<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   Form 10-K

[X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the fiscal year ended March 27, 1999.

[ ]  Transition Report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934.

                         Commission File Number 0-24173

                             GENESIS DIRECT, INC.
            (Exact name of registrant as specified in its charter)

           DELAWARE                                      22-3449666
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                  100 PLAZA DRIVE, SECAUCUS, NEW JERSEY 07094
         (Address of principal executive offices, including zip code)

                                (201) 867-2800
             (Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:         None
Securities registered pursuant to Section 12(g) of the Act:         Common Stock, $.01 par value per share
</TABLE>

Indicate by check mark whether the Registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.   YES    X   NO ______
                                         ------

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

As of July 6, 1999, 32,363,490 shares of the Registrant's Common Stock, $.01 par
value per share, were outstanding.  The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $20,899,971 as of July 6, 1999, based upon the closing price of
the Registrant's Common Stock on The Nasdaq Stock Market, as reported for such
date.  Shares of Common Stock held by each executive officer and director and by
each person known by the Registrant to beneficially own more than 5% of the
outstanding Common Stock have been excluded in that such person may under
certain circumstances be deemed to be affiliates. This determination for
executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.

Documents incorporated by reference:  The Company's definitive proxy statement
to be filed by the Company pursuant to Regulation 14A is incorporated into items
10, 11, 12 and 13 of Part III of this Form 10-K.
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                             GENESIS DIRECT, INC.
                        1998 ANNUAL REPORT ON FORM 10-K


                               TABLE OF CONTENTS

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                                                                                                  Page
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                                    PART I
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Item 1.   Business.............................................................................     4
Item 2.   Properties...........................................................................    17
Item 3.   Legal Proceedings....................................................................    17
Item 4.   Submission of Matters to Vote of Security Holders....................................    17

                                  PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters................    18
Item 6.   Selected Financial Data..............................................................    19
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
          Operations...........................................................................    20
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk...........................    26
Item 8.   Financial Statements and Supplementary Data..........................................    26
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial
          Disclosure...........................................................................    26

                                PART III

Item 10.  Directors and Executive Officers of the Registrant...................................    27
Item 11.  Executive Compensation...............................................................    27
Item 12.  Security Ownership of Certain Beneficial Owners and Management.......................    27
Item 13.  Certain Relationships and Related Transactions.......................................    27

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K......................    28

Signatures.....................................................................................    30
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                                       2
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               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  Certain statements contained herein including, without limitation, those
concerning (i) the Company's strategy (including its Internet strategy), (ii)
the Company's restructuring plans, (iii) the Company's capital expenditures,
(iv) the dispositions of catalogs expected by the Company in the near future,
and (v) the terms upon which such catalogs will be disposed, contain forward-
looking statements (within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Business--Factors That May Affect Future Financial Results." The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.

                                       3
<PAGE>

                                    PART I

Item 1.  Business

  Prior to February 1999, Genesis Direct, Inc., doing business as Proteam.com
("Genesis Direct" or "Proteam.com" or the "Company") positioned itself as a
leading database-driven specialty retailer in the rapidly growing universe of
non-store shopping. With a portfolio of 36 Company-owned brands, the Company
offered products directly to consumers in targeted niche markets primarily
through a variety of catalogs, as well as Internet websites and electronic
media, including television and radio. For the fiscal year ended March 27, 1999
("fiscal 1998"), the Company had net sales of approximately $252.3 million. The
predecessor to the Company was formed in 1995.

  In February 1999, the Company announced a strategic repositioning of its
business designed to capitalize on its prominence as a leading direct marketer
and e-tailer of sports products, to leverage its sports brands and operating
infrastructure and to facilitate the Company's further development as a web-
based sports products superstore.  In connection with the strategic
repositioning, the Board of Directors of the Company approved changing the name
of the Company to Proteam.com Inc., subject to shareholder approval, and
adopting Proteam.com as a trade name and changing the Company's ticker symbol
from GEND to PRTM, effective February 1999.

  The Company has incurred net losses of $155.8 million, $76.2 million and $13.5
million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively.  The
Company's restructuring plan, noted above, is aimed at reducing the Company's
overall operations and focusing on its primary sports merchandising business.
The major elements of the restructuring plan include the sale or closure of
substantially all non-sports related catalogs, sale of the Company's principal
distribution facility and reduction of leased office facilities and employee
headcount.  Despite these actions, management believes that the Company will
continue to incur significant operating losses in fiscal 1999 and requires
substantial additional capital in order to satisfy current obligations, fund
ongoing operations and pursue its Internet strategy.  While the Company is in
negotiations with banks and investment groups, the Company does not have any
commitments for additional financing and there can be no assurance that such
financing will be available when and to the extent required. The Company's
independent public accountants have included a "going concern" emphasis
paragraph in their audit report accompanying the fiscal 1998 financial
statements.  The paragraph states that the company's recurring losses and
limited working capital raise substantial doubt about the company's ability to
continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty. See
"Factors That May Affect Future Financial Results - Need For Additional
Capital," "Management's Discussion and Analysis" and Note 2 to the Company's
Consolidated Financial Statements.

  Prior to the restructuring, the Company offered more than 15,000 product
styles within four distinct, but interrelated, market categories: sports
(including licensed and non-licensed apparel, accessories, home furnishings,
equipment and limited edition collectibles), kids (including toys, games,
crafts, clothing and educational and developmental materials), gifts and
collectibles (including mechanical toys, dolls, and music- and entertainment-
related products and memorabilia) and institutional/business-to-business
(including educational, recreational and therapeutic products for schools, camps
and therapists).  As part of the restructuring, the Company is in the process of
discontinuing or selling the catalogs in the non-sports categories. The Company
has established a variety of strategic relationships in the sports market
including with the National Basketball Association (the "NBA"), the National
Hockey League (the "NHL"), Major League Baseball, the National Association of
Stock Car Auto Racing ("NASCAR") and the NFL Quarterback Club.  Pursuant to
these relationships, the Company produces the official catalogs of these
organizations and offers through them licensed and non-licensed merchandise
directly to consumers and institutions, including in the case of the NBA and the
NHL, through the leagues' websites.

                                       4
<PAGE>

 Market Overview

  According to the Direct Marketing Association ("DMA"), in recent years,
retailing in the United States has been characterized by a rapidly growing shift
to non-store sales through such media as printed catalogs, broadcast and cable
television infomercials, home shopping channels and the Internet. These
alternative forms of non-store retailing, which in 1997 accounted for
approximately $382.0 billion in sales, are expected to grow approximately 8% per
annum for the next five years. The Company believes that this growth is due to
the convenience of home shopping for time-constrained, dual-career consumer
households and the increasingly high level of customer service and reliability
offered by leading direct marketing firms. The Company also believes that, on a
percentage basis, the fastest growing portion of the home shopping market will
be on-line shopping via the Internet. According to estimates published by
Jupiter Communications, a research firm, online shopping revenue totaled $7.1
billion in 1998. Jupiter Communications predicts that online shopping revenue
will grow to $12.0 billion in 1999 and to $41.1 billion in 2002.

The Proteam.com Strategy

  The Company's objective is to become the leading provider of licensed and non-
licensed sports merchandise available online.  The Company seeks to enhance and
broaden the Proteam.com brand, customer base and electronic commerce expertise
with the goal of creating customers' preferred online shopping destination for
sports merchandise. Proteam.com offers a wide selection of licensed and non-
licensed sports merchandise related to professional football, basketball,
hockey, baseball and auto racing.  The Company currently takes on-line orders
for merchandise on its web site located at www.proteam.com.  In addition, under
exclusive arrangements with the NBA and NHL, the Company maintains the on-line
store on those leagues' websites located at www.nba.com and www.nhl.com,
respectively, where potential customers can receive information, view
merchandise, enter inquiries and orders and request catalogs.

  The Company plans to continue utilizing its catalog operations and other
marketing channels such as television and radio advertisements, infomercials,
sports events and trade shows, with the objective that these channels will serve
as an alternative means of reaching customers and as a promotional tool to
enhance the Proteam.com online brand.  In addition, the Company plans to
continue to cultivate strategic relationships with professional sports leagues
to further penetrate the sports market.

The Market for Sports Merchandise

  The Company believes that the market for merchandise that appeals to fans of
the major U.S professional sports is underserved by retail stores and other
websites and catalogs, and that the sports market will be responsive to its
direct marketing techniques and one-warehouse shipping and customer service
benefits. Fan-based sports merchandise includes licensed and non-licensed
apparel, accessories, home furnishings, equipment and limited edition
collectibles, as well as fantasy packages which offer customers the opportunity
to interact with sports celebrities. In many communities there is strong demand
for non-local team products that is generally not fulfilled by local retailers
because of capacity constraints. The Company believes that the ability to
advertise merchandise - up to 30,000 SKUs - for all major U.S. sports leagues,
teams and players in one web site, fulfilled from a central distribution center,
is a competitive advantage that is not yet offered in the industry and is costly
to replicate.  In addition, serving the sports market segment adds selling
seasons to the traditional holiday seasons through marketing efforts around
major sporting events, such as the Super Bowl, the World Series, the NBA
Championship and the Stanley Cup. The Company has "Official Catalog"
relationships with the NBA, the NHL and Major League Baseball, NASCAR and the
NFL Quarterback Club, as well as a strategic relationship with the National
Football League ("NFL"). The Company believes that by attracting customers to
its Proteam.com all-sport web site, and following up with targeted offerings in
the form of printed Proteam or official league catalogs, it can effectively
leverage these complementary selling channels.

The Proteam.com Portfolio

  The Company operates the following catalog and web site brands:

                                       5
<PAGE>

  Proteam.com, the Company's flagship brand, was acquired in December 1996 as
the catalog 1-800-Pro-Team. The Proteam.com website was launched in October 1998
and is a source for team or league logo merchandise that is typically hard-to-
find, with an emphasis on professional team licensed products. Proteam.com is
not only a strong brand with a loyal customer base of its own, but is also used
as a prospecting vehicle, bringing customers with strong potential to the
single-sport catalogs. Prior to launching the Proteam.com website, the Company
upgraded the look and feel of the catalog and implemented an aggressive customer
acquisition plan upon which the Company intends to capitalize by driving
customers to the Proteam.com website.  In addition, the Company continually
strives to make the Proteam.com web site an exciting destination for sports fans
to visit and plans to re-launch the site in Fall 1999 with significantly
expanded functionality, product offerings and customer service support systems.
Proteam.com is also mailed under an exclusive arrangement with Sears to a
portion of the Sears mailing list under the name Sears My Team.

  Hot Off The Ice was launched during the 1996 holiday period. Under an
exclusive arrangement with the NHL, Hot off The Ice is marketed as the "Official
Catalog of the Coolest Game on Earth" and reaches customers as the exclusive
store on the NHL's website located at www.nhl.com. In addition, Hot Off The Ice
has access to the NHL's proprietary database for its Hot Off The Ice mailings.
Hot Off The Ice offers licensed and non-licensed hockey-related products and
collectibles.

  Nothin' But Hoops was launched in October 1997. Under an exclusive arrangement
with the NBA, Nothin' But Hoops is marketed as the "Official Catalog of the NBA"
and reaches customers as the exclusive store on the NBA's website located at
www.nba.com. In addition, the Company has access to the NBA's proprietary
database for its Nothin' But Hoops mailings and reaches customers through NBA-
provided television, radio and print advertisements at no additional fee to the
Company and through the ability to distribute advertising materials at sports
events and at the NBA's new store located on Fifth Avenue in New York. Nothin'
But Hoops offers licensed NBA products, non-licensed basketball products and
basketball collectibles.

  Manny's Baseball Land was launched in March 1998. Under an exclusive
arrangement with Major League Baseball, Manny's Baseball Land is marketed as the
"Official Catalog of Major League Baseball" and, during fiscal 1998, reached
customers as the exclusive store on Major League Baseball's website located at
www.majorleaguebaseball.com. Manny's Baseball Land is based on the well-known
and established brand name "Manny's Baseball Land," which was started in 1949 as
a retail store outside of Yankee Stadium. Manny's Baseball Land offers baseball-
related products, including licensed Major League Baseball products.

  Proteam Football, formerly known as From the Sidelines, was launched in July
1997 and offers licensed and non-licensed football products and memorabilia. In
addition, the Company has a marketing relationship with the NFL pursuant to
which the Company and the NFL cooperate on special promotions.  For example, in
cooperation with the NFL, the Company runs an exclusive product promotion prior
to the Super Bowl.  The promotion offers "Super Bowl In A Box," a box containing
items that appeal to avid football fans, including a hat and T-shirt, each with
the Super Bowl teams logos, an official Super Bowl program and coupons for
discounts on future purchases. A postcard promoting the product, which could be
ordered by dialing 1-800-SUPERBOWL, was mailed to customers and was promoted in
television, Internet, radio and print advertisements. In addition, under an
arrangement with the NFL Quarterback Club, the Company personalizes authentic
football jerseys in the distribution center and has the right to distribute the
Official NFL Quarterback Club catalog, which offers limited edition autographed
football collectibles.

  Redline, The Official NASCAR Catalog, was acquired in October 1997 and offers
licensed NASCAR merchandise, including apparel and collectibles. The Company
also owns NASCAR Shoptalk, a television infomercial on ESPN. In addition, the
Company has a related promotions business, through which it markets its products
to bowling leagues at bowling centers nationwide, often in connection with well-
known consumer product companies that sponsor NASCAR drivers. The Company
capitalized on the increased media attention resulting from NASCAR's promotional
events surrounding its 50th anniversary in 1998.

  Proteam Kids, which the Company plans to launch in Fall 1999, is being
developed based on the Company's experience with its The Training Camp and
S.K.U.S.A. catalogs.  Proteam Kids will offer certain merchandise

                                       6
<PAGE>

lines offered by those catalogs such as unique children's developmental sports
training products and hard-to-find "sports lifestyle" products for children,
including apparel, home furnishings and toys.

  ProSports Liquidators was launched in March 1998. ProSports Liquidators offers
discounted merchandise from the Company's various sports catalogs and is mailed
primarily to the Company's less responsive or discount-driven customers as well
as to prospective discount-driven customers as a strategy for liquidating excess
inventory while reactivating customers.

  The Voyager's Collection was acquired in March 1997 and is an example of the
use of alternate distribution channels, a component of the Company's overall
strategy.  The Company has entered into an agreement with a major commercial
airline for the exclusive right to distribute The Voyager's Collection catalogs
in seat pockets on the airline flights and plans to enter into similar
arrangements with other airlines.  The Voyager's Collection offers travel-
related products as well as merchandise from Proteam.com and the Company's other
catalogs.  In Summer 1999, the Company plans to launch shopvoyager.com and plans
to reach customers as the exclusive store on the website of a major airline.

  Other Brands

  During fiscal 1998, the Company also operated the following brands, each of
which have been or will be sold or discontinued (the "non-continuing brands")
since the Company believes that the historic results of operations of these
businesses do not justify the continued investment of its financial and other
resources.  As noted above, the Company has determined that its resources should
be allocated to the fan-based U.S. professional sports market, which the Company
believes has a greater potential for growth and, ultimately, profitability.  The
Company will continue to reach international customers through its web sites,
but does not plan to mail catalogs internationally.

  Competitive Edge Golf was acquired in March 1997. Competitive Edge Golf
offered proprietary and non-proprietary golf products, including equipment,
apparel and novelties that appeal both to golf fans and players.

  Soccer Madness was acquired in October 1997. Soccer Madness offered brand-name
merchandise, including soccer shoes, apparel, equipment, bags, watches, jewelry
and accessories. As with Competitive Edge Golf, Soccer Madness appealed to
participants as well as fans.

  Fan and Fun was acquired in June 1998.  Fan and Fun offered U.S. team and
league logo merchandise to customers in Germany.  With an emphasis on
professional U.S. team licensed merchandise, Fan and Fun offered merchandise
that was typically hard for its customers to find.

  Gifts For Grandkids, which was acquired in October 1995, offered products
ranging from infant toys and dolls to room furnishings and outdoor play
products, including personalized products.

  Hand-in-Hand was acquired in February 1997. Under Hand-in-Hand, the Company
offered a selection of merchandise including toys, furniture, arts and crafts,
videos, books and apparel for infants, toddlers, and young children, serving
both consumers through the Hand-in-Hand Consumer Catalog and child care
professionals and institutions through the Hand-in-Hand Professional Catalog.

  Biobottoms, which was acquired in April 1998, offered a wide selection of
natural fiber children's apparel.

  Lilliput was acquired in December 1996. Lilliput offered a collection of
unique, handcrafted, limited production, primarily European-made mechanical
toys, including automobiles, airplanes, building blocks, musical toys, steam
engines and trains. Lilliput was sold in March 1999.

  Global Friends, acquired in two steps in June 1997 and April 1998, offered
proprietary theme dolls each from a different country or region with related
books, videos and playkits to create an educational and fun experience for young
girls.

                                       7
<PAGE>

  Command Performance was launched in July 1997. Command Performance included a
variety of music- and entertainment-related collectibles and memorabilia,
including limited edition lithographs of album cover art autographed by
musicians and videocassettes of classic television series.

  The Music Stand was acquired in August 1997. The Music Stand offered music-
related gifts and collectibles, including a substantial number of products,
which can be personalized. The Music Stand was sold in June 1999.

  Romance Boutique was launched in May 1998.  Romance Boutique offered romantic
gifts, such as lingerie, fragrance products, candles and candy. Romance Boutique
was sold in January 1999.

  Childswork/Childsplay was acquired in April 1997. Childswork/Childsplay helped
parents; educators, therapists and other mental health professionals who work
with socially and emotionally challenged children. Childswork/Childsplay offered
proprietary learning tools that encourage children to work through problems
while enjoying books, games and special activities. Childswork/Childsplay was
sold in May 1999.

  Ninos was acquired in April 1997. Ninos provided quality Spanish-language
educational children's toys, books and audio-visual products to parents and
bilingual educators nationwide.

  Sportime was acquired in January 1998. Sportime offered schools and other
institutions traditional recreational and athletic products as well as
innovative physical education products. The following related catalogs were
acquired with Sportime: Abilitations, which offered equipment for development
and restoration of physical and mental ability to physical, recreational and
occupational therapists; Chime Time, which offered movement-related products to
the pre-school market; Senior Products, which offered age-appropriate physical,
social and recreation activities to senior groups; and Active Minds, which
offered creative movement-oriented educational products for the pre-school and
grade school markets. Sportime and the related catalogs described above were
sold in February 1999.

  The Edge Company Catalog was acquired in August 1998.  The Edge Company
Catalog offers distinctive gifts, tools, collectibles, electronics and action
gear, including collectible knives.  In June 1999, the Company entered into an
agreement to sell The Edge Company Catalog, subject to certain conditions
including the buyer's ability to obtain financing to consummate the transaction.

