Item 1. Business
General
Specialty Catalog Corp. (the "Company") is the leading direct marketer of women's wigs and hairpieces in the US. The Company offers its products through multiple distribution channels consisting of regular mailings of catalogs to its proprietary customer list, Internet marketing and selling, and catalogs circulated as part of advertising and mailing-list rental programs. The Company has operations in the United States and the United Kingdom, and certain other operations. The Company provides its customers with a broad selection of stylish and comfortable products at affordable prices.
The growth strategy of the Company's wig and hairpiece business has these key elements:
. Increasing the profitability of its core business by improving operating processes and customer satisfaction,
. Increasing sales from its core catalog circulation by expanding its proprietary customer list through advertising and list rental programs,
. Increasing sales to its existing customers through refinements in database management, merchandise offerings, customer service, and creative presentations,
. Increasing sales through Internet retailing and advertising,
. Increasing sales through expanded business to business opportunities, and
. Pursuing international expansion opportunities.
Women's Wigs and Hairpieces
The Paula Young(R) catalog, with a 2001 planned circulation of over 9- million catalogs to its customer file, has the largest circulation and sales of any wig and hairpiece catalog in the US and Canada. As the Company's flagship catalog, the Paula Young catalog features a broad assortment of ladies wigs and hairpieces under the
Company's proprietary brand names--the Paula Young and Christine Jordan(R) lines of fashion wigs and hairpieces--and other popular wig brands, including Eva Gabor(R). In addition, the Paula Young catalog offers a selection of wig and hairpiece accessories including turbans, shampoos, combs and styling heads.
The Especially Yours(R) catalog features the Especially Yours brand of women's wigs and hairpieces specifically designed for African-American women. The Especially Yours line features women's wigs and hairpieces including natural hairline crimping and fiber texture that reflects the natural hair of its customers. Especially Yours catalogs also offer a selection of women's apparel, hats and accessories to the African-American women's market. The catalog also carries the Diahann Carroll(TM) line of wigs and hairpieces under an exclusive license with the Tony-award winning actress and singer.
The Company views each catalog as an opportunity to communicate with current and potential customers. In this regard, the Paula Young and the Especially Yours catalogs present the Company's products in a manner that focuses on the natural look, beauty, versatility and comfort of the products. Furthermore, the catalogs often feature customer testimonials, wearing instructions and other presentations designed to make the catalog the authoritative source on women's wigs and hairpieces.
International Activities
Through its wholly-owned subsidiary, Daxbourne International Limited ("Daxbourne"), the Company is a leading retailer and wholesaler of women's wigs, hairpieces and related products in the United Kingdom. Daxbourne has established a significant franchise in the UK through wholesale, retail and catalog distribution channels. Daxbourne's retail operations consist of 11 retail concessions within department stores and one stand-alone retail outlet.
On January 26, 2001, Daxbourne acquired the women's wig and hairpiece business of the Company's British licensee. The licensee had been the exclusive British licensee of the Company's Paula Young brand of women's wigs and hairpieces since 1994. During the term of the license agreement the licensee developed and circulated the Paula Young Fashion Wigs catalog using the merchandising and creative resources of the Company, thereby establishing Paula Young as a preeminent brand in Britain with a loyal customer following. The acquisition agreement provides for the termination of the 1994 license agreement and transfer of the assets of the Paula Young Fashion Wigs catalog business to Daxbourne. Daxbourne's catalog division will now circulate both catalogs--continuing to circulate its Jacqueline Collection catalog and the Paula Young Fashion Wigs catalog.
Western Schools(R)
Under the Company's Western Schools brand, continuing education ("CE") courses are offered to nurses (approximately 92 percent of its total revenues in 2000) and CPAs (approximately 8 percent of its total revenues in 2000). Western Schools has developed its franchise by offering high-quality, value- priced CE courses.
American Healthcare Institute(R)
Under the Company's American Healthcare Institute ("AHI") brand, the Company sponsors approximately 1,000 CE seminars and conferences each year to nurses and other mental health professionals.
On February 3, 2001, AHI moved from Wheaton, Maryland to the Company's headquarters in South Easton, Massachusetts.
Internet Marketing (wig.com, paulayoung.com, especiallyyours.com, Western- online.com and Ahi-online.com)
During 2000, the Company continued its Internet business by introducing Especiallyyours.com and Ahi-online.com. The Company also began to e-advertise on other Internet web sites and search engines through key word and banner advertising. The Company also introduced special offers and promotions to its customers via e-mail to promote sales at its web sites. In 2001, Western Schools business launched Western Schools Online, where students can down load courses, take tests, have the tests graded and receive continuing education credits all on line--a totally virtual experience. All of the Company's web sites have electronic order taking and e-mail customer service.
Industry and Markets
Wigs
Annual retail sales of women's wig and hairpieces in the US are estimated to be between $300-million and $400-million. The consumer wig market is generally comprised of fashion wig wearers and need-based wig wearers. Fashion-based consumers purchase wigs and hairpieces as a beauty accessory. Need-based wig wearers purchase wigs as a necessity, due to a physical condition such as thinning hair or hair loss, or due to medical procedures and conditions (e.g., alopecia and cancer treatments). Many everyday wig wearers replace their wigs every three to four months, and would perhaps have a wig "wardrobe," consisting of several wigs, either of the same style and color or of different styles and colors.
In the 1960s wigs and hairpieces were considered a fashion accessory. However, as styles and tastes changed, the fashion-driven demand for wigs decreased. Due to this trend, during the 1970s and 1980s, the number of specialty wig boutiques declined and department stores reduced their selling space allocated to inventories of wigs. The Company's catalog business was started to serve the need-based wig customers who were not being adequately serviced by other retail alternatives. Because only approximately 5-million women, or 25 percent of the estimated 20-million American women with thinning hair, currently wear wigs, there appears to be substantial opportunities for growth of the Company's business.
The Caucasian retail wig market--estimated to be approximately $200-million of annual retail sales comprising approximately 2.7-million units--is serviced by direct mail catalogers, beauty salons, wig shops, boutiques and department stores. It is estimated that catalog sales represent approximately forty percent of the wig and hairpiece units sold and approximately twenty percent of the sales dollars annually in the Caucasian market, demonstrating that price points at retail stores are generally higher than mail order price points. Catalogs offer the benefits of privacy, convenience, lower prices and broader product selection. Retail stores generally provide customers with more personalized service.
Unlike the Caucasian market, the African-American wig market--estimated to be approximately $140-million of annual retail sales comprising approximately 3.1-million units--has yet to undergo any significant transition to direct marketing from retail outlets. Although African-American women comprise approximately thirteen percent of the US female population, it is estimated that they purchase more than fifty percent of the wig and hairpiece units sold each year in the US. Only about five percent of African-American wigs and hairpieces are sold through catalogs, with the balance sold primarily in beauty salons and wig shops. The Company believes that its Especially Yours(R) catalog, which targets African-American women, already has the highest sales volume of any catalog offering wigs designed for African-American women.
The Company estimates that the international wig and hairpiece market is at least as large as the US market. By identifying opportunities through acquisitions and licensing programs, the Company has the ability to facilitate international expansion. The Company currently has a license agreement to sell its products in Germany.
Continuing Education
Nursing, accounting and other industries require their professionals to meet CE requirements on a periodic basis. Required CE frequency and the number of required hours vary from profession to profession and from state to state depending on state laws and association regulations. Approximately forty percent of the states in the US currently require nurses to have some form of CE. The CE industry has many small providers, including local universities, but few large providers. In addition, some hospitals and accounting firms educate their own employees through in-house programs and by subsidizing outside programs. Because CE is a required product, people may not be enthusiastic buyers. Accordingly, Western Schools and AHI compete aggressively in their markets on price, course content, course selection, and customer service.
Products
Wigs and Hairpieces
The Company sells a broad assortment of women's wigs and hairpieces in the United States, Canada, the UK, and Germany. The collections include 150 different wig styles and 36 different hairpieces in more than 80 colors. The current Paula Young and Especially Yours wig collections provide full head coverage. Hairpieces
include wiglets and add-ons. Wiglets are small wigs generally worn on the top of the head to add style or cover thinning hair on the top or crown area. Add- ons are generally used to add styling to the back of the head.
Sourcing
The Company purchases approximately ninety-one percent of its wigs and hairpieces directly from ten foreign manufacturers and the balance from three domestic importers. The five largest foreign manufacturers each represent between nine percent and twenty-three percent of wig and hairpiece purchases. As an industry leader, the Company stays in close contact with these manufacturers, as well as other prominent wig manufacturers. Through these relationships, the Company is able to obtain better control over purchasing, styles, quality and cost.
