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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-21499
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SPECIALTY CATALOG CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3253301
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
02375
21 BRISTOL DRIVE (ZIP CODE)
SOUTH EASTON, MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(508) 238-0199
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, if definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 3, 1997: $12,381,998
Number of shares of the Registrant's Stock outstanding as of March 3, 1997:
4,701,666
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 13, 1997 are incorporated by reference into Part
III of this Form 10-K. Portions of the Registrant's Registration Statement on
Form S-1 (registration No. 333-10793) are incorporated by reference into Part
IV of this Form 10-K.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, this Annual Report
on Form 10-K for Specialty Catalog Corp. (the "Company") may contain "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including but not
limited to, the Company's expected future revenues, operations and
expenditures, estimates of the potential markets for the Company's products,
assessments of competitors and potential competitors, projected timetables for
the market introduction of the Company's products and estimates of the
capacity of facilities to support such products. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested
in the forward-looking statements due to certain risks and uncertainties,
including, but not limited to, the following risks and uncertainties, (i)
increasing postal rates, paper prices and media costs, (ii) limited sources of
fiber used to make the wigs, (iii) the limited number of wig manufactures,
(iv) the Company's dependence upon foreign suppliers, (v) the potential
development of a cure for hair loss and cancer treatment improvements, (vi)
the effectiveness of catalogs and advertising, and (vii) the Company's
competition. See also "Risk Factors" under Item 7- -Management's Discussion
and Analysis of Financial Condition and Results of Operations. The forward-
looking statements contained herein represent the Company's judgement as of
the date of this Annual Report on Form 10-K, and the Company cautions readers
not to place undue reliance on such statements.
PART I
ITEM 1. 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 1996, SC Direct mailed 19.0 million catalogs, generating net sales
of $32.3 million. SC Direct has developed a proprietary data base consisting
of approximately 5.1 million persons, including more than one million active
customers and more than 1.1 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 is women over the age of 50. 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 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 began test marketing men's wigs in the Paula Young
catalog in March 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
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programs to its core customers and by expanding into new and related
professional fields. In 1996, SC Publishing mailed 6.0 million catalogs,
generating net sales of $4.0 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.
. 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
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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 no other
individual wig catalog retailer represents more 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.
Products
The Company sells a full range of wigs and hairpieces in five separate
product lines. Hairpieces include wiglets, add-ons or extensions, and the
Company's newest product, Style Enhancers. 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. Style Enhancers offer full coverage, like a
wig, but allow the woman to integrate her own hair with the hairpiece, thus
creating a blend of her own natural hair with the hairpiece. 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.
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 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 4% and 24% of its overall wig purchases in 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. 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.
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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, 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 $89 and have a "shake and wear" styling with quality
construction.
Celebrity Secrets(R) originally was launched as a wig line geared toward a
more sophisticated customer, with more contemporary styling and unique
features. However, in January 1997 this line was refocused on the new Style
Enhancer hairpiece products. Style Enhancers provide full coverage but allows
the woman to blend her own hair into the hairpiece. Style Enhancer prices
range from $59 to $69 and are available in the Paula Young catalog.
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 catalog.
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. Especially
Yours is featured in its own separate catalog with prices ranging from $29 to
$69 and is also available in selected Paula Young catalogs.
Touch of Class features only hairpieces, including wiglets, add-ons and
extensions. Touch of Class products are sold primarily in the Paula Young
catalog.
In addition to its own five proprietary brands, the Company also markets Eva
Gabor(R) wigs, a brand comparable in quality to Paula Young, but which is
owned by Eva Gabor International. There is no licensing or marketing agreement
between the Company and Eva Gabor International.
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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, New Zealand, and
most recently in Germany and Austria, 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 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 were approximately $1 million in
1996.
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. The Company began test marketing men's wigs in the Paula Young
catalog in March 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 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, shoes
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
1996, Paula's Hatbox represented 2% 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.
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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 1996 of
$4.0 million, or approximately 11% of the Company's overall net sales.
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 1996. 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. 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 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 58% 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 is in the second of a three year contract with AT&T. 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.
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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 1996, 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. Based on the
initial results obtained from the expansion, the Company has put further
expansion of the program on hold.
Fulfillment
The Company's fulfillment goal is the prompt delivery of ordered
merchandise. Orders of in-stock merchandise received before 11:00 a.m. are
usually shipped on the same day, primarily 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 1996, the Company shipped an average of approximately 3,107
orders per day, with a peak of 3,585 orders shipped in one day. The Company
estimates it currently has the physical capacity to ship approximately 7,800
orders per day in two shifts with additional employees.
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 17% 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.
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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
25.0 million catalogs in fiscal 1996, compared to 29.2 million catalogs in
fiscal 1995. 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 one million active customers and more
than 3.8 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 $241,000 in 1996. 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
Continuing Education ("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.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 265 employees,
comprising 60 salaried full-time employees, 133 full-time hourly employees,
and 72 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.
TRADEMARKS, PATENTS AND TRADE NAMES
The Company has registered 9 trademarks, 4 trademark applications, 1 patent
application 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.
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven L. Bock................. 43 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
</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 Senior Vice President and 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.
10
<PAGE>
ITEM 2. PROPERTIES
At December 28, 1996 the Company occupied 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 leased another 22,000
square foot facility one block away, primarily utilized as additional
warehouse space. In March 1997, the Company signed a five year and five month
lease beginning April 1, 1997 for a 50,000 square foot facility in an adjacent
town to replace the 22,000 square foot facility which will enable the Company
to consolidate all fulfillment operations into the new facility, and free up
expansion space in its main South Easton Facility.
Under the terms of the current lease for the 43,000 square foot facility,
both the landlord and the Company have the right to terminate the lease upon
four month's notice. In the event the 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 Company is currently assessing
various options regarding this facility.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company began trading in October 1996 (subsequent to
the public offering) on the National Association of Securities Dealers
Automated Quotation System "NASDAQ" National Market under the symbol "CTLG".
The following table sets forth the high and low quotations from NASDAQ. Prior
to the offering in October 1996, no established public trading market existed.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE
-------------
HIGH LOW
------ ------
<S> <C> <C>
Fourth Quarter (commencing October 17, 1996).............. $7 3/8 $6 1/2
</TABLE>
The number of record holders of the Company's common stock as of March 6,
1997 was approximately 13.
The Company has not paid a dividend with respect to its common stock nor
does the Company anticipate paying dividends in the foreseeable future. Under
the terms of the Company's existing debt agreement at December 28, 1996 and
the Company's new debt agreement entered into in March 1997, the Company is
not permitted to pay dividends.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
FISCAL YEAR ENDED
------------------------------------------------
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28,
1993 1994 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER-
SHARE AMOUNTS AND AVERAGE ORDER SIZE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1).................... $ 47,120 $ 33,801 $38,179 $42,568 $36,272
Cost of sales(1)................ 21,544 13,868 15,648 16,423 12,811
-------- -------- ------- ------- -------
Gross profit(1)................. 25,576 19,933 22,531 26,145 23,461
Selling, general and
administrative(1).............. 24,452 16,768 17,772 22,835 20,186
Restructuring charges........... -- -- -- 513 --
-------- -------- ------- ------- -------
Income from operations.......... 1,124 3,165 4,759 2,797 3,275
Interest expense, net........... 3,080 431 661 1,918 1,658
Reorganization items............ -- 1,038 2,890 -- --
-------- -------- ------- ------- -------
Income (loss) before income
taxes, cumulative effect of
change in accounting principle
and extraordinary item......... (1,956) 1,696 1,208 879 1,617
Income taxes.................... 180 704 498 357 644
-------- -------- ------- ------- -------
Income (loss) before cumulative
effect of change in accounting
principle and extraordinary
item........................... $ (2,136) $ 992 $ 710 $ 522 $ 973
======== ======== ======= ======= =======
Net income (loss)(2)............ $ (2,136) $ 9,977 $12,789 $ 522 $ 973
-------- -------- ------- ------- -------
Preferred stock dividends....... -- -- 31 292 --
-------- -------- ------- ------- -------
Net income available to common
stockholders................... $ (2,136) $ 9,977 $12,758 $ 230 $ 973
======== ======== ======= ======= =======
EARNINGS (LOSS) PER COMMON
SHARE:(3)
Income (loss) before cumulative
effect of change in accounting
principle and extraordinary
item........................... $ (0.71) $ 0.33 $ 0.23 $ 0.08 $ 0.25
Net Income (loss)............... $ (0.71) $ 3.31 $ 4.23 $ 0.08 $ 0.25
OTHER FINANCIAL AND OPERATING
DATA:
Total catalog circulation....... 17,562 18,807 22,623 29,245 25,049
Active customer file(4)......... 890 941 1,094 1,096 1,044
Average order size.............. $ 57.98 $ 60.82 $ 60.27 $ 61.05 $ 62.35
<CAPTION>
HISTORICAL
------------------------------------------------
AS OF
------------------------------------------------
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28,
1993 1994 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ (30) $ 124 $ 2,114 $ 649 $ 5,619
Total assets.................... 6,150 19,142 17,364 18,170 18,405
Long-term debt(5)............... 31,621 30,125 15,180 12,876 8,147
Preferred stock................. -- -- 2,249 2,249 --
Stockholders' equity (deficit).. $(30,358) $(20,381) $(4,654) $(4,416) $ 4,801
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
- --------
(1) Net sales, cost of sales, gross profit and selling, general and
administrative expenses include for fiscal 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 $32,430,000, $14,367,000 $18,063,000 and $15,885,000, respectively, in
fiscal 1992.
(2) 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.
(3) 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 consolidated
financial statements and the notes thereto.
(4) Reflects the number of customers who are being mailed catalogs at the end
of each period.
(5) Long-term debt reflects, for fiscal years ended January 2, 1993 and
January 1, 1994, amounts subject to settlement under reorganization
proceeding. See the consolidated financial statements and the notes
thereto.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated, "1996" means the Company's fiscal year ended
December 28, 1996, "1995" means the Company's fiscal year ended December 30,
1995, and "1994" means the Company's fiscal year ended December 31, 1994. The
discussion and analysis below should be read in conjunction with the Financial
Statements of the Company and the notes to the financial statements. 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.
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 1996, SC Direct's sales of women's wigs, hairpieces, accessories and hats
represented 88.5% of the Company's net sales. Since 1992, the mix of SC
Direct's sales has expanded 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 remainder 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.
RESULTS OF OPERATIONS
1996 Compared to 1995
Net sales decreased $6.3 million, or 14.8%, from $42.6 million in 1995 to
$36.3 million in 1996. This decrease was primarily caused by a 14.4% reduction
in the number of catalogs mailed during 1996 compared to 1995. Fewer catalogs
were mailed because (i) a reduction in advertising during the second half of
1995 and all of 1996 resulted in fewer prospective customers requesting
catalogs; and (ii) historical mailing results did not project that sufficient
revenues would be generated to cover the costs of printing and mailing
catalogs to certain segments of the customer mailing list in view of the
increases in the cost of paper and postage which have occurred since the
beginning of 1995. While these actions resulted in lower sales, the Company
believes they were important in generating operating income in 1996.
Gross margin increased from 61.4% in 1995 to 64.7% in 1996. This increase
resulted from (i) the continued expansion of the Company's direct import
program which resulted in a larger percentage of product being purchased at
lower prices directly from overseas factories; and (ii) a reduction in the
cost of shipping to customers packages weighing less than one pound, which
reduced total shipping costs.
SG&A expenses decreased $2.6 million, or 11.4%, from $22.8 million in 1995
to $20.2 million in 1996. This decrease resulted from mailing fewer catalogs
to customers and reducing page counts in certain catalogs in order to reduce
paper and postage costs. The decrease also reflects fewer mailings to
prospective customers as a result of the Company's decision to reduce
advertising expenditures during the second half of 1995 and all of 1996. Total
catalogs mailed decreased by 4.2 million, or 14.4%, from 29.2 million in 1995
to 25.0 million in 1996. Total catalog production costs decreased by $1.5
million, or 23.4%, from $6.4 million in 1995 to
15
<PAGE>
$4.9 million in 1996. Catalog production costs were adversely affected by the
cost of paper during the first six months of 1996. During the last six months
of 1996 the Company was able to take advantage of some reductions in the cost
of paper. Advertising and catalog expense for 1996 decreased $2.9 million or
17.8% from $16.3 million in 1995 to $13.4 million in 1996.
Net interest expense decreased $0.2 million,or 10.5%, from $1.9 million in
1995 to $1.7 million in 1996, reflecting lower principal amounts outstanding
on the Company's bank loan and lower interest rates. The Company's bank debt
was reduced in October 1996 by $5.9 million dollars through the use of
proceeds from the Company's initial public offering, of which $4.45 million
was applied to the company's term loan and $1.45 million was applied to the
company's line of credit.
Cash increased by $1,278,980, from $113,364 in 1995 to $1,392,344 in 1996.
This increase reflects the net proceeds from the initial public offering of
$7.8 million less the payment of bank debt as discussed above and the use of
the remaining net proceeds as working capital.
Net trade receivables decreased $547,853, or 40.0%, from $1,367,929 in 1995,
to $820,076 in 1996. This decrease is primarily due to a reduction in the
Company's private label credit card program. In 1995 the Company attempted to
expand the program with unsatisfactory results. As a result, the Company wrote
off poorly performing accounts during 1996 and is currently maintaining the
program at historical levels.
Accounts payable and accrued expenses decreased $2.0 million, or 42.6%, from
$4.7 million in 1995, to $2.7 million in 1996. This decrease reflects the
Company's ability to pay invoices more quickly as a result of its improved
cash position.
1995 Compared to 1994
Net sales increase $4.4 million, or 11.5%, from $38.2 million in 1994 to
$42.6 million in 1995. This increase was primarily caused by (i) an increase
in the number of catalogs mailed; (ii) $1.1 million of gross sales of wigs and
hairpieces marking the commencement of direct sales by the Company into
Canada; (iii) an increase of $1.3 million in Continuing Education sales; and
(iv) a reduction of $0.8 million in returned merchandise.
Gross margin increased from 59.0% in 1994 to 61.4% in 1995. This increase
resulted from continued expansion of the Company's direct import program which
resulted in a larger percentage of product being purchased at lower prices
directly from overseas factories.
SG&A expenses increased $5.0 million, or 28.1%, from $17.8 million in 1994
to $22.8 million in 1995. This increase resulted from (i) sharp increases in
paper, postage and media costs and, (ii) an increase in total catalogs mailed
of 6.6 million, or 29.2% from 22.6 million in 1994 to 29.2 million in 1995.
The 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. Due to a 14.3% postal
rate increase at the beginning of 1995 along with mailing more catalogs, total
postage costs increased $1.7 million, or 39.5% from $4.3 million in 1994 to
$6.0 million in 1995.
Net interest expense increased $1.2 million, or 171.4%, from $0.7 million 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.
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 by a
$968,000 shortfall from budgeted sales in the fourth quarter of 1995.
Net trade receivables increased $788,781, or 136.2%, from $579,148 in 1994,
to $1,367,929 in 1995. This increase is primarily due to an expansion of the
Company's private label credit card program in 1995.
16
<PAGE>
Accounts payable and accrued expenses increased $1.8 million, or 62.1%, from
$2.9 million in 1994, to $4.7 million in 1995. This increase reflected the
Company's efforts to manage cash by paying invoices less quickly.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities fluctuated during the past two
fiscal years as business conditions changed. In 1995 the Company generated
$1.0 million from operating activities and in 1996 the Company generated
$322,000 from operating activities. In 1995 accounts payable was higher than
normal due to liquidity issues and in 1996 the Company returned its accounts
payable to normal levels.
In November 1994 the Company entered into an agreement with Banque Nationale
de Paris ("BNP") for a $14 million term loan and a $2 million revolving line
of credit (the "Senior Indebtedness"). The term loan had an aggressive four
and one half year repayment schedule, which effectively utilized all of the
Company's free cash flow and caused the Company to have limited working
capital during 1995 and the first nine months of 1996.
In addition to principal and interest due under the Senior Indebtedness, the
Company was obligated to pay an additional fee to BNP ("Additional Fee") in
the event of any future default, prepayment or change in control, or upon the
final principal payment in May 1999. The Additional Fee due at December 28,
1996 was $625,000 and was scheduled to rise to $1.0 million over the term of
the bank loan. 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 the Company's initial public offering and
the use of proceeds of the offering, agreed to amend certain financial
covenants and agreed to waive the Additional Fee provided that BNP's Senior
Indebtedness was repaid in full on or prior to March 31, 1997.
Pursuant to the Company's Plan of Reorganization approved by the Bankruptcy
Court in September 1994, certain of the Company's current stockholders
purchased $3.6 million of subordinated indebtedness with a stated interest
rate of 11.5%, 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 December 28, 1996, approximately $4.7 million, including
accrued interest, was outstanding under the Subordinated Indebtedness.
Due to its working capital constraints, on June 1, 1996 the Company entered
into an agreement with a director, Martin E. 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.
In October 1996, the Company successfully completed an initial public
offering ("IPO") for 1.5 million shares of its common stock at $6.50 per
share. Net proceeds to the Company were $7.8 million. The proceeds from the
IPO were used to pay down $6.1 million of the Senior Indebtedness, to bring
accounts payable into a current position and to provide additional working
capital. The paydown reduced the future scheduled payments by approximately
one third and gave the Company full availability of its $2 million revolving
credit line. Since the IPO, the Company has maintained a cash balance between
$1.1 million and $2.4 million and has not had to use its revolving line of
credit.
On March 12, 1997 the Company entered into a new $11 million credit facility
("Credit Facility") with the Bank of Boston. The new Credit Facility provides
a $5 million term loan ("Term Loan") and a $6 million revolving line of credit
("Line of Credit"). The Company used the proceeds from the Term Loan and
$500,000
17
<PAGE>
under the Line of Credit to pay off its remaining indebtedness to BNP, thereby
avoiding any obligation to pay the Additional Fee to BNP. The Company is
currently in the process of repaying all of its Subordinated Indebtedness,
including accrued interest. The total amount repaid as of March 18, 1997 was
approximately $1.9 million. The Company plans on using all of its cash on hand
plus the Line of Credit to repay the Subordinated Indebtedness. After
repayment the availability under the Line of Credit is expected to be
approximately $2.5 million. The Company plans on using all future cash
receipts to pay down the line on a daily basis thereby keeping its outstanding
debt at the lowest possible level. The Line of Credit will be used to fund all
of the Company's disbursements, up to the $6 million limit, subject to certain
covenant restrictions.
The Company also plans on repaying Mr. Franklin and his associates the
$495,000 loaned to the Company in June 1996. It is expected that at the same
time Mr. Franklin and his associates will immediately exercise their warrants
upon receiving repayment.
The Term Loan has a four year repayment schedule with $750,000 due in 1997,
$1.25 million due in each of the next three years and $500,000 due in 2001.
The Company believes this amortization schedule is much more favorable than
under the BNP agreement, with $1.25 million less payments required in 1997 and
$1.1 million less in 1998.
The Company currently has recorded a deferred tax asset reflecting the
benefit of approximately $16.5 million of NOLs available for federal and state
income tax purposes, which expire from 2005 through 2010. The Company's
initial public offering resulted in an "ownership change" under Section 382 of
the Code and, as a result, the Company's ability to use its "pre-change" NOLs
is limited to $1.55 million in each fiscal year following the offering.
Realization of the NOLs is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. The Company believes that it is
more likely than not that the deferred tax asset will be realized, however,
there can be no assurance that the Company will be able to use the NOLs.
RISK FACTORS
Postal Rates, Paper Prices and Media Costs. Postage, shipping and paper
costs are significant expenses in the operation of the Company's business. The
Company mails its catalogs and generally ships its products to customers
through the 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. 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.
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.
Limited Number of Wig Manufacturers. The wigs sold by the Company are
produced by a limited number of manufacturers. Each of the Company's five
largest manufacturers supplied between 4% and 24% of the Company's overall wig
purchases in 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
18
<PAGE>
currently have, and does not anticipate entering into in the foreseeable
future, long-term supply contracts with its manufacturers.
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.
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 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.
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.
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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. 21
Financial Statements and Supplementary Schedules as of December 28, 1996
and December 30, 1995 and for the Three Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994
Consolidated Balance Sheets............................................ 22
Consolidated Statements of Operations.................................. 23
Consolidated Statements of Stockholders' Equity (Deficit).............. 24
Consolidated Statements of Cash Flows.................................. 25
Notes to Consolidated Financial Statements............................. 27
Schedule II--Valuation and Qualifying Accounts......................... 38
</TABLE>
All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been omitted
because the information is disclosed in the Consolidated Financial Statements
or because such schedules are not required or are not applicable.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Specialty Catalog Corp.
We have audited the accompanying consolidated balance sheets of Specialty
Catalog Corp. as of December 28, 1996 and December 30, 1995 and the related
consolidated statements of operations and consolidated statements of
stockholders' equity (deficit) and cash flows for the three years ended
December 28, 1996, December 30, 1995 and December 31, 1994. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with 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 28, 1996 and December 30, 1995 and the results of its operations and
its cash flows for the three years ended December 28, 1996, December 30, 1995
and December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Boston, Massachusetts
March 12, 1997
(March 18, 1997 with respect
to Note 7 and Note 12)
21
<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,392,344 $ 113,364
Accounts receivable, less allowance for doubtful
accounts of $72,197 and $160,000 at December 28,
1996 and December 30, 1995, respectively........ 820,076 1,367,929
Inventories...................................... 4,986,293 5,073,743
Prepaid expenses................................. 3,877,533 3,462,818
------------ ------------
Total current assets........................... 11,076,246 10,017,854
------------ ------------
Property and equipment:
Property and equipment, at cost.................. 4,113,834 3,982,348
Less accumulated depreciation and amortization... (3,298,109) (3,040,751)
------------ ------------
Property and equipment--net.................... 815,725 941,597
------------ ------------
Deferred income taxes.............................. 6,170,102 6,779,356
------------ ------------
Other assets....................................... 343,123 431,553
------------ ------------
Total assets................................. $ 18,405,196 $ 18,170,360
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............ $ 2,653,534 $ 4,730,936
Liabilities to customers......................... 691,377 755,902
Line of credit................................... -- 1,050,000
Income taxes..................................... 107,019 81,945
Current portion of long-term debt................ 2,005,714 2,750,000
------------ ------------
Total current liabilities...................... 5,457,644 9,368,783
------------ ------------
Long-term debt..................................... 3,394,286 8,750,000
Subordinated debt-related party.................... 4,752,325 4,125,519
Other long-term liabilities........................ -- 341,939
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $1.00 par value: 1,000,000
authorized; no shares issued and outstanding.... -- --
Common stock, $.01 par value: 10,000,000 shares
authorized; 4,701,666 shares issued and
outstanding at December 28, 1996................ 47,017 --
13% preferred stock, $100 par value: 30,000
shares authorized; 22,491 shares issued and
outstanding at December 30, 1995................ -- 2,249,100
Class A common stock, $.01 par value; 5,208,160
shares authorized; 1,958,880 shares issued and
outstanding at December 30, 1995................ -- 19,589
Class B common stock, $.01 par value; 651,020
shares authorized; 433,893 shares issued and
outstanding at December 30, 1995................ -- 4,339
Class C common stock, $.01 par value; 651,020
shares authorized; 433,893 shares issued and
outstanding at December 30, 1995................ -- 4,339
Additional paid-in capital....................... 15,199,050 4,641,774
Deferred compensation.............................. (83,363) --
Note receivable--stockholder....................... (140,174) (140,174)
Accumulated deficit................................ (10,221,589) (11,194,848)
------------ ------------
Total stockholders' equity (deficit)........... 4,800,941 (4,415,881)
------------ ------------
Total liabilities and stockholders' equity
(deficit)................................... $ 18,405,196 $ 18,170,360
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ $36,271,663 $42,568,120 $38,178,792
Cost of sales (including buying,
occupancy and order fulfillment
costs).............................. 12,810,921 16,423,590 15,648,066
----------- ----------- -----------
Gross profit......................... 23,460,742 26,144,530 22,530,726
----------- ----------- -----------
Operating expenses:
Selling, general and administrative
expenses.......................... 20,185,965 22,835,086 17,771,721
Restructuring charges.............. -- 512,943 --
----------- ----------- -----------
Total operating expenses............. 20,185,965 23,348,029 17,771,721
----------- ----------- -----------
Income from operations............... 3,274,777 2,796,501 4,759,005
----------- ----------- -----------
Interest expense--net................ (1,657,471) (1,917,664) (661,022)
----------- ----------- -----------
Income before reorganization items,
income taxes, and extraordinary
item................................ 1,617,306 878,837 4,097,983
Reorganization items................. -- -- 2,889,707
----------- ----------- -----------
Income before income taxes and
extraordinary item.................. 1,617,306 878,837 1,208,276
Income taxes......................... 644,047 356,575 497,954
----------- ----------- -----------
Income before extraordinary item..... 973,259 522,262 710,322
Extraordinary item--gain on debt
discharge--net of income taxes of
$1,094,649.......................... -- -- 12,078,489
----------- ----------- -----------
Net income........................... $ 973,259 $ 522,262 $12,788,811
----------- ----------- -----------
Preferred stock dividends............ -- (292,383) (31,241)
----------- ----------- -----------
Net income available to common
shareholders........................ $ 973,259 $ 229,879 $12,757,570
=========== =========== ===========
Per common share
Income before extraordinary items.. $ 0.25 $ 0.08 $ 0.23
Extraordinary items................ $ -- $ -- $ 4.00
Net income per share............... $ 0.25 $ 0.08 $ 4.23
=========== =========== ===========
Weighted average shares
outstanding....................... 3,946,211 3,015,078 3,015,078
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CLASS A CLASS B CLASS C 13% PREFERRED STOCK
-------------------- -------------------- ----------------- ----------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- -------- ------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1994.......... 1,000,000 $ 10,000 -- $ -- -- $ -- -- $ -- -- $ --
Cancellation of
SC Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... (1,000,000) (10,000) -- -- -- -- -- -- -- --
Issuance of SC
Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... 868,365 8,684 -- -- -- -- -- -- -- --
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 -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- --
Redeemable
preferred stock
dividends....... -- -- -- -- -- -- -- -- -- --
---------- -------- ---------- -------- -------- ------- -------- ------- -------- -----------
Balance, December
31, 1994......... 2,826,666 28,267 -- -- -- -- -- -- 22,491 2,249,100
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....... -- -- -- -- -- -- -- -- -- --
---------- -------- ---------- -------- -------- ------- -------- ------- -------- -----------
Balance, December
30, 1995......... -- -- 1,958,880 19,589 433,893 4,339 433,893 4,339 22,491 2,249,100
Issuance of
common stock in
connection with
initial public
offering........ 1,500,000 15,000 -- -- -- -- -- -- -- --
Exchange of
Class A, Class
B, and Class C
shares for
common stock.... 2,826,666 28,267 (1,958,880) (19,589) (433,893) (4,339) (433,893) (4,339) -- --
Conversion of
preferred stock
into common
stock........... 375,000 3,750 -- -- -- -- -- -- (22,491) (2,249,100)
Net income...... -- -- -- -- -- -- -- -- -- --
Redeemable
preferred stock
dividends....... -- -- -- -- -- -- -- -- -- --
Forgiveness of
preferred stock
dividends and
related accrued
interest........ -- -- -- -- -- -- -- -- -- --
Deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- --
Issuance of
warrants........ -- -- -- -- -- -- -- -- -- --
---------- -------- ---------- -------- -------- ------- -------- ------- -------- -----------
Balance, December
28, 1996......... 4,701,666 $ 47,017 -- $ -- -- $ -- -- $ -- -- $ --
========== ======== ========== ======== ======== ======= ======== ======= ======== ===========
<CAPTION>
ADDITIONAL
DEFERRED PAID-IN ACCUMULATED
COMPENSATION CAPITAL DEFICIT
------------ ------------ -------------
<S> <C> <C> <C>
Balance, January
1, 1994.......... $ -- $ 4,115,300 $(24,505,921)
Cancellation of
SC Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... -- 10,000 --
Issuance of SC
Corporation
common shares in
connection with
reorganization
and settlement
of bankruptcy
proceedings..... -- 859,681 --
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............. -- (19,583) --
Net income...... -- -- 12,788,811
Redeemable
preferred stock
dividends....... -- (31,241) --
------------ ------------ -------------
Balance, December
31, 1994......... -- 4,934,157 (11,717,110)
Exchange of
common shares
for Class A,
Class B, and
Class C shares.. -- --
Net income...... -- -- 522,262
Redeemable
preferred stock
dividends....... -- (292,383) --
------------ ------------ -------------
Balance, December
30, 1995......... -- 4,641,774 (11,194,848)
Issuance of
common stock in
connection with
initial public
offering........ -- 7,739,760 --
Exchange of
Class A, Class
B, and Class C
shares for
common stock.... -- -- --
Conversion of
preferred stock
into common
stock........... 2,245,350 --
Net income...... -- 973,259
Redeemable
preferred stock
dividends....... -- (146,188) --
Forgiveness of
preferred stock
dividends and
related accrued
interest........ -- 511,542 --
Deferred
compensation.... (87,750) 87,750 --
Amortization of
deferred
compensation.... 4,387 -- --
Issuance of
warrants........ -- 119,062 --
------------ ------------ -------------
Balance, December
28, 1996......... $(83,363) $15,199,050 $(10,221,589)
============ ============ =============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.......................... $ 973,259 $ 522,262 $ 12,788,811
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Interest paid through issuance of
debt............................. 237,216 445,333 --
Provision for bad debts........... 22,000 146,004 34,180
Depreciation and amortization..... 276,407 249,127 748,628
Deferred income taxes............. 609,254 350,819 1,439,943
Amortization of deferred
compensation..................... 4,387 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. 525,853 (934,785) 120,860
Inventories..................... 87,450 (852,477) (817,280)
Prepaid expenses................ (414,715) (288,275) (120,628)
Other assets.................... 87,285 104,935 (383,072)
Accounts payable and accrued
expenses....................... (2,028,204) 1,802,918 (1,944,118)
Provision for estimated
returns........................ (125,669) (356,033) 150,299
Liabilities to customers........ 61,144 (155,817) (8,654)
Income taxes.................... 25,074 (29,505) (43,077)
Other long-term liabilities..... (18,315) 18,315 --
Change due to reorganization
activities:
Extraordinary gain on debt
discharge...................... -- -- (13,173,138)
----------- ----------- ------------
Net cash provided by (used in)
operating activities............... $ 322,426 $ 1,022,821 $ (1,207,246)
----------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment........................ (148,206) (413,146) (447,919)
Repayments of note receivable..... -- 7,409 --
----------- ----------- ------------
Net cash used in investing
activities......................... $ (148,206) $ (405,737) $ (447,919)
----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common stock.......... 7,754,760 -- 827,042
Issuance of redeemable preferred
stock............................ -- -- 2,142,840
Settlement of long-term
obligations...................... -- -- (20,237,480)
Issuance of junior subordinated
debt and warrants................ 500,000 -- 17,680,186
Repayments of long-term debt...... (6,100,000) (2,500,000) --
Advances on line of credit........ 400,000 1,050,000 --
Repayments on line of credit...... (1,450,000) -- --
----------- ----------- ------------
Net cash provided by (used in)
financing activities............... $ 1,104,760 $(1,450,000) $ 412,588
----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents........................ 1,278,980 (832,916) (1,242,577)
Cash and cash equivalents, beginning
of year............................ 113,364 946,280 2,188,857
----------- ----------- ------------
Cash and cash equivalents, end of
year............................... $ 1,392,344 $ 113,364 $ 946,280
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest........................ $ 1,102,460 $ 1,533,826 $ 493,624
=========== =========== ============
Income taxes.................... $ 66,158 $ 35,261 $ 174,735
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS CASH FLOWS--(CONTINUED)
SUMMARY OF NONCASH TRANSACTIONS:
During the years ended December 28, 1996 and December 30, 1995, the Company
issued $237,216 and $445,333, respectively, of subordinated debt in lieu of
payment of interest.
