train front-line employees to assume high levels of
responsibility, provide them with appropriate support, and thereby empower them
to serve the Company's customers and achieve excellence. The Company instills in
each employee a strong sense that each individual contributes to total customer
satisfaction. 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 our
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.

PROPRIETARY HOUSEFILE

As of June 30, 1997, the Company's housefile contained 4.4 million names,
with 1.4 million active customers who have purchased at least once 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. The Company is
constantly refining and developing its housefile based on data collected from
customer calls, mailings and orders, as well as the integration of new customer
data purchased from select list brokers and list sources. The Company treats its
customer list as a proprietary asset which has long-term strategic value. From
time to time, however, the Company segments portions of its list to be rented to
select parties, including competitors, at competitive rates in accordance with
industry practice.

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 describes the Company's
principal marketing activities.

"Mining" the Housefile. The Company's housefile contains detailed
information on each customer, including purchase history and demographic,
geographic and psychographic data. These data are used by the Company's
proprietary statistical models to rank each customer's likelihood of responding
to a given offer, with the goal of increasing the contribution to operating
results of each catalog mailing. The Company believes that its sophisticated
statistical modeling and customer segmentation tech-

37
<PAGE> 39

niques provide it with a competitive advantage which allows it, over time, to
improve net revenues per catalog mailed on a cost effective basis.

Cross Marketing Opportunities. The Company employs proprietary cross
mailing statistical models (similar to those used to mail to existing customers
more efficiently), which allow it to leverage its housefile and acquired
customer lists and thereby reduce the cost and risk of obtaining new customers.
Beginning in 1997, the Company first applied these models to the After the
Stork, Playclothes, Gymboree Corporation, Osh Kosh B' Gosh, and The Disney
Catalog lists. The Company believes that as its housefile grows and new brands
are added to its portfolio, further leverage will be created. The Company
continues to develop and test new models and identify new sources for
prospective customers through strategic database alliances with other leading
direct marketers.

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)
strategic alliances with leading noncompetitive direct marketers, (ii) customer
lists of children's product, adult apparel, and other lifestyle catalogs, rented
on a one-time basis, (iii) compiled and participatory databases, (iv)
subscribers of children and family-related magazines and (v) magazine and other
advertisements. 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. Prospect mailings have historically
generated lower revenues per catalog than names derived from the Company's
housefile. Accordingly, the Company anticipates that overall revenues per
catalog would decline if the Company increased the percentage mix of prospect
names to housefile names in any given mailing plan. However, the Company must
also constantly update its mailing lists by identifying new customer names and
is committed to aggressively prospecting for new customers.

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 from the
Company's housefile.

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 continuously tests 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. The Company publishes a newsletter that provides information, services
and promotional opportunities to certain customers and activities and contests
for their children. Fulcrum is also testing its website as a means to build
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 companies. 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 to establish projected sales levels, an assortment plan and gross
margin targets. Fulcrum's marketing and merchandising groups work closely
together to forecast gross merchandise dollars by merchandise category. The
merchandising and design teams develop merchandise lines by studying prior
sales, extensive customer feedback analyses of prior season's merchandise
offerings, customer and merchandiser feedback, reviewing competitor catalogs,
visiting retail stores, surveying trend magazines, evaluating fabric lines and
attending industry shows to determine worldwide market trends. Based on

38
<PAGE> 40

this research and analysis, trends and color themes are developed, fabric and
prints are selected and products are designed and selected by each brand's
merchandise manager.

The Company's brands consist of a broad assortment of children's and teen
apparel merchandise categories, including sweaters, shirts, pants, dresses,
jumpers, underwear, hosiery, shoes, sleepwear, swimwear, outerwear, accessories,
personal care products, costumes, bedding, dolls and related accessories. The
Company's seeks to increase average order values and customer retention rates by
providing a broad merchandise assortment and by regularly adding fresh
merchandise and refining existing merchandise categories. The Company designs
most of its own products, but also purchases branded products from other
companies. The Company may increase the page counts of its catalogs to
accommodate the introduction of new, related or similar merchandise and
merchandise categories. The Company's merchandise mix is analyzed and refined
throughout each season as items are introduced, remerchandised and ultimately
replaced if they do not meet the Company's performance standards.

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 are distributed to senior management, each
brand team, marketing, merchandising and production for review. This feedback is
also used to develop merchandise placement pricing and assortment decisions.

INVENTORY MANAGEMENT

The Company currently offers a broad assortment of children's and teen
apparel that is carefully controlled through sophisticated inventory management
techniques. As of July 28, 1997, the Company's inventory management system
contained over 27,000 SKUs. Inventory buy plans are forecasted at 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 inventory). If an overstock position develops, the Company acts
quickly to dispose of excess 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 147
factories and suppliers, with no one exceeding 5.0% of total supplier purchases.

Fulcrum's quality assurance teams inspect production lines to ensure that
Fulcrum's garments are manufactured to the Company's exacting quality
specifications. Fulcrum requires contractors to certify that all applicable
labor laws are being followed and also monitors working conditions for safety
and fairness. 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 implemented a formal supplier communication program with more frequent
and structured feedback, and commenced testing e-mail opportunities with certain
of its suppliers. See "Risk Factors -- Reliance on Unaffiliated Manufacturers."

39
<PAGE> 41

CUSTOMER SERVICE AND FULFILLMENT

Fulcrum provides exceptional customer service by fulfilling the needs of
its customers in a timely and efficient manner. The Company's daily service
operations revolve around the call center, the distribution center and customer
returns.

Customer Service. Fulcrum maintains a highly efficient, state-of-the-art
call center at its corporate headquarters in Rio Rancho, New Mexico and an
international call center in the San Francisco, California Bay Area. Once a call
is received by the Company, it is routed to the first available customer service
representative by the Company's modularly expandable, state-of-the-art telephone
system. As of July 18, 1997, the Company had 410 customer service representative
stations installed in its call centers and 431 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. All customer service
representatives are kept apprised of the current status of calls waiting,
average speed to answer, longest wait time, average time to abandon, and the
number of representatives logged in and busy or idle on the phone system.
Customer service representatives are empowered to change work assignments to
meet customer demand and team captains are responsible for monitoring and
adjusting staffing levels as required. 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. The Company also
accepts orders by mail, fax and e-mail and accepts payment by credit card,
personal check and money order.

To provide exceptional customer service and redundancy 24 hours a day, 365
days a year, Fulcrum has contracted with a remote call center in Los Angeles,
California, which provides overflow, off hours and disaster support. 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. There
can be no assurance that the use of the remote call center will provide the
Company with the necessary support or that the Company will be able to
independently answer 98% of all domestic calls now or in the future. See "Risk
Factors -- Integration of Storybook Acquisition."

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 each customer order,
enabling the call center to provide real-time information regarding customer
orders. Before leaving the warehouse, each package is scanned by a manifesting
system, which is integrated with the order entry, billing and fulfillment
systems. 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 through customer service. The customer's credit card is billed
upon shipment, and the Company typically receives funds within two to three
business days. Any 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
children's merchandise. The Company is developing its return policy for zoe. The
Company establishes a reserve for returns in its financial statements based on
historical return rates. Because the Company's return reserves are based on
historical return rates, there can be no assurance that the introduction of new
merchandise in

40
<PAGE> 42

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 reserves. See "Risk Factors -- Merchandise Returns."

INFORMATION SYSTEMS

The Company is committed to investing in information systems to increase
its database utilization, the sophistication of its propriety modeling
techniques and its operating efficiency. 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 continuous data collection and analysis are
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
computer 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, the
Company's call center and distribution center are supported by numerous disaster
recovery protocols. The Company has installed two emergency generators 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. All critical data is
continuously backed up utilizing simultaneous back-up technology and daily back-
ups are stored appropriately to preserve data integrity. 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 maintains flexible agreements with
suppliers, which are typically for one season and are only active when service
standards are met. The Company's growth has required its suppliers to perform at
a consistently high level. Fulcrum shares analyses and other information with
its suppliers to assist them in understanding the goals of the Company, and
thereby empowering them, as partners, to be an integral part of Fulcrum's
success. Fulcrum is not currently a party to any long-term supply contracts
(other than a three-year contract for "800" service from AT&T), but may enter
such contracts in the future. 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 a third-party catalog printer that
provides printing and mailing services. The Company has received firm bids for
printing and mailing services but is not obligated to utilize any specific
third-party printer. The Company separately negotiates for paper purchases on a

41
<PAGE> 43

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. 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. The Company has not taken any steps to
hedge commodity price fluctuations. See "Risk Factors -- Fluctuations in Postage
and Paper Expenses."

COMPETITION

The children's and teen 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 apparel catalogers,
such as Biobottoms, Children's Wear Digest, Hanna Andersson and The Wooden
Soldier, as well as traditional apparel manufacturers and retailers of
children's clothing, including such brands as The Gap (including its Baby Gap,
Gap Kids and Old Navy brands), Gymboree, L.L. Bean, Lands' End, OshKosh B'Gosh
and J.C. Penney's. With the introduction of zoe; the Company will also compete
with teen apparel catalogers and retailers including The Limited, Gadzooks,
Delia's, The WetSeal, Urban Outfitters, Buckle and Charlotte Russe. Many of the
Company's competitors are larger, have longer operating histories, have
substantially greater financial, distribution and marketing resources and have
significantly greater name recognition than the Company.

The Company believes that the principal competitive factors in the
children's and teen apparel market are strength of brand, 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 online 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 July 18, 1997, the Company had 667 employees at its Rio Rancho
facility, of whom 141 were salaried, 496 were hourly and 30 were part-time and
220 employees at its Foster City and Hayward facilities of whom 40 were
salaried, 134 were hourly and 46 were part-time. None of the Company's employees
are covered by a collective bargaining agreement. The Company believes that it
provides employees competitive and attractive salary and benefits packages and
that the general labor market conditions in Rio Rancho, New Mexico and the San
Francisco, California Bay Area 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 160,000 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 also houses the call center and
distribution center. The Company also leases a 19,000 square foot facility in
Foster City, California and a 33,500 square foot facility in Hayward, California
acquired as a result of the Storybook Acquisition. The Company plans to
consolidate the functions carried out at its Foster City facility and to
relocate the functions carried out at its Hayward facility to its Rio Rancho
facility, by the end of 1997. 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

42
<PAGE> 44

taxes otherwise due. In order to effect such arrangements, the Industrial
Development Board of Rio Rancho, New Mexico issued industrial development
revenue bonds due 2021 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, subleased to the Company. See "Summary -- Proceeds of the
Offering" and "Certain Relationships and Related Transactions." The Company
believes its facilities are well-maintained and in good operating condition.

INTELLECTUAL PROPERTY

Certain of the Company's trademarks and trademark applications are held by
Brands and
licensed to the Company under terms contained in the Amended and Restated
Trademark License and Option Agreement, dated October 21, 1996 between Brands
and Fulcrum (the "Trademark Agreement"). The Company has incurred fees equal to
0.05% of its revenues to Brands during fiscal 1996 and the six month period
ended June 30, 1997. Pursuant to the terms of the Trademark Agreement, such fees
are payable at the end of the following fiscal year. The fees of $38,764
incurred in fiscal 1996 are due to be paid at the end of fiscal 1997 and the
fees of $11,866 incurred in the first half of fiscal 1997 are due to be paid at
the end of fiscal 1998. The Company's After the Stork, Storybook Heirlooms,
SunSkins and Just For Kids trademarks are 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. In
addition, following the acquisition of Playclothes, the Company became a party
to a license agreement (the "Regal Agreement") with Regal Greetings & Gifts,
Inc., a Canadian corporation ("Regal") to promote Playclothes in Canada.
Pursuant to the Regal Agreement, the Company is entitled to receive guaranteed
license payments of cd$355,000, cd$425,000, cd$500,000 and cd$500,000 on January
30, 1998, 1999, 2000 and 2001, respectively. In August 1997, following the
non-payment by Regal of certain payments due under the Regal Agreement, the
Company terminated the Regal Agreement and filed a complaint against Regal in
United States federal court, Southern District of New York, to enforce its
rights under the Regal Agreement. See "-- Legal Proceedings." The Company is not
aware of any pending conflicts concerning its use of its trademarks. See
"Certain Relationships and Related Transactions -- Trademark Option" and "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."

LEGAL PROCEEDINGS

In August 1997, the Company filed a complaint against Regal to enforce its
right to receive guaranteed license payments pursuant to the Regal Agreement of
cd$1.78 million, punitive damages, legal costs and other damages to be
determined at trial.

Other than as described in the preceding paragraph, the Company is party to
certain other legal proceedings in the ordinary course of business, none of
which is expected to have a material adverse effect on the Company's business,
financial condition or results of operations.

43
<PAGE> 45

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------
<S> <C> <C>
Michael G. Lederman........... 44 Chairman of the Board and Chief Executive Officer
Scott A. Budoff............... 33 President, Chief Operating Officer, Secretary and
Director
Gregory L. Anapol............. 28 Vice President, Operations
Katherine S. Batson........... 41 Vice President, Product Design and Development
Marc Benjamin................. 33 Vice President, Marketing and Analytical Services
Jonathan W. Bruml............. 39 Vice President, Merchandising
Carrie K. Cole................ 34 Vice President, Finance and Accounting, and Chief
Financial Officer
Estelle M. DeMuesy............ 37 Vice President, Market and Channel Development
Rona S. Palmer................ 45 Vice President, Brand Management
John J. De Oliveira........... 32 Executive Director, Information Services
Sean T. Linn.................. 27 Executive Director, Manufacturing and Inventory
Control
Joseph P. Sands............... 30 Treasurer and Director, Finance
Arnold Greenberg(1)........... 64 Director
Ray E. Newton, III(2)......... 33 Director
Patrick K. Sullivan, 44 Director
M.D.(2).....................
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 and devotes substantially
all of his time to his duties as such. 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, 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 and
devotes substantially all of his time to his duties as such. 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. In July 1997 she became Vice President,
Product Design and Development. Prior to

44
<PAGE> 46

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 as Vice President, Marketing and
Circulation. From January 1996 until July 1996, he was Vice President, Market
Development. In July 1997 he became Vice President, Marketing and Analytical
Services. Prior to joining Fulcrum, Mr. Benjamin worked as a Finance and
Business Development Associate for Japonica and Manager, Business Development
for Sunbeam from 1991 to February 1994. Mr. Benjamin previously worked for J.
Walter Thompson in New York.

Jonathan W. Bruml joined Fulcrum in June 1997 as Vice President,
Merchandising. Prior to joining Fulcrum in connection with the Storybook
Acquisition, Mr. Bruml was Executive Vice President of Merchandising at
Storybook Heirlooms, Inc. ("Storybook") since February 1996. From 1994 until
February 1996, he served as Vice President of Merchandising. Prior to joining
Storybook, Mr. Bruml was Group Vice President of the Better Sportswear division
at R.H. Macy & Co., Inc.

