SPECIALTY CATALOG CORP, S-1/A, 1996-10-03

SPECIALTY CATALOG CORP
S-1/A, 1996-10-03
CATALOG & MAIL-ORDER HOUSES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996

REGISTRATION NO. 333-10793
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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SPECIALTY CATALOG CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 5961 04-3253301
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
JURISDICTION OF CODE NUMBER)
INCORPORATION OR 21 BRISTOL DRIVE
ORGANIZATION) SOUTH EASTON, MA 02375
(508) 238-0199

(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)

STEVEN L. BOCK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
21 BRISTOL DRIVE SOUTH
EASTON, MA 02375 (508) 238-0199
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

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

COPIES TO:

ROBERT L. LAWRENCE, ESQ. DAVID A. MILLER, ESQ.
JEFFREY S. TULLMAN, ESQ. GRAUBARD MOLLEN & MILLER
KANE KESSLER, P.C. 600 THIRD AVENUE
1350 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10016
NEW YORK, NEW YORK 10019 TELEPHONE NO.: (212) 818-8800
TELEPHONE NO.: (212) 541-6222 FACSIMILE NO.: (212) 818-8881
FACSIMILE NO.: (212) 245-3009

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock $.01 par
value.................. 1,725,000(2) $ 7.50 $12,937,500 $4,461.21
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Underwriter's Purchase
Option................. 1 $100.00 $ 100 (3)
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Common Stock Underlying
Underwriter's Purchase
Option................. 150,000 $ 8.25 $ 1,237,500 $ 426.72
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Total................... -- -- $14,175,100 $4,887.93
</TABLE>
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(1) Estimated solely for the purposes of calculating the registration fee.
(2) Includes 225,000 shares which may be issued upon exercise of a 45-day
option granted to the Underwriter to cover over-allotments, if any. See
"Underwriting."
(3) Pursuant to Rule 457(g), no registration fee is payable.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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<PAGE>

SPECIALTY CATALOG CORP.

CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED
BY ITEMS OF FORM S-1

<TABLE>
<CAPTION>
FORM S-1 ITEM LOCATION IN PROSPECTUS
------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Front Cover Page of Registration
Statement; Cross-Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page of
Prospectus and Outside Back Cover
Page of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Prospectus Summary; Risk Factors
4. Use of Proceeds..................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price..... Underwriting
6. Dilution............................ Risk Factors; Dilution
7. Selling Security Holders............ Inapplicable
8. Plan of Distribution................ Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to Be
Registered......................... Outside Front Cover Page of
Prospectus; Prospectus Summary;
Description of Securities;
Underwriting
10. Interests of Named Experts and
Counsel............................ Inapplicable
11. Information with Respect to the
Registrant......................... Outside Front Cover Page of
Prospectus; Prospectus Summary;
Reorganization; Risk Factors;
Dividend Policy; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Description
of Securities; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Description of Securities
</TABLE>
<PAGE>

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

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 3, 1996

PROSPECTUS

1,500,000 SHARES

SPECIALTY CATALOG CORP.

COMMON STOCK [LOGO]SC CORP.

All of the 1,500,000 shares of Common Stock ("Common Stock") offered hereby are
being sold by Specialty Catalog Corp. ("Company").

Prior to this offering ("Offering"), there has been no public market for the
Common Stock of the Company and there can be no assurance that any such market
will develop. It is currently anticipated that the initial public offering
price of the shares will be between $6.50 and $7.50. See "Underwriting" for
information relating to the factors considered in determining the initial
public offering price of the Common Stock. The Company has applied for the
Common Stock to be quoted on the Nasdaq National Market under the symbol
"CTLG".

-----------

THE SHARES OFFERED HEREBY ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AT PAGE 9 HEREOF AND DILUTION
AT PAGE 16 HEREOF.

-----------

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

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share..................................... $ $ $
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Total(3)...................................... $ $ $
</TABLE>
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(1) Does not include a 2.5% nonaccountable expense allowance which the Company
has agreed to pay the Underwriter. The Company has also agreed to sell the
Underwriter an option ("Underwriter's Purchase Option") to purchase 150,000
shares of Common Stock and indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended ("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $ ($ if the
Underwriter's over-allotment option is exercised in full), estimated at
$ .
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock on the same terms set forth above, solely for the
purpose of covering over-allotments, if any. If such over-allotment option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

The shares of Common Stock are being offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares of Common Stock will be made
against payment therefor at the offices of the Underwriter in New York City, on
or about October , 1996.

GKN Securities

, 1996
<PAGE>

[PHOTOS]

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

This prospectus contains references to trademarks of entities other than the
Company, which have reserved all rights with respects to their respective
trademarks.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise indicated, "Company" shall include the two
operating subsidiaries of the Company, SC Corporation, doing business under the
name SC Direct ("SC Direct"), and SC Publishing, Inc. ("SC Publishing"), a
wholly-owned subsidiary of SC Direct. Each prospective investor is urged to
read this Prospectus in its entirety.

THE COMPANY

The Company is a direct marketer targeting niche consumer product categories.
SC Direct, its principal operating subsidiary, is the leading U.S. retailer of
women's wigs and hairpieces. SC Publishing, a subsidiary of SC Direct, sells
continuing education courses to nurses, real estate professionals and Certified
Public Accountants ("CPAs").

SC Direct sells wigs and hairpieces primarily to women over the age of 50,
using three distinct catalogs: Paula Young (R), Christine Jordan (TM) and
Especially Yours (TM). In 1995, SC Direct mailed 20.9 million catalogs,
generating net sales of $37.3 million. SC Direct has developed a proprietary
data base consisting of approximately 5.6 million persons, including more than
875,000 active customers and more than one million persons who have requested
catalogs in the past year but who have not made a purchase. Due to the fact
that wig wearers are difficult to identify, the Company believes that its wig
database is unique and would be very expensive to replicate. The Company
believes that this poses a substantial barrier to entry for any potential
competitor.

SC Direct's target market, women over age 50, is projected by the U.S. Census
Bureau to grow from 38.7 million women, or 38% of the total female population
in 1995, to 51.5 million women, or 45% of the total female population in 2010.
This growth is driven primarily by aging "baby-boomers." The Company believes
that only approximately five million, or 25%, of the 20 million American women
with thinning hair currently wear wigs, and that, accordingly, there is
substantial opportunity for future growth of SC Direct's business.

SC Direct's strategy for its core business is to exploit new distribution
opportunities for wigs and hairpieces and to sell additional products to its
customers. For example, in the last three years, SC Direct has introduced its
upscale Christine Jordan catalog and its Especially Yours catalog for African-
American customers, expanded into international markets and begun a test
program selling to hair salons.

In 1995, SC Direct launched its Paula's Hatbox (TM) catalog through which it
sells a variety of fashion hats to women. The Company believes that the market
for fashion hats has niche characteristics similar to those of the wig market.
In addition, SC Direct intends to enter another new market by testing men's
wigs in the Paula Young catalog in early 1997.

The Company utilizes primarily a two-step marketing program. Step one
involves obtaining prospective customers through a targeted advertising
program. Step two, which commences when a prospective customer responds
favorably to an advertisement placed by the Company, involves sending such
prospective customer a series of catalogs designed to elicit an initial sale.
Through this program, the Company has been able to convert into customers 15%
to 20% of those persons who request catalogs. Because this program involves
targeted mailings only to persons who have shown an interest in its products,
the Company also has been able to reduce its exposure to increases in paper,
postage and other catalog production costs.

3
<PAGE>

SC Publishing offers nurses, real estate agents and CPAs home study
continuing education through its Western Schools(R) catalogs. SC Publishing's
strategy is to build its business by offering additional products and programs
to its core customers and by expanding into new and related professional
fields. In 1995, SC Publishing mailed 8.3 million catalogs generating net sales
of $5.3 million.

The Company intends to build its existing niche markets and enter new niche
markets both by internal expansion and through acquisitions. Niche markets are
characterized by smaller market size, unique or hard to find products, or hard
to locate customers. The Company plans to implement its two-step marketing
program in new and acquired businesses where appropriate.

The catalog industry is very fragmented, with more than 8,000 catalogs
currently being circulated. Many catalog retailers, especially the smaller
ones, are finding it difficult to grow due to a combination of capital
constraints, higher costs and an inability to achieve sufficient operating
economies of scale. This situation was exacerbated by substantial increases in
paper and postage costs in 1995. The Company believes that this environment
will create many acquisition opportunities, allowing it to select acquisition
candidates that provide either strategic growth to its existing businesses or
an opportunity to enter additional niche markets. As of the date of this
Prospectus, the Company has no agreement or understanding, nor is it engaged in
any negotiations, with respect to any acquisition.

The Company was incorporated in Delaware on November 30, 1994, as a holding
company for SC Direct and SC Publishing, which emerged from bankruptcy on
November 23, 1994. See "Reorganization." The principal executive offices of the
Company are located at 21 Bristol Drive, South Easton, Massachusetts 02375 and
its telephone number is (508) 238-0199.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered........................................ 1,500,000 shares
Common Stock Outstanding Prior to this Offering............. 3,201,666 shares(1)
Common Stock to be Outstanding After this Offering.......... 4,701,666 shares
Proposed Nasdaq National Market Symbol...................... CTLG
</TABLE>
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(1) Gives effect to a 325.51 for 1 stock split.

USE OF PROCEEDS

The Company intends to apply the net proceeds of this Offering to repay $5.9
million of the Company's Senior Indebtedness (as hereinafter defined),
including: (i) $1.5 million to pay down the outstanding amount under the
revolving credit portion of the Senior Indebtedness; (ii) $1.8 million of the
Senior Indebtedness which is due within one year of the date hereof; and (iii)
$2.6 million of the Senior Indebtedness which is due more than one year
following the date hereof. The remaining $3.0 million will be used for working
capital and general corporate purposes. See "Use of Proceeds."

RISK FACTORS

The securities offered hereby involve a high degree of risk, including,
without limitation: substantial indebtedness; pledge of assets; substantial
portion of proceeds used to pay debt; broad discretion in application of
remaining proceeds; possible inability to refinance senior indebtedness;
working capital deficit; negative net worth; recent decrease in net sales and
net income; possible need for additional capital; effectiveness of catalogs and
advertising; postal rates, paper prices and media costs; limited sources of
fiber and limited number of wig manufacturers. See "Risk Factors."

5
<PAGE>

SUMMARY FINANCIAL AND OPERATING DATA

The summary financial data presented below, except for the summary operating
data, as of and for the fiscal years ended January 1, 1994, December 31, 1994
and December 30, 1995 is derived from the audited financial statements of the
Company included herein. The summary financial data for fiscal years ended
December 28, 1991 and January 2, 1993 and the summary financial data for the
six months ended July 1, 1995 and June 29, 1996, except for the summary
operating data, are derived from the unaudited financial statements of the
Company. In the opinion of management, the summary financial data presented
below as of and for the six months ended July 1, 1995 and June 29, 1996 include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations for
these periods. The six month results are not necessarily indicative of the
results to be expected for the full year. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company,
including the notes thereto, appearing elsewhere herein.

6
<PAGE>

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(1) Pro forma as adjusted operations data and earnings per share information
gives effect to: (i) the sale of 1,019,553 shares by the Company in this
Offering at an estimated initial offering price of $7.00 per share less the
Underwriter's discount and other offering expenses; (ii) the application of
the estimated net proceeds therefrom to repay $5.9 million of Senior
Indebtedness; and (iii) the Preferred Conversion (as hereinafter defined)
(375,000 shares). These transactions, along with the incremental effect of
issuing an additional 75,000 options (17,893 shares) to Steven L. Bock, the
Company's Chairman and Chief Executive Officer, in connection with this
Offering and the weighted average shares outstanding as of June 29, 1996 of
3,577,986, which includes the dilutive effect of the issuance of the
Warrants (as hereinafter defined) (265,335 shares) and 582,999 options to
Mr. Bock and Stephen M. O'Hara, the Company's President, calculated under
the treasury stock method described in Accounting Principles Board Opinion
No. 15, support the share figure of 4,990,432 used to calculate pro forma
as adjusted operations data and earnings per share information.

(2) Net sales include for fiscal 1991 and 1992 the sales of certain
subsidiaries that were sold as of the end of 1992. For comparative
purposes, excluding the sold subsidiaries, the Company's net sales would be
$30,817,000 in fiscal 1991 and $32,430,000 in fiscal 1992.
(3) Net income reflects, for the fiscal year ended January 1, 1994, a gain of
$8,985,122 from the cumulative effect of change in accounting for income
taxes and for the fiscal year ended December 31, 1994, a gain from
extraordinary item of $12,078,489, net of income taxes resulting from the
forgiveness of debt upon the Company's emergence from bankruptcy. See the
financial statements and the notes thereto.
(4) Earnings per share for each fiscal year of the Company is computed by
dividing net income after preferred dividends for such fiscal year by the
weighted average number of shares of common stock and common stock
equivalents outstanding during such fiscal year. See the financial
statements and the notes thereto.
(5) Reflects number of customers who are being mailed catalogs at the end of
each period.
(6) The pro forma as adjusted balance sheet information gives effect to the
issuance of the Junior Subordinated Indebtedness (as hereinafter defined),
the issuance of the Warrants, the irrevocable waiver of accrued dividends
on the 13% Preferred Stock, the Preferred Conversion, the grant of options
to purchase 75,000 shares of Common Stock at an exercise price of $5.33 per
share to Steven L. Bock, the Company's Chairman and Chief Executive
Officer, and the sale by the Company of 1,500,000 shares of Common Stock
offered hereby at an estimated initial public offering price of $7.00 per
share and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds." See the financial statements and the notes
thereto.
(7) Long term debt reflects, for fiscal years ended January 2, 1993 and January
1, 1994, amounts subject to settlement under reorganization proceedings.
See "Reorganization."

Unless otherwise indicated, the information in this Prospectus does not give
effect to: (i) 500,000 shares of Common Stock of the Company reserved for
issuance under the Company's 1996 Stock Option Plan ("Plan"), of which options
to purchase 252,150 shares of Common Stock have been granted; (ii) 225,000
shares which may be issued upon exercise of the Underwriter's over-allotment
option; (iii) 150,000 shares reserved for issuance pursuant to the
Underwriter's Purchase Option; (iv) 657,999 shares reserved for issuance upon
exercise of other outstanding options issued to Steven L. Bock and Stephen M.
O'Hara, the Company's Chief Executive Officer and President, respectively
("Officers' Options"); and (v) 265,335 shares reserved for issuance upon
exercise of certain outstanding warrants issued to a director and others
("Warrants"). Unless otherwise indicated, the number of shares of Common Stock
and all per share information gives effect to: (x) the 325.51 for 1 stock split
to be effected immediately prior to effectiveness of the registration statement
of which this prospectus is a part ("Registration Statement") and (y) the
conversion, on a pro rata basis, of 22,491 shares ($2,249,100 face amount) of
13% preferred stock ("13% Preferred Stock") into 375,000 (post-split) shares of
Common Stock immediately prior to this Offering ("Preferred Conversion").

7
<PAGE>

REORGANIZATION

The Company was incorporated on November 30, 1994 for the purpose of
becoming the parent company of SC Corporation. SC Corporation was incorporated
in February 1989, and in March 1989 it acquired four companies engaged in the
catalog business: Wigs by Paula, Inc. ("Wigs"), the predecessor of SC Direct;
Western Schools Inc., the predecessor of SC Publishing; After the Stork, Inc.
("Stork"), a children's apparel company; and Brotman's Inc. ("Brotman"), a
company selling fabrics to people who sew at home. SC Corporation incurred
substantial indebtedness in order to consummate these acquisitions, the terms
of which indebtedness could not be supported by the operating cash flows of
the acquired businesses. Accordingly, SC Corporation and each of its four
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code ("Bankruptcy") in the United States
Bankruptcy Court for the District of Connecticut ("Bankruptcy Court") on
December 28, 1992. From that date until November 23, 1994, SC Corporation
operated its business as debtor-in-possession, subject to the jurisdiction of
the Bankruptcy Court.

In January 1993, the Bankruptcy Court and SC Corporation agreed to lift the
stay and permit Signal Capital Corporation, SC Corporation's senior secured
creditor ("Signal"), to sell Stork and Brotman. Stork was sold for $950,000 to
a group of purchasers which included Viking Holdings Limited ("Viking") and
Steven Bock, the Company's chairman and chief executive officer. Brotman was
sold by Signal to a liquidator.

SC Corporation's Disclosure Statement with respect to the First Amended and
Restated Joint Plan of Reorganization of SC Corporation, Wigs and SC
Publishing ("Plan of Reorganization") was approved by the Bankruptcy Court on
September 21, 1994. The Plan of Reorganization was subsequently confirmed by
the Bankruptcy Court on October 26, 1994, and the reorganization of SC
Corporation was consummated on November 23, 1994.

The Plan of Reorganization provided for the payment of $15,508,726 in cash,
$1,673,453 in subordinated notes, 10,227 shares of preferred stock valued at
$1,022,700 and 295,121 shares of common stock valued at $295,121 in settlement
of $24,102,851 of secured claims, and $3,345,066 in cash, $354,247 in
subordinated notes, 2,164 shares of preferred stock valued at $216,400 and
179,353 shares of common stock valued at $179,353 in settlement of $11,665,353
of unsecured claims. The gain on such discharge of pre-petition claims has
been recorded as an extraordinary item, net of income taxes of $1,094,649. The
Company funded the Plan of Reorganization by selling additional shares of
common stock and 13% Preferred Stock, entering into a new senior credit
facility, and issuing subordinated notes. Subsequent to the consummation of
the reorganization, certain stockholders of the Company purchased the
subordinated notes and 13% Preferred Stock from the holder of the secured
claims at their face values and the common stock from the holders of the
secured and unsecured claims at its fair market value.

Pursuant to the Plan of Reorganization, the Company emerged from the
Bankruptcy in November 1994, subject to one outstanding income and sales tax
claim asserted by the Commonwealth of Massachusetts. Massachusetts has claimed
a payment due of $61,000 and the Company has fully accrued this amount.

8
<PAGE>

RISK FACTORS

The securities offered hereby are speculative in nature and involve a high
degree of risk. Accordingly, in analyzing an investment in these securities,
prospective investors should carefully consider, along with the other matters
referred to herein, the following risk factors.

SUBSTANTIAL INDEBTEDNESS; PLEDGE OF ASSETS. The Company's Senior
Indebtedness consists of a $16.0 million credit facility ($14.0 million term
loan and $2.0 million revolving credit line), of which an aggregate of $11.9
million was outstanding on June 29, 1996. In addition, as of June 29, 1996,
$4.4 million of principal and accrued interest was outstanding of its
Subordinated Indebtedness and, as of August 15, 1996, $495,000 of principal
and interest was outstanding of its junior subordinated indebtedness ("Junior
Subordinated Indebtedness"). Substantially all of the Company's assets are
pledged to secure the Senior Indebtedness, which, among other things,
prohibits mergers, sales of assets, payment of dividends and creation of
liens, and restricts borrowings and capital expenditures. In the event of a
default, Banque Nationale de Paris ("BNP"), its senior lender, could foreclose
on its security interest in the Company's assets. Such action would have a
material adverse effect on the Company's business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and the financial statements and notes
thereto.

SUBSTANTIAL PORTION OF PROCEEDS USED TO PAY DEBT; BROAD DISCRETION IN
APPLICATION OF REMAINING PROCEEDS. $5.9 million, or 66.2%, of the net proceeds
from this Offering (assuming an initial public offering price of $7.00) will
be used to repay part of the Senior Indebtedness. Furthermore, the Company
will have broad discretion as to the application of the remaining $3.0 million
of proceeds allocated to working capital and general corporate purposes. See
"Use of Proceeds."

POSSIBLE INABILITY TO REFINANCE SENIOR INDEBTEDNESS. Following the
application of the proceeds of this Offering to repay a portion of the Senior
Indebtedness, $5.4 million of the Senior Indebtedness will remain outstanding.
As part of its credit agreement with BNP, the Company is obligated to pay an
additional fee of $625,000, increasing periodically to a maximum of $1.0
million on November 22, 1998, upon any future default, prepayment, change in
control, or with the final loan payment ("Additional Fee"). BNP has agreed to
waive the Additional Fee if the Senior Indebtedness is repaid in full on or
before March 31, 1997. The Company intends to refinance the Senior
Indebtedness and the Subordinated Indebtedness prior to March 31, 1997.
Failure to refinance the Senior Indebtedness by March 31, 1997 will obligate
the Company to pay the Additional Fee to BNP, which will have a negative
impact on the Company's liquidity and earnings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

WORKING CAPITAL DEFICIT; NEGATIVE NET WORTH; RECENT DECREASE IN NET SALES
AND NET INCOME; POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company has had in
the past and continues to have a working capital deficit and a negative net
worth. As of June 29, 1996, the Company had a working capital deficit of
$185,000 and a negative net worth of $4.4 million. Results of operations for
the six months ended June 29, 1996 show a decline in net sales and net income
versus the prior year. Net sales decreased $3.6 million, or 16.1%, from $22.4
million for the six months ended July 1, 1995 to $18.8 million for the six
months ended June 29, 1996. Net income declined by $405,000, or 73.1%, from
$555,000 for the six months ended July 1, 1995 to $149,000 for the six months
ended June 29, 1996. In addition, total catalog circulation declined by
2,353,000 catalogs, or 15.4%, from 15,245,000 catalogs circulated in the six
months ended July 1, 1995 to 12,891,000 catalogs circulated in the six months
ended June 29, 1996. There can be no assurance that the Company's future
results will improve or that the decline in net sales and net income will not
be reflective of the future results of the Company. The Company anticipates,
based on current plans and assumptions relating to its operations, that the
proceeds of this Offering, together with existing resources and income
generated from operations, should be sufficient to satisfy the Company's
anticipated cash requirements for at least 12 months after completion of this
Offering. If, however, additional financing becomes necessary, the Company may
seek additional equity financing, which could have a dilutive effect on
stockholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

9
<PAGE>

EFFECTIVENESS OF CATALOGS AND ADVERTISING. The Company targets potential new
customers through its advertising programs and solicits orders from existing
customers through catalog marketing campaigns. Catalog marketing campaigns and
advertising are working capital intensive and the success of such activities
depends, to a large extent, upon the accuracy of assumptions and judgments
made by the Company. The Company must continuously identify new customers with
its advertising programs and stimulate new purchases from existing customers
with its catalog marketing campaigns in order to be successful. There can be
no assurance that such advertising and catalog mailings will result in
attracting new customers at the rate required to maintain profitability or
continue to generate new purchases from the Company's existing customers. The
failure of such activities to identify new customers or to generate new
purchases from existing customers may have a material adverse effect on the
Company's business and its results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Wigs--Marketing."

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 U.S. 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. Effective January 1, 1995, postal rates for
mailing the Company's catalogs increased 14.3%. The cost of paper also
increased significantly in 1995. Any future increases in postal or shipping
rates or paper costs will have an 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. See "Business--Wigs--Marketing."

LIMITED SOURCES OF FIBER. The majority of the Company's revenue is derived
from the sale of wigs. Virtually all of the wigs sold by the Company are made
from special synthetic fiber manufactured by only 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 Company believes that the time required to obtain an
alternate source and the attendant delay in new production, as well as a
possibly significant increase in the price of fiber, may have a material
adverse effect on the Company's wig and hairpiece sales and profit margin. See
"Business--Wigs--Products."

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 represented between 8% and 25% of the Company's overall
wig purchases in the first half of 1996. 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 its manufacturers. See
"Business--Wigs--Products" and "--Operations--Purchasing."

RISK OF PHYSICAL DISASTER. Substantially all of the Company's telemarketing,
customer service and management information systems functions are housed in
the Company's main facility in South Easton, Massachusetts. Although the
Company has a disaster recovery program and creates a daily back-up tape of
customer list and computer information and sends such tapes on a weekly basis
for off-site storage, a significant disruption or loss affecting the telephone
or computer systems, or any significant damage to the Company's headquarters,
could have a material adverse effect on the Company's business. Although the
Company maintains $10 million of business interruption insurance, there can be
no assurance that a physical disruption to the Company's business or
operations would be adequately covered by such insurance. See "Business--
Operations."

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. These

10
<PAGE>

women comprise a significant 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
(primarily marketed under the name Rogaine(R)), is now available over-the-
counter and is sold to men and women as a measure against hair loss. There can
be no assurance that a new drug will not be developed that could prevent hair
loss among women. Such an event could have a material adverse effect on the
Company's core wig business. In addition, the development of any new cancer
therapies that would eliminate hair loss as a side effect of treatment could
have a material adverse effect on the Company's business. See "Business--
Wigs--Industry and Market."

DEPENDENCE UPON FOREIGN SUPPLIERS; EXCHANGE RATES; CURRENCY
FLUCTUATIONS. All of the wigs purchased by the Company, including those
purchased from domestic importers, are manufactured in Asia. The Company
expects that most of its wig merchandise will continue to be manufactured in
Asia in the future. Accordingly, the Company's operations are subject to the
customary risks of doing business abroad, including fluctuations in the value
of currencies, export duties, quotas, work stoppages and, in certain parts of
the world, political instability and possible governmental intervention. Since
the Company pays for its wigs in U.S. dollars, the cost of wigs may be
adversely affected by an increase in the relative value of the relevant
foreign currencies against the U.S. dollar. 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. See "Business--Wigs--
Products."

RELIANCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the performance of its executive officers and key employees. The
loss of the services of any its key employees, particularly Steven L. Bock,
its Chairman and Chief Executive Officer, or Stephen M. O'Hara, its President,
could have a material adverse effect on the Company's business, financial
condition or operating results. The Company has employment agreements with
Messrs. Bock and O'Hara expiring December 31, 1999. The Company currently
maintains an $8.5 million key person life insurance policy on Mr. Bock and a
$5.5 million key person life insurance policy on Mr. O'Hara, although those
amounts may be reduced. See "Management."

PRIOR BANKRUPTCY. SC Corporation was formed in 1989 to effect a leveraged
buy-out of four catalog companies, including the Company's present operating
subsidiaries. Mr. Bock was a principal in the original investment group that
formed SC Corporation in 1989. On December 28, 1992, as a result of its
inability to service then-existing debt requirements, SC Corporation and each
of its four subsidiaries filed voluntary petitions for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. From that date until November
23, 1994, SC Corporation operated its business as debtor-in-possession subject
to the jurisdiction of the Bankruptcy Court. Pursuant to the Plan of
Reorganization, the Company emerged from the Bankruptcy in November 1994,
subject to one outstanding income and sales tax claim asserted by the
Commonwealth of Massachusetts. Massachusetts has claimed a payment due of
$61,000 and the Company has fully accrued this amount. Mr. Bock, who currently
serves as chief executive officer and director of the Company, was, prior to
and during the Bankruptcy, an executive officer and director of SC Corporation
or its predecessors. Mr. O'Hara, who currently serves as president of the
Company, was, prior to and during the Bankruptcy, president of Wigs. See
"Reorganization."

COMPETITION. The Company encounters competition in all areas of its
business. The Company competes directly with other direct mail catalog
retailers and numerous other retail sources of products which are the same as,
or similar to, those products sold by the Company through its catalogs. Some
of the Company's competitors have greater financial and marketing resources
than the Company. Potential competition may emerge via new distributions
channels such as the Internet and interactive television. See "Business--
Competition."

POSSIBLE TERMINATION OF LEASES. The Company leases two buildings in South
Easton, Massachusetts. Under the terms of the leases, the landlords and the
Company have the right to terminate the leases upon four month's notice. The
Company believes that, in the event that either or both landlords give the
Company notice, the Company could move to a new facility within four months.
Nonetheless, there can be no assurance that the Company will find an
appropriate space within four months or that the process of moving and
restarting operations in a new site would not have a material adverse effect
on the Company's operations. See "Business--Facilities."

11
<PAGE>

UNCERTAINTY AND EXPENSE OF INTELLECTUAL PROPERTY LITIGATION. 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. See
"Legal Proceedings."

CONTINUED CONTROL BY CURRENT MANAGEMENT. Upon completion of this Offering,
the Company's directors and executive officers and their affiliates will
control approximately 69.3% of the outstanding shares of Common Stock. As a
result, current management will be able to elect the entire Board of Directors
of the Company, thereby enabling them to control all major decisions of the
Company. Furthermore, such concentration of ownership may have the effect of
preventing a change in control of the Company. See "Principal Stockholders"
and "Description of Securities."

MANAGEMENT OF GROWTH. The Company has experienced significant growth in
recent years, and this growth has placed significant demands on the Company's
managerial, operational and financial resources. The Company is dependent on
its ability to retain and motivate high quality personnel, especially its
management, marketing and merchandising executives and other key employees,
and the inability of the Company to do so would have a material adverse effect
on the Company's business, financial condition and operating results. In
addition, the Company's operations are dependent upon the accuracy, capability
and proper utilization of its management information systems, including its
computers and telephone systems, which the Company will need to expand and
enhance on a regular basis to support its planned growth and to remain
competitive. There can be no assurance that if the Company continues to grow,
management will be effective in attracting and retaining additional qualified
personnel, expanding the Company's physical facilities, integrating acquired
businesses or otherwise managing growth. If the Company is unable to manage
growth effectively, the Company's business, financial condition and operating
results could be materially adversely affected. See "Business" and
"Management."

ABSENCE OF PRIOR PUBLIC MARKET. Prior to this Offering, there has been no
public market for the Common Stock of the Company and there can be no
assurance that an active trading market for the Common Stock will develop or
be sustained after this Offering. The initial public offering price has been
determined solely by negotiation between the Company and the Underwriter based
on a number of factors and may not be indicative of the market price for the
Common Stock after this Offering. The trading price of the Company's Common
Stock is expected to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in analysts' earnings
estimates, general conditions in the wig industry and other factors. In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies and that are often unrelated to
operating performance. See "Underwriting."

LIMITATION ON USE OF NOLS. The Company currently has recorded a deferred tax
asset reflecting the benefit of approximately $18 million of net operating
loss carryforwards ("NOLs") available for federal and state income tax
purposes, which expire from 2005 through 2010. The Company believes that this
Offering will result in an "ownership change" under Section 382 of the
Internal Revenue Code of 1986 ("Code") and, as a result, the Company's ability
to use its "pre-change" NOLs will be limited to between $1.5 million and $2.0
million in each fiscal year following this Offering. Realization of the NOLs
is dependent on generating sufficient taxable income prior to expiration of
the loss carryforwards. There can be no assurance that the Company will be
able to use the NOLs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

STATE SALES TAX COLLECTION. 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

12
<PAGE>

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 may require the Company to incur
administrative costs in collecting and remitting the sales taxes. The Company
believes that Massachusetts is the only jurisdiction where it is currently
required to collect sales taxes. See "Business--Government Regulations."

SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Company's Common Stock in the
public market after this Offering could adversely affect the market price of
the Common Stock. See "Management--Stock Option Plan", "Description of
Securities" and "Shares Eligible for Future Sale."

ANTITAKEOVER MATTERS; POTENTIAL ADVERSE EFFECT OF FUTURE ISSUANCES OF
AUTHORIZED PREFERRED STOCK. The Company's Certificate of Incorporation and By-
laws contain certain provisions that may delay, defer or prevent a takeover of
the Company. The Company's Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock"), and to determine the price, rights, preferences and restrictions,
including voting rights, of those shares, without any further vote or action
by the stockholders. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue Preferred Stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
the Board of Directors may deem necessary. The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of
holders of any Preferred Stock that may be issued in the future. The Company's
By-laws include provisions establishing advance notice procedures with respect
to stockholder proposals and director nominations and permit special
stockholder meetings to be called only by the Board of Directors or the Chief
Executive Officer. In addition, the Company is subject to certain anti-
takeover provisions of the Delaware General Corporation Law ("DGCL"). Such
provisions could adversely affect the holders of the Common Stock and could
discourage, delay or prevent a takeover of the Company. See "Description of
Securities."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will incur immediate and substantial dilution of $5.92 or 84.6%,
representing the difference between the net tangible book value of the Common
Stock immediately after this Offering and the assumed initial public offering
price of the Common Stock of $7.00. See "Dilution."

EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Immediately after this Offering,
not including the Underwriter's Purchase Option, there will be outstanding
options and warrants to purchase, in the aggregate, 1,175,484 shares of Common
Stock at per share exercise prices ranging from $0.31 to the initial public
offering price. These options and warrants consist of: (i) options to purchase
252,150 shares of common stock at the initial public offering price granted
under the Plan, 10,000 of which are currently exercisable; (ii) Officers'
Options to purchase 657,999 shares of Common Stock, consisting of options to
purchase 582,999 shares at $0.31 per share, of which options to purchase
528,444 shares are currently exercisable, and options to purchase 75,000
shares at $5.33 per share, none of which are currently exercisable; and (iii)
Warrants to purchase 265,335 shares at $1.88, all of which are currently
exercisable. The exercise of the foregoing options and warrants and the
Underwriter's Purchase Option will dilute the percentage ownership of the
Company's stockholders and any sales in the public market of shares of Common
Stock underlying such securities may adversely affect the prevailing market
price for the Common Stock. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of the outstanding securities will, to the extent they are able,
likely exercise them at a time when the Company could, in all likelihood,
obtain any needed capital on terms more favorable to the Company than those
provided in the options and the warrants. See "Dilution."

NO DIVIDENDS. The Company has never paid cash dividends on the Common Stock.
The Company intends to retain any future earnings to finance its growth.
Accordingly, any potential investor who anticipates the need for current
dividends from an investment in the Common Stock should not purchase any of
the shares of Common Stock offered hereby. The Company's Senior Indebtedness
contains, and the Company anticipates that any future credit facility or other
indebtedness that the Company may enter into or incur would contain, a
prohibition against the payment of cash dividends and certain restrictions on
the payment of non-cash dividends. See "Dividend Policy."

13
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of Common Stock offered
hereby, assuming an initial public offering price of $7.00 per share, are
estimated to be $8,910,000, or $10,319,625 if the Underwriter's over-allotment
option is exercised in full, after deducting the estimated underwriting
discounts and offering expenses payable by the Company. Of this amount, $5.9
million, or 66.2% of the net proceeds, will be used to repay a portion of the
Senior Indebtedness, including (i) $1.5 million to pay down the outstanding
amount under the revolving credit portion of the Senior Indebtedness; (ii)
$1.8 million of the Senior Indebtedness which is due within one year of the
date hereof; and (iii) $2.6 million of the Senior Indebtedness which is due
more than one year following the date hereof. The Company's Senior
Indebtedness consists of a $14.0 million term loan which bears interest at
3.5% above certain LIBOR rates and matures on May 22, 1999; and a $2.0 million
revolving credit facility, which bears interest at 2% over the prime rate and
matures on May 22, 1999. An aggregate of $11.9 million was outstanding under
the Senior Indebtedness on June 29, 1996.

The remainder of the net proceeds of this Offering, estimated to be
approximately $3.0 million, or 33.8% of the net proceeds ($4.4 million, or
42.8% of the net proceeds, if the Underwriter's over-allotment option is
exercised in full), will be used for general corporate purposes, including
capital expenditures and working capital.

