<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
FOR THE PERIOD ENDED JUNE 28, 1997
OR
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-21499
SPECIALTY CATALOG CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3253301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21 BRISTOL DRIVE
SOUTH EASTON, MASSACHUSETTS 02375
(Address of principal executive offices)
TELEPHONE NUMBER (508) 238-0199
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 1, 1997, there were 4,967,001 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
Page No.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF JUNE 28, 1997 AND DECEMBER 28, 1996, AND FOR
THE THREE MONTHS ENDED JUNE 28, 1997 AND JUNE
29, 1996 AND FOR THE SIX MONTHS ENDED JUNE 28,
1997 AND JUNE 29, 1996
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $11,273,442 $9,477,173 $22,246,695 $18,754,741
Cost of sales (including buying,
occupancy and order fulfillment costs) 3,657,656 3,499,986 7,444,103 7,003,241
----------- ---------- ----------- -----------
Gross profit 7,615,786 5,977,187 14,802,592 11,751,500
Selling, general & administrative
expenses 5,597,511 5,087,681 13,444,106 10,590,938
----------- ---------- ----------- -----------
Income from operations 2,018,275 889,506 1,358,486 1,160,562
Interest expense, net 174,201 469,779 440,973 909,216
----------- ---------- ----------- -----------
Income before income taxes and
extraordinary items 1,844,074 419,727 917,513 251,346
Income tax provision 755,980 167,704 385,356 102,046
----------- ---------- ----------- -----------
Income before extraordinary items 1,088,094 252,023 532,157 149,300
Extraordinary items - losses on early
extinguishment of debt (net of income
tax benefit of $41,372 for the three
months ended and $149,083 for the six
months ended June 28, 1997) 57,132 --- 218,699 ---
----------- ---------- ----------- -----------
Net income $ 1,030,962 $ 252,023 $ 313,458 $ 149,300
----------- ---------- ----------- -----------
Preferred stock dividends --- 73,094 --- 146,188
----------- ---------- ----------- -----------
Net income available to common
stockholders $ 1,030,962 $ 178,929 $ 313,458 $ 3,112
=========== ========== =========== ===========
Per common share:
Income before extraordinary items $ 0.20 $0.05 $ 0.10 $0.00
Loss on extraordinary items ($0.01) --- ($0.04) ---
----------- ---------- ----------- -----------
Net income per share $ 0.19 $0.05 $ 0.06 $0.00
=========== ========== =========== ===========
Weighted average shares outstanding 5,534,395 3,570,523 5,513,357 3,570,523
=========== ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETs
(unaudited)
<TABLE>
<CAPTION>
ASSETS JUNE 28, 1997 DECEMBER 28, 1996
-------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 324,755 $ 1,392,344
Accounts receivable, net 1,022,204 820,076
Inventories 4,877,492 4,986,293
Prepaid expenses 2,387,020 3,877,533
----------- ------------
Total current assets 8,611,471 11,076,246
----------- ------------
Property and equipment, net 975,502 815,725
----------- ------------
Deferred income taxes 5,964,094 6,170,102
----------- ------------
Other assets 299,953 343,123
----------- ------------
Total Assets $15,851,020 $ 18,405,196
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 1,806,462 2,653,534
Line of credit 2,423,834 ---
Liabilities to customers 857,405 691,377
Income taxes --- 107,019
Current portion of long-term debt 750,000 2,005,714
----------- ------------
Total current liabilities 5,837,701 5,457,644
----------- ------------
Long-term debt 4,250,000 3,394,286
Subordinated debt-related parties --- 4,752,325
Commitments and contingencies
Stockholders' Equity:
Common stock 49,670 47,017
Additional paid-in capital 15,696,393 15,199,050
Deferred compensation (74,613) (83,363)
Note receivable - stockholder --- (140,174)
Accumulated deficit (9,908,131) (10,221,589)
----------- ------------
Total Stockholders' Equity 5,763,319 4,800,941
----------- ------------
Total Liabilities and Stockholders' Equity $15,851,020 $ 18,405,196
=========== ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 313,458 $ 149,300
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for bad debt 15,446 ---
Depreciation and amortization 140,716 141,536
Deferred income taxes 206,008 ---
Interest paid through issuance of debt --- 237,216
Amortization of deferred compensation 8,750 ---
Extraordinary loss due to early extinguishment of debt 98,504 ---
Changes in operating assets and liabilities:
Accounts receivable (217,574) 229,460
Inventories 108,801 983,183
Prepaid expenses 1,490,512 (124,073)
Other assets 52,198 53,122
Accounts payable and accrued expenses (842,072) (129,450)
Liabilities to customers 166,028 (125,102)
Income taxes (107,019) 150,985
Other long-term liabilities --- 23,415
----------- -----------
Net cash provided by operating activities 1,433,756 1,589,592
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (300,496) (138,780)
----------- -----------
Net cash used in investing activities (300,496) (138,780)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit 2,423,834 400,000
Issuance of long term debt 5,000,000 ---
Repayment of subordinated debt (4,224,683) ---
Repayment of BNP debt (5,400,000) (1,100,000)
----------- -----------
Net cash used in financing activities (2,200,849) (700,000)
----------- -----------
Increase (decrease) in cash and cash equivalents (1,067,589) 750,812
Cash and cash equivalents, beginning of year 1,392,344 113,364
----------- -----------
Cash and cash equivalents, end of period $ 324,755 $ 864,176
=========== ===========
</TABLE>
SUMMARY OF NONCASH TRANSACTIONS:
In March 1997, $131,146 of note receivable from a stockholder was offset
against the portion of the subordinated notes owed to that stockholder.
In April 1997, $495,000 of junior subordinated debt and $5,000 of accrued
interest was converted into $2,653 of common stock and $497,343 of additional
paid-in capital as a result of a cashless exercise of warrants.
See notes to condensed consolidated financial statements
5
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
These unaudited condensed consolidated financial statements should be read
in conjunction with the Annual Report on Form 10-K of Specialty Catalog Corp.
(the "Company") for the fiscal year ended December 28, 1996, and the
consolidated financial statements and footnotes included therein. Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. The results of operations for the three and
six months ended June 28, 1997 are not necessarily indicative of the results for
the entire fiscal year ending January 3, 1998.
The financial statements for the three and six months ended June 28, 1997
and June 29, 1996 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. Accounting Policies
The accounting policies underlying the financial statements are those set
forth in Note 1 of the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"), 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. As
required, the Company will adopt SFAS No. 128 in the fourth quarter of 1997.
This statement, if applied, would show the basic and diluted earnings per share
for the three and six months ended June 28, 1997 and June 29, 1996 of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
------- ------- -------- -------
1997 1996 1997 1996
---- ---- ---- ----
BASIC EPS
<S> <C> <C> <C> <C>
Income from operations before extraordinary items $ 0.22 $0.06 $ 0.11 $0.00
Extraordinary items ($0.01) $0.00 ($0.04) $0.00
------- ----- ------- -----
Net income $ 0.21 $0.06 $ 0.07 $0.00
======= ===== ======= =====
</TABLE>
6
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
------- ------- ------- -------
1997 1996 1997 1996
---- ---- ---- ----
DILUTED EPS
<S> <C> <C> <C> <C>
Income from operations before extraordinary items $ 0.20 $0.05 $ 0.10 $0.00
Extraordinary items ($0.01) $0.00 ($0.04) $0.00
------- ----- ------- -----
Net income $ 0.19 $0.05 $ 0.06 $0.00
======= ===== ======= =====
</TABLE>
3. Long-Term Debt
On March 12, 1997, the Company entered into a new $11 million credit
facility with BankBoston, N.A. (the "BKB Agreement") for the purpose of
refinancing its existing senior and subordinated debt and to provide for capital
expenditures and working capital needs of the Company. The new BKB Agreement
provides a $5 million term loan (the "Term Loan") and a $6 million revolving
line of credit (the "Line of Credit"). The Term Loan and the Line of Credit
bear interest rates based on either a base rate, as defined in the BKB
agreement, or under a LIBOR contract rate. As of June 28, 1997, the Term Loan
was under LIBOR contract rates which ranged from 8.28% to 8.38%. A portion of
the Line of Credit was under a LIBOR contract rate of 8.28% with the remaining
portion of the Line of Credit at the base rate of 9.50%. 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 amount available
under the Line of Credit as of June 28, 1997 was approximately $3,576,000.