  Carol Wright Gifts was acquired in September 1998. Carol Wright Gifts offers
customers a variety of household and other products through direct mailings of
advertisements and promotions printed on unbound sheets inserted in envelopes.
Carol Wright Gifts also operates the Applecreek catalog, which offers similar
merchandise.

 Marketing

  Excluding the non-continuing brands, the Company maintains a proprietary
database of approximately 6 million sports and travel enthusiasts, of which more
than 2.5 million have purchased from the Company's businesses.  In addition, the
Company has the right to use the proprietary databases of certain professional
sports leagues.  The Company believes that building a large and loyal customer
base is critical to its strategy. The Company has grown its customer database
through catalog and list acquisitions, renting of mailing lists and strategic
alliances. The Company intends to continue enhancing its database with strategic
alliances and selective renting of mailing lists, and intends to direct its
marketing efforts at increasing the traffic to the Proteam.com website. Examples
of strategic alliances that enhance the Company's customer database are the
Company's exclusive arrangements with professional sports leagues that allow the
Company to use the leagues' databases, Internet websites and television and
print advertising opportunities. Examples of the marketing efforts intended to
increase traffic to the Proteam.com website include agreements that the Company
has entered into with Internet portals pursuant to which Proteam.com is promoted
on such sites with banner advertisements.  In addition, the Company is
developing an affiliate program with Linkshare for Proteam.com and plans to
further promote its online brand by utilizing both online and traditional
offline media advertising to drive customers to visit and purchase merchandise
from Proteam.com.

                                       8
<PAGE>

  The Company's strategy is to be on the Internet wherever sports fans go, from
professional league sites and other sites where the Company operates the online
store to the Company's own site, Proteam.com. The Company currently conducts on-
line transactions on Proteam.com utilizing an e-commerce software package that
allows customers to obtain products by placing secure orders over the worldwide
web. The Company continues to expand its web presence by placing its catalog
brands into high traffic, high profile sites, such as nhl.com and nba.com, as
well as smaller associate sites through strategic relationships with third
parties such as individual professional sports teams and through Linkshare.
These strategic relationships are intended to reduce the Company's web marketing
costs, increase traffic into the on-line stores and allow the Company to take
advantage of its partners' access to other media, such as television, print and
radio. In addition, the Company believes that its Internet sales should result
in higher margins as the Company can cross-market its products across several
media including the Internet and television without the need for dependence on
catalogs, thereby reducing the total dollars as a percentage of sales spent on
producing and mailing catalogs.  Further, in the Company's experience, Internet
customers are highly responsive to follow-up catalog mailings.

  In March 1998, the Company introduced a marketing database system to allow it
to use more sophisticated and efficient methods to analyze the performance of
each catalog mailing, web promotion and television advertisement and predict
future performance of products and customers. This marketing database system
allows the Company to segment its customer base according to many variables and
to analyze each segment's performance and buying patterns. Names are selectable
not only by frequency and monetary value of purchases, but by specific product,
product category, brand, market segment, channel of purchase or overall Company
purchase behavior. Statistical models also are able to analyze promotional
history, individual vs. household buying information, merchandise return
information and externally enhanced information such as creditworthiness and
household demographics. The resulting information is used to refine the
frequency and name selection for the Company's various promotions to maximize
the productivity of each market segment and promotion expenditure. This analysis
also enables the Company to strengthen the merchandising of its catalogs and
websites through analysis of various products' roles in enhancing the long-term
profitability of particular customer segments.

 Merchandising

  Merchandise Selections.   The Company's objective in selecting merchandise is
to offer products that are reflective of the identities and interests of the
Company's target customers. The Company's merchandising personnel utilize the
Company's proprietary databases and their niche market expertise to identify
merchandise in each market that appeal to their customers. By providing
customers with licensed and non-licensed sports products that are (i) exclusive
or hard-to-find, (ii)  in limited editions, (iii) personalized or customized or
(iv) proprietary, that is, developed exclusively for the Company's channels, the
Company believes it achieves higher gross margins and lower return rates than
those that generally prevail in the industry.

  Personalized and customized sports products have already proven to be strong
sellers with high margin potential. The Company built a 20,000-square-foot
customization facility in the distribution center that enable it to personalize
and customize many products by means of etching (for example, trophies and
awards), laser engraving (for example, desk accessories), heat transfer (for
example, jerseys and T-shirts) and embroidery (for example, caps and
sweatshirts).  As discussed below, the Company has sold its distribution center,
including the personalization equipment, to Toysrus.com, which will provide
personalization services to the Company through its fulfillment agreement.

  The Company continually adds new merchandise and refines existing merchandise
categories in an effort to promote additional purchases from target customers
and increase retention rates by responding to customers' changing preferences.
The Company's merchandising personnel continually evaluate the performance of
the Company's existing products and make merchandise placement and promotion
decisions based on item quality, sales trends, customer demand, performance
histories, current inventory positions and the projected success of each item.
Merchandising personnel also plan the introduction and testing of new items.
Consequently, the Company's merchandise mix is continually refined as new items
are introduced and tested and as items which do not meet the Company's
performance standards are replaced.

                                       9
<PAGE>

  The Company maintains a wide assortment of products to satisfy customer
preferences for every fan regardless of team or player affinity, maintaining
approximately 30,000 active sports SKUs. The Company believes that its extensive
capacity is a competitive advantage and enables quick entry into niche web
offerings that leverage its existing inventory.  Licensed sports apparel is an
example of a merchandise category that is not readily available in a wide
selection through traditional retailers, has high gross margins and low return
rates since it is generally non-fitted with limited fashion risk.

  Product Presentation.  The Proteam.com website, as well as the online stores
of nhl.com and nba.com, are undergoing extensive design and merchandise upgrades
that the Company plans to launch in Fall 1999.  Currently, Proteam.com and the
Company's other websites and catalogs include full color photographs displaying
the merchandise as well as product descriptions and pricing information.
Merchandise is described in a manner designed to stimulate the reader's
interest, highlight lifestyle and use of product and convey the unique spirit of
each item to the customer, thereby promoting the purchase decision. Many of the
websites and catalogs include additional information of interest to the niche
market customer. For example, several of the sports catalogs include season game
schedules and sports trivia and tips and The Voyager's Collection includes
travel tips. Merchandise narratives are often presented in a thematic manner or
"voice" designed to deliver the catalog brand's essence to each customer and to
personalize the catalog shopping experience.

  The Company has an in-house design team that designs its web sites and
catalogs. The in-house design team is responsible for all website and catalog
design and an in-house desktop publishing studio that controls all aspects of
the final digital preparation of the catalogs. These capabilities allow the
Company to preserve the distinctive character of each website and catalog and
also allows greater control of the catalog production schedule, which the
Company believes reduces the lead time necessary to produce catalogs and reduces
the costs of preparing pages for printing or web display.

 Operations

  Since inception, the Company invested heavily to develop an infrastructure
that integrates the call center, order entry, distribution, fulfillment and
inventory management functions.  As noted above, in June 1999, the distribution
center was sold to Toysrus.com.  In connection with that transaction, the
Company entered into a fulfillment agreement with Toysrus.com pursuant to which
Toysrus.com will provide fulfillment services for the Company on a long-term
basis.  See Note 20 to the Company's Consolidated Financial Statements.  The
services to be provided include receiving and maintaining the Company's
inventory in the distribution center, fulfilling orders (including pick, pack
and ship processing) and handling merchandise returns.  The Company will
continue to be responsible for inventory purchasing and inventory management.

  E-commerce.  The Company maintains an electronic commerce computing system
from Interworld to manage its web-based business.  The system allows customers
to shop for and purchase merchandise by viewing product images, descriptions,
and pricing.  The system incorporates specific functionality to encourage
customers to purchase merchandise such as special product promotions, discounts,
and gift certificates.  The e-commerce system is fully integrated with the
Company's other order processing systems and provides for on-line inventory
availability, email customer correspondence, and the automated, completely
electronic flow of orders.  The Company believes that such electronic
integration of the e-commerce system with the order processing systems described
below will significantly reduce the per order cost of processing orders
submitted to the Company through its various web sites and web site affiliates.

  Call Center.   The Company maintains a call center in Secaucus, New Jersey and
utilizes a third party call center during peak capacity times and overnight. As
of March 27, 1999, the Company has 450 customer service stations installed in
its call center, a capacity which was designed for the Company's original
business model.  The Company is currently exploring alternative uses of it
excess capacity. The Company seeks to offer prompt, knowledgeable and courteous
order entry services through the use of its easy-to-remember toll-free telephone
numbers, which may be called 24 hours a day, seven days a week to place orders,
request a catalog, or make merchandise inquiries. During the 1998 holiday
season, the Company had 330 full-time, part-time or seasonal trained customer
service representatives on staff. Once a call is received by the Company, it is
automatically routed to the best available customer service representative who
is knowledgeable about the particular catalog in

                                      10
<PAGE>

question. 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 customer
service representatives undergo a two-week training program and receive ongoing
training at the Company's on-site training facility. Customer service
representatives are trained in responding to all customer inquiries as well as
in up-selling and cross-selling. During fiscal 1998, the Company, together with
its third party provider, handled approximately 4.0 million calls, of which
approximately 2.3 million calls were handled at the Company's call center. On
its peak day during fiscal 1998, the Company's call center handled approximately
27,000 calls.

  The Company uses an integrated management information system that allows
telephone orders to be captured on-line and mail orders to be entered. As the
Company's sales representative processes the order, the Company's on-line data
processing system provides, among other things, customer history information,
merchandise availability information, merchandise specifications, available
substitutes and accessories, expected shipping date and order number. Customers
can pay with major credit cards, checks or money orders. All credit charges are
pre-authorized prior to shipping the order and credit authorization occurs
coincident with order processing. See "Factors That May Affect Future Financial
Results -- Dependence on Third-Party Service Providers and Key Operating
Systems."

  Distribution and Order Fulfillment.  The 500,000 square foot distribution
center in Memphis, Tennessee is integrated with the Company's order entry
systems to enable the Company to send out most orders on the same day they are
placed.  In fiscal 1998, the Company invested to further automate the
distribution center with a packing sorter and a shipping sorter.

  Once a customer's telephone order is completed, the Company's computer system
forwards the order to the distribution center, where all necessary distribution
and shipping documents are printed to facilitate processing. Thereafter, the
orders are prepared, packed and shipped continually throughout the day with the
last shipment for the day leaving the distribution center at 1:30 a.m. EST
during peak holiday periods. Shipped orders are bar-coded and scanned and the
merchandise and ship date are entered automatically into the customer order file
for access by sales agents. A system of conveyors automatically routes totes and
boxes carrying merchandise throughout the distribution center for fulfillment of
orders and replenishment of inventory.

  The distribution center is strategically placed at the hub of courier services
as well as convenient access to U.S. Postal Service priority mail, all serving
domestic and international markets to permit rapid order fulfillment. The
distribution center's location near courier hubs enables the Company to ship
orders until midnight, and for an expedited delivery fee the customer can
receive merchandise by 8:00 a.m. the next day. Currently, approximately 90% of
the in-stock orders placed before 5:00 p.m. EST are shipped on the same day of
the order.  See "Factors That May Affect Future Financial Results -- Dependence
on Toysrus.com and Dependence on Third-Party Service Providers and Key Operating
Systems."

  In June 1999, the Company sold the assets relating to the distribution center
to Toysrus.com, LLC ("Toysrus.com") for a total cash consideration of $30.0
million.  In connection with the sale, Toysrus.com and the Company entered into
a fulfillment services agreement pursuant to which Toysrus.com will provide
fulfillment services for the Company's business through the distribution center
thereby allowing the Company to continue to utilize the facility that it
developed.  The fulfillment services agreement is for an initial multi-year term
with an option to renew.  The agreement contains certain performance standards
applicable to the Company and Toysrus.com which could impact the overall cost to
the Company and, therefore, its decision to continue to utilize such fulfillment
services during the initial term or to renew subsequent to the initial term.

  Inventory Management.   The Company's broad assortment of products is
controlled through sophisticated inventory management techniques. Currently, the
Company's inventory management system contains approximately 30,000 active
sports SKUs. Purchases are forecasted down to the SKU level using a database
system installed during the fourth quarter of fiscal 1998 that takes into
account historical category and item results, seasonality models and product
lead times. The Company believes that its centralized inventory management
system will enable it to improve its ability to maintain high levels of
inventory accuracy and to continuously measure and analyze inventory levels and
compare them against demand. This will help the

                                      11
<PAGE>

Company in its effort to lower inventory levels, increase turns, maintain high
fill rates, reduce mark-downs and increase gross margins. If an overstock
position develops, the Company acts to dispose of the excess inventory by moving
the product through several promotional distribution channels, including price
promotions in current season catalogs, end-of-season clearance catalogs, sales
flyers in outbound packages, sales promotions on its websites and sale events
across the country.

  The Company regularly evaluates the performance of its web sites and catalog
mailings and adjusts its web site offerings and catalog mailings in response to
anticipated market demand. Despite circulation adjustments and inventory
forecasting techniques, the Company has designed a process for selling any
excess inventory. In March 1998, the Company launched Pro Sports Liquidators,
which is mailed primarily to the Company's less responsive or discount driven
customers and to prospective discount-driven customers, offers discounted
merchandise selected from the Company's various sports catalogs and is an
important component of the Company's inventory management.  The Company also
plans to establish web-based liquidation strategies including a discount section
on Proteam.com.

 Information Systems and Technology

  The Company has adopted a "best of breed" philosophy and flexible systems
architecture as the foundation of its information systems strategy. The Company
has implemented a variety of widely used systems, each uniquely qualified for
use in a specific functional area. These systems are widely used by leading
companies in the direct marketing industry for catalog management, order-taking
(mail and telephone), Internet/electronic commerce, order fulfillment, inventory
management, inventory forecasting, catalog production, and financial management.
The systems are electronically integrated to facilitate data flow in support of
the Company's operations.

  The Company's software systems operate on a variety of hardware platforms,
including Hewlett Packard 3000, Hewlett Packard 9000, IBM AS400 and Sun Sparc
systems. The Company believes its systems architecture, systems investment and
implementation of a Siemens telephone switch provide the Company with a
reliable, redundant and scaleable systems environment facilitating both current
operations and future growth.

  The Company's telecommunications system strategy is designed to reduce the
risk of telephone delays and capacity constraints, as well as optimize the
routing of calls to the most skilled customer service representatives. In the
event the call center is unable to receive incoming calls due to factors such as
natural disasters, equipment or electrical failures, the Company's
telecommunications system has the capacity to route calls to a third party call
service bureau to ensure that service interruptions can be minimized.

  The Company's information systems are engineered to provide quick response and
minimize the risk of data loss and operational delays due to system failure.
Critical processing systems operate in a redundant manner such that all data is
duplicated simultaneously on backup systems. In the event that one of the
Company's critical business systems fails, the Company is equipped to transact
business on a real-time back-up system with minimal downtime. See "Factors That
May Affect Future Financial Results -- Dependence on Third-Party Service
Providers and Key Operating Systems and -- Year 2000 Risk."

 Regulation

  The direct response business as conducted by the Company is subject to the
Mail or Telephone Order Merchandise Trade Regulation and related regulations
promulgated by the Federal Trade Commission. While the Company believes it is in
compliance with such regulations, no assurance can be given that new laws or
regulations will not be enacted or adopted which might adversely affect the
Company's operations. See "Factors That May Affect Future Financial Results --
Government Regulation."  In February,1999, the Company received a subpoena from
the New Jersey Office of Consumer Protection ("OCP") requesting information
about customer complaints.  The Company is responding to the subpoena by
supplying the requested information.  See "Legal Proceedings."

                                      12
<PAGE>

 Competition

  The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new competitors
as well as increased competition from established companies. The competitors in
the sports market include large retail operations, including some with catalog
operations, other catalog and direct marketing companies and Internet retailers.
See "Factors That May Affect Future Financial Results -- Competition."

 Employees

  As of March 27, 1999, the Company had approximately 330 full-time employees,
100 part-time employees and 7 seasonal employees at its headquarters and call
center in Secaucus, New Jersey.  In addition, as of March 27, 1999, the Company
had approximately 270 employees at its distribution center in Memphis,
Tennessee.  In connection with the sale of the distribution center to
Toysrus.com in June 1999, such employees are now employed by Toysrus.com.  In
addition, as of March 27, 1999, the Company had approximately 530 full-time
employees, 25 part-time employees and 10 consultants or temporary employees at
other offices in the United States performing services for catalogs that the
Company plans to sell or discontinue, including Carol Wright Gifts and The Edge
Company Catalog.  In February 1999, as part of its restructuring, the Company
terminated the employment of approximately 170 full-time and 5 part-time
employees.  During the Company's peak selling season, which includes November
and December, the Company utilizes a substantial number of seasonal employees.
For example, as of December 1998, the Company had approximately 290 seasonal
employees. None of the Company's employees is currently covered by collective
bargaining agreements

Factors That May Affect Future Financial Results

  Limited Operating History; History of Losses. The Company's predecessor was
organized in June 1995 and, accordingly, the Company has had only a limited
operating history. Since its formation, the Company has expended significant
funds to acquire other direct marketing businesses, to create and develop
various marketing vehicles and brands and to build an order processing and
distribution infrastructure capable of supporting future operations on a scale
substantially in excess of current levels. As a result, the Company has incurred
losses since its inception and expects to continue to incur losses through
fiscal 1999. In February 1999, the Company announced a significant repositioning
of its business.  The Company had an accumulated deficit of approximately $248.2
million at March 27, 1999 and had a net loss of $155.8 million for the fiscal
year then ended. There can be no assurance that the Company will be able to
achieve profitability. See ``Management's Discussion and Analysis of Financial
Condition and Results of Operations.''

  Need For Additional Capital. The Company requires substantial additional
capital in order to satisfy current obligations, fund ongoing operations and
pursue its Internet strategy. Additional capital is anticipated to be generated
in connection with the continued disposition of certain catalogs.  In addition,
additional capital may be sought through public or private offerings of equity
or debt securities as well as additional bank borrowings. While the Company is
in negotiations with banks and investment groups, the Company does not have any
commitments for additional financing and there can be no assurance that such
financing will be available when and to the extent required or that, if
available, such financing will be obtainable on acceptable terms. See
``Management's Discussion and Analysis of Financial Condition and Results of
Operations.'' The Company's independent public accountants have included a
"going concern" emphasis paragraph in their audit report accompanying the fiscal
1998 financial statements.  The paragraph states that the company's recurring
losses and limited working capital raise substantial doubt about the company's
ability to continue as a going concern and cautions that the financial
statements do not include adjustments that might result from the outcome of this
uncertainty.  See Note 2 to the Company's Consolidated Financial Statements.

  Risks Associated with Dispositions.  Since announcing its restructuring plan
in February 1999, the Company has sold four of its catalog companies.  The
Company seeks to sell certain of its remaining catalogs, but there can be no
assurance as to the timing or amount of the total proceeds to be generated by
the divestiture program.