The Company plans to use its available working capital, including cash flow
from operations and net proceeds of this Offering to: (i) advertise, produce
and mail catalogs and (ii) increase direct purchasing of wigs and hairpieces.
Depending on the Company's business needs and cash flow, additional amounts of
the Company's remaining Senior Indebtedness may be repaid from the net
proceeds of this Offering allocated to working capital. In addition, if a
suitable opportunity arises, the Company may also use a portion of the net
proceeds of this Offering as part of the financing for an acquisition. As of
the date of this Prospectus, the Company has no agreement or understanding,
nor is it engaged in any negotiations, with respect to any acquisition.

Net proceeds not immediately required for the purposes described above will
be invested in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest-bearing government
obligations.

The Company anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this Offering, together with existing
resources and income generated from operations, should be sufficient to
satisfy the Company's anticipated cash requirements for at least 12 months
after completion of this Offering. After that time, the Company believes that
income from operations should satisfy the Company's working capital needs;
however, there can be no assurance that this will be the case.

The allocation of the net proceeds of this Offering represents the Company's
best estimate based upon its current plans and certain assumptions regarding
industry and general economic conditions and the Company's future revenues and
expenditures. If any of these factors change, the Company may find it
necessary or advisable to reallocate some of the proceeds within the above
described categories or may be required to seek additional financing. There
can be no assurance that additional financing will be available to the Company
on acceptable terms, or at all. Any failure to obtain additional financing, if
required, could have a material adverse effect on the Company.

14
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of June 29, 1996. The pro forma information gives effect to the issuance of
the Junior Subordinated Indebtedness, the issuance of the Warrants, the
irrevocable waiver of accrued dividends on the 13% Preferred Stock in August
1996, the Preferred Conversion, and the grant of options to purchase 75,000
shares of Common Stock at an exercise price of $5.33 per share to Steven L.
Bock, the Company's chairman and chief executive officer. The pro forma as
adjusted information gives effect to all of the above, and, in addition, the
sale by the Company of 1,500,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $7.00 per share and the application
of the estimated net proceeds therefrom as described in "Use of Proceeds."
This table should be read in conjunction with the financial statements of the
Company including the notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 29, 1996
-------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt............ $ 2,950 $ 2,950 $ 1,352
Revolving portion of line of credit.......... 1,450 1,450 --
Long-term debt:
Non-current portion of long-term debt........ 7,450 7,450 4,598
Subordinated notes........................... 4,363 4,744 4,744
Accrued dividends............................ 511 -- --
Stockholders' equity:
Preferred Stock, $1.00 par value; 1,000,000
shares authorized, 22,491 shares issued and
outstanding................................. 2,249 -- --
Common Stock, $.01 par value; 10,000,000
shares authorized, 2,826,666 shares issued
and outstanding at June 29, 1996, 3,201,666
outstanding on a pro forma basis and
4,701,666 outstanding as adjusted........... 28 32 47
Additional paid-in capital................... 4,496 7,497 16,392
Note from stockholder........................ (140) (140) (140)
Deferred compensation........................ -- (125) (125)
Accumulated deficit.......................... (11,046) (11,046) (11,046)
-------- -------- --------
Total stockholders' equity................. (4,413) (3,782) 5,128
-------- -------- --------
Total capitalization....................... $ 12,311 $ 12,812 $ 15,822
======== ======== ========
</TABLE>

DIVIDEND POLICY

The Company has never declared or paid cash or other dividends on the Common
Stock and it is currently the intention of the Company not to declare or pay
cash dividends on the shares of Common Stock. The payment of cash dividends in
the future will depend on the Company's earnings, financial condition, capital
needs and other factors deemed relevant by the Board, including statutory
restrictions on the availability of capital for the payment of dividends, the
rights of holders of any series of preferred stock that may hereafter be
issued and the limitations, if any, on the payment of dividends under any
then-existing credit facility or other indebtedness. The Company's Senior
Indebtedness contains, and the Company anticipates that any future credit
facility or other indebtedness that the Company may enter into or incur would
contain, a prohibition against the payment of cash dividends and restrictions
on the payment of non-cash dividends. It is the current intention of the Board
to retain earnings, if any, to finance the operations and expansion of the
Company's business.

15
<PAGE>

DILUTION

The difference between the initial public offering price per share of Common
Stock and the pro forma as adjusted net tangible book value per share of
Common Stock after this Offering constitutes the dilution per share of Common
Stock to investors in this Offering. Net tangible book value per share is
determined by dividing the net tangible book value (total tangible assets less
total liabilities) by the number of outstanding shares of Common Stock.

At June 29, 1996, the Company had a negative pro forma net tangible book
value of $3,816,169, or approximately negative $1.19 per share of Common
Stock. After giving effect to the sale of Common Stock offered hereby
(assuming a price of $7.00 per share less underwriting discounts and estimated
expenses of this Offering), the net tangible book value of the Company would
be $5,093,831, or approximately $1.08 per share. This represents an immediate
increase in net tangible book value of $2.27 per share to the existing
stockholders, and an immediate dilution of approximately $5.92 per share to
investors in this Offering (or approximately 84.6% of the initial public
offering price).

The following table illustrates the per share dilution without giving effect
to results of operations of the Company subsequent to June 29, 1996.

<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $7.00
Pro forma net tangible book value per share before Offering. $(1.19)
Increase in net tangible book value per share attributable
to new investors........................................... 2.27
Net tangible book value per share after Offering.............. 1.08
-----
Dilution to new investors..................................... $5.92
=====
</TABLE>

The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid and the average price per share paid by the existing stockholders and by
new investors pursuant to this Offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 3,201,666 68.1% $ 7,529,000 41.8% $2.35
New investors................... 1,500,000 31.9 10,500,000 58.2 $7.00
--------- ----- ----------- -----
Total......................... 4,701,666 100.0% $18,029,000 100.0%
========= ===== =========== =====
</TABLE>

16
<PAGE>

SELECTED FINANCIAL AND OPERATING DATA

The selected financial data presented below, except for the selected
operating data, as of and for the fiscal years ended January 1, 1994,
December 31, 1994 and December 30, 1995 is derived from the audited financial
statements of the Company included herein. The selected financial data for
fiscal years ended December 28, 1991 and January 2, 1993 and the selected
financial data for the six months ended July 1, 1995 and June 29, 1996, except
for the selected operating data, are derived from the unaudited financial
statements of the Company. In the opinion of management, the selected
financial data presented below as of and for the six months ended July 1, 1995
and June 29, 1996 include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these periods. The six month results are not
necessarily indicative of the results to be expected for the full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements of the Company, including the notes thereto, appearing elsewhere
herein.

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL AS ADJUSTED(1)
------------------------------------------------------------------- -------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED YEAR SIX MONTHS
------------------------------------------------ ----------------- ENDED ENDED
DEC. 28, JAN. 2, JAN. 1, DEC. 31, DEC. 30, JULY 1, JUNE 29, DEC. 30, JUNE 29,
1991 1993 1994 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------- -------- -------------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS AND AVERAGE ORDER SIZE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(2)........... $ 46,552 $ 47,120 $ 33,801 $38,179 $42,568 $22,419 $18,754 $42,568 $18,754
Cost of sales(2)....... 21,699 21,544 13,868 15,648 16,423 8,859 7,003 16,423 7,003
-------- -------- -------- ------- ------- ------- ------- ------- -------
Gross profit(2)........ 24,853 25,576 19,933 22,531 26,145 13,560 11,751 26,145 11,751
Selling, general and
administrative(2)..... 27,487 24,452 16,768 17,772 22,835 11,156 10,591 22,835 10,591
Restructuring charges.. -- -- -- -- 513 513 -- 513 --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............ (2,634) 1,124 3,165 4,759 2,797 1,891 1,160 2,797 1,160
Interest expense, net.. 3,242 3,080 431 661 1,918 958 909 1,343 623
Reorganization items... -- -- 1,038 2,890 -- -- -- -- --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes,
cumulative effect of
change in accounting
principle and
extraordinary item.... (5,876) (1,956) 1,696 1,208 879 933 251 1,454 537
Income taxes........... 21 180 704 498 357 379 102 582 215
-------- -------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary item.... $ (5,897) $ (2,136) $ 992 $ 710 $ 522 $ 554 $ 149 $ 872 $ 322
======== ======== ======== ======= ======= ======= ======= ======= =======
Net income (loss)(3)... $ (5,897) $ (2,136) $ 9,977 $12,789 $ 522 $ 554 $ 149 $ 872 $ 322
-------- -------- -------- ------- ------- ------- ------- ------- -------
Preferred stock
dividends............. -- -- -- 31 292 146 146 -- --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Net income available to
common stockholders... $ (5,897) $ (2,136) $ 9,977 $12,758 $ 230 $ 408 $ 3 $ 872 $ 322
======== ======== ======== ======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER
COMMON SHARE:(4)
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary item.... $ (2.09) $ (0.76) $ 0.33 $ 0.22 $ 0.08 $ 0.14 $ 0.00 $ 0.17 $ 0.06
Net Income (loss)...... $ (2.09) $ (0.76) $ 3.30 $ 4.22 $ 0.08 $ 0.14 $ 0.00 $ 0.17 $ 0.06
OTHER FINANCIAL AND
OPERATING DATA:
Total catalog
circulation(5)........ 17,122 17,562 18,807 22,623 29,245 15,245 12,891
Active customer file... 762 890 941 1,094 1,096 1,254 1,222
Average order size..... $ 56.17 $ 57.98 $ 60.82 $ 60.27 $ 61.05 $ 60.05 $ 62.85
<CAPTION>
PRO FORMA
HISTORICAL AS ADJUSTED(6)
------------------------------------------------------------------- --------------
FISCAL YEAR ENDED SIX MONTHS ENDED SIX MONTHS
------------------------------------------------ ----------------- ENDED
DEC. 28, JAN. 2, JAN. 1, DEC. 31, DEC. 30, JULY 1, JUNE 29, JUNE 29,
1991 1993 1994 1994 1995 1995 1996 1996
-------- -------- -------- -------- -------- ------- -------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital........ $ (3,480) $ (30) $ 157 $ 2,114 $ 649 $ 2,248 $ (185) $ 6,373
Total assets........... 10,756 6,150 19,142 17,364 18,170 18,756 17,777 21,287
Long-term debt(7)...... 28,461 31,621 30,125 15,180 12,876 14,836 11,813 9,343
Preferred stock........ -- -- -- 2,249 2,249 2,249 2,249 --
Stockholders' equity
(deficit)............. $(28,222) $(30,358) $(20,381) $(4,654) $(4,416) $(4,245) $(4,413) $ 5,128
</TABLE>

17
<PAGE>

- --------

(1) Pro forma as adjusted operations data and earnings per share information
gives effect to: (i) the sale of 1,019,553 shares by the Company in this
Offering at an estimated initial offering price of $7.00 per share less
the Underwriter's discount and other offering expenses; (ii) the
application of the estimated net proceeds therefrom to repay $5.9 million
of Senior Indebtedness; and (iii) the Preferred Conversion (375,000
shares). These transactions, along with the incremental effect of issuing
an additional 75,000 options (17,893 shares) to Steven L. Bock, the
Company's Chairman and Chief Executive Officer, in connection with this
Offering and the weighted average shares outstanding as of June 29, 1996
of 3,577,986, which includes the dilutive effect of the issuance of the
Warrants (265,335 shares) and 582,999 options to Mr. Bock and Stephen M.
O'Hara, the Company's President, calculated under the treasury stock
method described in Accounting Principles Board Opinion No. 15, support
the share figure of 4,990,432 used to calculate pro forma as adjusted
operations data and earnings per share information.

(2) Net sales, cost of sales, gross profit and selling, general and
administrative expenses include for fiscal 1991 and 1992 the results of
certain subsidiaries that were sold as of the end of 1992. For comparative
purposes, excluding the sold subsidiaries the Company's net sales, cost of
sales, gross profit and selling, general and administrative expenses would
be: $30,817,000, $13,608,000, $17,209,000 and $16,607,000, respectively,
in fiscal 1991 and $32,430,000, $14,367,000 $18,063,000 and $15,885,000,
respectively, in fiscal 1992.
(3) Net income reflects, for the fiscal year ended January 1, 1994, a gain of
$8,985,122 from the cumulative effect of change in accounting for income
taxes, and for the fiscal year ended December 31, 1994, a gain from
extraordinary item of $12,078,489, net of income taxes resulting from the
forgiveness of debt upon the Company's emergence from the Bankruptcy. See
the financial statements and the notes thereto.
(4) Earnings per share for each fiscal year of the Company is computed by
dividing net income after preferred dividends for such fiscal year by the
weighted average number of shares of common stock and common stock
equivalents outstanding during such fiscal year. See the financial
statements and the notes thereto.
(5) Reflects the number of customers who are being mailed catalogs at the end
of each period.

(6) The pro forma as adjusted balance sheet information gives effect to the
issuance of the Junior Subordinated Indebtedness, the issuance of the
Warrants, the irrevocable waiver of accrued dividends on the 13% Preferred
Stock, the Preferred Conversion, the grant of options to purchase 75,000
shares of Common Stock at an exercise price of $5.33 per share to Steven
L. Bock, the Company's chairman and chief executive officer, the sale by
the Company of 1,500,000 shares of Common Stock offered hereby at an
estimated initial public offering price of $7.00 per share and the
application of the estimated net proceeds therefrom as described in "Use
of Proceeds." See the financial statements and the notes thereto.

(7) Long-term debt reflects, for fiscal years ended January 2, 1993 and
January 1, 1994, amounts subject to settlement under reorganization
proceeding. See "Reorganization."

18
<PAGE>

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

Unless otherwise indicated, "1995" means the Company's fiscal year ended
December 30, 1995, "1994" means the Company's fiscal year ended December 31,
1994, "1993" means the Company's fiscal year ended January 1, 1994 and "1992"
means the Company's fiscal year ended January 2, 1993. The discussion and
analysis below should be read in conjunction with the Financial Statements of
the Company and the notes to the financial statements included elsewhere in
this Prospectus. 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 as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Prospectus.

OVERVIEW

The Company is a direct marketer targeting niche consumer product
categories. SC Direct, its principal operating subsidiary, is the leading U.S.
retailer of women's wigs and hairpieces. SC Publishing, a subsidiary of SC
Direct, sells continuing education courses to nurses, real estate
professionals and CPAs.

In 1995, SC Direct's sales of women's wigs, hairpieces, accessories and hats
represented 87.6% of the Company's net sales. Since 1992, SC Direct's sales
have grown through: (i) the expansion of its core Paula Young wig business;
(ii) the introduction in 1993 of the upscale Christine Jordan wig catalog;
(iii) the introduction in 1994 of the Especially Yours catalog, serving
African-American women; and (iv) the introduction in 1995 of the Paula's
Hatbox catalog. In addition, in 1995 the Company began selling directly to
consumers in Canada.

The balance of the Company's sales come from SC Publishing's catalogs, which
sell continuing education courses to nurses, real estate agents and CPAs. In
July 1995, the Company moved SC Publishing from San Diego, California to the
Company's South Easton, Massachusetts facilities. The Company encountered
difficulties in integrating SC Publishing into its operations in South Easton,
resulting in disruptions to SC Publishing's operations and a reduction in its
1995 operating profitability.

As a direct marketer, an important goal of the Company is to expand the size
and prevent the "aging" of, and maximize sales to, its customer file. To
acquire new customers and prevent the "aging" of its customer file, the
Company must continually expend working capital to maintain its advertising
program and convert the recipients of its catalogs into customers. In
addition, to retain and sell more to existing customers, the Company must
expend working capital for additional catalog mailings to these customers.
Reductions in advertising lead to declines in new customer prospects and,
therefore, new customers. In addition, the Company experiences a time lag
between advertising expenditures to gain new customer prospects and the
receipt of revenues generated by new customers.

As is typical in the catalog industry, the Company's business is affected by
increases in paper, postage, print and other catalog production costs. During
a period of rising postage and paper costs, such as 1995, the catalog industry
faces pressure on operating profits. The Company believes that its niche focus
allows it to target its mailings, thereby reducing its exposure to increases
in paper, postage and other catalog production costs.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995

Net sales decreased $3.6 million, or 16.1%, from $22.4 million for the six
months ended July 1, 1995 to $18.8 million for the six months ended June 29,
1996. This decrease resulted from the Company's decision to conserve working
capital by limiting its advertising expenditures during the second half of
1995 and the first half of 1996 which reduced the number of catalogs mailed to
prospective new customers. Gross sales of wigs and hairpieces to new customers
declined $2.8 million, or 57.1%, from $4.9 million in 1995 to $2.1 million in
1996. Gross sales to new customers represented 9.3% of gross sales in the
first half of 1996 and 18.4% of gross sales in the first half of 1995. Gross
sales of wigs and hairpieces to existing customers declined $600,000, or

19
<PAGE>

3.6%, from $16.8 million in 1995 to $16.2 million in 1996. In addition, gross
sales of continuing education courses declined approximately $600,000, or
19.4%, from $3.1 million in the six months ended July 1, 1995 to $2.5 million
in the six months ended June 29, 1996 due to a decision to mail fewer
catalogs.

Gross margins from the sale of wigs and hairpieces increased from 58.2% in
the six months ended July 1, 1995 to 60.8% in the six months ended June 29,
1996 primarily due to lower product costs resulting from the continued
expansion of direct purchasing from overseas manufacturers. In the six months
ended June 29, 1996, the Company purchased 55.1% of its wigs directly from
manufacturers compared to 30.7% in the six months ended July 1, 1995. Gross
margin for continuing education courses increased slightly from 75.0% in the
six months ended July 1, 1995 to 75.4% in the six months ended June 29, 1996.

Selling, general and administrative ("SG&A") expenses declined $600,000, or
5.4%, from $11.2 million in the six months ended July 1, 1995 to $10.6 million
in the six months ended June 29, 1996. In the six months ended June 29, 1996,
the Company mailed fewer catalogs because of increases in paper prices and
postage rates, decreased advertising expenditures to conserve working capital
and employed additional senior managers. Total catalogs mailed decreased by
2.3 million, or 15.1%, from 15.2 million in 1995 to 12.9 million in 1996.
Total postage costs decreased $600,000, or 19.4%, from $3.1 million in the
first six months of 1995 to $2.5 million in the first six months of 1996.
Despite the reduction in the number of catalogs mailed, total catalog
production costs increased by $100,000, or 3.6%, from $2.8 million in 1995 to
$2.9 million in 1996, because of the increased paper prices. Advertising
expenditures decreased by $500,000, and general office overhead increased by
$300,000.

Deferred catalog costs increased $200,000, or 10%, from $2.0 million in the
six months ended July 1, 1995 to $2.2 million in the six months ended June 29,
1996. This increase was caused by an increase in the amount of production
costs being amortized, offset by a reduction in catalogs mailed and a
reduction in the prepayment of costs for catalogs not yet mailed.

Net interest expense declined $49,000, or 5.1%, from $958,000 in the six
months ended July 1, 1995 to $909,000 in the six months ended June 29, 1996,
reflecting lower interest rates and lower principal amounts outstanding on the
Senior Indebtedness.

1995 COMPARED TO 1994

Net sales increased $4.4 million, or 11.5%, from $38.2 million in 1994 to
$42.6 million in 1995. This increase is attributable to (i) an increase in
gross sales of wigs and hairpieces of $2.5 million, or 7.7%, from $32.6
million in 1994 to $35.1 million in 1995; (ii) an increase in gross sales of
wigs, hairpieces and hats through new catalogs of $1.3 million, or 162.5%,
from $800,000 in 1994 to $2.1 million in 1995; (iii) $1.1 million of gross
sales of wigs and hairpieces marking the commencement of direct sales by the
Company into Canada; and (iv) an increase in gross sales of continuing
education courses of $1.3 million, or 32.5%, from $4.0 million in 1994 to $5.3
million in 1995. In addition, a reduction in the rate of returned merchandise
accounted for $800,000 of the increase in net sales. Gross sales of wigs and
hairpieces to new customers declined $2.6 million, or 26.3%, from $9.9 million
in 1994 to $7.3 million in 1995. Gross sales of wigs and hairpieces to new
customers represented 21.2% of gross sales in 1994 and 14.5% of gross sales in
1995. This decline was caused by a decline in advertising during the last half
of 1995 which resulted in the mailing of 221,000 fewer inquiry catalogs in
1995 and lower response rates to the inquiry series.

Gross margin from the sale of wigs and hairpieces increased from 56.9% in
1994 to 59.6% in 1995 due to an increase in the direct purchasing of wigs from
overseas manufacturers. Gross margin from the sale of continuing education
courses decreased as a percentage of sales from 76.6% in 1994 to 74.1% in 1995
reflecting an increase in costs due to purchasing smaller quantities to fill
back orders and an increase in author fees.

Inventories increased by $900,000, or 21.4%, from $4.2 million at the end of
1994 to $5.1 million at the end of 1995. While this rate of increase was
higher than the rate at which sales increased in 1995, it was caused

20
<PAGE>

by a $968,000 shortfall from budgeted sales in the fourth quarter of 1995.
Inventory levels were reduced by $1,000,000, or 19.6%, through the normal
course of business in the first six months of 1996, from $5.1 million at the
end of December 1995 to $4.1 million at the end of June 1996. The Company
disposes of closeout inventory through a special mailing program to customers.

SG&A expenses increased by $5.0 million, or 28.1%, from $17.8 million in
1994 to $22.8 million in 1995. SG&A as a percentage of sales increased from
46.6% in 1994 to 53.6% in 1995, primarily as a result of sharp increases in
paper, postage and media costs. Total catalogs mailed increased by 6.6
million, or 29.2%, from 22.6 million in 1994 to 29.2 million in 1995. Due to a
14.3% postal rate increase at the beginning of 1995, total postage costs
increased $1.7 million, or 39.5%, from $4.3 million in 1994 to $6.0 million in
1995. Total catalog production costs increased by $2.3 million, or 56.1%, from
$4.1 million in 1994 to $6.4 million in 1995. Catalog production costs were
adversely affected by continuous increases in the cost of paper during 1995
that ranged from 19% to 45% depending on paper grade. In December 1995 paper
prices were 45% to 55% higher than in September 1994.

Deferred catalog costs increased by $600,000 or 35.3%, from $1.7 million in
1994 to $2.3 million in 1995. An increase in prepaid costs for catalogs not
yet mailed caused $400,000 of the increase. The remaining $200,000 of the
increase is attributable to changes in amortization schedules that more
accurately match catalog costs with associated catalog revenue streams in
accordance with the adoption of 93-7, "Reporting on Advertising Costs."

Media costs were affected by a 55.5% increase in the cost of free standing
inserts from $3.64 per thousand inserts in 1994 to $5.66 per thousand in 1995.
As a result of this rate increase and the continuing need to conserve working
capital, the Company reduced its total spending on this medium from $695,000
in 1994 to $421,000 in 1995, a 39.4% reduction.

Net interest expense increased from $661,000 in 1994 to $1.9 million in
1995, reflecting a full year of debt servicing costs on the Senior and
Subordinated Indebtedness incurred as part of the Company's reorganization in
November 1994.

1994 COMPARED TO 1993

Net sales increased $4.4 million, or 13.0%, from $33.8 million in 1993 to
$38.2 million in 1994. This increase was driven by an increase in gross sales
of wigs and hairpieces to existing customers of $3.6 million, or 12.4%, from
$29.0 million in 1993 to $32.6 million in 1994. Gross sales of wigs and
hairpieces to new customers in 1994 increased by $3.4 million, or 52.3%, from
$6.5 million in 1993 to $9.9 million in 1994 due to an increase in
advertising. Gross sales to new customers in 1994 were 21.3% of total gross
sales in 1994 in 1994 and 16.3% of total gross sales in 1993. Gross sales of
continuing education courses declined $500,000, or 11.1%, from $4.5 million in
1993 to $4.0 million in 1994.

The Company's gross margin remained relatively constant at 59.1% in 1993 and
59.0% in 1994, although gross profit increased $2.5 million as a result of the
increase in sales. Gross margin from the sale of wigs and hairpieces increased
from 56.1% in 1993 to 56.9% in 1994 reflecting the continuation of the direct
import program. Gross margin from the sale of continuing education courses
declined from 77.6% in 1993 to 76.6% in 1994 as sales of continuing education
courses for nurses, which have lower gross margins, increased to 53% of sales
in 1994 from 50% in 1993, and sales of courses for real estate agents, which
have higher gross margins, declined from 23% of sales in 1993 to 21% in 1994.
In addition, the Company lowered prices in the real estate catalogs to compete
with lower priced competitors.

SG&A expenses increased $1.0 million, or 6.0%, from $16.8 million in 1993 to
$17.8 million in 1994. SG&A as a percentage of sales declined from 49.6% in
1993 to 46.5% in 1994. Total catalogs mailed increased

21
<PAGE>

by 3.8 million, or 20.2%, from 18.8 million in 1993 to 22.6 million in 1994.
Total postage costs increased $500,000, or 13.2%, from $3.8 million in 1993 to
$4.3 million in 1994. Total catalog production costs increased by $400,000, or
10.8%, from $3.7 million in 1993 to $4.1 million in 1994.

Deferred catalog costs increased by $200,000, or 13.0%, from $1.5 million in
1993 to $1.7 million in 1994. This increase was caused by an increase in the
number of catalogs being amortized and an increase in photography costs and
costs associated with the start-up of the Company's hat catalog.

Media costs were affected by a 35.7% decrease in the costs of free standing
inserts from $5.66 per thousand in 1993 to $3.64 per thousand in 1994.
Although the Company benefitted from this decrease in media rates, on a cost
per thousand basis, a need to conserve working capital caused the Company to
decrease its total spending on this medium from $990,000 in 1993 to $695,000
in 1994, a 29.8% decrease.

Net interest expense increased $230,000, or 53.4%, from $431,000 in 1993 to
$661,000 in 1994 as a result of the interest expense incurred during the last
six weeks of 1994 on the Senior Indebtedness and Subordinated Indebtedness
incurred to finance the Company's Plan of Reorganization.

Reorganization expense increased from $1.0 million in 1993 to $2.9 million
in 1994, reflecting the use of additional legal, accounting and other
professional services needed to emerge from the Bankruptcy and an additional
compensation expense of $533,000. An extraordinary gain of $12.1 million was
recognized in 1994, reflecting the forgiveness of debt upon the execution of
the Plan of Reorganization on November 23, 1994.

1993 COMPARED TO 1992

Net sales in 1992 included $14.7 million of sales from two subsidiaries that
were sold as of the end of 1992. Excluding those sales, net sales for 1992
were $32.4 million. Net sales in 1993 increased $1.4 million, or 4.3%, from
$32.4 million in 1992 to $33.8 million in 1993. Gross sales of wigs and
hairpieces increased $2.7 million, or 10.3%, from $26.3 million in 1992 to
$29.0 million in 1993. Gross sales of wigs and hairpieces to new customers
decreased $400,000, or 5.8%, from $6.9 million in 1992 to $6.5 million in
1993. Gross sales of continuing education courses increased $200,000, or 4.7%,
from $4.3 million in 1992 to $4.5 million in 1993.

Gross margin increased from 55.7% in 1992 to 59.1% in 1993 as a result of
the start of SC Direct's direct purchasing program, together with a
significant shift to lower cost importers for a substantial portion of its wig
purchases. Gross margins from the sale of continuing education courses
declined slightly as lower margin sales to CPAs increased as a percentage of
total sales of continuing education courses.

SG&A expenses increased $900,000, or 5.7%, from $15.9 million in 1992 to
$16.8 million in 1993. Included in 1992 SG&A expenses were approximately
$600,000 of non-recurring expenses relating to the sale of two subsidiaries as
of the end of 1992. Excluding the $600,000, SG&A expense increased $1.5
million, or 9.8%, from $15.3 million in 1992 to $16.8 million in 1993.
Advertising expenditures increased by $1.1 million from $2.4 million in 1992
to $3.5 million in 1993. Total catalogs mailed increased by 1.2 million, or
6.8%, from 17.6 million in 1992 to 18.8 million in 1993. Total postage costs
increased by $100,000, or 2.7%, from $3.7 million in 1992 to $3.8 million in
1993. Total catalog production costs increased by $600,000, or 19.4%, from
$3.1 million in 1992 to $3.7 million in 1993.

Deferred catalog costs remained constant at $1.5 million at the end of
fiscal 1993 and fiscal 1992.

Net interest expense decreased by $2.7 million, or 87.1%, from $3.1 million
in 1992 to $431,000 in 1993 as a result of no interest being accrued on $26.3
million of pre-bankruptcy debt during 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company expends significant amounts of working capital for advertising,
inventory and catalog production costs in advance of the revenues generated by
these items. The Company has met its working capital needs primarily through
funds generated from operations and short-term bank financing. Because of the
need to amortize the Senior Indebtedness, there have been limited funds
available to expand the business.

Cash flow provided by operating activities fluctuated during the past three
fiscal years as business conditions changed. In 1993 the Company generated
$615,000 from operating activities, in 1994 the Company used $1.2

22
<PAGE>

million in operating activities and in 1995 the Company generated $1 million
from operating activities. In 1993 and 1994, while the Company was in
bankruptcy, cash was used to provide working capital for inventory, advertising
and catalog expenses. In addition, the Company accrued bankruptcy related
expenses during 1993 and 1994 which were paid at the end of 1994 along with
pre-petition obligations. In 1995 the Company increased its accounts payable to
normal levels. In the first six months of 1996 cash flow from operating
activities increased by $1.2 million from the first six months of 1995
primarily as a result of a $983,000 reduction in inventory.

The Company's Senior Indebtedness consists of a $16.0 million credit facility
($14.0 million term loan and $2.0 million revolving credit line), of which an
aggregate of $11.9 million was outstanding on June 29, 1996. The term loan
portion of the Senior Indebtedness is payable in installments, with the final
installment due on May 22, 1999, and bears interest at 3.5% above certain LIBOR
rates or, at the Company's option, at 2% over the prime rate. The revolving
portion is due on the maturity of the term loan and bears interest at 2% over
the prime rate. $5.9 million of the proceeds of this Offering are being used to
repay the Senior Indebtedness, including (i) $1.5 million to pay down the
outstanding amount under the revolving credit portion of the Senior
Indebtedness; (ii) $1.8 million of the Senior Indebtedness which is due within
one year of the date hereof; and (iii) $2.6 million of the Senior Indebtedness
which is due more than one year following the date hereof. The Company will be
able to reborrow under the revolving credit line following this Offering.

In addition to principal and interest due under the Senior Indebtedness, the
Company is obligated to pay the Additional Fee to BNP in the event of any
future default, prepayment or change in control, or upon the final principal
payment in May 1999. The Additional Fee is currently $625,000 and will rise to
$1.0 million over the term of the Senior Indebtedness. On August 14, 1996, the
Company entered into a Second Amendment, Waiver and Consent ("Second
Amendment") with BNP. Pursuant to the Second Amendment, BNP consented to this
Offering and the use of proceeds of this Offering, agreed to amend certain
financial covenants and agreed to waive the Additional Fee provided that BNP's
Senior Indebtedness is repaid in full on or prior to March 31, 1997. See "Use
of Proceeds" and Note 5 to the financial statements.

Pursuant to the Plan of Reorganization, certain of the Company's current
stockholders purchased $3.6 million of Subordinated Indebtedness. The principal
of the Subordinated Indebtedness is due December 1, 2002, subject to a
subordination agreement with BNP. The Subordinated Indebtedness bears interest
at 11.5%, payable semi-annually on June 1 and December 1; and the Company may,
at its option through November 22, 1999, and, under certain conditions, through
November 22, 2002, pay interest on the Subordinated Indebtedness with
additional notes containing identical terms and conditions as the Subordinated
Indebtedness. As of June 29, 1996, approximately $4.4 million, including
accrued interest, was outstanding under the Senior Indebtedness.

The Company has high amortization payments under the Senior Indebtedness. The
Company had little cash on hand at the end of any year, except 1993 when it was
in bankruptcy. Cash generated from operations plus $1.5 million of borrowings
under the revolving credit line have been used for working capital and to pay
principal and interest on the Senior Indebtedness. The term loan portion of the
Senior Indebtedness has been reduced from the original $14.0 million
outstanding when the loan was obtained in November 1994 to $10.4 million at the
end of June 1996. Capital expenditures average under $400,000 per year.

Due to its working capital constraints, on June 1, 1996 the Company entered
into an agreement with a director, Martin Franklin, and two associates of Mr.
Franklin, pursuant to which Mr. Franklin and such associates loaned $495,000 to
the Company. This loan was made on August 9, 1996, bears interest at 11.5%, and
is due August 9, 1999, provided that this loan will not be repaid prior to the
repayment of the Subordinated Indebtedness. In addition, in connection with
such loan, Mr. Franklin and his associates purchased for $5,000 a warrant to
acquire an aggregate of 265,335 shares of the Company's Common Stock at an
aggregate exercise price of $500,000. See "Certain Transactions" and Note 13 to
the financial statements.

The Company anticipates that following this Offering and the application of
the proceeds to repay a portion of the Senior Indebtedness, there will be
approximately $5.4 million of Senior Indebtedness outstanding. The Company
plans to refinance the remaining Senior Indebtedness and the Subordinated
Indebtedness after this

23
<PAGE>

Offering. The Company believes that partial repayment of the Senior
Indebtedness will lower its debt servicing cost, and that this, together with
the remaining net proceeds of this Offering, will enable the Company to expand
its business. Should the Company be unable to secure a lender to refinance
both the Senior and Subordinated Indebtedness, the Company will attempt to
refinance only the Senior Indebtedness. The Company anticipates, based on
current plans and assumptions relating to its operations, that the proceeds of
this Offering, together with existing resources and cash generated from
operations, should be sufficient to satisfy the Company's anticipated cash
requirements for at least 12 months after completion of this Offering. After
that time, the Company believes that income from operations should satisfy the
Company's working capital needs; however, there can be no assurance that this
will be the case.

The Company currently has recorded a deferred tax asset reflecting the
benefit of approximately $18 million of NOLs available for federal and state
income tax purposes, which expire from 2005 through 2010. The Company believes
that this Offering will result in an "ownership change" under Section 382 of
the Code and, as a result, the Company's ability to use its "pre-change" NOLs
will be limited to between $1.5 million and $2.0 million in each fiscal year
following this Offering. Realization of the NOLs is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards. There
can be no assurance that the Company will be able to use the NOLs.

SEASONALITY AND INFLATION

The Company's sales have been generally non-seasonal. The need-based profile
of the Company's wig and continuing education customers serves to minimize
seasonality, as opposed to the traditional seasonality of want-based
consumption.

The impact of inflation on the Company's operations has not been significant
to date. However, there can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operating
results.

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BUSINESS

GENERAL

The Company is a direct marketer targeting niche consumer product
categories. SC Direct, its principal operating subsidiary, is the leading U.S.
retailer of women's wigs and hairpieces. SC Publishing, a subsidiary of SC
Direct, sells continuing education courses to nurses, real estate
professionals and CPAs.

SC Direct sells wigs and hairpieces primarily to women over the age of 50,
using three distinct catalogs: Paula Young, Christine Jordan and Especially
Yours. In 1995, SC Direct mailed 20.9 million catalogs, generating net sales
of $37.3 million. SC Direct has developed a proprietary data base consisting
of approximately 5.6 million persons, including more than 875,000 active
customers and more than one million persons who have requested catalogs in the
past year but who have not made a purchase. Due to the fact that wig wearers
are difficult to find, the Company believes that its wig database is unique
and would be very expensive to replicate. The Company believes that this poses
a substantial barrier to entry for any potential competitor.