The BKB Agreement is cross collateralized by a first perfected 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.
In March 1997, the Company used the proceeds from the Term Loan and
$500,000 under the Line of Credit to pay off its remaining indebtedness to
Banque Nationale de Paris ("BNP"). In conjunction with this repayment, the
Company recorded a $161,567 extraordinary loss on the early extinguishment of
debt (net of income tax benefit of $107,711) for the write off of the remaining
deferred financing costs.
Also in March 1997, the Company repaid $1,896,913 of principal and accrued
interest on the senior subordinated debt, with $1,765,767 repaid from proceeds
from the Line of Credit and
7
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
$131,146 repaid by offsetting a note receivable from a stockholder.
In April 1997, the Company repaid its remaining senior subordinated debt in
the amount of $2,901,496 of principal and accrued interest. The repayment was
made with proceeds from the Line of Credit.
Also in April 1997, the Company repaid $495,000 of junior subordinated
notes. In connection with the original issuance of these notes, the Company
issued warrants for $5,000 to purchase 265,335 shares of common stock for an
aggregate exercise price of $500,000. The holders of these warrants elected a
cashless exercise of these warrants, pursuant to which the Company issued
265,335 shares of common stock as settlement of the junior subordinated notes
and $5,000 of accrued interest. In conjunction with this transaction, the
Company recorded a pre-tax charge for the early extinguishment of debt of
$98,504 in April 1997.
4. Sale of Assets
On June 27, 1997, the Company's subsidiary, SC Publishing, sold its
business of continuing education for real estate professionals. The sales price
of $212,250 included a license to use the trade name Western Schools for real
estate courses, all related inventory for existing courses, and title and rights
to its real estate courses, both existing and under development. The Company
recognized a pre-tax gain, included in selling, general, and administrative
expenses, on the sale of these assets of $121,980. The Company will also
receive an annual royalty fee equal to the greater of $25,000 or 5% of the
revenue received by the buyer from sales of courses sold under the Company's
trade name for a three year period. SC Publishing, however, is retaining its
continuing education business for nurses and Certified Public Accountants.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the historical information contained herein, this quarterly
Report on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Exchange 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, and projected timetables for the market introduction of
the Company's 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) the Company's indebtedness and
future capital requirements, (ii) increasing postal rates, paper prices and
media costs, (iii) limited sources of fiber used to make the Company's products,
(iv) the limited number of suppliers of the Company's products, (v) the
Company's dependence upon foreign suppliers, (vi) the potential development of a
cure for hair loss and cancer treatment improvements, (vii) the effectiveness of
the Company's catalogs and advertising programs and (viii) the Company's
competition. Additional information concerning certain risks and uncertainties
that could cause actual results to differ materially from those projected or
suggested in the forward-looking statements is contained in the Company's
filings with the Commission, including those risks and uncertainties discussed
under the caption "Risk Factors" in the Company's 10-K, dated March 27, 1997.
The forward-looking statements contained herein represent the Company's
judgement as of the date of this Report on Form 10-Q, and the Company cautions
readers not to place undue reliance on such statements.
THREE MONTHS ENDED JUNE 28, 1997 COMPARED TO THREE MONTHS ENDED JUNE 29, 1996
Net sales increased $1.8 million, or 19.0%, from $9.5 million for the three
months ended June 29, 1996 to $11.3 million for the three months ended June 28,
1997. This increase was due to increased sales to new customers in the second
quarter of 1997 as the Company began to realize the benefit of its first and
second quarter advertising programs, expanded promotional pricing on certain
products, and the continued introduction of new products such as the Style
Enhancer.
Gross margin increased from 63.1% for the three months ended June 29, 1996
to 67.6% for the three months ended June 28, 1997. 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
customer packages weighing less than one pound, which reduced total shipping
costs.