During the years ended December 28, 1996, December 30, 1995 and December 31,
1994, the Company declared dividends on preferred stock of $146,188, $292,383
and $31,241, respectively. In conjunction with Company's initial public
offering, all shares of preferred stock were converted into common stock and
all accumulated dividends, and accrued interest on those dividends, through
the date of the offering were irrevocably waived by the holders of the
preferred stock as of August 13, 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.
26
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
1. 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.
Cash and Cash Equivalents--Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when purchased.
Accounts Receivable--The Company records an allowance to provide for
uncollectable accounts receivable. This allowance is determined based on the
historical rate of bad debts applied to current balances. In 1996 and 1995,
the Company had write-offs of accounts receivable against this allowance of
$109,803 and $34,221, respectively. Bad debt expense for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 was $189,161,
$146,004, and $34,180, respectively. Amounts collected for previously written
off accounts are credited to miscellaneous income.
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 1996, 1995, and 1994, advertising expense was
$13.4 million, $16.3 million and $12.2 million, respectively.
Property and Equipment--Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets.
Amortization is computed on the straight-line method over the lesser of the
estimated useful lives of the related assets or the lease terms.
Other Assets--Other assets consist primarily of trademarks and deferred
financing costs. Trademarks are stated at cost less accumulated amortization.
Amortization is computed on a straight-line basis over 37 years. At December
28, 1996 and December 30, 1995, the Company had $35,685 and $33,870,
respectively, 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 28, 1996 and December
30, 1995 deferred financing costs were $287,804 and $397,091, respectively.
27
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--The Company uses the asset and liability method of accounting
for deferred income taxes. The provision for income taxes includes income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
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 28, 1996 and December 30, 1995, due to the short-term
maturities of these investments. The carrying value and fair value of the
Company's long-term debt at December 28, 1996 was $10,152,325. The fair value
of the Company's long-term debt is based on the subsequent repayment of the
Company's long-term debt in March 1997 (See Note 16).
Net Income Per Share--Net income per share is calculated using the weighted
average number of common shares and common equivalent 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 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 has disclosed 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
." 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.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which is effective for financial statements issued for
periods ending after December 15, 1997. This statement requires the disclosure
of basic and diluted per share computations. The Company has not yet
determined the impact of this statement to its earnings per share.
28
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 28, 1996,
December 30, 1995 and December 31, 1994, each consisted of 52 weeks.
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.
Management bases its estimates on historical experiences and on various
assumptions which are believed to be reasonable under the circumstances.
Reclassifications--Certain amounts in the 1994 and 1995 financial statements
have been reclassified to conform to the 1996 presentation.
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.
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 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 $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.
29
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reorganization items consist of the following:
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Interest income.............................................. $ 103,308
Professional fees............................................ (2,133,117)
Executive and employee compensation.......................... (533,840)
Other........................................................ (326,058)
-----------
$(2,889,707)
===========
</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 28, 1996 and December 30, 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred catalog costs............................. $2,206,141 $2,320,261
Prepaid advertising................................ 1,043,005 825,064
Other.............................................. 628,387 317,493
---------- ----------
$3,877,533 $3,462,818
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 28, 1996 and December 30, 1995 consists
of the following:
<TABLE>
<CAPTION>
USEFUL
LIFE 1996 1995
------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment................ 7 years $ 1,141,835 $ 1,139,016
Data processing equipment.............. 5 years 2,856,930 2,734,186
Leasehold improvements................. (i) 115,069 109,146
----------- -----------
4,113,834 3,982,348
Less accumulated depreciation and
amortization.......................... (3,298,109) (3,040,751)
----------- -----------
$ 815,725 $ 941,597
=========== ===========
</TABLE>
(i) Lesser of the estimated useful lives of the related assets or the
lease term.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 28, 1996 and December 30,
1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable.................................... $1,312,352 $3,368,865
Accrued compensation................................ 444,706 490,227
Accrued interest.................................... 357,542 148,865
Other accrued expenses.............................. 538,934 722,979
---------- ----------
$2,653,534 $4,730,936
========== ==========
</TABLE>
30
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LIABILITIES TO CUSTOMERS
Liabilities to customers at December 28, 1996 and December 30, 1995 consist
of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred revenue......................................... $175,780 $114,636
Reserve for returns...................................... 515,597 641,266
-------- --------
$691,377 $755,902
======== ========
</TABLE>
Deferred revenues reflect cash received from customers for back ordered
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 at December 28, 1996 and December 30, 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<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.......... $ 5,400,000 $11,500,000
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.................................................. 682,549 445,333
Junior Subordinated Note, 11.5%, payable August 12,
1999.................................................. 389,590 --
----------- -----------
10,152,325 15,625,519
Less current portion................................... 2,005,714 2,750,000
----------- -----------
$ 8,146,611 $12,875,519
=========== ===========
</TABLE>
The Company entered into a new credit agreement with The First National Bank
of Boston on March 12, 1997 (the "BKB Agreement") for the purpose of
refinancing the existing senior and subordinated debt and to provide for the
capital expenditures and working capital needs of the Company. The BKB
Agreement includes a $5,000,000 term loan and a $6,000,000 revolving credit
facility. The interest rate on the borrowings will vary subject to certain
financial ratios and outstanding borrowings. The BKB Agreement has a maturity
of four years from the closing. The term loan is to be repaid in quarterly
installments commencing September 30, 1997 with payments totalling $750,000 in
1997, $1,250,000 per year for 1998, 1999 and 2000, and $500,000 in 2001. The
Term loan is subject to accelerated prepayment clauses equal to 100% of the
net proceeds from sale of certain assets of the Company or debt or equity
offerings.
The BKB Agreement will be cross collateralized by a first perfect security
interest in all tangible and intangible assets of the Company. The BKB
Agreement is subject to certain covenants, including but not limited to
leverage and debt service coverage ratios, minimum earnings requirements, and
a restriction on the payment of cash dividends on the Company's Common Stock.
The BKB Agreement has been used to repay all the BNP obligations on March
12, 1997. On March 18, 1997, the Company repaid $1,896,913 of principal and
accrued interest on the SC Holdings LLC Subordinated Note and SC Holdings PIK
Note, with $1,765,767 repaid from proceeds from the BKB Agreement and $131,146
repaid through the forgiveness of the note receivable from a stockholder (see
Note 12).
SC Holdings LLC is a limited liability company whose stockholders owned 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
prior to the conversion of the 13% Preferred Stock to Common Stock
coincidental with the initial public offering.
31
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1996 and 1995, the Company issued $237,216 and $445,333,
respectively, of additional Subordinated Notes as payment of interest for the
periods January 1996 through June 1996 and November 1994 through December
1995, respectively.
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 and recorded as additional paid-in capital.
The aggregate maturities of long-term debt after December 28, 1996 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -----------
<S> <C>
1997........................................................... $ 2,005,714
1998........................................................... 2,314,286
1999........................................................... 1,469,590
2000........................................................... --
2001........................................................... --
2002 and thereafter............................................ 4,362,735
-----------
$10,152,325
===========
</TABLE>
8. PREFERRED STOCK
On November 30, 1994, the Company issued 22,491 shares of 13% Preferred
Stock. Coincidental with the Company's initial public offering on October 17,
1996, all outstanding shares of preferred stock were converted into 375,000
shares of common stock. All accumulated dividends, and accrued interest on
those dividends through the date of the offering, were irrevocably waived by
the holders of the preferred stock as of August 13, 1996.
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 Corporation
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 were entitled to one vote per share
while holders of Class B and Class C shares were entitled to one-half vote per
share and one and one-half votes per share, respectively. All dividend and
liquidation rights remained unchanged. Upon sale, disposition or other
transfer of any share(s) of Class B common stock by the original holder
thereof, (i) such
32
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
On October 17, 1996, the Company completed an initial public offering of 1.5
million shares of its common stock at an initial offering price of $6.50 per
share. Net proceeds to the Company after offering expenses was $7,754,760.
Coincidental with the offering, the Company increased the number of authorized
common shares from 6,510,200 to 10 million, converted on a one-for-one basis
the outstanding shares of Class A, Class B and Class C shares into common
stock, and effected a 325.51-for-one split of outstanding common stock. All
numbers of common shares and per share data in the accompanying consolidated
financial statements have been adjusted for the stock split.
Stock Compensation Plan--On October 17, 1996, the Company adopted the 1996
Stock Option Plan (the "Plan") which authorized the purchase of up to 500,000
shares of Common Stock through the grant of stock options and awards of
restricted stock. Each option has a maximum term of ten years from the date of
grant, subject to early termination. The per share exercise price for options
granted under the Plan will be not less than the fair market value of a share
of the Company's common stock on the date of the grant.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
PRICE PER EXERCISE
SHARES SHARE PRICE
------- ----------- --------
<S> <C> <C> <C>
Outstanding, January, 1994................... -- -- --
Granted...................................... 582,999 $ 0.31 $0.31
Exercised.................................... -- -- --
Forfeited or expired......................... -- -- --
------- ----------- -----
Outstanding December 31, 1994................ 582,999 $ 0.31 $0.31
Granted...................................... -- -- --
Exercised.................................... -- -- --
Forfeited or expired......................... -- -- --
------- ----------- -----
Outstanding, December 30, 1995............... 582,999 $ 0.31 $0.31
Granted...................................... 327,150 $5.33-$6.50 $6.23
Exercised.................................... -- -- --
Forfeited or expired......................... (7,500) $ 6.50 $6.50
------- ----------- -----
Outstanding, December 28, 1996............... 902,649 $0.31-$6.50 $2.40
======= =========== =====
</TABLE>
Options exercisable at December 28, 1996 and December 30, 1995 were 538,444
and 60,618, respectively. The options outstanding as of December 28, 1996 have
weighted average remaining contractual lives of 7.9 years for the $0.31
options issued in 1994 and 9.8 years for the options granted in 1996.
33
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB 25 and related Interpretations in accounting for the
Plan and therefore no compensation cost has been recognized for options
granted under the Plan provisions. Had compensation cost been determined based
on the fair value at the grant dates for options granted with the method
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-based Compensation", the Company's net income available to common
shareholders and earnings per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net Income:
As reported............................................ $973,259 $229,879
======== ========
Pro forma.............................................. $925,385 $229,879
======== ========
Earnings per share:
As reported............................................ $ 0.25 $ 0.08
======== ========
Pro forma.............................................. $ 0.23 $ 0.08
======== ========
</TABLE>
The fair value of each option grant used to compute pro forma net income and
earnings per share disclosures is the estimated present value on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1996 and 1995: expected volatility 60.14%; a risk free
interest rate of 6.38%; and an expected holding period of 6 years.
Stock Warrants--In connection with the issuance of 11.5% junior subordinated
notes on August 12, 1996, the Company issued warrants to purchase 265,335
shares of common stock for an aggregate exercise price of $500,000 ($1.8844
per share). The warrants expire on September 30, 1999. The notes have been
discounted using an effective interest rate of 21.5%, which represents the
Company's borrowing rate for junior subordinated debt at the date of the
transaction. The remainder of the consideration paid totaling $119,061 was
assigned to the warrants and was booked as an addition to additional paid-in
capital.
10. RESTRUCTURING CHARGES
During 1995, the Company restructured by consolidating its operations in one
geographic area in order to reduce costs and utilize resources more
efficiently. Specifically, restructuring charges include:
<TABLE>
<S> <C>
Office Closure Costs.............................................. $212,860
Employee Severance................................................ 300,083
--------
Total........................................................... $512,943
========
</TABLE>
Included in accrued expenses at December 28, 1996 and December 30, 1995 are
accrued restructuring related charges of $0 and $151,976, respectively.
34
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following at December 28,
1996, December 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 30,696 $ -- $ 5,046
State......................................... 4,097 5,756 147,614
-------- -------- --------
34,793 5,756 152,660
-------- -------- --------
Deferred:
Federal....................................... 517,866 298,196 293,500
State......................................... 91,388 52,623 51,794
-------- -------- --------
609,254 350,819 345,294
-------- -------- --------
Total....................................... $644,047 $356,575 $497,954
======== ======== ========
</TABLE>
Deferred income tax assets and liabilities consist of the following at
December 28, 1996 and December 30, 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.................. $6,582,150 $7,229,484
Operating reserves................................ 154,476 200,165
Inventory......................................... 312,484 226,990
Other............................................. 28,452 5,044
---------- ----------
7,077,562 7,661,683
---------- ----------
Deferred income tax liabilities:
Deferred catalog costs............................ 882,456 850,259
Other............................................. 25,004 32,068
---------- ----------
907,460 882,327
---------- ----------
Net deferred income tax asset....................... $6,170,102 $6,779,356
========== ==========
</TABLE>
Reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate........................ 34.0% 34.0% 34.0%
State taxes, net of Federal income tax benefits.......... 5.8 6.6 7.2
---- ---- ----
39.8% 40.6% 41.2%
==== ==== ====
</TABLE>
The Company has recorded a deferred tax asset of $6,170,102 reflecting the
benefit of $16,455,376 of net operating loss carryforwards which expire in
varying amounts between 2005 and 2010, for federal purposes. Realization is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. The use of the net operating losses is subject to an
annual limitation of $1,555,125 due to a change in control of the Company
pursuant to Section 382 of the Internal Revenue Code. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized.
35
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company has a note receivable from a stockholder in the amount of
$140,174 at December 28, 1996 and 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
26,535 shares of Common Stock and $80,186 of Subordinated Notes. On March 18,
1997 this note receivable was forgiven in lieu of repaying a portion of the
Subordinated Notes (See Note 7).
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 28, 1996:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1997................................ $123,376
========
</TABLE>
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 years ended December 28, 1996, December 30, 1995 and December
31, 1994 was $362,676, $438,450 and $569,212, 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 $1,575,000 at
December 28, 1996 as follows:
<TABLE>
<S> <C>
1997.............................. $ 505,000
1998.............................. 525,000
1999.............................. 545,000
----------
$1,575,000
==========
</TABLE>
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 $71,176, $67,188 and $59,594 in 1996, 1995 and 1994,
respectively. No discretionary contributions have been made to the plan.
15. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data for the third and fourth quarter of 1996
are displayed in the following table:
<TABLE>
<CAPTION>
1996 3RD QTR 4TH QTR
---- ---------- ----------
<S> <C> <C>
Net Sales......................................... $8,209,754 $9,307,168
Gross Profit...................................... 5,516,524 6,192,718
Net Income........................................ 343,848 480,110
Net Income per common share....................... $0.10 $0.09
</TABLE>
36
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUBSEQUENT EVENTS
In December 1996, the Company was given notice of the termination as of
March 1997 of the lease on one of its facilities. The Company has signed a new
five year and five month lease beginning April 1, 1997 for a 50,000 square
foot facility in an adjacent town. The new lease contains an annual fixed
rental rate of $196,026.
As discussed in Note 7, the Company entered into a new credit agreement with
the First National Bank of Boston on March 12, 1997 for the purpose of
refinancing the existing senior and subordinated debt and to provide for the
capital expenditures and working capital needs of the Company.
37
<PAGE>
SPECIALTY CATALOG CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- ---------- ---------- ---------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 28,
1996:
Allowance for doubtful
accounts.............. $160,000 $ 22,000 -- $ 109,803 $ 72,197
Reserve for returns.... $641,266 -- $7,574,181 $7,699,850 $515,597
Year ended December 30,
1995:
Allowance for doubtful
accounts.............. $ 42,068 $146,004 -- $ 28,072 $160,000
Reserve for returns.... $997,299 -- $8,298,427 $8,654,460 $641,266
Year ended December 31,
1994:
Allowance for doubtful
accounts.............. $ 20,500 $ 34,112 -- $ 12,612 $ 42,000
Reserve for returns.... $847,000 -- $8,617,427 $8,467,128 $997,299
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's Proxy Statement relating
to the 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the following captions in the Company's Proxy
Statement relating to the 1997 Annual Meeting of Shareholders:
"Election of Directors" and "Executive Compensation"
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Principal Shareholders" in the Company's
Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Transactions" in the Company's
Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <C> <S>
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Part II, Item 8 of this
Report
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are listed under Part II, Item 8
of this Report
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(C) of this
Report.
(B) REPORTS ON FORM 8-K
None.
</TABLE>
39
<PAGE>
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*3.1 Certificate of Incorporation of the Registrant, as amended. Filed as
Exhibit 3.01 to Specialty Catalog Corp.'s Form S-1, File No. 333-
10793.
*3.2 By-Laws of the Registrant, as amended. Filed as Exhibit 3.02 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*4.1 Specimen Certificate representing the Common Stock, par value $0.01
per share. Filed as Exhibit 4.01 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.1 1996 Stock Option Plan. Filed as Exhibit 10.01 to Specialty Catalog
Corp.'s Form S-1, File No. 333-10793.
*10.2 Employment Agreement dated as of October 4, 1996 between the
Registrant and Steven L. Bock. Filed as Exhibit 10.02 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.3 Employment Agreement dated as of October 4, 1996 between the
Registrant and Stephen M. O'Hara. Filed as Exhibit 10.03 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.4 Credit Agreement dated November 24, 1994 between the Bank Nationale de
Paris ("BNP") and Wigs By Paula, Inc., predecessor to the Registrant
("Wigs"). Filed as Exhibit 10.04 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.5 First Amendment, Waiver and Consent to the Credit Agreement dated
August 16, 1995 between BNP and the Registrant. Filed as Exhibit 10.05
to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.6 Second Amendment, Waiver and Consent to the Credit Agreement dated
August 14, 1996 between BNP and the Registrant. Filed as Exhibit 10.06
to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.7 Security Agreement dated as of November 23, 1994 between Wigs and BNP.
Filed as Exhibit 10.07 to Specialty Catalog Corp.'s Form S-1, File No.
333-10793.
*10.8 Trademark and Copyright Security Agreement dated as of November 23,
1994 between Wigs, BNP and other guarantors named therein. Filed as
Exhibit 10.08 to Specialty Catalog Corp.'s Form S-1, File No. 333-
10793.
*10.9 Pledge Agreement dated as of November 23, 1994 between SC Corporation
and BNP. Filed as Exhibit 10.09 to Specialty Catalog Corp.'s Form S-1,
File No. 333-10793.
*10.10 Pledge Agreement dated as of November 23, 1994 between the Registrant,
SC Holdings, L.L.C. and BNP. Filed as Exhibit 10.10 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.11 Guaranty dated November 23, 1994 between the Registrant, Western
Schools, Inc., Royal Advertising & Marketing, Inc., BNP and the Hedge
Banks. Filed as Exhibit 10.11 to Specialty Catalog Corp.'s Form S-1,
File No. 333-10793.
*10.12 Guaranty dated November 23, 1994 between SC Corporation, BNP, and the
Hedge Banks. Filed as Exhibit 10.12 to Specialty Catalog Corp.'s Form
S-1, File No. 333-10793.
*10.13 Guaranty dated November 30, 1994 between the Registrant, SC Holdings
L.L.C., BNP, and the Hedge Banks. Filed as Exhibit 10.13 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.14 Agreement dated June 1, 1996 between SC Direct, Inc., the Registrant
and Martin E. Franklin. Filed as Exhibit 10.14 to Specialty Catalog
Corp.'s Form S-1, File No. 333-10793.
*10.15 Debtor Securities Purchase Agreement dated November 23, 1994 between
WIGS, L.P. and SC Corporation. Filed as Exhibit 10.15 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.16 Pledge and Security Agreement dated November 30, 1994 between WIGS,
L.P. and SC Corporation. Filed as Exhibit 10.16 to Specialty Catalog
Corp.'s Form S-1, File No. 333-10793.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.17 Promissory Note dated November 23, 1994 in the principal amount of
$147,583 from WIGS, L.P. to SC Corporation. Filed as Exhibit 10.17 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.18 Lease dated July 10, 1985 between Simon D. Young, Trustee of the
Sandpy Realty Trust, ("Trustee") , and Wigs for premises located at 21
Bristol Drive, South Easton, MA. Filed as Exhibit 10.18 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
*10.19 First Amendment of Lease, dated March 15, 1986, between the Trustee
and Wigs. Filed as Exhibit 10.19 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.20 Second Amendment to Lease, dated March 1, 1989, between the Trustee
and Wigs. Filed as Exhibit 10.20 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.21 Third Amendment to Lease, dated October 22, 1993 between the Trustee
and Wigs. Filed as Exhibit 10.21 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.22 Letter Agreement, dated February 21, 1995 between the Trustee and SC
Corporation. Filed as Exhibit 10.22 to Specialty Catalog Corp.'s Form
S-1, File No. 333-10793.
*10.23 Lease, dated October 20, 1995 between Fredric Snyderman as Trustee of
JV Realty Trust and SC Direct Inc. for the premises at 23 Norfolk
Avenue. Filed as Exhibit 10.23 to Specialty Catalog Corp.'s Form S-1,
File No. 333-10793.
*10.24 Printing Agreement, dated January 1, 1995 between Quebecor Printing
(USA) Corp. and the Registrant, as amended. Filed as Exhibit 10.24 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.25 Amended and Restated Registration Rights Agreement, dated October 3,
1996 between the Registrant and certain of the Registrant's
stockholders, as amended. Filed as Exhibit 10.25 to Specialty Catalog
Corp.'s Form S-1, File No. 333-10793.
*10.26 First Amended and Restated Joint Plan of Reorganization of SC
Corporation, Western Schools, Inc. and Wigs by Paula dated September
21, 1994. Filed as Exhibit 10.26 to Specialty Catalog Corp.'s Form S-
1, File No. 333-10793.
*10.27 AT&T Contract Tariff Order dated February 9, 1995 between AT&T and the
Registrant. Filed as Exhibit 10.27 to Specialty Catalog Corp.'s Form
S-1, File No. 333-10793.
*10.28 Shareholder's Agreement dated as of November 30, 1994 between the
Registrant, SC Holdings L.L.C., SC Corporation and certain
shareholders. ("Shareholder's Agreement"). Filed as Exhibit 10.28 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.29 Amendment No. 1 to Shareholder's Agreement. Filed as Exhibit 10.29 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.30 SC Holdings L.L.C. Limited Liability Company Agreement. Filed as
Exhibit 10.30 to Specialty Catalog Corp.'s Form S-1, File No. 333-
10793.
*10.31 Supplemental Defined Contribution Plan. Filed as Exhibit 10.31 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.32 Form of Indemnification Agreement of Directors. Filed as Exhibit 10.32
to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.33 Form of Warrant, dated August 12, 1996. Filed as Exhibit 10.33 to
Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.34 Form of Subordinated Note, dated August 12, 1996. Filed as Exhibit
10.34 to Specialty Catalog Corp.'s Form S-1, File No. 333-10793.
*10.35 Fee Letter. Filed as Exhibit 10.35 to Specialty Catalog Corp.'s Form
S-1, File No. 333-10793.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.36 Net Building Lease dated March 7, 1997 between Campanelli Investment
Properties and the Registrant for premises located at 525 Campanelli
Industrial Drive, Brockton, MA.
10.37 Credit Agreement dated March 12, 1997 between The First National Bank
of Boston and the Registrant.
10.38 Amendment No. 2 to Printing Agreement, dated January 1, 1995 between
Quebecor Printing (USA) Corp. and the Registrant, as amended, dated
December 31, 1996.
11.1 Statement Regarding Computation of Per Share Earnings.
*21.1 Subsidiaries of the Registrant. Filed as Exhibit 21.01 to Specialty
Catalog Corp.'s Form S-1, File No. 333-10793.
27.1 Financial Data Schedule (for EDGAR filing purposes only).
</TABLE>
- --------
* Indicates exhibit previously filed with the Securities and Exchange
Commission on the Registrant's registration statement on Form S-1
(registration No. 333-10793) and is hereby incorporated by reference.
42
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED.
Specialty Catalog Corporation
/s/ Steven L. Bock
By: _________________________________
STEVEN L. BOCK
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
/s/ J. William Heise
By: _________________________________
J. WILLIAM HEISE
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATE INDICATED.