SC Direct's target market, women over age 50, is projected by the U.S.
Census Bureau to grow from 38.7 million women, or 38% of the total female
population in 1995, to 51.5 million women, or 45% of the total female
population in 2010. This growth is driven primarily by aging "baby-boomers."
The Company believes that only approximately five million, or 25%, of the 20
million American women with thinning hair currently wear wigs, and that,
accordingly, there is substantial opportunity for future growth of SC Direct's
business.

In 1995, SC Direct launched its Paula's Hatbox catalog, through which it
sells a variety of fashion hats to women. The Company believes that the market
for fashion hats has niche characteristics similar to those of the wig market.
In addition, SC Direct intends to begin test marketing men's wigs in the Paula
Young catalog in early 1997.

SC Publishing offers nurses, real estate agents and CPAs home study
continuing education through the Western Schools catalogs. SC Publishing's
strategy is to build its business by offering additional products and programs
to its core customers and by expanding into new and related professional
fields. In 1995, SC Publishing mailed 8.3 million catalogs, generating net
sales of $5.3 million.

The Company intends to build its business in existing niche markets and
enter new niche markets both by internal expansion and through acquisitions.
Niche markets are characterized by smaller market size, unique or hard to find
products, or hard to locate customers. In executing its plans, the Company
will seek to do the following:

. REFINE MARKETING PROGRAMS. The Company continually seeks to refine its
marketing programs, including the two-step marketing program which it
utilizes to identify hard to locate customers in niche markets. The
Company constantly seeks to develop new and improved marketing
techniques to increase catalog requests, convert catalog requests into
orders and increase sales to existing customers.

. OFFER BROAD PRODUCT SELECTION AT ATTRACTIVE PRICING. The Company
believes that it differentiates itself from both traditional store-front
retailers and other direct marketers by offering a broad and deep
selection of the products it offers. By virtue of its large order volume
and direct purchasing from wig manufacturers, the Company is able to
offer wigs at prices lower than most hair salons and wig shops.

. MAINTAIN CLOSE SUPPLIER RELATIONSHIPS. The Company maintains close
relationships with many of the leading wig manufacturers. Through these
relationships, the Company is able to obtain better control over
purchasing, styles, quality and cost.

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. CONTINUE TO PROVIDE SUPERIOR CUSTOMER SERVICE. By emphasizing the
training of marketing representatives, the Company seeks to maintain
high levels of customer satisfaction. The Company seeks to provide
prompt, courteous and knowledgeable service to its customers in order to
build customer loyalty and demonstrate to the customer the convenience
of catalog shopping.

. ACHIEVE ECONOMIES OF SCALE AND EFFICIENCIES. The Company believes that,
if it is able to achieve its growth objectives, it will be able to
reduce its fixed and other costs as a percentage of sales.

. DEVELOP NEW PRODUCTS AND ENTER NEW MARKETS. The Company intends to add
new product lines through new or expanded catalogs. To that end, the
Company carefully monitors the wig, hat and continuing education markets
to identify unfulfilled consumer demand. By developing and offering new
products to meet that demand, the Company creates additional sales
opportunities and reinforces customer loyalty to the Company's catalogs.
The Company is seeking to add complementary products to its existing
product lines that would appeal to its current customer base. The
Company is also looking for new markets to enter, either through
internal development or acquisitions.

WIGS

INDUSTRY AND MARKET

Based on U.S. Census Bureau import data, approximately five million wigs are
sold annually in the United States. The wig market is comprised of fashion wig
wearers and need-based wig wearers. Need-based wig wearers purchase wigs as an
everyday necessity due to a physical problem such as naturally thinning hair
or total hair loss, as well as temporary hair loss due to medical procedures
and conditions (i.e., cancer treatments). Many everyday wig wearers prefer to
replace their wigs every three to four months, and have a wig "wardrobe,"
consisting of several wigs of different styles and colors.

In the 1960s, wigs and related products were broadly viewed as a fashion
accessory, but as styles 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 and
inventories of wigs. The Company recognized that a base of dedicated, need-
based wig customers existed which was no longer being adequately serviced by
the remaining retail alternatives. Therefore, the Company launched its catalog
business to service this market.

The retail wig market is serviced by direct mail catalogers and retail
markets, including beauty salons, department stores and wig shops. The Company
estimates that catalog retailers represent 40% of the current market and offer
the benefits of privacy, convenience, lower prices and broad product
selection. Retail stores provide customers with more personalized service and
allow customers to try on the product, however, they charge higher prices and
offer less convenience, privacy and selection than catalog retailers. The
retail market is highly fragmented and the Company is unaware of any major
retail store that has greater than 1% of the market.

The Company believes it has advantages over its two principal mail order
competitors, General Wig Company (a subsidiary of Revlon, Inc.), which markets
wigs through the Beauty Trends catalog, and Vincent James Company, which
markets wigs through the TWC Catalog. The Company believes that these
advantages include economies of scale, the size of its customer list, and the
extent of its advertising program. The Company estimates that all other wig
catalog retailers represent less than 5% of the market.

The African-American wig market, unlike the Caucasian market, has yet to
undergo the transition to direct marketing from retail outlets. Currently,
only about 5% of African-American wigs are sold through catalogs, with the
balance sold in beauty salons, department stores and wig shops. As a result,
there are no significant catalog competitors. The Company is aware of only
three other mail order catalogs targeting the African-American market--Black
is Beautiful, Naomi Simms and Gold Medal. The Company believes that Especially
Yours' sales in 1995 exceeded the sales of each of the other catalogs
targeting African-Americans.

Millions of American women suffer varying degrees of hair loss. These women
comprise a significant percentage of the Company's customer base for its wigs
and hairpieces. Ongoing research is conducted by

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numerous groups, both public and private, seeking remedies for hair loss. One
drug, Minoxidil (primarily marketed under the name Rogaine(R)) is available
over-the-counter and is sold to men and women as a measure against hair loss.
There can be no assurance that a new drug will not be developed that could
prevent hair loss among women. Such an event could have a material adverse
effect on the Company's core wig business. In addition, any new cancer
therapies that would eliminate hair loss as a side effect of treatment could
have a material adverse effect on the Company's business.

PRODUCTS

The Company sells a full range of wigs and hairpieces in five separate
product lines. Hairpieces include wiglets and add-ons or extensions. 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 or extensions are usually
added for style reasons, generally to the back of the head. The Company offers
about 45 different wig styles per catalog in more than 25 colors, including
browns, blondes, grays and reds. Most wigs are available in one or two sizes,
except for wigs in the Christine Jordan line which offers all styles in five
sizes.

All of the Company's wigs, as well as the majority of all wigs sold in the
U.S., are manufactured in small, privately-owned factories in Korea, Indonesia
and China that manufacture to the specifications and designs of their
customers. The Company believes that there is adequate supply to meet the
demand, and the Company is not solely dependent on any one manufacturer for
its wig supply. All wigs and hairpieces sold by the Company are made of
synthetic fibers. The wig market is dominated by synthetic fiber wigs.
Synthetic fiber has several advantages over human hair, including lower cost,
permanent styling, truer colors and cleanliness.

The Company expects that most of its wig merchandise will continue to be
manufactured in Asia in the future. Accordingly, the Company's operations are
subject to the customary risks of doing business abroad, including
fluctuations in the value of currencies, export duties, quotas, work stoppages
and, in certain parts of the world, political instability and possible
governmental intervention. Since the Company pays for its wigs in U.S.
dollars, the cost of wigs may be adversely affected by an increase in the
relative value of the relevant foreign currencies against the U.S. dollar.
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.

Wigs are manufactured using a special modacrylic fiber, the market for which
is dominated by two Japanese firms, Kaneka Corporation and Toyo Chemical
Corporation. Modacrylic fiber is not a proprietary material, and other
manufacturers in the past have produced this material. Although the Company
believes that in the event of a disruption in the supply of fiber, alternative
sources could be found, such a transition to new fiber suppliers could
interrupt or delay wig production schedules, potentially causing a material
adverse effect on the Company's business.

The manufacture of a wig begins with the blending of the fibers for color
and the cutting of the fiber to proper length. The fibers are then sewn to a
cotton or lace wefting, after which the predetermined curl pattern is baked
in. The wefting is then sewn together into the final pattern and styled.

During the first half of 1996, the Company purchased approximately 55% of
its wigs and hairpieces directly from foreign manufacturers and the balance
from four U.S. importers. Each of the Company's five largest manufacturers
represented between 8% and 25% of its overall wig purchases in the first half
of 1996. The Company is increasing the percentage of wigs purchased directly
from manufacturers because direct purchasing permits better control over
price, quality and style. By 1998, the Company plans to purchase 80% to 90% of
its wigs directly from the manufacturers.

The Company also sells wig accessories, including brushes and stylers,
styrofoam head forms and stands, rainhoods, wig liners, shampoos and styling
products, generally at prices below $10.

MARKETING

The Company markets its products through catalogs, generally by way of a
two-step marketing program. Step one involves obtaining prospective customers
by soliciting customer interest through targeted advertising.

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The Company uses a variety of advertising media, including magazines,
newspaper tabloids, co-op mailers, package insert programs and television. The
Company places advertising based on demographics, cost and historical
experience. Historical experience is measured by cost per inquiry, cost per
customer and lifetime value of a customer and, based on this information, the
Company determines which media are effective and where future marketing
dollars should be spent.

Step two, which commences when a prospective customer responds favorably to
an advertisement placed by the Company, involves sending the prospective
customer a series of catalogs designed to elicit an initial sale. By pre-
qualifying prospects in this manner, SC Direct has been able to convert 15% to
20% of inquirers into customers within one year of catalog request. If a sale
is made, the customer is put on an active list and additional catalogs
designed to create a repeat buyer are mailed. Inactive inquiries and customers
are periodically sent a program of targeted mailings designed to reactivate
customer interest.

The Company believes that in niche markets its two-step marketing program
has several advantages over the more traditional one-step marketing approach
which entails mailing unsolicited catalogs to rented names. Since catalogs are
sent only to persons who have shown an interest in the Company's products, the
Company experiences higher conversion rates and fewer catalogs need to be
printed and mailed, which leads to savings in paper, postage and other catalog
production costs.

The Company continually refines its marketing programs and processes for the
purpose of increasing its conversion rate and satisfying its existing
customers. The Company employs a variety of research methods, including
demographic analysis, customer surveys, test mailings and advertising, focus
groups and outside research sources. The Company's research efforts have
assisted the Company in pursuing its strategic goals by identifying new niche
markets, such as hats and wigs and hairpieces for African-American women.

BRANDS

The Company markets through three distinct wig catalogs: Paula Young,
Christine Jordan and Especially Yours. Each catalog includes detailed product
descriptions and specifications, full color photographs and pricing
information. Each of these catalogs is published several times a year, and
often, different variations of each catalog are distributed. Each catalog
focuses on its namesake brand, as well as other selections of the Company's
brands. The Company markets the following brands through its catalogs:

Paula Young is the Company's flagship line, is designed to have the broadest
appeal and is available in all three catalogs. Paula Young wigs are value
priced from $29 to $59 and have a "shake and wear" styling with quality
construction. Gross sales of Paula Young brand wigs were $21.8 million in
1995, or 51% of the Company's wig sales.

Celebrity Secrets(R) is geared toward a more sophisticated customer.
Celebrity Secrets has more contemporary styling and unique features, such as a
monofilament "partial scalp" permitting a natural looking hair part. These
wigs command slightly higher prices ranging from $49 to $69 and are available
in all three catalogs. Gross sales of Celebrity Secrets brand wigs were $3.8
million in 1995, or 9% of the Company's wig sales.

Christine Jordan is the Company's premium brand and consists of the
Company's highest quality wigs ranging in price from $69 to $99. Christine
Jordan wigs have a unique fiber blend and come in their own distinctive
colors. In addition, the wigs have comfort construction with a natural
hairline and it is the only brand in the industry to carry five sizes in all
styles. This wig line is featured in its own separate catalog as well as the
Paula Young and Especially Yours catalogs. Gross sales of Christine Jordan
brand wigs were $8.9 million in 1995, or 21% of the Company's wig sales.

Especially Yours offers styles specially designed for African-American women
and offers a variety of features, including natural hairline crimping and
fiber texture, to reflect the natural hair of African-Americans.

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Especially Yours is featured in its own separate catalog with prices ranging
from $29 to $69 and is also being tested in selected Paula Young catalogs.
Gross sales of Especially Yours wigs were $600,000 in 1995, or 1% of the
Company's wig sales.

Touch of Class features only hairpieces, including wiglets, add-ons and
extensions. Touch of Class products are sold primarily in the Paula Young
catalog. Gross sales of Touch of Class brand hairpieces were $3.4 million in
1995, or 8% of the Company's wig sales.

In addition to its own five proprietary brands, the Company also markets Eva
Gabor(R) wigs, a brand comparable in quality to Paula Young and Celebrity
Secrets, but which is owned by Eva Gabor International. Eva Gabor wigs
comprised 10% of the Company's 1995 wig sales. There is no licensing or
marketing agreement between the Company and Eva Gabor International.

NEW OPPORTUNITIES

African-American Market. Although African-American women comprise
approximately 13% of the U.S. female population, they purchase approximately
50% of the wigs sold. The Company estimates that sales to the African-American
wig market approximate $125 million annually. African-American women wear
hairpieces for fashion reasons and are more likely to begin wearing wigs and
hairpieces at a younger age than Caucasian women. The Company's newest wig
catalog, Especially Yours, targets this market and is already the largest
African-American wig catalog. The Company plans to market actively to African-
American women.

International Expansion. The Company seeks to leverage its marketing and
product knowledge, infrastructure and procurement ability to expand
internationally. The Company estimates that the international market is at
least as large as the U.S. market. In the United Kingdom and New Zealand, the
Company has entered into license agreements which grant each licensee
exclusive rights to use the Company's trademarks to sell wigs in the
licensee's territory. The licensee uses the Company's inventory and
fulfillment services, for which the Company is reimbursed, and also receives
marketing advice and catalog development assistance. Pursuant to the license
agreements, the licensees are required to pay royalties on their net sales,
including a minimum guaranteed annual royalty, and expend a specified minimum
amount of advertising expenditures each year.

The U.K. licensee will conduct a test introduction of hats in late 1996 and
plans to enter the Netherlands market with wigs in early 1997. The Company has
targeted Europe, Japan, Scandinavia, Australia, Israel and South Africa as
potential expansion areas. In 1995, the Company purchased its Canadian
licensee's customer list and began to market directly to Canadian consumers.
The Company's Canadian net sales totaled $900,000 in 1995. There can be no
assurance that the Company will be able to achieve international success with
its products.

Business to Business. The Company launched a pilot program in 1995 to sell
wigs to beauty salons. The program permits participating salons to offer their
customers a broad selection of styles while keeping a limited inventory of
wigs in the store.

Men's Wigs. Utilizing its two-step marketing program, the Company intends to
begin test marketing men's wigs in the Paula Young catalog in early 1997.

HATS

In 1995, as part of its overall expansion strategy, the Company launched the
Paula's Hatbox catalog. The Company believed that the fashion hat market, like
the wig market, was not well served by existing retail chains of distribution,
with no major competitor offering a broad selection of quality hats. The
Company's research suggested that the marketing skills needed to capture this
niche market were similar to those the Company used in the wig market.

The women's fashion hat market is fragmented among department stores, small
boutiques, resort stores and other general merchants and catalog retailers who
offer a limited number of styles as a complement to their

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<PAGE>

principal product lines. Although the women's fashion hat market is estimated
to be a $700 million market, no dominant hat retailer has emerged.

The Company sells a variety of hats in more than 125 styles and colors,
ranging in style and price from simple baseball caps or sun visors for under
$20 to designer hats for more than $200. Paula's Hatbox also includes hat pins
and accessories, including costume jewelry, sunglasses, scarves, belts and
handbags.

The majority of the Company's hats are manufactured domestically and
purchased from domestic vendors often from top designers. Currently, with the
exception of hat boxes, the Company does not purchase hats and related
products directly from manufacturers. As sales of hats expand, the Company
expects to improve profit margins through improved sourcing.

The Company is using the two step marketing approach developed in its wig
business to sell hats. In addition, the Company is testing new one step
marketing techniques and selling hats through its Especially Yours catalog. In
1995, Paula's Hatbox represented less than 1% of the Company's sales. Although
the Company believes that the hat market presents a significant opportunity
for growth, there can be no assurance that the Company's efforts to expand its
hat business will be successful or profitable.

CONTINUING EDUCATION

SC Publishing distributes catalogs under the name of Western Schools and
specializes in providing continuing education ("CE") to nurses, real estate
brokers and salespersons, and CPAs. SC Publishing represents a relatively
small proportion of the Company's overall revenue, with net sales in 1995 of
$5.3 million, or approximately 12% of the Company's overall net sales. SC
Publishing's predecessor was organized in 1978 in California to provide real
estate continuing education courses.

Required CE frequency and the number of required hours varies from
profession to profession and from state to state depending on state laws and
association regulations. The CE industry has many small providers, including
local universities, but few large providers. In addition, some hospitals and
CPA 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, SC Publishing competes aggressively on
price, course content and selection, and customer service.

Nursing represented more than half of SC Publishing's continuing education
sales in 1995. Twenty-one states currently require nurses to have some form of
CE. Two additional states will begin to require CE in 1997. SC Publishing is
exploring the expansion of this segment through the addition of non-CE
products and business-to-business opportunities in joint ventures, with
hospitals, nursing homes and seminar providers.

SC Publishing sells continuing education to real estate agents only in
California, which is the largest U.S. market for real estate agents and
brokers. Although the California real estate market has been depressed in
recent years, the Company believes there are signs of improvement in this
market. SC Publishing is seeking to build market share by refining its
circulation plan and expanding its offerings to other related professionals
such as appraisers and new home builders. SC Publishing is also assessing
opportunities to begin selling in other states which require real estate
agents to take CE.

SC Publishing sells continuing education to CPAs, who generally are required
to obtain CE every year. SC Publishing seeks to compete in this market by
offering current CE topics in a convenient manner at competitive prices.

SC Publishing develops its products by first identifying topics pertinent to
its target audiences of nurses, real estate agents and CPAs and then
contracting with qualified authors to develop a course text book and exam
materials. In some cases where products may change rapidly because of changing
regulations or knowledge, SC Publishing buys existing textbooks and contracts
with authors and/or industry experts to convert these into

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courses. All courses are reviewed by other industry experts before publishing.
SC Publishing generally prints its own materials and hence controls its own
inventory investment based on projected demand.

OPERATIONS

ORDER ENTRY AND CUSTOMER SERVICE

The Company has structured its telemarketing operation and training for its
telemarketing representatives to simplify catalog shopping by emphasizing
prompt, courteous and knowledgeable service. Customers may call toll free
telephone numbers 24 hours a day, seven days a week, to place orders or to
request a catalog. Approximately 63% of the Company's orders are placed by
telephone, with calls lasting three to four minutes. The balance of orders are
received by mail. The Company has contracted with an outside telemarketing
provider to handle calls in the event call volume exceeds the Company's
capacity during peak business hours, as well as to answer the Company's phones
during off-peak hours. Overflow situations also occur due to holidays and
operational disruptions such as poor weather.

Telemarketing representatives process orders directly into the Company's
computer system which provides customer history, product availability, product
specifications, expected ship date and order number. The telemarketing
representatives use a scripted catalog sales system, are knowledgeable in key
product specifications and features, and are trained to cross-sell accessories
and related products. In keeping with the Company's efforts to maximize
operating efficiency, representatives are trained to handle a range of
products and customer service calls, allowing the Company to shift
representatives among products as call volume requires.

The Company signed a new three year contract with AT&T in 1995 which
management believes provides the Company with long-distance rates comparable
to those enjoyed by larger users. The Company uses AT&T equipment with a 500
line capacity and presently uses about 320 lines in 86 stations. The Company's
telephone system permits flexibility in routing calls to maximize teleservice
representative efficiency.

CREDIT

Virtually all of the Company's sales are transacted by check or through
credit card, and, as a result, accounts receivable consist primarily of
amounts due from the Company's credit card processor. Credit card payments are
deposited electronically into the Company's bank account one to two days after
submission of credit card transactions. Personal checks over $200 and all
credit card charges are pre-authorized. During fiscal 1995, losses due to bad
checks amounted to less than 1% of net product sales.

In addition, purchases from SC Direct may be made by certain customers with
the Paula Young credit card, which SC Direct began testing in 1990 and in 1995
offered to all wig customers who had previously paid by check. Before
expanding the credit card program further, the Company is evaluating whether
to continue to administer the card and finance the receivables internally or
to outsource these functions.

FULFILLMENT

The Company's fulfillment goal is the prompt delivery of ordered
merchandise. The Company's investment in computer systems has resulted in
operating efficiencies in order entry and fulfillment. Orders of in-stock
merchandise received before 11:00 a.m. are shipped on the same day, usually
via bulk or priority mail. For an additional charge, the Company will ship by
overnight or second day courier. Merchandise not in stock on the date of order
is shipped for delivery on the same day it is received by the Company, or the
next business day.

The Company uses an integrated computer picking, packing and shipping
system. The system 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 1995, the Company shipped an average of approximately 3,800
orders per day, with a peak of 5,473 orders shipped in one day. The Company
currently has the capacity to ship approximately 7,800 orders per day in two
shifts.

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RETURNS

The Company's return policy allows customers to return products for prompt
refund or exchange. Returns for refund and exchange over the past three years
averaged 16% and 14%, respectively, at SC Direct and 2% and 1%, respectively,
at SC Publishing. The Company believes that these return levels are normal for
mail order products of this nature. Return experience is closely monitored at
the SKU 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. Returned wigs are inspected and
returned to inventory if not worn, and if worn are donated to various
hospitals' chemotherapy departments and local chapters of the American Cancer
Society. Undamaged and unmarked SC Publishing books are also returned to
inventory.

INVENTORY MANAGEMENT

The Company's inventory management goal is a high initial fulfillment rate
with reasonable levels of inventory investment and low overstocks. To achieve
this goal, the Company seeks to schedule merchandise deliveries and inventory
amounts to conform closely to sales levels. The Company typically orders
merchandise in several lots, with the sizes of reorders dependent on customer
demand.

Initial orders for wigs and hats are placed two to four months before a
catalog mailing. Initial deliveries are scheduled to occur one or two weeks
before the first mailing. Initial purchase quantities are based on a variety
of factors, including past experience with the same or similar products,
future availability, shipping time, and, with respect to hat vendors, the
Company's ability to negotiate a reorder commitment from the vendor. The
Company analyzes the initial sales and returns for each item in a catalog.
Using this information, the Company projects gross demand and returns for such
items and, based on these projections and inventory on hand and on order,
makes decisions regarding additional purchases. The Company sells overstocks
and discontinued items through targeted mailings and sale pages bound into its
full-price catalogs.

CATALOG PRODUCTION

The Company's catalogs are created in-house by the Company's graphic arts
staff of designers and production artists using a computer desktop publishing
system. The Company's in-house preparation of catalogs provides the Company
with greater control, flexibility and creativity in catalog production and
product selection, and results in significant cost savings. The Company mailed
29.2 million catalogs in fiscal 1995, compared to 22.6 million catalogs in
fiscal 1994. The Company's most active customers receive a Company catalog as
often as every two weeks.

DATABASES

The Company has developed databases consisting in aggregate of approximately
5.9 million persons, including more than 1.2 million active customers and more
than one million active inquirers. The Company markets mailing lists derived
from its databases to non-competing businesses to provide additional sources
of income after confirming that security measures are in place to protect this
proprietary data. List rental income was $200,000 in 1995. The Company has
undertaken limited exchanges of lists of inactive customers with wig
competitors.

COMPETITION

The mail order catalog business is highly competitive. The Company believes
that it competes on the basis of quality, value, service, product offerings,
advertising effectiveness, catalog design, convenience and efficiency. The
Company's wig and hat catalogs compete with other mail order catalogs, both
specialty and general, and retail stores, including department stores,
specialty stores, discount stores and hair salons and wig shops. The Company's
CE catalogs compete with other mail order catalogs, in-house CE, professional
associations, and seminar providers. The Company believes that the Company's
catalogs have a competitive advantage in providing greater selection,
convenience and privacy than traditional retail outlets. Some of the Company's
competitors have greater financial and marketing resources than the Company.
Potential competition may emerge from new distribution channels such as the
Internet and interactive television.

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EMPLOYEES

As of July 31, 1996, the Company employed a total of 278 employees,
comprising 63 salaried full-time employees, 138 full-time hourly employees,
and 77 part-time hourly employees. None of the Company's employees are covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.

FACILITIES

The Company occupies a 43,000 square foot building in South Easton,
Massachusetts, which is utilized as one-third warehouse and two-thirds office
space. In addition, the Company also leases another 22,000 square foot
facility one block away, primarily utilized as additional warehouse space. In
June 1995, rent on the main facility was adjusted from $40,000 to $25,000 per
month, which management estimates to be slightly above market rates. The rent
on the 22,000 square foot facility is approximately at market rate. Under the
terms of the current leases, each landlord and the Company have the right to
terminate the respective lease upon four month's notice. In the event a
landlord gives the Company notice, the Company believes that it could move to
new appropriate space within four months. Nonetheless, there can be no
assurance that the Company will find appropriate space within four months. The
process of moving to and restarting operations in a new site could have a
material adverse effect on the Company's operations.

The Company is planning to expand to a larger facility to provide room for
growth and eliminate the inefficiencies of operating two warehouses.
Currently, the Company is investigating the lease of an appropriately sized
facility within a 10 to 15 mile radius of its present location. If the Company
does not locate a suitable site, it may enter into negotiations with its
present landlords for long-term leases. There can be no assurance that the
Company will be successful in locating a new facility or negotiating new
leases.

TRADEMARKS AND TRADE NAMES

The Company has registered 13 trademarks with the U.S. Patent and Trademark
Office. In the course of normal business, the Company often utilizes new
tradenames. 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 may
require the Company to incur administrative costs in collecting and remitting
the sales taxes. The Company believes that Massachusetts is the only
jurisdiction where it is currently required to collect sales taxes.

LEGAL PROCEEDINGS

The Company is, from time to time, a party to routine litigation arising in
the normal course of its business. The Company believes that none of these
actions will have a material adverse effect on the financial condition or
results of operations of the Company.

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.

33
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven L. Bock........................ 42 Chairman of the Board and Chief Executive
Officer
Stephen M. O'Hara..................... 41 President and Secretary
J. William Heise...................... 48 Senior Vice President and Chief Financial
Officer
Jerral R. Pulley...................... 62 Senior Vice President
Alan S. Cooper........................ 37 Director
Martin Franklin....................... 31 Director
Samuel L. Katz........................ 31 Director
Guy Naggar............................ 55 Director
</TABLE>

STEVEN L. BOCK has been Chairman of the Board and Chief Executive Officer of
the Company (or its predecessor company) since December 1990. He has been a
director of SC Direct and SC Publishing (including the years when these
companies were under bankruptcy protection of the courts) since March 1989. SC
Direct was formed by RSG Partners, a private investment and management firm
founded by Mr. Bock and two partners in 1988. Mr. Bock was a partner in RSG
Partners from 1988 to 1990. From October 1986 to October 1988, Mr. Bock was a
vice president of TSG Holdings, Inc., the investment advisor to
Transcontinental Services Group, a U.K. listed investment holding company,
where he was responsible for initiating, financing and managing business
investments. Mr. Bock is a director of Xetex Corporation, a technology
development company. Part of Xetex's business is conducted through
SOLI.FLO SM, a 50/50 joint venture with Fluor Daniel Inc., a publicly held
engineering and construction company. Mr. Bock is a Member of SOLI.FLO's
Members Committee. Mr. Bock is a member of the Young Presidents Organization.
He graduated (summa cum laude) with a B.A. degree from SUNY at Albany and
received his J.D. degree (cum laude) from Harvard Law School.

STEPHEN M. O'HARA has been President of the Company since 1994 and was
President of Wigs by Paula, Inc., a predecessor company, from November 1991 to
November 1994 (including the years Wigs By Paula, Inc. was under the
protection of the bankruptcy courts). From May 1990 to November 1991, Mr.
O'Hara was Vice President, Marketing and Vice President, Strategy of the All
American Gourmet division of Kraft General Foods. From May 1988 to May 1990,
Mr. O'Hara was President of Quantum Investments, a venture capital firm
targeting small consumer businesses, as well as a principal in Quantum
Associates, a management consulting firm. From November 1984 to May 1988 he
served in a variety of positions with CML Group ("CML"), most recently as
President of CML's subsidiary Carroll Reed, Inc., a women's apparel retailer
and direct marketer. Prior to CML, Mr. O'Hara served in Procter and Gamble's
marketing department from 1979 to 1984. Mr. O'Hara holds A.B. and M.B.A.
degrees from Harvard University.

J. WILLIAM HEISE has been Chief Financial Officer of the Company since
August 1996 and was Acting Chief Financial Officer from March 1996 to August
1996. From November 1994 to November 1995, Mr. Heise was Vice President/Chief
Financial Officer at Sun Television and Appliances, Inc., a retailer of
consumer electronics and appliances. From October 1983 to March 1994, Mr.
Heise served in a variety of positions with Victoria's Secret Catalogue, Inc.,
including Executive Vice President/Chief Financial Officer from 1989 to 1992
and Executive Vice President/Operations from 1992 to 1994. Mr. Heise holds a
B.A. degree from Ohio University.

JERRAL R. PULLEY has been Senior Vice President of SC Publishing since
October 1995. From November 1994 to October 1995, Mr. Pulley worked as an
independent consultant. From 1990 to November 1994, Mr. Pulley served as CEO
of Polymerics, Inc. a leading manufacturer of arts and crafts supplies. From
1970 through 1990, Mr. Pulley held a variety of senior positions at Binney &
Smith, Ryder System, Perfect Building Group, Borden Inc., Lifesavers, Inc. and
Pepsi-Cola of North America. From 1958 to 1970 Mr. Pulley worked in marketing
at Procter & Gamble. Mr. Pulley holds a B.S. degree from the University of
Utah and a M.B.A. degree from U.C.L.A.

34
<PAGE>

ALAN S. COOPER has been a director of the Company since February 1996. Mr.
Cooper has been general counsel of Dickstein Partners Inc., a private
investment firm, since March 1992. Prior to joining Dickstein Partners Inc.,
he was an attorney with Rosenman & Colin in New York City from August 1983 to
February 1992. Mr. Cooper is a director of Hills Stores Company. Mr. Cooper
received his B.S. and J.D. degrees from the University of Pennsylvania.

MARTIN E. FRANKLIN has been a director of the Company since November 1994.
Mr. Franklin is currently Chairman and Chief Executive Officer of BEC Group,
Inc., a NYSE company, and non-executive Chairman of Eyecare Products plc, a
London Stock Exchange Company. Mr. Franklin was Chairman and Chief Executive
Officer of Benson Eyecare Corporation, the predecessor company to BEC Group,
from October 1992 through May 1996. Mr. Franklin has been the Chairman of the
Board and Chief Executive Officer of Pembridge Holdings, Inc. since 1990 and
sits on various other private company boards. From 1988 to 1990, Mr. Franklin
was Managing Director of Pembridge Associates, Inc. Both Pembridge Associates,
Inc. and Pembridge Holdings specialize in merchant banking and related
services. Mr. Franklin received a B.A. in Political Science from the
University of Pennsylvania.

SAMUEL L. KATZ has been a director of the Company since November 1994. He
has been the Senior Vice President-Acquisitions of HFS Incorporated, a public
corporation engaged in the lodging and real estate franchising businesses,
since January 1996. From June 1993 to December 1995, Mr. Katz was a Vice
President of Dickstein Partners Inc. From February 1992 to June 1993, Mr. Katz
was the Co-Chairman of Saber Capital Inc., a private investment firm. From
February 1988 to January 1992, Mr. Katz served as an Associate and then a Vice
President of the Blackstone Group, an investment and merchant bank, where he
focused on leveraged buy-out transactions. Mr. Katz is a director of Hills
Stores Company. Mr. Katz received his B.A. in Economics from Columbia
University in 1986.

GUY NAGGAR has been a director of the Company since November 1994. Since
1981 he has been Chairman of Dawnay, Day & Co. Limited, a U.K. investment bank
founded in 1928, which is a member of the London Investment Banking
Association. Immediately prior to becoming Chairman of Dawnay, Day & Co.
Limited, Mr. Naggar was a Director of the Charterhouse Group Limited and of
its subsidiary, Charterhouse Japhet Limited.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Steven L. Bock
pursuant to which Mr. Bock will serve as the Chairman of the Board and Chief
Executive Officer of the Company for a term expiring on December 31, 1999, at
a salary of $280,000, subject to upward adjustment annually. Mr. Bock will be
eligible for a performance bonus which will be tied to the Company's
performance against its annual plan approved by the Board. Upon executing the
employment agreement, Mr. Bock was granted options under the Plan to purchase
75,000 shares of Common Stock at the initial public offering price. Options to
purchase 15,000 shares of Common Stock will vest and become exercisable each
year for five years, subject to accelerated vesting under certain
circumstances. Mr. Bock will receive deferred bonus compensation of $187,500
accrued under his prior employment agreement with the Company which will be
paid in three equal installments on January 1, 1997, June 30, 1997 and January
1, 1998. The Company currently maintains an $8.5 million key person life
insurance policy on Mr. Bock, although this amount may be reduced.

The Company has entered into an employment agreement with Stephen M. O'Hara
pursuant to which Mr. O'Hara will serve as President of the Company for a term
expiring on December 31, 1999 at a salary of $205,000 (subject to upward
adjustment annually). Mr. O'Hara will be eligible for a performance bonus
which will be tied to the Company's performance against its annual plan
approved by the Board. Upon executing the employment agreement, Mr. O'Hara was
granted options under the Plan to purchase 25,000 shares of Common Stock at
the initial public offering price. Options to purchase 5,000 shares of Common
Stock will vest and be exercisable each year for five years, subject to
accelerated vesting under certain circumstances. Mr. O'Hara will receive
deferred bonus compensation of $35,000 accrued under his prior employment
agreement with the Company which will be paid in three equal installments on
January 1, 1997, June 30, 1997 and January 1, 1998. The Company currently
maintains a $5.5 million key person life insurance policy on Mr. O'Hara,
although this amount may be reduced.

35
<PAGE>

The Company may terminate Mr. Bock's or Mr. O'Hara's employment: (i) upon his
death or permanent disability; (ii) if he engages in conduct that constitutes
"cause;" or (iii) if, after 1996, the Company fails to meet certain financial
targets. Messrs. Bock and O'Hara may terminate their respective agreements if
there is a material reduction of their respective responsibilities or a
material breach of the agreement by the Company, or upon a change in control of
the Company. Both Messrs. Bock and O'Hara employment agreements contain
noncompetition restrictions effective during their employment terms and for a
period of two years thereafter.