Carrie K. Cole joined Fulcrum in August 1995 as Vice President, Finance and
Accounting, Chief Financial Officer and Treasurer (and served as Treasurer until
July 1997). 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.

Estelle M. DeMuesy joined Fulcrum in June 1997 as Vice President, Market
and Channel Development. Prior to joining Fulcrum in connection with the
Storybook Acquisition, Ms. DeMuesy was President and Chief Executive Officer at
Storybook from February 1996 until June 1997. From January 1995 until February
1996, she served as Chief Operating Officer of Storybook. She previously was
Vice President of Operations of Storybook from January 1994 until January 1995
and was Operations Director of Storybook since February 1993. Prior to joining
Storybook, Ms. DeMuesy was Director of Customer Service at Newport News, Inc., a
catalog company now owned by Spiegel, Inc., from 1988 until 1992.

Rona S. Palmer joined Fulcrum in April 1994, and since January 1996, has
served as Vice President, Brand Management. She previously served 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 PhysioControl 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. from
July 1990 to July 1993. From July 1993 until joining Fulcrum, Mr. De Oliveira
attended a masters program in technology at the University of New Mexico.

Sean T. Linn joined Fulcrum in July 1995, and since January 1997, has been
Executive Director, Manufacturing and Inventory Control. He previously served 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.

Joseph P. Sands joined Fulcrum in May 1996 as the Director, Finance and
since July 1997, has also served as the Company's Treasurer. Prior to joining
Fulcrum, Mr. Sands attended Columbia Business School from January 1996 to May
1996. Previously, Mr. Sands was employed by Marsh & McLennan Co., Inc. as an
account executive from 1994 to 1995, and Merrill Lynch as a financial consultant
from 1992 to 1993. Mr. Sands is a Certified Public Accountant.

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.

45
<PAGE> 47

Ray E. Newton, III has served as a Director of the Company since October
1996 as a designate of Whitney Equity Partners, L.P., pursuant to the Securities
Purchase Agreement among Fulcrum Direct, Inc., Whitney Subordinated Debt Fund,
L.P. and Whitney Equity Partners, L.P. dated October 21, 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.

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, 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. Mr. Unger serves
as a director of 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 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 1997, Michael G.
Lederman, Scott A. Budoff and Ray Newton, III; term expiring in 1998, Patrick K.
Sullivan; and term expiring in 1999, Arnold Greenberg and Howard Unger. 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.

46
<PAGE> 48

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
------------
SECURITIES
UNDERLYING
FISCAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (#) COMPENSATION(1)
- --------------------------------------------------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael G. Lederman................................ 1996 $170,126 645,000(2) $2,959
Chairman of the Board and Chief Executive Officer
Scott A. Budoff.................................... 1996 $108,895 95,000(3) $ 752
President and Chief Operating Officer
</TABLE>

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

(1) Represents contributions by the Company to its 401(k) plan on behalf of the
named executive officers.

(2) Represents 540,000 Shares underlying Warrants granted to FCP. Although
Warrants are granted to FCP for the benefit of all executive officers who
have interests in FCP, Messrs. Lederman and Budoff currently control all
partnership interests in FCP. Other members of senior management hold
options to purchase partnership interests in FCP, which options have not
been exercised, and therefore no warrants issued to FCP are being allocated
to them for the purpose of this table. See "Management -- FCP Warrants."

(3) Represents 60,000 Shares underlying Warrants granted to FCP. Although
Warrants are granted to FCP for the benefit of all executive officers who
have interests in FCP, Messrs. Lederman and Budoff currently control all
partnership interests in FCP. Other members of senior management hold
options to purchase partnership interests in FCP, which options have not
been exercised, and therefore no warrants issued to FCP are being allocated
to them for the purpose of this table. See "Management -- FCP Warrants."

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
INDIVIDUAL GRANTS VALUE
------------------------------------------------------- AT ASSUMED ANNUAL
% OF TOTAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM($)(2)
OPTIONS FISCAL YEAR OR BASE EXPIRATION ---------------------
NAME GRANTED (%) PRICE($)(1) DATE 5% 10%
- ------------------------ ---------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Lederman..... 105,000 10.9 5.00 10/18/06 855,170 1,361,715
540,000(3) 56.2 1.00 1/1/06 879,603 1,400,621
Scott A. Budoff......... 35,000 3.6 5.00 10/18/06 285,057 453,906
60,000(4) 6.2 1.00 1/1/06 97,734 155,625
</TABLE>

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

(1) The exercise price of all options is the fair market value on the date of
grant. Options granted (excluding the FCP Warrants to purchase 540,000
shares and 60,000 shares allocated to Messrs. Lederman and Budoff,
respectively which are immediately exercisable) 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.

47
<PAGE> 49

(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.

(3) Represents 540,000 Shares underlying Warrants granted to FCP. Although
Warrants are granted to FCP for the benefit of all executive officers who
have interests in FCP, Messrs. Lederman and Budoff currently control all
partnership interests in FCP. Other members of senior management hold
options to purchase partnership interests in FCP, which options have not
been exercised, and therefore no warrants issued to FCP are being allocated
to them for the purpose of this table. See "Management -- FCP Warrants."

(4) Represents 60,000 Shares underlying Warrants granted to FCP. Although
Warrants are granted to FCP for the benefit of all executive officers who
have interests in FCP, Messrs. Lederman and Budoff currently control all
partnership interests in FCP. Other members of senior management hold
options to purchase partnership interests in FCP, which options have not
been exercised, and therefore no warrants issued to FCP are being allocated
to them for the purpose of this table. Other members of senior management.
See "Management -- FCP Warrants."

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 VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FY-
FY-END(#) END($)(1)
SHARES ------------------ -----------
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- -------------- ------------------ -----------
<S> <C> <C> <C> <C>
Michael G. Lederman............ -- -- 540,000(2)/105,000 2,160,000/0
Scott A. Budoff................ -- -- 60,000(3)/35,000 240,000/0
</TABLE>

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

(1) Value is based upon the fair market value of the stock of $5.00 as of
December 28, 1996 (the "Fair Market Value"), minus the exercise price of
$5.00 with respect to stock options and $1.00 with respect to the FCP
Warrants. Fair Market Value has been determined in good faith by the Board
based upon historical and projected financial performance.

48
<PAGE> 50

EMPLOYMENT AND MANAGEMENT INCENTIVE 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. The employment agreements also 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.

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 merit
bonus to be paid. Furthermore, the Board has agreed to provide for a management
incentive bonus to be paid to Messrs. Lederman and Budoff and certain other
executive officers in connection with the successful completion of certain
acquisitions, pursuant to a Management Incentive Agreement between the Company
and FCP. Messrs. Lederman and Budoff have elected to receive such compensation
through FCP, a partnership formed by executive officers of the Company in light
of certain tax and structural advantages. Pursuant to the Management Incentive
Agreement, a fee is paid to FCP for the benefit of the Company's senior
management team equal to the greater of $50,000 or 2% of the aggregate
consideration payable by the Company, or to the Company or the Company's
stockholders in connection with the applicable transaction up to a fee of
$400,000, with an incremental fee equal to 1% of the incremental aggregate
consideration thereafter. To date, FCP has received an aggregate of $355,000 in
payments under this agreement, all paid in the form of Common Stock totaling
50,271 shares. The Management Incentive Agreement expires in 2005 or upon a
Change of Control (as defined therein).

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 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.

In addition to the agreements described above, all other executive
officers, except for Mr. Sands, have employment agreements with the Company,
which provide for employment of such officers. Their positions, responsibilities
and salaries are determined annually by the Board of Directors. The employment
agreements provide that the amount, if any, of bonuses to be paid to the
officers will be determined annually by the Board. The employment of each
officer may be terminated by the individual or the Company with 30 days notice
with or without Cause (as defined therein). The employment agreements provide
that the officers will not compete with the Company during the employment term
and for a period of two years following termination.

49
<PAGE> 51

FCP WARRANTS

The Company periodically grants warrants to FCP in order to provide
incentive compensation to executive officers of the Company, who hold a portion
of their equity ownership of the Company through FCP. In January 1996, the
Company issued to FCP 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. In
June 1997, the Company issued to FCP a warrant to purchase 250,000 shares of
Common Stock at an exercise price equal to $8.24 per share at any time through
June 30, 2007.

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 executives 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 years pursuant to the Option Plan terminate
as of such termination date.

As of June 30, 1997, options to purchase 404,350 shares of Common Stock
were outstanding under the Option Plan at a weighted average exercise price of
$5.50 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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ownership. Based on shares outstanding as of June 30, 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, 49.3% of Fulcrum's Common

50
<PAGE> 52

Stock, (53.0% assuming exercise of all options and warrants held by them). The
general partners of FCP and FC are The Fulcrum Group, Inc. and SAB, Inc.,
corporations solely 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 terms of the
partnership agreements of FC and FCP, Mr. Lederman, through The Fulcrum Group,
Inc., maintains the exclusive ability to direct the voting and disposition of
the shares of Common Stock owned by such partnerships. FC is the sole limited
partner of FCP and FCP has also issued options to acquire limited partnership
interests in FCP to certain of Fulcrum's executive officers. A capital
distribution of $2.3 million was recorded by the Company in fiscal 1996 to FCP
with a corresponding reduction in retained earnings to reflect the reductions in
related party receivables. See Notes 9 and 10 of Notes to Consolidated Financial
Statements. The Company has granted Warrants to purchase an aggregate of 850,000
Shares of Common Stock to FCP in place of stock options which would otherwise
have been granted to the executive officers who have ownership interest in FCP.
Such executive officers have chosen, and the Company has agreed, to receive
incentive options in the form of FCP Warrants in order to achieve certain
structural and tax advantages. See "Management -- FCP Warrants."

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. Approximately 38.0% of the partnership capital of
Properties is held by individuals and entities who are not officers, directors
or affiliates owning 10% or more of the Company. Lease payments from Fulcrum to
Properties totalled $724,980 and $373,685 for fiscal 1996 and the six months
ended June 28, 1997, respectively. 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 (Messrs. Newton and Unger) on behalf of the
Company and was approved by a vote of the Board in which Messrs. Newton and
Unger voted in favor and all other members of the Board abstained. The purchase
was unanimously approved by the disinterested members of the Board. A portion of
the net proceeds of the Offering will be utilized to fund such purchase. Because
of their ownership interests in Properties, 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, Mr. Sullivan (and persons
affiliated with him) will receive $147,028 of the proceeds of such sales and
Carrie K. Cole, Vice President Finance and Accounting, and Chief Financial
Officer 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. The exercise price of the Trademark Option was negotiated by Messrs.
Lederman and Budoff on behalf of Brands and a committee comprised of certain
disinterested members of the Board (Messrs. Newton, Unger, Greenberg and
Sullivan) on behalf of the Company. The consideration paid for the After the
Stork brand name was not a factor in determining such exercise price. A portion
of the net proceeds of the Offering will be utilized to fund such purchase.
Because of their ownership interests in Brands, Mr. Lederman (and entities
controlled by him) will receive $1.6 million of the

51
<PAGE> 53

proceeds of such sale and 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, the
Company is obligated to pay Brands an annual fee. Royalty equal to 0.05% of the
Net Revenues (as defined in the Trademark Agreement as Gross Revenues minus
Returns) of Fulcrum in return for the exclusive right to use the trademarks and
licenses owned by Brands. Pursuant to the terms of the Trademark Agreement, such
fees are payable at the end of the following fiscal year. The fees of $38,764
incurred in fiscal 1996 are due to be paid at the end of fiscal 1997 and the
fees of $11,866 incurred in first half of fiscal 1997 are due to be paid at the
end of fiscal 1998.

Retail Option. Fulcrum Retail, Inc., a New Mexico corporation ("Fulcrum
Retail") and a wholly owned subsidiary of FCP, operates four retail stores
(located in Albuquerque, New Mexico; Gilroy, California; Clinton, Connecticut;
and East Brunswick, New Jersey) that distribute certain of the Company's
discontinued or damaged inventory. Two of such stores were acquired from
Storybook. The Company's policy is to sell such inventory at a price that the
Company believes is fair market value, which generally ranges from 25% to 100%
of cost, and is paid within standard industry terms. In fiscal 1995, fiscal 1996
and the six month period ended June 30, 1997, the Company sold $484,000,
$547,000 and $489,000, respectively, of inventory to Fulcrum Retail at an
average markdown of 35%. 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,
exercisable at its discretion, to purchase 100% of Fulcrum Retail for a price of
$1.0 million. The value of Fulcrum Retail was negotiated by Mr. Newton on behalf
of WEP and by Messrs. Lederman and Budoff on behalf of Fulcrum Retail and was
approved by the Board on behalf of the Company. 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. The
exercise price of the Company's Option to purchase Fulcrum Retail will not be
adjusted in the event that WEP exercises its option to purchase 10.5% of Fulcrum
Retail. In such event, 10.5% of the $1.0 million exercise price will be payable
to WEP in exchange for the 10.5% of the capital stock of Fulcrum Retail held by
it upon exercise of its option.

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 $6.0
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
$6.0 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. Additionally, FCP has agreed to
guarantee Fulcrum Retail's $1.1 million debt to the Company.

Messrs. Lederman and Budoff did not receive any consideration for their
guarantees nor did FC or FCP receive any consideration for its guarantees.

52
<PAGE> 54

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.

Whitney Investments. In October 1996, the Company privately placed $10.0
million in subordinated debt and $2.0 million in Common Stock with the Whitney
Subordinated Debt Fund ("WSDF") and Whitney Equity Partners ("WEP")
respectively. These sales of securities included the sale of a warrant to
purchase 405,460 shares of Common Stock sold to WSDF and sale of 394,385 shares
of common stock and a warrant to purchase 121,350 shares of Common Stock sold to
WEP. WSDF was paid a lender's fee of $200,000 and FCP was paid a financing fee
of $50,000 in connection with such financing. In June 1997, the Company
privately placed (the "June Whitney Investment") an aggregate of $10.0 million
in subordinated debt with WSDF and affiliates of Arnold Greenberg and Patrick K.
Sullivan, directors of the Company and an aggregate of $10.0 million in Common
Stock with WEP and affiliates of Messrs. Greenberg and Sullivan, respectively.
These sales of securities included the sale of warrants to purchase 200,000
shares of Common Stock sold to WSDF and affiliates of Messrs. Greenberg and
Sullivan Additionally, the Company is obligated to issue warrants to purchase up
to 200,000 additional shares of Common Stock to such parties in the event that
the subordinated debt is not repaid in full at certain dates. WSDF and
affiliates of Messrs. Greenberg and Sullivan were paid a lender's fee of
$300,000 and FCP was paid a financing fee of $100,000 (which was paid in 14,493
shares of Common Stock), in connection with the June Whitney Investment.