Selling, general and administrative expenses increased approximately
$510,000, or 10.0%, from $5.1 million for the three months ended June 29, 1996
to $5.6 million for the three months
9
<PAGE>
ended June 28, 1997. This increase was primarily due to an increase in
advertising expenditures incurred in the second quarter of 1997 compared to the
second quarter of 1996. Advertising expenses increased approximately $370,000,
due to the Company's ability to return advertising spending to historical levels
as a result of improved liquidity compared to last year. The remainder of the
increase was due to increases in marketing expenses as the Company tested
additional programs, and expenses relating to being a public company which were
not incurred in the prior year. These increases were offset by a decrease in
catalog costs due to a reduction in paper costs, book sizes and the number of
catalogs mailed.
On June 27, 1997, the Company's subsidiary, SC Publishing, sold its
business of continuing education for real estate professionals. The sales price
of $212,250 included a license to use the trade name Western Schools for real
estate courses, all related inventory for existing courses, and title and rights
to its real estate courses, both existing and under development. The Company
recognized a pre-tax gain, included in selling, general, and administrative
expenses, on the sale of these assets of $121,980. The Company will also
receive an annual royalty fee equal to the greater of $25,000 or 5% of the
revenue received by the buyer from sales of courses sold under the Company's
trade name for a three year period. SC Publishing, however, is retaining its
continuing education business for nurses and Certified Public Accountants.
Net interest expense decreased approximately $296,000, or 62.9%, from
approximately $470,000 for the three months ended June 29, 1996 to approximately
$174,000 for the three months ended June 28, 1997, reflecting lower principal
amounts outstanding on the Company's bank loans during the second quarter of
1997 compared to the second quarter of 1996, the repayment of the Company's
remaining senior subordinated debt in April 1997 and lower interest rates.
SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED JUNE 29, 1996
Net sales increased $3.5 million, or 18.6%, from $18.8 million for the six
months ended June 29, 1996 to $22.2 million for the six months ended June 28,
1997. This increase was due to an increase in the number of catalogs mailed,
increased sales from new customers in the first six months of 1997 as the
Company began to realize the benefit of its first and second quarter advertising
programs, expanded promotional pricing on certain products, and the introduction
of new products such as the Style Enhancer.
Gross margin increased from 62.7% for the six months ended June 29, 1996 to
66.5% for the six months ended June 28, 1997. 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 customer
packages weighing less than one pound, which reduced total shipping costs. The
reduction in the cost of shipping resulted from a program that began in July
1996. The expected future growth rate of the gross margin percentage, when
compared to past periods, will be lower because the benefit of the shipping
program has been realized in these past periods.
10
<PAGE>
Selling, general and administrative expenses increased $2.9 million, or
26.9%, from $10.6 million for the six months ended June 29, 1996 to $13.4
million for the six months ended June 28, 1997. This increase is primarily due
to an increase in advertising expenditures in the first six months. Advertising
expenses increased $2.1 million, due to the Company's ability to return
advertising spending to historical levels as a result of improved liquidity
compared to last year. The remainder of the increase was due to increases in
marketing expenses as the Company tested additional programs, and expenses
relating to being a public company which were not incurred in the prior year.
On June 27, 1997, the Company's subsidiary, SC Publishing, sold its
business of continuing education for real estate professionals. The sales price
of $212,250 included a license to use the trade name Western Schools for real
estate courses, all related inventory for existing courses, and title and rights
to its real estate courses, both existing and under development. The Company
recognized a pre-tax gain, included in selling, general, and administrative
expenses, on the sale of these assets of $121,980. The Company will also
receive an annual royalty fee equal to the greater of $25,000 or 5% of the
revenue received by the buyer from sales of courses sold under the Company's
trade name for a three year period. SC Publishing, however, is retaining its
continuing education business for nurses and Certified Public Accountants.