EXECUTIVE COMPENSATION

The following table shows the cash compensation paid by the Company and its
subsidiaries, as well as certain other compensation paid or accrued, during the
fiscal years ended December 30, 1995, and December 31, 1994 and January 1, 1993
to the Chief Executive Officer of the Company and each of the other three most
highly compensated executive officers ("Named Officers").

SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
- ------------------------------------------------------------------------------
FISCAL NUMBER OF
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS OPTIONS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven L. Bock................... 1995 $ 269,284 $ 65,960 --
Chairman and Chief Executive Of-
ficer 1994 212,116 100,000 310,226(1)
1993 215,923 -- --
Stephen M. O'Hara................ 1995 $ 194,718 $ 35,000 --
President 1994 166,424 81,850 272,773(2)
1993 157,228 -- --
J. William Heise................. (3) -- -- --
Chief Financial Officer
Jerral R. Pulley................. 1995(4) $ 25,962 $ 5,000 --
Senior Vice President
</TABLE>

(1) Represents options granted in 1994 at an exercise price of $0.31 per share,
all of which will become exercisable upon the effective date of this
Offering.
(2) Represents options granted in 1994 at an exercise price of $0.31 per share,
of which options to purchase 218,218 shares will become exercisable upon
the effective date of this Offering, and options to purchase 54,555 shares
will become exercisable one year from the effective date of this Offering.
(3) Mr. Heise became acting chief financial officer in March 1996 and on August
1, 1996, he was hired permanently at an annual salary of $130,000.
(4) Mr. Pulley was hired in October 1995 at an annual salary of $125,000.

AGGREGATED OPTION VALUES FOR FISCAL YEAR ENDED
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
NAME AT DECEMBER 30, 1995 AT DECEMBER 30, 1995($)(1)
- ----------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Steven L. Bock.......... -- 310,226 -- --
Stephen M. O'Hara....... -- 272,773 -- --
</TABLE>

(1) There was no public trading market for the Common Stock as of December 30,
1995. Accordingly, no value can be ascribed to these options.

36
<PAGE>

STOCK OPTION PLAN

The Company has adopted the Plan to attract and retain officers, non-
employee directors, employees, and consultants of the Company or any of its
subsidiaries. The Plan authorizes the purchase of up to 500,000 shares of
Common Stock through the grant of stock options and awards of restricted
stock. The Company has granted 252,150 options under the Plan to purchase
Common Stock at the initial public offering price. An additional 50,000
options may be granted within the first year following the effective date of
this Offering to new officers, directors, employees or consultants to the
Company, with the balance of the options available for issuance thereafter.
The Plan will be administered by either the Board of Directors or a committee
of two or more non-employee directors ("Administrator"). In general, the
Administrator will determine which eligible officers, directors, employees and
consultants of the Company may participate in the Plan and the type, extent
and terms of the stock option grants and awards of restricted stock. Options
granted to employees may be either incentive stock options within the meaning
of Section 422 of the Code ("ISOs") or non-ISOs. Each option has a maximum
term of ten years from the date of the grant, subject to early termination.
The exercise price of any options granted after this Offering shall be equal
to the greater of the market price per share of the Common Stock on the date
of grant or the initial public offering price. At the discretion of the
Administrator, the exercise price of the options may be paid in cash, with
shares of Common Stock having a fair market value equal to the option exercise
price, or with other property having a fair market value equal to the option
exercise price, including other vested but unexercised options. In the event
of a change in control, as defined in the Plan, all options will become
immediately vested and exercisable and the restrictions with regard to
restricted stock will lapse, unless the Administrator provides otherwise.

EMPLOYEE BENEFIT PLANS

The Company maintains a qualified defined contribution plan, under the
provisions of Section 401(k) of the Code, covering substantially all
employees. Under the terms of the plan, eligible employees may make
contributions up to 15% of pay, subject to statutory limitations.
Contributions not exceeding 5% of an employee's pay are matched 40% 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% for each completed year of service, becoming fully
vested after five years of service. Matching contributions by the Company
under the plan were $47,520, $59,594 and $67,188 in 1993, 1994 and 1995,
respectively. No discretionary contributions have been made to the plan.

The Company established a supplemental defined contribution plan in 1994
that covers senior employees who have not been granted stock options. Under
the terms of the plan, these employees may elect to defer up to 50% of any
bonus paid for that year. The Company matches 100% of all amounts deferred. In
addition, the Company pays interest on all outstanding balances at the prime
rate as reported in the Wall Street Journal, but not in excess of 12%. A
participant's rights to the deferred amount of regular bonus and income
thereon is fully vested and nonforfeitable at all times. A participant's right
to the Company's match becomes fully vested and nonforfeitable in cumulative
increments of 20% on each of the first through fifth anniversaries of the year
end in which the bonus was earned for that year. The total cost of this plan
to the Company was $0, $65,000 and $0, in 1993, 1994 and 1995, respectively.
The $65,000 contributed in 1994 initiated the plan. The supplemental defined
contribution plan will terminate upon this Offering.

COMPENSATION OF DIRECTORS

Each current non-employee director is paid annual cash compensation of
$7,500, payable quarterly, and has received options to purchase 2,500 shares
of Common Stock. These options were issued pursuant to the Plan on the date
hereof and are immediately exercisable at the initial public offering price.
All directors are reimbursed for expenses incurred on behalf of the Company.

BOARD COMMITTEES

The Board of Directors has established an Audit Committee comprised of two
non-employee directors. The Audit Committee will be responsible for
recommending to the Board of Directors the appointment of the

37
<PAGE>

Company's outside auditors, examining the results of audits, reviewing
internal accounting controls and reviewing related party transactions. The
Board of Directors has no compensation committee or nominating committee or
any committee performing the functions of such committees, although such
committees may be formed.

The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the
next annual meeting of the Company or until their successors have been duly
elected or qualified. There are no family relationships among any of the
executive officers or directors of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 30, 1995, the Company did not have a
compensation committee, and all deliberations concerning executive officer
compensation for each entity were had, and all determinations with respect
thereto were made, by the Company's Board of Directors. During such period,
Mr. Bock was an executive officer and director of the Company.

38
<PAGE>

PRINCIPAL STOCKHOLDERS

The table below sets forth certain information regarding the beneficial
ownership as of the date hereof and as adjusted to reflect the sale of Common
Stock offered hereby, by (i) each person known by the Company to own
beneficially five percent or more of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Officers and (iv) all directors
and executive officers as a group. Except as otherwise indicated, (x) the
Company believes that each of the beneficial owners of the Common Stock listed
in the table, based on information furnished by such owner, has sole
investment and voting power with respect to such shares, and (y) the address
of the beneficial owner is the address of the principal executive offices of
the Company. The information set forth in the table and accompanying footnotes
has been furnished by the named beneficial owners.
<TABLE>
<CAPTION>
PERCENTAGE(1)
-----------------
NUMBER OF
SHARES
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
- ---- ------------ -------- --------
<S> <C> <C> <C>
Steven L. Bock................................. 409,160(2) 11.7% 8.2%
Stephen M. O'Hara.............................. 218,218(3) 6.4% 4.4%
J. William Heise............................... -- * *
Jerral R. Pulley............................... -- * *
Alan S. Cooper................................. 2,500 * *
Dickstein Partners
9 West 57th Street
New York, New York 10019
Guy Naggar..................................... 2,500(4) * *
Dawnay, Day & Co., Ltd
15 Grosvenor Gardens
London, England SW1W09D
Samuel L. Katz................................. 93,075(4) 2.9% 2.0%
HFS, Incorporated
339 Jefferson Road
Parsippany, New Jersey 07054
Martin Franklin................................ 230,688(5) 6.7% 4.7%
555 Theodore Fremd Avenue
Rye, New York 10580
Dickstein & Co., L.P........................... 1,347,689(6) 42.1% 28.7%
9 West 57th Street
New York, New York 10019
Dickstein International Limited................ 1,347,689(6) 42.1% 28.7%
129 Front Street
Hamilton, Bermuda
Dickstein Focus Fund L.P....................... 1,347,689(6) 42.1% 28.7%
9 West 57th Street
New York, New York 10019
Viking Holdings Limited........................ 1,483,553(7) 46.3% 31.6%
c/o Abacus Secretaries (Jersey Limited) Limited
La Motte Chambers
St. Helier, Jersey
JE1 1BS Channel Islands
All executive officers and directors as a group
(8 persons)................................... 956,141(8) 24.1% 17.5%
</TABLE>
- --------
* Less than 1%

39
<PAGE>

(1) Applicable percentage of ownership is based upon 3,201,666 shares of Common
Stock outstanding before this Offering and 4,701,666 shares outstanding
after this Offering. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission ("Commission") and
generally includes voting and investment power with respect to securities.
Shares of Common Stock issued upon the exercise of options and warrants
currently exercisable or exercisable within 60 days are deemed outstanding
for computing the percentage ownership of the person holding such options
or warrants, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Includes 310,226 shares of Common Stock underlying stock options
immediately exercisable at a price of $0.31 per share. Excludes 75,000
shares of Common Stock underlying stock options granted outside of the Plan
which are not currently exercisable at a price of $5.33 per share and
75,000 shares of Common Stock underlying stock options granted under the
Plan which are not currently exercisable at an exercise price per share
equal to the initial public offering price. All of Mr. Bock's options which
are not currently exercisable vest in increments of 20% per year,
commencing on the first anniversary of the effective date of this Offering.

(3) Includes 218,218 shares of Common Stock underlying stock options which are
immediately exercisable at a price of $0.31 per share. Excludes 54,555
shares of Common Stock underlying options granted outside of the Plan
exercisable on the first anniversary of the effective date of this Offering
at a price of $0.31 per share, and 25,000 shares of Common Stock underlying
stock options granted under the Plan which vest in increments of 20% per
year, commencing on the first anniversary of the effective date of this
Offering at an exercise price per share equal to the initial public
offering price.
(4) Includes 2,500 shares of Common Stock underlying stock options issued under
the Plan which are immediately exercisable at an exercise price per share
equal to the initial public offering price.
(5) Includes 228,188 shares of Common Stock issuable upon exercise of Warrants
and 2,500 shares of Common Stock underlying stock options issued under the
Plan which are immediately exercisable. Does not include 37,147 shares of
Common Stock issuable upon the exercise of Warrants held by Mr. Franklin's
associates.
(6) Of the 1,347,689 total shares reported, Dickstein & Co., L.P. owns
beneficially 853,153 of such shares, Dickstein Focus Fund L.P. owns
beneficially 135,881 of such shares and Dickstein International owns
beneficially 358,655 of such shares. Dickstein & Co., L.P. disclaims
beneficial ownership of 135,881 shares owned by Dickstein Focus Fund L.P.
and 358,655 shares owned by Dickstein International Limited. Dickstein
Focus Fund L.P. disclaims beneficial ownership of 853,153 shares owned by
Dickstein & Co., L.P. and 358,655 shares owned by Dickstein International
Limited. Dickstein International Limited disclaims beneficial ownership of
853,153 shares owned by Dickstein & Co., L.P. and 135,881 shares owned by
Dickstein Focus Fund L.P. Dickstein & Co., L.P., Dickstein International
Limited and Dickstein Focus Fund L.P. manage investment funds. Dickstein
Partners, L.P. is the general partner of Dickstein & Co., L.P. and
Dickstein Focus Fund L.P. Dickstein Partners Inc. is the general partner of
Dickstein Partners, L.P. and is the advisor to Dickstein International
Limited. Mark B. Dickstein is the President and sole director of Dickstein
Partners Inc.
(7) Viking is a private investment company. The principal beneficial owners of
Viking are Guy Naggar (who holds less than 35% of the outstanding voting
securities of Viking) and a trust established solely for the benefit of Mr.
Naggar's adult children. Mr. Naggar has no voting or investment control
with respect to such trust.
(8) Includes 766,444 shares of Common Stock underlying stock options which are
currently exercisable and Warrants that are held by Martin Franklin but
excludes 266,702 shares underlying options which are not currently
exercisable and Warrants which are held by Mr. Franklin's associates.

40
<PAGE>

CERTAIN TRANSACTIONS

As part of the Plan of Reorganization: (i) Mr. Bock acquired for $30,000
98,934 shares of the Company's Common Stock; (ii) Dickstein & Co. acquired for
$2,184,000 867,786 shares of the Company's Common Stock, 7,272 shares of the
Company's 13% Preferred Stock and Subordinated Indebtedness in the principal
amount of $1,190,000; (iii) Dickstein International acquired for $1,092,000
433,893 shares of the Company's Common Stock, 3,636 shares of the Company's
13% Preferred Stock and Subordinated Indebtedness in the principal amount of
$595,000; and (iv) Viking Holdings Limited acquired for $2,626,000 and the
forgiveness of a $650,000 note receivable 1,301,680 shares of the Company's
Common Stock, 10,908 shares of the Company's 13% Preferred Stock and
Subordinated Indebtedness in the principal amount of $1,785,000. All of the
Subordinated Indebtedness was transferred to SC Holdings L.L.C. shortly after
completion of the Plan of Reorganization. The owners of SC Holdings L.L.C.
control the majority of the outstanding Common Stock.

In February 1993, the Bankruptcy Court and SC Corporation agreed to lift the
stay and permit Signal to sell Stork for $950,000 to a group of investors
which included Viking and Steven Bock.

In November 1994, Messrs. Bock and O'Hara received stock options to purchase
310,262 shares and 272,773 shares, respectively, of Common Stock at an
exercise price of $0.31 per share.

On April 28, 1995, the common stock of the Company was reclassified into
three classes, Class A, Class B and Class C. The different classes of common
stock had different voting rights, with Class A, Class B, and Class C having
voting rights of one vote, one-half vote and one and one-half votes,
respectively, per share. Except for the different voting rights, the Class A,
Class B and Class C common stock had identical rights. As of the date hereof
the Class A, Class B and Class C common stock has been reclassified into
Common Stock.

On June 1, 1996, the Company entered into an agreement with Martin Franklin,
a director of the Company, and two associates of Mr. Franklin, pursuant to
which Mr. Franklin and his associates loaned the Company $495,000 in Junior
Subordinated Indebtedness. The Junior Subordinated Indebtedness has the same
interest rate as the Subordinated Indebtedness, except that it will be junior
in priority to the Subordinated Indebtedness. It is due on August 9, 1999,
provided that the Subordinated Indebtedness has been paid in full.

In connection with the Junior Subordinated Indebtedness, the Company has
issued for $5,000 to Mr. Franklin and his associates the Warrants to purchase
265,335 shares of Common Stock. The Warrants are exercisable until September
30, 1999 to purchase Common Stock at a price of $1.88 per share.

In August 1996, Messrs. Bock, O'Hara, Heise and Pulley received stock
options pursuant to the Plan to purchase 75,000, 25,000, 30,000 and 12,500
shares of Common Stock, respectively, at a price equal to the initial public
offering price.

Immediately prior to this Offering, the Company converted all of the
outstanding 13% Preferred Stock into 375,000 shares of Common Stock. The
holders of the 13% Preferred Stock, Dickstein & Co., L.P., Dickstein
International, Dickstein Focus Fund, Viking, Mark Brodsky, Samuel Katz and
Wigs L.P., received 121,248, 43,969, 16,655, 181,873, 5,552, 11,104 and 11,254
shares of Common Stock respectively.

Effective upon this Offering, Mr. Bock has received non-qualified options to
purchase 75,000 shares of Common Stock at a price of $5.33 per share. Options
to purchase 15,000 shares of Common Stock will vest each year for five years,
subject to accelerated vesting under certain circumstances. These options will
be exercisable for a period of ten years from the date of grant.

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company is 11,000,000 shares, consisting
of 10,000,000 shares of Common Stock, $.01 par value per share and 1,000,000
shares of Preferred Stock, $1.00 par value per share. As of the date hereof
there are 3,201,666 shares of Common Stock outstanding. After the completion
of this Offering there will be 4,701,666 shares of Common Stock outstanding.
As of the effective date of this Offering no shares of Preferred Stock are
outstanding.

41
<PAGE>

COMMON STOCK

The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is
no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voted can elect all of
the directors then being elected. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the Common Stock. Holders of shares of
Common Stock, as such, have no redemption, preemptive or other subscription
rights, and there are no conversion provisions applicable to the Common Stock.
All of the outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby, when issued and paid for as set forth in this
Prospectus, will be, fully paid and nonassessable.

PREFERRED STOCK

The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action
by the stockholders, for any reason and at any time, to designate the rights,
preferences, limitations and restrictions of and upon shares of each series,
including dividend, voting, redemption and conversion rights. The Board of
Directors also may designate par value, preferences in liquidation and the
number of shares constituting any series. The Company believes that the
availability of Preferred Stock issuable in series will provide increased
flexibility for structuring possible future financings and acquisitions, if
any, and in meeting other corporate needs. It is not possible to state the
actual effect of the authorization and issuance of any series of Preferred
Stock upon the rights of holders of Common Stock until the Board of Directors
determines the specific terms, rights and preferences of a series of Preferred
Stock. However, such effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
or impairing liquidation rights of such shares without further action by
holders of the Common Stock. In addition, under various circumstances, the
issuance of Preferred Stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Issuance of Preferred Stock could also
adversely affect the market price of the Common Stock. The Company has no
present plans to issue any shares of Preferred Stock.

WARRANTS

INDEMNIFICATION OF OFFICERS AND DIRECTORS

As permitted by the DGCL, the Company's Certificate of Incorporation, as
amended, limits the personal liability of a director or officer to the Company
for monetary damages for breach of fiduciary duty of care as a director.
Liability is not eliminated for (i) any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) unlawful payment of dividends or stock purchases or redemptions pursuant
to Section 174 of the DGCL, or (iv) any transaction from which the director
derived an improper personal benefit.

42
<PAGE>

at the request of the Company. No indemnification will be provided under the
indemnification agreements, however, to any director or executive officer in
certain limited circumstances, including on account of knowingly fraudulent,
deliberately dishonest or willful misconduct. To the extent the provisions of
the indemnification agreements exceed the indemnification permitted by
applicable law, such provisions may be unenforceable or may be limited to the
extent they are found by a court of competent jurisdiction to be contrary to
public policy.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.

DELAWARE LAW

The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" with a publicly-held Delaware corporation for
three years following the date such person became an interested stockholder,
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (subject to certain
exceptions); or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the Board of
Directors of the corporation and authorized at a meeting of stockholders by
the affirmative vote of the holders of 66% of the outstanding voting stock of
the corporation not owned by the interested stockholder. A "business
combination" includes mergers, stock or asset sales and other transactions
resulting in a financial benefit to the interested stockholder.

The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.

SHAREHOLDERS' AGREEMENT

All of the existing holders of Common Stock and options to purchase Common
Stock are parties to a Shareholders' Agreement dated November 30, 1994 which
will terminate upon the completion of this Offering. This agreement (i)
prohibits the sale, pledge, transfer or disposal of shares of Common Stock
prior to the earlier of November 24, 1997 or the date on which the Company
shall have fully utilized its Federal income tax NOL's ("Ownership Change
Date") and (ii) restricts the sale, pledge, transfer or disposal of shares of
Common Stock subsequent to the Ownership Change Date. The Shareholders'
Agreement terminates on the earliest of (i) the date of dissolution or
liquidation of the Company, (ii) such time as any one shareholder or other
person owns all the shares of Common Stock, (iii) the date of the consummation
of a public offering of Common Stock under the Securities Act or (iv) such
time as all the parties to the Shareholders' Agreement elect to terminate such
agreement.

The Shareholders' Agreement provides for Dickstein & Co., L.P., Dickstein
International Limited and Dickstein Focus Fund, L.P. (collectively
"Dickstein") and Viking each to appoint two Directors. Dickstein has appointed
Messrs. Cooper and Katz to the Board and Viking has appointed Messrs. Franklin
and Naggar to the Board.

TRANSFER AGENT

The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company, New York, New York.

43
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 4,701,666 shares of
Common Stock outstanding, not including shares of Common Stock issuable upon
exercise of the Officer's Options, Warrants and Underwriter's Purchase Option
and assuming no exercise of the over-allotment option granted to the
Underwriter and options outstanding under the Plan. Of these outstanding
shares, the 1,500,000 shares sold to the public in this Offering may be freely
traded without restriction or further registration under the Securities Act,
except that any shares that may be held by an "affiliate" of the Company (as
that term is defined in the rules and regulations under the Securities Act)
may be sold only pursuant to a registration under the Securities Act or
pursuant to an exemption from registration under the Securities Act including
the exemption provided by Rule 144 adopted under the Securities Act. 3,201,666
shares of Common Stock are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Restricted Shares"), and may not be sold
unless such sale is registered under the Securities Act, or is made pursuant
to an exemption from registration under the Securities Act, including the
exemption provided by Rule 144. Of such shares, 3,065,803 will be available
for sale pursuant to Rule 144 commencing 1996, and 135,863 will be
available for sale pursuant to Rule 144 commencing February 1998, in each case
subject to the lock-up agreements described below.

In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
Restricted Shares for at least two years (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is given to the Commission
provided certain public information, manner of sale and notice requirements
are satisfied. A stockholder who is deemed to be an affiliate of the Company,
including members of the Board of Directors and senior management of the
Company, will still need to comply with the restrictions and requirements of
Rule 144, other than the two-year holding period requirement, in order to sell
shares of Common Stock that are not Restricted Securities, unless such sale is
registered under the Securities Act. A stockholder (or stockholders whose
shares are aggregated) who is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale by such stockholder,
and who has beneficially owned Restricted Shares for at least three years,
will be entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. The Commission is currently considering a
reduction in the required holding periods under Rule 144.

No predictions can be made of the effect, if any, that future sales of
shares of the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Common Stock in the public market could adversely affect the then-
prevailing market price.

All of the officers and directors of the Company and all other stockholders
of the Company immediately prior to the effective date have agreed that for a
period of 12 months from the date of this Prospectus they will not sell any of
such shares without the consent of the Underwriter; provided, however, that
such prohibition extends for a period of only six months from the date of this
Prospectus with respect to the 375,000 shares of Common Stock acquired in the
Preferred Conversion.

In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701
under the Securities Act ("Rule 701"). Rule 701 permits affiliates to sell
their shares which are subject to Rule 701 ("Rule 701 shares") under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell Rule 701 shares in reliance on
Rule 144 without having to comply with the public information, volume
limitation or notice provisions of Rule 144. In both cases, a holder of Rule
701 shares is required to wait until 90 days after the date of this
Prospectus. All holders of stock options under the Plan have agreed not to
dispose of Rule 701 shares for a period of 12 months from the date of this
Prospectus without the consent of the Underwriter.

44
<PAGE>

REGISTRATION RIGHTS

The Company has entered into a registration rights agreement with Dickstein
and Viking. Under this registration rights agreement, the Company has provided
to each of Dickstein and Viking, for so long as it owns at least 15% of the
outstanding Common Stock, (i) "demand" registration rights whereby each of
Dickstein and Viking can, with certain restrictions, on one occasion require
the Company to register under the Securities Act the Company's equity
securities it holds and that of certain other shareholders and
(ii) "piggyback" registration rights whereby each of Dickstein and Viking can,
with certain restrictions, require the Company to include the Company's equity
securities it holds in any registration statement filed by the Company. The
Company will pay all registration expenses related to any demand registration
excluding underwriting commissions. The Company will pay certain of the
expenses relating to piggyback registrations, with the remainder of such
expenses to be divided pro rata between Dickstein and Viking based on the
number of securities each has registered in the offering. In connection with
this Offering, Dickstein and Viking have agreed not to exercise their
registration rights for a period of one year following this Offering without
the prior written consent of the Underwriter. The Company will register
securities pursuant to the Registration Rights Agreement on Form S-3 or any
other available form.

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register approximately 500,000 shares underlying
options granted or to be granted under the Plan for resale under the
Securities Act. The Company has agreed with the Underwriter that it will not
file any Form S-8 registration statement for one year following the date of
this Prospectus. Shares covered by these registration statements will
thereupon be eligible for sale in the public markets to the extend applicable.

UNDERWRITING

GKN Securities Corp. ("Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 1,500,000 shares of Common Stock. The obligations of the Underwriter under
the Underwriting Agreement are subject to approval of certain legal matters by
counsel and various other conditions precedent, and the Underwriter is
obligated to purchase all of the shares of Common Stock offered by this
Prospectus (other than the shares of Common Stock covered by the over-
allotment option described below), if any are purchased.

The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock to the public at the initial public offering price set forth
on the cover page of this Prospectus and to certain dealers at that price less
a concession not in excess of $ per share of Common Stock. The Underwriter
may allow, and such dealers may reallow, a concession not in excess of $
per share of Common Stock to certain other dealers. After this Offering, the
offering price and other selling terms may be changed by the Underwriter.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 2.5% of the gross proceeds derived from the sale of the shares
of Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriter's over-allotment option), $50,000 of which has been
paid to date. The Company also has agreed to pay all expenses in connection
with qualifying the shares of Common Stock offered hereby for sale under the
laws of such states as the Underwriter may designate and registering this
Offering with the National Association of Securities Dealers, Inc., including
fees and expenses of counsel retained for such purposes by the Underwriter.

The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company
at the offering price, less underwriting discounts and the non-accountable
expense allowance, up to an aggregate of 225,000 additional shares of Common
Stock for the sole purpose of covering over-allotments, if any.

45
<PAGE>

In connection with this Offering, the Company has agreed to sell to the
Underwriter, for an aggregate of $100, the Underwriter's Purchase Option to
purchase up to an aggregate of 150,000 shares of Common Stock at a price of
$ per share, for a period of four years, commencing on the first and ending
on the fifth anniversary of the effective date of this Offering. The
Underwriter's Purchase Option may not be transferred, sold, assigned or
hypothecated during the one-year period following the date of this Prospectus
except to officers of the Underwriter and the selected dealers and their
officers or partners. The Underwriter's Purchase Option grants to the holders
thereof certain "piggyback" and demand rights for periods of seven and five
years, respectively, from the date of this Prospectus with respect to the
registration under the Securities Act of the shares issuable upon exercise of
the Underwriter's Purchase Option.

Pursuant to the Underwriting Agreement, all of the officers, directors and
stockholders of the Company as of the date of this Prospectus have agreed not
to sell any of their shares of Common Stock until the expiration of 12 months
from the date of this Prospectus without the prior consent of the Underwriter,
provided, however, that holders of 375,000 shares of Common Stock issued in
the Preferred Conversion shall be permitted to sell such shares commencing six
months after the effective date of this Offering. During the three year period
following the date of this Prospectus, the Underwriter shall have the right to
purchase for the Underwriter's account or to sell for the account of such
persons any securities sold by any of such persons in the open market.

The Underwriting Agreement provides that, for a period of three years from
the date of this Prospectus, the Underwriter may send a non-voting
representative to observe each meeting of the Board of Directors.

Prior to this Offering, there has been no public market for any of the
Company's Common Stock. Accordingly, the initial public offering price of the
Common Stock has been arbitrarily determined by negotiation between the
Company and the Underwriter and does not necessarily bear any relation to
established valuation criteria. Factors considered in determining such price,
in addition to prevailing market conditions, include an assessment of the
prospects for the industry in which the Company competes, the Company's
management and the Company's capital structure.

LEGAL MATTERS

The legality of the securities offered hereby will be passed upon for the
Company by Kane Kessler, P.C., New York, New York. Graubard Mollen & Miller,
New York, New York, has served as counsel to the Underwriter in connection
with this Offering.

EXPERTS

The consolidated financial statements as of December 30, 1995, December 31,
1994 and January 1, 1994 and for each of the three years in the period ended
December 30, 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere. Such consolidated financial statements have been included
herein in reliance upon the reports of such firm given upon their authority as
experts in auditing and accounting.

46
<PAGE>

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain portions having been omitted from
this Prospectus in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the
securities offered by this Prospectus and such omitted information, reference
is made to the Registration Statement, including any and all exhibits and
amendments thereto. Statements contained in this Prospectus concerning the
provisions of any documents filed as an exhibit are of necessity brief
descriptions thereof and are not necessarily complete, and in each instance
reference is made to the copy of the document filed as an exhibit to the
Registration Statement, each such statement being qualified in its entirety by
this reference.

Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048.
Copies of such material, including the Registration Statement, can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
site on the World Wide Web that contains reports, proxy and information
statements and other information regarding registrants that file
electronically. The address of such site is http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements, quarterly reports containing
unaudited financial information and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.

47
<PAGE>

SPECIALTY CATALOG CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Financial Statements as of December 30, 1995 and December 31, 1994 and
for the Three Years Ended December 30, 1995, December 31, 1994 and
January 1, 1993 Unaudited Financial Statements as of June 29, 1996 and
for the Six Months Ended June 29, 1996 and July 1, 1995:
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Deficit....................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-8
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The accompanying consolidated financial statements give effect to the
completion of the 325.51-for-one split of the Company's outstanding common
stock which will take place on the effective date of the offering. The
following report is in the form which will be furnished by Deloitte & Touche
on completion of the stock split of the Company's common stock described in
Note 15 to the consolidated financial statements and assuming that from August
16, 1996 to the date of such completion no other material events have occurred
that would affect the accompanying consolidated financial statements or
required disclosure therein.

To the Board of Directors of
Specialty Catalog Corp.

We have audited the accompanying consolidated balance sheets of Specialty
Catalog Corp. as of December 30, 1995 and December 31, 1994 and the related
consolidated statements of operations and consolidated statements of
stockholders' deficit and cash flows for the three years ended December 30,
1995, December 31, 1994 and January 1, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Specialty Catalog Corp. as of
December 30, 1995 and December 31, 1994 and the results of its operations and
its cash flows for the three years ended December 30, 1995, December 31, 1994
and January 1, 1994, in conformity with generally accepted accounting
principles.

April 19, 1996 (except for Note 15,
for which the date is August 16, 1996)

New York, New York

F-2
<PAGE>

SPECIALTY CATALOG CORP.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 30, JUNE 29, JUNE 29,
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 946,280 $ 113,364 $ 864,176 $ 1,364,176
Accounts receivable,
less allowance for
doubtful accounts of
$42,000, $160,000 and
$51,000 at December
31, 1994, December 30,
1995 and June 29,
1996, respectively.... 579,148 1,367,929 1,138,469 1,138,469
Inventories............ 4,221,266 5,073,743 4,090,560 4,090,560
Prepaid expenses....... 3,174,543 3,462,818 3,586,891 3,586,891
------------ ------------ ------------ ------------
Total current assets.... 8,921,237 10,017,854 9,680,096 10,180,096
------------ ------------ ------------ ------------
Fixed assets:
Property and equipment. 3,787,949 3,982,348 4,118,407 4,118,407
Less accumulated
depreciation and
amortization.......... (3,011,164) (3,040,751) (3,178,992) (3,178,992)
------------ ------------ ------------ ------------
Total fixed assets...... 776,785 941,597 939,415 939,415
------------ ------------ ------------ ------------
Deferred income taxes... 7,130,175 6,779,356 6,779,356 6,779,356
------------ ------------ ------------ ------------
Other assets............ 536,154 431,553 377,857 377,857
------------ ------------ ------------ ------------
Total assets............ $ 17,364,351 $ 18,170,360 $ 17,776,724 $ 18,276,724
============ ============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' DEFICIT
Current liabilities:
Line of credit......... $ -- $ 1,050,000 $ 1,450,000 $ 1,450,000
Accounts payable and
accrued expenses...... 2,928,018 4,730,936 4,601,486 4,601,486
Liabilities to
customers............. 1,267,752 755,902 630,800 630,800
Income taxes........... 111,450 81,945 232,930 232,930
Current portion of
long-term debt........ 2,500,000 2,750,000 2,950,000 2,950,000
------------ ------------ ------------ ------------
Total current liabili-
ties................... 6,807,220 9,368,783 9,865,216 9,865,216
------------ ------------ ------------ ------------
Long-term debt.......... 11,500,000 8,750,000 7,450,000 7,450,000
Subordinated debt-re-
lated party............ 3,680,186 4,125,519 4,362,735 4,743,674
Other long-term liabili-
ties................... 31,241 341,939 511,542 --
Commitments and contin-
gencies
Stockholders' deficit:
13% preferred stock,
$100 par value: 30,000
shares authorized;
22,491 shares issued
and outstanding....... 2,249,100 2,249,100 2,249,100
Common stock, $.01 par
value: 10,000,000
shares authorized;
2,826,666 shares is-
sued and outstanding
at December 31, 1994.. 28,267 32,017
Class A common stock,
$.01 par value; 16,000
shares authorized;
6,017.77 shares issued
and outstanding at De-
cember 30, 1995....... -- 19,589 19,589
Class B common stock,
$.01 par value; 2,000
shares authorized;
1,332.94 shares issued
and outstanding at De-
cember 30, 1995....... -- 4,339 4,339
Class C common stock,
$.01 par value; 2,000
shares authorized;
1,332.94 shares issued
and outstanding at De-
cember 30, 1995....... -- 4,339 4,339
Additional paid-in cap-
ital.................. 4,934,157 4,641,774 4,495,586 7,496,789
Deferred compensation... -- -- -- (125,250)
Note receivable--stock-
holder................. (148,710) (140,174) (140,174) (140,174)
Accumulated deficit..... (11,717,110) (11,194,848) (11,045,548) (11,045,548)
------------ ------------ ------------ ------------
Total stockholders' def-
icit................... (4,654,296) (4,415,881) (4,412,769) (3,782,166)
------------ ------------ ------------ ------------
Total liabilities and
stockholders' deficit.. $ 17,364,351 $ 18,170,360 $ 17,776,724 $ 18,276,724
============ ============ ============ ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

SPECIALTY CATALOG CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------- ------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1994 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $33,801,265 $38,178,792 $42,568,120 $22,419,386 $18,754,741
Cost of sales (including
buying, occupancy and
order fulfillment
costs)................. 13,867,938 15,648,066 16,423,590 8,859,075 7,003,241
----------- ----------- ----------- ----------- -----------
Gross profit............ 19,933,327 22,530,726 26,144,530 13,560,311 11,751,500
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses.............. 16,767,738 17,771,721 22,835,086 11,155,582 10,590,938
Restructuring charges.. -- -- 512,943 512,943 --
----------- ----------- ----------- ----------- -----------
Total operating ex-
penses................. 16,767,738 17,771,721 23,348,029 11,668,525 10,590,938
----------- ----------- ----------- ----------- -----------
Income from operations.. 3,165,589 4,759,005 2,796,501 1,891,786 1,160,562
----------- ----------- ----------- ----------- -----------
Interest expense--net... (431,322) (661,022) (1,917,664) (958,197) (909,216)
----------- ----------- ----------- ----------- -----------
Income before
reorganization items,
income taxes,
cumulative effect of
change in accounting
principle and
extraordinary item..... 2,734,267 4,097,983 878,837 933,589 251,346
Reorganization items.... 1,037,979 2,889,707 -- -- --
----------- ----------- ----------- ----------- -----------
Income before income
taxes, cumulative
effect of change in
accounting principle
and extraordinary item. 1,696,288 1,208,276 878,837 933,589 251,346
Income taxes............ 704,017 497,954 356,575 379,037 102,046
----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle
and extraordinary item. 992,271 710,322 522,262 554,552 149,300
Cumulative effect of
change in accounting
for income taxes....... 8,985,122 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income before extraordi-
nary item.............. 9,977,393 710,322 522,262 554,552 149,300
Extraordinary item--gain
on debt discharge--net
of income taxes of
$1,094,649............. -- 12,078,489 -- -- --
----------- ----------- ----------- ----------- -----------
Net income.............. $ 9,977,393 $12,788,811 $ 522,262 $ 554,552 $ 149,300
----------- ----------- ----------- ----------- -----------
Preferred stock divi-
dends.................. -- (31,241) (292,383) (146,191) (146,188)
----------- ----------- ----------- ----------- -----------
Net income available to
common shareholders.... $ 9,977,393 $12,757,570 $ 229,879 $ 408,361 $ 3,112
=========== =========== =========== =========== ===========
Per common share
Income before extraor-
dinary items.......... $ 0.33 $ 0.22 $ 0.08 $ 0.14 $ 0.00
Income from cumulative
effect................ 2.97 -- -- -- --
Net income per share.... $ 3.30 $ 4.22 $ 0.08 $ 0.14 $ 0.00
----------- ----------- ----------- ----------- -----------
Weighted average shares
outstanding............ 3,020,572 3,020,572 3,020,572 3,020,572 3,577,986
=========== =========== =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