                                      13
<PAGE>

  Risks Associated with the Internet.  The Internet commerce industry is new and
rapidly evolving and exposes the Company's business to several risks, including
the following:

  .  The Company's future revenue and profit on the Internet is dependent to a
     great extent on the widespread acceptance and use of the Internet as a
     medium of commerce by consumers of the type of merchandise offered by
     Proteam.com. There can be no assurance that such acceptance and use will
     continue or develop or that a sufficiently broad base of consumers will
     respond to Internet marketing efforts or adopt and continue to use the
     Internet as a medium of commerce.

  .  The Company licenses technology from third parties to provide the security
     and authentication necessary to effect online commerce transactions. Any
     compromise of the Company's security could have a material adverse effect
     on the Company's business.

  .  It is possible that a number of laws and regulations may be adopted with
     respect to Internet use, including regulations regarding privacy and
     consumer protection. These laws may impose additional burdens on the
     Company's business.

  .  Technology in the online commerce industry changes rapidly. These changes
     and the emergence of new industry standards and practices could render the
     Company's existing web sites obsolete. To succeed, the Company must enhance
     web site responsiveness, functionality and features, acquire and license
     leading technologies, and enhance the Company's existing services on a
     cost-effective and timely basis. The Company may not be able to adapt
     quickly enough to changing customer requirements and industry standards.

  Dependence on Toysrus.com. In June 1999, the Company entered into an agreement
with Toysrus.com pursuant to which Toysrus.com will provide fulfillment services
to the Company's business on a long-term basis.  There can be no assurance that
Toysrus.com will perform its obligations under the agreement. Any failure of
Toysrus.com to perform its material obligations under the agreement, or the
termination of the agreement prior to the end of the term in accordance with its
terms, could have a material adverse effect on the Company's business, results
of operations and financial condition.

  Dependence on Third-Party Service Providers and Key Operating Systems. In
addition to its dependence on Toysrus.com, the Company is dependent on other
third-party service providers and on its key operating systems. The Company's
ability to provide high quality customer service, process and fulfill orders and
manage inventory depends, to a large degree, on the efficient and uninterrupted
operation of the call center, distribution center and management information
systems and on the timely performance of vendors, catalog printers, shipping
companies and the U.S. Postal Service. Any material disruption or slowdown in
the operation of the Company's call center or management information systems, or
comparable disruptions or slowdowns suffered by its principal service providers,
could cause delays in the Company's ability to receive, process and fulfill
customer orders and may cause orders to be canceled, lost or delivered late,
goods to be returned or receipt of goods to be refused. In the course of
replacing and upgrading its systems, the Company has occasionally experienced
temporary system shutdowns, slowdowns and processing problems. For example,
during fiscal 1998, the Company experienced problems with the implementation of
new material handling equipment and supporting computer software systems.  The
packing sorter, shipping sorter, and supporting software was installed by the
vendors later than anticipated, limiting the Company's ability to adequately
test the systems and train its personnel prior to the holiday season, causing
operational problems and higher than expected costs.  In addition, the Company
experienced software problems that caused delays in processing orders and mis-
shipment of merchandise.  See ``Management's Discussion and Analysis of
Financial Condition and Results of Operations.'' The Company has taken a number
of precautions to prevent disruptions in the operation of the call center,
distribution center and management information systems, including in connection
with the future upgrades, but there can be no assurance that the Company will
not experience systems failures or other disruptions that could have a material
adverse effect on the Company's results of operations.

  Fluctuations in Costs of Paper and Postage. Paper and postage are significant
components of the Company's operating costs. Paper stock represents the largest
element of the cost of printed merchandise catalogs

                                      14
<PAGE>

and paper-based packaging products, such as shipping cartons, constitute a
significant element of distribution expense. Paper prices have historically been
volatile, increasing dramatically in 1995 and declining in 1996 and 1997. Future
price increases could have a material adverse effect on the Company's results of
operations. Postage for catalog mailings is also a significant element of the
Company's operating expense. The Company generally mails its catalogs by third-
class mail service. Third-class postage rates increased during fiscal 1998 and
can be expected to increase in the future, and there can be no assurance that
future increases will not adversely impact the Company's operating margins.

  High Fixed Costs. Operation and maintenance of the Company's call center and
management information systems involve substantial fixed costs. 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 the
catalog. If net sales from catalog mailings are substantially below
expectations, the Company's results of operations may be adversely effected. In
addition, the Company continually evaluates the results of its mailings and has
discontinued certain catalogs, and may not recover its investment in purchasing,
developing and mailing such catalogs.

  Reliance on Vendors. The Company currently purchases merchandise from more
than 1,000 unaffiliated vendors. In some instances, the Company's purchases from
a particular vendor may account for a significant percentage of that vendor's
total sales, resulting in more favorable terms for the Company than might
otherwise be available. However, there can be no assurance that the Company will
continue to be able to procure merchandise on such favorable terms. In addition,
there can be no assurance that the Company will be able to purchase merchandise
on favorable credit terms, and the Company may have to pay cash in advance of
delivery of merchandise.  See ``Management's Discussion and Analysis of
Financial Condition and Results of Operations.'' The Company does not have any
long-term contracts with its vendors and competes with other purchasers for the
vendors' production capacity. No vendor accounted for more than 10% of the
Company's inventory purchases in the fiscal year ended March 27, 1999.

  Quarterly and Seasonal Fluctuations. The Company's net sales and results of
operations have fluctuated and can be expected to continue to fluctuate on a
quarterly basis as a result of such factors as the timing of new merchandise
offerings and brand introductions, fluctuations in response rates, paper and
postage costs and merchandise return rates, shifts in the timing of holidays and
changes in the Company's merchandise mix. In addition, the Company's sales
generally are higher in the fourth calendar quarter, which corresponds to the
third quarter of its fiscal year. See ``Management's Discussion and Analysis of
Financial Condition and Results of Operations.''

  Merchandise Returns. As part of its customer service commitment, the Company
generally maintains an unconditional merchandise return policy, which allows
customers to return any non-personalized merchandise, at any time and for any
reason, regardless of condition. The Company has established an allowance for
merchandise returns based on historical return rates. There can be no assurance
that the Company's merchandise returns will not exceed its reserves. Any
significant increase in the Company's merchandise return rate could have a
material adverse effect on its results of operations.

  Dependence on Key Personnel. The Company depends to a significant extent upon
the efforts of its key personnel.  The Company's future success will depend on
its ability to retain key managers and to attract and employ additional
qualified management personnel.

  Competition. The markets for the Company's merchandise are highly competitive,
and the recent growth in these markets has encouraged the entry of many new
competitors as well as increased competition from established companies. Within
each merchandise category the Company has significant competitors and may face
new competition from new entrants or existing competitors who focus on market
segments currently served by the Company. These competitors include large retail
operations, including some with catalog operations, other catalog and direct
marketing companies and Internet retailers. Increased competition could result
in pricing pressures, increased marketing expenditures and loss of market share
and could have a material adverse effect on the Company's results of operations.
In addition, the online market is new, rapidly evolving and intensely
competitive.

                                      15
<PAGE>

  Collection of State Sales Taxes. Various states have sought to impose on
direct marketers having no physical presence in the state the burden of
collecting state sales and use taxes on the sale of merchandise shipped to that
state's residents. However, the U.S. Supreme Court has reaffirmed its 1967
holding in National Bellas Hess v. Ill. Dept. of Revenue, 368 U.S. 753, that a
state, absent Congressional legislation, may not impose tax collection
obligations on an out-of-state mail order company whose only contacts with the
taxing state are the distribution of catalogs and other advertisement materials
through the mail, and whose subsequent delivery of purchased goods occurs by
mail or interstate common carriers. Recently, the DMA entered into negotiations
with various state taxing authorities towards reaching an agreement for the
collection of sales tax in connection with catalog sales pursuant to uniform
rules that would reduce the cost of compliance with the laws of multiple taxing
jurisdictions. Such an agreement would have required catalog companies that
chose to become a party thereto, to collect sales and use taxes in return for
the simplified collection procedures. Due to objections voiced by members of the
catalog industry and catalog customers, the negotiations were suspended.

  Year 2000 Risk. Year 2000 compliance is the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The following paragraphs address the Year 2000 compliance of the systems
relating to the Company's continuing businesses.  Certain of the Company's non-
continuing businesses that the Company plans to sell or discontinue have systems
that are not currently Year 2000 compliant.  The Company has plans in place to
correct such problems prior to January 1, 2000 and does not expect that the
costs to correct such problems will be material.

  The Company has received letters from each of its applications vendors stating
that all of the Company's informational technology systems, such as its call
center order-taking software and distribution center order-fulfillment software,
are Year 2000 compliant.  The Company has begun an assessment of its non-
information technology systems, such as its security systems and telephones, to
determine if they are also Year 2000 compliant.  To date, the Company has
determined, based on information published or otherwise provided by such
systems' vendors, that many of its non-information technology systems are or
will be Year 2000 compliant.  The Company plans to initiate formal
communications with the vendors of its remaining non-information technology
systems.  Based on its assessment to date, the Company is not aware that any of
its non-information technology systems will not be Year 2000 compliant prior to
the Year 2000.  The Company has not incurred costs to modify or replace any of
its information technology or non-information technology systems.

  The Company has also begun an assessment of its significant vendors,
suppliers, and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
compliance issues. To date, the Company has determined, based on information
published or otherwise provided by such third parties, that many of such
parties' systems are or will be Year 2000 compliant.  The Company plans to
initiate formal communications with the remaining third parties with whom the
Company has a significant relationship.  Based on its assessment to date, the
Company is not aware that any of its significant vendors, suppliers and service
providers will not be Year 2000 compliant prior to the year 2000.

  In addition to the assessments and investigations described above, the Company
plans to conduct internal tests of all of its internal information and non-
information technology systems and all of its system interfaces with significant
vendors, suppliers and service providers to ensure Year 2000 compliance.
However, despite the Company's efforts to ensure that its internal systems and
the systems of its significant vendors, suppliers and service providers are Year
2000 compliant, there can be no guarantee that the failure of certain systems
will not have a material adverse effect on the Company.

  To date, the Company has handled its Year 2000 compliance program using only
internal resources.  Accordingly, the only costs incurred by the Company have
been the salary costs of its internal staff.  Although at the current time the
Company expects that it will be able to complete its Year 2000 compliance
program using only internal resources, there can be no assurance that the
Company will not require external resources to complete its Year 2000 compliance
program.

                                      16
<PAGE>

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

Item 2.  Properties

  During fiscal 1998, the Company leased a 500,000 square foot distribution
center in Memphis, Tennessee, which lease was assigned to Toysrus.com in June
1999.  In addition, during fiscal 1998 the Company leased 100,000 square feet of
office space for its principal executive and administrative offices and its call
center in Secaucus, New Jersey. The Secaucus lease expires in 2005. In addition,
the Company currently leases office and warehouse/distribution spaces in several
locations in the United States, all of which relate to catalogs that the Company
plans to discontinue or sell. The most significant of these is a 225,000 square
foot facility in Lincoln, Nebraska used for distribution and administrative
offices by the Company's Carol Wright Gifts business.

Item 3.  Legal Proceedings

  In February 1999, the Company received a subpoena from the New Jersey Office
of Consumer Protection ("OCP") requesting information including information
regarding customer complaints.  The Company is responding to the subpoena by
providing the requested documents. In addition, the Company is party to claims
and litigation that arise in the normal course of business. Management believes
that the ultimate outcome of these claims and litigation will not have a
material impact on the financial position, results of operations or cash flows
of the Company.

Item 4.  Submission of Matters to Vote of Security Holders

     During the fiscal quarter ended June 27, 1998, prior to the consummation of
the Company's Initial Public Offering on May 13, 1998, the stockholders of the
Company took the following actions by written consent in accordance with the
General Corporation Law of the State of Delaware and the By-Laws of the Company:

     1.  By a Written Consent in lieu of a meeting of stockholders, dated as of
April 16, 1998, stockholders representing approximately 71.8% of the Company's
outstanding shares of stock entitled to vote thereon, voted to (a) amend and
restate the Company's Certificate of Incorporation and (b) amend the Company's
1997 Long-Term Incentive Plan to increase the number of shares of Common Stock
available for grant to 4,125,000 and to remove the restriction limiting grants
to a single individual in any single calendar year.

     2.  By a Written Consent in lieu of a meeting of stockholders, dated as of
April 28, 1998, stockholders representing approximately 71.8% of the Company's
outstanding shares of stock entitled to vote thereon, voted to adopt the
Company's 1998 Employee Stock Purchase Plan.

                                      17
<PAGE>

                                    PART II

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

  Market Information.  The Company's Common Stock began trading on the Nasdaq
  ------------------
National Market on May 8, 1998 under the symbol "GEND."  In February 1999, the
symbol was changed to "PRTM."  The following table sets forth the high and low
closing sale prices for the common stock for the periods indicated, as reported
by the Nasdaq National Market.

<TABLE>
<CAPTION>
  Year ended March 27, 1999                    HIGH              LOW
  -------------------------                    ----              ---
<S>                                           <C>              <C>
     First Quarter (from May 8)               $15.00           $11.00
     Second Quarter                            11.88             2.56
     Third Quarter                              7.00             2.06
     Fourth Quarter                             9.88             3.50
</TABLE>

  As of July 6, 1999, there were approximately 326 holders of record of the
Company's Common Stock, although the Company believes there were a larger number
of beneficial owners.

  Dividend Policy.  Since its inception, the Company has never declared or paid
  ---------------
any dividends on its Common Stock and does not expect to in the foreseeable
future. The current policy of the Company is to retain any earnings to provide
for the future growth of the Company. The Company's existing loan agreements
with its lenders generally restrict its ability to pay dividends or make other
distributions on the Common Stock without the prior approval of the lenders.

  Recent Sales of Unregistered Securities.
  ---------------------------------------

  In August 1998, the Company issued 234,433 shares of Common Stock in
connection with the purchase of certain assets and liabilities of The Edge
Company Catalog, Inc. valued at $7.3125 per share (the closing price of the
Common Stock on the closing date).

  In September 1998, the Company issued 2,400,000 shares of Common Stock in
connection with the acquisition of certain assets and liabilities of Carol
Wright Gifts, Inc. valued at $2.5625 per share (the closing price of the Common
Stock on the closing date) and a convertible note in the principal amount of
$12,750,000. The holder of the convertible note may at any time after the
conversion date, as defined, convert the principal amount of the convertible
note at a conversion price of $12.75 per share into 1,000,000 shares of Common
Stock, subject to certain adjustments.  The conversion date is the date
immediately following the tenth consecutive trading day at which the closing
price of the Company's common stock on each such day was equal to or exceeded
$12.75.  Pursuant to the terms of the note, upon the occurrence and continuation
of an event of default, as defined, the note is convertible into shares of
common stock at a significantly lower conversion price.

  In February 1999, in connection with the issuance of subordinated notes, the
Company issued warrants to purchase an aggregate of 1,000,000 shares of Common
Stock at an exercise price of $9.31 per share to Global Internet Fund IV, an
entity affiliated with the Company's President and certain other shareholders,
and GEIPPP II.  The warrants are exercisable at any time after August 18, 1999
and expire on February 18, 2004.

  All of the recent sales of unregistered securities described in this section
were exempt from registration under Section 4(2) of the Securities Act.

  Use of Proceeds from Initial Public Offering.  On May 6, 1998, the Company's
  --------------------------------------------
Registration Statement on Form S-1 (File No. 333-47455) relating to the Initial
Public Offering was declared effective by the Securities and Exchange Commission
and, on May 13, 1998, the Initial Public Offering closed.  The managing
underwriters of the Initial Public Offering were Bear, Stearns & Co. Inc.,
Goldman, Sachs & Co., Salomon Smith Barney,

                                      18
<PAGE>

Invemed Associates, Inc. and Morgan Keegan & Company, Inc. Under the
Registration Statement, an aggregate of 11,125,000 shares of the Company's
Common Stock were sold to the public at a price of $15.00 per share. Of such
shares, 9,625,000 shares were sold by the Company and 1,500,000 shares were sold
by certain stockholders of the Company. The aggregate net proceeds (after
deducting underwriting discounts and commissions and before deducting other
expenses) received by the Company and by the selling stockholders from the
Initial Public Offering were approximately $135.0 million and $21.0 million,
respectively. The underwriters' over-allotment option was not exercised.

  In addition to underwriting discounts and commissions of approximately $9.4
million, the Company incurred approximately $2.4 million in other expenses in
connection with the Initial Public Offering, including registration and filing
fees, printing expenses, accounting fees and legal fees.  None of such expense
payments were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning 10% or more of any class of
equity securities of the Company or to affiliates of the Company.  The net
offering proceeds to the Company after deducting underwriting discounts and
commissions and other expenses were approximately $132.5 million.

  The Company used (i) approximately $28.0 million of the net proceeds to redeem
a portion of the Company's outstanding Convertible Subordinated Debentures due
June 1, 2003 (the "Debentures"), all of which were owned by GE Investment
Private Placement Partners II, a Limited Partnership ("GEIPPP II"), a principal
stockholder of the Company, (ii) approximately $7.75 million of the net proceeds
to repay the notes payable in the principal amount of $7.65 million (the "Bridge
Notes") held by GEIPPP II, (iii) approximately $10.0 million of the net proceeds
to repay its outstanding borrowings under the Revolving Credit Facility and a
portion of the Term Loan (each as defined in Item 7 below), (iv) approximately
$0.8 million of the net proceeds for the acquisition of Fan and Fun in June
1998, (v) approximately $17.0 million of the net proceeds for the acquisition of
certain assets of The Edge Company Catalog in August 1998, (vi) approximately
$10.3 million of the net proceeds for capital expenditures, and (vii)
approximately $58.6 million of the net proceeds for working capital.  Other than
the payments to GEIPPP II, none of the net proceeds were direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company.  The use of proceeds described herein does not
represent a material change in the use of proceeds described in the Prospectus
contained in the Registration Statement.

Item 6.  Selected Financial Data

  The selected consolidated financial data as of March 30, 1996, March 29, 1997,
March 28, 1998 and March 27, 1999 and for the periods from June 8, 1995
(inception) through March 30, 1996, the fiscal year ended March 29, 1997, the
fiscal year ended March 28, 1998 and the fiscal year ended March 27, 1999 have
been derived from the Company's historical financial statements which have been
audited by Ernst & Young LLP, independent auditors whose report thereon appears
elsewhere in this Form 10-K, which report includes a "going concern" emphasis
paragraph. The selected consolidated financial data are qualified by reference
to and should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the Consolidated Financial
Statements and notes thereto, and other financial information appearing
elsewhere in this Annual Report on Form 10-K.