Most of the synthetic wigs and hairpieces sold by the Company are made from a special synthetic fiber. Two Japanese firms, Kaneka Corporation and Toyo Chemical Corporation dominate the production of this fiber. A disruption in the current supply of this fiber may have a material adverse effect on the Company. The synthetic fiber is not a proprietary material and other manufacturers have previously produced it. Nonetheless, the time required to obtain an alternative source of supply and the attendant delay in new production, as well as possible increases in the price of the fiber, would have a significant impact on wig and hairpiece sales and profit margins.
The Company anticipates that most of its wigs and hairpieces will continue to be manufactured in the Far East. Accordingly, the Company's operations are subject to the risks of doing business abroad, including fluctuations in the value of currencies, export duties, work stoppages, political instability and governmental intervention. Therefore, the availability of and the cost of wigs and hairpieces may be affected. Although to date such risks have not had a significant effect on the Company's business operations, no assurance can be given that such risks will not have a material adverse effect on the Company's business operations in the future.
Apparel and Hats
Especially Yours catalogs offer a selection of apparel and hats targeted to African-American women. Hats are generally purchased from domestic vendors, and apparel is purchased from vendors, who generally contract to produce the merchandise overseas or domestically.
Marketing
The Company markets its wigs and hairpieces and CE courses through catalogs and over the Internet.
Paula Young and Especially Yours are differentiated from traditional storefront retailers and other direct marketers due to the broad and deep selection of the core wig products each offers. These brands also enjoy a significant price advantage against competing brands due to large order volume and direct purchasing from manufacturers.
The Company's two-step marketing program is the major method of new customer generation for Paula Young and Especially Yours. The Company's two- step marketing program entails first obtaining prospective customers by soliciting customer interest through targeted advertising, and following receipt of such interest with a series of catalogs designed to elicit an initial sale.
For the first step, the Company uses a variety of targeted advertising media, namely, magazines, newspapers, tabloids, co-op mailers, the Internet and package insert programs. Advertising placements are selected based on demographics, cost and historical experience. Historical experience is measured by cost per inquiry and cost per customer compared against the lifetime value of a customer. Based on this information, the Company evaluates the effectiveness of media placements, and adjusts plans and programs accordingly.
The second step, which commences when a prospective customer responds favorably to an advertisement, involves sending prospective customers a series of catalogs. Since the first step pre-qualifies prospective customers, Paula Young is able to convert approximately seventeen percent of advertising respondents into customers. Especially Yours is able to convert approximately nine percent of its Especially Yours inquirers into customers. When a sale is made, the customer is put on an active customer list and additional catalogs designed to create a repeat buyer are mailed.
Another method of customer generation involves the one-step process of periodically circulating to inactive inquirers and former customers targeted mailings designed to convert or reactivate this group into customers.
The Company also advertises through its Internet web sites www.wig.com, www.paulayoung.com and www.especiallyyours.com. These web sites provide information on the latest selection of wigs and hairpieces, products and styling, and answers to frequently asked questions. The web sites also have secure, online ordering capabilities and they also provide links to additional sites of interest to wig customers. Analysis shows that more than fifty percent of the customers buying through the Internet had no previous relationship with the Company. The Company has reserved other generic domain Internet sites in order to increase the amount of online traffic to its web sites. During 2000, the Company used key word and impression-based banner advertising, the expense of which was significantly offset by reductions in print advertising placements. This advertising has resulted in a substantial increase in visits to and purchases from the Company's web sites.
Western Schools markets its CE courses using a one-step marketing program targeted at nurses and certified public accountants whose licenses need to be renewed. Western Schools also provides its latest selection of CE courses and exam materials online through its web site www.westernschools.com. During 2001, the Company introduced www.Western-online.com. This web site will offer all Western Schools CE courses and exam taking online to the nursing profession.
AHI markets its CE courses using a one-step marketing program targeted at nurses and other mental health professionals whose licenses need to be renewed. AHI also provides its latest selection of CE courses online through its web site www.ahi-online.com.
New Opportunities
New Products
The Company seeks to leverage its customer relationships by adding new product lines to its catalogs. During 2000, the Company introduced Hotlocks(R), fashion accessories, such as hair extensions, scrunchies, headbands and clip-ons that come in many colors and are worn for fashion and fun. In early 2001, the WhisperLite(TM) collection was introduced. These wigs weigh as little as 1-and 1/2- ounces and have open wefting and lightweight cap construction for a very comfortable fit.
Business-to-Business
Through its Salon Silhouettes catalog the Company has been testing business-to-business opportunities in the US. The Salon Silhouettes catalog is distributed to wig shops and beauty salons in order to provide the opportunity for the Company to market to women who prefer shopping in retail outlets.
Licensing Agreements
Because of the leadership position of Paula Young, and building off the leverage of its unique position in the marketplace, including its unique products and its sourcing capabilities, Paula Young has been able to expand into other countries through licensing agreements. Generally the Company's standard license agreement grants each licensee an exclusive right to use the Company's trademarks to sell wigs and hairpieces within the licensee's territory. The Company supplies the licensee the inventory for which the Company is paid its cost for the inventory plus an administrative fee for shipping and handling costs. The Company also provides marketing advice and catalog development assistance. In general, the licensees are required to pay royalties on their net sales and expend a specified minimum amount of advertising each year. The Company currently has an active license agreement in Germany and will continue to search for additional international licensing opportunities.
Acquisitions
Through acquisitions, the Company may attempt to build market share through further consolidation of the wig and hairpiece market and the CE market. The Company may consider acquisition candidates, such as those offering products targeted to senior women or those offering complementary products.
Databases
The Company has developed proprietary databases of its wig and hairpiece customers, African-American women, nurses, other mental health professionals and certified public accountants. After confirming that security measures are in place to protect proprietary data, these lists are rented to non-competing businesses. Limited exchanges of lists of inactive customers with wig competitors are also done from time to time. Due to the uniqueness and niche nature of its products, the Company's customers are generally from very specific demographic categories. These databases are very specific and would be very difficult to replicate and, as such, protect the business's competitive advantages.
Operations
Order Entry and Customer Service
The Company's telemarketing operation strives to simplify and encourage catalog and Internet shopping by providing prompt, courteous and knowledgeable customer service. Customers can call toll-free telephone numbers from 7 AM to 12 AM, seven days a week to place orders or to request a catalog. Approximately sixty-eight percent of orders are placed by telephone or over the Internet. A third-party provider handles over-flow call volume during peak periods and coverage in the event of operational disruptions.
At the time of order entry complete information about the customer and the order are entered into an integrated information system. This system provides customer history, product availability and specifications, expected ship date and other order specifics. The Company attempts to train telemarketing representatives to use a scripted catalog sales system, in order to be knowledgeable in key product specifications and features, and to be trained to cross-sell accessories and related products. The Company also attempts to train telemarketing representatives to handle a range of products and customer service calls, allowing the Company to shift representatives among catalog lines as call volume requires.
Fulfillment
The Company's Massachusetts' distribution center fulfills all US and Canadian orders. Orders received for available product are usually shipped by the next business day, primarily via third class or priority mail. Merchandise not in stock on the date of order is generally shipped within two days of receipt. The Company's Daxbourne facility in London fulfills all UK and German orders.
The Company uses an integrated computer picking, packing and shipping system, which monitors the in-stock status of each item ordered, processes the order and generates all related packing and shipping materials, taking into account the location of items within the distribution center. During fiscal 2000, on average, the Company shipped approximately 4,400 packages per business day.
Returns
The Company's return policy allows customers to return products for exchange or refund. The Company believes that its return levels are normal for mail order products. Return experience is closely monitored at the individual product level to identify trends in product offerings, product defects and quality issues in an attempt to assess future purchases, enhance customer satisfaction and reduce overall returns. During 2000, the introduction of new colors and styles, particularly human hair wigs at higher price points than synthetic wigs, caused an increase in the rate of returns experienced by the Company. As a result, the Company decided to eliminate the majority of its human hair styles and other styles with high customer return rates.
Catalog Production
The Company's graphic arts staff designs all of the catalogs circulated by the Company's businesses. In-house design of catalogs results in greater control, continuity, flexibility and creativity, as well as significant cost savings.
