SPECIALTY CATALOG CORP, 424B4, 1996-10-18

SPECIALTY CATALOG CORP
424B4, 1996-10-18
CATALOG & MAIL-ORDER HOUSES

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<PAGE>

RULE NO. 424(b)(4)
REGISTRATION NO. 333-10793

PROSPECTUS

1,500,000 SHARES
LOGO
SPECIALTY CATALOG CORP. SPECIALTY Catalog
CORP.
COMMON STOCK

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. The initial public offering price of the shares is $6.50. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price of the Common Stock. The Common
Stock has been approved for quotation 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)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $6.50 $0.52 $5.98
- --------------------------------------------------------------------------------
Total(3).................................. $9,750,000 $780,000 $8,970,000
</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 $243,750 ($280,313 if
the Underwriter's over-allotment option is exercised in full), estimated
at $800,000.
(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
$11,212,500, $897,000 and $10,315,500, 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 22, 1996.

GKNSecurities

OCTOBER 17, 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
Nasdaq National Market Symbol............................... CTLG
</TABLE>
- --------
(1) Gives effect to a 325.51 for 1 stock split effected on October 11, 1996.

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 $2.3 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 1,109,798 shares by the Company in this
Offering at an initial offering price of $6.50 per share less the
Underwriter's discount and other offering expenses; (ii) the application of
the 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 (13,500 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 initial public offering price of $6.50 per share and
the application of the 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
effected on October 11, 1996 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 on October 3, 1996
("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 Indebtedness (as hereinafter defined) 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 Indebtedness.
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 72.2%, of the net proceeds
from this Offering will be used to repay part of the Senior Indebtedness.
Furthermore, the Company will have broad discretion as to the application of
the remaining $2.3 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. The Company expects that net sales will continue to
decline for at least the next quarter. 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 pending or threatened
action 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 action will not be commenced against the Company
in the future or, if such an action is commenced, 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 $5.57 or 85.7%,
representing the difference between the net tangible book value of the Common
Stock immediately after this Offering and the initial public offering price of
the Common Stock of $6.50. 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 $6.50 per share, are
estimated to be $8,170,000, or $9,478,938 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 72.2% 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 $2.3 million, or 27.8% of the net proceeds ($3.6 million, or
37.8% 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 expand its business by,
among other things: (i) increasing advertising levels in its wig and hat
business; (ii) testing new marketing programs; (iii) producing and mailing
additional catalogs; and (iv) increasing 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
initial public offering price of $6.50 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 7,460 15,615
Note from stockholder........................ (140) (140) (140)
Deferred compensation........................ -- (88) (88)
Accumulated deficit.......................... (11,046) (11,046) (11,046)
-------- -------- --------
Total stockholders' equity................. (4,413) (3,782) 4,388
-------- -------- --------
Total capitalization....................... $ 12,311 $ 12,812 $ 15,082
======== ======== ========
</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 (less
underwriting discounts and estimated expenses of this Offering), the net
tangible book value of the Company would be $4,353,831, or approximately $.93
per share. This represents an immediate increase in net tangible book value of
$2.12 per share to the existing stockholders, and an immediate dilution of
approximately $5.57 per share to investors in this Offering (or approximately
85.7% 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>
Initial public offering price................................. $6.50
Pro forma net tangible book value per share before Offering. $(1.19)
Increase in net tangible book value per share attributable
to new investors........................................... 2.12
Net tangible book value per share after Offering.............. .93
-----
Dilution to new investors..................................... $5.57
=====
</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 43.6% $2.35
New investors................... 1,500,000 31.9 9,750,000 56.4 $6.50
--------- ----- ----------- -----
Total......................... 4,701,666 100.0% $17,279,000 100.0%
========= ===== =========== =====
</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.... $ (1.96) $ (0.71) $ 0.33 $ 0.23 $ 0.08 $ 0.14 $ 0.00 $ 0.17 $ 0.06
Net Income (loss)...... $ (1.96) $ (0.71) $ 3.31 $ 4.23 $ 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) $ 124 $ 2,114 $ 649 $ 2,253 $ (185) $ 5,633
Total assets........... 10,756 6,150 19,142 17,364 18,170 18,755 17,777 20,547
Long-term debt(7)...... 28,461 31,621 30,125 15,180 12,876 14,792 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) $(4,246) $(4,413) $ 4,388
</TABLE>