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. In
1996, the Company converted $820,000 of debt (including accrued interest through
the date of conversion) related to a 12% line of credit owed to Mr. Lederman to
8,196 shares of Series B Preferred Stock, and sold an additional 10,896 shares,
of Series B Preferred Stock for $100 per share. In May 1996, the Company also
converted $500,000 of debt related to the Greenberg Loan to 5,000 shares of
Series A Preferred Stock for $100 per share. 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."

Series A Preferred Stock

<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
AGGREGATE NUMBER OF CONVERSION DIVIDENDS REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES SHARES PAID (12% COUPON) AMOUNT
- ---------------------------- -------------- ---------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Fulcrum Capital L.P. ....... $3,000,000 30,000(1) 1,800,000 $ 288,493 $ 0
Arnold Greenberg(2)......... 774,825 7,665(3) 275,940 37,884 0
Howard Unger................ 150,000 1,500(3) 54,000 395 0
Patrick K. Sullivan......... 500,000 5,000(4) 54,000 14,038 350,000(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. The purchase price was partially provided through the conversion of
outstanding indebtedness and accrued interest through the date of conversion
equal to $500,000.
(3) Converted at a ratio of one share of Series A Preferred Stock for each 36
shares of Common Stock.
(4) 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 and 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% through October 21, 1996
($20,636).

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

53
<PAGE> 55

Series B Preferred Stock

<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE NUMBER OF DIVIDENDS REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES PAID (12% COUPON) AMOUNT(2)
- -------------------------------- -------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
The Fulcrum Group, Inc.(1)...... $1,918,307 19,182 $ 141,223 $1,918,307
Arnold Greenberg(3)............. 1,289,925 12,285 46,649 1,289,925
</TABLE>

- ---------------
(1) The purchase price for the Series B preferred stock acquired by The Fulcrum
Group, Inc. was the conversion of outstanding debt with principal amount and
accrued interest equal to $1,918,307.
(2) 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 ($46,649) through October 21,
1996.
(3) Includes shares held by The Greenberg Family Fund LLC.

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 $1.1 million 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 $2.2 million
primarily for loans, administrative expenses and royalty payments. During fiscal
1996, the Company received payments from the Affiliated Entities of $1.5 million
primarily for inventory transfers, professional fees and merger and acquisition
expenses. During the six months ended June 30, 1997, the Company made aggregate
payments to Affiliated Entities of $68,170 primarily for property lease
payments. During the six months ended June 30, 1997, the Company received
payments from Affiliated Entities of $246,823 primarily for inventory purchases
and administrative costs.

As of December 30, 1995, December 28, 1996 and June 30, 1997 (unaudited),
the Company had aggregate net receivables from Properties, Retail, Brands, FCP
and FC of $1.2 million, $635,000 and $261,000, respectively, resulting primarily
from the sale by Fulcrum of certain discontinued inventory or damaged inventory
for retail sale or liquidation as well as advertising expenses 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 the fair market value, which generally ranges from 20% to 100% of
cost, and is to be paid within standard industry terms. Sales of such inventory
totaled $484,000, $547,000 and $489,000, during fiscal 1995, fiscal 1996 and for
the six month period ending June 28, 1997 (unaudited), respectively. There were
no sales to Retail in fiscal 1994.

On June 30, 1997, the Company entered into an agreement with Retail to
convert a current receivable of $1.1 million into a long-term receivable,
bearing interest at 0.5% over the same corporate base rate as the Credit
Facility. This long-term receivable is due June 30, 2002 and is guaranteed by
FCP.

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.

54
<PAGE> 56

PRINCIPAL STOCKHOLDERS

The table below sets forth certain information regarding ownership of
Common Stock as of June 30, 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)......................... 6,325,263 70.8% 53.0%
4321 Fulcrum Way NE
Rio Rancho, NM 87124
The Fulcrum Group, Inc.(2)(3)..................... 6,314,763 70.7 52.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Fulcrum Capital Partners L.P.(3)(4)............... 4,514,763 50.6 37.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Ray E. Newton III(5).............................. 2,241,195 25.6 19.1
177 Broad Street
Stamford, CT 06091
Fulcrum Capital L.P.(3)........................... 1,800,000 22.3 16.3
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Whitney Equity Partners, L.P.(5).................. 1,675,735 20.4 15.0
177 Broad Street
Stamford, CT 06091
Whitney Subordinated Debt Fund, L.P.(5)........... 565,460 6.5 4.9
177 Broad Street
Stamford, CT 06091
Arnold Greenberg(6)............................... 549,315 6.8 4.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Patrick K. Sullivan, M.D.(7)...................... 74,625 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Howard Unger...................................... 54,000 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Scott A. Budoff(3)(8)............................. 3,500 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
All directors and executive officers as a group
(16 persons)(2)(5)(6)(7)(9)..................... 9,411,198 97.3 74.2
</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 June 30, 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 3,664,763 shares held by FCP, 1,800,000 shares held by FC, warrants
to purchase 600,000 shares and 250,000 shares of Common Stock held by FCP
and, with respect to Mr. Lederman, an

55
<PAGE> 57

option to purchase 10,500 shares of Common Stock held by Mr. Lederman
exercisable within 60 days of June 30, 1997.

(3) The general partners of FCP and FC are corporations owned by Messrs.
Lederman (The Fulcrum Group, Inc.) and Budoff (SAB, Inc.). 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 terms of the partnership
agreements of FC and FCP, Mr. Lederman, through The Fulcrum Group, Inc.,
maintains the exclusive ability to direct the voting and disposition of the
shares of Common Stock owned by such partnerships.

(4) Includes warrants to purchase 600,000 shares and 250,000 shares of Common
Stock exercisable within 60 days of June 30, 1997.

(5) Includes, with respect to the Whitney Subordinated Debt Fund, L.P. ("WSDF"),
warrants to purchase 405,460 shares and 160,000 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 June 30, 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 18,125 shares and a warrant to purchase 2,500 shares of Common
Stock held by Maureen C. Sullivan Revocable Trust -- 1995.

(8) Includes an option to purchase 3,500 shares of Common Stock exercisable
within 60 days of June 30, 1997.

(9) Includes options to purchase an aggregate of 1,605,678 shares of Common
Stock exercisable within 60 days of June 30, 1997.

56
<PAGE> 58

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock having a par value of $0.01 per share and 5,000,000 shares of
Preferred Stock having a par value of $0.01 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 11,076,648 shares of Common Stock outstanding upon completion
of the Offering. In addition, an aggregate of 2,341,810 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 5,000,000 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.

57
<PAGE> 59

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 $0.01 per share for a purchase price of $1,156 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 for a purchase price of $347
(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.

As part of the June Whitney Investment the Company issued to WSDF and
affiliates of Messrs. Greenberg and Sullivan warrants (the "June Warrants") to
purchase 200,000 shares of Common Stock at an exercise price equal to $0.01 per
share for an aggregate purchase price of $696,463. In addition, the Company may
be required to issue warrants to purchase up to an additional 200,000 shares of
Common Stock at an exercise price equal to $0.01 per share contingent upon the
payment of the subordinated debt issued in connection with the June Whitney
Investment. The June Warrants are exercisable at any time after the earliest to
occur of (a) June 30, 2001, (b) a Change of Control (as defined in the June
Warrants) and (c) (x) the holder of such June Warrant receiving an Outside Sale
Notice (as defined in the June Warrants) or (y) the holder of such June Warrant
receiving a registration notice pursuant to Section 7 of the Stockholders
Agreement (as defined in the June Warrants). The June Warrants each contain
provisions that may cause an adjustment of the exercise price upon the
occurrence of certain equity issuances specified therein.

Each of WSDC and WEP has executed lock-up agreements as described in Shares
Eligible for Future Sale. See "Shares Eligible for Future Sale."

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; provided however, the provisions relating to registration rights as
discussed below will not terminate.

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 June 30, 1996, there were 8,076,648
shares subject to registration rights, the holders of which have been asked to
waive their registration rights in connection with the Offering.

58
<PAGE> 60

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 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 divided 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 any 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 a majority of the entire
Board, provided that the Board may not amend or repeal any By-law 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

59
<PAGE> 61

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 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.

60
<PAGE> 62

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 11,076,648 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 June 30, 1997. Of these
shares, all of the 3,000,000 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
8,076,648 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 8,076,648 shares of Common Stock have agreed that, other than
by bona fide gift or transfer by reason of death or intestacy, they will not,
without the prior written consent of Hambrecht & Quist LLC, (which consent may
be provided or withheld in its sole discretion for any reason and no reason)
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, 13,225 shares of Common Stock held
by existing stockholders will be eligible for sale without restriction under
Rule 144(k) or Rule 701, while 6,403,728 shares held by existing stockholders
will be eligible for sale subject to the volume and other restrictions of Rule
144. The remaining 1,665,763 shares held by existing stockholders will become
eligible for sale pursuant to Rule 144 upon expiration of applicable holding
periods. In addition, as of June 30, 1997, 2,341,810 shares were subject to
outstanding options and warrants. All of those shares are subject to lock-up
agreements. Upon expiration of lock-up agreements, 450,000 shares subject to
such options and warrants will be vested, and could be exercised and sold.

In general, under Rule 144, 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

61
<PAGE> 63

owned Restricted Shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.

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 June 30, 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 8,076,648 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."

62
<PAGE> 64

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC
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.............................................
Robertson, Stephens & Company LLC.................................

---------
Total................................................... 3,000,000
=========
</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 450,000
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.

In connection with the Storybook Acquisition and related financing
Hambrecht & Quist LLC will receive a fee of $100,000 for certain financial
advisory services.

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 liabilities 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 8,076,648 shares of Common Stock
upon completion of the Offering based on shares outstanding as of June 30, 1997,
have agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or

63
<PAGE> 65

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 of the Company as of December 30,
1995 and December 28, 1996 and for each of the three years in the period ended
December 28, 1996 included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

The financial statements of Storybook Heirlooms, Inc., as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

64
<PAGE> 66

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.

65
<PAGE> 67

FULCRUM DIRECT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets at December 30, 1995, December 28, 1996 and June 30,
1997 (unaudited).................................................................. F-3
Consolidated Statements of Operations for the fiscal periods 1994, 1995 and 1996 and
the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)...... F-4
Consolidated Statements of Stockholders' Equity for the fiscal periods 1994, 1995
and 1996 and the six months ended June 30, 1997 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the fiscal periods 1994, 1995 and 1996 and
the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)...... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>

STORYBOOK HEIRLOOMS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report........................................................ F-23
Balance Sheets at December 31, 1995 and 1996........................................ F-24
Statements of Operations for the fiscal years ended December 31, 1994, 1995 and
1996.............................................................................. F-25
Statements of Shareholders' Equity for the fiscal years ended December 31, 1994,
1995 and 1996..................................................................... F-26
Statements of Cash Flows for the fiscal years ended December 31, 1994, 1995 and
1996.............................................................................. F-27
Notes to Financial Statements....................................................... F-28

Statements of Operations for the six months ended June 30, 1996 (unaudited) and June
27, 1997 (unaudited).............................................................. F-32
Statement of Shareholders' Equity for the six months ended June 27, 1997
(unaudited)....................................................................... F-33
Statements of Cash Flows for the six months ended June 30, 1996 (unaudited) and June
27, 1997 (unaudited).............................................................. F-34
Notes to Financial Statements....................................................... F-35
</TABLE>

F-1
<PAGE> 68

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. 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 28,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

New York, New York
February 28, 1997

F-2
<PAGE> 69

FULCRUM DIRECT, INC. AND SUBSIDIARIES

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

ASSETS

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 196 $ 140 $ 4,727
Marketable securities................................................. 1,543 -- --
Receivables........................................................... 1,677 1,507 1,467
Inventories........................................................... 7,037 12,532 20,974
Deferred income taxes................................................. 202 29 --
Deferred catalog costs................................................ 621 1,315 2,324
Other current assets.................................................. 258 299 1,489
------- ------- -------
Total current assets........................................... 11,534 15,822 30,981
FURNITURE, FIXTURES AND EQUIPMENT, net.................................. 1,249 3,355 7,582
INTELLECTUAL AND PROPRIETARY PROPERTY, net.............................. 1,872 4,072 1,846
TRADEMARK............................................................... -- 349 6,776
LONG-TERM RECEIVABLES................................................... -- 1,110 2,184
DEFERRED FINANCING COSTS................................................ -- 663 1,047
EXCESS OF COSTS OVER FAIR MARKET VALUE OF ASSETS ACQUIRED............... 205 194 9,458
------- ------- -------
TOTAL ASSETS................................................... $ 14,860 $ 25,565 $59,874
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit....................................................... $ 4,820 $ -- $ --
Cash overdrafts....................................................... 839 1,200 3,995
Accounts payable...................................................... 1,880 3,107 6,854
Short-term debt....................................................... -- -- 2,000
Current portion of long-term debt..................................... 129 426 399
Reserve for returns................................................... 158 514 398
Other accrued liabilities............................................. 481 641 2,123
------- ------- -------
Total current liabilities...................................... 8,307 5,888 15,769
LONG-TERM DEBT, net of current portion.................................. 702 11,754 30,915
DEFERRED INCOME TAXES................................................... 34 -- --
------- ------- -------
Total liabilities.............................................. 9,043 17,642 46,684
------- ------- -------
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; and 5,000,000 shares
authorized, none issued or outstanding as of June 30, 1997.......... -- -- --
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; 25,000,000
shares authorized, 8,076,648 issued and outstanding as of June 30,
1997................................................................ 36 64 81
Additional paid-in capital............................................ 5,384 7,859 20,035
Unrealized gain on marketable securities, net of deferred tax......... 137 -- --
Retained earnings (deficit)........................................... 260 -- (6,926)
------- ------- -------
Total stockholders' equity..................................... 5,817 7,923 13,190
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 14,860 $ 25,565 $59,874
======= ======= =======
</TABLE>

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

F-3
<PAGE> 70

FULCRUM DIRECT, INC. AND SUBSIDIARIES

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

- ---------------
(1) The pro forma net loss and net loss per common and common equivalent share
represent those amounts as if the change in accounting policy had been applied
in all the periods presented.