                                      19
<PAGE>

<TABLE>
<CAPTION>
                                                                                                       Period from
                                            Fiscal Year        Fiscal Year        Fiscal Year          June 8, 1995
                                               Ended              Ended              Ended         (inception) through
                                         March 27, 1999(1)  March 28, 1998(1)  March 29, 1997(1)    March 30, 1996(1)
                                         -----------------  -----------------  -----------------   -------------------
                                                         (in thousands, except share and per share data)
<S>                                      <C>                <C>                <C>                 <C>
Statement of Operations Data:
Net sales..............................     $   252,337         $  107,210         $   18,537                      --
Gross profit(2)........................          68,449             25,604              8,089                      --
Selling, general and administrative
 Expenses..............................         162,398             97,840             20,711                $  2,710
Restructuring charges and reserve for
 loss on disposal of businesses sold
 or available for sale.................          52,665                 --                 --                      --
                                         -----------------  -----------------  -----------------   -------------------
Loss from operations...................        (146,614)           (72,236)           (12,622)                 (2,710)
Interest expense, net..................           3,952              3,975                888                       5
Extraordinary item.....................           5,235
                                         -----------------  -----------------  -----------------   -------------------
Net loss...............................        (155,801)           (76,211)           (13,510)                 (2,715)
Dividends accruing on Series A
 Preferred Stock.......................              --              2,439                 --                      --
                                         -----------------  -----------------  -----------------   -------------------
Net loss attributable to Common
 Stockholders..........................     $  (155,801)        $  (78,650)        $  (13,510)               $ (2,715)
                                         =================  =================  =================   ===================
Net loss per share attributable to
 Common Stockholders(3)................          $(5.41)            $(8.89)            $(4.60)                 $(4.49)
                                         =================  =================  =================   ===================
Weighted average number of shares
 Outstanding...........................      28,812,500          8,842,200          2,933,700                 605,000
                                         =================  =================  =================   ===================
</TABLE>

<TABLE>
<CAPTION>

                                         March 27, 1999  March 28, 1998   March 29, 1997   March 30, 1996
                                         --------------  --------------   --------------   --------------
<S>                                      <C>             <C>              <C>              <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents(4)...........        $  4,366        $  2,722          $ 8,184          $   240
Working capital (deficiency)...........           8,340         (12,912)             (53)          (1,197)
Total assets...........................         130,305         139,276           56,866            1,186
Subordinated Notes.....................           6,231              --               --               --
Debentures.............................              --          30,000           22,500               --
Other long-term debt, less current
 portion...............................          16,260          11,154            4,918               --
Series A Preferred Stock...............              --          96,739               --               --
Total stockholders' equity (deficiency)          33,013         (61,839)           8,375             (515)
</TABLE>

____________

(1)  The Company's fiscal year is a 52/53 week year that ends on the Saturday
     next preceding April 1 of the next calendar year. Accordingly, the year
     ended March 27, 1999 is referred to as "fiscal 1998," the year ended March
     28, 1998 is referred to as "fiscal 1997," the year ended March 29, 1997 is
     referred to as "fiscal 1996" and the period from June 8, 1995 (inception)
     through March 30, 1996 is referred to as "fiscal 1995."
(2)  Gross profit includes a restructuring charge related to inventory
     writedowns of $10,608 for the year ended March 27, 1999.
(3)  The net loss per share is based upon the weighted average number of shares
     of Common Stock outstanding during each period. See Note 3 to the Company's
     Consolidated Financial Statements.
(4)  Includes restricted cash of $2,823, $2,268 and $2,440 at March 27, 1999,
     March 28, 1998 and March 29, 1997, respectively.

Item 7.  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 the related notes thereto which are included elsewhere in this
Annual Report on Form 10-K. Except for the historical information contained
herein, the

                                      20
<PAGE>

discussion in this Annual Report on Form 10-K 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 Annual Report on Form 10-K shall be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-K. The Company's actual results could differ
materially from those anticipated in such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed before and in the section entitled "Business--Factors That
May Affect Future Financial Results," as well as those discussed elsewhere in
this Annual Report on Form 10-K.

 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 sales.
Any trends reflected by the following table may not be indicative of future
results.

<TABLE>
<CAPTION>
                                                                       Percentage of Net Sales
                                                ----------------------------------------------------------------------
                                                  Fiscal Year Ended       Fiscal Year Ended       Fiscal Year Ended
                                                    March 27, 1999          March 28, 1998          March 29, 1997
                                                ---------------------   ---------------------   ----------------------
<S>                                             <C>                     <C>                     <C>
Net sales.....................................             100.0%                  100.0%                  100.0%
Gross profit..................................              27.1                    23.9                    43.6
Selling, general and administrative expenses..              64.4                    91.3                   111.7
Restructuring charges and reserve for loss on
 disposal of businesses sold or available for
 sale.........................................             l20.8                       -                       -
Loss from operations..........................              58.1                    67.4                    68.1
Interest expense (income), net................               1.6                     4.2                     6.3
Net loss......................................              61.7                    71.1                    72.9
</TABLE>

 Fiscal Year Ended March 27, 1999 Compared to Fiscal Year Ended March 28, 1998

  Net Sales.  Net sales increased to $252.3 million in fiscal 1998 from $107.2
million in fiscal 1997. This increase was attributable to acquisitions completed
during fiscal 1998, revenue growth from existing catalogs and the 1997
acquisitions being included for all of fiscal 1998.

  Gross Profit. Gross profit increased to $68.4 million or 27.1% of sales for
fiscal 1998 period compared to $25.6 million or 23.9% for fiscal 1997. This
increase was attributable to the acquisitions completed during the year and the
1997 acquisitions being included for all of fiscal 1998. Gross profit for the
period is negatively affected by a $10.6 million write-off of inventory of
discontinued brands as part of the Company's restructuring plan. Excluding this
charge, the gross profit percentage was 31.3%. This improvement in gross profit
percentage compared to the previous fiscal year was primarily due to
significantly higher gross profit percentage on the Carol Wright Gifts business
(which was acquired in September 1998) compared to other Company brands. The
gross profit percentage was 23.5% after adjusting for Carol Wright Gifts and the
write-off of inventory on discontinued brands.

  Selling, general and administrative expenses.  Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation and
amortization. Selling, general and administrative expenses increased to $162.4
million in fiscal 1998 from $97.8 million in fiscal 1997. This increase is
primarily attributable to selling, general and administrative costs associated
with acquisitions completed in 1998 and the 1997 acquisitions being included for
the full year in fiscal 1998. Selling, general and administrative expenses as a
percentage of net sales decreased to 64.4% in fiscal 1998 from 91.3% in fiscal
1997. This percentage decrease was due to revenue increases from existing
catalogs and the 1998 and 1997 acquisitions which exceeded growth in the
Company's selling, general and administrative expenses. In connection with the

                                      21
<PAGE>

Company's acquisitions, amortization of acquired intangibles of $7.2 million is
included in selling general and administrative expenses in fiscal 1998 as
compared to $4.3 million in fiscal 1997.

  Restructuring Charge; Reserve for losses on businesses available for sale;
Loss on disposal of businesses. As a result of the Company's announced
restructuring plan, a total of $63.3 million in charges were taken in the fourth
quarter of fiscal 1998. These include: restructuring charges of $35.6 million,
of which $10.6 million represents inventory writedowns and, therefore, is
reported as part of cost of goods sold; a reserve for losses on businesses
available for sale totaling $24.0 million; and a $3.7 million loss on the
divestiture of the Sportime and Lilliput businesses completed in the quarter
ended March 27, 1999.

  The Company recorded $35.6 million of restructuring charges associated with
its program to reduce its overall operations and focus on its primary sports
merchandise brands. The restructuring program includes the termination of
numerous catalog brands, write-down of related inventories, intangibles and
goodwill, closure of certain facilities and employee terminations. The
restructuring charge reflects non-cash charges, asset writedowns, cash payments
completed prior to March 27, 1999, and $3.3 million in cash liabilities accrued
to cover cash obligations of the restructuring program (principally related to
employee severance and real estate lease liabilities), most of which will be
paid during fiscal 1999.

  The components of the $35.6 million in restructuring charges are: write-down
of inventories to net realizable value of $10.6 million (reflected as part of
cost of goods sold); write off of goodwill and other intangibles of $15.4
million; severance costs of $5.4 million; real estate liabilities on vacated
properties, net of anticipated sublet proceeds, of $0.7 million; and other
write-down of pre-payments, and other non-recoverable assets of $3.5 million.

  In connection with the adoption of its restructuring plan, the Company decided
to sell its principal distribution center and remaining non-sports brands not
central to its revised strategy including Carol Wright Gifts, The Edge,
Childswork/Childsplay, Sportime, and Music Stand among others. The carrying
value of the net assets associated with these brands, including the carrying
value of related goodwill and other intangibles, have been written down to their
net realizable value. The total charge needed to write down the net assets of
businesses available for sale and not completed as of March 27, 1999 was $24.0
million. Subsequent to March 27, 1999, sales of two catalog businesses and the
distribution center were completed resulting in net proceeds of $33.9 million
and incurred a net loss of $0.1 million, which was included in the provision
for losses on assets of businesses available for sale discussed above. See Note
20 to the Company's Consolidated Financial Statement.

  Net loss before extraordinary item. The net loss before extraordinary item
increased from $76.2 million in fiscal 1997 to $150.6 million in fiscal 1998.
However, $63.3 million of the increased loss was due to the restructuring
charges, provision for losses on businesses available for sale, and loss on
disposal of businesses mentioned above. Excluding these restructuring-related
items, the net loss increased to $87.3 million. On this basis the net loss was
34.6% of revenue in fiscal 1998 compared to 71.1% of revenue in fiscal 1997,
reflecting the lower cost of goods sold and selling, general and administrative
expenses as a percentage of revenue as described above.

 Fiscal Year Ended March 28, 1998 Compared to Fiscal Year Ended March 29, 1997

  Net Sales.  Net sales increased to $107.2 million in fiscal 1997 from $18.5
million in fiscal 1996. This increase was attributable to acquisitions completed
and start-ups launched during fiscal 1997, revenue growth from existing catalogs
and the 1996 acquisitions (which were completed in December 1996) being included
for all of fiscal 1997.

  Gross Profit.  Gross profit increased to $25.6 million or 23.9% of sales for
fiscal 1997 period compared to $8.1 million or 43.6% for fiscal 1996. This
increase was attributable to the acquisitions completed and start-ups launched
during fiscal 1997 and the 1996 acquisitions being included for all of fiscal
1997. The decrease in the gross profit percentage was primarily attributable to
two causes. First, during fiscal 1997, the Company was in various stages of
integrating the operations of its acquired businesses into its infrastructure.
As a result, the Company incurred certain overlapping and duplicative
fulfillment costs. Second, during the period between

                                      22
<PAGE>

September and December 1997, the Company experienced a temporary inability of
its call center software to interface with its distribution center software
resulting in lost sales revenues, reduced gross margins and increased per order
fulfillment costs. The Company believes that the duplicative fulfillment costs
and the software disruption contributed significantly to the loss for fiscal
1997.

  Selling, general and administrative expenses.  Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation and
amortization. Selling, general and administrative expenses increased to $97.8
million in fiscal 1997 from $20.7 million in fiscal 1996. Selling, general and
administrative expenses as a percentage of net sales decreased to 91.3% in
fiscal 1997 from 111.7% in fiscal 1996. This percentage decrease was due to
increased sales volume resulting from the acquisitions completed and start-ups
launched during 1997 and the 1996 acquisitions being included for fiscal 1997,
offset in part by increased costs associated with the Company's decision to
invest in infrastructure in order to take advantage of its opportunities for
future growth in new markets and channels as well as to integrate new brands. In
connection with the Company's acquisitions, amortization of acquired intangibles
of $4.3 million is included in selling, general and administrative expenses in
fiscal 1997 as compared to $0.8 million in fiscal 1996.

  Interest expense.  Interest expense increased to $4.5 million in fiscal 1997
from $1.2 million in fiscal 1996, primarily as a result of a higher average debt
balance.

 Liquidity and Capital Resources

  At March 27, 1999, the Company had cash of $4.4 million (including restricted
cash of $2.8 million) and working capital of $8.3 million (including $49.6
million of net assets available for sale). The Company's capitalization, defined
as the sum of long-term debt, and stockholders' equity, at March 27, 1999 was
$47.2 million.

  As part of the Company's strategic repositioning, it has sold four of its
catalog businesses and its distribution center, and intends to sell certain
other of its non-sports assets. The net proceeds of this asset disposal program
have been approximately $56.4 million to date, of which $22.5 million were
received from sales completed during fiscal 1998 and were used to repay past due
trade obligations, its existing bank credit facilities and to fund ongoing
business operations. The net proceeds of the remainder of such sale program are
expected to be in excess of $19 million and will be used to repay related
obligations and to fund ongoing business operations as well as an expansion of
its existing Internet business. However, there can be no assurances as to the
timing and amount of the total proceeds to be generated by the divestiture
program. Accordingly, in the fourth quarter of fiscal 1998, the Company received
$10 million in additional debt financing pursuant to a one-year debenture to
help fund the Company's operations in the interim. In addition, the Company has
arranged for the deferral of $13.1 million of debt to Cox Target Media, Inc. See
Note 11 to the Company's Consolidated Financial Statements.

  Despite these actions, management believes that the Company will need to raise
additional working capital in the near term through either debt or equity
offerings or the sale of assets in order to meet the Company's liquidity
requirements for its operations. In addition, management is currently
negotiating to renew the Company's existing revolving credit facility or replace
it with a new facility. Management is also seeking to raise additional equity or
other forms of long-term financing. If management's efforts at completing the
sales of assets and raising additional financing are successful it believes the
Company will have sufficient financial resources available to operate the
restructured business through fiscal 1999. The Company's independent public
accountants have included a "going concern" emphasis paragraph in their audit
report accompanying the fiscal 1998 financial statements. The paragraph states
that the company's recurring losses and limited working capital raise
substantial doubt about the company's ability to continue as a going concern and
cautions that the financial statements do not include adjustments that might
result from the outcome of this uncertainty. See Note 2 to the Company's
Consolidated Financial Statements.

  In connection with the strategic repositioning described in Part II, Item 5,
the Company incurred a pre-tax restructuring charge of approximately $35.6
million in the fiscal quarter ending March 27, 1999. This amount

                                      23
<PAGE>

includes the previously announced charge for inventory writedowns and
restructuring costs originally expected to be recorded in the third quarter of
fiscal 1998. In addition to the restructuring charge, the Company recorded $3.7
million in losses on the sale of its Sportime and Lilliput catalog businesses
during the quarter ended March 27, 1999. An additional charge of $24.0 million
was taken in the quarter to provide for expected losses from the sale of
businesses which the Company expects to incur from the completion of its
divestiture program on transactions the Company has either already completed
subsequent to the year ended March 27, 1999 or which the Company expects to
complete.

  Prior to the restructuring, the Company's principal capital needs arose from
(i) the acquisition and start-up of new catalog businesses, (ii) the funding of
operating losses arising from maintaining the infrastructure necessary to
support future acquisitions and the investment in growing these new acquisitions
through prospect mailings, (iii) growing the customer database and (iv) capital
expenditures related to the telemarketing and fulfillment centers. Following the
implementation of the Company's modified business plan, the Company's principal
capital needs in the near future are expected to arise from funding working
capital and capital expenditures needed to support the revised business levels.
The Company acquired four new businesses during the fiscal year ended March 27,
1999 for an aggregate of $19.7 million in cash, $17.5 million of notes and
2,634,433 shares of Common Stock. As noted above, the Company does not plan to
pursue additional acquisitions in the near term. The Company incurred capital
expenditures which totaled approximately $22.2 million during fiscal 1998 to
invest in its existing infrastructure, to exploit new channels of distribution
and to increase its activities in international markets.

  In May 1998, the Company completed the Initial Public Offering. The Company
received net proceeds of approximately $132.5 million from the Initial Public
Offering, after deducting underwriters' commissions of $9.4 million and other
expenses of approximately $2.5 million. The Company has used (i) approximately
$28.0 million of the net proceeds to redeem a portion of the Company's
outstanding Debentures owned by GEIPPP II, (ii) approximately $7.75 million of
the net proceeds to repay the Bridge Notes held by GEIPPP II, (iii)
approximately $10.0 million of the net proceeds to repay its outstanding
borrowings under the Revolving Credit Facility and a portion of the Term Loan
(each as defined below), (iv) approximately $0.8 million of the net proceeds for
the Fan and Fun acquisition completed in June 1998, (v) approximately $17.0 of
the net proceeds for the acquisition of certain assets of The Edge Company
Catalog in August 1998, (vi) approximately $10.3 million of the net proceeds for
capital expenditures, and (vii) approximately $58.6 million of the net proceeds
for working capital.

  Prior to the Initial Public Offering, in April 1998, the Company raised a
total of $7.65 million through the issuance of Bridge Notes to GEIPPP II.
Proceeds from the Bridge Notes were used (i) to pay for the expansion and
upgrading of the infrastructure at the Company's distribution center, (ii) to
fund the Biobottoms acquisition and (iii) to provide additional working capital.

  In May 1997, the Company entered into a $25.0 million revolving creditfacility
(the "Revolving Credit Facility") and a $5.0 million term loan (the "Term Loan,"
and together with the Revolving Credit Facility, the "Credit Facility") with The
CIT Group/Business Credit Inc. The Credit Facility is collateralized by
substantially all of the Company's assets. The $25.0 million revolving credit
portion of the Credit Facility bears interest at a variable rate equal to Prime
Rate of The Bank of New York plus 1/2% or LIBOR plus 3%. The $5.0 million term
loan is payable over five years and bears interest at the Prime Rate plus 1/2%.
The Credit Facility contains certain covenants, including a covenant with
respect to the maintenance of specified consolidated net worth. As of March 27,
1999, the Company had repaid the Revolving Credit Facility and had repaid all
but $1.1 million under the Term Loan. Subsequent to March 27, 1999 and the
application of proceeds from fiscal 1998 year to date sales of divested net
assets, the Company paid off all outstanding obligations under this facility and
currently is not permitted to make additional borrowings. The Company is
involved in negotiations with CIT and other lenders for a replacement credit
facility.

  During fiscal 1998, net cash used in operating activities was $79.7 million.
Net cash used in investing activities was $21.3 million, consisting primarily of
cash paid for acquisitions, net of cash acquired, of $19.8 million and cash paid
for additions to property and equipment of $22.2 million offset by proceeds from
the

                                      24
<PAGE>

sale of businesses of $22.5 million. Net cash provided by financing activities
was $102.0 million consisting primarily of the $132.6 million raised from the
Initial Public Offering.

  During fiscal 1997, net cash used by operating activities was $76.7 million.
Net cash used in investing activities was $50.1 million, consisting primarily of
cash paid for acquisitions, net of cash acquired, of $34.3 million and cash paid
for additions to property and equipment of $16.0 million. Net cash provided by
financing activities was $121.6 million consisting primarily of the $108.6
million raised from GEIPPP II and GDLP and other holders of Series A Preferred
Stock as set forth above.