17
<PAGE>

- --------
(1) Pro forma as adjusted operations data and earnings per share information
gives effect to: (i) the sale of 1,109,798 shares by the Company in this
Offering at an initial offering price of $6.50 per share less the
Underwriter's discount and other offering expenses; (ii) the application
of the 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 (13,500 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
initial public offering price of $6.50 per share and the application of
the 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 9.2% 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

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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 $400,000, and general office overhead increased by
$300,000.

Deferred catalog costs increased $400,000, or 19.1%, from $2.1 million in
the six months ended July 1, 1995 to $2.5 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 $1.9 million, or 5.8%, from $32.6
million in 1994 to $34.5 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 21.3% 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

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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 $425,000 in 1995, a 38.9% 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 59.0% in 1993 and
59.0% in 1994, although gross profit increased $2.6 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

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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 $300,000, or
7.9%, from $3.8 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 $1,003,000 in 1993 to $695,000
in 1994, a 30.7% 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 59.0% 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 $300,000, or 8.6%, from $3.5
million in 1992 to $3.8 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

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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 earning 11.5%
interest per annum, payable semi-annually on June 1 and December 1
("Subordinated Indebtedness"). 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. The principal
of the Subordinated Indebtedness is due December 1, 2002, subject to a
subordination agreement with BNP. 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

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<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.

The Company believes that it is more likely than not that the deferred tax
asset will be realized. This belief is based on the Company's ability to
generate income before taxes of $878,837, $1,208,278, and $1,696,288 for the
years ended December 30, 1995, December 31, 1994 and January 1, 1994,
respectively. During this period, the deferred tax asset has been reduced by
$2,205,766, or approximately 24%, from $8,985,122 at January 1993 to
$6,779,356 at December 30, 1995. Prior to 1993, the Company recorded
significant operating losses. These losses were primarily due to poor
operating performances of two of the Company's four subsidiaries during that
period and the significant debt service during that period. The Company
disposed of the two poor performing subsidiaries in January 1993 and reduced
its debt service as part of the Plan of Reorganization. Aggregate net losses
for the two subsidiaries for 1992 and 1991, respectively, including a loss of
$671,396 on disposal in 1992, were $1,766,473 and $4,208,847. The Company's
remaining two subsidiaries have a history of operating profits. Although these
profits decreased in 1995, the decrease in profitability was experienced
throughout the direct mail catalog industry due to the increase in both paper
and postage rates in that year. The Company has enacted certain policies in
order to reduce operating expenses and increase profitability in response to
the increase in paper and postage expenses and believes that it will be able
to attain its past levels of profitability in the near future. The Company
does not expect any significant differences between book and tax income and
therefore the Company believes that its book income closely approximates its
actual taxable income against which the NOLs can be applied.

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 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.

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

26
<PAGE>

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.

27
<PAGE>

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 $9.2 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.

28
<PAGE>

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 $3.6 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 gross sales totaled $1,100,000 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

29
<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

30
<PAGE>

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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<PAGE>

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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<PAGE>

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 7 trademarks and has 3 trademark applications
pending with the U.S. Patent and Trademark Office and has 4 trademarks
registered under California state law. 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.

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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.