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

F-4
<PAGE> 71

FULCRUM DIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PREFERRED STOCK,
$0.01 PAR VALUE
---------------------------------
COMMON STOCK,
SERIES A SERIES B $0.01 PAR VALUE ADDITIONAL TOTAL
--------------- --------------- --------------- PAID-IN UNREALIZED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL GAIN EARNINGS EQUITY
------ ------ ------ ------ ------ ------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' INVESTMENT
AT MARCH 16, 1994
(inception)........... -- $-- -- $-- -- $ -- $ -- $ -- $ -- $ --
Capital investment at
March 31, 1994........ -- -- -- -- 3,600 36 2,705 -- -- 2,741
Distribution of
capital............... -- -- -- -- -- -- (551) -- (91) (642)
Net income.............. -- -- -- -- -- -- -- -- 91 91
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, DECEMBER 31,
1994.................. -- -- -- -- 3,600 36 2,154 -- -- 2,190
Net income.............. -- -- -- -- -- -- -- -- 320 320
Issuance of Series A
Preferred Stock....... 30 -- -- -- -- -- 3,000 -- -- 3,000
Additional capital
contributions......... -- -- -- -- -- -- 1,773 -- -- 1,773
Distribution 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.................. 30 -- -- -- 3,600 36 5,384 137 260 5,817
Net income.............. -- -- -- -- -- -- -- -- 406 406
Net change of unrealized
gain on marketable
securities, net of
tax................... -- -- -- -- -- -- -- (137) -- (137)
Issuance of Series A
Preferred Stock....... 21 -- -- -- -- -- 2,123 -- -- 2,123
Issuance of Series B
Preferred Stock....... -- -- 31 -- -- -- 3,173 -- -- 3,173
Distribution of
capital............... -- -- -- -- -- -- (2,191) -- (83) (2,274)
Conversion of Series A
Preferred Stock....... (47) -- -- -- 2,417 24 (24) -- -- --
Call Series A Preferred
Stock................. (4) -- -- -- -- -- (400) -- -- (400)
Call Series B Preferred
Stock................. -- -- (31) -- -- -- (3,208) -- -- (3,208)
Sale of common stock and
warrants.............. -- -- -- -- 394 4 1,846 -- -- 1,850
Issuance of warrants.... -- -- -- -- -- -- 1,156 -- -- 1,156
Preferred stock
dividends (12% per
annum)................ -- -- -- -- -- -- -- -- (583) (583)
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, DECEMBER 28,
1996.................. -- -- -- -- 6,411 64 7,859 -- -- 7,923
Net loss (unaudited).... -- -- -- -- -- -- -- -- (6,926) (6,926)
Issuance of warrants
(unaudited)........... -- -- -- -- -- -- 696 -- -- 696
Sale of common stock and
warrants
(unaudited)........... -- -- -- -- 1,450 15 9,985 -- -- 10,000
Issuance of common stock
(unaudited)........... -- -- -- -- 216 2 1,495 -- -- 1,497
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, JUNE 30, 1997
(unaudited)........... -- $-- -- $-- 8,077 $ 81 $ 20,035 $ -- $ (6,926) $ 13,190
==== ==== ==== ==== ===== ==== ======= ==== ======= =======
</TABLE>

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

F-5
<PAGE> 72

FULCRUM DIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
-------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 91 $ 320 $ 406 $ (280) $ (6,926)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Cumulative effect of change in accounting
principle....................................... -- -- -- -- 3,033
Depreciation and amortization..................... 176 469 1,050 510 666
Net changes in current assets and liabilities:
Receivables..................................... (485) (1,038) 170 215 (887)
Inventories..................................... 41 (5,143) (5,425) (2,398) (4,889)
Customer lists.................................... (368) (1,733) (2,725) (27) (226)
Deferred catalog costs.......................... (203) (154) (694) (153) (549)
Other current assets............................ 498 24 (41) (1,480) (870)
Accounts payable................................ (173) 1,670 1,588 2,452 4,984
Reserve for returns............................. 67 66 6 84 (380)
Other accrued liabilities....................... 105 (121) 160 103 (522)
Deferred income taxes............................. 79 (8) 229 (152) (1,674)
Other long-term liabilities....................... (618) (50) -- -- --
------- -------
Net cash used by operating activities........... (790) (5,698) (5,276) (1,126) (8,240)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of assets................................. (245) (250) (626) (16) (2,449)
Net cash paid in the purchase of Storybook.......... -- -- -- -- (14,498)
Net cash paid in the purchase of Playclothes
assets............................................ -- -- (1,271) -- --
Net cash paid in the purchase of NewStork........... (2,341) -- -- -- --
Sale (purchase) of marketable securities............ -- (1,316) 1,316 1,316 --
------- -------
Net cash used by investing activities........... (2,586) (1,566) (581) 1,300 (16,947)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit....................... 917 3,434 10,193 4,014 14,315
Payments of line of credit.......................... -- (3,985) (8,899) (1,330) (6,412)
Payments of debt obligations........................ (322) (160) (5,419) (5456) (180)
Proceeds from debt obligations...................... 152 4,889 11,228 -- 11,305
Deferred financing costs............................ -- -- (663) -- --
Preferred stock dividends paid...................... -- (60) (222) (38) --
Proceeds from issuance of common stock and
warrants.......................................... -- -- 2,000 -- 10,746
Proceeds from issuance of preferred stock........... -- 3,000 3,465 3,515 --
Redemption of preferred stock....................... -- -- (3,608) -- --
Investment (distribution) of capital................ 2,741 230 (2,274) (774) --
------- -------
Net cash provided by financing activities....... 3,488 7,348 5,801 (69) 29,774
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 112 84 (56) 105 4,587
CASH AND CASH EQUIVALENTS, beginning of period........ -- 112 196 196 140
------- -------
CASH AND CASH EQUIVALENTS, end of period.............. $ 112 $ 196 $ 140 $ 301 $ 4,727
======= =======
CASH PAID FOR INTEREST................................ $ 94 $ 757 $ 1,198 $ 297 $ 1,022
======= =======
SUMMARY OF NON-CASH TRANSACTIONS:
Assignment of intangible assets to stockholder...... $ 642 $ -- $ -- $ -- $ --
======= =======
Related party long-term receivable.................. $ -- $ -- $ -- $ -- $ (1,074)
======= =======
Unrealized gain (loss) on marketable securities, net
of deferred tax................................... $ -- $ 137 $ (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 $ 253 $ --
======= =======
Conversion of Preferred Stock to Common Stock....... $ -- $ -- $ 24 $ -- $ --
======= =======
Stock issued for deferred financing costs........... $ -- $ -- $ -- $ -- $ 405
======= =======
Stock issued in the purchase of Storybook........... $ -- $ -- $ -- $ -- $ 1,042
======= =======
Equipment purchased on capital leases............... $ -- $ 593 $ 1,902 $ 1,383 $ 1,797
======= =======
</TABLE>

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

F-6
<PAGE> 73

FULCRUM DIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 16, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994,
THE FISCAL YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996
(INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

(1) DESCRIPTION AND HISTORY OF COMPANY:

Fulcrum Direct, Inc., a Delaware corporation ("Fulcrum" or the "Company"),
is a leading catalog retailer of apparel, accessories and shoes for children,
teens and young women up to 24 years. The Company's portfolio of brands includes
After the Stork, Playclothes, Storybook Heirlooms, zoe, Little Feet, SunSkins
and Discount Direct. The Company's 160,000 square foot headquarters, call center
and distribution center is located in Rio Rancho, New Mexico.

In February 1993, NewStork, Inc. a New Mexico corporation ("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 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 capital structure,
NewStork was merged into FCP Direct, and FCP Direct was merged into Fulcrum.

During 1995, Fulcrum developed its SunSkins brand, introduced the After the
Stork brand in Japan and developed other revenue enhancing programs. In Spring
1996, Fulcrum introduced Discount Direct and purchased a catalog customer list
from OshKosh B'Gosh. In Fall 1996, Fulcrum introduced its Little Feet brand in
the U.S. and Japan. Net revenues in Japan were $2,887, $9,005 and $2,516 in
fiscal years 1995 and 1996 and for the six month period ended June 30, 1997
(unaudited), respectively.

On December 31, 1996, the Company acquired, for cash consideration of
approximately $1,200 and assumption of $350 of customer returns liabilities,
certain assets relating to the Playclothes brand, previously part of a portfolio
of several brands marketed by a subsidiary of The Walt Disney Company ("The Walt
Disney Company"). 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 totaling $1,110. The Company allocated the approximately $1,500
purchase price in the accompanying fiscal year 1996 consolidated balance sheet
as follows: (i) $1,110 to long-term receivables, (ii) $349 to tradenames and
(iii) $60 to customer list.

On June 27, 1997 (unaudited), the Company acquired all of the outstanding
common stock of Storybook Heirlooms, Inc., ("Storybook") a specialty retailer of
children's clothing, for approximately $15,000, which includes 151,000 shares of
the Company's common stock valued at the date of acquisition to be $1,042. This
acquisition has been accounted for under the purchase method. The purchase price
was allocated based on estimated fair values at the date of acquisition. The
Company recorded $2,056 of deferred tax liability for the excess of the
resulting amounts recorded for financial reporting purposes over the tax basis
of certain assets and liabilities acquired. This resulted in an excess of cost
over fair value of net assets acquired of $9,264. The Company is continuing to
evaluate the assets and liabilities of Storybook and there may be adjustment to
the recording of the acquisition. The excess of cost over fair value of net
assets acquired are being amortized on a straight-line basis over 20 years.

F-7
<PAGE> 74

The Company plans to integrate Storybook by: (i) eliminating redundant
corporate staff including select executives and accounting, human resources, and
marketing and manufacturing staffs, (ii) consolidating duplicate distribution
center and call center facilities primarily into Fulcrum's Rio Rancho, New
Mexico facility by closing the Foster City, California facility; and (iii)
consolidating printing, freight, toll-free phone service and credit card
processing contracts, manufacturing and merchandising. The success of the
Storybook Acquisition will depend primarily on the Company's ability to
successfully integrate and consolidate Storybook, which will require substantial
management, financial and other resources and may pose risks with respect to
sales, customer service and market share.

The following unaudited pro forma information reflects the debt used to
finance the acquisition and presents a summary of consolidated results of
operations of the Company and Storybook as if the acquisition had occurred on
January 1, 1996.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 28, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Net revenues............................... $67,405 $ 38,074
Net income (loss).......................... $ 310 $ (7,688)
Net income (loss) per common and common
equivalent share......................... $ (0.03) $ (0.77)
</TABLE>

In management's opinion, the unaudited pro forma consolidated results of
operations are not indicative of the actual results that would have occurred had
the combination been consummated at the beginning of 1996 or of future
operations of the consolidated entities.

(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 subsidiaries, Storybook, a California
corporation, which the Company intends to eliminate through merger in the second
half of 1997, and 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.

F-8
<PAGE> 75

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 by
the Company's line of credit for check clearing requirements.

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 Statement of Financial Accounting Standards ("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 American
Institute of Certified Public Accountants ("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. Furniture, Fixtures and Equipment, Net

Furniture, fixtures and equipment, net are stated at cost. The Company
provides for depreciation using the straightline method in amounts that allocate
the cost of furniture, fixtures and equipment over their estimated useful lives
ranging from three to ten years. Costs of routine repair and maintenance are
expensed as incurred. During 1996, the Company capitalized $124 in
implementation and program instruction costs as part of the implementation of
$1,200 of fully integrated operations systems. Assets under capital leases were
$453, $1,190, and $3,039 as of December 30, 1995, December 28, 1996 and June 30,
1997 (unaudited), respectively.

i. Intellectual and Proprietary Property, Net

Intellectual and proprietary property costs consist principally of costs
associated with customer list acquisition. Such costs include the purchase of
customer lists and the rental of customer lists. The Company evaluates the
recoverability of such costs based upon the revenue and related margin
contribution derived from these activities.

As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs. This change was made in connection with the acquisition of
Storybook which has historically followed a

F-9
<PAGE> 76

policy of expensing such costs as incurred and while practices vary, the Company
has decided to conform to Storybook's practices and expense such costs as
incurred. The cumulative effect of the change was recorded as of December 29,
1996 and was $(1,802) or $(0.22) per share, net of tax benefit of $1,231.

Intellectual and proprietary property, is amortized using the straight-line
method over the estimated useful lives of the assets. Customer lists are
amortized over 5 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.

Other intellectual and proprietary property included purchased artwork,
patterns and a covenant not to compete and its costs are being amortized over
three years.

j. Asset Impairment

The carrying value of tangible and intangible assets is periodically
reviewed by the Company and impairments would be recognized if the undiscounted
value of projected future cash flows less interest is 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.

k. Trademarks

Trademarks associated with the acquisitions of Playclothes and Storybook
are amortized using the straight-line method over fifteen years.

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

The excess of the cost 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. The Company currently expects that, as a result of the
seasonality of the Company's business, this year's income tax benefit will be
offset by non-cash income tax expense in the remaining interim periods.

p. Nonrecurring Playclothes Start Up Costs

The Company has recorded nonrecurring expenses of $338 and $2,116 before
taxes for the year ended December 28, 1996 and the six months ended June 30,
1997 (unaudited), respectively. This is presented separately as a component of
income (loss) from operations in the Consolidated Statements of Operations. The
Walt Disney Company ceased operations relating to the Playclothes brand prior to
the acquisition of the Playclothes assets, and, as a result, significant costs
were incurred to restaff,

F-10
<PAGE> 77

improve the assets and start up the Playclothes business. Of these amounts, $338
in 1996 and $184 in the first six months of 1997 (unaudited) represent the costs
of recruiting, training and moving employees and other costs associated with the
start up of the Playclothes operation. Also included are expenses for the six
months ended June 30, 1997 (unaudited) amounting to $1,932 which represent list
testing costs. Specifically, a significant portion of the 1997 expenses relate
to the mailing of approximately 3.9 million catalogs mailed to test the
Playclothes housefile.

q. Net Income (Loss) per Common and Common Equivalent Share

Primary earnings per common and common equivalent share are computed by
dividing net income (loss), after deducting preferred stock dividends, by the
weighted average number of common shares outstanding during each period, plus,
for periods presented where the effect is not anti-dilutive, the incremental
shares that would have been outstanding upon the assumed exercise of dilutive
stock options and warrants issued during fiscal year 1996 and the six month
period ended June 30, 1997 (unaudited), using the treasury stock method as
follows:

<TABLE>
<CAPTION>
PERIOD OF SIX MONTHS ENDED
MARCH 16, --------------------------
1994 JUNE 30, JUNE 30,
(INCEPTION) FISCAL YEAR ENDED 1996 1997
THROUGH ---------------------------- ----------- -----------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding...... 3,600,000 3,904,641 6,389,285 5,832,000 6,426,286
Common equivalent shares
calculated using treasury
stock method.................. 1,876,335 1,876,335 1,876,335 1,876,335 1,867,733
--------- --------- --------- --------- ---------
Total shares for income per
share calculation............. 5,476,335 5,780,976 8,265,620 7,708,335 8,294,019
========= ========= ========= ========= =========
</TABLE>

Net income (loss) 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.

r. 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 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, reference is made to "Risk Factors" included elsewhere
in this Prospectus and incorporated by reference herein.