Competition
The mail order catalog business is highly competitive. The Company's businesses compete on the basis of uniqueness of product offering, breadth of product offering, quality of product offering, relative value of product offering, customer service, advertising effectiveness, and catalog design. The Paula Young(R) and Especially Yours(R) catalogs and web sites compete with other mail order catalogs, retail stores, including hair salons and wig shops, department, specialty and discount stores and Internet web sites. The Company enjoys advantages of economies of scale, the size of its customer list, and its extensive advertising programs.
The Company's CE businesses compete with other mail order catalogs, in- house CE programs, professional associations, and other seminar providers. The CE industry has many small providers, including local universities, but few large providers. Potential competition may emerge from new distribution channels such as the Internet. Accordingly, the businesses compete aggressively on price, course content and selection, and customer service.
Employees
As of December 30, 2000, the Company's United States operations employed a total of 298 employees, consisting of 81 salaried full-time employees, 129 full-time hourly employees, and 88 part-time employees. Daxbourne International Limited employed 63 employees, consisting of 26 salaried full- time employees and 37 part-time hourly employees in the United Kingdom. The Company's employees are not covered by a collective bargaining agreement. The Company believes that its relations with its employees are good.
Trademarks, Trade Names and Patents
The Company has 16 registered trademarks in the United States, two registered trademarks in the United Kingdom, two trademark applications and one patent with the US Patent and Trademark Office. The Company has four registered trademarks under California law. The Company also has five registered URLs. In the ordinary course of business, the Company often utilizes new trade names. When appropriate, the Company seeks to register these names.
Government Regulations
In 1994, the United States Supreme Court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes, but noted that Congress has the power to change this law. The imposition of an obligation to collect sales taxes may have a negative effect on the Company's response rates and would require the Company to incur administrative costs in collecting and remitting sales taxes. Massachusetts and Maryland are the only two jurisdictions where the Company is currently required to collect sales taxes.
Item 2.
Item 2. Properties
The Company occupies, under lease contracts, approximately 43,000 square foot office building in South Easton, Massachusetts, approximately 50,000 square foot warehouse facility in Brockton, Massachusetts and approximately 5,000 square feet of office space in Wheaton, Maryland.
The Company owns a building of approximately 6,000 square feet in London, England, which is used by Daxbourne for office and warehouse operations.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
The common stock of the Company trades on the Nasdaq National Market ("NASDAQ") under the symbol "CTLG". The following table sets forth the high and low quotations from Nasdaq.
The closing price of the Company's common stock at March 23, 2001 was $2.50 per share.
The number of holders of record of the Company's common stock as of March 23, 2001 was approximately 50.
The Company has been notified by NASDAQ that the Company's common stock bid price is below its continued listing standards and that the Company's current listing is subject to review by NASDAQ in accordance with its continued listing procedures. Accordingly, while an established public trading market exists, with respect to the Common Stock, there can be no assurance that the Common Stock will remain listed on the NASDAQ National Market or otherwise be subject of an established trading market. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors".
The Company has not paid a dividend with respect to its common stock and does not anticipate paying dividends in the foreseeable future. Under the terms of the Company's existing debt agreement, the Company is not permitted to pay dividends.
Item 6.
Item 6. Selected Financial Data
- -------- (1) The fiscal year ended January 1, 2000 includes four months of activity of AHI, which was acquired by the Company on September 10, 1999. For the four months ended January 1, 2000, AHI had net sales of $886,690, gross profit of $256,905 and a net loss of $14,870. (2) The fiscal year ended January 3, 1998 includes three months of activity of the Company's subsidiary, Daxbourne International Limited, which was acquired by the Company on October 3, 1997. For the three months ended January 3, 1998, Daxbourne had net sales of $1,172,376, gross profit of $844,171 and net income of $80,375. (3) Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," requires that shipping and handling fees, billed to a customer in a sale transaction, should be classified as part of revenues. This consensus had to be adopted no later than the fourth quarter of 2000. The Company has restated its consolidated statements of operations for the fiscal years presented by reclassifying all shipping and handling income from cost of sales and operating expenses to revenues. (4) In 1997, net income reflects a $218,699 extraordinary loss on the early retirement of debt (net of an income tax benefit of $149,083). (5) Certain amounts in the 1997, 1998 and 1999 financial statements have been reclassified to conform to the 2000 presentation.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward- looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those anticipated in these forward- looking statements. See "Note Regarding Forward-Looking Statements".
Introduction
The Company targets niche consumer product categories primarily via direct marketing. SC Direct, its principal operating subsidiary in the United States ("SC Direct"), is the US leading retailer of women's wigs and hairpieces. Daxbourne International Limited ("Daxbourne"), a subsidiary of SC Direct, is a leading United Kingdom retailer and wholesaler of women's wigs and hairpieces. SC Publishing, another subsidiary of SC Direct ("SC Publishing"), sells continuing education courses to nurses and certified public accountants. American Healthcare Institute ("AHI"), an operating division of SC Publishing, which was acquired by the Company on September 10, 1999, and accounted for under the purchase method of accounting, provides continuing-education seminars and conferences for the healthcare industry.
Results of Operations
2000 Compared to 1999
Revenues increased to $60.9 million in 2000 from $54.5 million in 1999, an increase of $6.4 million or 11.7 percent. This increase was due to the addition of $4.4 million in net sales from AHI, which was acquired by the Company in September 1999, and increases in SC Direct's, Daxbourne's and Western Schools net sales of approximately $1.1 million, $157,000, and $51,000 respectively. The remainder of the revenue increase resulted from the approximately proportionate increase in shipping & handling income of approximately $795,000 due to the increase in Company net sales mentioned above. The increase in SC Direct's net sales was primarily due to net sales increases in the Paula Young and Especially Yours catalogs in the amount of $2.2 million and $1.7 million, respectively. These increases were due primarily to increased number of orders from increased circulation of its catalogs to existing customers and to new customers generated by the Company's advertising programs and sales over the Internet as well as changes in the product mix in both catalogs. The increase in SC Direct's net sales was offset by a decrease of $2.8 million in net sales from its Paula Hatbox(R) catalog, as a result of the Company's decision in the fourth quarter of 1999 to no longer circulate this catalog.
Gross margin as a percentage of revenues increased to 63.9 percent in 2000 from 62.7 percent in 1999 as a result of minor merchandise mix changes. Gross margin increased to $38.9 million in 2000 from $34.1 million in 1999, an increase of $4.8 million or 14.1 percent. This increase was due to the increase in revenues discussed above as well as an increase in the gross margin rate discussed above.
Operating expenses increased to $36.0 million in 2000 from $31.9 million in 1999, an increase of $4.1 million or 12.9 percent. This increase was due primarily to: (a) additional catalog production and advertising expenses of approximately $2.5 million and $395,000, respectively, mainly related to the acquisition of AHI as well as increased circulation of catalogs mailed to the Paula Young and Especially Yours customers and to inactive Paula Young customers in an effort to reactivate these names, (b) approximately $632,000 related to costs incurred in connection with the bonus paid to the former chief executive officer and the terminated sale of the Company's common stock to Golub Associates, Inc., (c) increased depreciation and amortization of approximately $621,000 related to the implementation of the Company's catalog information system in August 1999, and (d) $1.7 million in additional payroll and benefit costs, mainly related to the AHI acquisition, additional information technology personnel and an increase in in-house telemarketing and customer service personnel. The increase in operating expenses was offset by: (i) a reduction in outside telemarketing and customer service costs of approximately $575,000, and (ii) a prior year's restructuring charge described below.
In August 1999, the Company announced the resignation of its chief executive officer. In connection with the resignation and search for a new chief executive officer, the Company recorded a pre-tax charge of $500,000, consisting of severance and other severance related benefits and recruiting fees. During the fourth quarter of 1999, the Company eliminated the circulation of the Paula's Hatbox catalog that featured ladies hats and selected women's apparel and accessories. The Company recorded a pre-tax charge of $730,000 in October 1999, of which $480,000 related to severance and severance related benefits for four employees and the write-off of remaining unamortized deferred catalog costs. The remaining $250,000 related to inventory write-offs.
Interest expense, net of interest income, increased to approximately $974,000 in 2000 from approximately $794,000 in 1999, an increase of approximately $180,000 or 22.7 percent. The increase was attributable to higher interest rates during 2000 compared to 1999, offset by lower average principal amounts outstanding on the Company's bank facility.
Income tax expense, as a percentage of pre-tax income, was 41.0 percent in 2000 versus 45.0 percent in 1999, due to an additional provision for state taxes as a result of the completion of a state tax audit during 1999.