SIGNATURES TITLE DATE
/s/ Stephen L. Bock Director and Chief March 24, 1997
_____________________________________ Executive Officer
STEVEN L. BOCK (Principal
Executive Officer)
/s/ Stephen M. O'Hara President March 24, 1997
_____________________________________
STEPHEN M. O'HARA
/s/ J. William Heise Senior Vice March 24, 1997
_____________________________________ President and Chief
J. WILLIAM HEISE Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ Alan S. Cooper Director March 24, 1997
_____________________________________
ALAN S. COOPER
/s/ Martin E. Franklin Director March 24, 1997
_____________________________________
MARTIN E. FRANKLIN
/s/ Samuel L. Katz Director March 24, 1997
_____________________________________
SAMUEL L. KATZ
/s/ Guy Naggar Director March 24, 1997
_____________________________________
GUY NAGGAR
43
<PAGE>
Exhibit 10.36
Net Building Lease
by and between
Joseph Campanelli, Nicholas Campanelli,
Alfred Campanelli, and Ronald Campanelli, as
Trustees of Campanelli Investment Properties, Landlord
and
SC Corporation
dated March 6, 1997
<PAGE>
Table of Contents
-----------------
ARTICLE I - Reference Data
- --------- --------------
1.1 Subjects Referred To..................................................
1.2 Exhibits..............................................................
ARTICLE II - Premises and Term
- ---------- -----------------
2.1 Premises..............................................................
2.2 Term..................................................................
2.2A Option to Terminate...................................................
2.3 Option to Extend......................................................
ARTICLE III - Landlord's Work
- ----------- ---------------
ARTICLE IV - Rent
- ---------- ----
4.1 The Fixed Rent........................................................
4.2 Real Estate Taxes.....................................................
4.3 Shared Costs..........................................................
4.4 Utilities.............................................................
4.5 Late Payment of Rent..................................................
ARTICLE V - Tenant's Additional Covenants
- --------- -----------------------------
5.1 Affirmative Covenants.................................................
5.1.1 Perform Obligations...........................................
5.1.2 Use...........................................................
5.1.3 Repair and Maintenance........................................
5.1.4 Compliance with Law...........................................
5.1.5 Tenant's Work.................................................
5.1.6 Indemnity.....................................................
5.1.7 Landlord's Right to Enter.....................................
5.1.8 Personal Property at Tenant's Risk............................
5.1.9 Payment of Cost of Enforcement................................
5.1.10 Yield Up......................................................
5.1.11 Estoppel Certificate..........................................
5.1.12 Landlord's Expenses re Consents...............................
5.1.13 Financial Statements..........................................
5.2 Negative Covenants....................................................
5.2.1 Assignment and Subletting.....................................
5.2.2 Overloading and Nuisance......................................
5.2.3 Installation, Alterations or Additions........................
ARTICLE VI - Casualty or Taking
- ---------- ------------------
6.1 Termination...........................................................
6.2 Restoration...........................................................
6.3 Award.................................................................
-i-
<PAGE>
ARTICLE VII - Defaults
- ----------- --------
7.1 Events of Default......................................................
7.2 Remedies...............................................................
7.3 Remedies Cumulative....................................................
7.4 Landlord's Right to Cure Defaults......................................
7.5 Effect of Waivers of Default...........................................
7.6 No Accord and Satisfaction.............................................
ARTICLE VIII - Mortgages
- ------------ ---------
8.1 Rights of Mortgage Holders.............................................
8.2 Lease Subordinate to Mortgages.........................................
ARTICLE IX - Miscellaneous Provisions
- ---------- ------------------------
9.1 Notices from One Party to the Other....................................
9.2 Quiet Enjoyment........................................................
9.3 Lease Not To Be Recorded...............................................
9.4 Bind and Inure; Limitation of Landlord's
Liability .........................................................
9.5 Landlord's Default.....................................................
9.6 Brokerage .........................................................
9.7 Applicable Law and Construction........................................
9.7.1 Applicable Law...................................................
9.7.2 No Other Agreement...............................................
9.7.3 No Representations by Landlord...................................
9.7.4 Titles...........................................................
9.7.5 "Landlord" and "Tenant"..........................................
9.8 Submission Not an Offer................................................
9.9 Landlord's Waiver......................................................
EXHIBITS
EXHIBIT A-1 - Site Plan
EXHIBIT B-1 - Office Floor Plan
EXHIBIT B-2 - Floor Plan Showing Premises
EXHIBIT C - Description of Landlord's Work
EXHIBIT D - Projected Shared Costs Budget
EXHIBIT E - Approved Alterations
EXHIBIT F - Form of Landlord's Waiver
-ii-
<PAGE>
ARTICLE I
Reference Data
--------------
1.1 Subjects Referred To.
--------------------
Each reference in this Lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this Section 1.1.
Date of this Lease: ______________, 1997
Premises: The 50,263 rentable square foot area shown on Exhibit
B-2 attached hereto in the 300,114 rentable square
foot building ("Building") located at 525 Campanelli
Industrial Drive, Brockton, Massachusetts, including
75 parking spaces, as shown on the plan attached
hereto as Exhibit A-1
Landlord: Joseph Campanelli, Nicholas Campanelli, Ronald
Campanelli and Alfred Campanelli, as Trustees of
Campanelli Investment Properties, under declaration of
trust dated July 6, 1962, recorded with the Middlesex
South Registry of Deeds in Book 10095, Page 307, as
amended
<PAGE>
Address of
Landlord: One Campanelli Drive
P.O. Box 850985
Braintree, MA 02185-0985
Tenant: SC Corporation, a Delaware corporation
Address of Tenant: 21 Bristol Drive
South Easton, Massachusetts 02375
Term: Commencing on April 1, 1997 (as the same
may be modified pursuant to Section 2.2)
and terminating on August 31, 2002
Annual Fixed
Rent Rate: $196,026.00 per annum ($16,335.50
monthly)
Permitted Uses: Warehouse and distribution, with
ancillary office, showroom and retail use
Public Liability
Insurance Limits: Bodily Injury: $2,000,000
Property Damage: $2,000,000
Tenant's Share: 16.7%
-2-
<PAGE>
ARTICLE II
Premises and Term
-----------------
2.1 Premises. Landlord hereby leases and demises to Tenant and Tenant
--------
hereby leases from Landlord, subject to and with the benefit of the terms,
covenants, conditions and provisions of this Lease, the Premises. Tenant shall
have, as appurtenant to the Premises, the right to use in common with others
entitled thereto the driveways on the parcel of land on which the Building is
located (the "Lot") (the Building and the Lot are hereafter referenced as the
"Property"), and the exclusive right to use the parking area shown on Exhibit
A-1 (subject to rights of passage thereover for other tenants of the Building).
Landlord and Tenant acknowledge that the Premises constitute a portion of the
premises under a lease (the "Prime Lease") from the predecessor in interest to
Landlord to the predecessor in interest to Footstar Corporation, a Texas
corporation (the "Sublandlord") dated October 15, 1968 as subleased from
Sublandlord to Landlord pursuant to a sublease on or about the date hereof (the
"Sublease"). Consequently, (i) during the pendency of the Prime Lease and the
Sublease, this Lease shall constitute a sub-sublease between Landlord as
sub-sublandlord and tenant as sub-subtenant and (ii) after the termination of
the Prime Lease, this Lease shall constitute a direct lease between Landlord and
Tenant.
2.2 Term. TO HAVE AND TO HOLD for the Term, unless sooner terminated as
----
hereinafter provided. Tenant acknowledges that prior to April 1, 1997, Landlord
will be performing Landlord's Work (as defined in Article III) in the Premises.
Tenant shall
-3-
<PAGE>
cooperate with Landlord and conduct its operations so as to permit
Landlord to achieve such completion as promptly as possible. Landlord will
cooperate with Tenant and provide Tenant reasonable access to the Premises prior
to the commencement of the Term; provided, however, that Tenant's access shall
not materially impede Landlord's completion of the Landlord's Work. If Tenant
occupies the Premises prior to April 1, 1997, it shall so occupy them on all of
the terms and conditions of this Lease, except that the Rent set forth in
Article IV hereof shall not be payable for the period prior to April 1, 1997
with the exception of Tenant's obligations to pay for utilities servicing the
Premises which obligation shall commence upon such occupancy. Notwithstanding
anything to the contrary herein, the Term shall not commence (and Annual Fixed
Rent shall not be payable) until the Landlord has substantially completed the
Landlord's Work with the exception of so-called punch list items having an
aggregate cost of no more than $15,000.00. Upon such substantial completion, at
the request of either party, the other party will execute a certificate
evidencing such substantial completion.
2.2A Option to Terminate. Provided that (a) Tenant is not in default
-------------------
under this Lease at the time it delivers the Termination Notice (as hereinafter
defined) and (b) Tenant delivers with the Termination Notice the Termination Fee
(as hereinafter defined), Tenant shall have the right to cause the Term of this
Lease to expire on any date (the "Termination Date") after the third anniversary
of the Commencement Date upon ninety (90) days' prior written notice (the
"Termination Notice") to
-4-
<PAGE>
Landlord. The Termination Fee shall mean a sum equal to one-half of the Annual
Fixed Rent to become due and payable between the Termination Date and August 31,
2002. Tenant's option under this Section 2.2A shall cease to be effective and
shall become null and void upon Tenant's exercise of its option to extend under
Section 2.3 hereof.
2.3 Option to Extend. Provided that (a) the other tenant of the
----------------
Building has not exercised its option to expand its premises (which option shall
be conditioned upon its exercise on or prior to September 1, 2001), and (b)
Tenant is not in default under this Lease at the time of exercise or extension
hereunder, Tenant shall have one right and option to extend the Term for an
additional period of five (5) years. Such option shall be exercised by written
notice from Tenant to Landlord given by no earlier than September 1, 2001 and no
later than December 1, 2001. If such option is so exercised, all of the terms,
covenants, conditions and provisions of this Lease shall apply during the Term
as extended, except that the Fixed Rent Rate shall be Two Hundred Twenty-One
Thousand One Hundred Fifty-Seven and 20/100 Dollars ($221,157.20) per annum,
payable monthly in installments of Eighteen Thousand Four Hundred Twenty-Nine
and 77/100 ($18,429.77) Dollars. Unless the context clearly requires otherwise,
the word "Term" as used in this Lease shall mean and include the period set
forth in Section 1.1 above and the period as to which the option set forth
herein has been exercised.
-5-
<PAGE>
ARTICLE III
Landlord's Work
---------------
Landlord shall cause to be performed the work required by Exhibit C
("Landlord's Work"). All such work shall be done in a good and workmanlike
manner employing good materials and so as to conform to all applicable
governmental laws, ordinances and regulations. Landlord shall use reasonable
efforts to complete Landlord's Work by no later than April 1, 1997. In addition,
upon a mutually satisfactory schedule, Landlord shall have the Premises wet
vacuumed once. Until the 3,600 square foot office area shown on Exhibit B-1 has
been completed, Landlord agrees to provide to Tenant an equivalent area of
office space elsewhere in the Building to allow Tenant to commence its business
operations. Additionally, until the warehouse portion of the Premises has been
substantially completed, Landlord, at the request of Tenant, will provide space
within the Building but outside of the Premises for Tenant's warehousing upon
compliance with Landlord's reasonable requirements (such as the provision of
evidence of satisfactory insurance with respect to the use thereof).
ARTICLE IV
Rent
----
4.1 The Fixed Rent. Tenant covenants and agrees to pay rent to Landlord
--------------
at the Address of Landlord or at such other place or to such other person or
entity as Landlord may by notice to Tenant from time to time direct, at the
Annual Fixed Rent Rate, in equal installments of 1/12th of the Annual Fixed Rent
Rate in advance on
-6-
<PAGE>
the first day of each calendar month included in the Term; and for any portion
of a calendar month at the end of the Term, at that rate payable in advance for
such portion.
4.2 Real Estate Taxes. Tenant shall pay to Landlord in accordance with
-----------------
Section 4.3 below Tenant's Share of: (i) all taxes, assessments (special or
otherwise), levies, fees, and all other government levies and charges, general
and special, ordinary and extraordinary, foreseen and unforeseen, which are, at
any time prior to or during the Term hereof, imposed or levied upon or assessed
against (A) the Property, (B) any Fixed Rent, Additional Rent or other sum
payable hereunder or (C) this Lease, or the leasehold estate hereby created, or
which arise in respect of the leasing, operation, possession or use of the
Property; (ii) all gross receipts or similar taxes imposed or levied upon,
assessed against or measured by any Fixed Rent, Additional Rent or other sum
payable hereunder; and (iii) all sales, value added, use and similar taxes at
any time levied, assessed or payable on account of the leasing or use of the
Property (collectively "taxes and assessments" or if singular "tax or
assessment"); provided that for any fraction of a tax or assessment period, or
installment period thereof, included in the Term at the beginning or end
thereof, Tenant shall pay to Landlord, within ten (10) days after Landlord's
invoice therefor, Tenant's Share of the fraction of taxes and assessments so
levied or assessed or becoming payable which is allocable to such included
period. Nothing contained in this Lease shall, however, require Tenant to pay
any franchise, corporate, estate, inheritance, succession capital levy or
-7-
<PAGE>
transfer tax of Landlord, or any income, profits or revenue tax or charge upon
the rent payable by Tenant under this Lease (other than any tax referred to in
clause (ii) above) unless (a) such tax is imposed, levied or assessed in
substitution for any other tax or assessment which Tenant is required to pay
pursuant to this Section 4.2, or (b) if at any time during the Term of this
Lease, the method of taxation shall be such that there shall be levied, assessed
or imposed on Landlord a capital levy or other tax directly on the rents
received from the Property and/or any tax or assessment measured by or based, in
whole or in part, upon such rents or measured in whole or in part by income from
the Property (if in computing such rents or income there is not allowable as a
deduction for the taxable year substantially all of the depreciation or interest
deductions allowed for federal income tax purposes for the taxable year), or
upon the value of the Property or any present or future improvement or
improvements on the Property, in which case Tenant's Share of all such taxes and
assessments or the part thereof so measured or based ("Substitute Taxes"), shall
be payable by Tenant, provided however, Tenant's obligation with respect to the
aforesaid Substitute Taxes shall be limited to the amount thereof as computed at
the rates that would be payable if the Property were the only property of
Landlord. Landlord shall promptly furnish to Tenant a copy of any notice of any
public, special or betterment assessment received by Landlord concerning the
Premises.
4.3 Shared Costs. Tenant shall reimburse Landlord for Tenant's Share of
------------
taxes, insurance,
-8-
<PAGE>
maintenance, and repair of the Property as set forth in this Section 4.3
("Shared Property Costs"). The initial budget for Shared Property Costs for the
period from March 15, 1997 through December 31, 1998 is attached hereto as
Exhibit D. Tenant shall, together with its payments of Fixed Rent hereunder, and
as Additional Rent hereunder, make monthly payments to Landlord equal to 1/12th
of Tenant's Share of the annual Shared Property Costs, with an appropriate
additional payment by Tenant to Landlord or reimbursement by Landlord to Tenant
upon reconciliation of actual costs, accompanied by supporting data in
reasonable detail, within thirty (30) days after the end of each calendar year
of this Lease and at the end of the Term hereof. For calendar year 1999 and all
subsequent calendar years falling entirely or partially within the Term,
Landlord shall prepare budgets for the Shared Property Costs. It is presently
anticipated by the Landlord that such budgets shall be agreed upon between the
Landlord and the tenant for the remaining space in the Building. Promptly upon
arriving at any revised budget for the Shared Property Costs, Landlord shall
deliver a copy thereof to the Tenant. To the extent that Landlord determines in
its reasonable discretion that it is economically reasonable, Landlord may
purchase a capital item to lower annual operating expenses and include within
each year's Shared Operating Costs the amortized cost of such capital item (with
an interest rate equal to 2% plus the prime rate of interest then in effect for
The First National Bank of Boston or its successors and an amortization period
equal to the useful life (as reasonably determined by the Landlord in accordance
with generally accepted accounting practices) of such
-9-
<PAGE>
capital item). The foregoing sentence shall not be deemed to apply to
expenditures for capital items constituting the Building's system and structures
(for example, the roof and mechanical systems of the Building), but rather shall
apply to items such as snow blowers designed to lower annual operating expenses
incurred in connection with the Building.
4.4 Utilities. The Premises shall be separately metered, and
---------
Tenant shall pay directly to the proper authorities charged with the collection
thereof all charges for water, sewer, gas, electricity, telephone and other
utilities or services used or consumed on the Premises, whether called charge,
tax, assessment, fee or otherwise, including, without limitation, water and
sewer use charges and taxes, if any, all such charges to be paid as the same
from time to time become due. Tenant shall make its own arrangements for such
utilities and Landlord shall be under no obligation to furnish any utilities to
the Premises and shall not be liable for any interruption or failure in the
supply of any such utilities to the Premises.
4.5 Late Payment of Rent. If any installment of Fixed Rent or payment
--------------------
of Additional Rent is paid later than five (5) days after the date the same was
due, it shall bear interest from the due date at the prime commercial rate of
The First National Bank of Boston, as it may be adjusted from time to time, plus
four percent per annum, but in no event more than the maximum rate of interest
allowed by law, the payment of which shall be Additional Rent.
-10-
<PAGE>
ARTICLE V
Tenant's Additional Covenants
-----------------------------
5.1 Affirmative Covenants. Tenant covenants at its sole expense at all
---------------------
times during the Term and for such prior or subsequent time as Tenant occupies
the Premises or any part thereof:
5.1.1 Perform Obligations. To perform promptly all of the
-------------------
obligations of Tenant set forth in this Lease; and to pay when due the Fixed
Rent and Additional Rent and all charges, rates and other sums which by the
terms of this Lease are to be paid by Tenant.
5.1.2 Use. To use the Premises only for the Permitted Uses, and from
---
time to time to procure all licenses and permits necessary therefor at Tenant's
sole expense.
5.1.3 Repair and Maintenance. Except as otherwise provided in
----------------------
Article VI, to keep the Premises including, without limitation, all improvements
thereon and all heating, plumbing, hot water, ventilating, electrical,
air-conditioning, security, alarm, mechanical and other fixtures and equipment
now or hereafter on the Premises in good order, condition and repair and in at
least as good order, condition and repair as they are in on the Commencement
Date; and to make all ordinary repairs and to do all other work necessary for
the foregoing purposes whether the same may be ordinary or extraordinary,
foreseen or unforeseen. To the extent that Tenant is responsible for repair and
maintenance pursuant to this Paragraph, Landlord shall cooperate with Tenant and
provide to Tenant the benefit of any warranties benefitting Landlord. It is
expressly understood and agreed that, except as
-11-
<PAGE>
set forth in the next paragraph, Landlord shall not be obligated during the term
of this Lease to make any repairs or alterations to the Premises.
Landlord shall be responsible for necessary repairs and maintenance to
the roof, structure and exterior of the Building and to maintain in good
condition all lawns and planted areas adjacent to the Premises and to keep in
good repair and clean and neat and free of snow and ice all surfaced roadways,
walks and parking and loading areas adjacent to the Premises, the costs of such
repairs, maintenance and work shall be included in the Shared Operating Costs.
Additionally, Landlord shall be responsible (i) for all capital replacements to
the roof, structure and exterior of the Building except to the extent
necessitated by Tenant's negligence or violation of the terms of this Lease, and
(ii), provided that Tenant has complied with its obligations set forth in the
first paragraph of this Section, all capital replacements of the heating,
plumbing, hot water, ventilating, electrical, air conditioning, security, alarm,
elevator, mechanical and other fixtures and equipment now in the Premises or
placed therein in connection with Landlord's Work.
5.1.4 Compliance with Law. Except as provided in Section 5.1.3, to
-------------------
make all repairs to the Premises required by any law or ordinance or any order
or regulation of any public authority; to keep the Premises equipped with all
safety equipment so required; to pay all municipal, county, or state taxes
assessed against the leasehold interest hereunder, or against personal property
of any kind on or about the Premises; and to comply with
-12-
<PAGE>
the orders, regulations, variances, licenses and permits of or granted by
governmental authorities with respect to zoning, building, fire, health and
other codes, regulations, ordinances or laws applicable to the Premises, and the
condition, use or occupancy thereof, except that Tenant may defer compliance so
long as the validity of any such order, regulation, code, ordinance or law shall
be contested by Tenant or Landlord in good faith and by appropriate legal
proceedings, if Tenant first gives Landlord appropriate assurance reasonably
satisfactory to Landlord against any loss, cost or expense on account thereof,
and provided such contest shall not subject Landlord to criminal penalties or
civil sanctions, loss of property or material civil liability.
5.1.5 Tenant's Work. To procure at Tenant's sole expense all
-------------
necessary permits and licenses before undertaking any work on the Premises; to
do all such work in compliance with the applicable provisions of Section 5.2.3
hereof; to do all such work in a good and workmanlike manner employing materials
of good quality and so as to conform with all applicable zoning, building, fire,
health and other codes, regulations, ordinances and laws; to furnish to Landlord
prior to the commencement of any such work costing in excess of $10,000.00 a
bond or other security acceptable to Landlord assuring that any work commenced
by Tenant will be completed in accordance with the specifications approved in
writing by Landlord, and that no liens for labor or materials will attach to the
Premises with respect to any such work; to pay promptly when due the entire cost
of any work on the Premises undertaken by Tenant so that the Premises shall at
all times be
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free of liens for labor and materials; to employ for such work one or more
responsible contractors whose labor will work without interference with other
labor working on the Premises; to require such contractors employed by Tenant to
carry workmen's compensation insurance in accordance with statutory requirements
and comprehensive public liability insurance covering such contractors on or
about the Premises in amounts that at least equal the limits set forth in
Section 1.1 and to submit certificates evidencing such coverage to Landlord
prior to the commencement of such work; and to save Landlord harmless and
indemnified from all injury, loss, claims or damage to any person or property
occasioned by or growing out of such work.
5.1.6 Indemnity. Tenant shall defend, with counsel selected by
---------
Tenant and reasonably satisfactory to Landlord, all actions, against Landlord,
any partner, trustee, stockholder, officer, director, employee or beneficiary of
Landlord, holders of mortgages on the Premises and any other party having an
interest in the Premises (herein, "Indemnified Parties") with respect to, and
shall pay, protect, indemnify and save harmless, to the extent permitted by law,
all Indemnified Parties from and against, any and all liabilities, losses,
damages, costs, expenses (including reasonable attorneys' fees and expenses),
causes of action, suits, claims, demands or judgments of any nature arising from
(i) injury to or death of any person, or damage to or loss of property, on or
about the Premises or connected with the use, condition or occupancy of any
thereof, (ii) violation by Tenant of this Lease, (iii) any act, fault, omission,
or other misconduct of Tenant or
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<PAGE>
its agents, contractors, licensees, sublessees or invitees, or (iv) any contest
initiated by Tenant referred to in Section 5.1.4. Tenant shall not be liable for
any incidental or consequential damages to Landlord by reason of any default by
Tenant hereunder, whether or not Tenant is notified that such damages may occur.
5.1.7 Landlord's Right to Enter. To permit Landlord and its agents
-------------------------
to enter the Premises at reasonable times upon reasonable advance notice (with
no notice required in the event of an emergency) to examine the Premises, to
make such repairs and replacements as Landlord may elect, without, however, any
obligation to do so (except as otherwise set forth herein), and to show the
Premises to prospective purchasers, lenders and tenants, and, during the last
six months of the Term, to keep affixed in suitable places notices of
availability of the Premises.
5.1.8 Personal Property at Tenant's Risk. All of the furnishings,
----------------------------------
fixtures, equipment, effects and property of every kind, nature and description
of Tenant and of all persons claiming by, through or under Tenant which, during
the continuance of this Lease or any occupancy of the Premises by Tenant or
anyone claiming under Tenant, may be on the Premises, shall be at the sole risk
and hazard of Tenant and if the whole or any part thereof shall be destroyed or
damaged by fire, water or otherwise, or by the leakage or bursting of water
pipes, steam pipes, or other pipes, by theft or from any other cause, no part of
said loss or damage is to be charged to or to be borne by Landlord.
5.1.9 Payment of Cost of Enforcement. To pay on demand Landlord's
------------------------------
expenses, including reasonable attorneys' fees,
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incurred in enforcing any obligation of Tenant under this Lease or in curing any
default by Tenant under this Lease as provided in Section 7.4. Landlord shall
pay on demand Tenant's expenses, including reasonable attorneys' fees, incurred
in enforcing any obligation of Landlord under this Lease.
5.1.10 Yield Up. At the expiration of the Term or earlier
--------
termination of this Lease: to surrender all keys to the Premises, to remove all
furnishings, fixtures, equipment and other personal property (including Tenant's
racking systems) now or hereafter located in the Premises, purchased or leased
by Tenant with its own funds, which are not affixed to the Building or Land or
which Landlord has agreed in writing that Tenant may remove at the expiration of
the Term (Landlord expressly agreeing that Tenant's racking system is to be so
removed), to remove such installations made by Tenant as Landlord may request
and all Tenant's signs wherever located, to repair all damage caused by such
removal and to yield up the Premises (including all installations and
improvements made by Tenant, except for trade fixtures, and such of said
installations or improvements as Landlord shall request Tenant to remove),
broom-clean and in the same good order and repair in which Tenant is obliged to
keep and maintain the Premises by the provisions of this Lease. Any property not
so removed shall be deemed abandoned and may be retained by Landlord or may be
removed and disposed of by Landlord in such manner as Landlord shall determine
and Tenant shall pay Landlord the entire cost and expense incurred by Landlord
in effecting such removal and disposition and in making any incidental repairs
and
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replacements to the Premises. For each day after the expiration of the Term,
or the earlier termination of this Lease, and prior to Tenant's performance of
its obligation to yield up the Premises under this Section 5.1.10, Tenant shall
pay to Landlord as rent an amount equal to one and one-half times the Fixed Rent
computed on a daily basis, together with all Additional Rent payable with
respect to each such day.
5.1.11 Estoppel Certificate. Upon not less than 15 days' prior
--------------------
notice by Landlord, to execute, acknowledge and deliver to Landlord a statement
in writing, addressed to such party as Landlord shall designate in its notice to
Tenant, certifying that this Lease is unmodified and in full force and effect
and that, to its knowledge, Tenant has no defenses, offsets or counterclaims
against its obligations to pay the Fixed Rent and Additional Rent and any other
charges and to perform its other covenants under this Lease (or, if there have
been any modifications that the same is in full force and effect as modified and
stating the modifications and, if there are any defenses, offsets or
counterclaims, setting them forth in reasonable detail), the dates to which the
Fixed Rent and Additional Rent and other charges have been paid and a statement
that Landlord is not in default hereunder (or if in default, the nature of such
default, in reasonable detail). Any such statement delivered pursuant to this
Section 5.1.11 may be relied upon by any prospective purchaser or mortgagee of
the Premises, or any prospective assignee of any such mortgagee.
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5.1.12 Landlord's Expenses Re Consents. To reimburse Landlord
-------------------------------
promptly on demand for all reasonable legal expenses incurred by Landlord in
connection with all requests by Tenant for consent or approval hereunder.
5.1.13 Financial Statements. Tenant shall furnish to Landlord and
--------------------
to any holder of a mortgage on the Premises as Landlord may designate by notice
to Tenant, within 90 days after each fiscal year of Tenant, a current balance
sheet and an annual operating statement, audited and certified by a certified
public accountant acceptable to Landlord (Landlord agreeing that any of the so-
called Big Six accounting firms are acceptable) and to any such holder of a
mortgage.
5.2 Negative Covenants. Tenant covenants at all times during the Term
------------------
and for such further time as Tenant occupies the Premises or any part thereof:
5.2.1 Assignment and Subletting. Without the consent of
-------------------------
Landlord, which consent shall not be unreasonably withheld, not to assign,
transfer, mortgage or pledge this Lease or to grant a security interest in
Tenant's rights hereunder, or to sublease (which term shall be deemed to include
the granting of concessions and licenses and the like) or permit anyone other
than Tenant to occupy all or any part of the Premises or suffer or permit this
Lease or the leasehold interest hereby created or any other rights arising under
this Lease to be assigned, transferred or encumbered, in whole or in part,
whether voluntarily, involuntarily or by operation of law. Without limiting the
foregoing, Landlord shall not be deemed unreasonable in withholding its consent
if
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(i) any defaults then existing with respect to the obligations of Tenant
under this Lease shall not have been cured, or (ii) in the case of a proposed
assignment, sublease or occupancy by another, the proposed assignee, sublessee,
or occupant is not credit worthy or not qualified to do business in the state in
which the Premises are located or such assignee, sublessee, or occupant does not
execute and deliver to Landlord an agreement satisfactory to Landlord by which
such assignee, sublessee or occupant shall be bound by and shall assume all the
obligations of Tenant under this Lease relating to the portion or all of the
Premises acquired by such assignee, sublessee or occupant.