SPECIALTY CATALOG CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
COMMON STOCK CLASS A CLASS B CLASS C PREFERRED STOCK ADDITIONAL
-------------------- ----------------- -------------- -------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- --------- ------- ------- ------ ------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
2, 1993.......... 1,000,000 $ 10,000 -- $ -- -- $ -- -- $ -- -- $ -- $4,115,300
Net income...... -- -- -- -- -- -- -- -- -- -- --
---------- -------- --------- ------- ------- ------ ------- ------ ------ ---------- ----------
Balance, January
1, 1994.......... 1,000,000 10,000 -- -- -- -- -- -- -- -- 4,115,300
Cancellation of
SC Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... (1,000,000) (10,000) -- -- -- -- -- -- -- -- 10,000
Issuance of SC
Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... 868,365 8,684 -- -- -- -- -- -- -- -- 859,681
Issuance of
preferred stock. -- -- -- -- -- -- -- -- 22,491 2,249,100 --
Exchange of SC
Corporation
common shares
for Specialty
Catalog Corp.
common shares at
the rate of
1/100 share of
Specialty
Catalog Corp.
stock for each
share of SC
Corporation
common stock for
one............. 1,958,301 19,583 -- -- -- -- -- -- -- -- (19,583)
Net income...... -- -- -- -- -- -- -- -- -- -- --
Redeemable
preferred stock
dividends....... -- -- -- -- -- -- -- -- -- -- (31,241)
---------- -------- --------- ------- ------- ------ ------- ------ ------ ---------- ----------
Balance, December
31, 1994......... 2,826,666 28,267 -- -- -- -- -- -- 22,491 2,249,100 4,934,157
Exchange of
common shares
for Class A,
Class B, and
Class C shares.. (2,826,666) (28,267) 1,958,880 19,589 433,893 4,339 433,893 4,339 -- -- --
Net income...... -- -- -- -- -- -- -- -- -- -- --
Redeemable
preferred stock
dividends....... -- -- -- -- -- -- -- -- -- -- (292,383)
---------- -------- --------- ------- ------- ------ ------- ------ ------ ---------- ----------
Balance, December
30, 1995......... -- -- 1,958,880 19,589 433,893 4,339 433,893 4,339 22,491 2,249,100 4,641,774
Net income
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Redeemable
preferred stock
dividends
(unaudited)..... -- -- -- -- -- -- -- -- -- -- (146,188)
---------- -------- --------- ------- ------- ------ ------- ------ ------ ---------- ----------
Balance, June 29,
1996 (unaudited). -- $ -- 1,958,880 $19,589 433,893 $4,339 433,893 $4,339 22,491 $2,249,100 $4,495,586
========== ======== ========= ======= ======= ====== ======= ====== ====== ========== ==========
<CAPTION>
ACCUMULATED
DEFICIT
-------------
<S> <C>
Balance, January
2, 1993.......... $(34,483,314)
Net income...... 9,977,393
-------------
Balance, January
1, 1994.......... (24,505,921)
Cancellation of
SC Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings.....
Issuance of SC
Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings.....
Issuance of
preferred stock.
Exchange of SC
Corporation
common shares
for Specialty
Catalog Corp.
common shares at
the rate of
1/100 share of
Specialty
Catalog Corp.
stock for each
share of SC
Corporation
common stock for
one.............
Net income...... 12,788,811
Redeemable
preferred stock
dividends....... --
-------------
Balance, December
31, 1994......... (11,717,110)
Exchange of
common shares
for Class A,
Class B, and
Class C shares..
Net income...... 522,262
Redeemable
preferred stock
dividends....... --
-------------
Balance, December
30, 1995......... (11,194,848)
Net income
(unaudited)..... 149,300
Redeemable
preferred stock
dividends
(unaudited)..... --
-------------
Balance, June 29,
1996 (unaudited). $(11,045,548)
=============
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

SPECIALTY CATALOG CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------- ------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1994 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............. $ 9,977,393 $ 12,788,811 $ 522,262 $ 554,552 $ 149,300
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Interest paid through
issuance of debt...... -- -- 445,333 211,611 237,216
Provision for bad
debts................. 26,004 34,180 146,004 12,195 --
Depreciation and amor-
tization.............. 776,440 748,628 249,127 116,878 141,536
Deferred income taxes.. 415,004 1,439,943 350,819 -- --
Cumulative effect of
change in accounting
for income taxes...... (8,985,122) -- -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable... (222,666) 120,860 (934,785) (299,842) 229,460
Inventories........... (1,145,222) (817,280) (852,477) 4,714 983,183
Prepaid expenses...... (1,600,109) (120,628) (288,275) (1,358,709) (124,073)
Other assets.......... (205,745) (383,072) 104,935 57,528 53,122
Accounts payable and
accrued expenses..... 1,818,219 (1,944,118) 1,802,918 1,265,962 (129,450)
Provision for
estimated returns.... 104,000 150,299 (356,033) (522,299) (237,138)
Other liabilities to
customers............ (263,141) (8,654) (155,817) 37,399 112,036
Income taxes.......... (79,971) (43,077) (29,505) 337,984 150,985
Other long-term
liabilities.......... -- -- 18,315 5,422 23,415
Change due to
reorganization
activities:
Extraordinary gain on
debt discharge....... -- (13,173,138) -- -- --
----------- ------------ ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. $ 615,084 $ (1,207,246) $ 1,022,821 $ 423,395 $ 1,589,592
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of property
and equipment......... (268,037) (447,919) (413,146) (206,639) (138,780)
Repayments of note re-
ceivable.............. -- -- 7,409 -- --
----------- ------------ ----------- ----------- -----------
Net cash used in invest-
ing activities......... $ (268,037) $ (447,919) $ (405,737) $ (206,639) $ (138,780)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Issuance of common
stock................. -- 827,042 -- -- --
Issuance of redeemable
preferred stock....... -- 2,142,840 -- -- --
Settlement of long-term
obligations........... -- (20,237,480) -- -- --
Issuance of long-term
debt.................. -- 17,680,186 -- -- --
Repayments of long-term
debt.................. -- -- (2,500,000) (500,000) (1,100,000)
Advances on line of
credit................ 2,972,147 -- 1,050,000 -- 400,000
----------- ------------ ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. $ 2,972,147 $ 412,588 $(1,450,000) $ (500,000) $ (700,000)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM REORGA-
NIZATION ACTIVITIES:
Decrease in obligations
subject to settlement
under reorganization
proceedings........... $(1,495,935) $ -- $ -- $ -- $ --
----------- ------------ ----------- ----------- -----------
Increase (decrease) in
cash................... 1,823,259 (1,242,577) (832,916) (283,244) 750,812
Cash, beginning of year. 365,598 2,188,857 946,280 946,280 113,364
----------- ------------ ----------- ----------- -----------
Cash, end of year....... $ 2,188,857 $ 946,280 $ 113,364 $ 663,036 $ 864,176
----------- ------------ ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
year for:
Interest............... $ 382,754 $ 493,624 $ 1,533,826 $ 712,748 $ 592,851
=========== ============ =========== =========== ===========
Income taxes.......... $ 316,837 $ 174,735 $ 35,261 $ 41,053 $ 42,669
=========== ============ =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

SUMMARY OF NONCASH TRANSACTIONS:

During the six-month periods ended June 29, 1996 and July 1, 1995 and the
year ended December 30, 1995, the Company issued $237,216, $211,611 and
$445,333 of subordinated debt in lieu of payment of interest.

During the six-month periods ended June 29, 1996 and July 1, 1995 and the
years ended December 30, 1995 and December 31, 1994, the Company declared
dividends on preferred stock of $146,188, $146,191, $292,383 and $31,241
which have not been paid at June 29, 1996.

In 1994 the Company received a note in the amount of $147,583 in exchange
for common and preferred stock.

See notes to consolidated financial statements.

F-7
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business--Specialty Catalog Corp. (the "Company") is a direct
marketer targeting niche consumer product categories. SC Corporation, the
Company's principal operating subsidiary doing business under the name SC
Direct ("SC Direct"), is the leading U.S. retailer of women's wigs and
hairpieces. SC Publishing, Inc. ("SC Publishing"), a wholly-owned subsidiary
of SC Direct, sells continuing education courses to nurses, real estate
professionals and Certified Public Accountants.

Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company, SC Direct, and SC Publishing.
All material intercompany balances and transactions have been eliminated in
consolidation.

Pro Forma Balance Sheet--The June 29, 1996 pro forma balance sheet gives
effect to the conversion of 13% Preferred Stock ("13% Preferred Stock") into
375,000 shares of common stock, the waiver of all accrued dividends and
interest on the 13% Preferred Stock, the issuance of the stock options
described in note 15 and the issuance of debt and related warrants also
described in note 15.

Accounts Receivable--The Company records an allowance to provide for
uncollectible accounts receivable. This allowance is determined based on the
historical rate of bad debts applied to current balances. In 1995 and 1994,
the Company had write-offs of accounts receivable against this allowance of
$34,221 and $34,180, respectively. Bad debt expense for the years ended
December 30, 1995, December 31, 1994 and January 1, 1994 was $146,004,
$34,180, and $26,004, respectively. Amounts collected for previously written
off accounts are credited to miscellaneous income.

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

Inventories--Inventories are stated at the lower of first-in, first-out cost
or market. 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
is capitalized and amortized over the expected period of future benefit,
generally two to four months. The adoption of Statement of Principles 93-7,
"Reporting on Advertising Costs," did not have a material impact on the
calculation of deferred catalog costs since the Company employed a similar
methodology in the past. For 1993, 1994, and 1995, advertising expense was
$11.6 million, $12.2 million and $16.3 million, respectively.

Property and Equipment--Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed on 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.

F-8
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other Assets--Trademarks are stated at cost less accumulated amortization.
Amortization is computed on a straight-line basis over 37 years. At December
31, 1995 and 1994, the Company had $33,870 and $21,482 of unamortized
trademarks included in other assets.

Deferred financing costs which were incurred by the Company in connection with
the Banque Nationale de Paris ("BNP") note (Note 7) are charged to operations
as additional interest expense over the life of the underlying indebtedness
using the straight-line method. At December 30, 1995 and December 31, 1994
deferred financing costs were $397,091 and $510,545, respectively.

Income Taxes--In 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109
requires that deferred income taxes be determined based on the expected future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred income tax assets and liabilities. A valuation allowance is recorded
when realization of a deferred tax asset is not assured. In connection with
the adoption of this statement, the Company recognized a cumulative effect of
$8,985,122 in 1993.

Revenue--The Company recognizes sales and the related costs of sales at the
time the 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, both assets and liabilities recognized and not
recognized in the consolidated balance sheet 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 line of credit approximate their carrying
values at December 30, 1995, due to the short-term maturities of these
investments. The carrying value and fair value of the Company's note
receivable at December 30, 1995 was $140,174. The fair value of the note
receivable is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The fair value of the Company's
long-term debt at December 30, 1995 was $15,636,397. The carrying value of the
Company's long term debt at December 30, 1995 was $15,625,519. The fair value
of the Company's long-term debt is based on discounted future cash flows using
current interest rates for financial instruments with similar characteristics
and maturity.

Net Income Per Share--Net income per share is calculated using the weighted
average number of common shares outstanding during each of the periods
retroactively restated to give effect to the 325.51-for-one stock split.

Newly Adopted Accounting Statements--In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with

F-9
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees and encourages (but does not require) compensation cost to be
measured based on fair value of the equity instruments awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB Opinion No. 25 to its stock-
based compensation awards to employees and will disclose the required pro forma
effect on net income and earnings per share.

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles which are to be disposed of. The adoption of this
statement had no effect on the financial position, or 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. The fiscal years ended December 30, 1995, December 31,
1994 and January 1, 1994, each consisted of 52 weeks.

Reclassifications--Certain amounts in the 1993 and 1994 financial statements
have been reclassified to conform to the 1995 presentation.

Unaudited Financial Statements--In the opinion of management of the Company,
the accompanying unaudited financial statements reflect all adjustments which
were of a normal recurring nature necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the six
months ended June 30, 1996 and June 30 1995.

2. CORPORATE ORGANIZATION AND BANKRUPTCY PROCEEDINGS

On December 28, 1992, SC Corporation and its subsidiaries Wigs by Paula, Inc.
("Wigs"), Western Schools, Inc., the predecessor of SC Publishing, After the
Stork, Inc. ("Stork") and Brotman Acquisition Corp. ("Brotman") filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code ("Bankruptcy") in the United States Bankruptcy Court for the District of
Connecticut, ("Bankruptcy Court"). From that date until November 23, 1994, SC
Corporation operated its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. During that period, the Company did not
pay $1,030,757 and $1,688,592 of contractual interest for the years ended
December 31, 1994 and January 1, 1994 while under the protection of Bankruptcy.

SC Corporation's Disclosure Statement with respect to the First Amended and
Restated Joint Plan of Reorganization of SC Corporation and its subsidiaries
Wigs and SC Publishing ("Plan of Reorganization") was approved by the
Bankruptcy Court on September 21, 1994. The Plan of Reorganization was
subsequently confirmed by the Bankruptcy Court on October 26, 1994 and the
reorganization of SC Corporation was consummated on November 23, 1994.

F-10
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$295,121 in settlement of $24,102,851 of secured claims, and $3,345,066 in
cash, $354,247 in subordinated notes, 2,164 shares of preferred stock valued
at $216,400 and 179,353 shares of common stock valued at $179,353 in
settlement of $11,665,353 of unsecured claims. The gain on such discharge of
pre-petition claims has been recorded as an extraordinary item, net of income
taxes of $1,094,649. The Company funded the Plan of Reorganization by selling
additional shares of common stock and 13% Preferred Stock ("13% Preferred
Stock"), entering into a new senior credit facility, and issuing subordinated
notes ("Subordinated Notes"). Subsequent to the consummation of the
reorganization, certain stockholders of the Company purchased the subordinated
notes and 13% Preferred Stock from the holder of the secured claims at their
face values and the common stock from the holders of the secured and unsecured
claims at its fair market value.

Reorganization items consist of the following:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Interest income................................... $ 103,308 $ 24,473
Professional fees................................. (2,133,117) (1,062,452)
Executive and employee compensation............... (533,840) --
Other............................................. (326,058) --
----------- -----------
$(2,889,707) $(1,037,979)
=========== ===========
</TABLE>

The Company was incorporated on November 30, 1994 for the purpose of
becoming the parent company of SC Corporation. On that date, the Company
issued 2,826,666 shares of its common stock and 22,491 shares of 13% Preferred
Stock to the stockholders of SC Corporation in exchange for their shares of SC
Corporation common stock and preferred stock.

3. PREPAID EXPENSES

Prepaid expenses at December 30, 1995 and December 31, 1994 consists of the
following:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred catalog costs................................ $2,320,261 $1,747,152
Prepaid advertising................................... 825,064 1,068,566
Other................................................. 317,493 358,825
---------- ----------
$3,462,818 $3,174,543
========== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 30, 1995 and
December 31, 1994:

<TABLE>
<CAPTION>
USEFUL
LIFE 1995 1994
------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment.................. 7 years $ 1,139,016 $ 1,326,389
Data processing equipment................ 5 years 2,734,186 2,363,330
Leasehold improvements................... (i) 109,146 98,230
----------- -----------
3,982,348 3,787,949
Less accumulated depreciation and amorti-
zation.................................. (3,040,751) (3,011,164)
----------- -----------
$ 941,597 $ 776,785
=========== ===========
</TABLE>

(i) Lesser of the estimated useful lives of the related assets or the lease
term.

F-11
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 30, 1995 and December 31,
1994 consist of the following:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accounts payable....................................... $3,368,865 $1,108,589
Accrued compensation................................... 490,227 933,087
Other accrued expenses................................. 871,844 886,342
---------- ----------
$4,730,936 $2,928,018
========== ==========
</TABLE>

6. LIABILITIES TO CUSTOMERS

Liabilities to customers at December 30, 1995 and December 31, 1994 consist
of the following:

<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Deferred revenue......................................... $114,636 $ 270,453
Reserve for returns...................................... 641,266 997,299
-------- ----------
$755,902 $1,267,752
======== ==========
</TABLE>

Deferred revenues reflect cash received from customers for backordered items
which have not yet been shipped. 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 consists of the following at December 30, 1995 and December
31, 1994:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
BNP term advance, Prime Rate plus 2% or Eurodollar
Rate plus 3.5%, payable quarterly in amounts
between $500,000 and $1,500,000 through May 22,
1999............................................... $11,500,000 $14,000,000
SC Holdings LLC Subordinated Note, 11.5%,
payable November 22, 2002.......................... 3,680,186 3,680,186
SC Holdings LLC PIK Note, 11.5%, payable November
22, 2002........................................... 445,333 --
----------- -----------
15,625,519 17,680,186
Less current portion................................ 2,750,000 2,500,000
----------- -----------
$12,875,519 $15,180,186
=========== ===========
</TABLE>

The Credit Agreement between BNP and the Company ("Agreement") has covenants
which prohibit the payment of cash dividends on the Company's Common Stock and
13% Preferred Stock and any principal or interest payments on the Subordinated
Notes and require that various financial limits and ratios be maintained.

F-12
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Agreement requires an annual prepayment of outstanding
principal equal to 75% of the Company's excess cash flow, as defined. Each
prepayment reduces pro rata the remaining scheduled term advance principal
payments.

The Agreement is secured by all assets of the Company and its subsidiaries.
In addition, the Company has pledged the shares of common stock of SC
Corporation, and SC Holdings LLC ("Holdings") has pledged its subordinated
note, to BNP as additional collateral, and the Company, its subsidiaries and
Holdings each have jointly, severally and unconditionally guaranteed the
borrowings under the Agreement, up to a certain percentage of each guarantor's
adjusted net assets, as defined. The Agreement also provides the Company with a
line of credit up to $2,000,000 for working capital and letters of credit. The
line of credit may be automatically and permanently reduced each year by a
portion of the Company's excess cash flow, as defined. The Company had
$1,050,000 and $0 outstanding under the line of credit and $536,000 and
$2,000,000 available under the line of credit at December 30, 1995 and December
31, 1994, respectively. Borrowings under the line of credit were at the prime
rate plus 2%, which was 10.5% at December 30, 1995. Borrowings under the term
advance at December 30, 1995 due within three months are at the three-month
Eurodollar rate plus 3.5% while the remainder of the borrowings are at the six-
month Eurodollar rate plus 3.5%. Such Eurodollar rates were 9.38% and 9.19%,
respectively.

The Company is obligated to pay various fees under the Agreement, including
an unused line of credit fee of 0.5% of the unused amount under the line.

Holdings is a limited liability company whose stockholders own all the issued
and outstanding shares of 13% Preferred Stock of the Company and certain of the
issued and outstanding shares of Common Stock of the Company.

The Company may, at its option through November 22, 1999, and, under certain
conditions, through November 22, 2002, pay interest on the Subordinated Notes
by issuing additional Subordinated Notes with identical terms and conditions
with an aggregate principal amount equal to the amount of interest then
payable. In 1995, the Company issued $445,333 of additional Subordinated Notes
as payment of interest for the period November 1994 through December 1995.

The aggregate maturities of long-term debt after December 30, 1995 are as
follows:

<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -----------
<S> <C>
1996............................................................. $ 2,750,000
1997............................................................. 3,250,000
1998............................................................. 3,750,000
1999............................................................. 1,750,000
2000............................................................. --
2001 and thereafter.............................................. 4,125,519
-----------
$15,625,519
===========
</TABLE>

As described in Note 13, the Company intends to have a public offering of its
common shares in late 1996 in order to pay a portion of its outstanding debt.
In the event that this offering is not successful, the Company believes that
its present cash flows from operations are sufficient in order to meet the
above debt service requirements, however, if necessary, the Company plans to
refinance the BNP term advance.

8. PREFERRED STOCK

On November 30, 1994, the Company issued 22,491 shares of 13% Preferred
Stock.

F-13
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 13% Preferred Stock dividends are cumulative and payable quarterly at
the end of each calendar quarter. In addition to the Credit Agreement's
prohibition of the payment of cash dividends on the Company's Common Stock and
13% Preferred Stock, the Company may not pay any dividends on any class of its
capital stock other than the 13% Preferred Stock or purchase, redeem or
otherwise acquire any shares of any class of its capital stock so long as
there are any accrued but unpaid dividends on any shares of the 13% Preferred
Stock. At December 30, 1995, there were $323,624 of cumulative 13% Preferred
Stock dividends in arrears, which is included in other long-term liabilities.

Prior to 1995, pursuant to the terms of the 13% Preferred Stock, the Company
was required to redeem all the outstanding shares of 13% Preferred Stock on
November 30, 2004 at a price equal to the par value of the outstanding shares
plus any accrued but unpaid dividends ("Redemption Price"). In 1995, the Board
and the holders of the 13% Preferred Stock elected to amend the Company's
charter by removing the mandatory redemption provision of the 13% Preferred
Stock. In addition, at any time prior to November 30, 2004, the Company may,
at its option, redeem any or all shares of the 13% Preferred Stock at the
Redemption Price.

The holders of the 13% Preferred Stock have no voting rights except as
provided by law.

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the 13% Preferred Stock shall be
entitled to receive the Redemption Price before any distribution shall be made
to holders of common stock or other capital stock of the Company. If the
assets of the Company at such time are insufficient to pay such amounts, such
assets shall be distributed pro rata to the holders of the 13% Preferred
Stock.

9. STOCKHOLDERS' EQUITY

Issuance of Common Stock--As part of the Company's reorganization and
settlement of its bankruptcy proceedings, on November 23, 1994 SC issued
868,365 shares of common stock and canceled 1,000,000 shares of old common
stock that had been issued prior to the date that SC Corporation filed for
reorganization under Chapter 11. On November 30, 1994, the stockholders
exchanged their shares of SC Corporation common stock for the Company's common
stock at the rate of approximately 100 shares of SC Corporation's common stock
for each share of the Company's common stock.

In 1995, the Company's Board of Directors and holders of common stock
elected to recapitalize the common stock into three classes, Class A, Class B
and Class C. Holders of Class A shares are entitled to one vote per share
while holders of Class B and Class C shares are entitled to one-half vote per
share and one and one-half votes per share, respectively. All dividend and
liquidation rights remain unchanged. Upon sale, disposition or other transfer
of any share(s) of Class B common stock by the original holder thereof, (i)
such share(s) shall automatically and immediately convert into an equal number
of shares of Class A common stock, and (ii) an equal number of shares of Class
C common stock shall automatically and immediately convert into an equal
number of shares of Class A common stock. All shareholders received one share
of Class A for each share of common with the exceptions of one shareholder who
received one-half share of Class A and one-half share of Class B for each
share of common and another shareholder who received one-half share of Class A
and one-half share of Class C for each share of common.

Shareholders' Agreement--All holders of common stock and options to purchase
common stock are parties to a Shareholders' Agreement dated November 30, 1994
which (i) prohibits the sale, pledge, transfer or disposal of shares of common
stock prior to the earlier of November 24, 1997 or the date on which the
Company shall have fully utilized its Federal income tax net operating loss
carryovers ("Ownership Change Date") and (ii) restricts the sale, pledge,
transfer or disposal of shares of common stock subsequent to the Ownership
Change Date by granting to the other holders of shares of common stock the
right of first refusal on any bona fide offer to purchase shares of common
stock. The Shareholders' Agreement terminates on the earliest of (i) the date
of

F-14
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

dissolution or liquidation of the Company, (ii) such time as any one
shareholder or other person owns all the shares of common stock, (iii) the
date of the consummation of a public offering of common stock under the
Securities Act of 1933 ("Act") or (iv) such time as all the parties to the
Shareholders' Agreement elect to terminate such agreement.

Registration Rights Agreement--The Company and all holders of common stock
are parties to a Registration Rights Agreement dated November 30, 1994 which
requires the Company, if it proposes to file a registration statement with
respect to its common stock under the Act, to give all holders of common stock
the opportunity to include their shares in such registration. In addition, the
Registration Rights Agreement requires the Company, upon request from either
of its major shareholders, to use its best efforts to effect the registration
under the Act of the shares of such major stockholder and (i) to notify all
other holders of common stock of such major stockholder's request, and (ii) to
use its best efforts to effect the registration under the Act of the shares of
all other shareholders who desire such registration.

Stock Option Agreements--On November 30, 1994, the Company granted a total
of 582,999 options to purchase shares of common stock to two executive
officers. The exercise price of the options is $0.3072 per share. At December
30, 1995 and December 31, 1994, 60,618 and 30,309 options were vested,
respectively. The remaining options vest over varying periods, with 143,530
options ("Vesting Options") vesting between November 23, 1996 and November 23,
1997, and 378,851 options ("Performance Options") vesting on November 1, 2003.
The Performance Options may vest earlier than November 1, 2003 if certain
earnings or internal rate of return thresholds are met.

10. RESTRUCTURING CHARGES

During 1995, the Company restructured by consolidating its operations in one
location in order to reduce costs and utilize resources more efficiently.
Specifically, restructuring charges include:

<TABLE>
<S> <C>
Office Closure Costs................................................ $212,860
Employee Severances................................................. 300,083
--------
Total............................................................. $512,943
========
</TABLE>

Actual termination benefits paid in 1995 totaled $214,007. Included in
accrued expenses at December 30, 1995 are accrued restructuring related
charges of $151,976.

11. INCOME TAXES

The provision for income taxes consists of the following at December 30,
1995 and December 31, 1994:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ 5,046 $ --
State........................................... 5,756 147,614 289,013
-------- -------- --------
5,756 152,660 289,013
-------- -------- --------
Deferred:
Federal......................................... 298,196 293,500 352,753
State........................................... 52,623 51,794 62,251
-------- -------- --------
350,819 345,294 415,004
-------- -------- --------
Total......................................... $356,575 $497,954 $704,017
======== ======== ========
</TABLE>

F-15
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income tax assets and liabilities consist of the following at
December 30, 1995 and December 31, 1994:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.................... $7,229,484 $7,726,848
Operating reserves.................................. 200,165 983,769
Inventory........................................... 226,990 106,103
Other............................................... 5,044 5,046
---------- ----------
7,661,683 8,821,766
---------- ----------
Deferred income tax liabilities:
Extraordinary gain on debt discharge................ -- 1,094,649
Deferred catalog costs.............................. 850,259 551,271
Other............................................... 32,068 45,671
---------- ----------
882,327 1,691,591
---------- ----------
Net deferred income tax asset......................... $6,779,356 $7,130,175
========== ==========
</TABLE>

Reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes for the years ended December 30, 1995,
December 31, 1994 and January 1, 1994 is as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate.......................... 34.0% 34.0% 34.0%
State taxes, net of Federal income tax benefits............ 6.6 7.2 7.5
---- ---- ----
40.6% 41.2% 41.5%
==== ==== ====
</TABLE>

The Company has recorded a deferred tax asset of $6,779,356 reflecting the
benefit of $18,073,209 of net operating loss carryforwards which expire in
varying amounts between 2005 and 2010. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized.

The use of the net operating losses may be subject to certain limitations
upon a change in control of the Company.

12. RELATED PARTY TRANSACTIONS

The Company has a note receivable from a stockholder in the amount of
$140,174 at December 30, 1995. The note bears interest at 9.25% and is
repayable in varying annual installments between December 31, 1996 and December
31, 1999.

The note was issued in November 1994 in exchange for shares of Common Stock
and 13% Preferred Stock and is collateralized by 18,365 shares of Common Stock,
490 shares of 13% Preferred Stock and $80,186 of Subordinated Notes.

13. COMMITMENTS AND CONTINGENCIES

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 noncancelable operating leases
as of December 30, 1995:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996................................................................ $193,500
1997................................................................ 31,168
--------
$224,668
========
</TABLE>

F-16
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management expects that, in the normal course of business, expiring leases
will be renewed or replaced by other leases. Rent expense under operating
leases for the year ended December 30, 1995, December 31, 1994 and January 1,
1994 was $438,450, $569,212 and $562,907, respectively.

Employment and Bonus Agreements--The Company has employment and bonus
agreements with two executive officers through December 31, 1999. The Company's
salary commitment under these agreements aggregates $2,060,000 at December 30,
1995 as follows:

In addition, the two executive officers may earn certain other bonuses based
on the Company's achievement of certain operating criteria.

14. EMPLOYEE BENEFIT PLANS

The Company maintains a qualified defined contribution plan, under the
provisions of Section 401(k) of the Internal Revenue Code, covering
substantially all employees. Under the terms of the plan, eligible employees
may make contributions up to 15% of pay, subject to statutory limitations.
Contributions not exceeding 5% of an employee's pay are matched 40% 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% for each completed year of service, becoming fully
vested after five years of service. Matching contributions by the Company under
the plan were $67,188, $59,594 and $47,520 in 1995, 1994 and 1993,
respectively. No discretionary contributions have been made to the plan.

The Company established a supplemental defined contribution plan in 1994 that
covers certain employees. Under the terms of the plan, these employees may
elect to defer up to 50% of any bonus paid for that year. The Company matches
100% of all amounts deferred. In addition, the Company pays interest on all
outstanding balances at the prime rate but not in excess of 12%. A
participant's rights to the deferred amount of regular bonus and income thereon
shall be fully vested and nonforfeitable at all times. A participant's right to
the Company's match shall become fully vested and nonforfeitable in cumulative
increments of 20% on each of the first through fifth anniversaries of the bonus
date for that year. The total cost of the plan to the Company was $0, $65,000
and $0, in 1993, 1994 and 1995, respectively. The $65,000 contributed in 1994
initiated the plan.

15. SUBSEQUENT EVENTS

On June 1, 1996, the Company entered into an agreement with a director and
two associates of the director to issue a junior subordinated note for $495,000
payable on November 22, 2002 and bearing interest at 11.5%. In connection with
the issuance of this note, the Company agreed to issue warrants for $5,000 to
purchase 265,335 shares of Class A common stock for an aggregate exercise price
of $500,000 ($1.8844 per share). The warrants expire on September 30, 1999. The
note and related warrants were issued on August 12, 1996. The note has been
discounted using an effective interest rate of 21.5%, which represented the
Company's borrowing rate for junior subordinated debt at the date of the
transaction. The remainder of the value representing $114,061 was assigned to
the warrants.

In July 1996, the Company signed a letter of intent with an underwriter for
an initial public offering of 1.25 million shares of the Company's Common
Stock. At the effective date of the offering, the Company will increase

F-17
<PAGE>

SPECIALTY CATALOG CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the number of authorized shares of Common Stock from 20,000 to 10,000,000 and
preferred stock from 30,000 to 1,000,000 and effect a 325.51-for-one split.
The effect of the stock split will be to transfer $19,583 representing the par
value of the additional shares issued from additional paid in capital to
Common Stock. All numbers of common shares and per share data in the
accompanying consolidated financial statements have been retroactively
adjusted to effect the stock split. Immediately after the stock split, all
outstanding shares of preferred stock will be converted into 375,000 shares of
Common Stock. All accumulated dividends and accrued interest on those
dividends through the date of the offering have been irrevocably waived by the
13% Preferred Stockholders as of August 13, 1996. In addition, at the date of
the offering, the Company will adopt the 1996 Stock Option Plan ("Plan"). It
is anticipated that 500,000 authorized but unissued shares of Common Stock
will be reserved for issuance under the Plan. The per share exercise price of
options granted under the Plan will be not less than 100% of the fair market
value of a share of the Company's Common Stock on the date of the grant.

In August 1996, the Company amended its Credit Agreement with BNP. This
amendment included revisions of certain financial limits and ratios that must
be maintained by the Company and is retroactive to December 31, 1995.

In August 1996, the Board of Directors granted a total of 175,000 options to
purchase shares of Common Stock to two executive officers contingent on the
occurrence of the offering. Of these options, 75,000 are exercisable at $5.33
per share and the remainder at the initial public offering price. The options
vest equally over five years subject to acceleration under certain
contingencies.

16. PRO FORMA AND SUPPLEMENTAL PRO FORMA EARNINGS PER SHARE (UNAUDITED)

Pro forma earnings per share of the Company give effect to the conversion of
all 13% Preferred Stock into 375,000 Common Shares, and the exercise of
options to purchase 657,999 shares of Common Stock more fully described in
Notes 7 and 13. Historical net income has been adjusted to give effect to the
elimination of accrued dividends on the 13% Preferred Stock. Pro forma
earnings per share for the periods ended December 30, 1995 and June 29, 1996
are as follows:

<TABLE>
<CAPTION>
DECEMBER 30, JUNE 29,
1995 1996
------------ --------
<S> <C> <C>
Pro forma earnings per share........................... $0.14 $0.04
===== =====
</TABLE>

Supplemental pro forma earnings per share gives effect to the number of
shares necessary for the Company to sell at a purchase price of $7.00 per
share less the Underwriters' discount, to raise sufficient proceeds (net of
estimated offering expenses) to retire $5,900,000 of the Company's
indebtedness to BNP. The number of supplemental pro forma shares outstanding
also gives effect to the conversion of all shares of 13% Preferred Stock for
375,000 of Common Stock, the exercise of a warrant for 265,335 shares of
Common Stock (See note 15) and the exercise of options for 657,999 shares of
Common Stock (See notes 9 and 15). Historical net income has been adjusted to
give effect to the reduction of interest expense on the BNP indebtedness as a
result of repayment of such debts, and to the elimination of accrued dividends
on the preferred stock and any interest expense accrued on unpaid accumulated
dividends. Supplemental pro forma earnings per share for the periods ended
December 30, 1995 and June 29, 1996 are as follows:

<TABLE>
<CAPTION>
DECEMBER 30, JUNE 29,
1995 1996
------------ --------
<S> <C> <C>
Supplemental pro forma earnings per share.............. $0.17 $0.06
===== =====
</TABLE>

F-18
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Reorganization............................................................ 8
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 14
Capitalization............................................................ 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Selected Financial and Operating Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 19
Business.................................................................. 25
Management................................................................ 34
Principal Stockholders.................................................... 39
Certain Transactions...................................................... 41
Description of Securities................................................. 41
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Available Information..................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

1,500,000 SHARES

LOGO
SPECIALTY Catalog
CORP.