1999 Compared to 1998
Net sales decreased to $54.5 million in 1999 from $55.6 million in 1998, a decrease of $1.1 million, or 1.9 percent. This decrease was due a decrease in SC Direct's net sales of $3.0 million, offset by increases in Daxbourne's and Western Schools net sales of approximately $261,000 and $616,000 respectively, primarily due to improved customer response rates as a result of changes in circulation strategies. On September 10, 1999, the Company acquired AHI. AHI had net sales of approximately $887,000 for the period September 10, 1999 through January 1, 2000. The decrease in SC Direct's net sales was primarily due to (i) a decrease of $3.2 million in net sales from its Paula Young catalog, resulting from lower sales to potential new customers due to a planned reduction in advertising expenditures in the first half of 1999, (ii) a decrease of $1.1 million in net sales from the Christine Jordan catalog as a result of the Company's decision to no longer circulate the Christine Jordan catalog, but continue to sell Christine Jordan branded products through its Paula Young catalog, and (iii) a decrease of approximately $604,000 in net sales from its Paula's Hatbox catalog. These net sales decreases in SC Direct were offset by an increase of $1.9 million in net sales from SC Direct's Especially Yours catalog, primarily due to increased orders attributable to an increase in the customer base as a result of customer generation efforts in previous years, and an increase in average order size, attributable to changes in the product mix in the Especially Yours catalog.
Gross margin as a percentage of net sales increased to 62.7 percent for 1999 from 62.4 percent for 1998. Gross margin decreased to $34.1 million in 1999 from $34.7 million in 1998, a decrease of approximately $561,000, or 1.6 percent, as a result of the reduction in net sales discussed above, offset by the increase in the gross margin rate mentioned above.
Operating expenses increased to $31.9 million in 1999 from $31.2 million in 1998, an increase of approximately $731,000, or 2.3 percent. This increase was attributable primarily to severance and severance related benefits, and the write-off of remaining non-amortized deferred catalog costs from the discontinuance of the Paula's Hatbox catalog. Included in operating expenses for 1999 are charges of: (i) $500,000 consisting of severance, severance related benefits and recruiting fees, recorded as a result of costs incurred in connection with the resignation of the Company's chief executive officer and for fees already incurred in connection with the Company's search for a replacement, (ii) approximately $277,000 related to costs incurred in connection with certain acquisitions that the Company decided not to pursue, (iii) increased depreciation and amortization of approximately $327,000 related to the implementation of the Company's catalog information system in August 1999, and (iv) the write-off of $480,000 for the remaining unamortized deferred catalog costs and severance and severance related benefits for four employees relating to the elimination of the Paula's Hatbox catalog. These increases to operating expenses are offset by lower advertising expenses of $1.1 million due to the Company's strategic decision to eliminate certain marginal advertising programs.
Interest expense, net of interest income, decreased to approximately $794,000 in 1999 from approximately $872,000 in 1998, a decrease of approximately $78,000, or 8.9 percent. The decrease was attributable to lower average principal amounts outstanding on the Company's bank facility due to debt repayments.
Income tax expense, as a percentage of pre-tax income, was 45.0 percent in 1999 versus 41.1 percent in 1998, due to an additional provision for state taxes as a result of the completion of a state tax audit during 1999.
Liquidity and Capital Resources
Net cash flows used by the Company for 2000 were approximately $702,000. Cash flows provided by operating activities for 2000 were $2.3 million, offset by uses of $1.4 million in investing activities and $1.5 million in financing activities. The major factors that caused the difference between net income and net cash flows provided by operations for 2000 were increases in: (i) depreciation and amortization expense of $1.7 million, and (ii) deferred income tax expense of approximately $83,000, offset by a decrease in cash working capital items of approximately $608,000. The Company used $1.4 million in investing activities for computer and equipment purchases. The $1.5 million in net cash used in financing activities was primarily due to: (i) the repayment of $1.9 million of long-term debt, (ii) the repayment of short-term borrowings of $5.4 million, (iii) the repayment of approximately $119,000 of capital leases, and (iv) the purchase of approximately $35,000 of treasury stock, offset by the issuance of $6.0 million of long-term debt related to the closing of the Company's new $12.25 million senior credit facility with Fleet National Bank.
On December 27, 2000, the Company entered into an $12.25 million credit agreement (the "Agreement") with Fleet National Bank (the "Bank") for the purpose of refinancing its existing senior debt and to provide for the working capital needs of the Company. The new credit facility, which may be increased to $13.0 million in 2002, replaces the Company's former credit facilities with the Bank. The Agreement includes a $9.0 million five-year term note (the "Term Loan") and a $3.25 million two-year revolving credit agreement (the "Line of Credit"). The amount available on the Line of Credit increases as principal amortization payments on the Term Loan are paid, such that the total Agreement remains at $12.25 million over the two years of the Line of Credit agreement. The Line of Credit provides for revolving credit loans and letters of credit with floating rates based on margins over LIBOR or prime at the Company's option. The Term Loan is for five years and is amortized at the rate of $450,000 a quarter beginning January 1, 2001.
As of December 30, 2000, $6.4 million of the Term Loan was under LIBOR contract rates ranging from 8.6625 percent to 9.02813 percent and the remainder of the Term Loan was at the base rate of 9.75 percent. As of December 30, 2000, approximately $788,000 of the Line of Credit was at the base rate of 9.75 percent. The Company is required to pay a commitment fee of 0.375 percent per annum on the unused portion of the commitment. At December 30, 2000, $2.5 million was available under this Line of Credit.
The Agreement is collateralized by a first perfected security interest in all tangible and intangible assets of the Company, subject to certain permitted liens. The Agreement is subject to certain consolidated covenants, including but not limited to leverage and debt service coverage ratios, minimum earnings requirements, and a restriction on the payment of cash dividends on the Company's common stock.
The Company's cash flow from operations and available credit facilities are considered adequate to fund planned business operations and both the short- term and long-term capital needs of the Company. However, certain events, such as an additional significant acquisition, could require new external financing.
Recently Issued Accounting Pronouncements
Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," requires that shipping and handling fees, billed to a customer in a sale transaction, should be classified as part of revenues. This consensus had to be adopted no later than the fourth quarter of 2000. The Company has restated its consolidated statements of operations for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999 by reclassifying all shipping and handling income from cost of sales and operating expenses to revenues.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The adoption of SAB No. 101 did not materially affect the Company's consolidated financial statements in the current year.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt SFAS No. 133 effective January 1, 2001. Management does not expect the adoption of SFAS No. 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company.
Risk Factors
Postal Rates, Paper Prices and Media Costs. Postage, shipping and paper costs are significant expenses in the operation of the Company's business. The Company mails its catalogs and generally ships its products to customers through the US Postal Service and, at the customer's request and expense, ships its products by overnight and second day delivery services. The Company passes on the costs of mailing its products directly to customers as separate shipping and handling charges, but does not directly pass on paper costs and the costs of mailing its catalogs. Any future increases in postal or shipping rates or paper costs could have a material adverse effect on the Company's operating results if the Company is unable to pass on these increases to its customers. In addition, a rise in media costs could have a material adverse effect on the Company's ability to generate new customers.
Limited Sources of Fiber. The majority of the Company's revenue is derived from the sale of wigs. The Company's synthetic wigs are made from special synthetic fiber manufactured by two Japanese companies, Kaneka Corporation and Toyo Chemical Corporation. The wig manufacturers from whom the Company purchases its inventory purchase the fiber from these two fiber manufacturers. Should there be a permanent or long-term disruption in the supply of fiber, the time required to obtain an alternate source and the attendant delay in new production, as well as a possible significant increase in the price of fiber, may have a material adverse effect on the Company's wig and hairpiece sales and profit margins.
Limited Number of Wig Manufacturers. The wigs sold by the Company are produced by a limited number of manufacturers. Each of the Company's five largest manufacturers supplied between nine percent and twenty-three percent of the Company's overall wig purchases in 2000. The loss of one or more of these manufacturers could materially disrupt the Company's wig operations. Although the Company believes that in such an event it could purchase its wig requirements from the remaining manufacturers and from additional manufacturers, there can be no assurance that such sources of supply could meet the Company's wig requirements without considerable disruption to the Company's purchasing cycles, inventory levels and profit margins. The Company does not currently have, and does not anticipate entering into in the foreseeable future, long-term supply contracts with manufacturers.