  During fiscal 1996, net cash used by operating activities was $13.5 million.
Net cash used by investing activities was $25.0 million, consisting primarily of
cash paid for acquisitions of $19.2 million and cash paid for additions to
property and equipment of $3.0 million. Net cash provided by financing
activities resulted from $44.2 million raised by GEIPPP II and GDLP as set forth
above.

  As of March 27, 1999, the Company had approximately $207 million of federal
tax net operating loss carryforwards which will expire in 2012 and 2013.  The
Company also had approximately $203 million of state tax net operating loss
carryforwards which will expire in 2004 and 2005.  Net deferred tax assets are
fully reserved as of March 28, 1998.

  The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change." In general,
an ownership change is deemed to occur if the percentage of stock of a
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period. As
a result of cumulative changes in the Company's ownership which have occurred,
including the Initial Public Offering, the Company's net operating loss
carryforwards will be subject to annual limitations.

 Seasonality

  The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be derived
from the fall and holiday seasons. As a result, the Company expects its sales
and results of operations generally to be the lowest in the second quarter of
each fiscal year, which precedes the back-to-school and holiday purchases. The
Company's quarterly results may fluctuate as a result of numerous factors,
including the timing of dispositions, the timing, quantity and cost of catalog
mailings, the response rates to such mailings, the timing of merchandise
deliveries, the merchandise mix, pricing and presentation of products offered
and sold, market acceptance of the Company's merchandise (including new
merchandise categories or products introduced) and the hiring and training of
additional personnel. 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. Results of operations are affected not only by the
seasonality of the Company's net revenues, but also by seasonal variations in
product mix and the fixed portion of the Company's operating expenses. See
"Factors that May Affect Future Financial Results."

 Inflation

  Results of operations have not been significantly affected by inflation since
the Company's inception. Management expects that in the normal course of
business, the Company will be able to offset the effects of increased costs
through operating efficiencies and selected price increases.

 Year 2000 Issue

  Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company has reviewed its computer programs and systems to ensure that the
programs and

                                      25
<PAGE>

systems will function properly and be year 2000 compliant, and the Company
believes that currently all of its computer systems relating to its continuing
businesses are year 2000 compliant. However, the Company is continuing to
monitor and review its computer programs and systems to ensure on-going year
2000 compliance. The Company has received letters from each of its applications
vendors stating that all of the Company's computer system applications are year
2000 compliant. However, the year 2000 problem may impact other entities with
which the Company transacts business, and the Company cannot predict the effect
of the year 2000 problem on such entities. See "Factors that May Affect Future
Financial Results--Year 2000 Risk."

 Recent Pronouncements of the Financial Accounting Standards Board

  Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at March 28, 1998, include the following
Statement of Financial Accounting Standards ("SFAS"):

  SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which will be effective for the Company for the fiscal year ending March 31,
2001, requires all derivatives to be recorded on the balance sheet at fair value
and establishes "special accounting" for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities, or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations.  Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in offsetting changes in fair values or cash flows of
both the hedge and the hedged item being recognized in earnings in the same
period.  Changes in fair value of derivatives that do not meet the criteria of
one of these categories of hedges are included in income.  The Company has not
engaged in derivative instruments or hedging activities in the past.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  The Company currently utilizes no material derivative financial instruments
which expose the Company to significant market risk.  The Company is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
certain of its debt.  The table below presents principal cash flows and related
weighted average interest rates of the Company's debt at March 27, 1999 by
expected maturity dates.  Weighted average variable rates are based on forward
rates in United States Government Treasury Constant Maturities at March 27,
1999.  Forward rates should not be considered a predictor of actual future
interest rates.

 Interest Rate Sensitivity Principal Amount By Expected Maturity (in thousands)
 ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                    Fair Value
                          1999        2000        2001       2002     2003   Thereafter    Total       3/27/99
                       ----------  ---------   ---------   -------  -------  ----------  ---------  ------------
<S>                    <C>         <C>         <C>         <C>      <C>      <C>         <C>        <C>
Notes Payable, Subordinated Note and Long-term Debt, and capitalized lease obligations including Current Portion

Fixed Rate               $26,072     $15,345       $ 697    $  212   $    6                $42,332     $ 38,191
Avg. Interest Rate          7.55%       8.76%         11%    13.86%   13.86%

Variable Rate            $     9                                                           $     9     $      9
Avg. Interest Rate          8.25%
</TABLE>

Item 8.  Financial Statements and Supplementary Data

  The response to this Item is submitted as a separate section of this Annual
Report on Form 10-K.  See Item 14.

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

  None.

                                      26
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

  On July 1, 1999, the Company's Chief Financial Officer, Ronald Benanto,
resigned.  Mr. Benanto lives in Massachusetts and had commuted to the Company's
offices in New Jersey since February 1998 when he joined the Company.

  The information required by Part III, Item 10 will be set forth in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and
is incorporated herein by reference.

Item 11.  Executive Compensation

  The information required by Part III, Item 11 will be set forth in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and
is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

  The information required by Part III, Item 12 will be set forth in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and
is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

  The information required by Part III, Item 13 will be set forth in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and
is incorporated herein by reference.

                                      27
<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

  (a)  (1)  Financial Statements.
  The Financial Statements filed as part of this Annual Report on Form 10-K are
identified in the Index to Consolidated Financial Statements on page F-1 hereto.

  (a)  (2)  Financial Statement Schedules.

  The following financial statement schedule is filed as part of this Annual
Report on Form 10-K:

                                                                            Page
                                                                            ----

            Schedule II - Valuation and Qualifying Accounts..............    S-1

  Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown on the financial
statements or notes thereto.

  (a)  (3)  Reports on Form 8-K.

  During the fiscal quarter ended March 28, 1999, the Company filed the
following reports on Form 8-K:

  In February 1999, the Company filed a Current Report on Form 8-K to report
that it sold its subsidiary, Sportime, LLC.

  (a)  (4)  Exhibits:

  The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission.

 Exhibit
   No.                                       Description
---------   --------------------------------------------------------------------
   3.1      Amended and Restated Certificate of Incorporation of the Registrant
            (incorporated by reference to Exhibit 3.3 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
   3.2      Amended and Restated By-Laws of the Registrant (incorporated by
            reference to Exhibit 3.5 of the Registrant's Registration Statement
            on Form S-1 (File No. 333-47455)).
   4.1      Specimen certificate for shares of the Registrants Common Stock
            (incorporated by reference to Exhibit 4.1 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
   4.2      Stockholders Agreement dated as of September 30, 1998 (incorporated
            by reference to Exhibit 4.2 of the Registrant's Registration
            Statement on Form S-1 (File No. 333-47455)).
   4.3      Registration Rights Agreement, date as of September 14, 1998, by and
            between Genesis Direct, Inc. and Carol Wright Gifts, Inc.
            (incorporated by reference to Exhibit 4.1 of the Registrant's
            Current Report on Form 8-K (File No. 0-24173)).
   4.4      Convertible Note, dated September 14, 1998, made by Genesis Direct,
            Inc. in favor of Carol Wright Gifts, Inc. (incorporated by reference
            to Exhibit 4.2 of the Registrant's Current Report on Form 8-K (File
            No. 0-24173)).
  10.1      Credit Agreement with CIT Group Business Credit, Inc. as
            administrative agent (incorporated by reference Exhibit 10.1 of the
            Registrant's Registration Statement on Form S-1 (File No. 333-
            47455)).
  10.2      Lease Agreement relating to property in Memphis, Tennessee, as
            amended to date (incorporated by reference to Exhibit 10.2 of the
            Registrant's Registration Statement on Form S-1 (File No. 333-
            47455)).

                                      28
<PAGE>

 Exhibit
   No.                                Description
---------   --------------------------------------------------------------------
  10.3      Sublease Agreement relating to property in Secaucus, New Jersey
            (incorporated by reference to Exhibit 10.3 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
  10.4      Employment Agreement between the Registrant and Warren Struhl
            (incorporated by reference to Exhibit 10.4 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
  10.5      Employment Agreement between the Registrant and Hunter Cohen
            (incorporated by reference to Exhibit 10.5 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
  10.6      Employment Agreement between the Registrant and David Sable
            (incorporated by reference to Exhibit 10.6 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
  10.7      Registrant's 1997 Long-Term Incentive Plan (incorporated by
            reference to Exhibit 4.5 of the Registrant's Registration Statement
            on Form S-8 (File No. 333-55681)).
  10.8      Registrant's 1998 Employee Stock Purchase Plan (incorporated by
            reference to Exhibit 4.6 of the Registrant's Registration Statement
            on Form S-8 (File No. 333-55681)).
  21.1      Subsidiaries of the Registrant.
  23.1      Consent of Ernst & Young LLP.
  24.1      Power of Attorney (included on p. 40 hereof).
  27.1      Financial Data Schedule for fiscal year ended March 27, 1999.

                                      29
<PAGE>

                                  SIGNATURES

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

                                             GENESIS DIRECT, INC.

Date: July 9, 1999                           By:  /s/ Warren Struhl
                                                --------------------------------
                                                Warren Struhl
                                                Chairman of the Board of
                                                Directors, President and Chief
                                                Executive Officer

                               POWER OF ATTORNEY

  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Warren Struhl, Hunter Cohen and David Sable, and each
of them, each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for such person and in his name, place and stead, in any and all
capacities, to sign any or all further amendments to this Annual Report on Form
10-K and to file the same, with all exhibits thereto, and other documents in
connections therewith, with the Securities and Exchange Commission, granting
unto each of said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully as to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitutes, may lawfully do or cause to be
done by virtue hereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on July 9, 1999:

Signature                          Title
---------                          -----

/s/ Warren Struhl                  Chairman of the Board of Directors, President
--------------------------
Warren Struhl                      and Chief Executive Officer (Principal
                                   Executive Officer)

/s/ Hunter C. Cohen                Chief Operating Officer and Director
--------------------------
Hunter C. Cohen

/s/ David M. Sable                 Chief Marketing Officer and Director
--------------------------
David M. Sable

/s/ Ron Munkittrick                Vice President - Finance
--------------------------
Ron Munkittrick                    (Controller)

/s/ Ilan Kaufthal                  Director
--------------------------
Ilan Kaufthal

/s/ Marvin Runyon                  Director
--------------------------
Marvin Runyon

/s/ Edward Spiegel                 Director
--------------------------
Edward Spiegel

/s/ David W. Wiederecht            Director
--------------------------
David W. Wiederecht

                                      30
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
Genesis Direct, Inc.
<S>                                                                                                          <C>
  Report of Independent Auditors.........................................................................    F-2

  Consolidated Balance Sheets at March 27, 1999 and March 28, 1998.......................................    F-3

  Consolidated Statements of Operations for the years ended March 27, 1999, March 28, 1998 and
    March 29, 1997.......................................................................................    F-4

  Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended March 27, 1999,
    March 28, 1998 and March 29, 1997....................................................................    F-5

  Consolidated Statements of Cash Flows for the years ended March 27, 1999, March 28, 1998 and
    March 29, 1997.......................................................................................    F-6

  Notes to Consolidated Financial Statements.............................................................    F-8
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS


Board of Directors
Genesis Direct, Inc.

     We have audited the accompanying consolidated balance sheets of Genesis
Direct, Inc. and subsidiaries as of March 27, 1999 and March 28, 1998 and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows of Genesis Direct, Inc. and its subsidiaries and its predecessor
entity, Genesis Direct, LLC for each of the three years in the period ended
March 27, 1999. Our audits also included the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Genesis Direct,
Inc. and subsidiaries at March 27, 1999 and March 28, 1998, and the consolidated
results of their and the predecessor entity, Genesis Direct, LLC operations and
cash flows for each of the three years in the period ended March 27, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

     The accompanying financial statements have been prepared assuming Genesis
Direct, Inc. will continue as a going concern. As more fully described in Note
2, the Company has incurred operating losses since inception, has an accumulated
deficit of $248.2 million at March 27, 1999, and has working capital of $8.3
million, inclusive of $49.6 million representing the estimated net realizable
value of net assets available for sale. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.


Hackensack, New Jersey
July 9, 1999
                                               Ernst & Young LLP

                                      F-2
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

                          Consolidated Balance Sheets
              (in thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                            March 27, 1999      March 28, 1998
                                                                                            --------------      --------------
<S>                                                                                         <C>                 <C>
Assets
Current assets:
   Cash and cash equivalents, including restricted cash of
     $2,823 and $2,268, respectively.....................................................      $     4,366         $     2,722
   Accounts receivable, less allowances of $2,426 and $1,415,
     respectively........................................................................            3,470               5,494
   Merchandise inventory, net............................................................           22,714              27,350
   Deferred advertising costs............................................................            5,268              10,239
   Other current assets..................................................................            1,256               1,348
   Notes receivable, current portion.....................................................              979                 340
   Net assets available for sale.........................................................           49,574
                                                                                            --------------      --------------
     Total current assets................................................................           87,627              47,593
Intangibles, net of accumulated amortization of $3,276 and
     $3,509, respectively................................................................            2,117               8,240
Goodwill, net of accumulated amortization of $2,373 and
     $1,643, respectively................................................................           24,943              55,140
Equipment and leasehold improvements, net................................................           14,529              25,639
Advances to officers.....................................................................              100                 100
Notes receivable, less current portion...................................................              935               1,275
Other assets.............................................................................               54               1,389
                                                                                            --------------      --------------
                                                                                               $   130,305         $  139,276
                                                                                            ==============      ==============
Liabilities and common stockholders' equity (deficiency)
 Current liabilities:
   Accounts payable......................................................................      $    27,138         $    20,435
   Accrued expenses......................................................................           23,552              14,549
   Current portion of notes payable and long-term debt...................................           18,155              20,478
   Subordinated notes - related parties..................................................            6,231                   -
   Current portion of obligations under capital leases...................................            1,686               1,840
   Other current liabilities.............................................................            2,525               3,203
                                                                                            --------------      --------------
     Total current liabilities...........................................................           79,287              60,505
Notes payable and long-term debt, less current portion...................................           14,140               7,176
Debentures--related parties..............................................................                -              30,000
Obligations under capital leases, net of current portion.................................            2,120               3,978
Other liabilities........................................................................            1,745               2,717
Series A Preferred Stock (liquidation value $1,000 per share),
   122,000 shares authorized, 94,300 shares issued and
   outstanding at March 28, 1998.........................................................                -              96,739
Common stockholders' equity (deficiency):
   Common stock, par value $.01 per share; 82,500,000 shares
     authorized, 32,358,961 and 8,990,575 shares issued and
     outstanding at March 27, 1999 and March 28, 1998,
     respectively........................................................................              323                  90
   Additional paid-in capital............................................................          280,927              30,507
   Accumulated deficit...................................................................         (248,237)            (92,436)
                                                                                            --------------      --------------
     Total common stockholders' equity (deficiency)......................................           33,013             (61,839)
                                                                                            --------------      --------------
     Total liabilities and common stockholders' equity...................................       $  130,305         $   139,276
                                                                                            ==============      ==============
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

                   Consolidated Statements of Operations (in
                thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                     Year ended
                                                               March 27, 1999      March 28, 1998      March 29, 1997
                                                               --------------      --------------      --------------
<S>                                                            <C>                 <C>                 <C>
Net sales..................................................      $    252,337         $   107,210         $    18,537
Cost of goods sold.........................................           173,280              81,606              10,448
Inventory restructuring charge.............................            10,608                   -                   -
                                                              ---------------      --------------      --------------
Gross profit...............................................            68,449              25,604               8,089
Selling, general and administrative expenses...............           162,398              97,840              20,711
Loss on disposal of businesses.............................             3,745                   -                   -
Restructuring charges......................................            24,964                   -                   -
Provision for losses on assets of businesses
  available for sale.......................................            23,956                   -                   -
                                                              ---------------      --------------      --------------
Loss from operations.......................................          (146,614)            (72,236)            (12,622)
Interest expense...........................................             4,974               4,488               1,162
Interest income............................................             1,022                 513                 274
                                                              ---------------      --------------      --------------
Net loss before extraordinary item.........................          (150,566)            (76,211)            (13,510)
Extraordinary item- loss on extinguishment
  of debt..................................................             5,235                   -                   -
                                                              ---------------      --------------      --------------
Net loss...................................................          (155,801)            (76,211)            (13,510)
Dividends accruing on Series A Preferred
  Stock....................................................                 -              (2,439)                  -
                                                              ---------------      --------------      --------------
Net loss attributable to common
  stockholders.............................................      $   (155,801)         $  (78,650)        $   (13,510)
                                                              ===============      ==============      ==============
Basic net loss per share:
  Loss before extraordinary item...........................      $      (5.23)         $    (8.89)        $     (4.61)
  Extraordinary item.......................................             (0.18)                  -                   -
                                                              ---------------      --------------      --------------
  Net loss.................................................      $      (5.41)         $    (8.89)        $     (4.61)
                                                              ---------------      --------------      --------------
Weighted average common shares
  outstanding..............................................        28,812,500           8,842,400           2,933,700
                                                              ===============      ==============      ==============
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

         Consolidated Statements of Stockholders' Equity (Deficiency)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                            Genesis Direct,                                                       Total
                                               L.L.C.        Shares of               Additional                 Stockholders'
                                               Members'       Common      Common      Paid-In     Accumulated      Equity
                                            Contributions     Stock       Stock       Capital       Deficit     (Deficiency)
                                            -------------   ---------  ----------  ------------   ------------  -------------
<S>                                         <C>             <C>        <C>         <C>           <C>            <C>
  Balance at March 30, 1996...........      $  2,200                                             $   (2,715)      $    (515)
     Capital contribution to
        Genesis Direct, Inc...........        (2,200)         605,000    $   6      $  2,194
     Issuance of Common Stock.........                      6,187,500       62        22,338                         22,400
     Net loss.........................                                                              (13,510)        (13,510)
                                            --------        ---------    -----       -------     ----------       ---------
  Balance at March 29, 1997...........                      6,792,500       68        24,532        (16,225)          8,375
     Issuance of Common Stock.........                      2,062,500       21         7,479                          7,500
     Common stock purchase
        warrant issued in connec-
        tion with debentures..........                                                   203                            203
     Issuance costs of Series A
        Preferred Stock...............                                                  (746)                          (746)
     Dividends accruing on Series
        A Preferred Stock.............                                                (2,439)                        (2,439)
     Issuance of Common Stock in
        connection with business
        acquisitions and licenses.....                        135,575        1         1,478                          1,479
     Net loss.........................                                                              (76,211)        (76,211)
                                            --------        ---------    -----      --------     ----------       ---------
  Balance at March 28, 1998...........      $     --        8,990,575    $  90      $ 30,507     $  (92,436)      $ (61,839)
                                            --------        ---------    -----      --------     ----------       ---------
     Issuance of Common Stock
        upon conversion of
        Debentures.....................                     2,331,521       23         9,727                          9,750
     Issuance of Common Stock
        upon conversion of note
        issued in connection with
        acquisition....................                       128,333        1         1,399                          1,400
     Issuance of Common Stock
        upon conversion of Series A
        Preferred Stock including
        reversal of accrued
        dividends of $3,059..........                       8,644,156       87        96,652                         96,739
     Issuance of Common Stock in
        connection with initial
        public offering................                     9,625,000       96       132,419                        132,515
     Issuance of Common Stock in
        connection with acquisitions...                     2,634,433       26         7,838                          7,864
     Sale of Common Stock..........                             4,943                     41                             41
     Issuance of Common Stock
        purchase options to non-
        employees.......................                                                 344                            344
     Common stock purchase
        warrants issued in connec-
        tion with indebtedness.......                                                  2,000                          2,000
     Net loss..........................                                                           (155,801)        (155,801)
                                            --------        ---------    -----      --------     ---------        ---------
  Balance at March 27, 1999............                     32,358,96    $ 323      $280,927     $(248,237)       $  33,013
                                            ========        =========    =====      ========     ==========       =========
</TABLE>
                            See accompanying notes.