If for any assignment or sublease or occupancy by another, Tenant
receives rent or other consideration, either initially or over the term of the
assignment, sublease or occupancy, in excess of the rent called for hereunder,
or in case of sublease of part of the Premises, in excess of such rent fairly
allocable to the part so subleased, after appropriate adjustments to assure that
all other payments called for hereunder are appropriately taken into account,
Tenant shall pay to Landlord, as Additional Rent, fifty (50%) percent of the
excess of each such payment of rent or other consideration received by Tenant
promptly after its receipt.
For the purposes of this Section 5.2.1, the transfer in the aggregate
in any one year of 10% or more in interest in Tenant (whether stock, partnership
interest or other form of ownership or control) by any person or persons having
an interest in ownership or control of Tenant shall be deemed an assignment of
this Lease. The preceding sentence shall not apply to changes in the
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percentage ownership of the initial Tenant named herein if such initial Tenant
is a corporation and the outstanding voting stock thereof is listed on a
recognized securities exchange.
Any attempted assignment, transfer, mortgage, pledge, grant of security
interest, sublease or other encumbrance shall be void. No assignment, transfer,
mortgage, grant of security interest, sublease or other encumbrance, whether or
not approved, and no indulgence granted by Landlord to any assignee, sublessee
or occupant shall in any way impair Tenant's continuing primary liability (which
after an assignment or subletting shall be joint and several with the assignee
or sublessee) of Tenant hereunder, and no approval in a particular instance
shall be deemed to be a waiver of the obligation to obtain Landlord's approval
in any other case.
5.2.2 Overloading and Nuisance. Not to injure, overload, deface or
------------------------
otherwise harm the Premises; nor commit any nuisance; nor permit the emission of
any objectionable noise or odor; nor make, allow or suffer any waste; not to
dump, flush, or in any way introduce any hazardous substances or any other toxic
substances into the septic, sewage or other waste disposal system serving the
Premises; not to (i) generate, (ii) store or use (except for minimal quantities
typically used in connection with the Permitted Uses and then only in compliance
with any and all Federal, state and local laws and ordinances) or (iii) dispose
of hazardous or toxic substances in or on the Premises, or dispose of hazardous
or toxic substances from the Premises to any other location, or commit or suffer
to be committed in or on the Premises
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any act which would require the filing of notice pursuant to Chapter 232 of the
Acts of 1982, without the prior written consent of Landlord and then only in
compliance with any and all Federal, state and local laws and ordinances
regulating such activity; nor make any use of the Premises which is improper,
offensive or contrary to any law or ordinance or which will invalidate any of
Landlord's insurance; nor conduct any auction, fire, "going out of business" or
bankruptcy sales. "Hazardous substances" and "toxic substances", as used in this
paragraph, shall have the same meanings as defined and used in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C.(S).9061 et seq.; in the Hazardous Materials Transportation Act, 49
-- ---
U.S.C.(S).1802; in the Toxic Substances Act, 15 U.S.C.(S).2601 et seq.; and in
-- ---
the regulations adopted and publications promulgated pursuant to said Acts.
Landlord represents to Tenant that it has no actual notice of any
violation of any law or ordinance regulating hazardous or toxic substances with
respect to the Premises.
5.2.3 Installation, Alterations or Additions. With the exception of
--------------------------------------
alterations and additions not affecting the Building's structure and systems and
costing not more than $5,000.00 in the aggregate, not to make any installations,
alterations or additions in, to or on the Premises (including, without
limitation, buildings, lawns, planted areas, walks, roadways, parking and
loading areas) nor to permit the making of any holes in the walls, partitions,
ceilings or floors, nor permit the painting or placing of any exterior signs,
placards or other
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advertising media, awning, aerials, antennas, or flagpoles, or the like, without
on each occasion obtaining the prior written consent of Landlord, and then only
pursuant to plans and specifications approved by Landlord in advance in each
instance. Notwithstanding the foregoing, Landlord has consented to the
alterations and additions described on Exhibit E attached hereto.
ARTICLE VI
Casualty or Taking
------------------
6.1 Termination. In the event that the Building or the Premises, or any
-----------
material part thereof, shall be taken by any public authority or for any public
use, or shall be destroyed or damaged by fire or casualty, or by the action of
any public authority, then this Lease may be terminated at the election of
Landlord. Such election, which may be made notwithstanding the fact that
Landlord's entire interest may have been divested, shall be made by the giving
of notice by Landlord to Tenant within 30 days after the right of election
accrues. Either Landlord or Tenant may terminate this Lease upon thirty (30)
days prior written notice to the other party in the event of a casualty or
taking which either (i) causes more than fifty percent (50%) of the Premises to
be unusable for the Permitted Uses or (ii) results in damage which can not be
restored within six (6) months after the date thereof, such election to be made
within thirty (30) days after the casualty or taking.
6.2 Restoration. If this Lease is not terminated in accordance with
-----------
Section 6.1, this Lease shall continue in force
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<PAGE>
and a just proportion of the rent reserved, according to the nature and extent
of the damages sustained by the Premises, shall be suspended or abated until the
Premises, or what may remain thereof, shall be put by Landlord in proper
condition for use, which Landlord covenants to do with reasonable diligence to
the extent permitted by the net proceeds of insurance recovered or damages
awarded for such taking, destruction or damage and subject to zoning and
building laws or ordinances then in existence. Net proceeds of insurance
recovered or damages awarded refers to the gross amount of such insurance or
damages less the reasonable expenses of Landlord in connection with the
collection of the same, including without limitation, fees and expenses for
legal and appraisal services.
6.3 Award. Except as otherwise set forth in this paragraph,
-----
irrespective of the form in which recovery may be had by law, all rights to
damages or compensation shall belong to Landlord in all cases. Tenant hereby
grants to Landlord all of Tenant's rights to such damages and covenants to
deliver such further assignments thereof as Landlord may from time to time
request. Tenant may separately pursue an award for its personal property,
equipment, and moving expenses, and, at no cost to Landlord, Landlord shall
cooperate with Tenant with respect to the same.
ARTICLE VII
Defaults
--------
7.1 Events of Default. (a) If Tenant shall default in the performance
-----------------
of any of its obligations to pay the Fixed Rent or
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<PAGE>
Additional Rent hereunder and if such default shall continue for 5 days after
notice from Landlord designating such default or (b) if Tenant shall default in
the performance of any of its other obligations under this Lease and such
default shall continue for 30 days after notice from Landlord to Tenant
designating such default or such longer period as is reasonably necessary
provided such default is not curable within thirty (30) days but Tenant
commences curing such default within thirty (30) days of such notice and
thereafter diligently prosecutes the same, or (c) if Tenant becomes insolvent or
fails to pay its debts as they fall due, or (d) if a trust mortgage or
assignment is made by Tenant for the benefit of creditors, or (e) if Tenant
proposes a composition, arrangement, reorganization or recapitalization with
creditors, or (f) if the leasehold estate under this Lease or any substantial
part of the property of Tenant is taken on execution, or by other process of
law, or is attached or subjected to any other involuntary encumbrance, or (g) if
a receiver, trustee, custodian, guardian, liquidator or similar agent is
appointed with respect to Tenant or if any such person or a mortgagee, secured
party or other creditor takes possession of the Premises or of any substantial
part of the property of Tenant and if such appointment or taking of possession
is not terminated within sixty (60) days after it first occurs, or (h) if a
petition is filed by or with the consent of Tenant under any federal or state
law concerning bankruptcy, insolvency, reorganization, arrangement, or relief
from creditors, or (i) if a petition is filed against Tenant under any federal
or state law concerning bankruptcy, insolvency,
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<PAGE>
reorganization, arrangement, or relief from creditors, and such petition is not
dismissed within 60 days thereafter, or (j) if Tenant dissolves or is dissolved
or liquidates or adopts any plan or commences any proceeding, the result of
which is intended to include dissolution or liquidation, or (k) if Tenant
violates the provisions of Section 5.2.1 of this Lease, then, and in any of such
cases, Landlord and the agents and servants of Landlord lawfully may, in
addition to and not in derogation of any remedies for any preceding breach of
covenant, immediately or at any time thereafter and without demand or notice and
with or without process of law (forcibly, if necessary) enter into and upon the
Premises or any part thereof in the name of the whole or mail a notice of
termination addressed to Tenant, and repossess the same as of Landlord's former
estate and expel Tenant and those claiming through or under Tenant and remove
its and their effects (forcibly, if necessary) without being deemed guilty of
any manner of trespass and without prejudice to any remedies which might
otherwise be used for arrears of rent or prior breach of covenant, and upon such
entry or mailing as aforesaid this Lease shall terminate, Tenant hereby waiving
all statutory rights (including without limitation rights of redemption, if any,
to the extent such rights may be lawfully waived) and Landlord, without notice
to Tenant (but subject to any so-called Landlord's Waiver which Landlord may
have executed), may store Tenant's effects, and those of any person claiming
through or under Tenant at the expense and risk of Tenant, and, if Landlord so
elects may, subject to any so-called Landlord's Waiver which Landlord may have
executed, sell
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such effects at public auction or private sale and apply the net proceeds to the
payment of all sums due to Landlord from Tenant, if any, and pay over the
balance, if any, to Tenant.
7.2 Remedies. In the event that this Lease is terminated under any of
--------
the provisions contained in Section 7.1 or shall be otherwise terminated for
breach of any obligation of Tenant, Tenant covenants to pay forthwith to
Landlord, as compensation, the excess of the total rent reserved for the residue
of the Term over the rental value of the Premises for said residue of the Term.
In calculating the rent reserved there shall be included, in addition to the
Fixed Rent and Additional Rent, the value of all other considerations agreed to
be paid or performed by Tenant for said residue. Tenant further covenants as
additional and cumulative obligations after any such termination to pay
punctually to Landlord all the sums and to perform all the obligations which
Tenant covenants in this Lease to pay and to perform in the same manner and to
the same extent and at the same time as if this Lease had not been terminated.
In calculating the amounts to be paid by Tenant pursuant to the next preceding
sentence Tenant shall be credited with the portion of any amount paid to
Landlord as compensation as in this Section 7.2 provided, allocable to the
corresponding portion of the Term and also with the net proceeds of any rent
obtained by Landlord by reletting the Premises, after deducting all Landlord's
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, fees for legal
services and expenses of cleaning the Premises and removing items therefrom that
were to
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have been removed by Tenant hereunder, it being agreed by Tenant that Landlord
may but shall not be obligated to (i) relet the Premises or any part or parts
thereof, for a term or terms which may at Landlord's option be equal to or less
than or exceed the period which would otherwise have constituted the balance of
the Term and may grant such concessions and free rent as Landlord in its
reasonable judgment considers advisable or necessary to relet the same, (ii)
make such alterations, repairs and decorations in the Premises as Landlord in
its reasonable judgment considers advisable or necessary to relet the same, and
(iii) keep the Premises vacant unless and until Landlord is able to rent the
Premises to a Tenant which is at least as desirable and financially responsible
as Tenant is on the date of this Lease, on terms not less favorable to Landlord
than those of this Lease. No action of Landlord in accordance with the foregoing
or failure to relet or to collect rent under reletting shall operate or be
construed to release or reduce Tenant's liability as aforesaid.
Except if this Lease is terminated during the last twelve (12) months
of the scheduled Term, in lieu of any other damages or indemnity and in lieu of
full recovery by Landlord of all sums payable under all the foregoing provisions
of this Section 7.2, Landlord may by notice to Tenant, at any time after this
Lease is terminated under any of the provisions contained in Section 7.1 or is
otherwise terminated for breach of any obligation of Tenant and before such full
recovery, elect to recover, and Tenant shall thereupon pay, as liquidated
damages, an amount equal to the aggregate of the Fixed Rent and Additional Rent
accrued in the 12
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<PAGE>
months ended next prior to such termination, plus the amount of rent of any kind
accrued and unpaid at the time of termination and less the amount of any
recovery by Landlord under the foregoing provisions of this Section 7.2 up to
the time of payment of such liquidated damages.
Nothing contained in this Lease shall, however, limit or prejudice the
right of Landlord to prove for and obtain in proceedings under any federal or
state law relating to bankruptcy or insolvency or reorganization or arrangement,
an amount equal to the maximum allowed by any statute or rule of law in effect
at the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater than the amount of the loss or
damages referred to above.
7.3 Remedies Cumulative. Any and all rights and remedies which Landlord may
-------------------
have under this Lease, and at law and equity, shall be cumulative and shall not
be deemed inconsistent with each other, and any two or more of all such rights
and remedies may be exercised at the same time insofar as permitted by law.
7.4 Landlord's Right to Cure Defaults. Landlord may, but shall not be
---------------------------------
obligated to, cure, at any time, following 10 days' prior written notice to
Tenant, except in cases of emergency when no notice shall be required, any
default by Tenant under this Lease; and whenever Landlord so elects, all costs
and expenses incurred by Landlord, including reasonable attorneys' fees, in
curing a default shall be paid by Tenant to Landlord as Additional Rent on
demand, together with interest thereon at the rate
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<PAGE>
provided in Section 4.3 from the date of payment by Landlord to the date of
payment by Tenant.
7.5 Effect of Waivers of Default. Any consent or permission by Landlord to
----------------------------
any act or omission which otherwise would be a breach of any covenant or
condition herein, or any waiver by Landlord of the breach of any covenant or
condition herein, shall not in any way be held or construed (unless expressly so
declared) to operate so as to impair the continuing obligation of any covenant
or condition herein, or otherwise, except as to the specific instance, operate
to permit similar acts or omissions.
The failure of Landlord to seek redress for violation of, or to insist upon
the strict performance of, any covenant or condition of this Lease shall not be
deemed a waiver of such violation nor prevent a subsequent act, which would have
originally constituted a violation, from having all the force and effect of an
original violation. The receipt by Landlord of rent with knowledge of the breach
of any covenant of this Lease shall not be deemed to have been a waiver of such
breach by Landlord, or by Tenant, unless such waiver be in writing signed by the
party to be charged. No consent or waiver, express or implied, by Landlord to or
of any breach of any agreement or duty shall be construed as a waiver or consent
to or of any other breach of the same or any other agreement or duty.
7.6 No Accord and Satisfaction. No acceptance by Landlord of a lesser sum
--------------------------
than the Fixed Rent, Additional Rent or any other charge then due shall be
deemed to be other than on account of the earliest installment of such rent or
charge due, unless Landlord
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<PAGE>
elects by notice to Tenant to credit such sum against the most recent
installment due, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent or other charge be deemed a
waiver, an agreement or an accord and satisfaction, and Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance of
such installment or pursue any other remedy in this Lease provided.
ARTICLE VIII
Mortgages
---------
8.1 Rights of Mortgage Holders. The word "mortgage" as used herein includes
--------------------------
mortgages, deeds of trust or other similar instruments evidencing other
voluntary liens or encumbrances, and modifications, consolidations, extensions,
renewals, replacements and substitutes thereof. The word "holder" shall mean a
mortgagee, and any subsequent holder or holders of a mortgage. Until the holder
of a mortgage shall enter and take possession of the Premises for the purpose of
foreclosure, such holder shall have only such rights of Landlord as are
necessary to preserve the integrity of this Lease as security. Upon entry and
taking possession of the Premises for the purpose of foreclosure, such holder
shall have all the rights of Landlord. Notwithstanding any other provision of
this Lease to the contrary, including without limitation Section 9.4, no such
holder of a mortgage shall be liable either as mortgagee or as assignee, to
perform, or be liable in damages for failure to perform, any of the obligations
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of Landlord unless and until such holder shall enter and take possession of the
Premises for the purpose of foreclosure. Upon entry for the purpose of
foreclosure, such holder shall be liable to perform all of the obligations of
Landlord accruing from and after such entry, subject to and with the benefit of
the provisions of Section 9.4, provided that a discontinuance of any foreclosure
proceeding shall be deemed a conveyance under said provisions to the owner of
the Premises. No Fixed Rent, Additional Rent or any other charge shall be paid
more than 15 days prior to the due dates thereof and payments made in violation
of this provision shall (except to the extent that such payments are actually
received by a mortgagee in possession or in the process of foreclosing its
mortgage) be a nullity as against such mortgagee and Tenant shall be liable for
the amount of such payments to such mortgagee.
The covenants and agreements contained in this Lease with respect to
the rights, powers and benefits of a holder of a mortgage (including, without
limitation, the covenants and agreements contained in this Section 8.1)
constitute a continuing offer to any person, corporation or other entity, which
by accepting a mortgage subject to this Lease, assumes the obligations herein
set forth with respect to such holder; such holder is hereby constituted a party
of this Lease as an obligee hereunder to the same extent as though its name were
written hereon as such; and such holder shall be entitled to enforce such
provisions in its own name. Tenant agrees on request of Landlord to execute and
deliver
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<PAGE>
from time to time any agreement which may be necessary to implement the
provisions of this Section 8.1.
8.2 Lease Subordinate to Mortgages. This Lease is and shall continue to be
------------------------------
subject and subordinate to any presently existing and, providing any future
mortgagee agrees to execute a so-called subordination, non-disturbance and
attornment agreement with Tenant in such mortgagee's then standard form, any
future mortgage or mortgages secured by the Premises, and to any and all
advances hereafter made thereunder, and to the interest of the holder or holders
thereof in the Premises. The holder of any such presently existing mortgage
shall have the election to subordinate the same to this Lease, exercisable by
filing with the appropriate recording office a notice of such election,
whereupon this Lease shall have priority over such mortgage. A copy of such
filing shall be given to Tenant. Tenant agrees to execute and deliver any
instruments of subordination necessary to carry out the agreements contained in
this Section 8.2. Any such mortgage to which this Lease is subordinated may
contain such terms, provisions and conditions as the holder deems usual or
customary.
ARTICLE IX
Miscellaneous Provisions
------------------------
9.1 Notices from One Party to the Other. All notices required or permitted
-----------------------------------
hereunder shall be in writing and addressed, if to the Tenant, at the Address of
Tenant or such other address as Tenant shall have last designated by notice in
writing to Landlord, with a copy to Richard A. Toelke, Esq., Bingham, Dana &
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Gould LLP, 150 Federal Street, Boston, MA 02110 and, if to Landlord, at the
Address of Landlord or such other address as Landlord shall have last designated
by notice in writing to Tenant, with a copy to Katharine E. Bachman, Esq., Hale
and Dorr LLP, 60 State Street, Boston, MA 02109. Any notice shall be deemed duly
given when deposited in the U.S. Mail, mailed to such address postage prepaid,
registered or certified mail, return receipt requested, when deposited with a
recognized overnight courier service, or when delivered to such address by hand
with receipt acknowledged.
9.2 Quiet Enjoyment. Landlord agrees that upon Tenant's paying the rent and
---------------
performing and observing the terms, covenants, conditions and provisions on its
part to be performed and observed, Tenant shall and may peaceably and quietly
have, hold and enjoy the Premises during the Term without any manner of
hindrance or molestation from Landlord or anyone claiming under Landlord,
subject, however, to the terms of this Lease.
9.3 Lease not to be Recorded. Tenant agrees that it will not record this
------------------------
Lease, and will not record any notice hereof.
9.4 Bind and Inure; Limitation of Landlord's Liability. The obligations of
--------------------------------------------------
this Lease shall run with the land, and this Lease shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. No owner of the Premises shall be liable under this Lease except for
breaches of Landlord's obligations occurring while owner of the Premises. The
obligations of Landlord shall be binding upon the assets of Landlord which
comprise the Premises but not upon other assets of Landlord. No individual
partner, trustee, stockholder, officer,
-33-
<PAGE>
director, employee or beneficiary of Landlord shall be personally liable under
this Lease and Tenant shall look solely to Landlord's interest in the Premises
in pursuit of its remedies upon an event of default hereunder, and the general
assets of Landlord and of the individual partners, trustees, stockholders,
officers, employees or beneficiaries of Landlord shall not be subject to levy,
execution or other enforcement procedure for the satisfaction of the remedies of
Tenant.
9.5 Landlord's Default. Landlord shall not be deemed to be in default in
------------------
the performance of any of its obligations hereunder unless it shall fail to
perform such obligations and such failure shall continue for a period of 30 days
following receipt of notice from Tenant or, provided that Landlord is diligently
prosecuting such cure, such additional time as is reasonably required to correct
any such default after notice has been given by Tenant to Landlord specifying
the nature of Landlord's alleged default. Landlord shall not be liable in any
event for incidental or consequential damages to Tenant by reason of any default
by Landlord hereunder, whether or not Landlord is notified that such damages may
occur. Tenant shall have no right to terminate this Lease for any default by
Landlord hereunder and no right, for any such default, to offset or counterclaim
against any rent due hereunder.
9.6 Brokerage. Tenant warrants and represents that it has had no dealings
---------
with any broker or agent in connection with this Lease other than Boston Real
Estate Partners ("Broker") to whom Landlord agrees to pay a total $25,000.00
commission if and only if (i) the Term commences and (ii) Tenant commences
payment of
-34-
<PAGE>
Annual Fixed Rent, and Tenant covenants to defend with counsel reasonably
approved by Landlord, hold harmless and indemnify Landlord from and against any
and all cost, expense or liability for (i) any compensation, commissions and
charges claimed by any other broker or agent with respect to Tenant's dealings
in connection with this Lease or the negotiation thereof or (ii) any additional
compensation, commissions and charges claimed by Broker.
9.7 Applicable Law and Construction.
-------------------------------
9.7.1 Applicable Law. This Lease shall be governed by and construed in
--------------
accordance with the laws of the state in which the Premises are located. If any
term, covenant, condition or provision of this Lease or the application thereof
to any person or circumstances shall be declared invalid, or unenforceable by
the final ruling of a court of competent jurisdiction having final review, the
remaining terms, covenants, conditions and provisions of this Lease and their
application to persons or circumstances shall not be affected thereby and shall
continue to be enforced and recognized as valid agreements of the parties, and
in the place of such invalid or unenforceable provision, there shall be
substituted a like, but valid and enforceable provision which comports to the
findings of the aforesaid court and most nearly accomplishes the original
intention of the parties.
9.7.2 No Other Agreement. There are no oral or written agreements
------------------
between Landlord and Tenant affecting this Lease. This Lease may be amended, and
the provisions hereof may be waived or
-35-
<PAGE>
modified, only by instruments in writing executed by Landlord and Tenant.
9.7.3 No Representations by Landlord. Neither Landlord nor any agent of
------------------------------
Landlord has made any representations or promises with respect to the Premises
or the Building except as herein expressly set forth, and no rights, privileges,
easements or licenses are granted to Tenant except as herein expressly set
forth.
9.7.4 Titles. The titles of the several Articles and Sections contained
------
herein are for convenience only and shall not be considered in construing this
Lease.
9.7.5 "Landlord" and "Tenant". Unless repugnant to the context, the
-----------------------
words "Landlord" and "Tenant" appearing in this Lease shall be construed to mean
those named above and their respective heirs, executors, administrators,
successors and assigns, and those claiming through or under them respectively.
If there be more than one tenant the obligations imposed by this Lease upon
Tenant shall be joint and several.
9.8 Submission Not an Offer. The submission of a draft of this Lease or a
-----------------------
summary of some or all of its provisions does not constitute an offer to lease
or demise the Premises, it being understood and agreed that neither Landlord nor
Tenant shall be legally bound with respect to the leasing of the Premises unless
and until this Lease has been executed by both Landlord and Tenant and a fully
executed copy delivered.
9.9 Landlord's Waiver. Upon the request of Tenant, Landlord agrees to
-----------------
execute a Landlord's Waiver in substantially the form
-36-
<PAGE>
attached hereto as Exhibit F pursuant to which Landlord will consent to the
granting of a security interest in the personal property owned by Tenant and
located in the Premises and other related rights.
WITNESS the execution hereof under seal as of the day and year set
forth in Section 1.1.
LANDLORD: /s/ Joseph Campanelli
------------------------------------
As Trustee and for Co-Trustees
of Campanelli Investment Properties,
and not individually
TENANT: SC Corporation
By: /s/ [SIGNATURE APPEARS HERE]
---------------------------------
Its: Sr. VP - CEO
----------------------------
Hereunto duly authorized
-37-
<PAGE>
================================================================================
Exhibit 10.37
CREDIT AGREEMENT
Dated as of March 12, 1997
Among
SPECIALTY CATALOG CORP.
SC CORPORATION, d/b/a SC DIRECT
SC PUBLISHING, INC.
and
THE FIRST NATIONAL BANK OF BOSTON
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS...................................1
Section 1.1. Definitions..........................................1
Section 1.2. Accounting Terms....................................11
ARTICLE 2. THE CREDITS.......................................................11
Section 2.1. The Revolving Credit................................11
Section 2.2. Requests for Revolving Credit Advances..............12
Section 2.3. Interest on Revolving Credit Advances...............12
Section 2.4. The Term Loan.......................................12
Section 2.5. Election of LIBOR Pricing Options...................13
Section 2.6. Additional Payments.................................13
Section 2.7. Set-Off; Computation of Interest; Etc...............14
Section 2.8. Commitment Fee......................................14
Section 2.9. Increased Costs, Etc................................14
Section 2.10. Changed Circumstances...............................16
Section 2.11. Use of Proceeds.....................................17
ARTICLE 3. CONDITIONS OF THE CREDITS.........................................17
Section 3.1. Conditions to Term Loan and First Revolving
Credit Advance...............................17
Section 3.2. Conditions to All Revolving Credit Advances.........19
ARTICLE 4. PAYMENT AND REPAYMENT.............................................19
Section 4.1. Mandatory Prepayments...............................19
Section 4.2. Voluntary Prepayments...............................20
Section 4.3. Payment and Interest Cutoff.........................20
Section 4.4. Payments Not at End of Interest Period..............21
ARTICLE 5. REPRESENTATIONS AND WARRANTIES....................................21
Section 5.1. Corporate Existence, Charter Documents, Etc.........21
Section 5.2. Principal Place of Business; Location of Records....22
Section 5.3. Qualification.......................................22
Section 5.4. Subsidiaries........................................22
Section 5.5. Corporate Power.....................................22
Section 5.6. Valid and Binding Obligations.......................23
Section 5.7. Other Agreements....................................23
Section 5.8. Payment of Taxes....................................23
Section 5.9. Financial Statements................................23
Section 5.10. Other Materials Furnished...........................24
Section 5.11. Stock...............................................24
Section 5.12. Changes in Condition................................24
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.13. Assets, Licenses, Etc...............................24
Section 5.14. Litigation..........................................25
Section 5.15. Pension Plans.......................................25
Section 5.16. Outstanding Indebtedness............................25
Section 5.17. Environmental Matters...............................25
Section 5.18. Foreign Trade Regulations...........................26
Section 5.19. Governmental Regulations............................27
Section 5.20. Margin Stock........................................27
ARTICLE 6. REPORTS AND INFORMATION...........................................27
Section 6.1. Interim Financial Statements and Reports............27
Section 6.2. Annual Financial Statements.........................28
Section 6.3. Notice of Defaults..................................28
Section 6.4. Notice of Litigation................................28
Section 6.5. Communications with Others..........................28
Section 6.6. Reportable Events...................................28
Section 6.7. Reports to other Creditors..........................29
Section 6.8. Communications with Independent Public Accountants..29
Section 6.9. Environmental Reports...............................29
Section 6.10. Miscellaneous.......................................29
ARTICLE 7. FINANCIAL COVENANTS...............................................30
Section 7.1. Ratio of Consolidated Senior Funded Debt to
Consolidated EBITDA..........................30
Section 7.2. Ratio of Consolidated Operating Cash Flow to
Consolidated Total Debt Service..............30
Section 7.3. Minimum Consolidated EBITDA.........................30
ARTICLE 8. AFFIRMATIVE COVENANTS.............................................30
Section 8.1. Existence and Business..............................30
Section 8.2. Taxes and Other Obligations.........................31
Section 8.3. Maintenance of Properties and Leases................31
Section 8.4. Insurance...........................................31
Section 8.5. Records, Accounts and Places of Business............32
Section 8.6. Inspection..........................................32
Section 8.7. Maintenance of Accounts.............................32
ARTICLE 9. NEGATIVE COVENANTS................................................32
Section 9.1. Restrictions on Indebtedness........................32
Section 9.2. Restriction on Liens................................33
Section 9.3. Restrictions on Asset Acquisition...................34
Section 9.4. Investments.........................................34
Section 9.5. Dispositions of Assets..............................35
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 9.6. Assumptions, Guaranties, Etc. of Indebtedness
of Other Persons..............................35
Section 9.7. Mergers, Etc........................................36
Section 9.8. ERISA...............................................36
Section 9.9. Distributions.......................................36
Section 9.10. Sale and Leaseback..................................36
Section 9.11. Transactions with Affiliates .......................36
ARTICLE 10. EVENTS OF DEFAULT AND REMEDIES...................................37
Section 10.1. Events of Default...................................37
Section 10.2. Remedies............................................38
ARTICLE 11. WAIVERS; AMENDMENTS; REMEDIES....................................39
ARTICLE 12. INDEMNIFICATION..................................................40
ARTICLE 13. MISCELLANEOUS....................................................41
Section 13.1. Successors and Assigns..............................41
Section 13.2. Notices.............................................41
Section 13.3. Merger..............................................42
Section 13.4. Governing Law.......................................42
Section 13.5. Counterparts........................................42
Section 13.6. Expenses............................................42
Section 13.7. Joint and Several Obligations.......................42
Section 13.8. Reliance on Representations and Actions of
the Company...................................42
Section 13.9. WAIVER OF JURY TRIAL................................43
</TABLE>
(iii)
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Revolving Credit Note
Exhibit B Term Note
Exhibit C Security Agreement
Exhibit D-1 Stock Pledge Agreement
Exhibit D-2 Stock Pledge Agreement
Exhibit E Assignment of Trademarks and Service Marks (U.S.)