Dependence Upon Foreign Suppliers; Exchange Rates; and Currency Fluctuations. The Company expects that most of its wigs and hairpieces will continue to be manufactured in the Far East in the future. Accordingly, the Company's operations are subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, export duties, work stoppages and, in certain parts of the world, political instability and possible governmental intervention. As such, the availability and cost of wigs may be favorably or adversely affected by any of these items. Although to date such risks have not had a significant effect on the Company's business operations, no assurance can be given that such risks will not have a material adverse effect on the Company's business operations in the future.
Risk of a Cure for Hair Loss; Cancer Treatment Improvement. Millions of American women suffer varying degrees of hair loss, including those suffering hair loss as a side effect of cancer treatments. Women suffering
from hair loss comprise a substantial percentage of the Company's customer base for its wigs and hairpieces. Ongoing research is conducted by numerous groups, both public and private, seeking remedies for hair loss. One drug, Minoxidil (marketed under the name Rogaine(R) as well as other names), is available over-the-counter and is sold to men and women as a measure against hair loss. There can be no assurance that another new drug will not be developed that could prevent hair loss among women. Such an event may have a material adverse effect on the Company's core wig business. In addition, the development of any therapies, such as new cancer treatments, that would eliminate hair loss as a side effect, may have a material adverse effect on the Company's business.
Registered Trademarks and Trade Names. The Company currently has several registered trademarks and may seek additional legal protection for its products and trade names. The Company has invested substantial resources in developing several distinctive catalog trademarks as well as branded products and product lines. There can be no assurance that the steps taken by the Company to protect its rights will be sufficient to deter misappropriation. Failure to protect these intellectual property assets could have a material adverse effect on the Company's business operations. Moreover, although the Company does not currently know of any lawsuit alleging the Company's infringement of intellectual property rights that could have a material adverse effect on the Company's business, there can be no assurance that any such lawsuit will not be filed against the Company in the future or, if such a lawsuit is filed, that the Company would ultimately prevail.
Risk of Delisting From NASDAQ--The Company's common stock is listed on the NASDAQ National Market System. The Company cannot guarantee that it will always be listed. NASDAQ's rules for continual listing include stockholders' equity requirements, and market value requirements. The Company has been notified by NASDAQ that the Company's common stock bid price is below its continued listing standards and that the Company's current listing is subject to review by NASDAQ.
If the Company's common stock is delisted from NASDAQ, and if the Company's common stock cannot be listed on the NASDAQ Small Cap Market, trading in the Company's common stock would likely be conducted, if at all, in the over-the- counter market. This would make it more difficult for stockholders to dispose of their common stock and more difficult to obtain accurate quotations on the Company's common stock. This could have an adverse effect on the price of the common stock. There are separate rules regulating broker-dealers who trade on behalf of customers in unlisted stocks. These rules require broker-dealers to sell common stock only to established customers and accredited investors (generally defined as investors with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with a spouse), to make special suitability determinations about the purchasers, and to receive the purchaser's written consent to the transaction prior to sale. The effect of these requirements, among others, may be to limit the ability or incentive of broker-dealers to sell the Company's common stock.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary exposures to market risks include fluctuations in interest rates on its short-term and long-term borrowings of approximately $9.8 million as of December 30, 2000 under its credit facility. On January 19, 2001, the Company and the Bank entered into an Interest Rate Swap Agreement based on a notional principal balance of $4.5 million. Under the interest rate swap agreement, the Company receives quarterly LIBOR-based interest rate payments from the Bank, and pays interest quarterly at a fixed rate of 5.57% to the Bank. These interest rate payments are settled net with the Bank. The agreement is effective for a period of two years and terminates on January 19, 2003.
Management does not believe that the risk inherent in the variable-rate nature of these instruments will have a material adverse effect on the Company's consolidated financial statements. However, no assurance can be given that such a risk will not have a material adverse effect on the Company's financial statements in the future.
The Company's Term Loan and Line of Credit bear interest rates based on either a base rate or a LIBOR contract rate. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources".
As of December 30, 2000, the outstanding balance on all of the Company's credit facilities was $9,788,099. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $98,000 on an annual basis. The Company's objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared with fixed-rate borrowings.
The foreign currencies to which the Company has the most significant exchange rate exposure are the British Pound, Chinese Yuan, Indonesian Rupiah and Korean Won. The Company expects that most of its wigs and hairpieces will continue to be manufactured in China, Indonesia and Korea in the future. Although a substantial portion of the Company's transactions with these countries occurs in US dollars, the Company's operations are subject to fluctuations in the value of these countries' currencies. Although to date such exchange rate exposures have not had a significant effect on the Company's business operations, no assurance can be given that such exchange rate exposures will not have a material adverse effect on the Company's business operations in the future.
Item 8.
Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Specialty Catalog Corp.:
We have audited the accompanying consolidated balance sheets of Specialty Catalog Corp. and subsidiaries (the "Company") as of December 30, 2000 and January 1, 2000 and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for the years then ended and the year ended January 2, 1999. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2000 and January 1, 2000 and the results of its operations and its cash flows for the years then ended and the year ended January 2, 1999, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts March 15, 2001
SPECIALTY CATALOG CORP.
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME (LOSS)
See notes to consolidated financial statements.
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Supplemental disclosures of cash flow information:
During the years ended December 30, 2000 and January 1, 2000, the Company received federal income tax refunds of $320,000 and $375,000, respectively.
Summary of non-cash transactions:
During the years ended December 30, 2000 and January 1, 2000, the Company recorded capital lease obligations of $10,430 and $290,789, respectively related to the purchase of data processing equipment.
During 1999, the Company disposed of fully depreciated fixed assets no longer in use totaling $753,244.
During 1998, 217,773 stock options were exercised for which the Company recorded a reduction in its income taxes payable and an increase in additional paid-in capital of $256,021. Unpaid severance amounting to $56,148 that was recorded in accrued restructuring charges to a former employee was used as payment against a portion of these stock options exercised.
See notes to consolidated financial statements.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended December 30, 2000, January 1, 2000, and January 2, 1999
1. Summary of Significant Accounting Policies
Nature of Business--Specialty Catalog Corp. (the "Company") targets niche consumer product categories, primarily via direct marketing. SC Corporation, the Company's principal operating subsidiary doing business under the name SC Direct ("SC Direct"), is the leading US retailer of women's wigs and hairpieces. Daxbourne International Limited ("Daxbourne"), a subsidiary of SC Direct, is a leading UK retailer, wholesaler and direct marketer of women's wigs and hairpieces. SC Publishing ("SC Publishing"), another subsidiary of SC Direct, sells continuing education courses to nurses and certified public accountants. American Healthcare Institute ("AHI"), an operating division of SC Publishing, which was acquired by the Company on September 10, 1999, provides continuing-education seminars and conferences for the healthcare industry.
Principles of Consolidation--The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Translation of Foreign Currencies--The financial statements of the Company's foreign subsidiary are translated from local currency into US dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency of its foreign subsidiary is considered to be the functional currency. Exchange gains and losses on intercompany balances of a long-term investment nature are recorded as a component of other comprehensive income (loss) in shareholders' equity, while other transaction gains and losses are recorded directly to the consolidated statements of operations. Comprehensive income (loss) consisted solely of accumulated foreign currency translation adjustments in connection with the Company's UK subsidiary in 2000 and 1999.
Cash and Cash Equivalents--Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased.
Inventories--Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. A reserve for obsolete inventory is recorded based on the expected realizable value of merchandise. The cost of inventory includes the cost of merchandise, freight, duty, brokerage fees and marine insurance.
Prepaid Expenses--The costs incurred to develop, print and place direct response advertisements to obtain names of potential customers are recorded as prepaid expenses until the time the advertisement is published, mailed or otherwise made available to potential customers. Direct response advertising, including catalog printing and mailing costs, for selling purposes, is capitalized and amortized over the expected period of future benefit, generally two to four months. For the years ended December 30, 2000, January 1 2000, and January 2, 1999, advertising expense was $17.0 million, $14.3 million and $15.4 million, respectively.
Property, Plant and Equipment--Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Amortization is computed on the straight-line method over the lesser of the estimated useful lives of the related assets or the lease terms.
In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires that costs incurred in the development of internal use software be capitalized and amortized over a period of time. The Company adopted SOP 98-1 in the first quarter of 1998. During 2000 and 1999, the Company capitalized $568,706 and $1,185,536, respectively, of costs associated with its new catalog
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (continued)
information system that was implemented in August 1999, of which $254,651 and $583,659, respectively, were internal payroll and payroll related costs.