                                      F-5
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries
                     Consolidated Statements of Cash Flows
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                              Year ended
                                                                      March 27, 1999         March 28, 1998         March 29, 1997
                                                                    ------------------     ------------------     -----------------
<S>                                                                 <C>                    <C>                    <C>
 Cash flows from operating activities
   Net loss.......................................................    $      (155,801)       $   (76,211)           $  (13,510)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
   Loss on sale of businesses                                                   3,745                  -                     -
   Depreciation and amortization..................................             12,635              6,104                 1,303
   Provision for losses on accounts receivable....................              1,011              1,161
   Non-cash interest expense......................................              1,643              3,110                   966
   Non-cash restructuring charges                                              27,399                  -                     -
   Stock options issued to non-employees                                          344                  -                     -
   Changes in operating assets and liabilities net of
    business acquired:............................................
   Accounts receivable............................................             (4,465)            (1,359)                1,102
   Merchandise inventory..........................................              2,185            (11,103)                 (161)
   Deferred advertising costs and other current assets............              4,043             (4,075)               (1,569)
   Accounts payable and accrued liabilities.......................             33,295              6,257                (1,038)
   Other assets...................................................              1,722               (620)                 (221)
   Other liabilities..............................................             (3,088)                 3                  (333)
                                                                        --------------       --------------         --------------
   Net cash used in operating activities..........................            (79,702)           (76,733)              (13,461)
  Cash flows from investing activities
   Intangibles....................................................             (1,248)               (71)                 (550)
   Acquisition of equipment and leasehold
     improvements.................................................            (22,225)           (15,964)               (3,000)
   Cash paid for acquired businesses, net of cash acquired........            (19,782)           (34,321)              (19,223)
   Proceeds from sale of businesses                                            22,547                  -                     -
   (Increase) decrease in restricted cash.........................               (555)               172                (2,200)
                                                                        --------------       --------------         --------------
   Net cash used in investing activities..........................            (21,263)           (50,184)              (24,973)
 Cash flows from financing activities
   (Repayment of) proceeds from line of credit....................            (12,474)            12,484                  (722)
   (Repayment of) proceeds from issuance of Debentures--related
    parties.......................................................            (20,250)             7,500                22,500
   Proceeds from issuance of subordinated notes
   related parties................................................              8,000                  -                     -
   Proceeds from issuance of note payable.........................              5,794                  -                     -
   Proceeds from sale of Common Stock or Member Interest..........            132,555              7,500                22,400
   Proceeds from sale of Series A Preferred Stock, net of.........
    issuance costs................................................                  -             67,379                     -
   Proceeds from bridge note borrowing............................                  -             26,175                     -
   (Repayment of) Proceeds from term loan.........................             (3,899)             5,000                     -
   (Repayments of) notes payable..................................             (7,672)            (4,411)                    -
                                                                        --------------       --------------         --------------
   Net cash provided by financing activities......................            102,054            121,627                44,178
                                                                        --------------       --------------         --------------
   Increase (decrease) in cash and cash equivalents...............              1,089             (5,290)                5,744
   Cash and cash equivalents at beginning of period...............                454              5,744                     -
                                                                        -------------        --------------         --------------
   Cash and cash equivalents at end of period.....................      $       1,543        $       454            $    5,744
                                                                        ==============       ==============         ==============
</TABLE>

                                      F-6
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries
               Consolidated Statements of Cash Flows (continued)
                                (in thousands)


<TABLE>
<CAPTION>
                                                                                               Year ended
                                                                      March 27, 1999        March 28, 1998         March 29, 1997
                                                                 ----------------------  ---------------------  --------------------
<S>                                                              <C>                     <C>                    <C>
  Supplemental disclosures of cash flow information
   Interest paid.................................................      $      6,548           $    2,134            $      197
                                                                       ============           ==========            ==========
  Supplemental disclosures of non-cash investing and
   financing activities
   Acquisitions:
      Liabilities assumed........................................           $40,414           $   13,145            $   17,029
      Issuance of notes payable..................................            17,538                5,160                 9,349
      Issuance of Common Stock...................................             7,864                1,029
      Obligations under non-compete agreements...................               184                1,605                 2,610
   Issuance of Common Stock in connection with licensing
    agreements...................................................                                    450
   Conversion of debt to Series A Preferred Stock................            94,300               26,175
   Conversion of Debentures to Common Stock......................             9,750
   Conversion of notes payable to Common Stock...................             1,400
   Dividends on Series A Preferred Stock.........................                                  2,439
   Conversion of Series A Preferred Stock to Common Stock........            94,300               26,175
   Reduction of seller notes payable in connection with the
    subsequent sale of net assets acquired.......................                                  1,000
   Capital leases................................................               713                5,818
</TABLE>

                            See accompanying notes.

                                      F-7
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

                  Notes to Consolidated Financial Statements
              (in thousands, except share and per share amounts)

                                March 27, 1999

1. Organization

     Prior to February 1999, Genesis Direct, Inc. and subsidiaries (collectively
"Genesis Direct" or the "Company") was engaged in catalog, direct and database
marketing of a broad range of consumer products, serving customers principally
in the United States.  In February 1999, the Company announced a strategic
repositioning of its business to focus on web-based marketing of sports-related
merchandise.

     Genesis Direct, LLC, the predecessor to Genesis Direct, Inc., was formed on
June 8, 1995 to develop a direct marketing company through the acquisition and
start-up of catalog businesses. On June 25, 1996, the assets and liabilities of
Genesis Direct, LLC were contributed to Genesis Direct, Inc. in exchange for
605,000 shares of Common Stock. The assets and liabilities contributed by
Genesis Direct, LLC were valued at their carryover basis in accordance with
accounting for predecessor companies. The 605,000 shares issued in exchange for
the contribution of assets and liabilities were assigned a value equal to the
original cash contributions to Genesis Direct, LLC by its members.

2. Going Concern Uncertainty

     The Company has incurred net losses of $155,801, $76,211 and $13,510 in
fiscal 1998, fiscal 1997 and fiscal 1996, respectively, and has an accumulated
deficit of $248,237 at March 27, 1999, and has working capital of $8,340,
inclusive of $49,574 representing the estimated net realizable value of net
assets of businesses available for sale.

     The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the fiscal 1998
financial statements. The paragraph states that the company's recurring losses
and limited working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.

     In February 1999, the Company's Board of Directors adopted a restructuring
plan to reposition the Company's operations and focus on its primary sports
merchandising business.  The major elements of the restructuring plan, certain
of which have been completed, include the sale or closure of substantially all
non-sports related catalog businesses, sale of the Company's principal
distribution facility and reduction of leased office facilities and employee
headcount.  In addition, management is currently negotiating to renew the
Company's existing revolving credit facility or replace it with a new facility.
Management is also seeking to raise additional equity or other forms of long-
term financing.  If management's efforts at completing the sales of assets and
raising additional financing are successful it believes the Company will have
sufficient financial resources available to operate the restructured business
through fiscal 1999.

     Management expects the Company to incur a significant operating loss in
fiscal 1999.  There can be no assurance that the Company will be able to renew
or replace its existing revolving credit facility, secure other long-term
financing or successfully complete its restructuring plan, the impact of which
could result in the Company incurring larger than anticipated operating losses
for fiscal 1999.  The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.

                                      F-8
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


3. Summary of Significant Accounting Policies

     Principles of Consolidation

     For periods subsequent to June 25, 1996, the consolidated financial
statements include the accounts of Genesis Direct, Inc. and its wholly-owned
subsidiaries. Prior to June 25, 1996, the financial statements included the
accounts of Genesis Direct, LLC. All significant intercompany accounts and
transactions have been eliminated.

     Basis of Presentation

     All amounts, except share and per share data are presented in thousands,
unless otherwise indicated.

     Fiscal Year

     The Company's fiscal year ends on the Saturday next preceding April 1,
resulting in either a 52 or 53 week fiscal year. The year ended March 27, 1999
("fiscal 1998") was a 53-week year, the year ended March 28, 1998 ("fiscal
1997") was a 52-week year and the year ended March 29, 1997 ("fiscal 1996") was
a 52-week year.

     Cash Equivalents

     Cash equivalents consist of highly liquid investments with original
maturities of three months or less when purchased.

     Restricted Cash

     Restricted cash includes amounts deposited in a bank to support letters of
credit in connection with certain of the Company's lease obligations, and
amounts held in escrow in connection with proceeds from the sale of businesses.

     Concentration of Credit Risk

     Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist of cash and
cash equivalents and trade accounts receivable. The Company restricts its
temporary cash investments to financial institutions with high credit standing.
Accounts receivable represent sales to governmental agencies and other
institutional customers throughout the United States. The Company performs
periodic credit evaluations of these customers but does not require collateral.

     Merchandise Inventory, Net

     Merchandise inventory, consisting principally of finished goods, is stated
at the lower of cost (first-in, first-out) or market. Merchandise inventory
reflects valuation reserves of approximately $17,101 and $3,926 at March 27,
1999 and March 28, 1998, respectively.

     Equipment and Leasehold Improvements

     Equipment and leasehold improvements are stated at cost.  Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets, ranging from five to ten years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the life of the
improvement or the remainder of the lease term.

                                      F-9
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


3. Summary of Significant Accounting Policies (continued)

     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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Advances to Officers

     Advances to officers are non-interest bearing advances which are due on
demand.

     Long-Lived Assets

     The Company periodically assesses long-lived assets, including goodwill and
other intangibles for recoverability. The Company's assessment at March 27, 1999
is based on undiscounted projected operating results of the business. Management
believes that these projections are reasonable, however, actual future operating
results may differ.

     Fair Values of Financial Instruments

     The estimated fair values of financial instruments have been determined by
the Company using available market information, including current interest
rates, and the following valuation methodologies:

     Cash and cash equivalents--the carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair values because of the
short maturity of these instruments.

     Notes receivable--the carrying amounts reported in the balance sheet for
notes receivable approximate their fair values at March 27, 1999. The fair value
is estimated on the basis of discounted cash flow analyses, using appropriate
interest rates for similar maturities.

     Notes payable, long-term debt and subordinated notes-related parties
Debentures--related parties--the aggregate fair value of notes payable, long-
term debt, debentures-related parties and subordinated notes-related parties is
$35,043 at March 27, 1999 (carrying value $38,526).  The fair value is estimated
on the basis of rates offered to the Company for debt of similar maturities.

     Revenue Recognition

     Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns, net of exchanges, is recorded based upon historical
experience.

     Advertising and Promotion Costs

     Recognition of advertising costs is in accordance with the provisions of
the AICPA Statement of Position 93-7, Reporting of Advertising Costs.
Advertising costs other than direct response are expensed at the time the
initial advertising takes place. Direct response advertising costs, consisting
primarily of catalog design, printing and postage expenditures, are amortized
over the period during which associated net revenues are expected, generally
approximating three months or less. Direct response and other advertising
expenses were $87,975, $42,528 and $3,740 for fiscal 1998, fiscal 1997 and
fiscal 1996, respectively. As of March 27, 1999 and March 28, 1998, $5,268 and
$10,239, respectively, of direct response advertising costs are reflected as
deferred charges.

                                      F-10
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


3. Summary of Significant Accounting Policies (continued)

     Income Taxes

     Deferred income taxes are determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

     Business Combinations

     The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date
based on their estimated respective fair values and, under certain
circumstances, are subject to revision for a period not to exceed one year from
the date of acquisition. In certain cases, the purchase price is subject to
adjustment based upon the verification of financial position and results of
operations of the acquired business as of a specified date. The results of
operations of the acquired enterprises are included in the Company's
consolidated financial statements for the periods subsequent to the
acquisitions.

     Goodwill

     Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired and is being amortized over periods from ten to forty years.

     Intangibles

     Intangible assets include the cost of agreements not-to-compete entered
into in connection with certain business combinations and costs to acquire
customer mailing lists. The costs of non-compete agreements are amortized over
the terms of the agreements. The costs of acquired customer lists are amortized
over the period which the acquired company, based on historical experience,
retains its customers, generally three years.

     Computer Software

     The Company capitalizes the cost of computer software purchased from third
parties which is amortized over five years. Internal costs incurred to modify
purchased software and to develop software for internal use are expensed as
incurred.

     Loss Per Share

     Loss per share amounts for all periods are based on the provisions of
Statement of Financial Accounting Standards No. 128 Earnings Per Share. Diluted
loss per share is not presented since the effect of all potentially dilutive
securities is anti-dilutive. At March 27, 1999 a total of 5,323,107 shares could
potentially affect the calculation of diluted earnings per share in future
periods. In addition, no shares have been issued since inception for amounts
representing nominal consideration.

     In May 1998, the Company effected a 275 for 1 stock split. All common share
and per share information in the accompanying financial statements has been
retroactively restated to reflect this stock split.

     Reclassifications

     Certain prior year amounts have been reclassified to conform with the
current year presentation.

                                      F-11
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

4. Notes Receivable

     Includes the balance of a note which was received in connection with the
sale of certain assets, which bears interest at 6% and is payable in quarterly
installments beginning January 1998 and a $500 short term note received in
connection with a sale of a business.

5. Equipment and Leasehold Improvements

     Equipment and leasehold improvements consist of the following:

<TABLE>
<CAPTION>
                                                  March 27, 1999     March 28, 1998
                                                  --------------     --------------
     <S>                                          <C>               <C>
     Equipment, furniture and fixtures........        $    5,843         $    9,150
     Computer equipment and software..........             9,171              7,410
     Leasehold improvements...................             3,226             11,385
                                                      ----------            -------
                                                          18,240             27,945
     Less accumulated depreciation............             3,711              2,306
                                                      ----------         ----------
                                                      $   14,529         $   25,639
                                                      ==========         ==========
</TABLE>

  Depreciation expense was approximately $5,450, $2,056 and $505 for fiscal
1998, fiscal 1997 and fiscal 1996, respectively.

6. Capital Leases

     The Company leases equipment under certain capital leases.  Amortization of
assets under capital leases is included in depreciation expense.

     Assets recorded under capital leases are included in equipment and
leasehold improvements as follows:

<TABLE>
<CAPTION>
                                                    March 27, 1999        March 28, 1998
                                                    --------------        --------------
     <S>                                            <C>                   <C>
     Equipment, furniture and fixtures....                  $2,176                $1,463
     Computer equipment...................                   4,600                 4,600
                                                    --------------        --------------
                                                             6,776                 6,063
     Less accumulated depreciation........                   1,635                   533
                                                    --------------        --------------
                                                            $5,141                $5,530
                                                   ===============        ==============
</TABLE>

     Future minimum lease payments and the maturities of the obligations under
capital leases at March 27, 1999 net of leases transferred upon sale of the
distribution center are as follows:

<TABLE>
     <S>                                                                  <C>
     1999................................................................         $2,090
     2000................................................................          1,721
     2001................................................................            438
     2002................................................................            210
                                                                          --------------
     Total minimum lease payments........................................          4,459
     Less interest.......................................................            653
     Less current portion of obligations under capital lease.............          1,686
                                                                          --------------
     Obligations under capital lease, net of current portion.............         $2,120
                                                                          ==============
</TABLE>

                                      F-12
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

7. Accrued Expenses

<TABLE>
<CAPTION>
                                                         March 27, 1999      March 28, 1998
                                                         --------------      --------------
     <S>                                                 <C>                 <C>
     Sales returns....................................    $    1,506            $      592
     Employee compensation............................         2,012                 1,346
     Interest.........................................         1,136                 2,352
     Reorganization costs- acquired businesses........           331                 4,597
     Accrued inventory purchases......................         1,260                   613
     Due to customers.................................         2,664                 1,401
     Fixed assets.....................................         6,517                     -
     Restructuring charges............................         3,293                     -
     Royalties........................................         2,246                   209
     Other............................................         2,587                 3,439
                                                          ----------            ----------
                                                          $   23,552            $   14,549
                                                          ==========            ==========
</TABLE>

8.     Restructuring Charge and Reserve for Losses on Businesses Held for Sale

     In the fourth quarter of fiscal 1998, the Company recorded a restructuring
charge of $35,572 associated with its program to reduce its overall operations
and focus on its primary sports merchandise brands.  The restructuring program
includes the sale or termination of numerous catalog brands, write-down of
related inventories, intangibles and goodwill, closure of certain facilities and
employee terminations.  The components of the restructuring charge are
summarized as follows:

<TABLE>
<CAPTION>
                                                         Original                   Utilized                      Balance at
                                                                        ----------------------------------
                                                          Charge             Cash              Non-Cash          March 27,1999
                                                      ---------------   --------------     ---------------      ---------------
       <S>                                            <C>               <C>                <C>                  <C>
       Write off of goodwill and other                    $15,386                               $15,386
         intangibles................................
       Write down of inventories to net                    10,608                                10,608
         realizable value...........................
       Severance costs (approximately 188
         employees).................................        5,440            $2,601                 229               $2,610
       Lease liabilities on vacated properties......          661               261                                      400
       Other........................................        3,477             1,790               1,404                  283
                                                       --------------   --------------     ---------------      ---------------
                                                          $35,572            $4,652             $27,627               $3,293
                                                       ==============   ==============     ===============      ===============
</TABLE>

     As of March 27, 1999 the Company has an accrual of $3,293 associated with
the restructuring charge (principally related to employee severance and lease
liabilities), a significant portion of which is expected to be paid during
fiscal 1999.

     In connection with the adoption of the restructuring plan, the Company has
decided to sell its principal distribution facility and certain existing catalog
brands including Carol Wright Gifts, The Edge, Childswork/Childsplay, Lilliput,
Sportime and Music Stand.  The carrying values of the net assets, including the
carrying value of related goodwill and other intangibles, of these businesses
have been written down to their net realizable values.  Considerable management
judgement is necessary to estimate the net realizable value and, accordingly,
actual results could vary significantly from such estimates (principally with
respect to Carol Wright Gifts).  The total charge needed to write down the net
asset value for businesses available for sale totaled $23,956.  During the
quarter ended March 27, 1999 the Company completed the dispositions of Sportime
and Lilliput resulting in aggregate losses of $3,745.  Subsequent to March 27,
1999, the Company completed the dispositions of its principal distribution
facility, Music Stand and Childswork/Childsplay, and entered into an agreement
with a buyer for the disposition of The Edge, the closing of such transaction is
dependent upon, among other things, the ability of the buyer to obtain a
specified level of financing.