Exhibit F Assignment of Keyman Life Insurance Policies
Exhibit H Form of Landlord Consent and Waiver
Exhibit I Form of Compliance Certificate
Exhibit J Opinion of Borrower's Counsel
Exhibit K Form of Pricing Notice
Schedule 2.11 Schedule of Indebtedness
Schedule 5.4 Schedule of Subsidiaries
Schedule 5.8 Schedule of Payment of Taxes
Schedule 5.9 Schedule of Financial Statements
Schedule 5.11 Schedule of Issued and Outstanding Stock
Schedule 5.13(a) Schedule of Lien, Encumbrances, Indebtedness and Capitalized
Lease Obligations
Schedule 5.13(b) Schedule of Patents, Trademarks, Copyrights and Licenses
Schedule 5.15 Schedule of Pension Plans
Schedule 5.16 Schedule of Outstanding Indebtedness
Schedule 5.17 Environmental Matters
Schedule 8.4 Schedule of Insurance
(iv)
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of March 12, 1997 by and among
SPECIALTY CATALOG CORP., a Delaware corporation (the "Company"), SC CORPORATION,
a Delaware corporation d/b/a SC Direct ("SC Direct"), and SC PUBLISHING, INC., a
Delaware corporation ("SC Publishing") (each a "Borrower" and collectively the
"Borrowers"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking
association (the "Bank").
Recitals
--------
WHEREAS, the Borrowers desire to refinance existing senior and subordinated
debt; and
WHEREAS, the Borrowers desire to arrange for credit facilities for their
capital expenditures and working capital needs; and
WHEREAS, the Borrowers have requested that the Bank make available a Term
Loan of $5,000,000 and Revolving Credit Advances of up to $6,000,000; and
WHEREAS, all of the obligations of the Borrowers under this Agreement will
be secured by a first perfected security interest in all tangible and intangible
assets, now owned or hereafter acquired by the subsidiaries of the Company, a
pledge of all of the stock of such subsidiaries, and certain other collateral;
and
WHEREAS, the Bank is willing to provide the credit facilities described
herein on the terms and conditions set forth herein;
NOW, THEREFORE, for good and valuable consideration, the Borrowers, jointly
and severally, and the Bank hereby agree as follows:
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS
Section 1.1. Definitions. In addition to the terms defined elsewhere in
-----------
this Agreement, unless otherwise specifically provided herein, the following
terms shall have the following meanings for all purposes when used in this
Agreement, and in any note, agreement, certificate, report or other document
made or delivered in connection with this Agreement:
"Affiliate" shall mean (a) any director or officer of the Company or
---------
any Subsidiary, (b) any Person owning 10% or more of any class of capital
stock of the Company or any Subsidiary and (c) any Person that controls, is
controlled by or is under common control with the Company or any
Subsidiary. For purposes of this definition, "control" of a Person shall
mean the possession, directly or indirectly, of
<PAGE>
the power to direct or cause the direction of its management or policies,
whether through the ownership of voting securities, by contract or otherwise.
"Agreement" shall mean this Credit Agreement, as amended or supplemented
---------
from time to time. References to Articles, Sections, Exhibits, Schedules and the
like refer to the Articles, Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise indicated, as amended and supplemented from time to
time.
"Applicable Base Rate" shall mean the Base Rate plus the Applicable Margin.
--------------------
"Applicable Commitment Fee Rate" shall mean (a) 0.50% per annum from the
------------------------------
date hereof through June 28, 1997 and thereafter at all times when the
Applicable Margin is at Level I or II and (b) 0.375% per annum at all times when
the Applicable Margin is at Levels III or IV.
"Applicable LIBOR Rate" shall mean the LIBOR Rate plus the Applicable
---------------------
Margin.
"Applicable Margin" (a) shall mean at all times except as provided in
-----------------
clause (b) below, 1.00% per annum with respect to Base Rate Loans and 2.50% per
annum with respect to LIBOR Rate Loans, and (b) from the Applicable Margin
Determination Date with respect to the fiscal quarter ending in June, 1997 and
thereafter, so long as no Default is outstanding the Applicable Margin shall
mean the Applicable Base Rate Margin, with respect to Base Rate Loans, and the
Applicable LIBOR Rate Margin with respect to LIBOR Rate Loans, respectively, as
set forth below based on the Consolidated Leverage Ratio as of the end of the
previous quarter and determined and adjusted on each Applicable Margin
Determination Date:
<TABLE>
<CAPTION>
Applicable Base Applicable LIBOR
Level Consolidated Leverage Ratio Rate Margin Rate Margin
----- --------------------------- ----------- -----------
<S> <C> <C> <C>
I Greater than 3.00-to-1.00 1.00% 2.50%
II Greater than 2.50-to-1.00 but less
than or equal to 3.00-to-1.00 0.75% 2.25%
III Greater than 2.00-to-1.00 but less
than or equal to 2.50-to-1.00 0.50% 2.00%
IV Less than or equal to 2.00-to-1.00 0.25% 1.75%
</TABLE>
"Applicable Margin Determination Date" shall mean the date that the
------------------------------------
Borrowers deliver a Compliance Certificate to the Bank in accordance with the
requirements of Section 6.1(b).
2
<PAGE>
"Bank Agreement" shall mean this Agreement, the Revolving Credit Note, the
--------------
Term Note, the Security Agreements, the Pledge Agreements, and any other present
or future agreement from time to time entered into between any Borrower or any
Subsidiary and the Bank, each as from time to time amended or supplemented, and
all statements, reports and certificates delivered by the Borrowers to the Bank
in connection therewith.
"Bank Obligations" shall mean all present and future obligations and
----------------
Indebtedness of the Borrowers and their Subsidiaries owing to the Bank under
this Agreement or any other Bank Agreement, including, without limitation, the
obligations to pay the Indebtedness from time to time evidenced by the Revolving
Credit Note and the Term Note, and obligations to pay interest, commitment fees,
balance deficiency fees, charges, expenses and indemnification from time to time
owed under any Bank Agreement.
"Base Rate" shall mean the greater of (a) rate of interest announced from
---------
time to time by the Bank as its "Base Rate" and (b) the Federal Funds Effective
Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of
1%).
"Base Rate Loans" shall mean any Revolving Credit Advance or portion of the
---------------
Term Loan upon which interest will accrue on the basis of a formula including as
a component thereof the Base Rate.
"Business Day" shall mean (a) for all purposes other than as covered by
------------
clause (b) below, a day other than a Saturday or Sunday on which the Bank shall
be open to conduct a commercial banking business in Boston, Massachusetts, and
(b) with respect to all notices, determinations, payments and other matters
relating to LIBOR Rate Loans, any day that is a "Business Day" described in
clause (a) above and that is also a day for trading by and between banks in U.S.
dollar deposits in the London interbank Eurodollar market.
"Capital Assets" shall mean fixed assets, both tangible (such as land,
--------------
buildings, fixtures, machinery and equipment) and intangible (such as patents,
copyrights, trademarks, franchises and goodwill); provided, however, that
Capital Assets shall not include any item customarily charged directly as an
expense or depreciated over a useful life of twelve (12) months or less in
accordance with generally accepted accounting principles.
"Capital Expenditures" shall mean amounts paid or incurred, including
--------------------
indebtedness incurred, by any Borrower or any of their Subsidiaries in
connection with the purchase or lease by any Borrower or any of their
Subsidiaries of Capital Assets that would be required to be capitalized and
shown on the balance sheet of such Borrower or Subsidiary in accordance with
generally accepted accounting principles.
3
<PAGE>
"Capitalized Lease" shall mean any lease which is or should be capitalized
-----------------
on the balance sheet of the lessee in accordance with generally accepted
accounting principles and Statement of Financial Accounting Standards No. 13.
"Capitalized Lease Obligations" shall mean the amount of the liability
-----------------------------
reflecting the aggregate discounted amount of future payments under all
Capitalized Leases calculated in accordance with generally accepted accounting
principles and Statement of Financial Accounting Standards No. 13.
"Closing Date" shall mean the date on which all of the conditions set forth
------------
in Section 3.1 have been satisfied.
"Collateral" shall mean all accounts receivable, inventory, equipment,
----------
Pledged Stock and Related Collateral and all other property of the Borrowers or
another Person, now owned or hereafter acquired which is designated as
collateral and in which the Bank is granted a lien to secure any of the Bank
Obligations pursuant to the Security Agreements or otherwise (whether or not
such agreement makes reference to this Agreement or the Bank Obligations).
"Compliance Certificate" shall mean a certificate in the form of Exhibit I
----------------------
hereto and executed by the chief executive officer or chief financial officer of
the Company.
"Consolidated" and "Consolidating," and "consolidated" and "consolidating"
------------ -------------- ------------ -------------
when used with reference to any term, mean that term as applied to the accounts
of the Company (or other specified Person) and all of its Subsidiaries (or other
specified Persons), or such of its Subsidiaries as may be specified,
consolidated in accordance with generally accepted accounting principles and
with appropriate deductions for minority interests (if any) in Subsidiaries, as
required by generally accepted accounting principles.
"Consolidated Current Liabilities" shall mean, at any date as of which the
--------------------------------
amount thereof shall be determined, all liabilities of the Company and its
Subsidiaries which should properly be classified as current in accordance with
generally accepted accounting principles consistently applied, including,
without limitation, all fixed prepayments of, and sinking fund payments with
respect to, Indebtedness and all estimated taxes of the Company and its
Subsidiaries required to be made within one year from the date of determination.
"Consolidated EBITDA" shall mean for any period the sum of (a) Consolidated
-------------------
Net Income plus (b) all amounts deducted in computing Consolidated Net Income in
respect of (i) interest expense on Indebtedness, (ii) taxes based on or measured
by income, and (iii) depreciation and amortization expense, in each case for the
period under review; provided, however, that in calculating Consolidated EBITDA
-----------------
for periods
4
<PAGE>
through the fiscal quarter ending in December, 1996, the following assumed
amounts shall be used in place of actual amounts:
<TABLE>
<CAPTION>
Quarter Ending Assumed Consolidated EBITDA (000's)
-------------- -----------------------------------
<S> <C>
March, 1996 $(147)
June, 1996 859
September, 1996 1,226
December, 1996 1,998
</TABLE>
"Consolidated Net Income" shall mean the net income (or deficit) from
-----------------------
operations of the Company and its Subsidiaries, after taxes, determined in
accordance with generally accepted accounting principles consistently applied.
"Consolidated Operating Cash Flow" shall mean (a) Consolidated EBITDA less
--------------------------------
(b) the sum of (i) Capital Expenditures plus (ii) consolidated cash payments for
taxes for the applicable period.
"Consolidated Senior Funded Debt" shall mean (a) all Indebtedness of the
-------------------------------
Company and its Subsidiaries for borrowed money (including Capitalized Lease
Obligations but excluding trade accounts payable and contingent obligations)
less (b) all Subordinated Indebtedness of the Company and its Subsidiaries.
"Consolidated Total Debt Service" shall mean for any period the sum of (a)
-------------------------------
interest expense for such period, plus (b) principal payments on Indebtedness
----
required to be made during such period; provided, however, that with respect to
-----------------
periods prior to the Closing, Consolidated Total Debt Service shall be
calculated on the assumption that (a) there were no principal payments in the
first and second quarter of fiscal 1996 and principal payments in the third and
fourth quarter of fiscal 1996 of $250,000 and $500,000, respectively, and (b)
interest on the amount of indebtedness paid down at Closing (less cash balances
of $2,699,790 on hand at Closing) accrued at a rate equal to 8.06%.
"Default" shall mean an Event of Default or an event or condition which
-------
with the passage of time or giving of notice, or both, would become such an
Event of Default.
"Distribution" shall mean as to any Person: (a) the declaration or payment
------------
of any dividend on or in respect of any shares of any class of capital stock of
such Person, other than dividends payable solely in shares of common stock of
such Person, (b) the purchase, redemption, or other acquisition or retirement of
any shares of any class of capital stock of such Person directly or indirectly,
(c) any other distribution on or in
5
<PAGE>
respect of any shares of any class of capital stock of such Person, (d)
any setting apart or allocating any sum for the payment of any dividend
or distribution, or for the purchase, redemption or retirement of any
shares of capital stock of such Person, and (e) any payment of
principal of any Subordinated Indebtedness other than a Permitted
Restricted Payment.
"Environmental Law" means any judgment, decree, order, law,
-----------------
license, rule or regulation pertaining to environmental matters, or any
federal, state, county or local statute, regulation, ordinance, order
or decree relating to public health, welfare, the environment, or to
the storage, handling, use or generation of hazardous substances in or
at the workplace, worker health or safety, whether now existing or
hereafter enacted.
"ERISA" shall mean the Employee Retirement Income Security Act
-----
of 1974, as amended from time to time.
"Event of Default" shall have the meaning set forth in Section
----------------
10.1 hereof.
"Federal Funds Effective Rate" shall mean for any one day, a
----------------------------
fluctuating interest rate per annum equal to the weighted average of
the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published
for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by
the Bank from three Federal funds brokers of recognized standing
selected by the Bank.
"Generally accepted accounting principles" shall mean
----------------------------------------
generally accepted accounting principles as defined by controlling
pronouncements of the Financial Accounting Standards Board, as from
time to time supplemented and amended.
"Governmental Authority" shall mean any nation or government,
----------------------
any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranty" or "Guarantee" or "Guaranties" shall include any
-------- --------- ----------
arrangement whereby a Person is or becomes liable in respect of any
Indebtedness or other obligation of another and any other arrangement
whereby credit is extended to another obligor on the basis of any
promise of a guarantor, whether that promise is expressed in terms of
an obligation to pay the Indebtedness of such obligor, or to purchase
or lease assets under circumstances that would enable such obligor to
discharge one or more of its obligations, or to maintain the capital,
the working capital, solvency or general financial condition of such
obligor, whether or not such arrangement is listed in the balance sheet
of the guarantor or referred to in a footnote thereto.
6
<PAGE>
"Indebtedness" shall mean, as to any Person, all obligations,
------------
contingent and otherwise, which in accordance with generally accepted
accounting principles consistently applied should be classified upon
such Person's balance sheet as liabilities, but in any event including
liabilities secured by any mortgage, pledge, security interest, lien,
charge or other encumbrance existing on property owned or acquired by
such Person whether or not the liability secured thereby shall have
been assumed, letters of credit open for account, obligations under
acceptance facilities, Capitalized Lease Obligations and all
obligations on account of Guaranties, endorsements and any other
contingent obligations in respect of the Indebtedness of others whether
or not reflected on such balance sheet or in a footnote thereto.
"Interest Period" shall mean with respect to each LIBOR Rate
---------------
Loan the period commencing on the date of such LIBOR Rate Loan and
ending one, two, three or six months thereafter, as the Company may
request in a Pricing Notice, provided that:
(i) any Interest Period (other than an Interest
Period determined pursuant to clause (ii) below) that would otherwise
end on a day that is not a Business Day shall be extended to the next
succeeding Business Day unless such Business Day falls in the next
calendar month, in which case such Interest Period shall end on the
immediately preceding Business Day;
(ii) any Interest Period that would otherwise end (a)
after the Term Loan Maturity Date with respect to a LIBOR Rate Loan
representing all or a portion of the Term Loan shall end on the Term
Loan Maturity Date, and (b) after the Revolving Credit Termination Date
with respect to a LIBOR Rate Loan representing a Revolving Credit
Advance shall end on the Revolving Credit Termination Date; and
(iii) notwithstanding clause (ii) above, no Interest
Period shall have a duration of less than one month, and if any
Interest Period applicable to any LIBOR Rate Loan would be for a
shorter period, such Interest Period shall not be available hereunder.
"Landlord's Consent and Waiver" shall mean the Landlord's
-----------------------------
Consent and Waiver executed by the Borrowers in connection herewith
substantially in the form of Exhibit H hereto.
"LIBOR Pricing Option" shall mean the option granted to the
--------------------
Borrowers pursuant to Section 2.5 hereof to have interest on all or a
portion of the Revolving Credit Advances or all or a portion of the
Term Loan computed on the basis of the Applicable LIBOR Rate for an
applicable Interest Period.
"LIBOR Rate" shall mean for any Interest Period for any LIBOR
----------
Rate Loan, the quotient of (i) the rate of interest determined by the
Bank, at about 10:00 a.m. (Boston time) on the LIBOR Rate Fixing Day as
being the rate at which deposits in
7
<PAGE>
U.S. dollars are offered to it by first-class banks in the London
interbank market for deposit for such Interest Period in amounts
comparable to the aggregate principal amount of LIBOR Rate Loans to
which such Interest Period relates, divided by (ii) the difference
between one (1) minus the Reserve Requirement (expressed as a decimal)
applicable to that Interest Period. The LIBOR Rate shall be adjusted
automatically as of the effective date of any change in the Reserve
Requirement.
"LIBOR Rate Fixing Day" shall mean, in the case of any LIBOR
---------------------
Rate Loan, the second Business Day preceding the Business Day on which
an Interest Period begins.
"LIBOR Rate Loan" shall mean any Revolving Credit Advance or
---------------
portion of the Term Loan upon which interest will accrue on the basis
of a formula including as a component thereof the LIBOR Rate. The
expiration date of any LIBOR Rate Loan shall be the last day of the
Interest Period applicable to such LIBOR Rate Loan.
"Investment" shall mean (a) any stock, evidence of
----------
Indebtedness or other security of another Person, (b) any loan,
advance, contribution to capital, extension of credit (except for
current trade and customer accounts receivable for inventory sold or
services rendered in the ordinary course of business and payable in
accordance with customary trade terms) to another Person, and (c) any
purchase of (i) stock or other securities of another Person or (ii) any
business or undertaking of another Person (whether by purchase of
assets or securities), any commitment or option to make any such
purchase if, in the case of an option, the aggregate consideration paid
for such option was in excess of $100, or (d) any other investment, in
all cases whether existing on the date of this Agreement or thereafter
made.
"Maximum Revolving Credit Amount" shall mean as of any date of
-------------------------------
determination $6,000,000; provided that if the obligation of the Bank
to make further Revolving Credit Advances is terminated upon the
occurrence of an Event of Default, the Maximum Revolving Credit Amount
as of any date of determination thereafter shall be deemed to be $0.
"Net Cash Proceeds" means, with respect to (a) any sale,
-----------------
lease, transfer or other disposition of any asset, or (b) the
incurrence or issuance of any Indebtedness for borrowed money except
for the Bank Obligations hereunder, including Capitalized Lease
Obligations or (c) the sale or issuance of any capital stock or other
ownership or profit interest, any equity securities convertible into or
exchangeable for capital stock or other ownership or profit interest or
any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any Person, the
aggregate amount of cash received from time to time (whether as initial
consideration or through payment or disposition of deferred
consideration) by or on behalf of such Person in connection with such
transaction after deducting therefrom only (without duplication) (i)
brokerage commissions, underwriting fees and discounts, legal fees,
8
<PAGE>
finder's fees and other similar transaction fees and commissions, (ii)
the amount of taxes payable in connection with or as a result of such
transaction and (iii) the amount of any Indebtedness secured by a lien
on such asset that, by the terms of such transaction, is required to be
repaid upon such disposition, in each case to the extent, but only to
the extent, that the amounts so deducted are properly attributable to
such transaction or to the asset that is the subject thereof and are,
in the case of clauses (i) and (iii), at the time of receipt of such
cash, actually paid to a Person that is not the Company, any Subsidiary
or any Affiliate and, in the case of clause (ii), on the earlier of the
dates on which the tax return covering such taxes is filed or required
to be filed, actually paid to a Person that is not the Company, any
Subsidiary or any Affiliate.
"1996 Financial Statements" shall mean the Consolidated
-------------------------
Balance Sheet of the Company and its Subsidiaries as of the last day of
the fiscal quarter ended September, 1996 and the related Consolidated
Statements of Operations, Stockholders' Deficit and Cash Flow for the
three quarter period ended September, 1996 and notes to such financial
statements.
"Pension Plan" shall mean an employee benefit plan or other
------------
plan maintained for the employees of the Company or any Subsidiary as
described in Section 4021(a) of ERISA.
"Permitted Acquisition" shall mean an acquisition by the
---------------------
Company or a Subsidiary of all of the capital stock of a Person, or all
or substantially all of the assets of or a line of business conducted
by a Person so long as (a) the Person so acquired is engaged in, or the
assets or line of business so acquired will be used in the wig
business, and (b) the aggregate purchase price for any such acquisition
including cash, property or stock, does not exceed $750,000.
"Permitted Restricted Payment" shall mean repayments of the
----------------------------
entire outstanding principal amount of Subordinated Indebtedness,
together with all accrued and unpaid interest thereon described on
Schedule 5.16 within thirty (30) days after the Closing Date.
-------------
"Person" shall mean an individual, corporation, partnership,
------
joint venture, association, estate, joint stock company, trust,
organization, business, or a government or agency or political
subdivision thereof.
"Pledge Agreements" shall mean the Pledge Agreement from the
-----------------
Company to the Bank of even date herewith substantially in the form of
Exhibit D-1 hereto and the Pledge Agreement from SC Corporation to the
-----------
Bank of even date herewith substantially in the form of Exhibit D-2
-----------
hereto.
"Pledged Shares" shall mean the shares of capital stock and
--------------
other interests and rights pledged to the Bank under the Pledge
Agreements.
9
<PAGE>
"Pricing Notice" shall have the meaning set forth in Section
--------------
2.5.
"Related Collateral" shall mean all general intangibles;
------------------
keyman life insurance policies owned by the Borrowers and payable to
the Borrowers; trade names, trademarks and trade secrets; patents,
copyrights and other intellectual property; customers lists; mailing
lists; goodwill; cash; deposit accounts; tax refunds; claims under
insurance policies (whether or not proceeds of other Collateral);
rights of set off; rights under judgments; tort claims and chooses in
action; computer programs and software; books and records (including
without limitation all electronically recorded data); contract rights;
and all contracts and agreements to which any Person is a party or
beneficiary, whether any of the foregoing be now existing or hereafter
arising, now or hereafter received by or belonging to any Person.
"Reportable Event" shall mean an event reportable to the
----------------
Pension Benefit Guaranty Corporation under Section 4043 of Title IV of
ERISA.
"Reserve Requirement" shall mean the maximum aggregate reserve
-------------------
requirement (including all basic, supplemental, marginal and other
reserves) which is imposed under Regulation D of the Federal Reserve
Board on the Bank against "Euro-currency Liabilities" as defined in
said Regulation D.
"Revolving Credit Advance" shall mean any loan or advance from
------------------------
the Bank to the Borrowers pursuant to Section 2.1 this Agreement.
"Revolving Credit Note" shall mean the Revolving Credit Note
---------------------
executed by the Borrowers, jointly and severally, in connection
herewith substantially in the form of Exhibit A hereto.
---------
"Revolving Credit Termination Date" shall mean March 12, 2001.
---------------------------------
"SC Publishing Disposition" shall mean the sale of all of the
-------------------------
capital stock of SC Publishing or the sale in one or more transactions
of all or substantially all of the assets of SC Publishing, or any of
its divisions, in either case to a Person which is not an Affiliate of
the Company or any of its Subsidiaries and which transaction or
transactions, as the case may be, are consummated in full on or before
March 12, 1998.
"Security Agreements" shall mean (a) the Security Agreement
-------------------
from the Borrowers to the Bank of even date herewith substantially in
the form of Exhibit C hereto, (b) the Assignment of Trademarks and
---------
Service Marks (U.S.) from the Borrowers to the Bank of even date
herewith substantially in the form of Exhibit E hereto, (c) the
---------
Assignment of Keyman Life Insurance Policies from the Borrowers to the
Bank of even date herewith substantially in the form of Exhibit F
---------
hereto and (d) the Pledge Agreements.
10
<PAGE>
"Subordinated Indebtedness" shall mean Indebtedness of the
-------------------------
Borrowers which is subordinated to the Indebtedness of the Borrowers
hereunder and under the Revolving Credit Note and the Term Note and to
all other Bank Obligations, on terms and conditions approved in writing
by the Bank.
"Subsidiary" shall mean any Person of which the Company or
----------
other specified parent shall now or hereafter at the time own, directly
or indirectly through one or more Subsidiaries or otherwise, sufficient
voting stock (or other beneficial interest) to entitle it to elect at
least a majority of the board of directors or trustees or similar
managing body.
"Term Loan" shall mean the term loan made by the Bank to the
---------
Borrowers under Section 2.5 hereof.
"Term Loan Maturity Date" shall mean March 12, 2001.
-----------------------
"Term Note" shall mean the Term Note executed by the
---------
Borrowers, jointly and severally, in connection herewith substantially
in the form of Exhibit B hereto.
---------
Section 1.2. Accounting Terms. All accounting terms used and not
----------------
defined in this Agreement shall be construed in accordance with generally
accepted accounting principles consistently applied, and all financial data
required to be delivered hereunder shall be prepared in accordance with such
principles.
ARTICLE 2. THE CREDITS
Section 2.1. The Revolving Credit. Subject to the terms and conditions
--------------------
hereof and so long as there is no Default, the Bank will make Revolving Credit
Advances to the Borrowers, from time to time, until the Revolving Credit
Termination Date, as requested by the Company, as agent for the Borrowers in
accordance with Section 2.2; provided that the aggregate principal amount of all
Revolving Credit Advances at any time outstanding hereunder shall not exceed the
Maximum Revolving Credit Amount and provided further that at all times prior to
the time of repayment in full of all Subordinated Indebtedness of the Borrowers
described on Schedule 5.16, out of the proceeds of Revolving Credit Advances or
-------------
otherwise, the principal amount of all outstanding Revolving Credit Advances
outstanding hereunder shall not exceed the Maximum Revolving Credit Amount less
the principal amount of the Subordinated Indebtedness described on Schedule 5.16
-------------
then outstanding, as reduced from time to time as evidenced by receipts
delivered to the Bank by the Borrowers. The Borrowers shall execute and deliver
to the Bank the Revolving Credit Note to evidence the Revolving Credit Advances.
Subject to the foregoing limitations and the provisions of Section 4.1 below,
the Borrowers may borrow, repay pursuant to Section 4.2 and reborrow Revolving
Credit Advances hereunder from the date of this Agreement to the Revolving
Credit Termination Date.