Intangibles--Intangible assets, consisting of goodwill, covenants not to compete, customer lists, trademarks, and trade names, are amortized using the straight-line method over useful lives of three to thirty years. Management's policy regarding intangible assets is to evaluate the recoverability of its intangible assets when the facts and circumstances suggest that these assets may be impaired. This policy is consistent with those policies set forth in Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed". Evaluations consider factors including operating results, business and strategic plans, economic projections, and market emphasis. Evaluations compare expected cumulative, non-discounted operating cash flows with net book values of related intangible assets. Unrealizable intangible asset values are charged to operations. There were no impairment charges during the fiscal years presented.
Other Assets--Other assets consist primarily of deferred financing costs. Deferred financing costs which were incurred by the Company in connection with the credit agreement (the "Agreement") with Fleet National Bank (the "Bank") (see footnote 7) are amortized over the life of the underlying indebtedness using the straight-line method. At December 30, 2000 and January 1, 2000, deferred financing costs were $71,448 and $81,987, respectively.
Income Taxes--The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities.
Revenue--The Company recognizes sales and the related costs of sales at the time merchandise is shipped to customers. The Company allows for merchandise returns at the customer's discretion within the period stated in the Company's sales policy. An allowance is provided for returns based on historical return rates applied to recent shipments.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, relating to both those assets and liabilities recognized and those not recognized in the consolidated balance sheets of the Company, for which it is practicable to estimate fair value. The estimated fair value of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.
The fair value of the Company's cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings approximate their carrying values at December 30, 2000 and January 1, 2000, due to the short- term maturities of these investments. The carrying values and fair values of the Company's long-term debt at December 30, 2000 and January 1, 2000 were $9,000,000 and $5,025,000.
Stock-Based Compensation--Compensation cost of stock-based compensation arrangements with employees is measured based on Accounting Principles Board ("APB") Opinion No. 25. The Company applies APB Opinion No. 25 to its stock- based compensation awards to employees and the disclosure provisions of SFAS No. 123, "Accounting for Stock-based Compensation", are addressed in footnote 10.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (continued)
Newly Issued Accounting Pronouncements--Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping and Handling Fees and Costs", requires that shipping and handling fees, billed to a customer in a sale transaction, should be classified as part of revenues. This consensus had to be adopted no later than the fourth quarter of 2000. The Company has restated its consolidated statements of operations for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999 by reclassifying all shipping and handling income from cost of sales and operating expenses to revenues.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The adoption of SAB No. 101 did not materially affect the Company's consolidated financial statements in the current year.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt SFAS No. 133 effective January 1, 2001. Management does not expect the adoption of SFAS No. 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company.
Fiscal Year--The Company is on a 52/53-week fiscal year, ending on the Saturday closest to December 31. Unless otherwise indicated, "2000" means the 52 weeks ended December 30, 2000, "1999" means the 52 weeks ended January 1, 2000 and "1998" means the 52 weeks ended January 2, 1999.
Accounting Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management bases its estimates on historical experiences and on various assumptions that are believed to be reasonable under the circumstances. The primary estimates underlying the Company's financial statements include allowances for doubtful accounts, allowances for returns, and inventory valuation.
Reclassifications--Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform to the 2000 presentation.
2. Prepaid Expenses
Prepaid expenses at December 30, 2000 and January 1, 2000 consist of the following:
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property, Plant and Equipment
Property, plant and equipment at December 30, 2000 and January 1, 2000 consist of the following:
- -------- (i) Lesser of the estimated useful lives of the related assets or the lease term.
Depreciation and amortization expense related to property, plant and equipment was $1,274,150, $734,776 and $429,311 for 2000, 1999 and 1998, respectively. In 1999, the Company disposed of fully depreciated fixed assets no longer in use totaling $753,244. There were no gains or losses recognized on the consolidated statement of operations from these disposals.
4. Intangible Assets
Intangible assets at December 30, 2000 and January 1, 2000 consist of the following:
Amortization expense related to intangible assets was $416,082, $335,943 and $316,620 for 2000, 1999 and 1998, respectively.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 30, 2000 and January 1, 2000 consist of the following:
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Liabilities to Customers
Liabilities to customers at December 30, 2000 and January 1, 2000 consist of the following:
Deferred revenue reflects cash received from customers for ordered items that have not yet been shipped. Refunds due customers represents merchandise returned by customers for a cash or credit refund. The reserve for returns represents estimated merchandise to be returned for refunds in the future based on historical return rates applied to recent shipments.
7. Long-Term Debt
Long-term debt at December 30, 2000 and January 1, 2000 consists of the following:
On December 27, 2000, the Company entered into an $12.25 million credit agreement (the "Agreement") with Fleet National Bank (the "Bank") for the purpose of refinancing its existing senior debt and to provide for the working capital needs of the Company. The new credit facility, which may be increased to $13.0 million in 2002, replaces the Company's former credit facilities with the Bank. The Agreement includes a $9.0 million five-year term note (the "Term Loan") and a $3.25 million two-year revolving credit agreement (the "Line of Credit"). The amount available on the Line of Credit increases as principal amortization payments on the Term Loan are paid, such that the total Agreement remains at $12.25 million over the two years of the Line of Credit agreement. The Line of Credit provides for revolving credit loans and letters of credit with floating rates based on margins over LIBOR or prime at the Company's option. The Term Loan is for five years and is amortized at the rate of $450,000 a quarter beginning January 1, 2001.
As of December 30, 2000, $6.4 million of the Term Loan was under LIBOR contract rates ranging from 8.6625 percent to 9.02813 percent and the remainder of the Term Loan was at the base rate of 9.75 percent. As of December 30, 2000, approximately $788,000 of the Line of Credit was at the base rate of 9.75 percent. The Company is required to pay a commitment fee of 0.375 percent per annum on the unused portion of the commitment. At December 30, 2000, $2,461,901 was available under the Line of Credit.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Agreement is collateralized by a first perfected security interest in all tangible and intangible assets of the Company, subject to certain permitted liens. The Agreement is subject to certain consolidated covenants, including but not limited to leverage and debt service coverage ratios, minimum earnings requirements, and a restriction on the payment of cash dividends on the Company's common stock. The aggregate maturities of long-term debt after December 30, 2000 are as follows:
8. Operating Expenses
On December 3, 1999, the Company and Golub Associates, Inc. ("GAI") jointly announced the execution of a non-binding letter of intent pursuant to which GAI would lead a transaction to acquire all of the outstanding common stock of Specialty Catalog Corp. for a cash purchase price of $5.00 per share. This transaction was subject to various contingencies. On January 19, 2000, a merger agreement was entered into which provided for a cash merger in which the holders of common stock of the Company immediately prior to the effective date of the merger would have received $5.00 per share of the Company's common stock. The merger agreement was subject to the satisfaction of a number of closing conditions. On March 9, 2000, the Company announced that the Company and GAI and its affiliates had mutually terminated the merger agreement because, even though financing had been arranged, certain other closing conditions could not be satisfied in a timely manner. In 2000 and 1999, the Company recorded costs of $632,294 and $65,467, respectively, from this transaction.
In August 1999, the Company announced the resignation of its chief executive officer. In connection with the resignation and its search for a new chief executive officer, in the third quarter of 1999, the Company recorded a pre-tax charge of $500,000, consisting of severance and other severance related benefits and recruiting fees. Accrued compensation expenses at January 1, 2000 include expenses accrued in connection with these charges of $397,344. All amounts relating to the accrued expenses were paid in 2000.
From 1996 to 1999, the Company circulated the Paula's Hatbox catalog that featured ladies hats and then expanded to include selected women's apparel and accessories. In a move motivated by the desire to exit the competitive ladies ready-to-wear market segment, and to dedicate its focus and resources on the growth and development of the Company's core wig businesses, the Company decided to stop circulating this catalog in the fourth quarter of 1999. The Company recorded a pre-tax charge of $730,000 in October 1999 related to the write-off of remaining unamortized deferred catalog costs, inventory write- offs and to severance and severance related benefits for four employees. Accrued restructuring charges at January 1, 2000 include expenses accrued in connection with this closure of $27,091. All amounts relating to the accrued expenses were paid in 2000.