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<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 annual increases which will bring the annual
salary in the last year of the term to $310,000. Mr. Bock will be eligible for
a performance bonus ranging between 1% to 100% of his base salary, based upon
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 and options to purchase 75,000 shares of Common Stock at a price of
$5.33 per share, granted outside of the Plan. 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 annual
increases which will bring the annual salary in the last year of the term to
$235,000. Mr. O'Hara will be eligible for a performance bonus ranging between
1% to 100% of his base salary, based upon 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 employment: (i) upon his death or
permanent disability; (ii) if he engages in conduct that constitutes "cause;"
(iii) if, after 1996, the Company fails to meet certain financial targets; or
(iv) upon a change of control. Mr. Bock may terminate his agreement if there
is a material reduction of his responsibilities or a material breach of the
agreement by the Company. Mr. O'Hara or the Company may terminate this
employment agreement at any time, with notice. In the event Mr. Bock's
employment is terminated for any reason other than "cause" or death, Mr. Bock
will receive a severance payment of from one year to two years of base salary.
In the event Mr. O'Hara's employment is terminated for any reason other than
"cause" or death, Mr. O'Hara will receive a severance payment of from six
months to one year of base salary. Both employment agreements contain
noncompetition restrictions effective during the term of employment and for a
period of two years thereafter. For the term of the employment agreements, and
for any period thereafter during which the Company is obligated to pay
severance, the Company must provide $1 million of life insurance for the
benefit of each of Messrs. Bock and O'Hara. In the event the Company fails to
maintain such insurance, upon the death of Mr. Bock or Mr. O'Hara, the Company
must pay such officer's estate a death benefit of $1 million.

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 $ 270,294 $ 65,960 --
Chairman and Chief Executive Of-
ficer 1994 212,116 100,000 310,226(1)
1993 216,923 -- --
Stephen M. O'Hara................ 1995 $ 194,718 $ 35,000 --
President 1994 166,424 81,850 272,773(2)
1993 167,360 -- --
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 became exercisable upon the date hereof.
(2) Represents options granted in 1994 at an exercise price of $0.31 per
share, of which options to purchase 218,218 shares became exercisable upon
the date hereof, and options to purchase 54,555 shares will become
exercisable one year from the date hereof.
(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 or affiliates. 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 date hereof
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.
Only senior employees who have not been granted stock options participate in
the plan. 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 of the year in which the bonus was earned.
The total cost of this plan to the Company was $0, $65,000 and $0, in 1993,
1994 and 1995, respectively. As of the date hereof there is $70,000 in accrued
and payable bonuses under the plan. The $65,000 contributed in 1994 initiated
the plan. The supplemental defined contribution plan will be terminated 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
Messrs. Samuel L. Katz, Alan S. Cooper and Martin E. Franklin. Mr. Katz serves
as chairman of the committee. The Audit Committee is

37
<PAGE>

responsible for recommending to the Board of Directors the appointment of the
Company's outside auditors, examining the results of audits, reviewing
internal accounting controls and reviewing related party transactions. The
Board of Directors has also established a Compensation and Options Committee
consisting of Messrs. Cooper and Franklin. Mr. Cooper serves as chairman of
this committee.

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 which
become exercisable upon the consummation of this Offering 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
date hereof.
(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 date hereof 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 date hereof 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
310,226 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, 11.5% per annum, except that
it is junior in priority to the Subordinated Indebtedness. The Junior
Subordinated Indebtedness is due on August 12, 1999.

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.

On October 3, 1996, 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 the date hereof, 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 date hereof 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.

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

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 January 14, 1997, 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 all of its
current stockholders. 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, a "demand" registration right 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. All of the stockholders and the holders of the Warrants
have "piggyback" registration rights whereby each of them 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 all of the expenses relating to
the registrations, other than underwriting discounts and commissions. In
connection with this Offering, the current stockholders 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 $0.31 per share of Common Stock. The Underwriter
may allow, and such dealers may reallow, a concession not in excess of $0.10
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
$7.15 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
("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 7,459,289
Deferred compensation... -- -- -- (87,750)
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 $ 0.23 $ 0.08 $ 0.14 $ 0.00
Income from cumulative
effect................ 2.98 -- -- -- --
Net income per share.... $ 3.31 $ 4.23 $ 0.08 $ 0.14 $ 0.00
----------- ----------- ----------- ----------- -----------
Weighted average shares
outstanding............ 3,015,078 3,015,078 3,015,078 3,015,078 3,570,523
=========== =========== =========== =========== ===========
</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.

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

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 15, 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 junior subordinated notes for $495,000
payable on August 12, 1999 and bearing interest at 11.5%. In connection with
the issuance of these notes, 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 $6.50 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 NOVEMBER 11, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

1,500,000 SHARES

LOGO
SPECIALTY Catalog
CORP.

COMMON STOCK

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

GKN Securities

OCTOBER 17, 1996