11
<PAGE>
Section 2.2. Requests for Revolving Credit Advances. Each Revolving
--------------------------------------
Credit Advance shall be made on notice given by the Company to the Bank not
later than 12:00 noon (Boston time) on the date of the proposed Borrowing (a
"Notice of Revolving Credit Borrowing"); provided, however that if the Company
-------- -------
elects a LIBOR Rate Pricing Option with respect to any Revolving Credit Advance
in accordance with Section 2.5 hereof, such Notice of Revolving Credit Borrowing
shall be given by the Company contemporaneously with a Pricing Notice in the
manner and within the time specified in Section 2.5. Each such Notice of
Revolving Credit Borrowing shall be by telephone or telecopy, and if by
telephone confirmed immediately in writing by the Company, specifying therein
(a) the requested date of such Revolving Credit Advance, and (b) the amount of
such Revolving Credit Advance (which must be a minimum of $1,000,000 and
increments of $100,000 in the case of requests for LIBOR Rate Loans). The
Borrowers agree, jointly and severally, to indemnify and hold the Bank harmless
for any action, including the making of any Revolving Credit Advances hereunder,
or loss or expense, taken or incurred by the Bank in good faith reliance upon
any such telephone request. At the time of the initial request for a Revolving
Credit Advance made under this Section 2.2, the Borrowers shall have provided
the Bank with a Compliance Certificate. The Borrowers hereby agree (i) that the
Bank shall be entitled to rely upon the Compliance Certificate most recently
delivered to the Bank until it is superseded by a more recent Compliance
Certificate, and (ii) that each request for a Revolving Credit Advance, whether
by telephone or in writing or otherwise, shall constitute a confirmation of the
representations and warranties contained in the most recent Compliance
Certificate then in the Bank's possession.
Section 2.3. Interest on Revolving Credit Advances. Subject to the
-------------------------------------
terms of Section 2.5 relating to LIBOR Pricing Options, the Borrowers, jointly
and severally, shall pay interest on the unpaid balance of the Revolving Credit
Advances from time to time outstanding at a per annum rate equal to the
Applicable Base Rate. Interest on the Revolving Credit Advances shall be payable
quarterly in arrears on the first day of each quarter, commencing April 1, 1997
and continuing until all of the Indebtedness of the Borrowers to the Bank under
the Revolving Credit Note shall have been paid in full.
Section 2.4. The Term Loan.
-------------
(a) On the Closing Date, the Bank will make a term loan to the
Borrowers in the amount of $5,000,000. On the Closing Date, the Borrowers,
jointly and severally, will execute and deliver to the Bank the Term Note to
evidence the Term Loan. The principal amount of the Term Loan will be repaid in
quarterly installments, payable on the first day of each quarter (i.e. April,
July, October and January), as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Quarterly Payment Date Amount
---------------------- ------
<S> <C>
October 1, 1997 $250,000
January 1, 1998 500,000
July 1, 1998-2000 250,000
October 1, 1998-2000 500,000
January 1, 1999-2001 500,000
Term Loan Maturity Date 500,000
</TABLE>
(b) Subject to the terms of Section 2.5 relating to LIBOR
Pricing Options, the Borrowers shall pay interest on the unpaid balance of the
Term Loan from time to time outstanding at a per annum rate equal to the
Applicable Base Rate. Interest shall be payable in arrears on the first day of
each quarter, commencing April 1, 1997 and continuing until the Term Note shall
have been paid in full.
Section 2.5. Election of LIBOR Pricing Options. Subject to all the
---------------------------------
terms and conditions hereof and so long as there exists no Default, the
Borrowers may, by delivering a notice (a "Pricing Notice") to the Bank received
at or before 10:00 a.m. Boston time on the date two Business Days prior to the
commencement of the Interest Period selected in such Pricing Notice, elect to
have all or a portion of the outstanding Revolving Credit Advances or all or a
portion of the Term Loan, as the Company may specify in such Pricing Notice,
accrue and bear daily interest during the Interest Period so selected at a per
annum rate equal to the Applicable LIBOR Rate for such Interest Period;
provided, however, that any such election made with respect to the Revolving
- -------- -------
Credit Advances or Term Loan shall be in an amount not less than $1,000,000 and
in increments of $100,000; and provided further that no such election will be
----------------
made if it would result in there being more than four (4) LIBOR Pricing Options
in the aggregate outstanding at any one time. Interest on Revolving Credit
Advances or portions of the Term Loan bearing interest at the Applicable LIBOR
Rate shall be paid for the applicable Interest Period on the last day thereof,
on every third month during any Interest Period longer than three months and
when such LIBOR Rate Loan is due (whether at maturity, by reason of acceleration
or otherwise). Each Pricing Notice shall be substantially in the form of Exhibit
-------
K attached hereto and shall specify: (i) the selection of a LIBOR Pricing
- -
Option; (ii) the effective date and amount of Revolving Credit Advances or
portions of the Term Loan subject to such LIBOR Pricing Option, subject to the
limitations set forth herein; and (iii) the duration of the applicable Interest
Period. Each Pricing Notice may only be revoked subject to Section 4.4.
Section 2.6. Additional Payments.
-------------------
(a) During the continuance of any Event of Default, the
Borrowers, jointly and severally, shall pay to the Bank additional interest on
the unpaid principal balance of the Revolving Credit Advances and the Term Loan
and, to the extent permitted by law, on any overdue installments of interest, at
a rate per annum equal to the applicable interest rates under the Revolving
Credit Note and the Term Note plus 2%.
13
<PAGE>
(b) If a payment of principal or interest hereunder is not
made within 10 days after its due date, and the Borrowers shall have failed to
make such payment on the next Business Day after notice thereof, the Borrowers,
jointly and severally, will also pay on demand a late payment charge equal to 5%
of the amount of such payment. Nothing in the preceding sentence shall affect
the Bank's right to exercise any of its rights or remedies in an Event of
Default has occurred.
Section 2.7. Set-Off; Computation of Interest; Etc. The Borrowers
-------------------------------------
hereby authorize the Bank, without prior notice to the Borrowers or any
Subsidiary, if and to the extent payment is not promptly made pursuant to the
Revolving Credit Note or the Term Note or pursuant to any of Sections 2.3, 2.4,
2.6, 2.8, 4.1, 12 or 13.7 or any other provision hereof or of any other Bank
Agreement, to charge against any account of any Borrower or any Subsidiary with
the Bank an amount equal to the accrued interest and principal and other amounts
from time to time due and payable to the Bank hereunder and under all other Bank
Agreements. Interest hereunder and under the Revolving Credit Note and the Term
Note shall be computed on the basis of a 360-day year for the number of days
actually elapsed. Any increase or decrease in the interest rate on the Revolving
Credit Note or the Term Note resulting from a change in the Base Rate shall be
effective immediately from the date of such change. No interest payment or
interest rate charged hereunder shall exceed the maximum rate authorized from
time to time by applicable law. If the due date for any payment of principal is
extended by operation of law, interest shall be payable for such extended time.
If any payment required by this Agreement becomes due on a day that is not a
Business Day such payment may be made on the next succeeding Business Day, and
such extension shall be included in computing interest in connection with such
payment. The outstanding amount of the Revolving Credit Advances and the Term
Note as reflected on the Bank's records from time to time shall be considered
correct and binding on the Borrowers (absent manifest error) unless within 30
days after receipt of any notice by the Bank of such outstanding amount, the
Company notifies the Bank in writing to the contrary.
Section 2.8. Commitment Fee. The Borrowers, jointly and severally,
--------------
shall pay to the Bank a commitment fee equal to the product of the Applicable
Commitment Fee Rate multiplied by the amount by which the Maximum Revolving
Credit Amount exceeds the daily average principal amount of the Revolving Credit
Advances outstanding from time to time. The commitment fee shall be payable
quarterly in arrears on the first day of each April, July, October and January,
commencing April 1, 1997.
Section 2.9. Increased Costs, Etc.
--------------------
(a) Anything herein to the contrary notwithstanding, if any
changes in present or future applicable law (which term "applicable law," as
used in this Agreement, includes statutes and rules and regulations thereunder
and interpretations thereof by any competent court or by any governmental or
other regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at any
time or from time to time heretofore or hereafter made upon or otherwise issued
to the
14
<PAGE>
Bank by any central bank or other fiscal, monetary or other authority, whether
or not having the force of law), including without limitation any change
according to a prescribed schedule of increasing requirements, whether or not
known or in effect as of the date hereof, shall (i) subject the Bank to any tax,
levy, impost, duty, charge, fee, deduction or withholding of any nature with
respect to this Agreement or the payment to the Bank of any amounts due to it
hereunder, or (ii) materially change the basis of taxation of payments to the
Bank of the principal of or the interest on the Revolving Credit Advances or the
Term Loan or any other amounts payable to the Bank hereunder, or (iii) impose or
increase or render applicable any special or supplemental deposit or reserve or
similar requirements or assessment against assets held by, or deposits in or for
the account of, or any liabilities of, or loans by an office of the Bank in
respect of the transactions contemplated herein, or (iv) impose on the Bank any
other condition or requirement with respect to this Agreement or any Revolving
Credit Advance or the Term Loan, and the result of any of the foregoing is (A)
to increase the cost to the Bank of making, funding or maintaining all or any
part of the Revolving Credit Advances or Term Loan or its commitment hereunder,
or (B) to reduce the amount of principal, interest or other amount payable to
the Bank hereunder, or (C) to require the Bank to make any payment or to forego
any interest or other sum payable hereunder, the amount of which payment or
foregone interest or other sum is calculated by reference to the gross amount of
any sum receivable or deemed received by the Bank from the Borrowers hereunder,
then, and in each such case not otherwise provided for hereunder, the Borrowers,
jointly and severally, will upon demand made by the Bank promptly following the
Bank's receipt of notice pertaining to such matters accompanied by calculations
thereof in reasonable detail, pay to the Bank such additional amounts as will be
sufficient to compensate the Bank for such additional cost, reduction, payment
or foregone interest or other sum; provided that the foregoing provisions of
this sentence shall not apply in the case of any additional cost, reduction,
payment or foregone interest or other sum resulting from any taxes charged upon
or by reference to the overall net income, profits or gains of the Bank.
(b) Anything herein to the contrary notwithstanding, if, after
the date hereof, the Bank shall have determined that any present or future
applicable law, rule, regulation, guideline, directive or request (whether or
not having force of law), including without limitation any change according to a
prescribed schedule of increasing requirements, whether or not known or in
effect as of the date hereof, regarding capital requirements for banks or bank
holding companies generally, or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Bank with any of the foregoing, either imposes a requirement upon the
Bank to allocate additional capital resources or increases the Bank's
requirement to allocate capital resources or the Bank's commitment to make, or
to the Bank's maintenance of, the Revolving Credit Advances or the Term Loan
hereunder, which has or would have the effect of reducing the return on the
Bank's capital to a level below that which the Bank could have achieved (taking
into consideration the Bank's then existing policies with respect to capital
adequacy and assuming full utilization of the Bank's capital) but for such
applicability, change, interpretation, administration or compliance, by any
amount deemed by the Bank to be material, the Bank
15
<PAGE>
shall promptly after its determination of such occurrence give notice thereof to
the Borrowers. The Borrowers and the Bank shall thereafter attempt to negotiate
in good faith an adjustment to the compensation payable hereunder which will
adequately compensate the Bank for such reduction. If the Borrowers and the Bank
are unable to agree to such adjustment within thirty (30) days of the day on
which the Borrowers receive such notice, the Bank shall notify the Borrowers
that the fees payable hereunder shall increase at the end of 90 days by an
amount which will, in the Bank's reasonable determination, evidenced by
calculations in reasonable detail furnished to the Borrowers, compensate the
Bank for such reduction with effect from the date of the Bank's original notice
(but not earlier than the effective date of any such applicability, change,
interpretation, administration or compliance), the Bank's determination of such
amount to be conclusive and binding upon the Borrowers, absent manifest error.
The Borrowers may, within such 90-day period, refinance the Bank Obligations
without premium or penalty but subject to payment of any amounts due under
Section 4.4.
(c) In determining the additional amounts payable under this
Section 2.9, the Bank may use any reasonable method of averaging, allocating or
attributing such additional costs, reductions, payments, foregone interest or
other sums among its customers in good faith and on an equitable basis. This
Section 2.9 shall only apply if and to the extent that the additional amounts
payable hereunder are not already reflected in the calculation of the Reserve
Requirement.
Section 2.10. Changed Circumstances. In the event that:
---------------------
(a) on any date on which the Applicable LIBOR Rate would
otherwise be set the Bank shall have determined in good faith (which
determination shall be final and conclusive) that adequate and fair means do not
exist for ascertaining the LIBOR Rate; or
(b) at any time the Bank shall have determined in good faith
(which determination shall be final and conclusive) that
(i) the implementation of a LIBOR Pricing Option has
been made impracticable or unlawful by (A) the occurrence of a
contingency that materially and adversely affects the London interbank
market, or (B) compliance by the Bank in good faith with any applicable
law or governmental regulation, guideline or order or interpretation or
change thereof by any governmental authority charged with the
interpretation or administration thereof or with any request or
directive of any such governmental authority (whether or not having the
force of law); or
(ii) the LIBOR Rate shall no longer represent the
effective cost to the Bank for U.S. dollar deposits in the London
interbank market, as applicable for deposits in which it regularly
participates;
then, and in such event, the Bank shall forthwith so notify the Company thereof.
Until the Bank notifies the Company that the circumstances giving rise to such
notice no longer apply,
16
<PAGE>
the obligation of the Bank to allow election by the Borrowers of a LIBOR Pricing
Option shall be suspended. If at the time the Bank so notifies the Company, the
Company has previously given the Bank a Pricing Notice with respect to a LIBOR
Pricing Option, but the LIBOR Pricing Option requested therein has not yet gone
into effect, such Pricing Notice shall automatically be deemed to be withdrawn
and be of no force or effect. If circumstances described in clause (b)(i)(B)
arise, then upon such date as shall be specified in such notice (which shall not
be earlier than the date such notice is given), the LIBOR Pricing Option with
respect to any new requests for LIBOR Rate Loans shall be terminated, but any
existing LIBOR Rate Loans may continue to be maintained through the end of the
applicable Interest Period.
Section 2.11. Use of Proceeds. The proceeds of the initial Revolving
---------------
Credit Advance and the Term Loan shall be used by the Company to repay in full
the Indebtedness of the Company described on Schedule 2.11. The proceeds of all
future Revolving Credit Advances shall be used by the Borrowers for capital
expenditures, for general working capital, for Permitted Restricted Payments and
for other corporate purposes, so long as no Default exists or would result from
any such use or Permitted Restricted Payment. The Borrowers will not, directly
or indirectly, use any part of such proceeds for the purpose of purchasing or
carrying any margin stock within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System or to extend credit to any Person for
the purpose of purchasing or carrying any such margin stock.
ARTICLE 3. CONDITIONS OF THE CREDITS
Section 3.1. Conditions to Term Loan and First Revolving Credit
--------------------------------------------------
Advance. The Bank's obligation to make the Term Loan and first Revolving Credit
- -------
Advance shall be subject to compliance by the Borrowers with their agreements
contained in this Agreement, and to the condition precedent that the Bank shall
have received each of the following, in form and substance satisfactory to the
Bank and its counsel or in the form attached hereto as an Exhibit, as the case
may be:
(a) The Revolving Credit Note and the Term Note duly executed
by the Borrowers.
(b) The Security Agreements duly executed by the Borrowers,
certificates for the Pledged Shares together with stock powers executed in
blank, and evidence of the filing of Uniform Commercial Code financing
statements and all other actions required to grant the Bank a first, perfected
lien on and security interest in the Collateral.
(c) Copies of the consent votes of the Board of Directors of
each Borrower authorizing the execution, delivery and performance of this
Agreement, the Revolving Credit Note, the Term Note, the Security Agreements and
the other Bank Agreements to which such Borrower is a party, certified by the
Secretary or an Assistant Secretary (or Clerk or Assistant
17
<PAGE>
Clerk) of such Borrower (which certificate shall state that such resolutions are
in full force and effect).
(d) A certificate of the Secretary or an Assistant Secretary
(or Clerk or Assistant Clerk) of such Borrower certifying the name and
signatures of the officers of such Borrower authorized to sign this Agreement,
the Revolving Credit Note, the Term Note, the Security Agreements and the other
Bank Agreements to which such Borrower is a party and the other documents to be
delivered by the Borrowers hereunder.
(e) Certificates of legal existence and corporate good
standing for the Borrowers of recent date issued by the appropriate Delaware and
Massachusetts governmental authorities.
(f) Certificates of tax good standing for the Borrowers of
recent date issued by the appropriate Delaware governmental authorities.
(g) The opinion of Bingham, Dana & Gould, LLP, counsel to the
Borrowers, dated the date of execution of this Agreement, in form and substance
satisfactory to the Bank.
(h) A certificate of a duly authorized officer of each
Borrower, dated the date of the Term Loan and first Revolving Credit Advance, to
the effect that all conditions precedent on the part of such Borrower to the
execution and delivery hereof and the making of the Term Loan and First
Revolving Credit Advance have been satisfied.
(i) A Compliance Certificate dated the date of the Term Loan
and first Revolving Credit Advance, including evidence that the ratio of
Consolidated Funded Debt, after giving effect to the closing of the Term Loan
and the first Revolving Credit Advance, on a pro-forma basis, to Consolidated
EBITDA for the four quarter period ending December, 1996, did not exceed
3.0-to-1.0.
(j) Receipt by the Bank of $30,000 in payment of the Bank's
closing fee, which shall be deemed earned in full upon the execution and
delivery hereof.
(k) Certificates of insurance with respect to the Collateral
naming the Bank as loss payee with a standard endorsement in favor of the Bank.
(l) The Landlord Consents and Waivers executed by the
respective landlords of the Borrowers' premises located in Easton, Massachusetts
and in Brockton, Massachusetts.
(m) Evidence of the simultaneous repayment of all Indebtedness
of the Borrowers to Banque Nationale de Paris and termination of all security
interests and liens securing such Indebtedness.
18
<PAGE>
(n) Such other documents, certificates and opinions as the
Bank may reasonably request.
Section 3.2. Conditions to All Revolving Credit Advances. The
-------------------------------------------
Bank's obligation to make any Revolving Credit Advance pursuant to this
Agreement shall be subject to compliance by the Borrowers with their agreements
contained in this Agreement and each other Bank Agreement, and to the
satisfaction, at or before the making of each Revolving Credit Advance, of all
of the following conditions precedent:
(a) The representations and warranties herein and those made
by or on behalf of the Borrowers in any other Bank Agreement shall be correct as
of the date on which any Revolving Credit Advance is made, with the same effect
as if made at and as of such time (except that the references in Article 5 to
the 1996 Financial Statements shall be deemed to refer to the most recent annual
audited consolidated financial statements of the Company and its Subsidiaries
furnished to the Bank.)
(b) On the date of any Revolving Credit Advance hereunder,
there shall exist no Default.
(c) The Borrowers shall have paid the balance of all fees then
due and payable to the Bank as referenced herein.
(d) The making of the requested Revolving Credit Advance shall
not be prohibited by any law or governmental order or regulation applicable to
the Bank or to any Borrower, and all necessary consents, approvals and
authorizations of any Person for any such Revolving Credit Advance shall have
been obtained.
ARTICLE 4. PAYMENT AND REPAYMENT
Section 4.1. Mandatory Prepayments.
---------------------
(a) If at any time the aggregate outstanding principal balance
of all Revolving Credit Advances made hereunder exceeds the Maximum Revolving
Credit Amount, the Borrowers shall immediately repay to the Bank an amount equal
to such excess.
(b) All proceeds of accounts receivable of the Borrowers shall
be applied to reduce the Revolving Credit Advances as and when received, and
such proceeds shall be applied first to reduce Revolving Credit Advances which
are Base Rate Loans.
(c) The Borrowers will make all required principal payments on
the Term Loan on the dates when due.
19
<PAGE>
(d) The Borrowers shall, on the date of receipt of the Net
Cash Proceeds by any Borrower or any of their Subsidiaries from (i) the sale,
lease, transfer or other disposition of any assets of any Borrower or any of
their Subsidiaries (other than Net Cash Proceeds from a transaction permitted
under Section 9.5), (ii) the incurrence or issuance by any Borrower or any of
their Subsidiaries of any Indebtedness for borrowed money, except for the Bank
Obligations, (iii) the sale or issuance by any Borrower or any of their
Subsidiaries of any capital stock or other ownership or profit interest or any
warrants, options or rights to acquire capital stock or other ownership or
profits interest (other than Net Cash Proceeds from any such sale or issuance
which described as one of its purposes undertaking acquisitions if such Net Cash
Proceeds are used to finance any transaction permitted under Section 9.7 within
ninety (90) days of the receipt thereof by such Borrower or Subsidiary), prepay
an aggregate principal amount of the Term Loan equal to the amount of such Net
Cash Proceeds. Partial prepayments of the Term Loan under this Section 4.1(c)
shall be applied to the scheduled principal payments in inverse order of
maturity and shall be applied first to portions of the Term Loan which are
outstanding as Base Rate Loans.
Section 4.2. Voluntary Prepayments.
---------------------
(a) The Borrowers may make prepayments to the Bank of any
outstanding principal amount of the Revolving Credit Advances which are Base
Rate Loans and of any outstanding principal amount of the Term Loan equal to
$100,000 or an integral multiple thereof which are Base Rate Loans in accordance
with Section 4.3 at any time prior to 12:00 noon (Boston time) on any Business
Day without premium or penalty.
(b) The Borrowers may make prepayments to the Bank of any
outstanding principal amount of the Revolving Credit Advance or of the Term Loan
equal in either case to $100,000 or an integral multiple thereof which are LIBOR
Rate Loans in accordance with Section 4.3 at any time prior to 12:00 noon
(Boston time) on any Business Day subject, however, to payment of the amounts
set forth in Section 4.4.
(c) Partial prepayments of the Term Loan made under this
Section 4.2 shall be applied to reduce the remaining scheduled principal
payments of the Term Loan ratably, and such partial prepayments shall be applied
first to reduce that portion of the Term Loan which is a Base Rate Loan.
Section 4.3. Payment and Interest Cutoff. Notice of each prepayment
---------------------------
pursuant to Section 4.2 shall be given to the Bank (a) in the case of prepayment
of Base Rate Loans, not later than 12:00 noon (Boston time) on the date of
payment, and (b) in the case of prepayment of LIBOR Rate Loans on any day other
than the last day of the Interest Period applicable thereto, not later than
12:00 noon (Boston time) two (2) Business Days prior to the proposed date of
payment, and shall specify the total principal amount of the Revolving Credit
Advances or Term Loan to be paid on such date. Notice of prepayment having been
given in compliance with this Section 4.3, the amount specified to be prepaid
shall become due and payable on the date specified for prepayment and from and
after said date (unless the Borrowers shall default
20
<PAGE>
in the payment thereof) interest thereon shall cease to accrue. Unpaid interest
on the principal amount of any Revolving Credit Advances or portions of the Term
Loan so prepaid accrued to the date of prepayment shall be due on the date of
prepayment.
Section 4.4. Payments Not at End of Interest Period. If the Borrowers
--------------------------------------
for any reason make any payment of principal with respect to any LIBOR Rate Loan
on any day other than the last day of the Interest Period applicable to such
LIBOR Rate Loan, including without limitation by reason of acceleration, or fail
to borrow a LIBOR Rate Loan after electing a LIBOR Pricing Option with respect
thereto pursuant to Section 2.5, the Borrowers, jointly and severally, shall pay
to the Bank, an amount computed pursuant to the following formula:
L = (R - T) x P x D
---------------
360
L = amount payable to the Bank
R = the effective rate of interest on such LIBOR Rate Loan
T = the effective interest rate per annum at which any readily
marketable bond or other obligation of the United States,
selected in the Bank's sole discretion, maturing on or near
the last day of the then applicable Interest Period of such
LIBOR Rate Loan and in approximately the same amount as such
LIBOR Rate Loan can be purchased by the Bank on the day of
such payment of principal or failure to borrow
P = the amount of principal prepaid or the amount of the requested
LIBOR Rate Loan
D = the number of days remaining in the Interest Period as of
the date of such payment or the number of days of the
requested Interest Period
The Borrowers shall pay such amount upon presentation by the Bank of a statement
setting forth the amount and the Bank's calculation thereof pursuant hereto,
which statement shall be deemed true and correct absent manifest error.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement and make the
Revolving Credit Advances and the Term Loan as contemplated hereby, the
Borrowers hereby make the following representations and warranties:
Section 5.1. Corporate Existence, Charter Documents, Etc. The
-------------------------------------------
Company and each Subsidiary is a corporation validly organized, legally existing
and in good standing under the laws of the jurisdiction in which it is organized
and has corporate power to own its properties and conduct its business as now
conducted and as proposed to be conducted by it. Certified copies of the charter
documents and By-Laws of the Company and each Subsidiary have been delivered to
the Bank and are true, accurate and complete as of the date hereof.
21
<PAGE>
Section 5.2. Principal Place of Business; Location of Records.
------------------------------------------------
The Company's and each Subsidiary's principal place of business is located at 21
Bristol Drive, South Easton, Massachusetts, and the Company and each Subsidiary
has had no other principal place of business during the last six months. All of
the books and records or true and complete copies thereof relating to the
accounts and contracts of the Company and each Subsidiary are and will be kept
at such location.
Section 5.3. Qualification. The Company and each Subsidiary is duly
-------------
qualified, licensed and authorized to do business and is in good standing as a
foreign corporation in each jurisdiction where its failure to be so qualified
would have a material adverse effect on the business, assets or condition,
financial or otherwise, of the Company or any Subsidiary.
Section 5.4. Subsidiaries. The Borrowers have no Subsidiaries except
------------
for those listed in Schedule 5.4. All of the issued and outstanding capital
------------
stock of each Subsidiary listed on Schedule 5.4 is owned of record and
------------
beneficially by the Company or SC Direct as set forth on Schedule 5.4. The
Company does not have any assets except capital stock of its Subsidiaries.
Section 5.5. Corporate Power. The execution, delivery and
---------------
performance of this Agreement, the Revolving Credit Note, the Term Note, the
Security Agreements and all other Bank Agreements and other documents delivered
or to be delivered by the Company or any Subsidiary to the Bank in connection
herewith, and the incurrence of Indebtedness to the Bank hereunder or
thereunder, now or hereafter owing,
(a) are within the corporate powers of the Company and each
Subsidiary, as the case may be, having been duly authorized by its Board of
Directors or other similar governing body, and, if required by law, by its
charter documents or by its By-Laws, by its stockholders;
(b) do not require any approval or consent of, or filing with,
any governmental agency or other Person (or such approvals and consents have
been obtained and delivered to the Bank) and are not in contravention of law or
the terms of the charter documents or By-Laws of the Company and each Subsidiary
or any amendment thereof;
(c) do not and will not
(i) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Company or any Subsidiary is a party
or by which the Company, any Subsidiary or any of their respective
properties are bound or affected,
(ii) result in, or require, the creation or
imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance of any nature on any property
of the Company or any Subsidiary, except as provided in the Bank
Agreements, or
22
<PAGE>
(iii) result in a violation of or default under any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award, now in effect having applicability to the
Company or any Subsidiary, or to any of their respective properties.
Section 5.6. Valid and Binding Obligations. This Agreement, the
-----------------------------
Revolving Credit Note, the Term Note, the Security Agreements and all the other
Bank Agreements executed in connection herewith and therewith constitute, or
will constitute when delivered, the valid and binding obligations of the Company
and its Subsidiaries, as the case may be, enforceable in accordance with their
respective terms, except as the enforceability thereof may be subject to
bankruptcy, insolvency, moratorium and other laws affecting the rights and
remedies of creditors and secured parties and to the exercise of judicial
discretion in accordance with general equitable principles.
Section 5.7. Other Agreements. Neither the Company nor any
----------------
Subsidiary is a party to any indenture, loan or credit agreement, or any lease
or other agreement or instrument, or subject to any charter or corporate
restriction, which is likely to have a material adverse effect on the business,
properties, assets, operations or financial condition of the Company or any
Subsidiary, or which restricts the ability of the Company or any Subsidiary to
carry out any of the provisions of this Agreement, the Revolving Credit Note,
the Term Note, the Security Agreements or any of the Bank Agreements executed in
connection herewith and therewith.