In August 1998, the Company announced the reorganization of certain management positions. In connection with this reorganization, the Company recorded in the third quarter of 1998 a pre-tax charge of $469,558, consisting of severance and other severance related benefits through July 1999 for five employees. Accrued expenses at January 2, 1999 include expenses accrued in connection with these charges of $99,301.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Acquisitions
American Healthcare Institute
On September 10, 1999, the Company acquired the assets and assumed certain liabilities of AHI, a private Maryland-based continuing-education seminar and conference provider for $1,323,381 in cash. This transaction was accounted for as a purchase. The results of operations of AHI for the period from September 10, 1999 through January 1, 2000 are included in the accompanying consolidated financial statements. The $1,150,634 excess of costs over net assets acquired was allocated to customer lists and goodwill which are being amortized over 3 and 20 years, respectively.
10. Shareholders' Equity
Treasury Stock--In December 1998, the Company's Board of Directors authorized the Company to repurchase up to $1.0 million of the Company's common stock. As of December 30, 2000, the Company had repurchased 144,100 shares at an average price of $3.56 per share.
Stock Compensation Plan--On June 22, 2000, the Company adopted the 2000 Stock Incentive Plan (the "Plan"). The Plan authorizes the issuance of up to 750,000 shares of the Company's common stock through the grant of stock options and awards of restricted stock. Each option has a maximum term of ten years from the date of grant, subject to early termination.
Options granted under the Company's 1996 Stock Incentive Plan, as amended (the "1996 Plan"), before their termination will remain outstanding according to their terms, but no further options will be granted under the 1996 Plan after June 22, 2000.
Rights Agreement--On April 11, 2000, the board of directors of the Company adopted a stockholder rights plan pursuant to a Rights Agreement dated as of April 11, 2000, between the Company and Continental Stock Transfer and Trust Company, as Rights Agent. The Rights Agreement is effective as of April 11, 2000 for all shares of Common Stock outstanding on such date and for all shares of Common Stock issued thereafter and prior to the earliest of the Distribution Date (as defined in the Rights Agreement). Each Right is exercisable (as defined in the Rights Agreement) by the registered holder of a Right Certificate to purchase 1/1000th of a share of Series A Preferred Stock of the Company, subject to adjustment, at an exercise price per 1/1000th of a share of Series A Preferred Stock of $15, subject to adjustment. Each 1/1000th of a share of Series A Preferred Stock will have economic attributes (i.e., participation in dividends and voting rights) substantially equivalent to one whole share of the common stock of the Company. The Rights expire on the tenth anniversary of the date of the Rights Agreement unless earlier redeemed or exchanged by the Company as provided in the Rights Agreement. For further information, a detailed description of the Rights Agreement and a copy of the Rights Agreement were included in a current report on Form 8-K, which was filed with the Securities and Exchange Commission on April 13, 2000.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity is summarized below:
The 1,261,677 stock options outstanding as of December 30, 2000 consisted of 310,226 of $0.31 options issued in November 1994 to an employee of the Company, 75,000 of $5.33 options issued in October 1996 to an employee of the Company, 150,000 of $7.15 options issued in October 1996 to the Company's underwriters in connection with the Company's initial public offering, 303,951 of options ranging in exercise prices from $6.50 to $6.625 issued under the 1996 Plan to employees and directors of the Company and 422,500 of options ranging in exercise prices from $2.25 to $2.50 issued under the Plan to employees and directors of the Company.
Options exercisable at December 30, 2000, January 1, 2000 and January 2, 1999 were 639,177, 650,326 and 524,583, respectively. The options outstanding as of December 30, 2000 have weighted average remaining contractual lives of 3.9 years for the $0.31 options issued in 1994, 5.8 years for the $5.33-$7.15 options granted in 1996, 6.8 years for the $6.50-$6.625 options granted in 1997, 7.4 years for $6.50 options granted in 1998, 8.5 years for the $6.50 options granted in 1999 and 9.5 years for the $2.25-$2.50 options granted in 2000. The weighted average fair value of stock options granted in 2000, 1999 and 1998 were $1.09, $0.54 and $1.75, respectively.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies the intrinsic value provisions of APB Opinion No. 25 and related interpretations in accounting for awards granted to employees. Had compensation cost been determined based on the fair value at the grant dates for options granted with the method prescribed by SFAS No. 123 "Accounting for Stock-based Compensation", the Company's net income and basic and diluted earnings per share would have been changed to the pro forma amounts indicated below:
The fair value of each option grant used to compute pro forma net income and basic and diluted earnings per share disclosures is the estimated present value on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2000, 1999 and 1998 respectively: expected volatility of 33.32 percent, 29.00 percent and 27.59 percent, a risk free interest rate of 6.00 percent, 5.30 percent and 5.63 percent and an expected holding period of 6 years.
11. Reconciliation of Basic and Diluted Earnings per Share
The following table shows the amounts used in computing basic and diluted earnings per share for net income and the effects of potentially dilutive options on the weighted average number of shares outstanding.
Options to purchase 923,951 shares of common stock ranging from $5.33 to $7.15 per share were not included in computing diluted EPS for the year ended December 30, 2000 because their effects were antidilutive. Options to purchase 670,351 shares of common stock ranging from $5.33 to $7.15 per share were not included in computing diluted EPS for the year ended January 1, 2000 because their effects were antidilutive. Options to purchase 599,935 shares of common stock ranging from $6.88 to $7.15 per share were not included in computing diluted EPS for the year ended January 2, 1999 because their effects were antidilutive.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Income Taxes
The provision for income taxes at December 30, 2000, January 1, 2000 and January 2, 1999 consists of the following:
Deferred income tax assets and liabilities at December 30, 2000 and January 1, 2000 consist of the following:
Reconciliation of the statutory Federal income tax rate and the effective rate of the provision for income taxes for the years ended December 30, 2000, January 1, 2000 and January 2, 1999 is as follows:
The Company has recorded a deferred tax asset of $4,273,287 primarily reflecting the benefit of $10,379,069 of net operating loss carryforwards which expire in varying amounts between 2001 and 2010. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The use of the
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ynet operating losses is subject to an annual limitation of $1,555,125 due to a change in control of the Company pursuant to Section 382 of the Internal Revenue Code of 1986, as amended ("IRC"). Over the past three years, the Company has used substantially all of the net operating loss carryforwards available to it. Tax benefits of Federal operating loss carryforwards of approximately $190,000, $632,000 and $703,000 were utilized in 2000, 1999 and 1998, respectively. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized.
13. Commitments and Contingencies
Lease Commitments--Certain non-cancelable leases are classified as capital leases, and the leased assets are included as part of "Property, Plant and Equipment". The obligations of the Company under such leases are collateralized by leased equipment. Other leases are classified as operating leases and are not capitalized. Future minimum lease payments under capital leases as of December 30, 2000 are included in "Other Long-term Liabilities" and are as follows:
Operating Leases--The Company leases certain administrative, warehousing and other facilities and equipment under operating leases. The following is a schedule of future minimum rental payments under non-cancelable operating leases as of December 30, 2000:
Management expects that, in the normal course of business, expiring leases will be renewed or replaced by other leases. Rent expense under operating leases was $651,563, $580,137 and $594,752 for 2000, 1999 and 1998, respectively.
Employment and Bonus Agreements--On May 9, 2000, the Company announced the appointment of Joseph J. Grabowski as president of the Company effective as of May 8, 2000. On July 1, 2000, Mr. Grabowski assumed the title of CEO, replacing Steven L. Bock whose resignation was effective June 30, 2000.
The term of the executive employment agreement (the "Employment Agreement") between the Company and Mr. Grabowski commenced on May 8, 2000 and, unless extended, terminates on May 7, 2002 (the "Initial Term"). Under this Employment Agreement, Mr. Grabowski will receive an annual salary of $300,000, along with other benefits. Mr. Grabowski will be eligible for a performance bonus of up to 100 percent of his annual salary, based upon the Company's performance as compared against the annual performance plan. Upon
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
executing this agreement, Mr. Grabowski was granted options under the 2000 Stock Incentive Plan to purchase 250,000 shares of common stock of the Company at $2.50 per share, the then fair market value of the stock. Mr. Grabowski is also eligible to receive an additional grant of 250,000 stock options, at a price which shall equal the Fair Market Value on the date of the grant, as defined in the 2000 Stock Incentive Plan, after the end of the first fiscal year in which the Company's gross revenues exceed $120,000,000.
The Company may terminate Mr. Grabowski's employment upon his death or permanent disability, or if he engages in conduct that constitutes "cause" under the Employment Agreement. Mr. Grabowski may terminate his employment for "Good Reason" as defined in the Employment Agreement. In the event Mr. Grabowski's employment is terminated by the Company other than for "cause", Mr. Grabowski will receive a "Termination Payment" as defined in the Employment Agreement. The Employment Agreement contains non-competition and other restrictions effective during the term of employment and for a one-year period thereafter.