Net interest expense decreased approximately $468,000, or 51.5%, from
approximately $909,000 for the six months ended June 29, 1996 to approximately
$441,000 for the six months ended June 28, 1997, reflecting lower principal
amounts outstanding on the Company's bank loans during the first six months of
1997 compared to the first six months of 1996, the repayment of the Company's
senior subordinated debt in March and April 1997, and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
On March 12, 1997, the Company entered into a new $11 million credit
facility with BankBoston, N.A. (the "BKB Agreement") for the purpose of
refinancing its existing senior and subordinated debt and to provide for capital
expenditures and working capital needs of the Company. The new BKB Agreement
provides a $5 million term loan (the "Term Loan") and a $6 million revolving
line of credit (the "Line of Credit"). The Term Loan and the Line of Credit
bear interest rates based on either a base rate, as defined in the BKB
agreement, or under a LIBOR contract rate. As of June 28, 1997, the Term Loan
was under LIBOR contract rates which ranged from 8.28% to 8.38%. A portion of
the Line of Credit was under a LIBOR contract rate of 8.28% with the remaining
portion of the Line of Credit at the base rate of 9.50%. 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 more favorable than under the BNP agreement, with
$1.25 million less payment required in 1997 and $1.1 million less in 1998. The
Company plans on using future cash receipts to pay down the Line of Credit on a
regular basis. 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 amount available under the Line of
11
<PAGE>
Credit as of June 28, 1997 was approximately $3,576,000.
The BKB Agreement is cross collateralized by a first perfected 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.
In March 1997, the Company used the proceeds from the Term Loan and
$500,000 under the Line of Credit to pay off its remaining indebtedness to BNP.
In conjunction with this repayment, the Company recorded a $161,567
extraordinary loss on the early extinguishment of debt (net of income tax
benefit of $107,711) for the write off of the remaining deferred financing
costs.
Also in March 1997, the Company repaid $1,896,913 of principal and accrued
interest on the senior subordinated debt, with $1,765,767 repaid from proceeds
from the Line of Credit and $131,146 repaid by offsetting a note receivable from
a stockholder.
In April 1997, the Company repaid the remaining senior subordinated debt in
the amount of $2,901,496 of principal and accrued interest. The repayment was
made with proceeds from the Line of Credit.
Also in April 1997, the Company repaid $495,000 of junior subordinated
notes. In connection with the original issuance of these notes, the Company
issued warrants for $5,000 to purchase 265,335 shares of common stock for an
aggregate exercise price of $500,000. The holders of these warrants elected a
cashless exercise of these warrants, pursuant to which the Company issued
265,335 shares of common stock as settlement of the junior subordinated notes
and $5,000 of accrued interest. In conjunction with this transaction, the
Company recorded a pre-tax charge for the early extinguishment of debt of
$98,504 in April 1997.
The Company's cash flow from operations and available credit facilities are
considered adequate to fund planned business operations and both the short-term
and long-term capital needs of the Company. However, certain events, such as
significant acquisitions, could require additional external financing.
Additionally, the Company plans to incur approximately $400,000 in connection
with certain capital leases to be entered into during the second half of fiscal
1997 for new computer equipment.
12
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128") which is effective for financial
statements issued for periods ending after December 15, 1997. This statement
requires the disclosure of basic and diluted earnings per share computations.
As required, the Company will adopt SFAS No. 128 in the fourth quarter of 1997.
This statement, if applied, would show the basic and diluted earnings per share
for the three and six months ended June 28, 1997 and June 29, 1996 of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
------- ------- ------- -------
1997 1996 1997 1996
---- ---- ---- ----
BASIC EPS
<S> <C> <C> <C> <C>
Income from operations before extraordinary items $ 0.22 $0.06 $ 0.11 $0.00
Extraordinary items ($0.01) $0.00 ($0.04) $0.00
------- ----- ------- -----
Net income $ 0.21 $0.06 $ 0.07 $0.00
======= ===== ======= =====
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
---- ---- ---- ----
DILUTED EPS
Income from operations before extraordinary items $ 0.20 $0.05 $ 0.10 $0.00
Extraordinary items ($0.01) $0.00 ($0.04) $0.00
------- ----- ------- -----
Net income $ 0.19 $0.05 $ 0.06 $0.00
======= ===== ======= =====
</TABLE>
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on Tuesday, May 13,
1997. The following represents the results of the voting on proposals submitted
to a vote of stockholders at such meeting:
a. Proposal to elect directors: Steven L. Bock by a vote of 4,323,753 in
favor and 500 withheld, Alan S. Cooper by a vote of 4,323,753 in favor and
500 withheld, Martin E. Franklin by a vote of 4,323,753 in favor and 500
withheld, Samuel L. Katz by a vote of 4,323,753 in favor and 500 withheld,
Guy Naggar by a vote of 4,323,753 in favor and 500 withheld, and Andrea
Pomerantz Lustig by a vote of 4,323,753 in favor and 500 withheld, were re-
elected as directors of the Company for a term of office expiring on the
date of the next annual meeting of shareholders, or special meeting in lieu
thereof, and until their respective successors are duly elected and
qualified.