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

s. Accounting for Stock-Based Compensation

The Company applies Accounting Principle Board 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
("FASB") 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

F-11
<PAGE> 78

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.

t. Seasonal and Quarterly Fluctuations

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 Spring, Fall and Holiday
seasons. As a result, the Company expects its sales and results of operations to
be generally lower in the second and third quarters than in the first and fourth
quarters of each fiscal year, which includes Easter, Back-to-School and Holiday
purchases, respectively. Accordingly, 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 quarters.

u. Accounting Pronouncements Not Yet Adopted

The FASB issued SFAS No. 128, Earnings Per Share which is effective for
calendar years beginning after December 15, 1997 at which time it will require
restatement of prior year earnings per share calculations. Management has not
yet determined the effect, if any, of SFAS No. 128 on the consolidated financial
statements.

In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued and
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. In 1995,
the Company recorded to stockholders' equity a $137 unrealized gain on the sale
of marketable securities, net of deferred tax. In 1996, the Company reversed
this amount upon the sale of such securities. The Company held no marketable
securities in fiscal year 1997. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.

Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to stockholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.

v. Unaudited Interim Financial Statements

In the opinion of management, the unaudited financial statements for the
six months ended June 30, 1996 and June 30, 1997 are presented on a basis
consistent with the audited financial statements and reflect all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results thereof. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.

F-12
<PAGE> 79

(3) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated debt, net of discount, effective
interest at 11.7%, due October 2003. $7,000
principal repayment due upon completion of
an initial public offering................. $ -- $ -- $ 9,304
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 8,919
Line of credit, variable interest, due May
1999, secured by assets of the Company..... 366 1,661 9,564
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 3,314
8.25% leasehold improvement note, due August
2001, secured by assets of the Company and
guaranteed by a related party.............. -- 235 213
----- ------- -------
831 12,180 31,314
Less: Current portion of long-term debt...... (129) (426) (399)
----- ------- -------
Total long-term debt......................... $ 702 $ 11,754 $30,915
===== ======= =======
</TABLE>

At December 30, 1995, December 28, 1996 and June 30, 1997 (unaudited),
there were $4,820, $0 and $2,000 of short-term borrowings outstanding,
respectively, comprised of a note payable to a bank and lines of credit payable
to related parties and a bank. The weighted average interest rate in 1995 and
1996 was 13.4% and 8.5% for the six month period ended June 30, 1997
(unaudited).

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 (the "1996
WSDF Notes"). 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 as well as an option
to purchase a 10.5% interest in Fulcrum Retail, Inc., a related party, which was
valued at $150 (see Note 9), resulting in an effective interest rate on the
subordinated debt of 12.5%. Deferred financing costs of $663 were incurred in
connection with this transaction.

On June 30, 1997 (unaudited), the Company entered into a subordinated debt
agreement with WSDF and two members of its board of directors for $10,000 in
outstanding principal, a stated interest rate of 10.101%, due October 21, 2003
(the "1997 WSDF Notes"). A $7,000 principal repayment must be made within five
days of completion of an initial public offering by the Company. A warrant
valued at $696 was issued in connection with the subordinated debt, resulting in
an effective interest rate on the subordinated debt of 11.7%. Deferred financing
costs of approximately $450 were incurred in connection with this transaction.

On December 28, 1996, the Company entered into an agreement with a bank to
expand its line of credit (the "Credit Facility"), effective January 1, 1997.
The $10,000 Credit Facility, which was increased to $15,000 and extended to May
1999, 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 all the assets of the Company. The Credit Facility bears interest
rates of 0.5% over the bank's corporate base rates or 3.1% above LIBOR. As of
June 30, 1997 (unaudited), outstanding borrowings on

F-13
<PAGE> 80

the Credit Facility were $9,564 and outstanding letters of credit totaled
$1,078. The maximum amount of this facility that may be used for letters of
credit is $2,000.

The Credit Facility and subordinated debt agreements 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 as
of June 30, 1997 (unaudited) are as follows:

<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------------
<S> <C>
1997 (remaining six months)................................ $ 399
1998....................................................... 890
1999....................................................... 10,445
2000....................................................... 684
2001....................................................... 673
After 2001................................................. 20,000
-------
33,091
Less: Unamortized original issue discount on subordinated
debt..................................................... (1,777)
Less: Current portion of long-term debt.................... (399)
-------
$30,915
=======
</TABLE>

(4) COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company leases its 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). Future minimum rental payments under
operating and capital leases at June 30, 1997 (unaudited) were as follows:

<TABLE>
<CAPTION>
FISCAL YEARS OPERATING LEASES CAPITAL LEASES
--------------------------------------- ---------------- --------------
<S> <C> <C>
1997 (remaining six months)............ $ 750 $ 462
1998................................... 1,676 965
1999................................... 1,684 728
2000................................... 1,166 651
2001................................... 973 472
After 2001............................. 2,382 462
------
Total minimum lease payments........... $8,631 3,740
======
Less amounts representing interest..... (426)
Present value of net minimum lease
payments............................. 3,314
Less current maturities................ (367)
Long-term lease obligation............. $2,947
</TABLE>

Rental expense for the period from March 16, 1994 (inception) through
December 31, 1994 and for the fiscal years ended December 30, 1995, December 28,
1996 and for the six month periods ended June 30, 1996 (unaudited) and June 30,
1997 (unaudited) was $124, $189, $520, $270 and $504, respectively.

F-14
<PAGE> 81

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:

a. Management Incentive Agreement

The Board has agreed to provide for a management incentive bonus to be paid
to Messrs. Lederman and Budoff and certain other executive officers in
connection with the successful completion of certain acquisitions, pursuant to a
Management Incentive Agreement between the Company and FCP. Messrs. Lederman and
Budoff have elected to receive such compensation through FCP, a partnership
formed by executive officers of the Company in light of certain tax and
structural advantages. Pursuant to the Management Incentive Agreement, a fee is
paid to FCP for the benefit of the Company's senior management team equal to the
greater of $50 or 2% of the aggregate consideration payable by the Company, or
to the Company or the Company's stockholders in connection with the applicable
transaction up to a fee of $400, with an incremental fee equal to 1% of the
incremental aggregate consideration thereafter. To date, FCP has received an
aggregate of $355 in payments under this agreement, all paid in the form of
Common Stock totaling 50,271 shares. The Management Incentive Agreement expires
in 2005 or upon a Change of Control (as defined therein).

b. Management Team Equity Plan

The Board and the Company's stockholders approved the Management Team
Equity Plan (the "Option Plan") on October 18, 1996. The Option Plan provides
for the granting to executives and other key employees of the Company non
qualified stock options. A total of 765,000 shares of common stock are reserved
for issuance upon exercise of options granted under the Option Plan. As of June
30, 1997 (unaudited), options to purchase 404,350 shares of Common Stock were
outstanding under the Option Plan at a weighted average exercise price of $5.50
per share. The exercise price of all stock options granted through December 28,
1996 was $5.00 per share and was $8.24 for all stock options granted subsequent
to December 28, 1996. Such options expire in ten years from date of grant and
vest over a five-year period. Of these options, 34,195 were vested at June 30,
1997 (unaudited). The effect on income of these options calculated in accordance
with SFAS No. 123 was immaterial for the six month period ended June 30, 1997
(unaudited).

c. 401(k) Plan

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% of
their pay, subject to statutory limitations. The Company may, at its discretion,
make matching contributions up to 6% of the employee's deferred compensation.
Employee contributions are always fully vested. 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, for the years ended December 30, 1995 and December 28, 1996
and for the six month period ended June 30, 1997 (unaudited) were not
significant.

F-15
<PAGE> 82

(6) SUPPLEMENTARY CONSOLIDATED BALANCE SHEET DATA:

a. Receivables

Receivables consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Credit card......................... $ 194 $ 328 $ 287
Integrated programs................. -- 250 141
Customer list rental................ 148 138 204
Related companies, net (See Note
10 -- Related Party
Transactions)..................... 1,225 635 261
Other............................... 110 156 574
------ ------- -------
$1,677 $ 1,507 $ 1,467
====== ======= =======
</TABLE>

b. Inventories

Inventories consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods....................... $4,296 $ 10,037 $17,286
Work in process...................... 564 594 1,771
Raw materials........................ 2,177 1,901 1,917
------ ------- -------
$7,037 $ 12,532 $20,974
====== ======= =======
</TABLE>

c. Furniture, Fixtures and Equipment, Net

Furniture, fixtures and equipment, net consist of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................. $ 762 $1,579 $ 3,446
Computer software................... 219 958 1,447
Furniture and equipment............. 273 790 2,659
Leasehold improvements.............. 9 300 151
------ ------ -------
1,263 3,627 7,703
Less: Accumulated depreciation and
amortization ..................... (304) (759) (1,212)
Add: Assets not yet in service...... 290 487 1,091
------ ------ -------
$1,249 $3,355 $ 7,582
====== ====== =======
</TABLE>

F-16
<PAGE> 83

d. Intellectual and Proprietary Property, Net

Intellectual and proprietary property, net consists of:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer lists....................... $2,190 $4,914 $ 2,077
Other................................ 29 89 270
------ ------ -------
2,219 5,003 2,347
Less: Accumulated amortization....... (347) (931) (501)
------ ------ -------
$1,872 $4,072 $ 1,846
====== ====== =======
</TABLE>

(7) SUPPLEMENTARY STATEMENTS OF OPERATIONS DATA:

a. Other Income

<TABLE>
<CAPTION>
PERIOD OF SIX MONTHS ENDED
MARCH 16, -------------------------
1994 JUNE 30, JUNE 30,
(INCEPTION) FISCAL YEAR ENDED 1996 1997
THROUGH --------------------------- ----------- -----------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
State job training
program
incentives...... $ -- $ 90 $500 $ 267 $ 362
Gain on sale of
marketable
securities...... -- 9 347 347 --
Dividend income... -- 60 15 15 --
Miscellaneous
income.......... 52 18 7 -- 9
--- ---- ---- ---- ----
$ 52 $177 $869 $ 629 $ 371
=== ==== ==== ==== ====
</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 $90, $500,
$267 and $362 in fiscal years 1995 and 1996 and for the six month periods ended
June 30, 1996 and June 30, 1997 (unaudited), respectively. The Company has $633
of the grant available for use in fiscal year 1997 and has submitted an
application for up to an additional $2,000 of benefit in fiscal year 1998.

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

b. Other Expenses

<TABLE>
<CAPTION>
PERIOD OF SIX MONTHS ENDED
MARCH 16, -------------------------
1994 JUNE 30, JUNE 30,
(INCEPTION) FISCAL YEAR ENDED 1996 1997
THROUGH --------------------------- ----------- -----------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Relocation of
operations...... $ -- $ -- $ (246) $(243) $--
Miscellaneous
expense......... (112) (1) (10) (10) $--
--- ---- ---- ---- ----
$ (112) $ (1) $ (256) $(253) $--
=== ==== ==== ==== ====
</TABLE>

F-17
<PAGE> 84

8) INCOME TAXES:

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $ -- $ -- $ -- $ -- $ --
State.................... -- -- -- -- --
Total current............ -- -- -- -- --
Deferred:
Federal.................. 67 129 196 (135) (372)
State.................... 12 22 34 (23) (70)
--- ---- ---- ---- ----
Total deferred........... 79 151 230 (158) (442)
--- ---- ---- ---- ----
Total income tax expense
(benefit)................ $ 79 $151 $230 $(158) $ (442)
=== ==== ==== ==== ====
</TABLE>

The tax benefit of the cumulative effect of change in accounting principle
is $1,231, all of which relates to deferred income tax. 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 SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit)........ $ 58 $160 $216 $(143) $(1,892)
Adjustments in income taxes
resulting from:
Increase in valuation
allowance............. -- -- -- -- 1,607
Amortization of
goodwill.............. 7 4 3 2 2
State income taxes....... 12 22 34 (23) (187)
Adjustment of deferred
income taxes.......... -- (35) -- -- --
Other................. 2 -- (23) 6 28
--- ---- ---- ----- -------
Income tax expense
(benefit) before
cumulative effect of
change in accounting
principle................ 79 151 230 (158) (442)
Benefit of cumulative
effect of change in
accounting principle..... -- -- -- -- (1,231)
--- ---- ---- ----- -------
Income tax expense
(benefit)................ $ 79 $151 $230 $(158) $(1,673)
=== ==== ==== ===== =======
</TABLE>

F-18
<PAGE> 85

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

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Reserve for returns................. $136 $ 211 $ --
Inventory reserves.................. 158 375 688
Allowance for doubtful accounts..... 271
Net operating loss.................. 730 1,118 3,836
Other............................... 71 4 50
Other accrued liabilities........... -- -- 273
---- ---- ----
Total gross deferred tax assets..... 1,095 1,708 5,118
---- ---- ----
Less valuation allowance:
Federal............................. -- -- (1,436)
State............................... (29) (18) (188)
---- ---- ----
Total valuation allowance........... (29) (18) (1,624)
---- ---- ----
Deferred tax assets, net.............. 1,066 1,690 3,494
---- ---- ----
Deferred tax liabilities:
Basis differences in furniture,
fixtures and equipment and
intellectual and proprietary
property......................... (769) (1,633) (3,103)
Other............................... -- -- (167)
Prepaid expenses.................... (199)
Unrealized gain on
available-for-sale marketable
securities under SFAS No. 115.... (90) -- --
Other............................... (39) (28) (25)
---- ---- ----
Total gross deferred tax
liabilities...................... (898) (1,661) (3,494)
---- ---- ----
Deferred tax assets (liability),
net................................. $168 $ 29 $ --
==== ==== ====
</TABLE>

In addition to the $2,056 of deferred tax liability recorded in connection
with the Storybook acquisition, Storybook also has a $353 deferred tax asset
associated with miscellaneous book tax reserves differences.

The Company had net tax basis operating loss carryforwards ("NOLs") of
$2,837, at December 28, 1996. Of this amount $778 relates to the periods prior
to the acquisition of New Stork, by FCP Direct, Inc., the successor to the
Company by merger. These NOLs expire as follows:

<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------------------------------------
<S> <C>
2006........................................................ $ 243
2007........................................................ 160
2008........................................................ 375
2009........................................................ 53
2010........................................................ 782
2011........................................................ 1,224
------
$2,837
======
</TABLE>

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

In 1996, the Company entered into an arrangement with the City of Rio
Rancho, New Mexico whereby the Company is permitted to make certain reduced
payments in lieu of property and sales

F-19
<PAGE> 86

taxes otherwise due. In order to effect such arrangements, the Industrial
Development Board of Rio Rancho, New Mexico issued industrial development
revenue bonds due 2021 to Equipment Bond Purchaser, Inc., a New Mexico
corporation, which is a wholly owned subsidiary of the Company.

(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
authorized 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.

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 converted 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 -- Short-Term Borrowings 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,
4,000 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 January
1, 2006 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, 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.