COMMON STOCK

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

GKN Securities

, 1996

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the Company's estimates of the expenses to be
incurred by it in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and
commissions:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 4,887.93
NASD registration fee........................................... 1,996.25
Nasdaq listing fee.............................................. 1,000.00
Printing registration statement and other documents............. 100,000.00*
Fees and expenses of Registrant's counsel....................... 200,000.00*
Underwriter's expense allowance................................. 262,500.00*
Accounting fees and expenses.................................... 100,000.00*
Blue Sky expenses and counsel fees.............................. 25,000.00*
Engraving....................................................... 5,000.00*
Miscellaneous................................................... 49,615.82
-----------
Total......................................................... $750,000.00
===========
</TABLE>
- --------
* Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of Delaware, as amended ("DGCL"),
authorizes a Delaware corporation to indemnify its officers, directors,
employees and agents against expenses and liabilities incurred in legal
proceedings involving such persons because of their holding or having held
such positions with the corporation and to purchase and maintain insurance for
such indemnification. The Company's By-Laws and Article Seventh of its
Certificate of Incorporation, as amended, substantively provide that the
Company indemnify its officers, directors, employees and agents to the fullest
extent permitted by Section 145 of the DGCL.

In accordance with Section 102(b)(7) of the DGCL, Article 8 of the Company's
Certificate of Incorporation, as amended, eliminates the personal liability of
directors to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director with certain limited exceptions set forth in
Section 102(b)(7).

The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons on the one hand and the Underwriters
and their respective controlling persons on the other hand against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act of 1933, as amended ("Securities Act").

The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited
circumstances, including on account of knowingly fraudulent, deliberately
dishonest or willful misconduct. To the extent the provisions of the
indemnification agreements exceed the indemnification permitted by applicable
law, such provisions may be unenforceable or may be limited to the extent they
are found by a court of competent jurisdiction to be contrary to public
policy.

II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Described below is information regarding all securities that have been
issued by the Company in the past three years.

1. On November 23, 1994, SC Corporation, a predecessor of the Company,
pursuant to the First Amended and Restated Joint Plan of Reorganization of SC
Corporation, Wigs by Paula, Inc., and SC Publishing, undertook a
reorganization ("Reorganization") and left the protection of the bankruptcy
court. As part of the Reorganization: (i) Mr. Bock acquired for $30,000 98,934
shares of the Company's Common Stock; (ii) Dickstein & Co. acquired for
$2,184,000 867,786 shares of the Company's Common Stock, 7,272 shares of the
Company's 13% Preferred Stock and subordinated indebtedness ("Subordinated
Indebtedness") in the principal amount of $1,190,000; (iii) Dickstein
International acquired for $1,092,000 433,893 shares of the Company's Common
Stock, 3,636 shares of the Company's 13% Preferred Stock and Subordinated
Indebtedness in the principal amount of $595,000; and (iv) Viking Holdings
Limited acquired for $2,626,000 and the forgiveness of a $650,000 note
receivable 1,301,680 shares of the Company's Common Stock, 10,908 shares of
the Company's 13% Preferred Stock and Subordinated Indebtedness in the
principal amount of $1,785,000. All of the Subordinated Indebtedness was
transferred to SC Holdings L.L.C. shortly after completion of the Plan of
Reorganization. The owners of SC Holdings L.L.C. control the majority of the
outstanding Common Stock. The Subordinated Indebtness bears interest at 11.5%
per annum and is due on December 1, 2002. The issuance of the shares and the
Subordinated Indebtness was exempt from the registration provisions of the
Securities Act pursuant to Section 3(a)(7) of the Securities Act.

2. On November 30, 1994, all of the outstanding shares of SC Corporation
common stock were exchanged for shares of Common Stock and 13% Preferred Stock
at the rate of 1/100 share of the Company's common stock for each outstanding
share of SC Corporation common stock. The forgoing transactions were exempt
from the registration provisions of the Securities Act pursuant to Section
4(2)(a) of the Securities Act.

The following table sets forth the number of shares of the Company's Common
Stock and the amount of subordinated indebtness each stockholder received
pursuant to the Reorganization. The numbers of shares owned and the conversion
of the 13% Preferred Stock into Common Stock reflect a recapitalization of the
Company whereby each share of Preferred Stock was converted into 16.67 shares
of Common Stock.

<TABLE>
<CAPTION>
AMOUNT OF
COMMON STOCK PREFERRED SUBORDINATED
NAME SHARES ISSUED SHARES ISSUED INDEBTNESS
---- ------------- ------------- ------------
<S> <C> <C> <C>
Steven L. Bock.................... 303.93 0 --
Bruce Pollack..................... 121.57 0 --
Wigs, L.P......................... 260.51 675 $ 110,406
Dickstein & Co., L.P.............. 2,665.88 7,272 $1,189,926
9 West 57th Street
New York, NY 10019
Dickstein International Limited... 1,332.94 3,636 $ 594,964
9 West 57th Street
New York, NY 10019
Viking Holdings Limited........... 3,998.82 10,908 $1,784,890
c/o Abacus Secretaries (Jersey)
Limited
La Motte Chambers
St. Helier, Jersey
JE1 1BS Channel Islands
</TABLE>

3. Mark Brodsky and Samuel Katz acquired their shares of Common Stock and
13% Preferred Stock as set forth in the following table in February 1996 from
Dickstein International. The transaction was exempt from the

II-2
<PAGE>

registration requirements of the Securities Act pursuant to the so-called
"Section 4 (1 1/2)" exemption. The following table sets forth the number of
shares of common stock and 13% Preferred each stockholder received. The
numbers of shares owned and the conversion of the 13% Preferred Stock into
Common Stock reflect a recapitalization of the Company whereby each share of
Preferred Stock was converted into 16.67 shares of Common Stock.

<TABLE>
<CAPTION>
COMMON
STOCK PREFERRED
NAME ISSUED STOCK ISSUED
---- ------ ------------
<S> <C> <C>
Mark Brodsky............................................. 122.07 332.98
Samuel Katz.............................................. 244.14 665.96
</TABLE>

4. On June 1, 1996, the Company entered into an agreement with Martin
Franklin, a director of the Company, and two associates of Mr. Franklin,
pursuant to which Mr. Franklin and his associates loaned the Company $495,000
in junior subordinated indebtedness. This loan was made on August 9, 1996,
bears interest at 11.5%, and is due August 9, 1999, provided that this loan
will not be repaid prior to the repayment of the Subordinated Indebtedness. In
connection with this loan, the Company has issued for $5,000 to Mr. Franklin
and his associates warrants to purchase 265,335 shares of Common Stock. The
warrants are exercisable until September 30, 1999 at an exercise price of
$1.88 per share.

The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities
Act pursuant to Section 4(2) thereof.

5. On August 1, 1996, Dickstein Focus Fund acquired 999.08 shares of 13%
Preferred Stock and 366.26 shares of Common Stock from Dickstein & Co. L.P.
The transaction was exempt from the registration requirements of the
Securities Act pursuant to the so-called "Section 4(1 1/2)" exemption.

No underwriter was engaged in connection with the foregoing sales of
securities. The Company has reason to believe that all of the foregoing
purchasers were familiar with or had access to information concerning the
operations and financial conditions of the Company, and all of those
individuals purchasing securities represented that they were accredited
investors, acquiring the shares for investment and without a view to the
distribution thereof. At the time of issuance, all of the foregoing securities
were deemed to be restricted securities for purposes of the Securities Act and
the certificates representing such securities bore legends to that effect.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*1.01 --Preliminary form of Underwriting Agreement.
*1.03 --Form of Selected Dealer Agreement.
*1.04 --Underwriter's Purchase Option.
***3.01 --Certificate of Incorporation of the Registrant, as amended.
**3.02 --By-Laws of the Registrant, as amended.
**4.01 --Specimen Certificate representing the Common Stock, par value $0.01
per share.
**5.01 --Opinion of Kane Kessler, P.C.
**10.01 --1996 Stock Option Plan.
**10.02 --Employment Agreement dated as of , 1996 between the
Registrant and Steven L. Bock.
**10.03 --Employment Agreement dated as of , 1996 between the
Registrant and Steven M. O'Hara.
***10.04 --Credit Agreement dated , 1994 between Bank Nationale de Paris
("BNP") Wigs By Paula, Inc., predecessor to the Registrant ("Wigs").
***10.05 --First Amendment, Waiver and Consent to the Credit Agreement dated
August 16, 1995 between BNP and the Registrant.
***10.06 --Second Amendment, Waiver and Consent to the Credit Agreement dated
August 14, 1996 between BNP and the Registrant.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
***10.07 --Security Agreement dated as of November 23, 1994 between Wigs and
BNP.
***10.08 --Trademark and Copyright Security Agreement dated as of November 23,
1994 between WIGS, BNP and other guarantors named therein.
***10.09 --Pledge Agreement dated as of November 23, 1994 between SC
Corporation and BNP.
***10.10 --Pledge Agreement dated as of November 23, 1994 between the
Registrant, SC Holdings, L.L.C. and BNP.
***10.11 --Guaranty dated November 23, 1994 between the Registrant, Western
Schools, Inc., Royal Advertising & Marketing, Inc., BNP and the
Hedge Banks.
***10.12 --Guaranty dated November 23, 1994 between SC Corporation, BNP, and
the Hedge Banks.
***10.13 --Guaranty dated November 30, 1994 between the Registrant, SC
Holdings L.L.C., BNP, and the Hedge Banks.
***10.14 --Agreement dated June 1, 1996 between SC Direct, Inc., the
Registrant and Martin Franklin.
***10.15 --Debtor Securities Purchase Agreement dated November 23, 1994
between WIGS, L.P. and SC Corporation.
***10.16 --Pledge and Security Agreement dated November 30, 1994 between WIGS,
L.P. and SC Corporation.
***10.17 --Promissory Note dated November 23, 1994 in the principal amount of
$147,583 from WIGS, L.P. to SC Corporation.
***10.18 --Lease dated July 10, 1985 between Simon D. Young, Trustee of the
Sandpy Realty Trust, ("Trustee"), and Wigs for premises located at
21 Bristol Drive, South Easton, MA.
***10.19 --First Amendment of Lease, dated March 15, 1986, between the Trustee
and Wigs.
***10.20 --Second Amendment to Lease, dated March 1, 1989 between the Trustee
and Wigs By Paula, Inc.
***10.21 --Third Amendment to Lease, dated October 22, 1993 between the
Trustee and Wigs By Paula, Inc.
***10.22 --Letter Agreement, dated February 21, 1995 between the Trustee and
SC Corporation.
***10.23 --Lease, dated October 20, 1995 between Fredric Snyderman as Trustee
of JV Realty Trust and SC Direct Inc. for the premises at 23 Norfolk
Avenue.
***10.24 --Printing Agreement, dated January 1, 1995 between Quebecor Printing
(USA) Corp. and the Registrant, as amended.
**10.25 --Registration Rights Agreement, dated between the
Registrant and certain of the Registrant's stockholders, as amended.
***10.26 --First Amended and Restated Joint Plan of Reorganization of SC
Corporation, Western Schools, Inc. and Wigs by Paula dated September
21, 1994.
***10.27 --AT&T Contract Tariff Order dated February 9, 1995 between AT&T and
the Registrant.
***10.28 --Shareholders' Agreement dated as of November 30, 1994 between the
Registrant, SC Holdings L.L.C., SC Corporation and certain
shareholders. ("Shareholders' Agreement").
***10.29 --Amendment No. 1 to Shareholders' Agreement.
***10.30 --SC Holdings L.L.C. Limited Liability Company Agreement, dated as of
.
**10.31 --Supplemental Defined Contribution Plan.
**10.32 --Form of Indemnification Agreement of Directors.
***11.01 --Statement Regarding Computation of per share earnings.
**21.01 --Subsidiaries of the Registrant.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**23.01 --Consent of Kane Kessler, P.C. (included in Exhibit 5)
*23.02 --Consent of Deloitte and Touche
***24.01 --Power of Attorney (contained on page II-7)
***27.01 --Financial Data Schedule
</TABLE>
- --------
* Filed herewith
** To be filed by amendment.
*** Previously filed.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes:

(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) and to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;

(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;

(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;

(4) to provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser;

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

II-5
<PAGE>

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

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

II-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON OCTOBER 3, 1996.

Specialty Catalog Corp.

/s/ Steven L. Bock
By: _________________________________
Steven L. Bock,
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Steven Bock and Stephen O'Hara, jointly
and severally, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement and all documents relating
thereto, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.

SIGNATURE TITLE DATE

/s/ Steven L. Bock Director and Chief
- ------------------------------------- Executive Officer October 3, 1996
/s/ Steven L. Bock (Principal
Executive Officer)

/s/ Steven L. Bock, as Attorney-in- President
Fact October 3, 1996
- -------------------------------------
/s/ Stephen M. O'Hara

/s/ Steven L. Bock, as Attorney-in- Chief Financial
Fact Officer (Principal October 3, 1996
- ------------------------------------- Financial and
/s/ J. William Heise Accounting Officer)

/s/ Steven L. Bock, as Attorney-in- Director
Fact October 3, 1996
- -------------------------------------
/s/ Alan S. Cooper

II-7
<PAGE>

SIGNATURE TITLE DATE

/s/ Steven L. Bock, as Attorney-in- Director
Fact October 3, 1996
- -------------------------------------
/s/ Martin Franklin

/s/ Steven L. Bock, as Attorney-in- Director
Fact October 3, 1996
- -------------------------------------
/s/ Samuel L. Katz

/s/ Steven L. Bock, as Attorney-in- Director
Fact October 3, 1996
- -------------------------------------
/s/ Guy Naggar

II-8
<PAGE>

EXHIBIT

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Reserve Allowance:
Balance at beginning of period................ (847,000) (997,299)
Charges to net sales.......................... (8,617,427) (8,298,427)
Deductions--Refunds........................... 8,467,128 8,654,460
Balance at end of period...................... (997,299) (641,266)
Allowance for Doubtful Accounts:
Balance at beginning of period................ (20,500) (42,068)
Charges to bad debt expense................... (34,112) (146,004)
Deductions--Write-offs........................ 12,612 28,072
Balance at end of period...................... (42,000) (160,000)
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----
<C> <S> <C>
*1.01 --Preliminary form of Underwriting Agreement.
*1.03 --Form of Selected Dealer Agreement.
*1.04 --Underwriter's Purchase Option.
***3.01 --Certificate of Incorporation of the Registrant, as amended.
**3.02 --By-Laws of the Registrant, as amended.
**4.01 --Specimen Certificate representing the Common Stock, par
value $0.01 per share.
**5.01 --Opinion of Kane Kessler, P.C.
**10.01 --1996 Stock Option Plan.
**10.02 --Employment Agreement dated as of , 1996 between the
Registrant and
Steven L. Bock.
**10.03 --Employment Agreement dated as of , 1996 between the
Registrant and
Steven M. O'Hara.
***10.04 --Credit Agreement dated , 1994 between Bank Nationale
de Paris ("BNP") Wigs By Paula, Inc., predecessor to the
Registrant ("Wigs").
***10.05 --First Amendment, Waiver and Consent to the Credit Agreement
dated August 16, 1995 between BNP and the Registrant.
***10.06 --Second Amendment, Waiver and Consent to the Credit Agreement
dated August 14, 1996 between BNP and the Registrant.
***10.07 --Security Agreement dated as of November 23, 1994 between
Wigs and BNP.
***10.08 --Trademark and Copyright Security Agreement dated as of
November 23, 1994 between WIGS, BNP and other guarantors
named therein.
***10.09 --Pledge Agreement dated as of November 23, 1994 between SC
Corporation and BNP.
***10.10 --Pledge Agreement dated as of November 23, 1994 between the
Registrant, SC Holdings, L.L.C. and BNP.
***10.11 --Guaranty dated November 23, 1994 between the Registrant,
Western Schools, Inc., Royal Advertising & Marketing, Inc.,
BNP and the Hedge Banks.
***10.12 --Guaranty dated November 23, 1994 between SC Corporation,
BNP, and the Hedge Banks.
***10.13 --Guaranty dated November 30, 1994 between the Registrant, SC
Holdings L.L.C., BNP, and the Hedge Banks.
***10.14 --Agreement dated June 1, 1996 between SC Direct, Inc., the
Registrant and Martin Franklin.
***10.15 --Debtor Securities Purchase Agreement dated November 23, 1994
between WIGS, L.P. and SC Corporation.
***10.16 --Pledge and Security Agreement dated November 30, 1994
between WIGS, L.P. and SC Corporation.
***10.17 --Promissory Note dated November 23, 1994 in the principal
amount of $147,583 from WIGS, L.P. to SC Corporation.
***10.18 --Lease dated July 10, 1985 between Simon D. Young, Trustee of
the Sandpy Realty Trust, ("Trustee"), and Wigs for premises
located at 21 Bristol Drive, South Easton, MA.
***10.19 --First Amendment of Lease, dated March 15, 1986, between the
Trustee and Wigs.
***10.20 --Second Amendment to Lease, dated March 1, 1989 between the
Trustee and Wigs By Paula, Inc.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----
<C> <S> <C>
***10.21 --Third Amendment to Lease, dated October 22, 1993 between the
Trustee and Wigs By Paula, Inc.
***10.22 --Letter Agreement, dated February 21, 1995 between the
Trustee and SC Corporation.
***10.23 --Lease, dated October 20, 1995 between Fredric Snyderman as
Trustee of JV Realty Trust and SC Direct Inc. for the
premises at 23 Norfolk Avenue.
***10.24 --Printing Agreement, dated January 1, 1995 between Quebecor
Printing (USA) Corp. and the Registrant, as amended.
**10.25 --Registration Rights Agreement, dated between the
Registrant and certain of the Registrant's stockholders, as
amended.
***10.26 --First Amended and Restated Joint Plan of Reorganization of
SC Corporation, Western Schools, Inc. and Wigs by Paula dated
September 21, 1994.
***10.27 --AT&T Contract Tariff Order dated February 9, 1995 between
AT&T and the Registrant.
***10.28 --Shareholders' Agreement dated as of November 30, 1994
between the Registrant, SC Holdings L.L.C., SC Corporation
and certain shareholders. ("Shareholders' Agreement").
***10.29 --Amendment No. 1 to Shareholders' Agreement.
***10.30 --SC Holdings L.L.C. Limited Liability Company Agreement,
dated as of .
**10.31 --Supplemental Defined Contribution Plan.
**10.32 --Form of Indemnification Agreement of Directors.
***11.01 --Statement Regarding Computation of Per Share Earnings.
**21.01 --Subsidiaries of the Registrant.
**23.01 --Consent of Kane Kessler, P.C. (included in Exhibit 5).
*23.02 --Consent of Deloitte & Touche LLP.
***24.01 --Power of Attorney (contained on page II-7).
***27.01 --Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.

<PAGE>

EXHIBIT 1.01

UNDERWRITING AGREEMENT

BETWEEN

SPECIALTY CATALOG CORP.

AND

GKN SECURITIES CORP.

DATED: ________________
<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX OF DEFINITIONS................................................. v

1. Purchase and Sale of Securities................................... 1
1.1 Firm Securities............................................. 1
1.1.1 Purchase of Firm Securities.......................... 1
1.1.2 Payment and Delivery................................. 1
1.2 Over-Allotment Option....................................... 2
1.2.1 Option Securities.................................... 2
1.2.2 Exercise of Option................................... 2
1.2.3 Payment and Delivery................................. 2
1.3 Underwriter's Purchase Option............................... 2
1.3.1 Purchase Option...................................... 2
1.3.2 Payment and Delivery................................. 3

2. Representations and Warranties of the Company..................... 3
2.1 Filing of Registration Statement............................ 3
2.1.1 Pursuant to the Act.................................. 3
2.1.2 Pursuant to the Exchange Act......................... 3
2.2 No Stop Orders, Etc......................................... 3
2.3 Disclosures in Registration Statement....................... 3
2.3.1 Securities Act and Exchange Act Representation....... 3
2.3.2 Disclosure of Contracts.............................. 4
2.3.3 Prior Securities Transactions........................ 4
2.4 Changes After Dates in Registration Statement............... 4
2.4.1 No Material Adverse Change........................... 4
2.4.2 Recent Securities Transactions, Etc.................. 5
2.5 Independent Accountants..................................... 5
2.6 Financial Statements........................................ 5
2.7 Authorized Capital; Options; Etc............................ 5
2.8 Valid Issuance of Securities; Etc........................... 5
2.8.1 Outstanding Securities............................... 5
2.8.2 Securities Sold Pursuant to this Agreement........... 6
2.9 Registration Rights of Third Parties........................ 6
2.10 Validity and Binding Effect of Agreements................... 6
2.11 No Conflicts, Etc........................................... 6
2.12 No Defaults; Violations..................................... 7
2.13 Corporate Power; Licenses; Consents......................... 7
2.13.1 Conduct of Business................................. 7
2.13.2 Transactions Contemplated Herein.................... 7
2.14 Title to Property; Insurance................................ 7
2.15 Litigation; Governmental Proceedings........................ 7
2.16 Good Standing............................................... 8
2.17 Taxes....................................................... 8
2.18 Employees' Options.......................................... 8
2.19 Transactions Affecting Disclosure to NASD................... 8
2.19.1 Finder's Fees....................................... 8
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.19.2 Payments Within Twelve Months...................... 8
2.19.3 Use of Proceeds.................................... 9
2.19.4 Insiders' NASD Affiliation......................... 9
2.20 Foreign Corrupt Practices Act.............................. 9
2.21 Nasdaq Eligibility......................................... 9
2.22 Intangibles................................................ 9
2.23 Relations With Employees................................... 9
2.23.1 Employee Matters................................... 9
2.23.2 Employee Benefit Plans............................. 10
2.24 Officers' Certificate...................................... 10
2.25 Reserved................................................... 10
2.26 Agreements With Insiders................................... 10
2.26.1 Lock-Up Agreements................................. 10
2.26.2 Lock-up Agreements with Holders of Preferred Stock. 10
2.27 Subsidiaries............................................... 11
2.28 Unaudited Financials....................................... 11
2.29 Employment Agreements...................................... 11
2.30 UCC, Lien and Title Searches............................... 11

3. Covenants of the Company......................................... 11
3.1 Amendments to Registration Statement........................ 11
3.2 Federal Securities Laws..................................... 11
3.2.1 Compliance........................................... 11
3.2.2 Filing of Final Prospectus........................... 11
3.2.3 Exchange Act Registration............................ 12
3.3 Blue Sky Filing............................................. 12
3.4 Delivery to the Underwriter of Prospectuses................. 12
3.5 Events Requiring Notice to the Underwriter.................. 12
3.6 Review of Financial Statements.............................. 12
3.7 Reserved.................................................... 12
3.8 Nasdaq Maintenance.......................................... 13
3.9 Reserved.................................................... 13
3.10 Reserved.................................................... 13
3.11 Reports to the Underwriter.................................. 13
3.11.1 Periodic Reports, Etc............................... 13
3.11.2 Transfer Sheets and Weekly Position Listings........ 13
3.12 Agreements between the Underwriter and the Company.......... 13
3.12.1 Underwriter's Purchase Option....................... 13
3.13 Disqualification of Form S-1 (or other appropriate form).... 13
3.14 Payment of Expenses......................................... 13
3.14.1 General Expenses.................................... 13
3.14.2 Non-Accountable Expenses............................ 14
3.15 Application of Net Proceeds................................. 15
3.16 Delivery of Earnings Statements to Security Holders......... 15
3.17 Key Person Life Insurance................................... 15
3.18 Stabilization............................................... 15
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.19 Internal Controls........................................... 15
3.20 Accountants and Lawyers..................................... 15
3.21 Transfer Agent.............................................. 15
3.22 Sale of Securities.......................................... 15
3.23 Options..................................................... 15

4. Conditions of the Underwriter's Obligations....................... 16
4.1 Regulatory Matters........................................... 16
4.1.1 Effectiveness of Registration Statement............... 16
4.1.2 NASD Clearance........................................ 16
4.1.3 No Blue Sky Stop Orders............................... 16
4.2 Company Counsel Matters...................................... 16
4.2.1 Effective Date Opinion of Counsel..................... 16
4.2.2 Closing Date and Option Closing Date Opinion
of Counsel........................................... 20
4.2.3 Reliance.............................................. 20
4.3 Cold Comfort Letter.......................................... 20
4.4 Officers' Certificates....................................... 21
4.4.1 Officers' Certificate................................. 21
4.4.2 Secretary's Certificate............................... 22
4.5 No Material Changes.......................................... 22
4.6 Delivery of Agreements....................................... 22
4.7 Opinion of Counsel for the Underwriter....................... 23

5. Indemnification................................................... 23
5.1 Indemnification of the Underwriter........................... 23
5.1.1 General............................................... 23
5.1.2 Procedure............................................. 23
5.2 Indemnification of the Company............................... 24
5.3 Contribution................................................. 24
5.3.1 Contribution Rights................................... 24
5.3.2 Contribution Procedure................................ 25

6. [Intentionally Omitted].......................................... 25

7. Additional Covenants............................................. 25
7.1 Attendance at Board Meetings................................ 25
7.2 Press Releases.............................................. 25
7.3 Form S-8 or any Similar Form................................ 25
7.4 Compensation and Other Arrangements......................... 26

8. Representations and Agreements to Survive Delivery............... 26

9. Effective Date of This Agreement and Termination Thereof......... 26
9.1 Effective Date.............................................. 26
9.2 Termination................................................. 26
9.3 Notice...................................................... 26
9.4 Expenses.................................................... 27

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.5 Indemnification............................................. 27

10. Miscellaneous................................................... 27
10.1 Notices................................................... 27
10.2 Headings.................................................. 27
10.3 Amendment................................................. 27
10.4 Entire Agreement.......................................... 28
10.5 Binding Effect............................................ 28
10.6 Governing Law, Jurisdiction............................... 28
10.7 Execution in Counterparts................................. 28
10.8 Waiver, Etc............................................... 28
</TABLE>
<PAGE>

INDEX OF DEFINITIONS
---------------------
<TABLE>
<CAPTION>

Term Section
- ---- -------
<S> <C>
Act................................................................ 2.1.1
Closing Date....................................................... 1.1.2
Code...............................................................2.23.2
Commission......................................................... 2.1.1
Common Stock....................................................... 1.1.1
Company..................................................... Introductory
Paragraph
Effective Date..................................................... 1.2.2
ERISA..............................................................2.23.2
ERISA Plans........................................................2.23.2
Exchange Act....................................................... 2.1.2
Filing Date........................................................2.19.2
Firm Securities.................................................... 1.1.1
Insiders...........................................................2.26.1
Intangibles........................................................ 2.22
NASD...............................................................2.19.1
Nasdaq............................................................. 2.21
Option Closing Date................................................ 1.2.2
Option Securities.................................................. 1.2.1
Over-allotment Option.............................................. 1.2.1
Preliminary Prospectus............................................. 2.1.1
Principal Stockholders............................................. 7.2
Prospectus......................................................... 2.1.1
Public Securities.................................................. 1.2.1
Registration Statement............................................. 2.1.1
Regulations........................................................ 2.1.1
Securities..........................................................1.3.1
Subsidiary(ies).................................................... 2.27
Unaudited Financials............................................... 2.28
Underwriter................................................. Introductory
Paragraph
Underwriter's Purchase
Option........................................................... 1.3.1
Underwriter's Securities........................................... 1.3.1
Underwriter's Shares............................................... 1.3.1
</TABLE>
<PAGE>

SPECIALTY CATALOG CORP.

1,500,000 SHARES OF COMMON STOCK

UNDERWRITING AGREEMENT
----------------------

New York, New York
October __, 1996

GKN Securities Corp.
61 Broadway, 12th Floor
New York, New York 10006

Ladies and Gentlemen:

The undersigned, Specialty Catalog Corp., a Delaware corporation (the
"Company"), hereby confirms its agreement with GKN Securities Corp. (being
referred to herein variously as "you" or the "Underwriter") as follows:

1. Purchase and Sale of Securities.
-------------------------------

1.1 Firm Securities.
---------------

1.1.1 Purchase of Firm Securities. On the basis of the representations
---------------------------
and warranties herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to the Underwriter and the
Underwriter agrees to purchase from the Company 1,500,000 shares of the
Company's Common Stock, at a purchase price of $________ per share ("Common
Stock") (these shares of Common Stock being referred to herein as "Firm
Securities").

1.1.2 Payment and Delivery. Delivery and payment for the Firm
--------------------
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or at
such earlier time as the Underwriter shall determine, or at such other time as
shall be agreed upon by the Underwriter and the Company at the offices of the
Underwriter or at such other place as shall be agreed upon by the Underwriter
and the Company. The hour and date of delivery and payment for the Firm
Securities are called the "Closing Date." Payment for the Firm Securities shall
be made on the Closing Date at the Underwriter's election by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company upon delivery to you of certificates (in form and substance satisfactory
to the Underwriter) representing the Firm Securities for the account of the
Underwriter. The Firm Securities shall be registered in such name or names and
in such authorized denominations as the Underwriter may request in writing at
least two full business days prior to the Closing Date. The Company will permit
the Underwriter to examine and package the Firm Securities for delivery, at
least one full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Securities except upon tender of payment
by the Underwriter for all the Firm Securities.
<PAGE>

1.2 Over-Allotment Option.
---------------------

1.2.1 Option Securities. For the purposes of covering any over-
-----------------
allotments in connection with the distribution and sale of the Firm Securities,
the Underwriter is hereby granted an option to purchase up to an additional
225,000 shares of Common Stock from the Company ("Over-allotment Option"). Such
additional 225,000 shares of Common Stock are hereinafter referred to as the
"Option Securities." The Firm Securities and the Option Securities are
hereinafter referred to collectively as the "Public Securities." The purchase
price to be paid for the Option Securities will be the same price per Option
Security as the price per Firm Security set forth in Section 1.1.1 hereof.

1.2.2 Exercise of Option. The Over-allotment Option granted pursuant
------------------
to Section 1.2.1 hereof may be exercised by the Underwriter as to all or any
part of the Option Securities at any time, from time to time, within forty-five
days after the effective date ("Effective Date") of the Registration Statement
(as hereinafter defined). The Underwriter will not be under any obligation to
purchase any Option Securities prior to the exercise of the Over-allotment
Option. The Over-allotment Option granted hereby may be exercised by the giving
of oral notice to the Company from the Underwriter, which must be confirmed by a
letter or telecopy setting forth the number of Option Securities to be
purchased, the date and time for delivery of and payment for the Option
Securities and stating that the Option Securities referred to therein are to be
used for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Securities. If such notice is given at least
two full business days prior to the Closing Date, the date set forth therein for
such delivery and payment will be the Closing Date. If such notice is given
thereafter, the date set forth therein for such delivery and payment will not be
earlier than five full business days after the date of the notice. If such
delivery and payment for the Option Securities does not occur on the Closing
Date, the date and time of the closing for such Option Securities will be as set
forth in the notice (hereinafter the "Option Closing Date"). Upon exercise of
the Over-allotment Option, the Company will become obligated to convey to the
Underwriter, and, subject to the terms and conditions set forth herein, the
Underwriter will become obligated to purchase, the number of Option Securities
specified in such notice.

1.2.3 Payment and Delivery. Payment for the Option Securities will be
--------------------
at the Underwriter's election by certified or bank cashier's check(s) in New
York Clearing House funds, payable to the order of the Company at the offices of
the Underwriter or at such other place as shall be agreed upon by the
Underwriter and the Company upon delivery to you of certificates representing
such securities for the Underwriter. The certificates representing the Option
Securities to be delivered will be in such denominations and registered in such
names as the Underwriter requests not less than two full business days prior to
the Closing Date or the Option Closing Date, as the case may be, and will be
made available to the Underwriter for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to such Closing Date.

1.3 Underwriter's Purchase Option.
-----------------------------

1.3.1 Purchase Option. The Company hereby agrees to issue and sell to
---------------
the Underwriter (and/or its designees) on the Closing Date, for an aggregate of
$100, an option ("Underwriter's Purchase Option") for the purchase of an
aggregate of 150,000 shares of Common Stock at an initial exercise price of ___
percent of the initial offering price of a share of Common Stock i.e., $________
per share of Common Stock ("Underwriter's Shares"). Each of the Underwriter's
Shares is identical to the Firm Securities. The Underwriter's Purchase Option
and the

2
<PAGE>

Underwriter's Shares are hereinafter referred to collectively as the
"Underwriter's Securities." The Public Securities and the Underwriter's
Securities are hereinafter referred to collectively as the "Securities."

1.3.2 Payment and Delivery. Delivery and payment for the Underwriter's
--------------------
Purchase Option shall be made on the Closing Date. The Company shall deliver to
the Underwriter, upon payment therefor, certificates for the Underwriter's
Purchase Option in the name or names and in such authorized denominations as the
Underwriter may request.

2. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to the Underwriter as follows:

2.1 Filing of Registration Statement.
--------------------------------

2.1.1 Pursuant to the Act. The Company has filed with the Securities
-------------------
and Exchange Commission ("Commission") a registration statement and an amendment
or amendments thereto, on Form S-1, File No. 333-10793, including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Public Securities under the Securities Act of 1933, as amended ("Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the Regulations), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective by the Commission on the date
hereof.

2.1.2 Pursuant to the Exchange Act. The Company has filed with the
----------------------------
Commission a registration statement on Form 8-A, File No. ____________,
providing for the registration under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), of the Public Securities. Such registration of the
Securities has been declared effective by the Commission on the date hereof.

2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
--------------------
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.

2.3 Disclosures in Registration Statement.
-------------------------------------

2.3.1 Securities Act and Exchange Act Representation. At the time the
----------------------------------------------
Registration Statement became effective and at all times subsequent thereto up
to and including the Closing Date and the Option Closing Date, if any, the
Registration Statement and the Prospectus and any amendment or supplement
thereto contained and will contain all material statements which are required to
be stated therein in accordance with the Act and the Regulations, and conformed
and will conform in all material respects to the requirements of the
Act and the Regulations; neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, during such time period and on such
dates, contained or will contain any untrue statement of a material fact or

3
<PAGE>

omitted or will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, nor did they or will
they contain any untrue statement of a material fact or did they or will they
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto at the time such filing was made
complied in all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter by the Underwriter expressly for use in the Registration Statement
or Prospectus or any amendment thereof or supplement thereto.

2.3.2 Disclosure of Contracts. The description in the Registration
-----------------------
Statement and the Prospectus of contracts and other documents is accurate and
presents fairly the information required to be disclosed and there are no
contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None
of the material provisions of such contracts or instruments violates or will
result in a violation of any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its respective assets or businesses,
including, without limitation, those relating to environmental laws and
regulations.

2.3.3 Prior Securities Transactions. No securities of the Company have
-----------------------------
been sold by the Company or by or on behalf of, or for the benefit of, any
person or persons controlling, controlled by, or under common control with the
Company within the three years prior to the date hereof, except as disclosed in
the Registration Statement.

2.4 Changes After Dates in Registration Statement.
---------------------------------------------

2.4.1 No Material Adverse Change. Since the respective dates as of
--------------------------
which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, including, but not
limited to, a material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, whether or
not arising in the ordinary course of business, and (ii) there have been no
transactions entered into by the Company, other than those in the ordinary
course of business, which are material with respect to the condition, financial
or otherwise, or to the results of operations, business or business prospects of
the Company.