                                      F-13
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


8. Restructuring Charge and Reserve for Losses on Businesses Held for Sale
(continued)

     Businesses sold or terminated during fiscal 1998 or held for sale at March
27, 1999 accounted for total sales of approximately $184,000 for fiscal 1998.

9. Business Acquisitions and Divestitures

     Fiscal 1998

     Acquisitions

     In April 1998, the Company acquired certain assets and liabilities of
Biobottoms, Inc., a company engaged in the direct marketing of children's
apparel. The aggregate purchase price, including all direct costs, of $3.6
million consisted of (i) $1,265 of cash, (ii) $1,430 for retirement of debt,
(iii) $1,170 of notes, bearing interest at an annual rate of 7.0%. The cost of
the acquisition exceeded the fair value of the acquired net assets by
approximately $5.0 million which was recorded as goodwill and was being
amortized over 40 years.  In conjunction with its overall restructuring program,
the Company  has decided to terminate this brand and, accordingly, has written-
down  the carrying value of all related assets, including goodwill and other
intangibles, to their net realizable values and is included in restructuring
charges on the statement of operations.

     In June 1998, the Company acquired Fan and Fun, a company engaged in the
direct marketing of sports apparel and merchandise. The purchase price consisted
of $873 of cash.

     In August 1998, the Company acquired certain assets and liabilities of The
Edge Company Catalog, Inc., (the "Edge") a company engaged in the direct
marketing of distinctive gifts, tools, collectibles, electronics and action
gear, including collectible knives. The aggregate purchase price of $22,332,
including all direct costs, consisted of (i) $17,321 in cash, (ii) 234,433
shares of the Company's Common Stock valued at $7.3125 per share (the closing
price of the Common Stock on the closing date), (iii) a 6% interest bearing
promissory note in the principal amount of $960, (iv) an 8% interest bearing
promissory note in the principal amount of $900 and (v) an 8% interest bearing
promissory note in the principal amount of $1,758. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $20,200
which was recorded as goodwill and was being amortized over 40 years.  In
conjunction with its overall restructuring program, the Company has decided  to
sell The Edge catalog and accordingly has written-down the carrying value of all
related assets, including goodwill and other intangibles, to their net
realizable value which is included in the provision for losses on assets of
businesses available for sale.

     In September 1998, the Company acquired certain assets and liabilities of
Carol Wright Gifts, Inc. ("Carol Wright Gifts"), a company engaged in the direct
marketing of general merchandise to consumers. The aggregate purchase price,
including all direct costs, of $18,900 consisted of (i) 2,400,000 shares of the
Company's Common Stock valued at $2.5625 per share (the closing price of the
Common Stock on the closing date), and (ii) a convertible promissory note in the
principal amount of $12,750.  The cost of the acquisition exceeded the fair
value of the acquired net assets by approximately $15,317 which was recorded as
goodwill and was being amortized over 40 years.  In conjunction with its overall
restructuring program, the Company had decided to sell the Carol Wright Gifts
catalog and accordingly has written-down the carrying value of all related
assets, including goodwill and other intangibles, to their net realizable value
which is included in the provision for losses on assets of businesses available
for sale.

                                      F-14
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


9. Business Acquisitions and Divestitures (continued)

     Dispositions

     In February 1999, the Company sold Sportime for net proceeds of $23,000
which resulted in a loss of approximately $1,600.

     In March 1999, the Company sold its Lilliput brand for net proceeds of
$1,100 which resulted in a loss of approximately $2,145.

     Presentation of pro forma operating  results with respect to the acquired
businesses for fiscal 1998 and 1997 is not considered meaningful based on the
Company's overall restructuring plan and the sale and termination of certain
acquired businesses.

     Fiscal 1997

     In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Artesania, Inc. ("Ninos"). Ninos is engaged in the direct
marketing of children's bilingual educational products. The aggregate purchase
price, including all direct costs, was approximately $1,358. The cost of the
acquisition exceeded the fair value of the acquired net assets by approximately
$1,298 which has been recorded as goodwill.

     In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Center for Applied Psychology, Inc. ("Childswork/Childsplay").
Childswork/Childsplay is engaged in the direct marketing of children's
educational products to the school and professional markets. The aggregate
purchase price, including all direct costs, was approximately $2,245. The cost
of the acquisition exceeded the fair value of the acquired net assets by
approximately $997 which has been recorded as goodwill.

     In June 1997, Genesis acquired certain assets from and entered into a
license agreement with Global Friends Collection, Inc. ("Global Friends").
Global Friends is engaged in the direct marketing of collectible dolls and
related merchandise. The preliminary aggregate purchase price, including all
direct costs, was approximately $1,394 and was partially financed through the
issuance of a $210 non-interest bearing note payable to the seller. This note
has been discounted to its present value using an effective annual interest rate
of 12%. The cost of the acquisition exceeded the fair value of the acquired
assets by approximately $718 which has been recorded as goodwill.

     In August 1997, Genesis acquired all of the outstanding common stock of
Fanfare Enterprises, Inc. ("Music Stand"). Fanfare is engaged in the direct
marketing of consumer products relating to the performing arts. The preliminary
aggregate purchase price, including all direct costs, was approximately $4,888
and was partially financed through the issuance of a $500 interest bearing (8%)
note payable to the sellers. The cost of the acquisition exceeded the fair value
of the acquired net assets by approximately $2,549 which has been recorded as
goodwill.

     In October 1997, the Company acquired certain assets and assumed certain
liabilities of H&L Productions, Inc. ("NASCAR"). NASCAR is engaged in the direct
marketing of licensed NASCAR merchandise and other collectibles. The preliminary
aggregate purchase price, including all direct costs, was approximately $6,455
and was partially financed through the issuance of an aggregate of $1,325
interest bearing (5.76%) convertible notes and $1,075 interest bearing (5.76%)
notes payable to the sellers. The cost of the acquisition exceeded the fair
value of the acquired net assets by approximately $5,820 which has been recorded
as goodwill. The principal former stockholder, who is employed by the Company,
is also entitled to certain additional payments based on operating results for
the year ended December 31, 1997. The portion of such additional payments, if
any, attributable to operating results subsequent to the date of acquisition
will be accounted for as compensation expense in accordance with Emerging Issues
Task Force (EITF) Issue No. 95-8.

                                      F-15
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


9.  Business Acquisitions and Divestitures (continued)

     In October 1997, Genesis acquired all of the outstanding common stock of
Zig Zag Imports, Inc. ("Soccer Madness"). Soccer Madness is engaged in the
direct marketing of licensed and other sports merchandise. The preliminary
aggregate purchase price, including all direct costs, was approximately $3,090
and was partially financed through the issuance of 2,750 shares of Common Stock
valued at $10.91 per share and $1,050 interest-bearing (7.0%) notes payable to
the sellers. The cost of the acquisition exceeded the fair value of the acquired
net assets by approximately $2,516 which has been recorded as goodwill.

     In January 1998, the Company completed the acquisition of certain assets
and certain liabilities of Select Service & Supply Co., Inc. ("Sportime").
Sportime is engaged in the direct marketing of licensed and other sports
merchandise. Payment of the aggregate preliminary purchase price of
approximately $20.8 million included cash of $18.1 million, a $1.0 million 8%
term note, $0.4 million of non-compete payments due in equal quarterly
installments through January 2002 and the issuance of 91,575 shares of Common
Stock valued at $10.91 per share.

     Fiscal 1996

     In December 1996, Genesis acquired all of the outstanding common stock of
Athletic Supply of Dallas, Inc. ("ASD"). ASD is engaged in the direct marketing
of licensed and other sports merchandise. The aggregate purchase price,
including all direct costs, was approximately $10,000 and was partially financed
through the issuance of $5,000 of non-interest bearing notes payable to the
sellers. These notes payable have been discounted to their present value at an
effective annual interest rate of 12%. The cost of the acquisition exceeded the
fair value of the acquired net assets by approximately $11,413 which has been
recorded as goodwill. On the date of acquisition, the Company determined it
would divest the fulfillment operations of ASD and expected that divestiture to
occur within one year.

     In October 1997, the Company completed the sale of the assets and
liabilities of the fulfillment operations of ASD to one of ASD's former
shareholders. The aggregate proceeds from the sale were approximately $2.7
million, including a $1.0 million reduction in the outstanding principal balance
of the existing seller note payable. The amounts of loss from operations and
allocated interest costs for the period prior to the sale which were excluded
from the determination of net loss in accordance with EITF Issue No. 87-11 were
not material. The sale resulted in a reduction of goodwill of approximately $2.8
million.

     In December 1996, Genesis acquired certain assets and assumed certain
liabilities of Manny's Baseball Land, Inc. ("ProTeam"). ProTeam is engaged in
the direct marketing of licensed and other sports merchandise. The aggregate
purchase price, including all direct costs, was approximately $10,932 and was
partially financed through the issuance of $5,275 of non-interest bearing notes
payable to the sellers. These notes payable have been discounted to their
present value at an effective annual interest rate of 12%. The cost of the
acquisition exceeded the fair value of the acquired net assets by approximately
$11,351 which has been recorded as goodwill.

     In February 1997, Genesis acquired certain assets and assumed certain
liabilities of First Step Design Ltd. ("Hand In Hand"). Hand In Hand is engaged
in the direct marketing of children's games, educational material, and related
products. The aggregate purchase price, including all direct costs, was
approximately $2,486. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $2,119 which has been recorded as goodwill.

                                      F-16
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


9. Business Acquisitions and Divestitures (continued)

     During fiscal 1996, in separate transactions, Genesis acquired certain
assets and assumed certain liabilities of Lilliput Motor Company, Inc., Duclos
Direct Marketing, Inc. and The Thursley Group, Inc., all of which are engaged in
direct marketing of consumer products. The aggregate purchase price for these
businesses, including all direct costs, was approximately $2,416, and was
partially financed through the issuance of $800 of non-interest bearing notes
payable to the sellers. These notes payable have been discounted to their
present value at an effective annual interest rate of 12%. The cost of the
acquisitions exceeded the fair value of acquired businesses' net assets by
approximately $2,917 which has been recorded as goodwill.

     In connection with each of the transactions described above, certain
individuals and the Company entered into agreements not-to-compete. These
agreements cover periods ranging from six months to four years from the date of
the respective transactions. The cost of these agreements totaled approximately
$316, $1,605 and $2,610 for the acquisitions completed during fiscal 1998,
fiscal 1997 and fiscal 1996, respectively. Such amounts are generally payable
over the term of the agreements. Certain of these obligations have been
discounted to their present value at an effective annual interest rate of 12%.

     In connection with certain of the transactions described above, the Company
has adopted, although in certain cases not finalized, plans to relocate the
operations of the acquired businesses. Such plans are finalized when the date of
integration of the acquired business into the Company's call center and
distribution center is determined, which, in all cases, has been within one year
of the date of consummation of the acquisition. The Company has recorded
estimated liabilities aggregating approximately $5,142 and $4,138 for
acquisitions completed during fiscal 1998 and fiscal 1997, respectively, which
related principally to employee termination costs and remaining lease
obligations. The Company paid $4,806 and $1,753 of the liabilities during fiscal
1998 and fiscal 1997, respectively. The ultimate amounts incurred may differ
from the amounts recorded. Any such differences will result in an adjustment to
these estimated liabilities and a corresponding adjustment, within one year from
each acquisition date, to goodwill, unless the differences result from events
occurring after the consummation date, which differences will be expensed when
incurred. During fiscal 1998, the Company reduced accrued liabilities by
approximately $4,602 related to businesses sold or held for sale at March 27,
1999 for which such costs will not be incurred. The reversal of the amounts were
recorded as an adjustment to goodwill attributable to the related acquired
entity.

     In connection with certain of the transactions described above, the Company
has pledged all of its member interests in the respective LLC subsidiary formed
for the purpose of acquiring the business of the sellers and provided a
guarantee of the notes payable.

10.  Series A Preferred Stock

     In September and December 1997, the Company sold an aggregate of 94,300
shares of Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock") including 32,857 shares to the holders of shares of the Company's common
stock and outstanding debentures. Dividends were cumulative at an annual rate of
6%.

     The purchase of an aggregate of 26,175 shares of Series A Preferred Stock
was completed through the conversion in September 1997 of $26,175,000 principal
amount of 8% notes payable issued by the Company during August and September
1997. Such notes payable were automatically convertible into shares of the
Series A Preferred Stock at a conversion price of $1,000 per share (which is
equivalent to $3.63 per share after the stock split) which represents the price
at which all shares of Series A Preferred Stock issued by the Company were sold.

                                      F-17
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


10.  Series A Preferred Stock (continued)

     The Series A Preferred Stock was convertible, at the holders' option, at
any time into shares of Common Stock at an initial conversion price of $10.91
per share, subject to adjustment. The Series A Preferred Stock was subject to
automatic conversion upon the completion of (i) a qualifying initial public
offering, as defined, at an initial conversion of $10.91 per share, subject to
adjustment. In conjunction with the Company's initial public offering, all of
the shares of Series A Preferred Stock were automatically converted into
8,644,156 shares of common stock based on the initial conversion price.

11.  Notes Payable and Long-Term Debt

     The Company's notes payable and long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                            March 27, 1999         March 28, 1998
                                                                           ----------------       ----------------
<S>                                                                        <C>                    <C>
Convertible note payable to seller in a business acquisition (A)........       $12,750

7% note payable to seller in a business combination (B).................        13,124

Revolving credit note payable to bank (C)...............................             9                 $12,483

Term loan payable to bank (C)...........................................         1,101                   5,000

5.76% notes payable to sellers in a business acquisition, due in
 semi-annual installments of $358 beginning April 1998..................           358                   1,075

7% notes payable to sellers in a business acquisition, due
 July 1999..............................................................           770

6% notes payable to sellers in a business acquisition, due
 April 1999.............................................................           960

8% notes payable to sellers in a business acquisition, due in
 annual installments of $300 beginning August 1999......................           900

8% notes payable to sellers in a business acquisition, due in
 semi-annual installments of $440 beginning February 1999...............         1,320

7% notes payable to sellers in a business acquisition, due in
 annual installments of $350 beginning October 1998.....................           700                   1,050

Non-interest bearing notes payable (discounted at 12%) to
 sellers in a business combination, due March 1999......................           200                     179

Non-interest bearing notes payable (discounted at 12%) to
 sellers in a business combination, due in annual
 installments of $105 beginning June 1998...............................           103                     195

8% notes payable to sellers in a business acquisition, which
 was assumed by the buyer of Sportime...................................                                 1,000

Non-interest bearing notes payable (discounted at 12%) to
 sellers in a business acquisition, due in quarterly
 installments through March 1999........................................                                 2,125
</TABLE>

                                      F-18
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

11.  Notes Payable and Long-Term Debt (continued)


<TABLE>
<CAPTION>
                                                                      March 27, 1999            March 28, 1998
                                                                      --------------            --------------
<S>                                                                   <C>                       <C>
Non-interest bearing notes payable (discounted at 12%) to
 sellers in a business acquisition, balance due in December
 1998..............................................................                                      2,446

5.76% convertible note ("convertible note") payable to
 sellers in a business acquisition (D).............................                                      1,325

8% notes payable to sellers in a business acquisition, due in
 April 1998........................................................                                        500

Non-interest bearing notes payable (discounted at 12%) to
 sellers in a business acquisition, due December 1998..............                                        276
                                                                      --------------            --------------
Less current portion...............................................           32,295                    27,654
                                                                              18,155                    20,478
                                                                      --------------            --------------
                                                                         $    14,140               $     7,176
                                                                      ==============            ==============
</TABLE>

______________________

     (A)  Convertible note payable to Cox Target Media, Inc. in connection with
          the acquisition of Carol Wright Gifts. The convertible note bears
          interest at the prime rate plus 0.5% payable when the principal
          balance matures. The principal balance is due March 14, 2001. The
          holder of the convertible note may at any time after the conversion
          date, as defined, convert the principal amount of the convertible note
          at a conversion price of $12.75 per share into 1,000,000 shares of
          Common Stock, subject to certain adjustments. The conversion date is
          the date immediately following the tenth consecutive trading day at
          which the closing price of the Company's common stock on each such day
          was equal to or exceeded $12.75. Pursuant to the terms of the note,
          upon the occurrence and continuation of an event of default, as
          defined, the note is convertible into shares of common stock at a
          significantly lower conversion price.

     (B)  The note arose as a result of certain liabilities in connection with
          the Company's acquisition of Carol Wright Gifts and services provided
          to the Company by the seller subsequent to the acquisition date. The
          note bears interest at 7% and, in accordance with the terms of a
          standstill agreement, is payable along with the outstanding principal
          balance under certain circumstances on the occurrence of certain
          events, as defined. Under the terms of the standstill agreement, the
          note is subordinate to all borrowings under the Company's revolving
          credit and term loan facility described below and requires the Company
          to use the proceeds from the sale of Carol Wright Gifts to repay the
          outstanding principal balance and accrued interest. The remaining
          unpaid balance is payable pursuant to the Company's "good faith"
          determination, as defined, of cash available for such purposes after
          payments required to be made to normal trade creditors.

     (C)  In May 1997, the Company entered into a $30 million revolving credit
          and term loan facility (the "Credit Agreement"), with a commercial
          lender. Under the Credit Agreement, the Company may borrow up to $25
          million (including $4 million reserved for issuance of letters of
          credit) under a revolving credit facility based on eligible collateral
          which includes specified percentages of certain accounts receivable
          and inventory. As of March 27, 1999, the bank had notified the Company
          that it would not permit any additional advances under the revolving
          credit facility. All borrowings under the revolving credit facility
          bear interest at the prime rate plus 0.5% or LIBOR plus 3%, at the
          Company's option. The term loan bears interest at the prime rate plus
          0.5% with annual payments of $800 beginning in May 1998. The Company
          repaid the remaining outstanding balance of the term loan subsequent
          to March 27, 1999. Among other things, the Credit Agreement restricts

                                      F-19
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

11.  Notes Payable and Long-Term Debt (continued)

          the Company's ability to incur additional indebtedness, pay dividends
          on Common Stock and requires the Company to maintain a specified level
          of consolidated net worth, as defined.

     (D)  In accordance with its terms, the principal balance of the convertible
          note was converted upon the completion of the initial public offering
          of the Company's common stock.

     The principal balances of certain of the seller notes described above are
subject to adjustments to reflect finalization of the applicable purchase
transaction. Such potential adjustments principally relate to measurements of
financial targets and indemnification provisions of the purchase agreements.

     Short-term borrowings at March 27, 1999 were at weighted-average interest
rates of 9%.