F-20
<PAGE> 87

Effective June 30, 1997 (unaudited), WEP and two members of the Company's
board of directors purchased from the Company 1,450,000 shares of common stock.
Additionally, on June 30, 1997 (unaudited), the Company granted to WSDF and two
members of the Company's board of directors, in connection with the subordinated
debt, a warrant expiring October 21, 2003, to purchase 200,000 shares in the
aggregate of the Company's common stock. This warrant may be exercised at $.01
per share. The Company is obligated to issue warrants for additional shares up
to 200,000 in the aggregate, based on any amount remaining outstanding on the
1997 WSDF Notes as of December 31, 1997, June 30, 1998 or December 31, 1998, as
defined. These warrants were estimated to have a fair value at date of issuance
of $696 which was recorded to additional paid-in capital and as original issue
discount on the related subordinated debt.

A capital distribution of $2,274 to FCPLP was recorded by the Company in
fiscal 1996 to reflect the reduction in related party receivables described in
Note 10(a).

In connection with the Storybook Acquisition, the Company issued 151,000
shares of Common Stock valued as of the date of the acquisition to two senior
executives of Storybook.

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 without the prior approval of its lenders.

(10) RELATED PARTY TRANSACTIONS:

a. Receivables

As of December 30, 1995, December 28, 1996 and June 30, 1997 (unaudited),
the Company had net receivables from related parties of $1,225, $635 and $261,
respectively, resulting primarily from the sale by Fulcrum of certain
discontinued inventory or damaged inventory for retail sale or liquidation as
well as advertising expenses and miscellaneous operating charges paid by Fulcrum
and billed to the appropriate related entity. Such receivables have been
guaranteed by FCPLP. 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, $547 and $489, during fiscal years 1995 and 1996 and for
the six month period ending June 28, 1997 (unaudited), respectively. There were
no sales to the related retail company in 1994.

On June 30, 1997, the Company entered into an agreement with a related
party to convert a current receivable of $1,074 into a long-term receivable,
bearing interest at 0.5% over the same corporate base rate as the Credit
Facility. This long-term receivable is due June 30, 2002 and is guaranteed by
FCPLP.

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 distribution 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 and Storybook. 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). Of the $1,750 purchase price, Brands will receive a distribution of
$1,100.

F-21
<PAGE> 88

c. Facility

The Company leases its 160,000 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, 2006. Rent expense for the six months ended
June 30, 1996 (unaudited) and for fiscal year 1996 was $227 and $455,
respectively, which related to the lease of the 80,000 square feet then in
existence. Rent expense for the six months ended June 30, 1997 (unaudited) was
$374, which relates to the lease of 160,000 square feet. 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). Of the $8,100 purchase price, Fulcrum Properties, L.P. will receive
a distribution of $1,200.

(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 remote.

(12) SUBSEQUENT EVENTS (UNAUDITED):

The Company is contemplating filing a registration statement in
anticipation of an initial public offering. As of August 8, 1997, proceeds from
the proposed offering are unknown.

The Company intends to use the net proceeds from any such offering to (i)
repay $10,000 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-22
<PAGE> 89

INDEPENDENT AUDITORS' REPORT

Storybook Heirlooms, Inc.:

We have audited the accompanying balance sheets of Storybook Heirlooms,
Inc. (the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Storybook Heirlooms, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Francisco, California
March 28, 1997

F-23
<PAGE> 90

STORYBOOK HEIRLOOMS, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............................................ $ 707,798 $ 538,396
Accounts receivable............................................. 80,552 286,699
Receivable from shareholder..................................... -- 507,686
Merchandise inventories......................................... 3,073,610 3,682,279
Deferred catalog costs.......................................... 529,516 1,294,143
Prepaid expenses and other assets............................... 120,127 365,906
Deferred taxes.................................................. -- 145,652
---------- -----------
Total current assets.................................... 4,511,603 6,820,761
PROPERTY AND EQUIPMENT -- Net..................................... 832,488 1,030,849
---------- -----------
TOTAL ASSETS...................................................... $ 5,344,091 $ 7,851,610
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables.................................................. $ 2,129,442 $ 3,135,869
Accrued compensation............................................ 207,858 245,727
Other accrued liabilities....................................... 211,855 253,458
Reserve for sales returns....................................... 426,641 512,976
Income taxes payable............................................ -- 49,160
Current deferred taxes.......................................... -- 88,417
Current portion of long-term obligations........................ 72,549 181,041
---------- -----------
Total current liabilities............................... 3,048,345 4,466,648
---------- -----------
LONG-TERM OBLIGATIONS............................................. 115,022 206,718
DEFERRED TAXES.................................................... -- 9,633
COMMITMENTS AND CONTINGENCIES..................................... -- --

SHAREHOLDERS' EQUITY:
Preferred stock -- no par value; 5,000,000 shares authorized;
none outstanding............................................. -- --
Common stock -- no par value; 30,000,000 shares authorized;
shares issued and outstanding: 11,446,787 and 11,438,797..... 3,429,701 3,434,301
Accumulated deficit............................................. (1,248,977) (265,690)
---------- -----------
Total shareholders' equity.............................. 2,180,724 3,168,611
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 5,344,091 $ 7,851,610
========== ===========
</TABLE>

See notes to financial statements.

F-24
<PAGE> 91

STORYBOOK HEIRLOOMS, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, 1996

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES........................................ $ 26,990,000 $ 28,243,321 $ 30,948,100
COST OF SALES.................................... (13,682,137) (14,361,187) (15,108,621)
------------ ------------ ------------
GROSS MARGIN..................................... 13,307,863 13,882,134 15,839,479
SELLING, GENERAL AND ADMINISTRATIVE.............. (12,662,172) (12,583,741) (13,793,454)
------------ ------------ ------------
OPERATING INCOME................................. 645,691 1,298,393 2,046,025
INTEREST EXPENSE................................. (93,484) (126,953) (153,125)
OTHER INCOME (EXPENSE) -- NET.................... 25,232 (42,868) 277,785
------------ ------------ ------------
INCOME BEFORE INCOME TAXES....................... 577,439 1,128,572 2,170,685
INCOME TAX PROVISION............................. -- -- (766,029)
------------ ------------ ------------
NET INCOME....................................... $ 577,439 $ 1,128,572 $ 1,404,656
============ ============ ============
</TABLE>

See notes to financial statements.

F-25
<PAGE> 92

STORYBOOK HEIRLOOMS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1993............. 11,404,787 $3,426,401 $(2,942,091) $ 484,310
EXERCISE OF STOCK OPTIONS............... 4,000 400 -- 400
DISTRIBUTION TO SHAREHOLDERS............ -- -- (12,897) (12,897)
NET INCOME.............................. -- -- 577,439 577,439
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1994............. 11,408,787 3,426,801 (2,377,549) 1,049,252
EXERCISE OF STOCK OPTIONS............... 14,000 2,900 -- 2,900
NET INCOME.............................. -- -- 1,128,572 1,128,572
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1995............. 11,422,787 3,429,701 (1,248,977) 2,180,724
EXERCISE OF STOCK OPTIONS............... 24,000 4,600 -- 4,600
DISTRIBUTIONS TO SHAREHOLDERS........... -- -- (421,369) (421,369)
NET INCOME.............................. -- -- 1,404,656 1,404,656
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1996............. 11,446,787 $3,434,301 $ (265,690) $3,168,611
========== ========== ========= ==========
</TABLE>

See notes to financial statements.

F-26
<PAGE> 93

STORYBOOK HEIRLOOMS, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
(52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................. $ 577,439 $ 1,128,572 $ 1,404,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 211,771 252,787 249,416
Deferred taxes................................. -- -- 67,558
Deferred rent.................................. 33,991 (9,380) 17,411
Loss on disposal of equipment.................. 6,976 -- 240,713
Changes in assets and liabilities:
Receivables.................................. (93,813) 82,074 (206,147)
Merchandise inventories...................... (1,460,147) (160,546) (608,669)
Deferred catalog costs....................... 155,677 (156,871) (764,627)
Prepaid expenses and other assets............ (199,345) 140,575 (245,779)
Trade payables............................... 882,680 (39,700) 1,006,427
Accrued compensation and other accrued
liabilities............................... 91,396 59,660 79,472
Allowance for sales returns.................. (95,897) (50,806) 86,335
----------- ----------- -----------
Net cash provided by operating
activities.............................. 110,728 1,246,365 1,326,766
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment................ (409,327) (98,435) (461,388)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings:
Bank shareholders.............................. 495,170 -- --
Bank line of credit............................ 750,000 1,754,000 2,270,000
Repayments:
Bank line of credit............................ (724,318) (2,164,000) (2,270,000)
Shareholders................................... (466,491) (207,662) --
Capital lease obligations...................... (112,058) (125,428) (110,325)
Advances to shareholder........................... -- -- (2,142,445)
Repayments from shareholder....................... -- -- 1,634,759
Exercise of stock options......................... 400 2,900 4,600
Distribution to shareholders...................... (12,897) -- (421,369)
----------- ----------- -----------
Net cash used in financing activities..... (70,194) (740,190) (1,034,780)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS..... (368,793) 407,740 (169,402)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD........... 668,851 300,058 707,798
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD................. $ 300,058 $ 707,798 $ 538,396
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 83,028 $ 143,490 $ 153,126
=========== =========== ===========
Cash paid for income taxes........................ $ 800 $ 800 $ 638,001
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased under capital leases.......... $ 146,870 $ 36,571 $ 327,932
=========== =========== ===========
</TABLE>

See notes to financial statements.

F-27
<PAGE> 94

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND ACCOUNTING POLICIES

ORGANIZATION -- Storybook Heirlooms, Inc. (the "Company"), incorporated on
August 30, 1989, is a specialty retailer of children's clothing, which it
markets through mail order catalogs dispersed through the United States and
Japan and two outlet stores.

BASIS OF PRESENTATION -- The Company operates and reports on a 52/53-week
fiscal year ending on the Friday nearest December 31 of each year. Fiscal 1996
included 53 weeks and ended on January 3, 1997. Fiscal 1995 and 1994 included 52
weeks and ended on December 29, 1995 and December 30, 1994, respectively. For
purposes of presentation, the Company presents its fiscal year as ending
December 31.

CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with an initial maturity of 90 days or less to be cash
equivalents.

MERCHANDISE INVENTORIES are stated at lower of cost (first-in, first-out
method) or market.

DEFERRED CATALOG COSTS consist of direct costs to produce and distribute
catalogs. Such costs are capitalized and amortized over the expected sales life
of each catalog, which is generally three months.

PROPERTY AND EQUIPMENT are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Amortization of leasehold improvements is computed using the straight-line
method based on the estimated useful lives of the assets or the term of the
lease, if shorter.

REVENUE RECOGNITION -- Catalog sales are recorded when merchandise is
shipped. Reserves for estimated sales returns are recorded at the time the
revenue is recognized.

RENT EXPENSE is recognized on a straight-line basis over the life of the
lease.

INCOME TAXES -- Through December 31, 1995, the Company was an S Corporation
for both federal and California income tax purposes and, accordingly, the profit
and losses of the corporation were included in the individual tax returns of the
shareholders. For state purposes the Company was required to pay a California S
Corporation income tax of 1.5%. Effective January 1, 1996, the Company elected
to change its tax status to a C Corporation. In connection with the change to a
C Corporation, the Company recorded a deferred tax liability of $114,860, which
is included in other income for 1996. The Company uses the asset and liability
method to account for income taxes, which requires the Company to compute
deferred income taxes based on the difference between financial statement and
tax basis of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.

STOCK-BASED COMPENSATION -- The Company accounts for stock-based awards
using the intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees.

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

F-28
<PAGE> 95

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. PROPERTY AND EQUIPMENT

Property and equipment is as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and equipment.............................. $1,016,428 $1,393,452
Machinery and equipment..................................... 121,798 266,330
Leasehold improvements...................................... 306,341 187,484
---------- ----------
Total............................................. 1,444,567 1,847,266
Accumulated depreciation and amortization................... (612,079) (816,417)
---------- ----------
Property and equipment -- net............................... $ 832,488 $1,030,849
========== ==========
</TABLE>

Property and equipment at December 31, 1995 and 1996 includes $439,960 and
$525,168, respectively, of equipment purchased under capital lease agreements.
The related accumulated amortization at December 31, 1995 and 1996 is $235,417
and $167,478, respectively.

3. LEASES

The Company leases its office and distribution center, certain equipment,
and two retail store facilities under leases that expire through 2001. The terms
of the store facility leases require minimum rental payments, contingent rental
payments based upon a percentage of store revenues, and provide for renewal
options from four to seven years. The Company's distribution facility lease
expires in July 1997 and management expects that the lease will be renewed in
the ordinary course of business. Total rent expense for the years ended 1994,
1995 and 1996 was $328,887, $495,984 and $631,869, respectively.

These facility leases contain provisions for an abatement of rent during
the first year and escalating payments over the remainder of the lease term.
Rent expense recognized in excess of cash rent paid is reflected as deferred
rent on the accompanying balance sheet and amounted to $46,171 and $28,760 at
December 31, 1995 and 1996, respectively.

At December 31, 1996, the present value of future minimum capital lease
payments, inclusive of bargain purchase options, and the future minimum cash
payments under noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ending December 31:
1997.............................................................. $ 201,086 $ 444,537
1998.............................................................. 149,829 394,804
1999.............................................................. 47,452 409,961
2000.............................................................. -- 371,860
2001.............................................................. -- 179,434
Thereafter........................................................ -- --
--------- ----------
Total minimum lease payments.............................. 398,367 $1,800,596
==========
Less amount representing interest................................. (39,369)
---------
Present value of future minimum lease payments.................... 358,998
Less current portion.............................................. (171,125)
---------
Long-term capital lease obligations............................... $ 187,873
=========
</TABLE>

F-29
<PAGE> 96

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. BANK LINE OF CREDIT

In December 1996, the Company established a line of credit with a bank
which provides for borrowings up to $1,750,000. Borrowings bear interest at the
bank's base rate plus .75% and are collateralized by a security interest in
accounts receivable, inventory and equipment. The agreement contains restrictive
covenants as to debt ratios, liquidity and pretax profits. Outstanding
borrowings are payable to the bank on demand. There was no outstanding
borrowings at December 31, 1996.

5. INCOME TAXES

The provision for income taxes at December 31, 1996 consists of the
following:

<TABLE>
<S> <C>
Current:
Federal......................................................... $533,977
State........................................................... 164,794
--------
Total current........................................... 698,771
--------
Deferred:
Federal......................................................... 39,445
State........................................................... 27,813
--------
Total deferred.......................................... 67,258
--------
Total provision................................................... $766,029
========
</TABLE>

Deferred tax assets and (liabilities) consist of the following:

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1996 1996
---------- ------------
<S> <C> <C>
Deferred tax assets:
Sales returns reserve......................................... $ 170,656 $ 205,190
Inventory reserve and basis difference........................ 247,883 275,997
State taxes................................................... -- 56,029
Other temporary differences................................... 25,897 37,816
--------- ---------
Gross deferred assets.................................... 444,436 575,032
Deferred tax liabilities:
Prepaid expenses.............................................. (280,671) (498,931)
Other temporary differences................................... (48,905) (28,499)
--------- ---------
Net deferred tax asset............................................. $ 114,860 $ 47,602
========= =========
</TABLE>

The net deferred tax asset represents temporary differences for future tax
deductions which management believes the realization of such asset is more
likely than not.