Section 5.8. Payment of Taxes. Except as described on Schedule 5.8, the
---------------- ------------
Company and its Subsidiaries have filed all tax returns which are required to be
filed by them and have paid, or made adequate provision for the payment of, all
taxes which have or may become due pursuant to said returns or to assessments
received. All federal tax returns of the Company and its Subsidiaries through
their fiscal year ended in 1992 have been audited by the Internal Revenue
Service or are not subject to such audit by virtue of the expiration of the
applicable period of limitation, and the results of such audits are fully
reflected in the balance sheet contained in the 1996 Financial Statements. The
Company knows of no material additional assessments since such date for which
adequate reserves appearing in the balance sheet contained in the 1996 Financial
Statements have not been established. The Company and its Subsidiaries have made
adequate provisions for all current taxes, and to the best of the Company's
knowledge there will not be any additional assessments for any fiscal periods
prior to and including that which ended on the date of said balance sheet in
excess of the amounts reserved therefor.
Section 5.9. Financial Statements. All balance sheets, statements and
--------------------
other financial information furnished to the Bank in connection with this
Agreement and the transactions contemplated hereby (each of which is listed on
Schedule 5.9), including, without limitation, the 1996 Financial Statements,
- ------------
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except for the absence of
footnotes with interim statements) and present fairly the consolidated financial
condition of the Company and its Subsidiaries and all such information so
furnished was true, correct and complete as of the date thereof.
23
<PAGE>
Section 5.10. Other Materials Furnished. The written information,
-------------------------
exhibits, memoranda or reports furnished to the Bank by or on behalf of the
Company or any Subsidiary in connection with the negotiation of this Agreement,
taken as a whole, do not contain any material misstatement of fact or omit to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
Section 5.11. Stock. There are presently issued by the Company and
-----
its Subsidiaries and outstanding the shares of capital stock indicated on
Schedule 5.11. The Company and its Subsidiaries have received the consideration
- -------------
for which such stock was authorized to be issued and have otherwise complied
with all legal requirements relating to the authorization and issuance of shares
of stock and all such shares are validly issued, fully paid and non-assessable.
The Company and its Subsidiaries have no other capital stock of any class
outstanding.
Section 5.12. Changes in Condition. Since the date of the balance
--------------------
sheet contained in the 1996 Financial Statements, there has been no material
adverse change in the business or assets or in the financial condition of the
Company or any Subsidiary, and neither the Company nor any Subsidiary has
entered into any transaction outside of the ordinary course of business which is
material to the Company or any Subsidiary. Neither the Company nor any
Subsidiary has any contingent liabilities of any material amount which are not
referred to in the 1996 Financial Statements.
Section 5.13. Assets, Licenses, Etc.
---------------------
(a) The Company and its Subsidiaries have good and marketable
title to, or valid leasehold interests in, all of their assets, real and
personal, including the assets carried on their books and reflected in the 1996
Financial Statements, subject to no liens, charges or encumbrances, except for
(i) liens, charges and encumbrances described in Schedule 5.13(a) and permitted
----------------
by Section 9.2 hereof, and (ii) assets sold, abandoned or otherwise disposed of
in the ordinary course of business. The Company owns no assets or properties
other than the capital stock of its Subsidiaries.
(b) The Company and its Subsidiaries own all material
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, and trade names necessary to continue to conduct their
business as heretofore conducted by them and as now conducted by them each of
which is listed, together with Patent and Trademark Office application or
registration numbers, where applicable, on Schedule 5.13(b) hereto. The Company
and its Subsidiaries conduct their respective businesses without infringement or
claim of infringement of any license, patent, copyright, service mark,
trademark, trade name, trade secret or other intellectual property right of
others. To the best knowledge of the Company, there is no infringement or claim
of infringement by others of any material license, patent, copyright, service
mark, trademark, trade name, trade secret or other intellectual property right
of the Company and its Subsidiaries.
24
<PAGE>
Section 5.14. Litigation. Except as described on Schedule 5.8,
---------- ------------
there is no litigation, at law or in equity, or any proceeding before any
federal, state, provincial or municipal board or other governmental or
administrative agency pending or, to the knowledge of the Company, threatened,
or any basis therefor, which involves a material risk of any judgment or
liability which could, if adversely determined, result in any material adverse
change in the business or assets or in the financial condition of the Company or
any Subsidiary, and no judgment, decree, or order of any federal, state,
provincial or municipal court, board or other governmental or administrative
agency has been issued against the Company or any Subsidiary which has or may
have a material adverse effect on the business or assets or on the financial
condition of the Company or any Subsidiary.
Section 5.15. Pension Plans. No employee benefit plan established
-------------
or maintained by the Company or any Subsidiary or any other Person a member of
the same "control group," as the Company (a "Pension Affiliate"), within the
meaning of Section 302(f)(6)(b) of ERISA, (including any multi-employer plan to
which the Company or any Subsidiary contributes) which is subject to Part 3 of
Subtitle B of Title I of the ERISA, had a material accumulated funding
deficiency (as such term is defined in Section 302 of ERISA) as of the last day
of the most recent fiscal year of such plan ended prior to the date hereof, or
would have had an accumulated funding deficiency (as so defined) on such day if
such year were the first year of such plan to which Part 3 of Subtitle B of
Title I of ERISA applied, and no material liability under Title IV of ERISA has
been, or is expected by the Company or any Subsidiary to be, incurred with
respect to any such plan by the Company or any Subsidiary or any Pension
Affiliate. The execution and delivery by the Company of this Agreement and the
other Bank Agreements executed on the date hereof will not involve any
prohibited transaction within the meaning of ERISA or Section 4975 of the Code.
The Company and its Subsidiaries have no Pension Plans other than those
described on Schedule 5.15.
-------------
Section 5.16. Outstanding Indebtedness. The outstanding amount of
------------------------
Indebtedness for borrowed money (including Capitalized Lease Obligations) of the
Company and its Subsidiaries as of the date hereof, is correctly set forth in
Schedule 5.16 hereto, and said Schedule correctly describes the credit
- -------------
agreements, guaranties, leases and other instruments pursuant to which such
Indebtedness has been incurred and all security interests securing such
Indebtedness. Said schedule also describes all agreements and other arrangements
pursuant to which the Company or any Subsidiary may borrow any money.
Section 5.17. Environmental Matters. Except as set forth in Schedule
--------------------- --------
5.17,
- ----
(a) None of the Company, any Subsidiary or any operator of any
of their respective properties is in violation, or to the Company's knowledge is
in alleged violation, of any Environmental Law, which violation would have a
material adverse effect on the business, assets or financial condition of the
Company or any Subsidiary.
(b) None of the Company, any Subsidiary or any operator of any
of their respective properties has received notice from any third party,
including without limitation any
25
<PAGE>
federal, state, county, or local governmental authority, (i) that it has been
identified as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended
("CERCLA") or any equivalent state law, with respect to any site or location;
(ii) that any hazardous waste, as defined in 42 U.S.C. ss. 6903(5), any
hazardous substances, as defined in 42 U.S.C. ss. 9601(14), any pollutant or
contaminant, as defined in 42 U.S.C. ss. 9601(33), or any toxic substance, oil
or hazardous materials or other chemicals or substances regulated by any
Environmental Laws ("Hazardous Substances") which it has generated, transported
or disposed of, has been found at any site at which a federal, state, county, or
local agency or other third party has conducted or has ordered the Company, any
Subsidiary or another third party or parties (e.g. a committee of potentially
responsible parties) to conduct a remedial investigation, removal or other
response action pursuant to any Environmental Law; or (iii) that it is or shall
be a named party to any claim, action, cause of action, complaint (contingent or
otherwise) or legal or administrative proceeding arising out of any actual or
alleged release or threatened release of Hazardous Substances. For purposes of
this Agreement, "release" means any past or present releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping,
disposing or dumping of Hazardous Substances into the environment.
(c) (i) The Company, each Subsidiary and, to the best of the
Borrowers' knowledge, each operator of any real property owned or operated by
the Borrowers is in compliance, in all material respects, with all provisions of
the Environmental Laws relating to the handling, manufacturing, processing,
generation, storage or disposal of any Hazardous Substances; (ii) to the best of
the Borrowers' knowledge, no portion of property owned, operated or controlled
by the Company or any Subsidiary has been used for the handling, manufacturing,
processing, generation, storage or disposal of Hazardous Substances except in
accordance with applicable Environmental Laws; (iii) to the best of the
Borrowers' knowledge, there have been no releases or threatened releases of
Hazardous Substances on, upon, into or from any property owned, operated or
controlled by the Company or any Subsidiary, which releases could have a
material adverse effect on the value of such properties or adjacent properties
or the environment; (iv) to the best of the Borrowers' knowledge, there have
been no releases of Hazardous Substances on, upon, from or into any real
property in the vicinity of the real properties owned, operated or controlled by
the Company or any Subsidiary which, through soil or groundwater contamination,
may have come to be located on the properties of the Company or any Subsidiary;
(v) to the best of the Borrowers' knowledge, there have been no releases of
Hazardous Substances on, upon, from or into any real property formerly but no
longer owned, operated or controlled by the Company or any Subsidiary.
(d) None of the properties of the Company or any Subsidiary is
or shall be subject to any applicable environmental cleanup responsibility law
or environmental restrictive transfer law or regulation by virtue of the
transactions set forth herein and contemplated hereby.
Section 5.18. Foreign Trade Regulations. Neither the Company nor
-------------------------
any Subsidiary is (a) a person included within the definition of "designated
foreign country" or "national" of
26
<PAGE>
a "designated foreign country" in Executive Order No. 8389, as amended, in
Executive Order No. 9193, as amended, in the Foreign Assets Control Regulations
(31 C.F.R., Chapter V, Part 500, as amended), in the Cuban Assets Control
Regulations of the United States Treasury Department (31 C.F.R., Chapter V, Part
515, as amended) or in the Regulations of the Office of Alien Property,
Department of Justice (8 C.F.R., Chapter II, Part 507, as amended) or within the
meanings of any of the said Orders or Regulations, or of any regulations,
interpretations, or rulings issued thereunder, or in violation of said Orders or
Regulations or of any regulations, interpretations or rulings issued thereunder;
or (b) an entity listed in Section 520.101 of the Foreign Funds Control
Regulations (31 C.F.R., Chapter V, Part 520, as amended).
Section 5.19. Governmental Regulations. None of the Borrowers or
------------------------
any Subsidiary of any Borrower is subject to regulation under the Public Utility
Holding Company Act of 1935, the Federal Power Act, the Investment Company Act
of 1940, or is a common carrier under the Interstate Commerce Act, or is engaged
in a business or activity subject to any statute or regulation which regulates
the incurring by the Borrowers of Indebtedness for borrowed money, including
statutes or regulations relating to common or contract carriers or to the sale
of electricity, gas, steam, water, telephone or telegraph or other public
utility services.
Section 5.20. Margin Stock. Neither the Company nor any Subsidiary
------------
owns any "margin stock" within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System, or any regulations, interpretations or
rulings thereunder, nor is the Company or any Subsidiary engaged principally or
as one of its important activities in extending credit which is used for the
purpose of purchasing or carrying margin stock.
ARTICLE 6. REPORTS AND INFORMATION
Section 6.1. Interim Financial Statements and Reports.
----------------------------------------
(a) Within thirty (30) days after the end of each calendar
month, the Borrowers shall furnish to the Bank a consolidated balance sheet of
the Company and its Subsidiaries as of the end of such month and a consolidated
statement of income for the Company and its Subsidiaries for such monthly period
and for the period commencing at the end of the previous fiscal year and ending
with the end of such month.
(b) As soon as available, and in any event within forty-five
(45) days after the end of each of the first three quarters of each fiscal year
of the Company, the Borrowers shall furnish to the Bank (i) consolidated and
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such quarter and consolidated and consolidating statements of income,
shareholders' equity and cash flow of the Company and its Subsidiaries for such
quarter and for the period commencing at the end of the previous fiscal year and
ending with the end of such quarter, setting forth in each case in comparative
form the corresponding
27
<PAGE>
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail; and (ii) a Compliance Certificate.
Section 6.2. Annual Financial Statements. As soon as available, but in
---------------------------
any event within ninety (90) days after the end of each fiscal year of the
Company, the Borrowers shall furnish to the Bank (a) consolidated and
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such fiscal year and consolidated and consolidating statements of income,
shareholders' equity and cash flow of the Company and its Subsidiaries for such
fiscal year, in each case (other than the consolidating statements) reported on
by Deloitte & Touche LLP, any other of the "Big 6" accounting firms, or other
independent certified public accountants of recognized national standing
acceptable to the Bank, which report shall express, without reliance upon
others, a positive opinion regarding the fairness of the presentation of such
financial statements in accordance with generally accepted accounting principles
consistently applied, said report to be without qualification, except in cases
of unresolved litigation and accounting changes with which such accountants
concur, together with the statement of such accountants that they have caused
the provisions of this Agreement to be reviewed and that nothing has come to
their attention to lead them to believe that any Default exists hereunder or
specifying any Default and the nature thereof, and (b) a Compliance Certificate.
Section 6.3. Notice of Defaults. As soon as possible, and in any event
------------------
within five (5) Business Days after any Borrower becomes aware of the occurrence
of each Default, the Borrowers shall furnish to the Bank the statement of their
chief executive officer or chief financial officer setting forth details of such
Default and the action which the Company has taken or proposes to take with
respect thereto.
Section 6.4. Notice of Litigation. Promptly after the commencement
--------------------
thereof, the Borrowers shall furnish the Bank written notice of all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
Company or any Subsidiary, which, if adversely determined, would have a material
adverse affect on the business, assets, or financial condition of the Company or
any Subsidiary.
Section 6.5. Communications with Others. At all times while the stock
--------------------------
of any Borrower is traded publicly, the Borrowers shall furnish the Bank with
copies of all regular, periodic and special reports and all registration
statements which any Borrower files with the Securities and Exchange Commission
or any governmental authority which may be substituted therefor, or with any
national or regional securities exchange.
Section 6.6. Reportable Events. At any time that the Company or any
-----------------
Subsidiary have a Pension Plan, the Borrowers shall furnish to the Bank, as soon
as possible, but in any event within thirty (30) days after the Borrowers know
or have reason to know that any Reportable Event with respect to any Pension
Plan has occurred, the statement of its chief executive officer or chief
financial officer setting forth the details of such Reportable Event
28
<PAGE>
and the action which the Company or any Subsidiary have taken or proposes to
take with respect thereto, together with a copy of the notice of such Reportable
Event to the Pension Benefit Guaranty Corporation.
Section 6.7. Reports to other Creditors. Promptly after filing the
--------------------------
same, the Borrowers shall furnish to the Bank copies of any compliance
certificate and other information furnished to any other holder of the
securities (including debt obligations) of the Company or any Subsidiary
pursuant to the terms of any indenture, loan or credit or similar agreement and
not otherwise required to be furnished to the Bank pursuant to any other
provision of this Agreement.
Section 6.8. Communications with Independent Public Accountants. At
--------------------------------------------------
any reasonable time and from time to time, the Borrowers shall provide the Bank
and any agents or representatives of the Bank access to the independent public
accountants of the Borrowers to discuss the Borrowers' financial condition,
including, without limitation any recommendations of such independent public
accountants concerning the management, finances, financial controls or
operations of the Company and its Subsidiaries and the Borrowers shall cooperate
with the Bank and such accountants to facilitate any such discussion. Promptly
after the receipt thereof, the Borrowers shall, at the Bank's request, furnish
to the Bank copies of any written recommendations concerning the management,
finances, financial controls, or operations of the Company or any Subsidiary
received from the Borrowers' independent public accountants.
Section 6.9. Environmental Reports. The Borrowers shall furnish to the
---------------------
Bank: (a) not later than seven days after notice thereof, notice of any
enforcement actions, or, to the knowledge of the Borrowers, threatened
enforcement actions affecting the Company or any Subsidiary by any Governmental
Authority related to Environmental Laws; (b) copies, promptly after they are
received, of all orders, notices of responsibility, notices of violation,
notices of enforcement actions, and assessments, and other written
communications pertaining to any such orders, notices, claims and assessments
received by the Company or any Subsidiary from any Governmental Authority; (c)
not later than seven days after notice thereof, notice of any civil claims or
threatened civil claims affecting the Company or any Subsidiary by any third
party alleging any violation of Environmental Laws or harm to human health or
the environment; (d) copies of all cleanup plans, site assessment reports,
response plans, remedial proposals, or other submissions of the Company or any
Subsidiary, other third party (e.g., committee of potentially responsible
parties at a Superfund site), or any combination of same, submitted to a
Governmental Authority in response to any communication referenced in
subsections (a) and (b) herein simultaneously with their submission to such
Governmental Authority; and (e) from time to time, on request of the Bank,
evidence of the Company's and any Subsidiaries' insurance coverage, if any, for
any environmental liabilities.
Section 6.10. Miscellaneous. The Borrowers shall provide the Bank with
-------------
such other information that is reasonably available to the Borrowers as the Bank
may from time to time
29
<PAGE>
request respecting the business, properties, prospects, condition or operations,
financial or otherwise, of the Company and any Subsidiaries.
ARTICLE 7. FINANCIAL COVENANTS
On and after the date hereof, until all of the Bank Obligations shall
have been paid in full and the Bank shall have no commitment hereunder, the
Borrowers agree that the Company and its Subsidiaries shall observe the
following covenants:
Section 7.1. Ratio of Consolidated Senior Funded Debt to Consolidated
--------------------------------------------------------
EBITDA. The Company and its Subsidiaries shall not permit the ratio of
- ------
Consolidated Senior Funded Debt on any date to Consolidated EBITDA for the most
recent four quarter period for which financial statements have been delivered
pursuant to Section 6.1(b) to be greater than (a) 3.00-to-1.00 on June 28, 1997
(the first date such ratio is to be tested) and at any time thereafter but prior
to January 3, 1998, (b) 2.50-to-1.00 at January 3, 1998 and any time thereafter
but prior to January 2, 1999, (c) 2.00-to-1.00 at January 2, 1999 and any time
thereafter but prior to January 1, 2000, and (d) 1.50-to-1.00 at January 1, 2000
and at any time thereafter.
Section 7.2. Ratio of Consolidated Operating Cash Flow to Consolidated
---------------------------------------------------------
Total Debt Service. The Company and its Subsidiaries shall not permit for any
- ------------------
period of four consecutive fiscal quarters, commencing with the period ending
March, 1997, the ratio of (a) Consolidated Operating Cash Flow to (b)
Consolidated Total Debt Service, to be less than 1.5-to-1.0.
Section 7.3. Minimum Consolidated EBITDA. The Company and its
---------------------------
Subsidiaries shall earn Consolidated EBITDA for each period of four consecutive
fiscal quarters, commencing with the period ending March, 1997, of not less than
$3,000,000.
ARTICLE 8. AFFIRMATIVE COVENANTS
On and after the date hereof, until all of the Bank Obligations shall
have been paid in full and the Bank shall have no commitment hereunder, the
Borrowers covenant that they will, and will cause each of their Subsidiaries to,
comply with the following covenants and provisions:
Section 8.1. Existence and Business. The Company and each Subsidiary
----------------------
will (a) subject to Section 9.6, preserve and maintain their corporate existence
and qualify and remain qualified as a foreign corporation in each jurisdiction
in which such qualification is required, (b) preserve and maintain in full force
and effect all material rights, licenses, patents and franchises, (c) comply in
all material respects with all valid and applicable statutes, rules and
regulations necessary for the conduct of business, and (d) engage only in (i)
the businesses in which they are currently engaged as of the Closing Date and
(ii) businesses reasonably
30
<PAGE>
related to the businesses in which they are currently engaged as of the Closing
Date; provided that (A) such reasonably related businesses do not involve direct
retail operations and do not require significant expenditures or commitments and
(B) the addition of such reasonably related businesses does not materially
change the nature of the Borrowers' business.
Section 8.2. Taxes and Other Obligations. The Company and each
---------------------------
Subsidiary (a) will duly pay and discharge, or cause to be paid and discharged,
before the same shall become in arrears, all material taxes, assessments and
other governmental charges, imposed upon them and their properties, sales and
activities, or upon the income or profits therefrom, as well as the claims for
labor, materials, or supplies which if unpaid might by law result in a lien or
charge upon any of their properties; provided, however, that the Company and any
Subsidiary may contest any such charges or claims in good faith so long as (i)
an adequate reserve therefor has been established and is maintained if and as
required by generally accepted accounting principles and (ii) no action to
foreclose any such lien has been commenced, and (b) will promptly pay or cause
to be paid when due, or in conformance with customary trade terms (but not later
than 60 days from the due date in the case of trade debt), all lease
obligations, trade debt and all other Indebtedness incident to their operations.
The Borrowers and each Subsidiary shall cause all applicable tax returns and all
amounts due thereunder to be filed and paid, as the case may be, in order to
maintain their good standing with the Internal Revenue Service and state, local
and foreign tax authorities.
Section 8.3. Maintenance of Properties and Leases. The Company and
------------------------------------
each Subsidiary shall maintain, keep and preserve all of their properties
(tangible and intangible) in good repair and working order, ordinary wear and
tear excepted. The Company and each Subsidiary shall replace and improve their
properties as necessary for the conduct of their business. The Company and each
Subsidiary shall comply in all material respects with all leases naming any of
them as lessees.
Section 8.4. Insurance. The Company and each Subsidiary (a) will keep
---------
their principal assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
explosion or hazards, by extended coverage in an amount sufficient to avoid
co-insurance liability, and (b) will maintain with financially sound and
reputable insurers insurance against other hazards and risks and liability to
persons and property to the extent and in a manner reasonably satisfactory to
the Bank, and in any event as customary for companies in similar businesses
similarly situated; provided, however, that on prior notice to the Bank they may
-----------------
effect workmen's compensation insurance through an insurance fund operated by
such state or jurisdiction and may also be a self-insurer with respect to
workmen's compensation and with respect to group medical benefits under any
medical benefit plan. The provisions of the Security Agreements relating to
insurance shall not be limited by the provisions of this Section 8.4. On request
of the Bank from time to time, the Borrowers will render to the Bank a statement
in reasonable detail as to all insurance coverage required by this Section. A
description of the material elements of insurance coverage of the Company and
its Subsidiaries as of the date hereof is set forth on Schedule 8.4.
------------
31
<PAGE>
Section 8.5. Records, Accounts and Places of Business. The Company and
----------------------------------------
each Subsidiary shall maintain comprehensive and accurate records and accounts
in accordance with generally accepted accounting principles consistently
applied. The Company and each Subsidiary shall maintain adequate and proper
reserves. The Company and each Subsidiary will promptly notify the Bank of (a)
any changes in the places of business of the Company and any Subsidiary and (b)
any additional places of business which may arise hereafter.
Section 8.6. Inspection. At any reasonable time and from time to time,
----------
and, so long as no Event of Default has occurred and is continuing, upon
reasonable notice to the Company, the Borrowers shall permit the Bank and any of
the Bank's agents or representatives to examine and make copies of and abstracts
from the records and books of account of, and visit the properties of, the
Company and its Subsidiaries and to discuss the affairs, finances and accounts
of the Borrowers and their Subsidiaries with any of their officers or directors.
Section 8.7. Maintenance of Accounts. The Company and its Subsidiaries
-----------------------
shall maintain the Bank as their depository for their operating, concentration
and disbursement accounts.
ARTICLE 9. NEGATIVE COVENANTS
On and after the date hereof, until all of the Bank Obligations shall
have been paid in full and the Bank shall have no further commitment hereunder,
the Borrowers covenant that none of them nor any of their Subsidiaries will,
without the prior express written consent or waiver of the Bank:
Section 9.1. Restrictions on Indebtedness. Create, incur, suffer or
----------------------------
permit to exist, or assume or guarantee, either directly or indirectly, or
otherwise become or remain liable with respect to, any Indebtedness, except the
following:
(a) Indebtedness for borrowed money outstanding at the date of
this Agreement as set forth on Schedule 5.13(a) but no refinancings thereof;
----------------
provided that all of such Indebtedness is paid in full on or before April 11,
1997.
(b) Indebtedness on account of Consolidated Current
Liabilities (other than for money borrowed) incurred in the normal and ordinary
course of business.
(c) Indebtedness in respect of (i) taxes, assessments,
governmental charges or levies and claims for labor, materials and supplies to
the extent that payment thereof shall not at the time be required to be made in
accordance with the provisions of Section 8.2 hereof, (ii) judgments or awards
which have been in force for less than the applicable appeal period so long as
execution is not levied thereunder or in respect of which the Company or any
Subsidiary shall at the time in good faith be prosecuting an appeal or
proceedings for review in a manner satisfactory to the Bank and in respect of
which a stay of execution shall have been
32
<PAGE>
obtained pending such appeal or review and for which adequate reserves have been
established in accordance with generally accepted accounting principles, and
(iii) endorsements made in connection with the deposit of items for credit or
collection in the ordinary course of business.
(d) Indebtedness in an amount not to exceed (i) $100,000 in
respect of purchase money security interests permitted under Section 9.2(b)
hereof and (ii) $500,000 in respect of a purchase money security interest in a
new computer system permitted under Section 9.2(b) hereof.
(e) Indebtedness to the Bank.
Section 9.2. Restriction on Liens. Create or incur or suffer to be
--------------------
created or incurred or to exist any encumbrance, mortgage, pledge, lien, charge
or other security interest of any kind upon any of its property or assets of any
character, whether now owned or hereafter acquired, or transfer any of such
property or assets for the purposes of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
its general creditors, or acquire or agree or have an option to acquire any
property or assets upon conditional sale or other title retention agreement,
device or arrangement (including Capitalized Leases) or suffer to exist for a
period of more than 30 days after the same shall have been incurred any
Indebtedness against it which if unpaid might by law or upon bankruptcy or
insolvency, or otherwise, be given any priority whatsoever over its general
creditors, or sell, assign, pledge or otherwise transfer for security any of its
accounts, contract rights, general intangibles, or chattel paper (as those terms
are defined in the Massachusetts Uniform Commercial Code) with or without
recourse; provided, however, that the Company or any Subsidiary may create or
-------- -------
incur or suffer to be created or incurred or to exist:
(a) Liens and security interests securing the Bank
Obligations.
(b) Purchase money security interests (which term shall
include mortgages, conditional sale contracts, Capitalized Leases and all other
title retention or deferred purchase devices) to secure the purchase price of
property acquired hereafter by the Borrowers, or to secure Indebtedness incurred
solely for the purpose of financing such acquisitions; provided, however, that
------------------
no such purchase money security interests shall extend to or cover any property
other than the property the purchase price of which is secured by it, and that
the principal amount of Indebtedness (whether or not assumed) with respect to
each item of property subject to such a security interest shall not exceed the
fair value of such item on the date of its acquisition.
(c) Deposits or pledges made in connection with, or to secure
payment of, workmen's compensation, unemployment insurance, old age pensions or
other social security; liens in respect of judgments or awards to the extent
such judgments or awards are permitted as Indebtedness by the provisions of
Section 9.1(c); and liens for taxes, assessments or governmental charges or
levies and liens to secure claims for labor, material or supplies to the
33
<PAGE>
extent that payment thereof shall not at the time be required to be made in
accordance with Section 8.2.
(d) Encumbrances in the nature of zoning restrictions,
easements, and rights or restrictions of record on the use of real property
which do not materially detract from the value of such property or impair its
use in the business of the owner or lessee.
(e) Liens (other than judgments and awards) created by or
resulting from any litigation or legal proceeding, provided the execution or
other enforcement thereof is effectively stayed and the claims secured thereby
are being actively contested in good faith by appropriate proceedings
satisfactory to the Bank.
(f) Liens arising by operation of law to secure landlords,
lessors or renters under leases or rental agreements made in the ordinary course
of business and confined to the premises or property rented.
Nothing contained in this Section 9.2 shall permit the Borrowers to
incur any Indebtedness or take any other action or permit to exist any other
condition which would be in contravention of any other provision of this
Agreement.
Section 9.3. Restrictions on Asset Acquisition. In the case of the
---------------------------------
Company, acquire any assets other than capital stock in its Subsidiaries all of
which will be pledged to the Bank pursuant to the Pledge Agreement.