4
<PAGE>

2.4.2 Recent Securities Transactions, Etc. Subsequent to the
------------------------------------
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.

2.5 Independent Accountants. Deloitte & Touche LLC, whose report is filed
-----------------------
with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.

2.6 Financial Statements. The financial statements, including the notes
--------------------
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.

2.7 Authorized Capital; Options; Etc. The Company had at the date or dates
---------------------------------
indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.

2.8 Valid Issuance of Securities; Etc.
----------------------------------

2.8.1 Outstanding Securities. All issued and outstanding securities of
----------------------
the Company have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company. The outstanding options and warrants to purchase
shares of Common Stock constitute the valid and binding obligations of the
Company, enforceable in accordance with their terms. The authorized Common
Stock and outstanding options and warrants to purchase shares of Common Stock
conform to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.

2.8.2 Securities Sold Pursuant to this Agreement. The Securities have
------------------------------------------
been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such holders; the Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
and all corporate action

5
<PAGE>

required to be taken for the authorization, issuance and sale of the Securities
has been duly and validly taken. When issued, the Underwriter's Purchase Option
will constitute a valid and binding obligation of the Company to issue and sell,
upon exercise thereof and payment therefor, the number and type of securities of
the Company called for thereby and the Underwriter's Purchase Option will be
enforceable against the Company in accordance with its terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

2.9 Registration Rights of Third Parties. Except as set forth in the
------------------------------------
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.

2.10 Validity and Binding Effect of Agreements. This Agreement has been
-----------------------------------------
duly and validly authorized by the Company and this Agreement constitutes, and
the Underwriter's Purchase Option when executed and delivered pursuant to this
Agreement will constitute, the valid and binding agreements of the Company,
enforceable against the Company in accordance with their respective terms,
except (i) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (ii) as
enforceability of any indemnification provision may be limited under the federal
and state securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

2.11 No Conflicts, Etc. The execution, delivery, and performance by the
------------------
Company of this Agreement and the Underwriter's Purchase Option and the
consummation by the Company of the transactions herein and therein contemplated
and the compliance by the Company with the terms hereof and thereof have been
duly authorized by all necessary corporate action and do not and will not, with
or without the giving of notice or the lapse of time or both, (i) result in a
breach of, or conflict with any of the terms and provisions of, or constitute a
default under, or result in the creation, modification, termination or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company pursuant to the terms of any indenture, mortgage, deed of trust, note,
loan or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company may be bound or to which any of the
property or assets of the Company is subject; (ii) result in any violation of
the provisions of the Certificate of Incorporation or the By-Laws of the
Company; (iii) violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business; or (iv) have
a material adverse effect on any permit, license, certificate, registration,
approval, consent, license or franchise concerning the Company.

2.12 No Defaults; Violations. Except as described in the Prospectus, no
-----------------------
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. The Company is not
in violation of any term

6
<PAGE>

or provision of its Certificate of Incorporation or By-Laws or in violation of
any franchise, license, permit, applicable law, rule, regulation, judgment or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business, except as
described in the Prospectus.

2.13 Corporate Power; Licenses; Consents.
-----------------------------------

2.13.1 Conduct of Business. The Company has all requisite corporate
-------------------
power and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease its properties and conduct its business as
described in the Prospectus, and the Company is and has been doing business in
compliance with all such material authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local laws, rules and
regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.

2.13.2 Transactions Contemplated Herein. The Company has all corporate
--------------------------------
power and authority to enter into this Agreement and to carry out the provisions
and conditions hereof, and all consents, authorizations, approvals and orders
required in connection therewith have been obtained. No consent, authorization
or order of, and no filing with, any court, government agency or other body is
required for the valid issuance, sale and delivery, of the Securities pursuant
to this Agreement and the Underwriter's Purchase Option, and as contemplated by
the Prospectus, except with respect to applicable federal and state securities
laws.

2.14 Title to Property; Insurance. The Company has good and marketable
----------------------------
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar business.

2.15 Litigation; Governmental Proceedings. Except as set forth in the
------------------------------------
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business is bound or subject.

2.16 Good Standing. The Company has been duly organized and is validly
-------------
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.

7
<PAGE>

2.17 Taxes. The Company has filed all returns (as hereinafter defined)
-----
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriter, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to be
filed in respect to taxes.

2.18 Employees' Options. No more than 910,149 shares of Common Stock are
------------------
eligible for sale pursuant to Rule 701 promulgated under the Act in the 12 month
period following the Effective Date.

2.19 Transactions Affecting Disclosure to NASD.
-----------------------------------------

2.19.1 Finder's Fees. Except as described in the Prospectus, there are
-------------
no claims, payments, issuances, arrangements or understandings for services in
the nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company that may affect the
Underwriter's compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").

2.19.2 Payments Within Twelve Months. The Company has not made any
-----------------------------
direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in consideration of such
person raising capital for the Company or introducing to the Company persons who
provided capital to the Company, (ii) to any NASD member, or (iii) to any person
or entity that has any direct or indirect affiliation or association with any
NASD member within the twelve month period prior to the date on which the
Registration Statement was filed with the Commission ("Filing Date") or
thereafter, other than payments to the Underwriter.

2.19.3 Use of Proceeds. None of the net proceeds of the offering will
---------------
be paid by the Company to any participating NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.

2.19.4 Insiders' NASD Affiliation. No officer or director of the
--------------------------
Company or owner of any of the Company's unregistered securities has any direct
or indirect affiliation or association with any NASD member, except as provided
on Schedule 2.19.4 attached hereto. The Company will advise the Underwriter and
the NASD if any stockholder of the Company is or becomes an affiliate or
associated person of an NASD member participating in the offering.

8
<PAGE>

2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
-----------------------------
officers, directors, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
with the Foreign Corrupt Practices Act of 1977, as amended.

2.21 Nasdaq Eligibility. As of the Effective Date, the Public Securities
------------------
have been approved for quotation on the Nasdaq National Market System
("Nasdaq").

2.22 Intangibles. The Company owns or possesses the requisite licenses or
-----------
rights to use all trademarks, service marks, service names, trade names, patents
and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the United
States Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to, or
proceeding pending or threatened and the Company has not received any notice of
conflict with the asserted rights of others which challenges the exclusive right
of the Company with respect to, any Intangibles used in the conduct of the
Company's business except as described in the Prospectus. The Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.

2.23 Relations With Employees.
------------------------

2.23.1 Employee Matters. The Company has generally enjoyed a
----------------
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.

2.23.2 Employee Benefit Plans. Other than as set forth in the
----------------------
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to

9
<PAGE>

contribute to, any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan," or a, "multi-employer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). The Company does not, and has at no time, maintained or contributed to
a defined benefit plan, as defined in Section 3(35) of ERISA. If the Company
does maintain or contribute to a defined benefit plan, any termination of the
plan on the date hereof would not give rise to liability under Title IV of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Internal Revenue Code of 1986, as amended ("Code"), which could
subject the Company to any tax penalty for prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multi-employer plan."

2.24 Officers' Certificate. Any certificate signed by any duly authorized
---------------------
officer of the Company and delivered to you or to your counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.

2.25 Reserved.
--------

2.26 Agreements With Insiders.
------------------------

2.26.1 Lock-Up Agreements. Subject to Section 2.26.2 directly below,
------------------
the Company has caused to be duly executed legally binding and enforceable
agreements pursuant to which all of the officers, directors and stockholders of
the Company (including their family members and affiliates) and all option
holders who would have the ability to sell the shares underlying their options
under Rule 701 under the Act (collectively, "Insiders"), agree not to sell any
shares of Common Stock owned by them (either pursuant to Rule 144 of the
Regulations or otherwise) for a period of 12 months following the Effective Date
except with the prior written approval of the Underwriter.

2.26.2 Lock-up Agreements with Holders of Preferred Stock. The Company
--------------------------------------------------
has caused to be duly executed legally binding and enforceable agreements
pursuant to which the holders of the 375,000 shares of Common Stock issuable
upon conversion of the Company's 13% Preferred Stock agree not to sell any of
such shares of Common Stock (either pursuant to Rule 144 or otherwise) for a
period of six months following the Effective Date except with the consent of the
Underwriter.

2.27 Subsidiaries. The representations and warranties made by the Company
------------
in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)") also apply and be true with respect to each
subsidiary, individually and taken as a whole with the Company and all other
subsidiaries, as if each representation and warranty contained herein made
specific reference to the subsidiary each time the term "Company" was used.

2.28 Unaudited Financials. The Company has furnished to the Underwriter as
--------------------
early as practicable prior to the date hereof a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the Company
(which in no event shall be as of a date more than thirty days prior to the
Effective Date) which have been read by the Company's independent accountants,
as stated in their letter to be furnished pursuant to Section 4.3 hereof.

10
<PAGE>

2.29 Employment Agreements. The Company has entered into employment
---------------------
agreements with each of Steven L. Bock and Stephen M. O'Hara in the forms filed
as exhibits to the Registration Statement.

2.30 UCC, Lien and Title Searches. The Company has provided the
----------------------------
Underwriter with the results of such UCC, lien and title searches in such
jurisdictions as have been requested by the Underwriter and Graubard, Mollen &
Miller, counsel to the Underwriter.

3. Covenants of the Company. The Company covenants and agrees as follows:
------------------------

3.1 Amendments to Registration Statement. The Company will deliver to the
------------------------------------
Underwriter, prior to filing, any amendment or supplement to the Registration
Statement or Prospectus proposed to be filed after the Effective Date and not
file any such amendment or supplement to which the Underwriter shall reasonably
object.

3.2 Federal Securities Laws.
-----------------------

3.2.1 Compliance. During the time when a Prospectus is required to be
----------
delivered under the Act, the Company will use all reasonable efforts to comply
with all requirements imposed upon it by the Act, the Regulations and the
Exchange Act and by the regulations under the Exchange Act, as from time to time
in force, so far as necessary to permit the continuance of sales of or dealings
in the Public Securities in accordance with the provisions hereof and the
Prospectus. If at any time when a Prospectus relating to the Public Securities
is required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.

3.2.2 Filing of Final Prospectus. The Company will file the Prospectus
--------------------------
(in form and substance satisfactory to the Underwriter) with the Commission
pursuant to the requirements of Rule 424 of the Regulations.

3.2.3 Exchange Act Registration. For a period of five years from the
-------------------------
Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of the
Exchange Act.

3.3 Blue Sky Filing. The Company will endeavor in good faith, in cooperation
---------------
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Public Securities for offering and sale under the
securities laws of such jurisdictions as the Underwriter may reasonably
designate, provided that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Company would be subject to service
of general process or to taxation as a foreign corporation doing business in
such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may be required by the
laws of such jurisdiction.

11
<PAGE>

3.4 Delivery to the Underwriter of Prospectuses. The Company will deliver to
-------------------------------------------
the Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act such
number of copies of each Preliminary Prospectus and the Prospectus as the
Underwriter may reasonably request and, as soon as the Registration Statement or
any amendment or supplement thereto becomes effective, deliver to you two
original executed Registration Statements, including exhibits, and all post-
effective amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.

3.5 Events Requiring Notice to the Underwriter. The Company will notify the
------------------------------------------
Underwriter immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the mailing and delivery to the Commission for filing of any amendment
or supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.

3.6 Review of Financial Statements. For a period of five years from the
------------------------------
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
Form 10-Q quarterly report and the mailing of quarterly financial information to
stockholders.

3.7 Reserved.
--------

3.8 Nasdaq Maintenance. For a period of five years from the date hereof, the
------------------
Company will use its best efforts to maintain the quotation by Nasdaq of the
Common Stock.

3.9 Reserved.
--------

3.10 Reserved.
--------

3.11 Reports to the Underwriter.
--------------------------

3.11.1 Periodic Reports, Etc. For a period of five years from the
----------------------
Effective Date, the Company will promptly furnish to the Underwriter copies of
such financial statements and other periodic and special reports as the Company
from time to time files with any governmental authority or furnishes generally
to holders of any class of its securities, and promptly furnish to the
Underwriter

12
<PAGE>

(i) a copy of each periodic report the Company shall be required to file with
the Commission, (ii) a copy of every press release and every news item and
article with respect to the Company or its affairs which was released by the
Company, (iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules
13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, (v) a copy of
monthly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
and loss statements and data regarding outstanding purchase orders) as is
regularly prepared by management of the Company, and (vi) such additional
documents and information with respect to the Company and the affairs of any
future subsidiaries of the Company as the Underwriter may from time to time
reasonably request.

3.11.2 Transfer Sheets and Weekly Position Listings. For a period of
--------------------------------------------
two years from the Effective Date, the Company will furnish to the Underwriter
at the Company's sole expense transfer sheets and lists of the beneficial and
record holders of the Company's securities from the transfer agent of the
Company and the weekly transfer sheets and position listings of the Depository
Trust Company.

3.12 Agreements between the Underwriter and the Company.
--------------------------------------------------

3.12.1 Underwriter's Purchase Option. On the Closing Date, the Company
-----------------------------
will execute and deliver the Underwriter's Purchase Option to the Underwriter
substantially in the form filed as an exhibit to the Registration Statement.

3.13 Disqualification of Form S-1 (or other appropriate form). For a
--------------------------------------------------------
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration of the Underwriter's Securities
under the Act.

3.14 Payment of Expenses.
-------------------

3.14.1 General Expenses. The Company hereby agrees to pay on each of
----------------
the Closing Date and the Option Closing Date, if any, to the extent not paid at
Closing Date, all expenses incident to the performance of the obligations of the
Company under this Agreement, including but not limited to (i) the preparation,
printing, filing, delivery and mailing (including the payment of postage with
respect to such mailing) of the Registration Statement, the Prospectus
and the Preliminary Prospectuses and the printing and mailing of this Agreement
and related documents, including the cost of all copies thereof and any
amendments thereof or supplements thereto supplied to the Underwriter in
quantities as may be required by the Underwriter, (ii) the printing, engraving,
issuance and delivery of the shares of Common Stock and the Underwriter's
Purchase Option, including any transfer or other taxes payable thereon, (iii)
the qualification of the Public Securities under state or foreign securities or
Blue Sky laws, including the filing fees under such Blue Sky laws, the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments
and supplements thereto, fees and disbursements of the Underwriter's counsel,
and fees and disbursements of local counsel, if any, retained for such purpose,
and a one-time fee of $5,000 payable to the Underwriter's counsel for the
preparation of the Secondary Trading Memorandum, (iv) costs associated with
applications for assignments of a rating of the Public Securities by qualified
rating agencies, (v) filing fees, costs and expenses (including fees (up to an
aggregate of $5,000) and disbursements for the Underwriter's counsel) incurred
in registering the offering with the NASD, (vi) costs (up to an aggregate of
$25,000) of placing "tombstone" advertisements in The Wall Street Journal and
-----------------------
The New York Times and a third publication to be selected by the Underwriter,
- ------------------
(vii) fees and disbursements of the transfer agent, (viii) the Company's
expenses associated with "due

13
<PAGE>

diligence" meetings arranged by the Underwriter, (ix) the preparation, binding
and delivery of transaction "bibles," in form and style satisfactory to the
Underwriter and in such quantities as the Underwriter may reasonably request,
and transaction lucite cubes or similar commemorative items in a style and
quantity as reasonably requested by the Underwriter, (x) any listing of the
Public Securities on Nasdaq SmallCap or Nasdaq National Market, as the case may
be, and any securities exchange or any listing in Standard & Poor's, and (xi)
all other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section
3.15.1. Since an important part of the public offering process is for the
Company to describe appropriately and accurately both the background of the
principals of the Company and the Company's competitive position in its
industry, the Company has engaged and will pay for an investigative search firm
of the Underwriter's choice to conduct an investigation of principals of the
Company mutually selected by the Underwriter and the Company. The Underwriter
may deduct from the net proceeds of the offering payable to the Company on the
Closing Date, or the Option Closing Date, if any, the expenses set forth herein
to be paid by the Company to the Underwriter and/or to third parties.

3.14.2 Non-Accountable Expenses. The Company further agrees that, in
------------------------
addition to the expenses payable pursuant to Section 3.15.1, it will pay to the
Underwriter a non-accountable expense allowance equal to two and one half
percent (2 1/2%) of the gross proceeds received by the Company from the sale of
the Public Securities, of which $50,000 has been paid to date, and the Company
will pay the balance on the Closing Date and any additional monies owed
attributable to the Option Securities or otherwise on the Option Closing Date by
certified or bank cashier's check or, at the election of the Underwriter, by
deduction from the proceeds of the offering contemplated herein. If the
offering contemplated by this Agreement is not consummated for any reason
whatsoever then the following provisions shall apply: The Company's liability
for payment to the Underwriter of the non-accountable expense allowance shall be
equal to the sum of the Underwriter's actual out-of-pocket expenses (including,
but not limited to, counsel fees, "road-show" and due diligence expenses). The
Underwriter shall retain such part of the non-accountable expense allowance
previously paid as shall equal such actual out-of-pocket expenses. If the
amount previously paid is insufficient to cover such actual out-of-pocket
expenses, the Company shall remain liable for and promptly pay any other actual
out-of-pocket expenses. If the amount previously paid exceeds the amount of
actual out-of-pocket expenses, the Underwriter shall promptly remit to the
Company any such excess.

3.15 Application of Net Proceeds. The Company will apply the net proceeds
---------------------------
from the offering received by it in a manner consistent with the application
described under the caption "USE OF PROCEEDS" in the Prospectus.

3.16 Delivery of Earnings Statements to Security Holders. The Company will
---------------------------------------------------
make generally available to its security holders as soon as practicable, but not
later than the first day of the fifteenth full calendar month following the
Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.

3.17 Key Person Life Insurance. The Company has purchased and will
-------------------------
maintain key person life insurance in an amount no less than $1,000,000 on the
lives of each of Steven L. Bock and Stephen M. O'Hara and pay the annual
premiums therefor naming the Company as the sole beneficiary thereof for at
least five years following the Effective Date.

14
<PAGE>

3.18 Stabilization. Neither the Company, nor, to its knowledge, any of its
-------------
employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.

3.19 Internal Controls. The Company maintains and will continue to
-----------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

3.20 Accountants and Lawyers. For a period of five years from the
-----------------------
Effective Date, the Company shall retain independent public accountants and
securities lawyers acceptable to the Underwriter. Deloitte & Touche LLP and
Kane Kessler, P.C. are acceptable to the Underwriter.

3.21 Transfer Agent. For a period of five years from the Effective Date,
--------------
the Company shall retain a transfer agent for the Common Stock and Warrants
acceptable to the Underwriter. Continental Stock Transfer & Trust Company is
acceptable to the Underwriter.

3.22 Sale of Securities. The Company agrees not to permit or cause a
------------------
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of 12 months following the Effective
Date without obtaining the prior written consent of the Underwriter, subject to
Section 2.26.2 hereof.

3.23 Options. The exercise prices of any options granted pursuant to the
-------
Company's 1996 Stock Option Plan after the Effective Date will be equal to the
greater of the market price per share of Common Stock on the date of grant and
the per-share public offering price of the Firm Securities and options for no
more than 327,150 shares of Common Stock will be granted prior to the one-year
anniversary of the Effective Date, except in the case of options granted to
persons who become employees after the Effective Date as a result of an
acquisition, merger or other business combination.

4. Conditions of the Underwriter's Obligations. The obligations of the
-------------------------------------------
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:

4.1 Regulatory Matters.
------------------

4.1.1 Effectiveness of Registration Statement. The Registration
---------------------------------------
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending

15
<PAGE>

or contemplated by the Commission and any request on the part of the Commission
for additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriter.

4.1.2 NASD Clearance. By the Effective Date, the Underwriter shall
--------------
have received clearance from the NASD as to the amount of compensation allowable
or payable to the Underwriter as described in the Registration Statement.

4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the
-----------------------
Securities in any jurisdiction designated by you pursuant to Section 3.3 hereof
shall have been issued on either on the Closing Date or the Option Closing Date,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.

4.2 Company Counsel Matters.
-----------------------

4.2.1 Effective Date Opinion of Counsel. On the Effective Date, the
---------------------------------
Underwriter shall have received the favorable opinion of Kane Kessler, P.C.,
counsel to the Company, dated the Effective Date, addressed to the Underwriter
and in form and substance satisfactory to Graubard Mollen & Miller, counsel to
the Underwriter, to the effect that:

(i) The Company has been duly organized and is validly existing as a
corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which it owns or leases any
real property or the character of its operations requires such qualification or
licensing.

(ii) The Company has all requisite corporate power and authority, and
has all necessary authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental or regulatory officials and bodies to own
or lease its properties and conduct its business as described in the Prospectus,
and the Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates and permits and all
federal, state and local laws, rules and regulations. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and
all consents, authorizations, approvals and orders required in connection
therewith have been obtained. No consents, approvals, authorizations or orders
of, and no filing with any court or governmental agency or body (other than such
as may be required under the Act and applicable Blue Sky laws), is required for
the valid authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement
and the Underwriter's Purchase Option, and as contemplated by the Prospectus or
if so required, all such authorizations, approvals, consents, orders,
registrations, licenses and permits have been duly obtained and are in full
force and effect and have been disclosed to the Underwriter.

(iii) All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company. The outstanding options and warrants to purchase shares of Common

16
<PAGE>

Stock constitute the valid and binding obligations of the Company, enforceable
in accordance with their terms. The offers and sales of the outstanding Common
Stock and options and warrants to purchase shares of Common Stock were at all
relevant times either registered under the Act and the applicable state
securities or Blue Sky Laws or exempt from such registration requirements. The
authorized and outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus.

(iv) The Securities have been duly authorized and, when issued and
paid for, will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being
such holders. The Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge after due inquiry, similar contractual rights granted by the
Company. All corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and validly taken. When
issued, the Underwriter's Purchase Option will constitute a valid and binding
obligation of the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for thereby
and the Underwriter's Purchase Option, when issued, will be enforceable against
the Company in accordance with its terms, except (a) as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (b) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and (c)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought. The
certificates representing the Securities are in due and proper form.

(v) To the best of such counsel's knowledge, after due inquiry,
except as set forth in the Prospectus, no holders of any securities of the
Company or of any options, warrants or securities of the Company exercisable for
or convertible or exchangeable into securities of the Company have the right to
require the Company to register any such securities of the Company under the Act
or to include any such securities in a registration statement to be filed by the
Company.

(vi) To the best of such counsel's knowledge, after due inquiry, the
shares of Common Stock and the Warrants are eligible for quotation on the Nasdaq
National Market.

(vii) This Agreement and the Underwriter's Purchase Option have each
been duly and validly authorized and, when executed and delivered by the
Company, will consti tute valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (b) as
enforceability of any indemnification provisions may be limited under the
federal and state securities laws, and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
the equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.

(viii) The execution, delivery and performance by the Company of this
Agreement and the Underwriter's Purchase Option, the issuance and sale of the
Securities, the consummation of the transactions contemplated hereby and thereby
and the compliance by the Company with the terms and provisions hereof and
thereof, do not and will not, with or without the giving of notice or the lapse
of time, or both, (a) conflict with, or result in a breach of, any of the terms
or provisions of, or constitute a default under, or result in the creation or
modification of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company pursuant to the terms of, any material
mortgage, deed of trust, note, indenture, loan, contract, commitment or other
material agreement or instrument, to which the Company is a party or by which

17
<PAGE>

the Company or any of its properties or assets may be bound, (b) result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company, (c) violate any statute or any judgment, order or decree, rule
or regulation applicable to the Company of any court, domestic or foreign, or of
any federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company, its properties or assets, or (d) have a
material effect on any permit, certification, registration, approval, consent,
license or franchise of the Company.

(ix) The Registration Statement, each Preliminary Prospectus and the
Prospectus and any post-effective amendments or supplements thereto (other than
the financial statements included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Act and Regulations. The Securities and all other securities issued or
issuable by the Company conform in all respects to the description thereof
contained in the Registration Statement and the Prospectus. The statements in
the Prospectus under "Business," "Management," "Certain Transactions," "Risk
Factors," Principal Stockholders," "Description of Securities" and "Shares
Eligible for Future Sale" have been reviewed by such counsel, and insofar as
they refer to statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions are correct in all material respects. No
statute or regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required, nor are any contracts
or documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement not so described or filed as required.

(x) Counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Underwriter at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise set
forth in this opinion), no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or the
Prospectus or any amendment or supplement thereto, as of the date of such
opinion, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).

(xi) The Registration Statement is effective under the Act, and, to
the best of such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act or
applicable state securities laws.

(xii) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
(tangible and intangible) stated in the Prospectus to be owned or leased by it,
free and clear of all liens, encumbrances, claims, security interests, defects
and restrictions of any material nature whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable.

(xiii) Except as described in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition of any
material license, contract, indenture, mortgage, deed of trust, note, loan or
credit agreement, or any other material agreement

18
<PAGE>

or instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which any of the properties or assets of the Company is
subject. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws or of any franchise, license, permit,
applicable law, rule, regulation, judgment or decree of any governmental agency
or court, domestic or foreign, having jurisdiction over the Company or any of
its properties or business, except as described in the Prospectus.

(xiv) To the best of such counsel's knowledge after due inquiry, the
Company owns or possesses, free and clear of all liens or encumbrances and
rights thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all Intangibles and
other rights necessary to conduct its business (including, without limitation,
any such licenses or rights described in the Prospectus as being licensed to,
owned or possessed by the Company), and there is no claim or action by any
person pertaining to, or proceeding, pending or, to the best of such counsel's
knowledge after due inquiry, threatened, which challenges the exclusive rights
of the Company with respect to any Intangibles used in the conduct of the its
business (including without limitation any such licenses or rights described in
the Prospectus as being owned or possessed by the Company); to the best of such
counsel's knowledge after due inquiry, the Company's current products, services
and processes do not infringe on any Intangibles held by third parties except as
discussed in the Prospectus; and the Company's Intangibles which have been
registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect.

(xv) To the best of such counsel's knowledge after due inquiry,
except as described in the Prospectus, the Company does not own an interest in
any corporation, partnership, joint venture, trust or other business entity.

(xvi) To the best of such counsel's knowledge after due inquiry,
except as described in the Prospectus, there is no action, suit or proceeding
before or by any court of governmental agency or body, domestic or foreign, now
pending, or threatened against the Company, which might result in any material
and adverse change in the condition (financial or otherwise), business or
prospects of the Company, or might materially and adversely affect the
properties or assets thereof.

Unless the context clearly indicates otherwise, the term "Company" as used
in this Section 4.2.1 shall include each subsidiary of the Company. The opinion
of counsel for the Company and any opinion relied upon by such counsel for the
Company shall include a statement to the effect that it may be relied upon by
counsel for the Underwriter in its opinion delivered to the Underwriter.

4.2.2 Closing Date and Option Closing Date Opinion of Counsel. On each
-------------------------------------------------------
of the Closing Date and the Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Kane Kessler, P.C., counsel to the
Company, dated the Closing Date or the Option Closing Date, as the case may be,
addressed to the Underwriter and in form and substance satisfactory to Graubard
Mollen & Miller, counsel to the Underwriter, confirming as of the Closing Date
and, if applicable, the Option Closing Date, the statements made by Kane
Kessler, P.C. in their opinion delivered on the Effective Date.

4.2.3 Reliance. In rendering such opinion, such counsel may rely (i)
--------
as to matters involving the application of laws other than the laws of the
United States and jurisdictions in which

19
<PAGE>

they are admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, if at all, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriter's counsel) of other counsel
reasonably acceptable to Underwriter's counsel, familiar with the applicable
laws, and (ii) as to matters of fact, to the extent they deem proper, on
certificates or other written statements of officers of departments of various
jurisdiction having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriter's counsel if requested. The
opinion of counsel for the Company shall include a statement to the effect that
it may be relied upon by counsel for the Underwriter in its opinion delivered to
the Underwriter.

4.3 Cold Comfort Letter. At the time this Agreement is executed, and at
-------------------
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriter and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the Underwriter, from Deloitte & Touche LLP, dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:

(i) Confirming that they are independent accountants with respect to the
Company within the meaning of the Act and the applicable Regulations;

(ii) Stating that in their opinion the financial statements of the Company
included in the Registration Statement and Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
published Regulations thereunder;

(iii) Stating that, based on the performance of procedures specified by
the American Institute of Certified Public Accountants for a review of the
latest available unaudited interim financial statements of the Company (as
described in SAS No.71 Interim Financial Information), with an indication of the
date of the latest available unaudited interim financial statements, a reading
of the latest available minutes of the stockholders and board of directors and
the various committees of the board of directors, consultations with officers
and other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (a) the unaudited financial
statements of the Company included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and the Regulations or any material modification should be made to
the unaudited interim financial statements included in the Registration
Statement for them to be in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement, (b)
at a date not later than five days prior to the Effective Date, Closing Date or
Option Closing Date, as the case may be, there was any change in the capital
stock or long-term debt of the Company, or any decrease in the stockholders'
equity of the Company as compared with amounts shown in the June 29, 1996
balance sheet included in the Registration Statement, other than as set forth in
or contemplated by the Registration Statement, or, if there was any decrease,
setting forth the amount of such decrease, and (c) during the period from June
30, 1996 to a specified date not later than five days prior to the Effective
Date, Closing Date or Option Closing Date, as the case may be, there was any
decrease in revenues, net earnings or net earnings per share of Common Stock, in
each case as compared with the corresponding period in the preceding year and as
compared with the corresponding period in the preceding quarter, other than as
set forth in or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease;

20
<PAGE>

(iv) Setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of the Company (including a break-down
of commercial papers and notes payable to banks);

(v) Stating that they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each case
to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, and work sheets,
of the Company with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;

(vi) Stating that they have not during the immediately preceding five year
period brought to the attention of the Company's management any reportable
condition related to internal structure, design or operation as defined in the
Statement on Auditing Standards No. 60 --"Communication of Internal Control
Structure Related Matters Noted in an Audit," in the Company's internal
controls; and

(vii) Statements as to such other matters incident to the transaction
contemplated hereby as you may reasonably request.

4.4 Officers' Certificates.
----------------------

4.4.1 Officers' Certificate. At each of the Closing Date and the
---------------------
Option Closing Date, if any, the Underwriter shall have received a certificate
of the Company signed by the Chairman of the Board or the President and the
Secretary of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Underwriter will have received such other and
further certificates of officers of the Company as the Underwriter may
reasonably request.

4.4.2 Secretary's Certificate. At each of the Closing Date and the
-----------------------
Option Closing Date, if any, the Underwriter shall have received a certificate
of the Company signed by the Secretary of the Company, dated the Closing Date or
the Option Date, as the case may be, respectively, certifying (i) that the By-
Laws and Certificate of Incorporation, as amended, of the Company are true and
complete, have not been modified and are in full force and effect, (ii) that the
resolutions relating to the public offering contemplated by this Agreement are
in full force and effect and have not been modified, (iii) all correspondence
between the Company or its counsel and the Commission, (iv) all correspondence
between the Company or its counsel and the NASD concerning inclusion on Nasdaq,
and (v) as to the incumbency of the officers of the Company. The documents
referred to in such certificate shall be attached to such certificate.

4.5 No Material Changes. Prior to and on each of the Closing Date and the
-------------------
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or

21
<PAGE>

otherwise, of the Company from the latest dates as of which such condition is
set forth in the Registration Statement and Prospectus, (ii) there shall have
been no transaction, not in the ordinary course of business, entered into by the
Company from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company, taken as a whole, (iii) the Company shall not be in
default under any provision of any instrument relating to any outstanding
indebtedness which default would have a material adverse effect on the Company,
(iv) no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.

4.6 Delivery of Agreements. The Company has delivered to the Underwriter an
----------------------
executed copy of the Purchase Option.

4.7 Opinion of Counsel for the Underwriter. All proceedings taken in
--------------------------------------
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the Underwriter, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.

5. Indemnification.
---------------

5.1 Indemnification of the Underwriter.
----------------------------------

5.1.1 General. Subject to the conditions set forth below, the Company
-------
agrees to indemnify and hold harmless the Underwriter, its directors, officers,
agents and employees and each person, if any, who controls the Underwriter
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all loss, liability, claim, damage
and expense whatsoever (including but not limited to any and all legal or other
expenses reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, whether arising out of any action
between the Underwriter and the Company or between the Underwriter and any
third-party or otherwise) to which they or any of them may become subject

22
<PAGE>

under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
(i) any Preliminary Prospectus, the Registration Statement or the Prospectus (as
from time to time each may be amended and supplemented); (ii) in any post-
effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or issuable
upon exercise of the Underwriter's Purchase Option; or (iii) any application or
other document or written communication (in this Section 5 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, Nasdaq or any securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in any application, as the case may be. The Company agrees promptly to notify
the Underwriter of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus.

5.1.2 Procedure. If any action is brought against the Underwriter or
---------
controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, the Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of counsel
(subject to the approval of the Underwriter) and payment of actual expenses.
The Underwriter or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by the Underwriter and/or controlling
person shall be borne by the Company. Notwithstanding anything to the contrary
contained herein, if the Underwriter or controlling person shall assume the
defense of such action as provided above, the Company shall have the right to
approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.

5.2 Indemnification of the Company. The Underwriter agrees to indemnify
------------------------------
and hold harmless the Company against any and all loss, liability, claim, damage
and expense described in the foregoing indemnity from the Company to the
Underwriter, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions directly relating to the
transactions effected by the Underwriter in connection with this offering made
in any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement

23
<PAGE>

thereto or in any application in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to the Underwriter by
or on behalf of the Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any such application. In case any action shall be
brought against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the Underwriter by the
provisions of Section 5.1.2.

5.3 Contribution.
------------

5.3.1 Contribution Rights. In order to provide for just and equitable
-------------------
contribution under the Act in any case in which (i) any person entitled to
indemnification under this Section 5 makes claim for indemnification pursuant
hereto but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 5 provides for
indemnification in such case, or (ii) contribution under the Act, the Exchange
Act or otherwise may be required on the part of any such person in circumstances
for which indemnification is provided under this Section 5, then, and in each
such case, the Company and the Underwriter shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
said indemnity agreement incurred by the Company and the Underwriter, as
incurred, in such proportions that the Underwriter is responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the initial offering price
appearing thereon and the Company is responsible for the balance; provided,
that, no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 5.3, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Public Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of the Underwriter, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as the Underwriter.

5.3.2 Contribution Procedure. Within fifteen days after receipt by any
----------------------
party to this Agreement (or its representative) of notice of the commencement of
any action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is to be made against another party ("contributing party"),
notify the contributing party of the commencement thereof, but the omission to
so notify the contributing party will not relieve it from any liability which it
may have to any other party other than for contribution hereunder. In case any
such action, suit or proceeding is brought against any party, and such party
notifies a contributing party or its representative of the commencement thereof
within the aforesaid fifteen days, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified. Any such contributing party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution on account of any
settlement of any claim, action or proceeding which was effected by such party
without the written consent of such contributing party. The contribution
provisions contained in this Section are intended to supersede, to the extent
permitted by law, any right to contribution under the Act, the Exchange Act or
otherwise available.