b. Proposal to approve the selection of Deloitte & Touche L.L.P. as the
independent auditors of the Company for the fiscal year ending January 3,
1998.
Number of Number of Number of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
4,320,253 2,000 2,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1* Net Building Lease dated March 7, 1997 between Campanelli
Investment Properties and the Registrant for premises located
at 525 Campanelli Industrial Drive, Brockton, MA. Filed as
Exhibit 10.36 to Specialty Catalog Corp.'s 1996 Annual Report
on Form 10-K.
10.2* Credit Agreement dated March 12, 1997 between The First
National Bank of Boston and the Registrant. Filed as Exhibit
10.37 to Specialty Catalog Corp.'s 1996 Annual Report on Form
10-K.
10.3* Amendment No. 2 to Printing Agreement, dated January 1, 1995
between Quebecor Printing (USA) Corp. and the Registrant, as
amended, dated December 31, 1996. Filed as Exhibit 10.38 to
Specialty Catalog Corp.'s 1996 Annual Report on Form 10-K.
14
<PAGE>
11.1 Computation of weighted average shares used in computing
earnings per share amounts. Filed herewith.
27 Financial Data Schedule (for EDGAR filing purposes only). Filed
herewith.
* Indicates exhibit previously filed with the Securities and Exchange
Commission on the Registrant's 1996 Annual Report on Form 10-K and is
hereby incorporated by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three and
six months ended June 28, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIALTY CATALOG CORP.
Dated: August 7, 1997 /s/ Steven L. Bock
--------------------------------------------
Steven L. Bock
Chairman and Chief Executive Officer
Dated: August 7, 1997 /s/ J. William Heise
--------------------------------------------
J. William Heise
Senior Vice President, Chief Financial Officer
(Principal Accounting and Financial Officer)
16
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
PRIMARY AND PRIMARY AND PRIMARY AND PRIMARY AND
FULLY DILUTED FULLY DILUTED FULLY DILUTED FULLY DILUTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME
Net income $1,030,962 $ 252,023 $ 313,458 $ 149,300
Preferred stock dividends --- 73,094 --- 146,188
---------- ---------- ---------- ----------
Net income available to common
stockholders $1,030,962 $ 178,929 $ 313,458 $ 3,112
========== ========== ========== ==========
Primary and Fully Diluted Earnings per
Share: $ 0.19 $ 0.05 $ 0.06 $ 0.00
========== ========== ========== ==========
NUMBER OF SHARES
Primary and Fully Diluted Weighted
Average Shares 5,534,395 3,570,523 5,513,357 3,570,523
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-28-1997
<CASH> 324,755
<SECURITIES> 0
<RECEIVABLES> 1,022,204
<ALLOWANCES> (87,643)
<INVENTORY> 4,877,492
<CURRENT-ASSETS> 8,611,471
<PP&E> 4,414,331
<DEPRECIATION> (3,438,829)
<TOTAL-ASSETS> 15,851,020
<CURRENT-LIABILITIES> 5,837,701
<BONDS> 4,250,000
0
0
<COMMON> 49,670
<OTHER-SE> 5,713,649
<TOTAL-LIABILITY-AND-EQUITY> 15,851,020
<SALES> 22,246,695
<TOTAL-REVENUES> 22,246,695
<CGS> 7,444,103
<TOTAL-COSTS> 7,444,103
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440,973
<INCOME-PRETAX> 917,513
<INCOME-TAX> 385,356
<INCOME-CONTINUING> 532,157
<DISCONTINUED> 0
<EXTRAORDINARY> 218,699
<CHANGES> 0
<NET-INCOME> 313,458
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