The 1996 provision for income taxes as reported in the financial statements
differs from the amount that would result from applying the regular federal
statutory rate to income before income taxes primarily due to state income taxes
and tax benefit from the Company's foreign sales corporation.

6. STOCK OPTIONS

F-30
<PAGE> 97

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1996, options for 1,450,567 (1995 -- 1,827,796) shares were available for future
grant. In July 1995, the Board of Directors reduced the exercise price for
358,500 options granted in 1994 from $0.85 to $0.65.

Option activity is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
EXERCISE PER
SHARES PRICE SHARE
--------- -------- -------------
<S> <C> <C> <C>
Balance, December 31, 1993............................... 398,201 $.10 to $.60
Options granted........................................ 358,500 $.65
Options exercised...................................... (4,000) $.10
Options canceled....................................... (163,930) $.10 to $.55
---------
Balance, December 31, 1994............................... 588,771 $.49
Options granted........................................ 262,084 $.65
Options exercised...................................... (14,000) $.18
Options canceled....................................... (66,000) $.59
---------
Balance, December 31, 1995 (217,463 exercisable at a
weighted average price of $.37)........................ 770,855 $.54
Options granted........................................ 635,000 $.65
Options exercised...................................... (24,000) $.19
Options canceled....................................... (257,771) $.60
---------
Balance, December 31, 1996 (311,217 exercisable at a
weighted average price of $.48)........................ 1,124,084 $.60
=========
</TABLE>

Exercise prices of options outstanding at December 31, 1996, ranged from
$.10 to $.65. The weighted average remaining contractual life of options
outstanding at December 31, 1996 was approximately 5.5 years.

Had compensation cost for the Company's stock-based plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, the Company's pro forma net income for 1996 and 1995 would not have been
materially different than actual net income.

WARRANTS -- In 1994, the Company issued warrants to purchase 10,000 shares
of common stock at an exercise price of $1 per share. These warrants expire in
February 1999.

7. RELATED PARTY TRANSACTIONS

During 1996, the Company made loans totalling $2,142,445 to the Company's
Chairman and majority shareholder, of which $507,686 was outstanding at December
31, 1996. The outstanding balance bears interest at 10.75% and is due December
31, 1997. During 1996, the total interest received on the loan was $99,477. At
December 31, 1996 there was no outstanding interest due.

F-31
<PAGE> 98

STORYBOOK HEIRLOOMS, INC.

STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 27, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 27,
1996 1997
----------- -----------
<S> <C> <C>
NET SALES......................................................... $16,048,057 $14,963,088
COST OF SALES..................................................... (7,887,166) (6,993,666)
----------- -----------
GROSS MARGIN...................................................... 8,160,891 7,969,422
ADVERTISING AND CATALOG COSTS..................................... (3,418,627) (3,700,367)
GENERAL AND ADMINISTRATIVE........................................ (3,938,700) (4,038,575)
----------- -----------
OPERATING INCOME.................................................. 803,564 230,480
INTEREST EXPENSE.................................................. (27,133) (70,104)
OTHER EXPENSE -- NET.............................................. (58,955) (179,802)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................................. 717,476 (19,426)
INCOME (BENEFIT) TAX PROVISION.................................... (296,013) 3,293
----------- -----------
NET INCOME (LOSS)................................................. $ 421,463 $ (16,133)
=========== ===========
</TABLE>

See notes to financial statements.

F-32
<PAGE> 99

STORYBOOK HEIRLOOMS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 27, 1997

<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996.............. 11,446,787 $3,434,301 $(265,690) $3,168,611
NET LOSS (unaudited)..................... -- -- (16,133) (16,133)
---------- ---------- --------- ----------
BALANCES, JUNE 27, 1997 (unaudited)...... 11,446,787 $3,434,301 $(281,823) $3,152,478
========== ========== ========= ==========
</TABLE>

See notes to financial statements.

F-33
<PAGE> 100

STORYBOOK HEIRLOOMS, INC.

STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 27, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 27,
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 421,463 $ (16,133)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 113,420 161,368
Deferred taxes............................................................ -- (305,853)
Changes in assets and liabilities:
Receivables............................................................. (764,368) (656,202)
Merchandise inventories................................................. (730,432) (833,561)
Deferred catalog costs.................................................. (197,137) 834,632
Prepaid expenses and other assets....................................... (914,922) 25,443
Trade payables.......................................................... (1,307,901) (1,578,031)
Accrued compensation and other accrued liabilities...................... 1,291,574 563,978
Allowance for sales returns............................................. 113,333 (249,224)
Income taxes payable.................................................... 296,013 (49,160)
----------- -----------
Net cash used in operating activities................................ (1,678,957) (2,102,743)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (143,104) (111,826)
Other....................................................................... (109,839) --
----------- -----------
Net cash used in investing activities................................ (252,943) (111,826)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on line of credit................................................ 1,727,143 --
Payments of capital lease obligations....................................... (81,578) (78,827)
Distribution to shareholders................................................ (421,463) --
Advances from parent........................................................ -- 1,755,000
----------- -----------
Net cash provided by financing activities............................ 1,224,102 1,676,173
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS.......................................... (707,798) (538,396)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD..................................... 707,798 538,396
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD........................................... $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 27,133 $ 12,863
=========== ===========
Cash paid for income taxes.................................................. $ 487,000 $ 577,547
----------- -----------
</TABLE>

See notes to financial statements.

F-34
<PAGE> 101

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND ACCOUNTING POLICIES

BASIS OF PRESENTATION -- Prior to the purchase of the Company by Fulcrum
Direct, Inc., ("Fulcrum") as described below, the Company operated and reported
on a 52/53-week fiscal year ending on the Friday nearest December 31 of each
year. Subsequent to the purchase, the Company will operate and report on a
52/53-week fiscal year ending on the Saturday nearest December 31 of each year.
The six month periods ending June 30, 1997 and June 27, 1996 included 25 and 26
weeks, respectively.

CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with an initial maturity of 90 days or less to be cash
equivalents.

MERCHANDISE INVENTORIES are stated at lower of cost (first-in, first-out
method) or market.

REVENUE RECOGNITION -- Catalog sales are recorded when merchandise is
shipped. Reserves for estimated sales returns are recorded at the time the
revenue is recognized.

RENT EXPENSE is recognized on a straight-line basis over the life of the
lease.

STOCK-BASED COMPENSATION -- The Company accounts for stock-based awards
using the intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees.

SEASONAL AND QUARTERLY FLUCTUATIONS -- 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 Spring, Fall and Holiday seasons. As a result, the

F-35
<PAGE> 102

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Company expects its sales and results of operations to be generally lower in the
second and third quarters than in the first and fourth quarters of each fiscal
year, which includes Easter, Back-to-School and Holiday purchases, respectively.
Accordingly, 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 quarters.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED -- In June 1997, SFAS No. 130,
Comprehensive Income, was issued and becomes effective in 1998 and requires
reclassification of earlier financial statements for comparative purposes. SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency translation adjustments and gains and losses on certain securities be
shown in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.

UNAUDITED INTERIM FINANCIAL STATEMENTS -- In the opinion of management, the
unaudited financial statements for the six months ended June 30, 1996 and June
27, 1997 are presented on a basis consistent with the audited financial
statements and reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the result thereof. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year.

2. ACQUISITION

On June 27, 1997 Fulcrum acquired all of the outstanding common stock of
the Company for $15,000,000, which includes 151,000 shares of Fulcrum's common
stock valued at the date of acquisition to be $1,042,000 ("the Acquisition").
This acquisition has been accounted for under the purchase method. The purchase
price was allocated based on estimated fair values at the date of acquisition.
Fulcrum recorded $1,654,000 of deferred tax liability for the excess of the
resulting amounts recorded for financial reporting purposes over the tax basis
of certain assets and liabilities acquired. This resulted in an excess of cost
over fair value of net assets acquired of $9,264,000.

3. LEASES

The Company leases its office and distribution center, certain equipment,
and two retail store facilities under leases that expire through 2001. The terms
of the store facility leases require minimum rental payments, contingent rental
payments based upon a percentage of store revenues, and provide for renewal
options from four to seven years. The Company's distribution facility lease
expires in July 1997 and management expects that the lease will be renewed in
the ordinary course of business. Total rent expense for the six months ended
June 30, 1996 and June 27, 1997 was $328,887 and $495,984, respectively.

F-36
<PAGE> 103

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

At June 27, 1997, the present value of future minimum capital lease
payments, inclusive of bargain purchase options, and the future minimum cash
payments under noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Fiscal Years:
1997 (remaining six months)....................................... $ 135,448 $ 222,269
1998.............................................................. 153,703 394,804
1999.............................................................. 49,390 409,961
2000.............................................................. -- 371,860
2001.............................................................. -- 179,434
Thereafter........................................................ -- --
--------- ----------
Total minimum lease payments.............................. 338,541 $1,578,328
==========
Less amount representing interest................................. (29,609)
---------
Present value of future minimum lease payments.................... 308,932
Less current portion.............................................. (181,322)
---------
Long-term capital lease obligations............................... $ 127,610
=========
</TABLE>

4. BANK LINE OF CREDIT

In December 1996, the Company established a line of credit with a bank
which provides for borrowings up to $1,750,000. Borrowings bear interest at the
bank's base rate plus .75% and are collateralized by a security interest in
accounts receivable, inventory and equipment. The agreement contains restrictive
covenants as to debt ratios, liquidity and pretax profits. Outstanding
borrowings are payable to the bank on demand. Effective with the Acquisition,
the line of credit was terminated.

5. INCOME TAXES

The provision for income taxes for the six months ended June 27, 1997
consists of the following:

<TABLE>
<S> <C>
Current:
Federal........................................................ $ 236,433
State.......................................................... 66,127
--------
Total current.......................................... 302,560
--------
Deferred:
Federal........................................................ (240,207)
State.......................................................... (65,646)
--------
Total deferred......................................... (305,853)
--------
Total provision.................................................. $ (3,293)
========
</TABLE>

The June 27, 1997 provision for income taxes as reported in the financial
statements differs from the amount that would result from applying the regular
federal statutory rate to income before income taxes primarily due to state
income taxes.

F-37
<PAGE> 104

STORYBOOK HEIRLOOMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

6. STOCK OPTIONS

STOCK OPTION PLAN -- Under the 1989 and 1991 Stock Option Plans, incentive
or nonqualified stock options to purchase up to 2,659,651 shares of common stock
may be granted. Options must be granted at not less than 85% of fair market
value at the date of grant as determined by the Board of Directors. Options vest
over a period of five years and expire seven years after the date of grant. At
June 27, 1997, options for 1,450,567 shares were available for future grant. In
July 1995, the Board of Directors reduced the exercise price for 358,500 options
granted in 1994 from $0.85 to $0.65.

Option activity is summarized as follows (unaudited):

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1996 (311,217 exercisable at a weighted average
price of $.48)...................................................... 1,124,084 $.60
Options canceled.................................................... (1,124,084) $.60
Balance, June 27, 1997................................................ --
=========
</TABLE>

Had compensation cost for the Company's stock-based plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, the Company's pro forma net income for the six months ended June 27, 1997
and for fiscal years 1996 and 1995 would not have been materially different than
actual net income.

Pursuant to the Acquisition, all stock options were canceled.

WARRANTS -- In 1994, the Company issued warrants to purchase 10,000 shares
of common stock at an exercise price of $1 per share. These warrants expire in
February 1999.

F-38
<PAGE> 105

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

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............................... 8
The Company................................ 16
Use of Proceeds............................ 17
Dividend Policy............................ 17
Capitalization............................. 18
Dilution................................... 19
Selected Consolidated Financial Data....... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Business................................... 33
Management................................. 46
Certain Relationships and Related
Transactions............................. 52
Principal Stockholders..................... 57
Description of Capital Stock............... 59
Shares Eligible for Future Sale............ 63
Underwriting............................... 65
Legal Matters.............................. 66
Experts.................................... 66
Additional Information..................... 67
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.

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

3,000,000 SHARES

[FULCRUM DIRECT LOGO]

COMMON STOCK
--------------------

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

HAMBRECHT & QUIST

ROBERTSON, STEPHENS & COMPANY
, 1997

============================================================
<PAGE> 106

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................................................... 4,900
Nasdaq National Market original listing fee....................... 17,500
Blue sky fees and expenses (including attorneys' fees and
expenses)....................................................... 10,000
Printing and engraving expenses................................... 150,000
Transfer agent's fees and expenses................................ 15,000
Accounting fees and expenses...................................... 275,000
Legal fees and expenses........................................... 350,000
Miscellaneous expenses............................................ 67,145
--------
Total................................................... $900,000
========
</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> 107

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 the following persons on
the following dates:

<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
DATE NAME SHARES PURCHASE PRICE
- ------------------------- ----------------------------------------- --------- --------------
<S> <C> <C> <C>
October 1, 1995.......... Fulcrum Capital Partners, L.P. 20,000(1) $2,000,000
November 1, 1995......... Fulcrum Capital Partners, L.P. 10,000(1) 1,000,000
January 1, 1996.......... Pete Lederman 3,000(2) 300,000
January 1, 1996.......... Lori Feldman 1,500(2) 150,000
May 1, 1996.............. The Greenberg Family Fund LLC 5,000(2) 500,000
May 1, 1996.............. Bella Ejnes 600(2) 60,000
June 1, 1996............. Patrick K. Sullivan 1,000(2) 100,000
June 1, 1996............. The Greenberg Family Fund LLC 1,665(2) 174,825
June 1, 1996............. Murray Alter 335(2) 35,175
June 1, 1996............. Roberta Greenberg 1,000(2) 100,000
July 1, 1996............. Patrick K. Sullivan 4,000(2) 400,000
July 1, 1996............. Howard Unger 1,500(2) 150,000
July 1, 1996............. Bella Ejnes 400(2) 40,000
July 1, 1996............. Dan and Corrine Blum 500(2) 50,000
July 1, 1996............. Kim Fields 250(2) 25,000
July 1, 1996............. Gary Budoff 125(2) 12,500
July 1, 1996............. Mark Ejnes 125(2) 12,500
July 1, 1996............. Ted Ejnes 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> 108

SERIES B PREFERRED STOCK, PAR VALUE $0.01 PER SHARE

Shares of Series B Preferred Stock were sold to the following persons on
the following dates:

<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
DATE NAME SHARES PURCHASE PRICE
- ------------------------- ---------------------- --------- --------------
<S> <C> <C> <C>
January 1, 1996.......... The Fulcrum Group, 8,196 $ 819,618.59
Inc.
March 1, 1996............ The Fulcrum Group, 5,029 502,948.39
Inc.
June 1, 1996............. The Greenberg Family 12,285 1,289,925.00
Fund
September 1, 1996........ The Fulcrum Group, 5,957 595,739.77
Inc.
</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. The Company
has granted Warrants to FCP in lieu of stock options which would otherwise have
been granted to the executive officers who have ownership interest in FCP. Such
executive officers have chosen, and the Company has agreed,to receive incentive
options in the form of FCP Warrants to achieve certain structural and tax
advantages. Therefore, no purchase price was paid for the FCP Warrants. 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.