6. [Intentionally Omitted].
-----------------------

24
<PAGE>

7. Additional Covenants.
--------------------

7.1 Attendance at Board Meetings. For a period of three years from the
----------------------------
Effective Date, the Underwriter shall be permitted to send a representative (who
need not be the same individual from meeting to meeting) to observe each meeting
of the Board of Directors, but who will not be entitled to vote at such
meetings. The Company agrees to give to the Underwriter written notice of each
such meeting and to provide to the Underwriter an agenda and minutes of the
meeting no later than it gives such notice and provides such items to the other
directors. The Company shall reimburse the representative of the Underwriter
for its out-of-pocket expenses incurred in connection with its attendance at the
Company's Board meetings including, but not limited to, food lodging and
transportation.

7.2 Press Releases. The Company will not issue a press release or engage in
--------------
any other publicity until 25 days after the Effective Date without the
Underwriter's prior written consent, which will not be unreasonably withheld.

7.3 Form S-8 or any Similar Form. The Company shall not file a Registration
----------------------------
Statement on Form S-8 (or any similar or successor form) for the registration of
shares of Common Stock underlying stock options for a period of one year from
the Effective Date without the Underwriter's written consent.

7.4 Compensation and Other Arrangements. The Company hereby agrees that for
-----------------------------------
a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Compensation Committee of the Company's Board of
Directors, a majority of the members of which shall have no affiliation or other
relationship with the Company other than as directors.

8. Representations and Agreements to Survive Delivery. Except as the context
--------------------------------------------------
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriter and Company, including the indemnity agreements contained in Section
5 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriter until the earlier of
the expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if any,
at which time the representations, warranties and agreements shall terminate and
be of no further force and effect.

9. Effective Date of This Agreement and Termination Thereof.
--------------------------------------------------------

9.1 Effective Date. This Agreement shall become effective on the Effective
--------------
Date at the time that the Registration Statement is declared effective.

9.2 Termination. You shall have the right to terminate this Agreement at any
-----------
time prior to any Closing Date, (i) if any domestic or international event or
act or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, general securities markets in the United
States; or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange, The Boston Stock Exchange or in the over-the-counter market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges

25
<PAGE>

for prices for securities shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by the
NASD or by order of the Commission or any other government authority having
jurisdiction, or (iii) if the United States shall have become involved in a war
or major hostilities, or (iv) if a banking moratorium has been declared by a New
York State or federal authority, or (v) if a moratorium on foreign exchange
trading has been declared which materially adversely impacts the United States
securities market, or (vi) if the Company shall have sustained a material loss
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in your opinion, make it inadvisable to proceed with the delivery
of the Securities, or (vii) if Steven L. Bock or Stephen M. O'Hara shall no
longer serve the Company in their present capacities, or (viii) if the Company
has breached any of its representations, warranties or obligations hereunder, or
(ix) if the Underwriter shall have become aware after the date hereof of such a
material adverse change in the condition (financial or otherwise), business, or
prospects of the Company, or such adverse material change in general market
conditions as in the Underwriter's judgment would make it impracticable to
proceed with the offering, sale and/or delivery of the Securities or to enforce
contracts made by the Underwriter for the sale of the Securities.

9.3 Notice. If you elect to prevent this Agreement from becoming effective
------
or to terminate this Agreement as provided in this Section 9, the Company shall
be notified on the same day as such election is made by you by telephone or
telecopy, confirmed by letter.

9.4 Expenses. In the event that this Agreement shall not be carried out for
--------
any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.

9.5 Indemnification. Notwithstanding any contrary provision contained in
---------------
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.

10. Miscellaneous.
-------------

10.1 Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed

If to the Underwriter:

GKN Securities Corp.
61 Broadway, 12th Floor
New York, New York 10006
Attention: Andrew Lazarus

Copy to:

Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.

26
<PAGE>

If to the Company:

Specialty Catalog Corp.
21 Bristol Drive
South Easton, Massachusetts 02375
Attention: Steven L. Bock, Chairman and
Chief Executive Officer

Copy to:

Kane Kessler, P.C.
1350 Avenue of the Americas
New York, New York 10019
Attention: Robert A. Lawrence, Esq.

10.2 Headings. The headings contained herein are for the sole purpose of
--------
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.

10.3 Amendment. This Agreement may only be amended by a written instrument
---------
executed by each of the parties hereto.

10.4 Entire Agreement. This Agreement (together with the other agreements
----------------
and documents being delivered pursuant to or in connection with this Agreement)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersede all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.

10.5 Binding Effect. This Agreement shall inure solely to the benefit of
--------------
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.

10.6 Governing Law, Jurisdiction. This Agreement shall be governed by and
---------------------------
construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of or relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from the
other party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.

27
<PAGE>

10.7 Execution in Counterparts. This Agreement may be executed in one or
-------------------------
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.

10.8 Waiver, Etc. The failure of any of the parties hereto to at any time
------------
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument executed
by the party or parties against whom or which enforcement of such waiver is
sought; and no waiver of any such

28
<PAGE>

breach, non-compliance or non-fulfillment shall be construed or deemed to be a
waiver of any other or subsequent breach, non-compliance or non-fulfillment.

If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.

Very truly yours,

SPECIALTY CATALOG CORP.

By:
----------------------------------------
Name: Steven L. Bock
Title: Chairman and Chief Executive Officer

Accepted as of the date first
above written.

New York, New York

GKN SECURITIES CORP.

By:
----------------------------------
Name: Deborah Schondorf-Novick
Title: Senior Vice President -
Investment Banking

<PAGE>

EXHIBIT 1.03

________________________________________________

SELECTED DEALER AGREEMENT
________________________________________________

Ladies and Gentlemen:

1. Registration under the Securities Act of 1933, as amended ("Act"), of
the 1,500,000 shares ("Shares")/*/ of common stock, $.01 par value ("Common
Stock") of Specialty Catalog Corp. ("Company") as more fully described in the
Preliminary Prospectus, dated September 16, 1996, and in the final prospectus,
which will be forwarded to you (the final prospectus being hereinafter referred
to as the "Prospectus"), will become effective in the near future. We are
offering for sale certain of the Units which we have agreed to purchase from the
Company, for purchase by a selected group of dealers ("Selected Dealers") on the
terms and conditions stated herein.

Authorized Public Offering Price: $_______ per Share.

Dealers' Selling Concession: Not to exceed $0.______ per Share
payable upon termination of this
Agreement, except as provided below. We
reserve the right not to pay such
concession on any of the Shares
purchased by any of the Selected Dealers
from us and repurchased by us at or
below the price stated above prior to
such termination.

Reallowance: You may reallow not in excess of
$0.______ per Share as a selling
concession to dealers who are members in
good standing of the National
Association of Securities Dealers, Inc.
("NASD") or to foreign dealers who are
not eligible for membership in the NASD
and who have agreed (i) not to sell the
Shares within the United States of
America, its territories or possessions
or to persons who are citizens thereof
or residents therein, and (ii) to abide
by the applicable Conduct Rules of the
NASD.

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

/*/ Plus the over-allotment option available to the Underwriter to purchase up
to an additional 225,000 shares of Common Stock.
<PAGE>

Delivery and Payment: Delivery of the Shares shall be made on
or about October __, 1996 or such later
date as we may advise on not less than
one day's notice to you, at the office
of GKN Securities Corp., 61 Broadway,
12th Floor, New York, New York 10006, or
at such other place as we shall specify
on not less than one day's notice to
you. Payment for the Shares is to be
made, against delivery, at the
authorized public offering price stated
above, or, if we shall so advise you, at
the authorized public offering price
less the dealers' selling concession
stated above, by a certified or official
bank check in New York Clearing House
Funds payable to the order of GKN
Securities Corp.

Termination: This Agreement shall terminate at the
close of business on the 45th day
following the effective date of the
Registration Statement (of which the
enclosed Prospectus forms a part),
unless extended at our discretion for a
period or periods not to exceed in the
aggregate 30 additional days. We may
terminate this Agreement, whether or not
extended, at any time without notice.

2. Any of the Shares purchased by you hereunder are to be offered by you
to the public at the public offering price, except as herein otherwise provided
and except that a reallowance from such public offering price not in excess of
the amount set forth on the first page of this Agreement may be allowed as
consideration for services rendered in distribution to dealers that (a) are
actually engaged in the investment banking or securities business; (b) execute
the written agreement prescribed by Rule 2740 of the Conduct Rules of the NASD;
and (c) are either members in good standing of the NASD or foreign banks,
dealers or institutions not eligible for membership in the NASD which represent
to you that they will promptly reoffer such Shares at the public offering price
and will abide by the conditions with respect to foreign banks, dealers and
institutions set forth in paragraph 9 below.

3. You, by becoming a member of the Selected Dealers, agree (a) upon
effectiveness of the Registration Statement and your receipt of the Prospectus,
to take up and pay for the number of Shares allotted and confirmed to you, (b)
not to use any of the Shares to reduce or cover any short position you may have,
(c) upon our request, to advise us of the number of Shares purchased from us as
manager of the Selected Dealers remaining unsold by you and to resell to us any
or all of such unsold Shares at the public offering price stated above, less all
or such part of the concession allowed you as we may determine, and (d) to make
available a copy of the Prospectus to all persons who on your behalf will
solicit orders for the Shares prior to the making of such solicitations by such
persons. You are not authorized to give any information or to make any
representations other than those contained in the Prospectus or any supplements
or amendments thereto.

-2-
<PAGE>

4. As contemplated by Rule 15c2-8 under the Securities Exchange Act of
1934, as amended, we agree to mail a copy of the Prospectus to any person making
a written request therefor during the period referred to in the rules and
regulations adopted under such Act, the mailing to be made to the address given
in the request. You confirm that you have delivered all preliminary prospectuses
and revised preliminary prospectuses, if any, required to be delivered under the
provisions of Rule 15c2-8 and agree to deliver all copies of the Prospectus
required to be delivered thereunder. We have heretofore delivered to you such
preliminary prospectuses as have been required by you, receipt of which is
hereby acknowledged, and will deliver such further prospectuses as may be
requested by you.

5. You agree that until termination of this Agreement you will not make
purchases or sales of the Shares except (a) pursuant to this Agreement, (b)
pursuant to authorization received from us, or (c) in the ordinary course of
business as broker or agent for a customer pursuant to any unsolicited order.

6. Additional copies of the Prospectus and any supplements or amendments
thereto shall be supplied in reasonable quantity upon request.

7. The Shares are offered by us for delivery when, as and if sold to, and
accepted by, us and subject to the terms herein and in the Prospectus or any
supplements or amendments thereto, to our right to vary the concessions and
terms of offering after their release for public sale, to approval of counsel as
to legal matters and to withdrawal, cancellation or modification of the offer
without notice.

8. Upon written application to us, you shall be informed as to the
jurisdictions under the securities or blue sky laws of which we believe the
Shares are eligible for sale, but we assume no responsibility as to such
eligibility or the right of any member of the Selected Dealers to sell any of
the Shares in any jurisdiction. We have caused to be filed a Further State
Notice relating to such of the Shares to be offered to the public in New York in
the form required by, and pursuant to, the provisions of Article 23A of the
General Business Law of the State of New York. Upon the completion of the public
offering contemplated herein, each member of the Selected Dealers agrees to
promptly furnish to us, upon our request, territorial distribution reports
setting forth each jurisdiction in which sales of the Shares were made by such
member, the number of Shares sold in such jurisdiction, and any further
information as we may request, in order to permit us to file on a timely basis
any report which we as Underwriter of the offering or manager of the Selected
Dealers may be required to file pursuant to the securities or blue sky laws of
any jurisdiction.

9. You, by becoming a member of the Selected Dealers, represent that you
are actually engaged in the investment banking or securities business and that
you are (a) a member in good standing of the NASD and will comply with Rule 2740
of the NASD's Conduct Rules or (b) a foreign dealer or institution which is not
eligible for membership in the NASD and which has agreed (i) not to sell Shares
within the United States of America, its territories or possessions or to
persons who are citizens thereof or residents therein; (ii) that any and all
sales shall be in compliance with the NASD's Interpretation with Respect to
Free-Riding and Withholding; (iii) to comply, as though it were a member of the
NASD, with Rules 2730, 2740 and 2750 of the NASD's Conduct Rules, and to comply
with Rule 2420 thereof as that Rule

-3-
<PAGE>

applies to a non-member broker or dealer in a foreign country.

10. Nothing herein shall constitute any members of the Selected Dealers
partners with us or with each other, but you agree, notwithstanding any prior
settlement of accounts or termination of this Agreement, to bear your proper
proportion of any tax or other liability based upon the claim that the Selected
Dealers constitute a partnership, association, unincorporated business or other
separate entity and a like share of any expenses of resisting any such claim.

11. We shall be the Underwriter of the offering and manager of the
Selected Dealers and shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the offering or the
Selected Dealers or any members of them. Except as expressly stated herein, or
as may arise under the Act, we shall be under no liability to any member of the
Selected Dealers as such for, or in respect of (i) the validity or value of the
Shares, (ii) the form of, or the statements contained in, the Prospectus, the
Registration Statement of which the Prospectus forms a part, any supplements or
amendments to the Prospectus or such Registration Statement, any preliminary
prospectus, any instruments executed by, or obtained or any supplemental sales
data or other letters from, the Company, or others, (iii) the form or validity
of the Underwriting Agreement, or this Agreement, (iv) the eligibility of any of
the Shares for sale under the laws of any jurisdiction, (v) the delivery of the
Shares, (vi) the performance by the Company, or others of any agreement on its
or their part, or (vii) any matter in connection with any of the foregoing,
except our own want of good faith.

12. If for federal income tax purposes the Selected Dealers, among
themselves or with the Underwriter, should be deemed to constitute a
partnership, then you elect to be excluded from the application of Subchapter K,
Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and you
agree not to take any position inconsistent with such selection. You authorize
us, in our discretion, to execute and file on your behalf such evidence of such
selection as may be required by the Internal Revenue Service.

13. All communications from you shall be addressed to us at GKN Securities
Corp., 61 Broadway, 12th Floor, New York, New York 10006, Attention: Andrew
Lazarus. Any notice from us to you shall be deemed to have been duly given if
mailed, telegraphed or sent by facsimile transmittal to you at the address to
which this letter is mailed. This Agreement shall be construed in accordance
with the laws of the State of New York without giving effect to principles of
conflicts of law. Time is of the essence in this Agreement.

-4-
<PAGE>

If you desire to become a member of the Selected Dealers, please advise us
to that effect immediately by facsimile transmission and sign and return to us
the enclosed counterpart of this letter.

Very truly yours,

GKN SECURITIES CORP.

By:________________________________
Name: Deborah Schondorf-Novick
Title: Senior Vice President -
Investment Banking

We accept membership in the Selected Dealers on the terms specified above.

Dated: ________________, 1996

___________________________________________
(Selected Dealer)

By: _______________________________________
(Sign Here)

Title:_______________________________________
(Print Signatory's Title)

-5-

<PAGE>

EXHIBIT 1.04

THE REGISTERED HOLDER OF THIS PURCHASE OPTION, BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.

NOT EXERCISABLE PRIOR TO OCTOBER __, 1997. VOID AFTER 5:00 P.M. EASTERN TIME,
OCTOBER __, 2001.

PURCHASE OPTION

FOR THE PURCHASE OF

_______ SHARES OF COMMON STOCK

SPECIALTY CATALOG CORP.

(A DELAWARE CORPORATION)

1. Purchase Option.
---------------

THIS CERTIFIES THAT, in consideration of $___ duly paid by or on behalf of
GKN Securities Corp. ("Holder"), as registered owner of this Purchase Option, to
Specialty Catalog Corp. ("Company"), Holder is entitled, at any time or from
time to time at or after October __, 1997 ("Commencement Date"), and at or
before 5:00 p.m., Eastern Time, October __, 2001 ("Expiration Date"), but not
thereafter, to subscribe for, purchase and receive, in whole or in part, up to
_______ shares of Common Stock of the Company, $.01 par value ("Common Stock").
The shares of Common Stock are sometimes collectively referred to herein as the
"Securities." If the Expiration Date is a day on which banking institutions are
authorized by law to close, then this Purchase Option may be exercised on the
next succeeding day which is not such a day in accordance with the terms herein.
During the period ending on the Expiration Date, the Company agrees not to take
any action that would terminate the Purchase Option. This Purchase Option is
initially exercisable at $______ per share of Common Stock purchased; provided,
however, that upon the occurrence of any of the events specified in Section 6
hereof, the rights granted by this Purchase Option, including the exercise price
and the number of shares of Common Stock to be received upon such exercise,
shall be adjusted as therein specified. The term "Exercise Price" shall mean
the initial exercise price or the adjusted exercise price, depending on the
context, of a share of Common Stock.

2. Exercise.
--------

2.1 Exercise Form. In order to exercise this Purchase Option, the
-------------
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Securities
being purchased. If the subscription rights represented hereby shall not be
exercised at or before 5:00 p.m., Eastern time, on the Expiration Date this
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
<PAGE>

2.2 Legend. Each certificate for Securities purchased under this Purchase
------
Option shall bear a legend as follows unless such Securities have been
registered under the Securities Act of 1933, as amended:

"The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended ("Act"), or applicable state law. The
securities may not be offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the Act, or pursuant to an
exemption from registration under the Act and applicable state law."

2.3 Cashless Exercise.
-----------------

2.3.1 Determination of Amount. In lieu of the payment of the Exercise
-----------------------
Price in the manner required by Section 2.1, the Holder shall have the right
(but not the obligation) to pay the Exercise Price for the Securities being
purchased with this Purchase Option upon exercise by the surrender to the
Company of any exercisable but unexercised portion of this Purchase Option
having a "Value" (as defined below), at the close of trading on the last trading
day immediately preceding the exercise of this Purchase Option, equal to the
Exercise Price multiplied by the number of shares of Common Stock being
purchased upon exercise ("Cashless Exercise Right"). The sum of (a) the number
of shares of Common Stock being purchased upon exercise of the non-surrendered
portion of this Purchase Option pursuant to this Cashless Exercise Right and (b)
the number of shares of Common Stock underlying the portion of this Purchase
Option being surrendered, shall not in any event be greater than the total
number of shares of Common Stock purchasable upon the complete exercise of this
Purchase Option if the Exercise Price were paid in cash. The "Value" of the
portion of the Purchase Option being surrendered shall equal the remainder
derived from subtracting (a) the Exercise Price multiplied by the number of
shares of Common Stock underlying the portion of this Purchase Option being
surrendered from (b) the Market Price of the shares of Common Stock multiplied
by the number of shares of Common Stock underlying the portion of this Purchase
Option being surrendered. As used herein, the term "Market Price" at any date
shall be deemed to be the last reported sale price of the Common Stock on such
date, or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the immediately preceding three trading days,
in either case as officially reported by the principal securities exchange on
which the Common Stock is listed or admitted to trading, or, if the Common Stock
is not listed or admitted to trading on any national securities exchange or if
any such exchange on which the Common Stock is listed is not its principal
trading market, the last reported sale price as furnished by the NASD through
the Nasdaq National Market or SmallCap Market, or, if applicable, the OTC
Bulletin Board, or if the Common Stock is not listed or admitted to trading on
the Nasdaq National Market or SmallCap Market or OTC Bulletin Board or similar
organization, as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.

2.3.2 Mechanics of Cashless Exercise. The Cashless Exercise Right may be
------------------------------
exercised by the Holder on any business day on or after the Commencement Date
and not later than the Expiration Date by delivering the Purchase Option with a
duly executed exercise form attached hereto with the cashless exercise section
completed to the Company, exercising the Cashless Exercise Right and specifying
the total number of shares of Common Stock the Holder will purchase pursuant to
such Cashless Exercise Right.

2
<PAGE>

3. Transfer.
--------

3.1 General Restrictions. Subject to Section 3.2, the registered Holder
--------------------
of this Purchase Option, by its acceptance hereof, agrees that it will not sell,
transfer or assign or hypothecate this Purchase Option prior to the Commencement
Date to anyone other than (i) an officer or partner of such Holder, (ii) an
officer of GKN Securities Corp. ("Underwriter") or an officer or partner of any
Selected Dealer or member of the underwriting syndicate in connection with the
Company's public offering with respect to which this Purchase Option has been
issued, or (iii) any Selected Dealer. On and after the Commencement Date,
transfers to others may be made in accordance with the terms of this Purchase
Option subject to compliance with or exemptions from applicable securities laws.
In order to make any permitted assignment, subject to Section 3.2 hereof, the
Holder must deliver to the Company the assignment form attached hereto duly
executed and completed, together with the Purchase Option and payment of all
transfer taxes, if any, payable in connection therewith. Unless the Company can
show that the transfer may not be effected in accordance with applicable
securities laws, the Company shall immediately transfer this Purchase Option on
the books of the Company and shall execute and deliver a new Purchase Option or
Purchase Options of like tenor to the appropriate assignee(s) expressly
evidencing the right to purchase the aggregate number of shares of Common Stock
purchasable hereunder or such portion of such number as shall be contemplated by
any such assignment.

3.2 Restrictions Imposed by the Act. This Purchase Option and the
-------------------------------
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company (the Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission and in compliance with
applicable state law.

4. New Purchase Options to be Issued.
---------------------------------

4.1 Partial Exercise or Transfer. Subject to the restrictions in Section
----------------------------
3 hereof, this Purchase Option may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Purchase Option for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any Exercise Price
and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock purchasable hereunder as to which
this Purchase Option has not been exercised or assigned.

4.2 Lost Certificate. Upon receipt by the Company of evidence
----------------
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any
such new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.

3
<PAGE>

5. Registration Rights.
-------------------

5.1 Demand Registration.
-------------------

5.1.1 Grant of Right. The Company, upon written demand ("Initial Demand
--------------
Notice") of the Holder(s) of at least 51% of the Purchase Options and/or the
underlying shares of Common Stock ("Majority Holders"), agrees to register on
one occasion, all or any portion of the Purchase Options requested by the
Majority Holders in the Initial Demand Notice and all of the Common Stock
underlying the Purchase Options (collectively the "Registrable Securities"). On
such occasion, the Company will file a Registration Statement covering the
Registrable Securities within sixty days after receipt of the Initial Demand
Notice and use its best efforts to have such registration statement declared
effective promptly thereafter. Should this registration or the effectiveness
thereof be delayed by the Company, the exercisability of the Purchase Options
shall be extended for a period of time equal to the delay in registering the
Registrable Securities provided, however, that such extension date shall not
extend beyond five years from the Effective Date. Moreover, if the Company
fails to comply with the provisions of this Section 5.1.1, the Company shall, in
addition to any other equitable or other relief available to the Holder(s), be
liable for any and all incidental, special and consequential damages sustained
by the Holder(s). The demand for registration may be made at any time during a
period of five years commencing on the Effective Date. The Company covenants
and agrees to give written notice of its receipt of any Initial Demand Notice by
any Holder(s) to all other registered Holders of the Purchase Options and/or the
Registrable Securities within ten days from the date of the receipt of any such
Initial Demand Notice.

5.1.2 Terms. The Company shall bear all fees and expenses attendant to
-----
registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by the
Holders to represent them in connection with the sale of the Registrable
Securities. The Company agrees to use its best efforts to cause the filing
required herein to become effective promptly and to qualify or register the
Registrable Securities in such states as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a state in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such state, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause
any registration statement filed pursuant to the demand rights granted under
Section 5.1.1 to remain effective for a period of at least nine consecutive
months from the date that the Holders of the Registrable Securities covered by
such registration statement are first given the opportunity to sell all of such
securities.

5.2 "Piggy-Back" Registration.
-------------------------

5.2.1 Grant of Right. In addition to the demand right of registration,
--------------
the Holders of the Purchase Options shall have the right for a period of seven
years commencing on the Effective Date to include the Registrable Securities as
part of any other registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8) provided, however, that if, in the written opinion
of the Company's managing underwriter or underwriters, if any, for such
offering, the inclusion of the Registrable Securities, when added to the
securities being registered by the Company or the selling stockholder(s), will
exceed the maximum amount of the Company's securities which can be marketed (i)
at a price reasonably related to their then current market

4
<PAGE>

value, or (ii) without materially and adversely affecting the entire offering,
the Company shall nevertheless register all or any portion of the Registrable
Securities required to be so registered but such Registrable Securities shall
not be sold by the Holders until 180 days after the registration statement for
such offering has become effective and provided further that, if any securities
are registered for sale on behalf of other stockholders in such offering and
such stockholders have not agreed to defer such sale until the expiration of
such 180 day period, the number of securities to be sold by all stockholders in
such public offering during such 180 day period shall be apportioned pro rata
--- ----
among all such selling stockholders, including all holders of the Registrable
Securities, according to the total amount of securities of the Company owned by
said selling stockholders, including all holders of the Registrable Securities.

5.2.2 Terms. The Company shall bear all fees and expenses attendant to
-----
registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by the
Holders to represent them in connection with the sale of the Registrable
Securities. In the event of such a proposed regis tration, the Company shall
furnish the then Holders of outstanding Registrable Securities with not less
than thirty days written notice prior to the proposed date of filing of such
registration statement. Such notice to the Holders shall continue to be given
for each registration statement filed by the Company until such time as all of
the Registrable Securities have been sold by the Holder. The holders of the
Registrable Securities shall exercise the "piggy-back" rights provided for
herein by giving written notice, within twenty days of the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall cause any registration statement filed pursuant to the above "piggyback"
rights to remain effective for at least nine months from the date that the
Holders of the Registrable Securities are first given the opportunity to sell
all of such securities.

5.3 General Terms.
-------------

5.3.1 Indemnification. The Company shall indemnify the Holder(s) of the
---------------
Securities to be sold pursuant to any registration statement hereunder and each
person, if any, who controls such Holders within the meaning of Section 15 of
the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all reasonable attorneys' fees and other expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement but only to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter contained in Section 5 of the Underwriting Agreement
between the Underwriter and the Company, dated the Effective Date. The
Holder(s) of the Securities to be sold pursuant to such registration statement,
and their successors and assigns, shall severally, and not jointly, indemnify
the Company, against all loss, claim, damage, expense or liability (including
all reasonable attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, in writing, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
5 of the Underwriting Agreement pursuant to which the Underwriter has agreed to
indemnify the Company.

5
<PAGE>

5.3.2 Exercise of Warrants. Nothing contained in this Purchase Option
--------------------
shall be construed as requiring the Holder(s) to exercise their Purchase Options
or Warrants prior to or after the initial filing of any registration statement
or the effectiveness thereof.

5.3.3 Exclusivity. The Company shall not permit the inclusion of any
-----------
securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Securities.

5.3.4 Documents Delivered to Holders. The Company shall furnish to each
------------------------------
Holder participating in an offering contemplated by Section 5.1 hereof and to
each underwriter of any such offering, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under any underwriting agreement related thereto), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.

5.3.5 Underwriting Agreement. The Company shall enter into an
----------------------
underwriting agreement with the managing underwriter(s) selected by any Holders
whose Registrable Securities are being registered pursuant to Section 5.1. Such
agreement shall be reasonably satisfactory in form and substance to the Company,
each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Securities and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such under writers shall also be made to and
for the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders, their shares and their
intended methods of distribution.

6
<PAGE>

5.3.6 Documents to be Delivered by Holder(s); Cooperation. Each of the
---------------------------------------------------
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling securityholders and shall
otherwise cooperate with the Company's reasonable requests.

6. Adjustments.
-----------

6.1 Adjustments to Exercise Price and Number of Securities. The Exercise
------------------------------------------------------
Price and the number of shares of Common Stock issuable upon exercise of the
Purchase Option shall be subject to adjustment from time to time as hereinafter
set forth:

6.1.1 Stock Dividends, Split-Ups. If after the date hereof, and subject
--------------------------
to the provisions of Section 6.3 below, the number of outstanding shares of
Common Stock is increased by a stock dividend payable in shares of Common Stock
or by a split-up of shares of Common Stock or other similar event, then, on the
effective date of such stock dividend or split-up, the number of shares of
Common Stock issuable on exercise of the Purchase Option shall be increased in
proportion to such increase in outstanding shares.

6.1.2 Aggregation of Shares. If after the date hereof, and subject to the
---------------------
provisions of Section 6.3, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares of Common
Stock issuable on exercise of the Purchase Option shall be decreased in
proportion to such decrease in outstanding shares.

6.1.3 Adjustments in Exercise Price. Whenever the number of shares of
-----------------------------
Common Stock purchasable upon the exercise of this Purchase Option is adjusted,
as provided in this Section 6.1, the Exercise Price shall be adjusted (to the
nearest cent) by multiplying such Exercise Price immediately prior to such
adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option
immediately prior to such adjustment, and (y) the denominator of which shall be
the number of shares of Common Stock so purchasable immediately thereafter.

6.1.4 Replacement of Securities Upon Reorganization, etc. If after the
---------------------------------------------------
date hereof any capital reorganization or reclassification of the Common Stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation or other similar event shall be effected, then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale, lawful
and fair provision shall be made whereby the Holders shall thereafter have the
right to purchase and receive, upon the basis and upon the terms and conditions
specified in the purchase Option and in lieu of the securities of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented thereby, such shares of stock, securities, or assets as may
be issued or payable with respect to or in exchange for the number of securities
equal to the number of securities immediately theretofore purchasable and
receivable upon the exercise of the rights represented by the Purchase Option,
had such reorganization, reclassification, consolidation, merger, or sale not
taken place and in such event appropriate provision shall be made with respect
to the rights and interests of the Holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise Price
and of the number of securities purchasable upon the exercise of the Purchase
Option) shall thereafter be applicable, as nearly as may be in relation to any
share of stock, securities, or assets thereafter

7
<PAGE>

deliverable upon the exercise hereof. The Company shall not effect any such
consolidation, merger, or sale unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from such
consolidation or merger, or the corporation purchasing such assets, shall assume
by written instrument executed and delivered to the Holders evidencing its
obligation to deliver such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such Holders may be entitled to
purchase.

6.1.5 Changes in Form of Purchase Option. This form of Purchase Option
----------------------------------
need not be changed because of any change pursuant to this Section, and Purchase
Options issued after such change may state the same Exercise Price and the same
number of shares of Common Stock as are stated in the Purchase Options initially
issued pursuant to this Agreement. The acceptance by any Holder of the issuance
of new Purchase Options reflecting a required or permissive change shall not be
deemed to waive any rights to a prior adjustment or the computation thereof.

6.2 [Intentionally Omitted]

6.3 Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
upon the exercise or transfer of the Purchase Option, nor shall it be required
to issue scrip or pay cash in lieu of any fractional interests, it being the
intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up or down to the nearest whole number of shares of Common
Stock or other securities, properties or rights.

7. Reservation and Listing. The Company shall at all times reserve and keep
-----------------------
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Purchase Options and payment of the Exercise Price therefor, all shares of
Common Stock and other securities issuable upon such exercise shall be duly and
validly issued, fully paid and non-assessable and not subject to preemptive
rights of any stockholder. As long as the Purchase Options shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon exercise of the Purchase Options to be listed
(subject to official notice of issuance) on all securities exchanges (or, if
applicable, on Nasdaq) on which the Common Stock issued to the public in
connection herewith is then listed and/or quoted.

8. Certain Notice Requirements.
---------------------------

8.1 Holders' Right to Receive Notice. Nothing herein shall be construed
--------------------------------
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Options and their exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.

8
<PAGE>

8.2 Events Requiring Notice. The Company shall be required to give the
-----------------------
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.

8.3 Notice of Change in Exercise Price. The Company shall, promptly after
----------------------------------
an event requiring a change in the Exercise Price pursuant to Section 6 hereof,
send notice to the Holders of such event and change ("Price Notice"). The Price
Notice shall describe the event causing the change and the method of calculating
same and shall be certified as being true and accurate by the Company's
President and Chief Financial Officer.

8.4 Transmittal of Notices. All notices, requests, consents and other
----------------------
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.

9. Miscellaneous.
-------------

9.1 Amendments. The Company and the Underwriter may from time to time
----------
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.

9.2 Headings. The headings contained herein are for the sole purpose of
--------
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.

9.3 Entire Agreement. This Purchase Option (together with the other
----------------
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.

9
<PAGE>

9.4 Binding Effect. This Purchase Option shall inure solely to the
--------------
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.

9.5 Governing Law; Submission to Jurisdiction. This Purchase Option shall
-----------------------------------------
be governed by and construed and enforced in accordance with the law of the
State of New York, without giving effect to principles of conflicts of law. The
Company hereby agrees that any action, proceeding or claim against it arising
out of, or relating in any way to, this Purchase Option shall be brought and
enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives
any objection to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any process or summons to be served upon the Company may be
served by transmitting a copy thereof by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in
Section 8.4 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the Company in any action, proceeding or claim. The
Company agrees that the prevailing party(ies) in any such action shall be
entitled to recover from the other party(ies) all of its reasonable attorneys'
fees and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.

9.6 Waiver, Etc. The failure of the Company or the Holder to at any time
-----------
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non-fulfillment.

9.7 Execution in Counterparts. This Purchase Option may be executed in
-------------------------
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.

IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the ____ day of ______________,
199_.

SPECIALTY CATALOG CORP.

By:__________________________
Name: Steven L. Bock
Title: Chairman and Chief
Executive Officer

10
<PAGE>

Form to be used to exercise Purchase Option:

SPECIALTY CATALOG CORP.
21 Bristol Drive
South Easton, Massachusetts 02375

Date:_________________, 19__

The undersigned hereby elects irrevocably to exercise the within Purchase
Option and to purchase ____ shares of Common Stock of Specialty Catalog Corp.
and hereby makes payment of $____________ (at the rate of $_________ per share
of Common Stock) in payment of the Exercise Price pursuant thereto. Please
issue the Common Stock as to which this Purchase Option is exercised in
accordance with the instructions given below.

or
--

The undersigned hereby elects irrevocably to exercise the within Purchase
Option and to purchase _________ shares of Common Stock of Specialty Catalog
Corp. by surrender of the unexercised portion of the within Purchase Option
(with a "Value" of $__________ based on a "Market Price" of $___________).
Please issue the Common Stock in accordance with the instructions given below.

______________________________
Signature

______________________________
Signature Guaranteed

NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A
BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING
MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.

INSTRUCTIONS FOR REGISTRATION OF SECURITIES

Name ________________________________________________________
(Print in Block Letters)

Address ________________________________________________________

11
<PAGE>

Form to be used to assign Purchase Option:

ASSIGNMENT

(To be executed by the registered Holder to effect a transfer of the within
Purchase Option):

FOR VALUE RECEIVED,____________________________________
does hereby sell, assign and transfer unto_______________________

the right to purchase _______________________ shares of Common Stock of
Specialty Catalog Corp. ("Company") evidenced by the within Purchase Option and
does hereby authorize the Company to transfer such right on the books of the
Company.

Dated:___________________, 19__

______________________________
Signature

NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

<PAGE>

EXHIBIT 23.02

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors of
Specialty Catalog Corp.

We consent to the use in this Registration Statement of Specialty Catalog
Corp. on Form S-1 of our report dated April 19, 1996 (except for Note 13, for
which the date is August 16, 1996), appearing in the Prospectus, which is a
part of this Registration Statement, and to the references to us under the
heading "Experts" in such Prospectus.

/s/ Deloitte & Touche LLP
__________________________________________
Deloitte & Touche LLP

New York, New York

October 3, 1996