Section 9.4. Investments. Have outstanding or hold or acquire or make
-----------
or commit itself to acquire or make any Investment except the following:
(a) Investments having a maturity of less than one year from
the date thereof by the Borrowers in: (i) obligations of the Bank; (ii)
obligations of the United States of America or any agency or instrumentality
thereof; (iii) repurchase agreements involving securities described in clauses
(i) and (ii) with the Bank; and (iv) commercial paper which is rated not less
than prime-one or A-1 or their equivalents by Moody's Investor Service, Inc. or
Standard & Poor's Corporation, respectively, or their successors;
(b) Existing Investments of the Company in its Subsidiaries,
as described on Schedule 5.4;
(c) Investments of the Company or any of its Subsidiaries in
new wholly-owned Subsidiaries incorporated under the laws of any state of the
United States formed or acquired after the date hereof, provided that on or
prior to the date of formation or acquisition thereof:
(i) such Subsidiary becomes a Borrower hereunder, jointly and
severally, or, at the Bank's option, guaranties the payment and
performance of the
34
<PAGE>
Bank Obligations to the Bank, all on terms and conditions as reasonably
requested by the Bank;
(ii) such Subsidiary becomes a party to the Security
Agreements, or executes supplemental security agreements similar in
form and scope, pursuant to which such Subsidiary grants to the Bank a
security interest in and lien on all assets of such Subsidiary;
(iii) the owner of such Subsidiary's capital stock
executes a pledge agreement in favor of the Bank, pursuant to which all
of the capital stock of such Subsidiary is pledged to the Bank and
certificates for such shares together with stock powers executed in
blank are delivered to the Bank;
(iv) the Company delivers to the Bank lien searches
demonstrating that the assets of such Subsidiary are not subject to any
liens or encumbrances of record except such as would be permitted under
Section 9.2;
(v) the Company delivers to the Bank an opinion of
counsel, in form and substance satisfactory to the Bank, as to such
Subsidiary, the execution, delivery and performance of the documents
executed by such Subsidiary and the Company referred to above, and such
other matters as reasonably requested by the Bank; and
(vi) the Company and such Subsidiary deliver to the Bank
such additional instruments, certificates, and documents as the Bank
may reasonably request relating to the requirements set forth above;
(d) Investments consisting of normal travel and similar
advances to employees of the Company and its Subsidiaries not exceeding $50,000
in the aggregate at any one time outstanding; and
(e) Investments consisting of advances to Royal Advertising &
Marketing, Inc. ("Royal") to pay for advertising and marketing expenses
contracted by Royal for the benefit of the Borrowers.
Section 9.5. Dispositions of Assets. Sell, lease or otherwise dispose
----------------------
of any assets except for (a) the sale, lease or other disposition of inventory
or other property (not including receivables) in the ordinary course of business
and (b) the SC Publishing Disposition.
Section 9.6. Assumptions, Guaranties, Etc. of Indebtedness of Other
------------------------------------------------------
Persons. Assume, guarantee, endorse or otherwise be or become directly or
- -------
contingently liable (including, without limitation, by way of agreement,
contingent or otherwise, to purchase, provide funds for payment, supply funds to
or otherwise invest in any Person or otherwise assure the creditors of any such
Person against loss) in connection with any Indebtedness of
35
<PAGE>
any other Person, except for guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business.
Section 9.7. Mergers, Etc. Enter into any merger or consolidation with
-------------
or acquire all or substantially all of the assets or capital stock of any
Person, or sell, assign, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whether now owned or hereafter acquired) to any Person, except that (a)
any Subsidiary may merge into the Company or any other Subsidiary, (b) the
Company and any Subsidiary may consummate a Permitted Acquisition or enter into
a merger with another entity, provided that immediately after and giving effect
thereto, no event shall occur and be continuing which constitutes a Default
(including under Section 8.1 and including under Article 7, assuming that the
financial restrictions set forth in Article 7 are applied immediately after and
giving effect to such acquisition or merger) and provided further that the
Company or such Subsidiary is the surviving corporation to any such merger and
(c) the Company may effect all or any portion of the SC Publishing Disposition
at any time prior to March 12, 1998.
Section 9.8. ERISA. At any time while the Company or any Subsidiary
-----
has a Pension Plan, permit any accumulated funding deficiency to occur with
respect to any Pension Plan or other employee benefit plans established or
maintained by the Company or any Subsidiary or to which contributions are made
by the Company or any Subsidiary (the "Plans"), and which are subject to the
"Pension Reform Act" and the rules and regulations thereunder or to Section 412
of the Code, and at all times comply in all material respects with the
provisions of the Act and Code which are applicable to the Plans. The Company
will not permit the Pension Benefit Guaranty Corporation to cause the
termination of any Pension Plan under circumstances which would cause the lien
provided for in Section 4068 of the Pension Reform Act to attach to the assets
of the Company or any Subsidiary.
Section 9.9. Distributions. Make any Distribution or make any other
-------------
payment on account of the purchase, acquisition, redemption, or other retirement
of any shares of stock, whether now or hereafter outstanding, except that (a)
any Subsidiary may make a Distribution to the Company and (b) the Company may
make Permitted Restricted Payments so long as no Default exists or would result
from any such Permitted Restricted Payment.
Section 9.10. Sale and Leaseback. Sell or transfer any of its
------------------
properties with the intention of taking back a lease of the same property or
leasing other property for substantially the same use as the property being sold
or transferred.
Section 9.11. Transactions with Affiliates. Enter into any transaction,
----------------------------
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service, with any Affiliate, except (a) for arm's length
transactions in the ordinary course of business on terms no more favorable to
such Affiliate than could be obtained from an unaffiliated third party and (b)
that the Company and its Subsidiaries may pay salaries, fees and bonuses to its
36
<PAGE>
directors, officers and employees as are usual and customary in the Company's or
its Subsidiaries' business.
ARTICLE 10. EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default. Each of the following events shall be
-----------------
deemed to be Events of Default hereunder:
(a) The Borrowers shall fail to make any payment in respect
of (i) the principal of any of the Bank Obligations as the same shall become
due, whether at the stated payment dates or by acceleration or otherwise, or
(ii) interest or commitment fees on or in respect of any of the Bank Obligations
as the same shall become due, and such failure shall continue for a period of
five (5) days.
(b) The Company or any Subsidiary shall fail to perform or
observe any of the terms, covenants, conditions or provisions of Sections 6.1,
6.2, 6.3, 6.4, 6.8, Article 7, Sections 8.1, 8.2 and 8.6 and Article 9 hereof.
(c) The Company or any Subsidiary shall fail to perform or
observe any other covenant, agreement or provision to be performed or observed
by the Company or any Subsidiary under this Agreement or any other Bank
Agreement, and such failure shall not be rectified or cured to the Bank's
satisfaction within thirty (30) days after the occurrence thereof.
(d) The Bank shall determine that any representation or
warranty of the Company or any Subsidiary herein or in any other Bank Agreement
or any amendment to any thereof shall have been materially adversely false or
misleading at the time made or intended to be effective.
(e) The Company or any Subsidiary shall fail to make any
payment of Indebtedness for money borrowed by the Borrowers when such payment is
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) or shall fail to perform or observe any provision of any agreement or
instrument relating to such Indebtedness, and such failure shall permit the
holder thereof to accelerate an aggregate amount in excess of $100,000 of such
Indebtedness.
(f) The Company or any Subsidiary shall be involved in
financial difficulties as evidenced:
(1) by its commencement of a voluntary case under
Title 11 of the United States Code as from time to time in effect, or
by its authorizing, by appropriate proceedings of its board of
directors or other governing body, the commencement of such a voluntary
case;
37
<PAGE>
(2) by its filing an answer or other pleading
admitting or failing to deny the material allegations of a petition
filed against it commencing an involuntary case under said Title 11, or
seeking, consenting to or acquiescing in the relief therein provided,
or by its failing to controvert timely the material allegations of any
such petition;
(3) by the entry of an order for relief in any
involuntary case commenced under said Title 11;
(4) by its seeking relief as a debtor under any
applicable law, other than said Title 11, of any jurisdiction relating
to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors, or by its consenting to or
acquiescing in such relief;
(5) by the entry of an order by a court of competent
jurisdiction (1) by finding it to be bankrupt or insolvent, (2)
ordering or approving its liquidation, reorganization or any
modification or alteration of the rights of its creditors, or (3)
assuming custody of, or appointing a receiver or other custodian for
all or a substantial part of its property and such order shall not be
vacated or stayed on appeal or otherwise stayed within 30 days;
(6) by the filing of a petition against the Company
or any Subsidiary under said Title 11 which shall not be vacated within
60 days; or
(7) by its making an assignment for the benefit of,
or entering into a composition with, its creditors, or appointing or
consenting to the appointment of a receiver or other custodian for all
or a substantial part of its property.
(g) There shall have occurred a judgment against the Company
or any Subsidiary in any court (i) for an amount in excess of $100,000, and from
which no appeal has been taken or with respect to which all appeal periods have
expired, unless such judgment is, to the Bank's satisfaction, insured against in
full, or (ii) which shall have a materially adverse effect upon the assets,
properties or financial condition of the Borrowers.
(h) Both Steven L. Bock and Stephen M. O'Hara shall cease to
serve actively as full-time employee of the Borrowers, whether by reason of
death, disability, resignation, action by the Board of Directors, or otherwise,
and 90 days shall have passed without express written waiver.
(i) Any "Event of Default" under any other Bank Agreement
shall have occurred.
Section 10.2. Remedies. Upon the occurrence of an Event of Default, in
--------
each and every case, the Bank may proceed to protect and enforce its rights by
suit in equity, action at
38
<PAGE>
law and/or other appropriate proceeding either for specific performance of any
covenant or condition contained in this Agreement or any other Bank Agreement or
in any instrument delivered to the Bank pursuant hereto or thereto, or in aid of
the exercise of any power granted in this Agreement, any Bank Agreement or any
such instrument, and (unless there shall have occurred an Event of Default under
Section 10.1(f), in which case the unpaid balance of Bank Obligations shall
automatically become due and payable) may, by notice in writing to the Borrowers
declare (a) its obligation to make Revolving Credit Advances to be terminated,
whereupon such obligation shall be terminated and/or (b) declare all or any part
of the unpaid balance of the Bank Obligations then outstanding to be forthwith
due and payable, whereupon such unpaid balance or part thereof shall become so
due and payable without presentation, protest or further demand or notice of any
kind, all of which are hereby expressly waived. In such event, the Bank may
proceed to enforce payment of such balance or part thereof in such manner as it
may elect, and the Bank may offset and apply toward the payment of such balance
or part thereof any Indebtedness of it to the Company, or to any obligor on the
Bank Obligations, including any Indebtedness represented by deposits in any
general or special account maintained with the Bank or with any other bank
controlling, controlled by or under common control with the Bank.
ARTICLE 11. WAIVERS; AMENDMENTS; REMEDIES
No delay or omission on the part of the Bank in exercising its rights
and remedies against the Borrowers or any other interested party shall
constitute a waiver of any rights or remedies of the Bank. A breach by the
Borrowers of their obligations under this Agreement may be waived only by a
written waiver executed by the Bank. The Bank's waiver of a breach by the
Borrowers in one or more instances shall not constitute or otherwise be an
implicit waiver of subsequent breaches. To the extent permitted by applicable
law, the Borrowers hereby agree to waive, and do hereby absolutely and
irrevocably waive (a) all presentments, demands for performance, notices of
nonperformance, protests, notices of protest and notices of dishonor in
connection with any of the Indebtedness evidenced by the Revolving Credit Note
and the Term Note, (b) any requirement of diligence or promptness on the Bank's
part in the enforcement of its rights under the provisions of this Agreement or
any Bank Agreement, and (c) any and all notices of every kind and description
which may be required to be given by any statute or rule of law with respect to
the Borrowers' liability (i) under this Agreement or in respect of the
Indebtedness evidenced by the Revolving Credit Note, the Term Note or any other
Bank Obligation or (ii) under any other Bank Agreement. No course of dealing
between the Borrowers and the Bank shall operate as a waiver of any of the
Bank's rights under this Agreement or any Bank Agreement or with respect to any
of the Bank Obligations. This Agreement shall be amended only by a written
instrument executed by the parties hereto making explicit reference to this
Agreement. The Bank's rights and remedies under this Agreement and under all
subsequent agreements between the Bank and the Borrowers shall be cumulative and
any rights and remedies expressly set forth herein shall be in addition to, and
not in limitation of, any other rights and remedies which may be available to
the Bank in law or at equity.
39
<PAGE>
ARTICLE 12. INDEMNIFICATION
Without limitation of any other obligation or liability of the
Borrowers or right or remedy of the Bank contained herein, the Borrowers hereby
covenant and agree to indemnify and hold the Bank, and the shareholders,
directors, agents, officers, partners, subsidiaries and affiliates of the Bank,
harmless from and against any and all damages, losses, settlement payments,
obligations, liabilities, claims, including, without limitation, claims for
finder's or broker's fees, actions or causes of action, and reasonable costs and
expenses incurred, suffered, sustained or required to be paid by an indemnified
party in each case by reason of or resulting from any claim relating to the
transactions contemplated hereby other than any such claims which are determined
by a final, non-appealable order of a court to be the result of the Bank's or
such indemnified party's gross negligence or willful misconduct. Promptly upon
receipt by any indemnified party hereunder of notice of the commencement of any
action against such indemnified party for which a claim is to be made against
the Borrowers hereunder, such indemnified party shall notify the Borrowers in
writing of the commencement thereof, although the failure to provide such notice
shall not affect the indemnification rights of any such indemnified party
hereunder to the extent the Borrowers demonstrate to the reasonable satisfaction
of such indemnified party that such failure to provide notice prejudiced the
Borrowers in its defense of such claim. The Borrowers shall have the right, at
their option upon notice to the indemnified parties, to defend any such matter
at their own expense and with their own counsel, except as provided below, which
counsel must be reasonably acceptable to the indemnified parties. The
indemnified party shall cooperate with the Borrowers in the defense of such
matter. The indemnified party shall have the right to employ separate counsel
and to participate in the defense of such matter at its own expense. In the
event that (a) the employment of separate counsel by an indemnified party has
been authorized in writing by the Borrowers, (b) the Borrowers have failed to
assume the defense of such matter or (c) the named parties to any such action
(including impleaded parties) include any indemnified party who has been advised
by counsel that there may be one or more legal defenses available to it or
prospective bases for liability against it, which are different from those
available to or against the Borrowers, then the Borrowers shall not have the
right to assume the defense of such matter with respect to such indemnified
party. The Borrowers shall not be liable for any compromise or settlement of any
such matter effected without its written consent, provided that any such consent
or refusal to consent may not be unreasonably delayed. The Borrowers shall not
compromise or settle any such matter against an indemnified party without the
written consent of the indemnified party, provided that any such consent or
refusal to consent may not be unreasonably withheld or delayed; provided that
the Borrowers' shall not be liable for any damages in excess of those for which
they would have been liable had the indemnified party accepted such compromise
or settlement offer.
40
<PAGE>
ARTICLE 13. MISCELLANEOUS
Section 13.1. Successors and Assigns.
----------------------
(a) This Agreement shall bind and shall be enforceable by the
respective successors and assigns of the parties hereto. The representations and
warranties made by the Borrowers in this Agreement shall bind the Borrowers'
successors and assigns.
(b) The Bank and any subsequent holder of all or a portion of
the Bank's interests hereunder shall have the right from time to time and at any
time to sell, assign, transfer, negotiate and grant participation interests in
all or any part of its commitments hereunder, the Revolving Credit Note, the
Term Note and its rights under any other Bank Agreement to one or more financial
institutions; provided, however, that any such transfer, assignment or
-----------------
participation shall be of a proportionate interest in each of the Revolving
Credit Note, the Term Note and the commitment hereunder and shall aggregate not
less than $3,000,000. In the case of any such sale, assignment, transfer,
negotiation or participation of all or any portion of such commitments, the
Revolving Credit Note, the Term Note and its rights under any other Bank
Agreement, the assignee, transferee or recipient thereof shall have, to the
extent of such sale, assignment, transfer, negotiation or participation, the
same rights, benefits and obligations as the Bank hereunder. The Borrowers
hereby acknowledge and agree that any such transfer, assignment or other
disposition described in this Section 13.1(b) (other than participations) will
give rise to direct obligations of the Borrowers to the buyer, assignee or
transferee, as the case may be, and in such event the term "Bank" as used herein
shall include each such buyer, assignee or transferee, each of which, to the
extent of its interest therein, may rely on, and possess all rights of the Bank
hereunder, under the Revolving Credit Note, the Term Note and under all other
Bank Agreements.
Section 13.2. Notices. All notices and other communications made or
-------
required to be given pursuant to this Agreement shall be in writing and shall be
mailed by United States mail, postage prepaid, or sent by nationally-recognized
overnight carrier service, addressed as follows:
(a) If to the Bank, at 100 Federal Street, Boston, MA 02110,
Attention: Margaret Ronan Stack, Vice President, or at such other address(es) or
to the attention of such other Person as the Bank shall from time to time
designate in writing to the Borrowers.
(b) If to the Borrowers, c/o Specialty Catalog Corp., 21
Bristol Drive, South Easton, MA 02375, Attention: Steven L. Bock, or at such
other address(es) or to the attention of such other Person as the Borrowers
shall from time to time designate in writing to the Bank.
Any notice so addressed and mailed by registered or certified mail
shall be deemed to have been given when mailed.
41
<PAGE>
Section 13.3. Merger. This Agreement and the other Bank Agreements
------
contemplated hereby constitute the entire agreement of the Borrowers and the
Bank and express the entire understanding of the Borrowers and the Bank with
respect to credit advanced or to be advanced by the Bank to the Borrowers.
Section 13.4. Governing Law. This Agreement shall be governed by and
-------------
construed and enforced under the laws of The Commonwealth of Massachusetts.
Section 13.5. Counterparts. This Agreement and all amendments to this
------------
Agreement may be executed in several counterparts, each of which shall be an
original. The several counterparts shall constitute a single Agreement.
Section 13.6. Expenses. The Borrowers agree, jointly and severally, to
--------
pay on demand, all of the Bank's reasonable expenses in preparing, executing,
delivering and administering this Agreement, all amendments hereto, and the
Revolving Credit Note, the Term Note, the Security Agreements and the other Bank
Agreements and related instruments and documents, and perfecting and maintaining
its liens under the Security Agreements, including, without limitation, the
reasonable fees and out-of-pocket expenses of the Bank's special counsel,
Goodwin, Procter & Hoar LLP, and the Bank's expenses in connection with audits
and Commercial Finance Exams of the Borrowers, which the Bank agrees shall, so
long as no Event of Default has occurred and is continuing, be held no more
frequently than once in each fiscal year of the Borrowers. The Borrowers also
agree, jointly and severally, to pay on demand, all reasonable out-of-pocket
expenses incurred by the Bank, including, without limitation, legal and
accounting fees, in connection with the collection of amounts upon the
occurrence of an Event of Default hereunder, the revision, protection or
enforcement of any of the Bank's rights against the Borrowers under the
Agreement, the Revolving Credit Note, the Term Note, the Security Agreements and
the other Bank Agreements and the administration of special problems that may
arise under this Agreement or any other Bank Agreement. The Borrowers also agree
to pay all stamp and other taxes in connection with the execution and delivery
of this Agreement and related instruments and documents.
Section 13.7. Joint and Several Obligations. All obligations of the
-----------------------------
Borrowers hereunder and under the Revolving Credit Note and the Term Note shall
be joint and several obligations of the Borrowers.
Section 13.8. Reliance on Representations and Actions of the Company.
------------------------------------------------------
The Borrowers hereby appoint the Company as the Borrowers' agent to execute,
deliver and perform, on behalf of the Borrowers, any and all notices,
certificates, documents and actions to be executed, delivered or performed
hereunder or under any Bank Agreement, and the Borrowers hereby agree that the
Bank may rely upon any representation, warranty, certificate, notice, document
or telephone request which purports to be executed or made or which the Bank in
good faith believes to have been executed or made by the Company or any of its
executive officers, and the Borrowers hereby further, jointly and severally,
agree to indemnify and hold the Bank harmless for any action, including the
making of Revolving Credit
42
<PAGE>
Advances hereunder, and any loss or expense, taken or incurred by the Bank as a
result of its good faith reliance upon any such representation, warranty,
certificate, notice, document or telephone request.
Section 13.9. WAIVER OF JURY TRIAL. THE BANK AND THE BORROWERS AGREE
--------------------
THAT NONE OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN
ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON OR ARISING
OUT OF, THIS AGREEMENT, THE REVOLVING CREDIT NOTE, THE TERM NOTE, ANY BANK
AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE
RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH
ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN
WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK
AND THE BORROWERS, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS.
NEITHER THE BANK NOR THE BORROWERS HAVE AGREED WITH OR REPRESENTED TO THE OTHER
THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL
INSTANCES.
43
<PAGE>
IN WITNESS WHEREOF, the Borrowers and the Bank have caused this Credit
Agreement to be executed by their duly authorized officers as of the date set
forth above.
SPECIALTY CATALOG CORP.
By: /s/ [SIGNATURE APPEARS HERE]
-----------------------------------------------
CEO
SC CORPORATION d/b/a SC Direct
By: /s/ [SIGNATURE APPEARS HERE]
-----------------------------------------------
CEO
SC PUBLISHING, INC.
By: /s/ [SIGNATURE APPEARS HERE]
-----------------------------------------------
CEO
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Margaret Roman Stack
-----------------------------------------------
VICE PRESIDENT
44
<PAGE>
[LOGO OF QUEBECOR PRINTING (USA) CORP. APPEARS HERE]
Exhibit 10.38
QUEBECOR PRINTING (USA) CORP.
SC DIRECT, INC.
AMENDMENT NO. 2
THIS AMENDMENT AGREEMENT (the "Amendment"), effective as of December 31, 1996,
is between Quebecor Printing (USA) Corp., ("Printer") a Delaware corporation,
having an office at 125 High Street, Boston, Massachusetts 02110 and SC
Holdings, Specialty Catalogs Corporation, DBA, SC Direct, Inc. (in
Massachusetts), SC Publishing and Royal Advertising, ("Customer") a
Massachusetts corporation having an office at 21 Bristol Drive, S. Easton,
Massachusetts, 02375.
WHEREAS, The Printer and Customer have previously entered into an agreement
dated January 1, 1995 ("the Agreement") as amended dated March 8, 1996 ("the
Amendment No.1") under which Printer agreed to print and Customer agreed to
purchase certain quantities of Customers' catalog program, and
WHEREAS, Customer and Printer desire to amend the Agreement and Amendment No. 1
dated March 8, 1996.
NOW THEREFORE, in consideration of the convenants and agreements set forth
herein, the parties agree as follows:
1. All capitalized terms herein, unless otherwise defined herein, shall
have the same meanings as provided in the Agreement.
2. The second paragraph of Section 4.G of the Agreement, as amended by
the First Amendment to the Printing Agreement, is hereby deleted in
its entirety and replaced with the following:
"If, in Printer's judgment, there is a significant adverse
change in Customer's credit standing or in the event that
Customer does not comply with the payment provisions hereunder,
Printer shall have the right to change the terms of payment and
its obligation to perform further Work will be subject to
reaching mutual agreement on such revised terms. Customer shall
pay interest on any invoice amount outstanding after the due
date, except for amounts disputed in good faith as provided
below, at the prime lending rate as from time to time
established by Chase Manhattan/Bank plus one percent (1%). No
delay or omission on the part of the Printer in exercising
<PAGE>
[LOGO OF QUEBECOR PRINTING(USA) CORP. APPEARS HERE]
any right hereunder shall be deemed a waiver of such right or
any other remedy. A waiver of any one occasion shall not be
construed as a bar to or waiver of such right or remedy on any
future occasion.
3. Printer shall pay Customer for the work to date, a rebate ("Rebate")
over the first two years of the term of this Agreement according to the
following schedule:
01/01/97 - 12/31/97 $4,166.67 per month
01/01/98 - 12/31/98 $4,166.67 per month
Printer shall pay Customer a Sign on Bonus ("the Sign on Bonus") over
the remaining term of this Agreement according to the following
schedule:
01/01/99 - 12/31/99 $2,777.75 per month
01/01/00 - 12/31/00 $2,777.75 per month
01/01/01 - 12/31/01 $2,777.83 per month
Notwithstanding the foregoing, in the event that Customer's print
production and distribution volume (the "Volume") for any calendar year
falls below 25 million catalogs, the Sign on Bonus and or rebate, as the
case may be, shall be reduced according to the following formula (the
"Reduction"):
25,000,000 - Volume X $3,333.33 per month
-------------------
25,000,000
The Reduction, if any, resulting from a shortfall of Volume during the
years 1997 and 1998 shall be applied to the Sign on Bonus payable during
the year 1999 and, if necessary, the Sign on Bonus payable during the
year 2000. The Reduction, if any, resulting from a shortfall of Volume
during the year 1999 shall be applied to the Sign on Bonus payable
during the year 2000 and, if necessary, the Sign on Bonus payable during
the year 2001. The Reduction, if any, resulting from a shortfall of
Volume during the year 2000 shall be applied to the Sign on Bonus
payable during the year 2001. The Reduction, if any, resulting from
shortfall of Volume during the year 2001 shall be payable to Printer as
part of the last invoice issued to Customer for Work performed in 2001.
<PAGE>
[LOGO OF QUEBECOR PRINTING (USA) CORP. APPEARS HERE]
4. In all other aspects, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed in
Boston, Massachusetts as of the day and year first above written.
SC DIRECT, INC. QUEBECOR PRINTING (USA) CORP.
/s/ James F. Monti
- ---------------------- --------------------------
Name: James M. Crowley Name: James F. Monti
Title: Director of Production Title: V.P. Sales, N.E. Region
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 1995 DECEMBER 31, 1994
PRIMARY AND PRIMARY AND PRIMARY AND
FULLY DILUTED FULLY DILUTED FULLY DILUTED
----------------- ----------------- -----------------
<S> <C> <C> <C>
INCOME
Net Income............... $ 973,259 $ 522,262 $12,788,811
Preferred Dividends...... -- (292,383) (31,241)
--------- --------- -----------
Net Income Available to
Common Stockholders..... $ 973,259 $ 229,879 $12,757,570
========= ========= ===========
Primary Earnings per
Share................... $ 0.25 $ 0.08 $ 4.23
========= ========= ===========
Fully Dilutive Earnings
per Share............... $ 0.25 $ 0.08 $ 4.23
========= ========= ===========
NUMBER OF SHARES
Primary
Weighted Average
Shares................ 3,195,502 2,826,666 2,826,666
Incremental Shares
Attributed to Exercise
of Warrants........... 188,412 188,412 188,412
Incremental Shares
Attributed to Exercise
of Stock Options...... 562,297 -- --
--------- --------- -----------
3,946,211 3,015,078 3,015,078
========= ========= ===========
Fully Dilutive
Weighted Average
Shares................ 3,195,502 2,826,666 2,826,666
Incremental Shares
Attributed to Exercise
of Warrants........... 188,412 188,412 188,412
Incremental Shares
Attributed to Exercise
of Stock Options...... 563,074 -- --
--------- --------- -----------
3,946,988 3,015,078 3,015,078
========= ========= ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 1,392,344
<SECURITIES> 0
<RECEIVABLES> 820,076
<ALLOWANCES> 72,197
<INVENTORY> 4,986,293
<CURRENT-ASSETS> 11,076,246
<PP&E> 4,113,834
<DEPRECIATION> (3,298,109)
<TOTAL-ASSETS> 18,405,196
<CURRENT-LIABILITIES> 5,457,644
<BONDS> 8,146,611
0
0
<COMMON> 47,017
<OTHER-SE> 4,753,924
<TOTAL-LIABILITY-AND-EQUITY> 18,405,196
<SALES> 36,271,663
<TOTAL-REVENUES> 36,271,663
<CGS> 12,810,921
<TOTAL-COSTS> 12,810,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,657,471
<INCOME-PRETAX> 1,617,306
<INCOME-TAX> 644,047
<INCOME-CONTINUING> 973,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 973,259
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