On June 28, 1997, in connection with the Storybook Acquisition, the Company
issued shares of Common Stock to trusts established for the benefit of Estelle
M. DeMuesy and Jonathan W. Bruml in the amounts of 86,000 and 65,000,
respectively.

On June 30, 1997, the Company sold to the following persons Common Stock in
the following amounts at a price of $6.90 per share:

<TABLE>
<CAPTION>
NUMBERS
NAME OF SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Whitney Equity Partners, L.P...................................................... 1,160,000
The Greenberg Family Fund LLC..................................................... 271,875
Maureen C. Sullivan, Revocable Trust-1995......................................... 18,125
</TABLE>

On July 30, 1997, the Company issued 2,416,500 shares of Common Stock in
exchange for an equal number of shares of its Common Stock in order to correct a
defect in the original issuance of such shares.

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.

On June 30, 1997, the Company sold to the following persons Senior
Subordinated Promissory Notes due 2003 in the following principal amounts for
the following prices and warrants to purchase Common Stock for the following
prices:

<TABLE>
<CAPTION>
NAME NOTES/PRICE WARRANTS/PRICE
- -------------------------------------------------- --------------------- ----------------
<S> <C> <C>
Whitney Subordinated Debt Fund, L.P............... $8,000,000/$7,442,829 160,000/$557,170
The Greenberg Family Fund LLC..................... 1,875,000/1,744,413 37,500/130,586
Maureen C. Sullivan, Revocable Trust-1995......... 125,000/116,294 2,500/8,706
</TABLE>

II-3
<PAGE> 109

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Securities Purchase Agreement, dated as of June 27, 1997, by and among
Storybook Heirlooms, Inc., certain stockholders of Storybook Heirlooms, Inc.
and Fulcrum Direct, Inc.**
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.**
10.4.1 Amendment No. 1 dated as of February 24, 1997 among Fulcrum Direct, Inc.,
Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P.**
10.4.2 Amendment No. 3 to Securities Purchase Agreement dated as of May 7, 1997 among
Fulcrum Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity
Partners, L.P.**
10.4.3 Amendment No. 4 to Securities Purchase Agreement dated as of June 30, 1997
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.**
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 Amended and Restated Management Incentive Agreement by and between Fulcrum
Direct, Inc. and Fulcrum Capital Partners L.P.
</TABLE>

II-4
<PAGE> 110

<TABLE>
<C> <S>
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 Bond Purchase Agreement, dated as of December 27, 1995, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties,
L.P.**
10.17 Bond Purchase Agreement, dated as of December 23, 1996, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties,
L.P.**
10.18 Indenture, dated as of December 1, 1995, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.**
10.18.1 Indenture, dated as of December 1, 1996, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.**
10.19 Lease and Option Agreement, dated as of August 11, 1995, by and between
Fulcrum Direct, Inc. and Fulcrum Properties L.P.**
10.19.1 Lease Amendment, dated as of December 29, 1995, by and between Fulcrum Direct,
Inc. and Fulcrum Properties, L.P.**
10.19.2 Lease Amendment, dated as of September 24, 1996, 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.**
10.23 Securities Purchase Agreement, dated as of June 30, 1997, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P., The Greenberg Family Fund
LLC and Maureen C. Sullivan, Revocable Trust -- 1995**.
10.24 Senior Subordinated Promissory Note, dated as of June 30, 1997, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.**
10.25 Common Stock Purchase Warrant, dated as of June 30, 1997, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.**
10.26 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Estelle M. DeMuesy.**
10.27 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Jonathan W. Bruml.**
10.28 Severance, Confidentiality and Non-Competition Agreement, dated as of June 27,
1997, by and between Jerry H. Machado and Fulcrum Direct, Inc.**
11.1 Schedule of Computation of Primary Net Earnings Per Share**
21.1 Subsidiaries of the Company**
23.1 Consent of Arthur Andersen LLP**
23.2 Consent of Deloitte & Touche LLP**
23.3 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.

** Previously filed.

II-5
<PAGE> 111

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-6
<PAGE> 112

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 August 26, 1997.

FULCRUM DIRECT, INC.

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

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed on August 26,
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

* Director
- ---------------------------------------------
Arnold Greenberg

* Director
- ---------------------------------------------
Ray E. Newton, III

* Director
- ---------------------------------------------
Patrick K. Sullivan, M.D.

* Director
- ---------------------------------------------
Howard Unger

*By: /s/ SCOTT A. BUDOFF
- ---------------------------------------------
Scott A. Budoff, attorney in fact
</TABLE>

II-7
<PAGE> 113

EXHIBIT INDEX

<PAGE> 114

<TABLE>
<C> <S>
10.16 Bond Purchase Agreement, dated as of December 27, 1995, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties,
L.P.**
10.17 Bond Purchase Agreement, dated as of December 23, 1996, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties,
L.P.**
10.18 Indenture, dated as of December 1, 1995, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.**
10.18.1 Indenture, dated as of December 1, 1996, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.**
10.19 Lease and Option Agreement, dated as of August 11, 1995, by and between
Fulcrum Direct, Inc. and Fulcrum Properties L.P.**
10.19.1 Lease Amendment, dated as of December 29, 1995, by and between Fulcrum Direct,
Inc. and Fulcrum Properties, L.P.**
10.19.2 Lease Amendment, dated as of September 24, 1996, 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.**
10.23 Securities Purchase Agreement, dated as of June 30, 1997, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P., The Greenberg Family Fund
LLC and Maureen C. Sullivan, Revocable Trust -- 1995.**
10.24 Senior Subordinated Promissory Note, dated as of June 30, 1997, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.**
10.25 Common Stock Purchase Warrant, dated as of June 30, 1997, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.**
10.26 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Estelle M. DeMuesy.**
10.27 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Jonathan W. Bruml.**
10.28 Severance, Confidentiality and Non-Competition Agreement, dated as of June 27,
1997, by and between Jerry H. Machado and Fulcrum Direct, Inc.**
11.1 Schedule of Computations of Primary Net Earnings per Share.**
21.1 Subsidiaries of the Company**
23.1 Consent of Arthur Andersen LLP**
23.2 Consent of Deloitte & Touche LLP**
23.3 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.

** Previously filed.

<PAGE> 1
AMENDED AND RESTATED
MANAGEMENT INCENTIVE AGREEMENT

Amended and Restated Management Incentive Agreement dated as of June
30, 1997 between Fulcrum Direct, Inc., a Delaware corporation with its office at
4321 Fulcrum Way, NE, Rio Rancho, New Mexico 87104 (the "Company"), and Fulcrum
Capital Partners L.P., a Delaware limited partnership with its office at 1501
12th Street NW, Albuquerque, New Mexico 87124 ("FCP"), amending the Advisory
Agreement, dated April 1, 1994, between the Company and FCP.

WHEREAS, the Company and FCP desire that the name of the agreement be
amended and restated to more accurately reflect the purpose and intent of the
parties hereto;

WHEREAS, it is expected that a significant portion of the aggregate
value of the Company in the future will be related to the growth of the Company
through acquisitions, by expansion, or otherwise;

WHEREAS, the executive officers of the Company have utilized FCP as an
entity to align their economic interests in the Company in the form of general
and limited partnership interests in FCP;

WHEREAS, the general and limited partners of FCP have considerable
expertise in identifying possible acquisitions and in providing related M&A
services and such parties are also executive officers of the Company;

WHEREAS, in view of the foregoing, the Company has determined that it
is in the best interests of the Company and its shareholders to compensate and
provide incentive for such parties to identify possible acquisitions for the
Company and to provide related M&A services in connection therewith.

NOW, THEREFORE, the Company and FCP hereby agree as follows:

1. Incentive Payments.

The Company agrees to make incentive payments as provided in
Section 1.2 below in order to provide incentives to its executive officers:
(i) to seek business units for acquisition by the Company, whether through
merger, acquisition of assets, tender or exchange offer, acquisition of
securities or otherwise and/or upon the request of the Board of Directors of the
Company, to find a purchaser for or other acquirer of the Company or any of its
subsidiaries or all or any portion of its or their businesses or assets (whether
existing or owned on the date of this Agreement or hereafter acquired and
whether in a single transaction or a series of transactions), whether through
merger, sale of assets, tender or exchange offer, sales of a majority interests
of the Company's outstanding voting securities, liquidation or otherwise (any
such transaction hereinafter referred to as an "Acquisition Transaction"); (ii)
to analyze any offers with respect to an Acquisition Transaction, whether or not
solicited or initiated by the Company; (iii) to assist in the negotiation and
closing of any such Acquisition Transaction; (iv) to provide related M&A
services.

1.2 In the event that an Acquisition Transaction occurs
during the Term (as hereinafter defined) or as a result of discussions
commenced, or agreement reached, during the Term, FCP shall be entitled to
receive upon consummation of each Acquisition Transaction an incentive payment
(the "Payment") equal to the greater of (i) $50,000 or (ii) .02 multiplied by
the Fair Value (as defined below) of the Acquisition Transaction; provided, if
the Fair Value is greater than $20,000,000, then the Payment shall be

<PAGE> 2
equal to the sum of (i) $400,000 and (ii) the Fair Value less $20,000,000
multiplied by .01. For purpose of this Agreement, "Fair Value" shall mean the
greater of (i) the aggregate consideration payable by the Company or to the
Company or the Company's shareholders, as the case may be, (whether in cash,
property and/or securities) in connection therewith or (ii) the book value of an
Acquisition Transaction for purposes of purchase accounting in accordance with
generally accepted accounting principles. The value of any consideration paid
pursuant to an Acquisition Transaction (other than cash or marketable
securities) shall be the fair market value thereof determined, in good faith, by
the Board of Directors of the Company. If the aggregate consideration in an
Acquisition Transaction may be increased by contingent payments related to
future earnings or operations or otherwise, the portion of the Fee related
thereto payable to FCP shall be calculated pursuant hereto and paid in cash when
and as such contingent payments are made.

1.3 Except as otherwise provided herein, any Payment which
shall become payable under this Agreement, shall be due and payable at the
closing of each Acquisition Transaction; provided, that FCP may, at its option,
take a demand note from the Company with a principal amount equal to the
Payment, accruing interest at 12% per annum, which note shall accrue interest
quarterly but shall not require any payment by the Company until such time as
FCP shall demand payment thereunder, which payment may be demanded by FCP in
either cash or the common stock of the Company, which determination FCP shall
make in its sole discretion.

2. Term

2.1 The Term shall commence on the date hereof and shall
terminate on the earlier of (i) 90 days following the receipt by FCP of
written notice from the Company of a Change of Control or (ii) December 31,
2005 (the "Term").

2.2 If an Acquisition Transaction occurs during the Term, or
occurs after the Term has terminated as result of discussions commenced or an
agreement reached during the Term, FCP shall be entitled to incentive payments
as provided in Section 1 hereof notwithstanding such termination and regardless
of the reason for such termination.

2.3 For purposes of this Agreement, a "Change in Control" of
the Company shall be deemed to have occurred if (x) any "Person" (as defined
below) becomes the "Beneficial Owner" (as defined below), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities,
(y) the Company sells all or substantially all of the assets of the Company;
or (z) as a direct result of a disposition of the Company's securities by
Michael G. Lederman, Michael G. Lederman ceases to be the Beneficial Owner,
directly or indirectly, of securities of the Company representing at least
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities.

<PAGE> 3
"Person" shall have the meaning given in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended from time to time (the "Exchange Act"), as
modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall
not include (i) the Company or any of its subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or
any of its subsidiaries, (iii) the partners, directors, officers, employees or
affiliates of Fulcrum Capital Partners L.P., Fulcrum Capital L.P., The Fulcrum
Group, Inc., or SAB, Inc., or any successor thereof or (iv) an underwriter
temporarily holding securities pursuant to an offering os such securities,
"Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the
Exchange Act.

3. Notices

Any notice of communication given by any party
hereto to the other shall be in writing and personally delivered or mailed by
registered or certified mail, return receipt requested, postage prepaid, if to
the Company, to the address provided above; if to FCP to the address provided
above. All notices shall be deemed given when actually received. Any person
entitled to receive notice may designate in writing, by notice to the other,
such other address to which notices to such person shall thereafter be sent.

4. Miscellaneous

4.1 Entire Agreement. This Agreement contains the entire
understanding of the parties in respect of its subject matter and supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.

4.2 Amendment; Waiver. This Agreement may not be amended,
supplemented, canceled or discharged, except by written instrument executed by
the party affected thereby. No failure to exercise, and no delay in exercising,
any right, power or privilege hereunder shall operate as a waiver thereof. No
waiver of any breach of any provision of this Agreement shall be deemed to be a
waiver of any preceding or succeeding breach of the same or any other provision.

4.3 Binding Effect; Assignment. The rights and obligations of
this Agreement shall bind and inure to the benefit of any successor of the
Company by reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business and properties. The rights or
obligations of the Company and of FCP under this Agreement may not be assigned
without the prior written consent of the non-assigning party.

4.4 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.

<PAGE> 4
4.5 Governing Law; Interpretation. This Agreement shall be
construed in accordance with and governed for all purposes by the laws and
public policy (other than conflict of laws principles) of the State of Delaware
applicable to contracts executed and to be wholly performed within such State
and the parties submit to the jurisdiction of the federal and state courts in
New Mexico for the resolution of all disputes hereunder. Service of process in
any dispute shall be effective (i) upon the Company, if service is made on an
authorized officer of the Company; (ii) upon FCP, if service is made on an
authorized officer of FCP.

4.6 Further Assurances. The parties hereto agree to execute,
acknowledge, deliver and perform, and/or cause to be executed, acknowledged,
delivered and performed, at any time, and/or from time-to-time, as the case may
be, all such further agreements, deeds assignments, transfers, conveyances,
powers of attorney and/or assurances as may be necessary, and/or desirable, to
carry out the provisions and/or intent of this Agreement including, without
limitations, upon the reasonable request of FCP such other agreements as are
necessary or desirable in order for the Company to confirm the engagement of FCP
for the purposes provided herein.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

FULCRUM DIRECT, INC.

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

FULCRUM CAPITAL PARTNERS L.P.

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