     As of March 27, 1999, maturities, including imputed interest, of notes
payable and long-term debt over the next five fiscal years are as follows:

     1999.............................  $18,155
     2000.............................   13,840
     2001.............................      300


12.  Subordinated Notes Payable - Related Parties

     In February 1999, the Company entered into two Subordinated Term Note
Agreements ("Subordinated Notes") with GEIPPP II and Global Internet Fund IV,
LLC ("GIF IV") an entity affiliated with the Company's President and certain
other stockholders. Each Subordinated Note allows the Company to borrow up to
$5,000 of which $4,000 each was outstanding at March 27, 1999. The Subordinated
Notes bear interest at an annual rate of 7% payable semi-annually, subject to
the subordination agreement. The Subordinated Notes mature at the earliest of
(i) August 21, 2003, (ii) February 18, 2000, provided that all amounts due under
the revolving credit note and term loan payable to bank under the Credit
Agreement described above have been paid in full or (iii) five days from the
date on which all of the following three events have occurred: (a) all
borrowings under the Credit Agreement are paid in full, (b) the principal amount
of the operating loan from Cox Target Media, Inc. is paid in full and (c) monies
are available from the sale of certain businesses or assets of the Company, as
defined.

     In conjunction with the issuance of the Subordinated Notes, the Company
issued to the holders four warrants to purchase up to an aggregate of 1 million
shares of the Company's common stock at an exercise price of $9.31 per share,
subject to adjustment. The warrants are exercisable at any time after August 18,
1999 and expire on February 18, 2004. The warrants had a fair value of $2,000
which has been accounted for as original issue discount and additional paid in
capital. The original issue discount is being amortized ($231 in fiscal 1998)
using the effective interest method over the minimum term of the notes (one
year) which results in an effective interest rate of 32%. Total interest expense
on the Subordinated Notes was $268 for fiscal 1998.

13.  Debentures Payable--Related Parties

     On June 25, 1996, the Company entered into a Note and Stock Purchase
Agreement (as amended, the "Note and Stock Purchase Agreement") with GE
Investment Private Placement Partners II ("GEIPPP II") and Genesis Direct LP
("GDLP"). Pursuant to the Note and Stock Purchase Agreement, between June 1996
and April 1997, the Company issued to GEIPPP II 2,750,000 shares of the
Company's common stock and $30.0 million principal amount of debentures (the
"Debentures"), in consideration of $40.0 million in cash.

                                      F-20
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

13.  Debentures Payable--Related Parties (continued)

     The Debentures were subordinated to all other outstanding obligations and
carried interest at 8%. In accordance with their original terms, $9,750
principal amount of the Debentures were converted into 2,331,521 shares of the
Company's common stock at the date of the Initial Public offering. The remaining
$20,250 principal amount of the Debentures were redeemed immediately after the
Initial Public Offering. In conjunction with the redemption, the Company paid an
aggregate of $5,235 in additional interest at a prepayment interest rate above
the stated rate of 8%. This amount had been accounted for as an extraordinary
item on extinguishment of debt.

     Total interest expense on the Debentures was $5,585, $2,419 and $667 for
fiscal 1998, fiscal 1997 and fiscal 1996, respectively.

14.  Stockholders' Equity

     In May 1998, the Company completed an initial public offering of its Common
Stock (the "Initial Public Offering").  A total of 11,125,000 shares of Common
Stock were sold to the public, of which 9,625,000 were sold by the Company and
1,500,000 were sold by certain stockholders of the Company.  The Company
received net proceeds of $132.5 million from the Initial Public Offering, after
deducting underwriters commissions and other related costs. In connection with
the partial repayment of the Debentures, the Company incurred an extraordinary
charge of $5.2 million consisting of prepayment penalties.

     In conjunction with a sale of Series A Preferred Stock, the parties to the
Note and Stock Purchase Agreement entered into Amendment No. 3 to the Note and
Stock Purchase Agreement. In consideration for entering into such amendment, the
Company issued to a holder of the Debentures and Common Stock four warrants each
to purchase up to 68,750 shares of the Common Stock at an exercise price of
$10.91 per share, subject to adjustment. The warrants are exercisable at any
time after the Company completes an initial public offering of its Common Stock.
The warrants expire on September 25, 1998, March 17, 1999, May 25, 1999 and July
4, 1999, respectively. The warrants had a fair value of $200 at the date of
grant which has been accounted for as additional paid-in capital and interest
expense.

     As of March 27, 1999 the Company has reserved shares of Common Stock for
issuance as follows:

                                                             Number of Shares
                                                             ----------------
        Exercise of common stock purchase warrants.........       1,137,500
        Conversion of seller note payable..................       1,000,000
        Exercise of common stock options...................       4,125,000
        Employee Stock Purchase Plan.......................         250,000
                                                                  ---------
           Total shares reserved...........................       6,512,500
                                                                  =========

15.  Stock Option and Stock Purchase Plans


     During fiscal 1996, the Company's Board of Directors adopted the Genesis
Direct, Inc. 1997 Long-Term Incentive Plan (the "Plan"). Under the terms of the
Plan, the Board of Directors or committee thereof may grant stock options, stock
appreciation rights, or restricted stock at such prices as may be determined by
the Board of Directors. The maximum number of shares subject to the Plan is
4,125,000. Generally, the options vest ratably over five years and expire after
ten years. Vested options are exercisable at the end of year ten or earlier in
the event the Company completes an initial public offering of its Common Stock.

                                      F-21
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

15.  Stock Option and Stock Purchase Plans (continued)

     Option activity under the plan is as follows:

<TABLE>
<CAPTION>
                                                                      Weighted Average
                                                       Number of       Exercise Price
                                                        Options          Per Share
     <S>                                          <C>                 <C>
     Outstanding at March 31, 1996.............               --                  --
          Granted..............................          498,025            $  10.91
          Forfeited............................               --                  --
                                                  --------------      --------------
     Outstanding at March 29, 1997.............          498,025            $  10.91
          Granted..............................        1,170,675            $  12.83
          Forfeited............................          111,650            $  10.91
                                                  --------------      --------------
     Outstanding at March 28, 1998.............        1,557,050            $  12.35
          Granted..............................        2,414,573            $  16.52
          Forfeited............................          737,786            $   8.54
          Expired..............................           48,230            $  10.91
                                                  --------------      --------------
     Outstanding at March 27, 1999.............        3,185,607            $  16.40
                                                  --------------      --------------
     Exercisable at March 27, 1999.............          671,230            $  14.19
                                                  ==============      ==============
</TABLE>

     The grants made under the Plan, have an exercise price ranging from $3.12
to $30.91.

     The weighted-average grant date fair value of options was $3.16 and $3.19
per share for fiscal 1998 and fiscal 1997, respectively, for options issued at
exercise prices equal to fair market value of the Company's Common Stock on the
date of grant. The weighted average grant date fair value of options was $7.46
per share for fiscal 1998 for options issued at exercise prices above fair
market value of the Company's Common Stock on the date of grant. At March 27,
1999, the outstanding options have a weighted average remaining contractual life
of approximately 9 years.

  The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123") requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

     The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for fiscal
1998 and fiscal 1997 respectively: weighted-average risk-free interest rates of
5.5% and 5.5%, respectively; no dividends; a .67 volatility factor for fiscal
1998 and a near-zero volatility factor for fiscal 1997 of the expected market
price of Common Stock and a weighted-average expected life of the options of 5
years for both years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

                                      F-22
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

15.  Stock Option and Stock Purchase Plans (continued)

     For purposes of proforma disclosures, the estimated fair value of options
granted is amortized to expense over the options vesting period.  Had the
Company accounted for its employee stock options under the fair value method of
SFAS No. 123, the Company's net loss would have been approximately $157,438
($5.46 per share) for fiscal 1998 and approximately $78,826 ($8.92 per share)
for fiscal 1997. The pro forma impact of accounting for stock options under SFAS
No. 123 could be significant in future periods.

     During fiscal 1998, the Company's Board of Directors adopted the Genesis
Direct, Inc. 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan").
Under the terms of the Stock Purchase Plan employees may contribute up to 10% of
their compensation to be used to purchase shares of the Company's common stock.
The purchase price of such shares is determined by  the Plan Administrator at
not less than 85% and not more than 100% of the fair market value of the common
stock, as defined.  The maximum number of shares subject to the Stock Purchase
Plan is 250,000.  During fiscal 1998, the Stock Purchase Plan purchased 4,943
shares of common stock.

16.  Commitments

     The Company leases certain office and distribution facilities, as well as
certain equipment, under long-term operating leases. Lease terms range from five
to ten years, with renewal options of up to ten years. In addition, certain of
the leases require the Company to pay additional rents based on costs of
operating the property and contain certain escalation clauses.

     Future minimum lease payments under the leases for the next five fiscal
years are approximately as follows:

     1999..............................  $3,108
     2000..............................   2,171
     2001..............................   1,990
     2002..............................   1,672
     2003..............................   1,606
     Thereafter........................   1,612

     Rent expense was $7,766, $5,506 and $428 for fiscal 1998, fiscal 1997 and
fiscal 1996, respectively.

     Pursuant to employment agreements, three senior executives each receive an
annual base salary of $400,000 subject to annual review and increase.  In
addition, each senior executive is entitled to receive a bonus of up to 50% of
his annual base salary depending on performance results.  If a senior
executive's employment is terminated either by the Company without cause (as
defined in the employment agreements) or by such senior executive for good
reason (as defined in the employment agreements), the Company is required to pay
to such senior executive two times the senior executive's annual base salary
plus two times the highest annual bonus paid to the senior executive during the
36-month period ending the date of termination.

17.  Income Taxes

     No provision (benefit) for income taxes has been recorded for fiscal 1998
or fiscal 1997 due to net operating losses incurred for which a full valuation
allowance has been provided.

                                      F-23
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)

17.  Income Taxes (continued)

     Significant components of the Company's deferred tax liabilities and assets
are as follows:

<TABLE>
<CAPTION>
                                                                           March 27, 1999          March 28, 1998
                                                                           --------------          --------------
     <S>                                                                   <C>                     <C>
     Deferred tax liabilities:
          Equipment and leasehold improvements.......................             $ 1,488                 $    --
          Goodwill...................................................                                       2,368
                                                                           --------------          --------------
             Total deferred tax liabilities..........................               1,488                   2,368
       Deferred tax assets:
          Accounts receivable........................................                 922                     645
          Inventory..................................................               7,782                   3,209
          Goodwill...................................................               2,339                       -
          Intangible assets..........................................               1,943                     801
          Equipment and leasehold improvements.......................                                         265
          Accrued liabilities........................................                 878                   2,406
          Net operating loss carryforwards...........................              78,697                  29,855
                                                                           --------------          --------------
       Total deferred tax assets.....................................              92,561                  37,181
       Valuation allowance...........................................              91,073                  34,813
                                                                           --------------          --------------
       Net deferred tax assets.......................................               1,488                   2,368
                                                                           --------------          --------------
       Net deferred tax (assets) liabilities.........................             $    --                 $    --
                                                                           --------------          --------------
</TABLE>

     As of March 27, 1999, the Company has approximately $207 million of federal
tax net operating loss carryforwards which will expire in 2012 through 2013.
The Company also has approximately $203 million of state tax net operating loss
carryforwards which will expire in 2004 and 2005.

     The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change". In general,
an ownership change is deemed to occur if the percentage of stock of a loss
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period. As
a result of cumulative changes in the Company's ownership which have occurred,
including the initial public offering completed in May 1998, the Company's net
operating loss carryforwards will be significantly limited.

     The reasons for the difference between the total expense (benefit) and the
amount computed by applying the U.S. statutory federal income tax rate to income
before income taxes are as follow:


<TABLE>
<CAPTION>
                                                                    Year Ended          Year Ended
                                                                  March 27, 1999      March 28, 1998
                                                                  --------------      --------------
          <S>                                                     <C>                 <C>
          Statutory rate applied to pre-tax loss...............      $(52,071)           $(25,908)
          Permanent differences................................           171                 126
          Change in valuation allowance........................       (51,900)             25,782
                                                                     --------            --------
                                                                     $      0            $      0
                                                                     ========            ========
</TABLE>


                                      F-24
<PAGE>

                     Genesis Direct, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements - (Continued)
              (in thousands, except share and per share amounts)


18.  Employee Benefit Plan

     The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows employees meeting
certain eligibility requirements to contribute up to 15% of their annual
compensation. The Company matches these contributions at a rate of 50% of the
employees' pre-tax contributions up to a maximum of 6% of the employee's annual
compensation. The Company's contributions for fiscal 1998, fiscal 1997 and
fiscal 1996 were $316, $53 and $26, respectively.

19.  Sales and Use Tax

     A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of its
use tax by a mail order company unless the company has a physical presence in
the state. However, there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. The
Company attempts to conduct its operations in compliance with its interpretation
of the applicable legal standard, but there can be no assurance that such
compliance will not be challenged.

     In recent challenges, various states have sought to require companies to
begin collection of use taxes and/or pay taxes from previous sales. The Company
has not received assessments from any state. The amount of potential
assessments, if any, cannot be reasonably estimated.

     The Supreme Court decision also established that Congress has the power to
enact legislation which would permit states to require collection of use taxes
by mail order companies. Congress has from time to time considered proposals for
such legislation. The Company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.

20.  Subsequent Events

     In April 1999, the Company sold its principal distribution facility for net
proceeds of $30,000.  In conjunction with this sale the Company entered into a
fulfillment services agreement with the purchaser.  The fulfillment services
agreement requires the Company to pay rates substantially above those available
from other third party service providers.  Accordingly, the Company has recorded
an accrual for an estimate of the aggregate amount to be paid for fulfillment
services above the fair value of such services.  The sale of the distribution
center resulted in a net gain of approximately $3,550 and is netted against the
accrual for losses on businesses held for sale at March 27, 1999.  This facility
included assets under capital leases with a net carrying value of $1,089 at
March 27, 1999.  The transaction included the transfer of the remaining capital
lease obligation of approximately $898 at March 27, 1999.

     In May 1999, the Company sold Childswork/Childsplay for net proceeds of
$1,800.  The transaction resulted in a loss of approximately $1,379 which was
included in the accrual for losses on businesses held for sale at March 27,
1999.

     In June 1999, the Company sold Music Stand for net proceeds of $2,100.  The
transaction resulted in a loss of approximately $2,325 which was included in the
accrual for losses on businesses held for sale at March 27, 1999.

                                      F-25
<PAGE>

                                  Schedule II
                             Genesis Direct, Inc.
                       Valuation and Qualifying Accounts
                                (in thousands)

<TABLE>
<CAPTION>
           Column A                                 Column B                Column C                 Column D       Column E
----------------------------------------          ------------   -------------------------------  --------------  ------------
                                                                            Additions
                                                                 -------------------------------
                                                                                    Charged to
                                                                                   -------------
                                                   Balance at      Charged to         Other                        Balance at
                                                  ------------   -------------     -------------                  ------------
                                                   Beginning        Costs and       Accounts --    Deductions         End of
                                                  ------------   -------------     -------------  --------------  ------------
           Description                             of Period        Expenses         Describe        Describe        Period
----------------------------------------          ------------   -------------     -------------  --------------  ------------
<S>                                               <C>            <C>               <C>            <C>             <C>
Year ended March 29, 1997
Deducted from asset accounts:
Allowance for doubtful accounts.........                      0            254                                             254
Inventory valuation reserve.............                      0          1,390                                           1,390
Deferred tax valuation allowance........                      0          5,789 (1)                                       5,789

Year ended March 28, 1998
Deducted from asset accounts:
Allowance for doubtful accounts.........                    254          1,161                                           1,415
Inventory valuation reserve.............                  1,390          2,536 (1)                                       3,926
Deferred tax valuation allowance........                  5,789         29,024 (1)                                      34,813

Year ended March 27, 1999
Deducted from asset accounts:
Allowance for doubtful accounts.........                  1,415          1,011                                           2,426
Inventory valuation reserve.............                  3,926         13,175                                          17,101
Deferred tax valuation allowance........                 34,813         56,260                                          91,073
</TABLE>

(1) Includes amounts resulting from business combinations.

                                      S-1
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
No.         Description
---         -----------
<S>         <C>
 3.1        Amended and Restated Certificate of Incorporation of the Registrant
            (incorporated by reference to Exhibit 3.3 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
 3.2        Amended and Restated By-Laws of the Registrant (incorporated by
            reference to Exhibit 3.5 of the Registrant's Registration Statement
            on Form S-1 (File No. 333-47455)).
 4.1        Specimen certificate for shares of the Registrants Common Stock
            (incorporated by reference to Exhibit 4.1 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
 4.2        Stockholders Agreement dated as of September 30, 1998 (incorporated
            by reference to Exhibit 4.2 of the Registrant's Registration
            Statement on Form S-1 (File No. 333-47455)).
 4.3        Registration Rights Agreement, date as of September 14, 1998, by and
            between Genesis Direct, Inc. and Carol Wright Gifts, Inc.
            (incorporated by reference to Exhibit 4.1 of the Registrant's
            Current Report on Form 8-K (File No. 0-24173)).
 4.4        Convertible Note, dated September 14, 1998, made by Genesis Direct,
            Inc. in favor of Carol Wright Gifts, Inc. (incorporated by reference
            to Exhibit 4.2 of the Registrant's Current Report on Form 8-K (File
            No. 0-24173)).
10.1        Credit Agreement with CIT Group Business Credit, Inc. as
            administrative agent (incorporated by reference Exhibit 10.1 of the
            Registrant's Registration Statement on Form S-1 (File No. 333-
            47455)).
10.2        Lease Agreement relating to property in Memphis, Tennessee, as
            amended to date (incorporated by reference to Exhibit 10.2 of the
            Registrant's Registration Statement on Form S-1 (File No. 333-
            47455)).
10.3        Sublease Agreement relating to property in Secaucus, New Jersey
            (incorporated by reference to Exhibit 10.3 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
10.4        Employment Agreement between the Registrant and Warren Struhl
            (incorporated by reference to Exhibit 10.4 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
10.5        Employment Agreement between the Registrant and Hunter Cohen
            (incorporated by reference to Exhibit 10.5 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
10.6        Employment Agreement between the Registrant and David Sable
            (incorporated by reference to Exhibit 10.6 of the Registrant's
            Registration Statement on Form S-1 (File No. 333-47455)).
10.7        Registrant's 1997 Long-Term Incentive Plan (incorporated by
            reference to Exhibit 4.5 of the Registrant's Registration Statement
            on Form S-8 (File No. 333-55681)).
10.8        Registrant's 1998 Employee Stock Purchase Plan (incorporated by
            reference to Exhibit 4.6 of the Registrant's Registration Statement
            on Form S-8 (File No. 333-55681)).
21.1        Subsidiaries of the Registrant.
23.1        Consent of Ernst & Young LLP.
24.1        Power of Attorney (included on p. 40 hereof).
27.1        Financial Data Schedule for fiscal year ended March 27, 1999.
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