In addition, Mr. Grabowski, along with all other salaried employees, may earn certain other bonuses based on the Company's achievement of certain operating targets.
14. Employee Benefit Plan
The Company maintains a qualified defined contribution plan, under the provisions of Section 401(k) of the IRC, covering substantially all United States employees. Under the terms of the plan, eligible employees may make contributions of up to 15 percent of pay, subject to statutory limitations. Contributions not exceeding 5 percent of an employee's pay are matched 40 percent by the Company. The Company may, at its discretion, make an additional year-end contribution. Employee contributions are always fully vested. Company contributions vest 20 percent for each completed year of service, becoming fully vested after five years of service. Matching contributions by the Company under the plan were $105,578, $87,697 and $86,535 in 2000, 1999 and 1998, respectively. No discretionary contributions have been made to the plan.
15. Business Segments and Financial Information by Geographic Location
Specialty Catalog Corp. has six reportable segments: Paula Young, Especially Yours and Paula's Hatbox under the SC Direct division, Western Schools and AHI under the SC Publishing division and Daxbourne International Limited. The SC Direct division sells women's wigs and hairpieces using two distinct catalogs: Paula Young and Especially Yours. In addition, prior to the end of 1999, SC Direct sold apparel, hats and other fashion accessories through its Paula's Hatbox catalog. The SC Publishing division distributes catalogs under its Western Schools brand and specializes in providing continuing education courses to nurses and accounting professionals. SC Publishing's other segment, AHI, which was acquired by the Company on September 10, 1999, distributes catalogs under its own name and specializes in providing continuing education seminars and conferences to nurses and other mental health professionals. Daxbourne International Limited is a retailer and wholesaler of women's wigs, hairpieces and related products in the United Kingdom.
Beginning in the second quarter of fiscal year 2000, the Company changed its reportable segments from SC Direct, SC Publishing, AHI and Daxbourne International Limited to Paula Young, Especially Yours, Paula's Hatbox, Western Schools, AHI and Daxbourne International Limited. The change was made to conform the Company's financial reporting to how it now manages its business. As a result, the Company has restated the segment reporting results for the years ended January 1, 2000 and January 2, 1999.
The Company's reportable segments are strategic business units that offer either different products or operate in different geographic locations. The Company markets its products in two major geographic areas, the United States and the United Kingdom. The SC Direct and SC Publishing divisions market their products and maintain their assets in the United States. Daxbourne International Limited markets its products and maintains its assets in the United Kingdom.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of information about the Company's operations by segment for the year ended December 30, 2000, January 1, 2000 and January 2, 1999 follows:
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Selected Quarterly Financial Data (1) (unaudited):
- -------- (1) Emerging Issues Task Force ("EITF") Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," requires that shipping and handling fees, billed to a customer in a sale transaction, should be classified as part of revenues. This consensus had to be adopted no later than the fourth quarter of 2000. The Company has restated its consolidated statements of operations for the fiscal years ended December 30, 2000, January 1, 2000 and January 2, 1999 by reclassifying all shipping and handling income from cost of sales and operating expenses to revenues. (2) The fiscal year ended January 1, 2000 includes four months of activity of AHI, which was acquired by the Company on September 10, 1999. For the four months ended January 1, 2000, AHI had net sales of $886,690, gross profit of $256,905 and a net loss of $14,870.
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Subsequent Events
On January 19, 2001, the Company and the Bank entered into an Interest Rate Swap Agreement based on a notional principal balance of $4.5 million. Under the interest rate swap agreement, the Company receives quarterly LIBOR-based interest rate payments from the Bank, and pays interest quarterly at a fixed rate of 5.57% to the Bank. These interest rate payments are settled net with the Bank. The agreement is effective for a period of two years and terminates on January 19, 2003.
On January 26, 2001, Daxbourne acquired the women's wig and hairpiece business of the Company's British licensee. The licensee had been the exclusive British licensee of the Company's Paula Young brand of women's wigs and hairpieces since 1994. During the term of the license agreement the licensee developed and circulated the Paula Young Fashion Wigs catalog using the merchandising and creative resources of the Company, thereby establishing Paula Young as a preeminent brand in Britain with a loyal customer following. The acquisition agreement provides for the termination of the 1994 license agreement, transfer of the assets of the Paula Young Fashion Wigs catalog business to Daxbourne. Daxbourne's catalog division will now circulate both catalogs--continuing to circulate its Jacqueline Collection catalog and the Paula Young Fashion Wigs catalog.
On February 3, 2001, AHI moved from Wheaton, Maryland to the Company's headquarters in South Easton, Massachusetts.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the discussion responsive thereto under the captions "Election of Directors" and "Executive Compensation" in the Company's Proxy Statement relating to the 2001 Annual Meeting of Shareholders.
Item 11.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Executive Compensation" in the Company's Proxy Statement relating to the 2001 Annual Meeting of Shareholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Principal Shareholders" in the Company's Proxy Statement relating to the 2001 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Certain Transactions" in the Company's Proxy Statement relating to the 2001 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements are listed and included under Part II, Item 8 of this Report.
2. FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable.
3. EXHIBITS
The exhibits are listed under Part IV, Item 14(C) of this Report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
(c) EXHIBITS
Exhibit No.Description ---------------------- 3.1 Certificate of Incorporation of the Registrant, as amended. Filed as Exhibit 3.01 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 3.2 By Laws of the Registrant, as amended. Filed as Exhibit 3.02 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 4.1 Specimen Certificate representing the Common Stock, par value $0.01 per share. Filed as Exhibit 4.01 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.1 Employment Agreement dated as of May 8, 2000 between the Registrant and Joseph Grabowski. Filed as Exhibit 10.1 to Specialty Catalog Corp.'s Form 10-Q, dated May 15, 2000. 10.2 Rights Agreement between Specialty Catalog Corp. and Continental Stock Transfer and Trust Company, as Rights Agent. Filed as Exhibit 4.1 to Specialty Catalog Corp.'s Form 8-K, dated April 11, 2000, File No. 0- 21499. 10.3 Amended and Restated Senior Credit Facilities dated December 27, 2000 between Fleet National Bank and the Registrant, Filed herewith. 10.4 2000 Stock Incentive Plan. Filed as Appendix A to Specialty Catalog Corp.'s Proxy Statement for its 2000 Annual Meeting. 10.5 1996 Stock Option Plan. Filed as Exhibit 10.01 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.6 Employment Agreement dated as of October 4, 1996 between the Registrant and Steven L. Bock. Filed as Exhibit 10.02 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.7 First Amendment to Employment Agreement dated as of June 24, 1999 between the Registrant and Steven L. Bock, Filed as Exhibit 10.17 to Specialty Catalog Corp.'s Form 10-K, dated March 28, 2000, File No. 0- 21499. 10.8 Second Amendment to Employment Agreement dated as of December 2, 1999 between the Registrant and Steven L. Bock, Filed as Exhibit 10.18 to Specialty Catalog Corp.'s Form 10-K, dated March 28, 2000, File No. 0- 21499. 10.9 Lease dated July 10, 1985 between Simon D. Young, Trustee of the Sandpy Realty Trust, ("Trustee"), and SC Corporation (f/k/a Wigs by Paula) for premises located at 21 Bristol Drive, South Easton, MA. Filed as Exhibit 10.18 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.10 First Amendment of Lease, dated March 15, 1986, between the Trustee and SC Corporation. Filed as Exhibit 10.19 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.11 Second Amendment to Lease, dated March 1, 1989, between the Trustee and SC Corporation. Filed as Exhibit 10.20 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793. 10.12 Third Amendment to Lease, dated October 22, 1993 between the Trustee and SC Corporation. Filed as Exhibit 10.21 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPECIALTY CATALOG CORP.
/s/ Joseph Grabowski By: _________________________________ Joseph Grabowski President and Chief Executive Officer
/s/ Thomas McCain By: _________________________________ Thomas McCain Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated. By so signing, each of the undersigned, in his or her capacity as a director or officer, or both, as the case may be, of the Registrant, does hereby appoint Thomas K. McCain, and his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer or both, as the case may be, of the Registrant, this report on Form 10-K and any and all amendments to said report and all instruments necessary or incidental in connection therewith, and to file the same with Securities and Exchange Commission. Said attorney shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorney.