<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE PERIOD ENDED APRIL 3, 1999
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)
<TABLE>
<S> <C>
DELAWARE 04-3253301
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
21 BRISTOL DRIVE
SOUTH EASTON, MASSACHUSETTS 02375
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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 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
Number of shares of the Registrant's Common Stock outstanding as of May 1,
1999: 4,411,586
================================================================================
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SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
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PAGE NO.
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF APRIL 3, 1999 AND JANUARY 2, 1999,
AND FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 4, 1998
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 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
</TABLE>
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PART I. FINANCIAL STATEMENTS
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 3, 1999 APRIL 4, 1998
------------- -------------
<S> <C> <C>
Net sales....................................................... $13,266,668 $13,308,564
Cost of sales (including buying, occupancy and order
fulfillment costs).......................................... 4,560,428 4,833,253
----------- -----------
Gross profit.................................................... 8,706,240 8,475,311
Selling, general and administrative expenses.................... 7,666,090 8,913,292
----------- -----------
Income (loss) from operations................................... 1,040,150 (437,981)
Interest expense--net........................................... 195,813 210,353
----------- -----------
Income (loss) before income taxes............................... 844,337 (648,334)
Income tax provision (benefit) 347,169 (273,281)
----------- -----------
Net income (loss)............................................... 497,168 (375,053)
----------- -----------
Other comprehensive income (loss)............................... (36,286) 7,050
----------- -----------
Comprehensive income (loss)..................................... $ 460,882 $ (368,003)
=========== ===========
Earnings (loss) per share - Basic EPS:
Net income (loss) per share............................... $0.11 $(0.07)
=========== ===========
Weighted average shares outstanding....................... 4,440,264 5,042,386
=========== ===========
Earnings (loss) per share - Diluted EPS:
Net income (loss) per share............................... $0.11 $(0.07)
=========== ===========
Weighted average shares outstanding....................... 4,723,636 5,042,386
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 427,587 $ 721,949
Accounts receivable, net.................................................. 1,204,924 1,220,741
Inventories........................................................... 5,156,821 5,388,395
Prepaid expenses...................................................... 3,490,285 3,738,846
----------- -----------
Total current assets............................................ 10,279,617 11,069,931
----------- -----------
Property, plant and equipment, net.............................................. 3,249,525 2,946,112
----------- -----------
Intangible assets, net.......................................................... 3,469,341 3,678,158
----------- -----------
Deferred income taxes........................................................... 4,183,455 4,521,988
----------- -----------
Other assets.................................................................... 211,856 183,193
----------- -----------
Total assets.................................................... $21,393,794 $22,399,382
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................................... $ 3,002,290 $ 3,403,414
Liabilities to customers.................................................. 965,498 676,447
Line of credit............................................................ 4,039,272 5,097,067
Current portion of long-term debt..................................... 1,958,863 1,963,319
----------- -----------
Total current liabilities....................................... 9,965,923 11,140,247
----------- -----------
Long-term debt.................................................................. 3,516,940 3,671,167
Other long-term liabilities..................................................... 234,667 151,619
Commitments and contingencies
Stockholders' equity:
Common stock............................................................ 52,397 52,397
Additional paid-in capital.............................................. 16,159,570 16,159,570
Deferred compensation................................................... (43,988) (48,363)
Accumulated other comprehensive income.................................. (20,360) 15,926
Accumulated deficit..................................................... (5,892,372) (6,389,540)
----------- -----------
10,255,247 9,789,990
Less treasury stock, at cost, 822,188 shares at April 3, 1999 and
757,788 at January 2, 1999............................................. (2,578,983) (2,353,641)
----------- -----------
Total stockholders' equity...................................... 7,676,264 7,436,349
----------- -----------
Total liabilities and stockholders' equity............. $21,393,794 $22,399,382
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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<CAPTION>
THREE MONTHS ENDED
APRIL 3, 1999 APRIL 4, 1998
------------- -------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 497,168 $ (375,053)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization............................... 197,936 178,116
Deferred income taxes....................................... 346,600 (277,476)
Amortization of deferred compensation....................... 4,375 4,375
Changes in operating assets and liabilities:
Accounts receivable........................................ 3,032 (262,048)
Inventories................................................ 214,318 383,996
Prepaid expenses........................................... 245,054 (386,584)
Other assets............................................... (34,861) 18,841
Accounts payable and accrued expenses...................... (381,819) 777,395
Liabilities to customers................................... 289,051 227,886
Income taxes............................................... -- (282,329)
Other long-term liabilities................................ -- 12,501
----------- ----------
Net cash provided by operating activities....................... $ 1,380,854 $ 19,620
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (339,465) (587,134)
----------- ----------
Net cash used in investing activities........................... $ (339,465) $ (587,134)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................... -- 10,752
Advances (repayments) on line of credit - net............ (990,285) 1,127,503
Repurchase of treasury stock............................. (225,342) --
Repayment of long-term debt (102,154) (50,607)
Repayment of capital lease obligations................... (17,209) (23,293)
----------- ----------
Net cash provided by (used in) financing activities............. $(1,334,990) $1,064,355
----------- ----------
Effect of exchange rate changes on cash and cash equivalents.... $ (761) $ 4,235
----------- ----------
Increase (decrease) in cash and cash equivalents................ (294,362) 501,076
Cash and cash equivalents, beginning of year.................... 721,949 603,840
----------- ----------
Cash and cash equivalents, end of year.......................... $ 427,587 $1,104,916
=========== ==========
</TABLE>
SUMMARY OF NON-CASH TRANSACTIONS:
During the three months ended April 3, 1999, the Company recorded capital
lease obligations of $100,257 related to the purchase of data processing
equipment.
During the three months ended April 4, 1998, an officer of the Company
exercised 35,000 stock options for which the Company recorded a deduction in its
income tax payable and an increase in additional paid in capital of $67,024.
See notes to condensed consolidated financial statements.
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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 January 2, 1999, and the consolidated
financial statements and footnotes included therein. Certain information and
footnote disclosures normally included in the 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 months ended April 3,
1999 are not necessarily indicative of the results for the entire fiscal year
ending January 1, 2000.
The financial statements for the three months ended April 3, 1999 and April
4, 1998 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 January 2, 1999.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1 required
that costs incurred in the development of internal use software be capitalized
and amortized over a period of time. The Company adopted SOP 98-1 in the first
quarter of 1998. During the three months ended April 3, 1999 and April 4, 1998,
the Company capitalized approximately $260,000 and $130,000, respectively, of
costs associated with a new comprehensive catalog information system, of which
approximately $107,000 and $67,000, respectively, were internal payroll and
payroll related costs.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. The Company has not yet determined the effect, if any, of adopting
SFAS No. 133 on the consolidated financial statements.
3. TREASURY STOCK
In December 1998, the Company's Board of Directors authorized the Company
to repurchase up to $1.0 million of common stock. As of April 3, 1999, the
Company repurchased 64,400 shares at an average price of $3.50 per share.
4. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
The following data shows the amounts used in computing basic and diluted
earnings (loss) per share for net income (loss) and the effects of potentially
dilutive securities on the weighted average number of shares outstanding.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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<CAPTION>
FOR THE THREE MONTHS ENDED
APRIL 3, 1999 APRIL 4, 1998
------------- -------------
<S> <C> <C>
Net income (loss) available to common shareholders
$ 497,168 $ (375,053)
plus assumed conversions....................... ---------- ----------
BASIC EPS............................................ $ 0.11 $ (0.07)
---------- ----------
Basic weighted average shares outstanding............ 4,440,264 5,042,386
========== ==========
EFFECT OF DILUTIVE SECURITIES
Stock options 283,372 --
Net income (loss) available to common shareholders
$ 497,168 $ (375,053)
plus assumed conversions....................... ---------- ----------
DILUTED EPS.......................................... $ 0.11 $ (0.07)
---------- ----------
Diluted weighted average shares outstanding.......... 4,723,636 5,042,386
========== ==========
</TABLE>
Options to purchase 585,435 shares of common stock ranging from $5.33 to
$7.15 per share were not included in computing diluted EPS for the three months
ended April 3, 1999 because their effects were antidilutive. Options to purchase
1,121,984 shares of common stock ranging from $0.31 to $7.15 per share were not
included in computing diluted EPS for the three months ended April 4, 1998
because their effects were antidilutive.
5. RESTRUCTURING CHARGES
In August 1998, the Company announced a reorganization of certain
management positions. In connection with this reorganization, the Company
recorded in the third quarter of 1998 a pre-tax charge of $469,558, consisting
of severance pay and other severance related benefits for five former employees
of the Company. The Company will pay out the severance and severance related
benefits through July 1999. Included in accrued expenses at April 3, 1999 are
accrued restructuring charges of $53,917.
6. BUSINESS SEGMENTS AND FINANCIAL INFORMATION BY GEOGRAPHIC LOCATION
Specialty Catalog Corp. has three reportable segments: SC Direct, SC
Publishing and Daxbourne International Limited. SC Direct primarily sells
women's wigs and hairpieces through its Paula Young(R) and Christine Jordan(R)
catalogs. SC Direct also offers African-American women a broad selection of
quality wigs, hairpieces, apparel and related products through its Especially
Yours(R) catalog. In addition, SC Direct sells apparel, hats and other fashion
accessories through its Paula's Hatbox(R) catalog. SC Publishing distributes
catalogs under its Western Schools(R) brand and specializes in providing
continuing education courses to nurses and CPAs. Daxbourne International
Limited is a retailer and wholesaler of women's wigs, hairpieces and related
products in the United Kingdom.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the financial statements included in the Company's Annual
Report on Form 10-K for the year ended January 2, 1999. The Company's
reportable segments are strategic business units that offer either different
products or operate in different geographic locations. The Company markets its
products in two major geographic areas, the United States and the United
Kingdom. SC Direct and SC Publishing market their products and maintain their
assets in the United States. Daxbourne International Limited markets its
products and maintains its assets in the United Kingdom.
-7-
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
A summary of information about the Company's operations by segment for the
three months ended April 3, 1999 and April 4, 1998 follows (intersegment
eliminations are inter-company receivables and investments in subsidiaries):
<TABLE>
<CAPTION>
SC INTERSEGMENT
SC DIRECT PUBLISHING DAXBOURNE ELIMINATIONS TOTAL
--------- ---------- --------- ------------ -----
FOR THE THREE MONTHS ENDED APRIL 3, 1999
<S> <C> <C> <C> <C> <C>
Net sales.................................. $10,300,330 $1,577,169 $1,389,169 -- $13,266,668
Gross profit............................... 6,518,594 1,202,421 985,225 -- 8,706,240
Selling, general and administrative (1).... 6,186,097 620,264 661,793 -- 7,468,154
Depreciation and amortization (1).......... 91,525 10,927 95,484 -- 197,936
Operating profit........................... 240,972 571,230 227,948 -- 1,040,150
Interest expense, net...................... 129,852 -- 65,961 -- 195,813
Income tax provision....................... 45,560 234,217 67,392 -- 347,169
Segment assets............................. 16,887,662 3,986,879 4,769,342 $(4,250,089) 21,393,794
Capital expenditures....................... 334,012 5,453 -- -- 339,465
FOR THE THREE MONTHS ENDED APRIL 4, 1998
Net sales.................................. $10,650,528 $1,316,211 $1,341,825 -- $13,308,564
Gross profit............................... 6,589,066 924,265 961,980 -- 8,475,311
Selling, general and administrative (1).... 7,587,775 577,039 570,116 -- 8,734,930
Depreciation and amortization (1).......... 72,386 8,301 97,675 -- 178,362
Operating profit (loss).................... (1,071,095) 338,925 294,189 -- (437,981)
Interest expense, net...................... 123,875 -- 86,478 -- 210,353
Income tax provision (benefit)............. (489,939) 138,958 77,700 -- (273,281)
Segment assets............................. 18,968,900 3,725,570 5,611,406 $(3,461,695) 24,844,181
Capital expenditures....................... 578,331 -- 8,803 -- 587,134
</TABLE>
(1) Depreciation and amortization is included in selling, general and
administrative expense in the condensed consolidated statements of
operations under "selling, general and administrative expenses" for the
three months ended April 3, 1999 and April 4, 1998.
-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 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 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, especially in China, Indonesia and Korea, (vi) the customary risks of
doing business abroad, including fluctuations in the value of currencies, (vii)
the potential development of a cure for hair loss and cancer treatment
improvements, (viii) the effectiveness of the Company's catalogs and advertising
programs, (ix) the Company's competition, (x) the impact of acquisitions on the
Company's prospects and (xi) contingencies and risks associated with the year
2000 problem. 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 Securities and Exchange Commission, including those risks and
uncertainties discussed under the caption "Risk Factors" in the Company's Form
10-K for the year ended January 2, 1999. The forward-looking statements
contained herein represent the Company's judgment as of the date of this
Quarterly Report on Form 10-Q, and the Company cautions readers not to place
undue reliance on such statements.
THREE MONTHS ENDED APRIL 3, 1999 COMPARED TO THE THREE MONTHS ENDED APRIL 4,
1998
Net sales remained substantially unchanged at $13.3 million for the three
months ended April 3, 1999 compared to the three months ended April 4, 1998. SC
Direct's net sales were approximately $350,000 lower than the prior year's first
quarter net sales, primarily due to (i) a decrease in net sales from its Paula
Young(R) catalog of approximately $823,000, which was primarily due to less
sales to new customers as a result of a reduction in advertising expenditures
and (ii) a decrease in net sales from its Christine Jordan(R) catalog of
approximately $257,000 due to lower catalog circulation from quarter to quarter.
These net sales decreases were offset by an increase of approximately $797,000
in net sales from SC Direct's Especially Yours(R) catalog. SC Publishing's net
sales were approximately $261,000 higher than the prior year's first quarter net
sales, primarily due to improved customer response rates.
Gross margin dollars increased approximately $231,000, or 2.7%, from $8.5
million for the three months ended April 4, 1998 to $8.7 million for the three
months ended April 3, 1999. The gross margin percentage increased from 63.7% for
the three months ended April 4, 1998 to 65.6% for the three months ended April
3, 1999. This increase in the gross margin rate reflects primarily the
Company's efforts to transition its core Paula Young(R) catalog from an
emphasis on reduced prices and discounting to a focus on product line expansion
and innovation, including the introduction of human hair and human hair blend
wigs.
Selling, general and administrative expenses ("SG&A") decreased $1.2
million, or 13.5%, from $8.9 million for the three months ended April 3, 1998 to
$7.7 million for the three months ended April 3, 1999. The decrease in SG&A
related primarily to lower advertising expenses of approximately $1.2 million
which is primarily a result of the Company's strategy decision to eliminate
certain marginal advertising programs which did not generate new customers and
sales at a level sufficient to justify the additional advertising expenditures.
-9-
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Net interest expense decreased approximately $15,000, or 7.1%, from
approximately $210,000 for the three months ended April 3, 1998 to approximately
$195,000 for the three months ended April 3, 1999. The decrease in net interest
expense reflects lower average principal amounts outstanding on the Company's
bank facility for the first quarter of 1999 compared to the first quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $1.4 million for the three
months ended April 3, 1999. The cash flows provided by operating activities
were offset by approximately $339,000 used in investing activities and $1.3
million used in financing activities. The $339,000 in cash used in investing
activities was primarily due to the Company's installation of a new catalog
information system, which amounted to approximately $260,000. The $1.3 million
in cash used in financing activities was primarily due to (i) the repayment of
$1.0 million on the Company's line of credit, (ii) the Company's repurchases of
approximately $225,000 of common stock and (iii) the repayment of long term debt
of approximately $102,000.
The Company is in the process of installing a new catalog information
system purchased from an outside vendor. The system is currently undergoing
modification by the Company's internal staff. The system is scheduled to be
implemented for SC Direct, the main operating subsidiary of the Company, in mid-
1999. Following the implementation by SC Direct, it is anticipated that the
system will be modified to deal with the special processing needs of SC
Publishing, another subsidiary of the Company. The entire cost of the new
system, including new hardware and internal payroll and payroll related costs,
is estimated to be $1.8 million. As of April 3, 1999, $1.4 million of these
costs have been capitalized, of which approximately $260,000 was added during
the three months ended April 3, 1999.
In December 1998, the Company's Board of Directors authorized the Company
to repurchase up to $1.0 million of common stock. As of April 3, 1999, the
Company repurchased 64,400 shares at an average price of $3.50 per share.
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
additional significant acquisitions, could require new external financing.
YEAR 2000 READINESS
The Company's current information and computer systems will be affected by
the Year 2000 ("Y2K") issue, which refers to the inability of computerized
systems to process dates beyond December 31, 1999. The Company has formulated a
Y2K Plan to address the Company's Y2K issues. Based on its current assessments
from the Y2K Plan, the Company does not expect at present that it will
experience a disruption of its operations as a result of the change to the new
millennium.
The Company is in the process of installing a new comprehensive catalog
information system purchased from an outside vendor, who has represented that
the software addresses the Y2K issue. If the Company's new computer system
fails with respect to the Y2K issue, there could be a material adverse impact on
the business operations or financial performance of the Company, including its
ability to take customer orders, ship products, invoice customers and collect
payments. It is anticipated that the installation will be completed in mid-1999
for SC Direct. The Company estimates that the entire cost of the new system,
including new hardware and internal payroll and payroll related costs, will be
$1.8 million. As of April 3, 1999, $1.4 million of these costs have been
capitalized, of which approximately $260,000 was added during the three months
ended April 3, 1999. If the new catalog information system cannot be effectively
installed, then the Company has scheduled its current computer vendor to provide
a free upgrade in June 1999 that will make the Company's current computer
operating system Y2K ready. Also, in January 1998, the Company successfully
converted its financial and accounting systems to a new software package that
has been represented by the vendor to be Y2K ready.
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<PAGE>
The foregoing timetable and assessment of costs to become Y2K compliant
reflect management's current best estimates. These estimates are based on many
assumptions, including assumptions about the cost, availability and ability of
resources to locate, remediate and modify affected systems, equipment and
facilities. Based upon its activities to date, the Company does not currently
believe that these factors will cause results to differ significantly from those
estimated. However, the Company cannot reasonably estimate the potential impact
on its financial condition and operations if key third parties including, among
others, suppliers, contractors, financial institutions, non-retail customers and
governments do not become Y2K compliant on a timely basis.
The Company is assessing the state of readiness of its major suppliers and
customers through written inquiry and evaluation of responses. The Company
intends to follow up with those suppliers or customers that indicate material
problems. Alternate suppliers or service providers will be identified for those
whose responses indicate an unusually high risk of a Y2K problem. The Company's
evaluation of business processes that are not related to information systems,
and the development of contingency plans where such evaluation identifies a high
risk of a Y2K problem should be completed by the third quarter of 1999. The
main risks associated with the Y2K problem are the uncertainties as to whether
the Company's suppliers can continue to perform their services for the Company
uninterrupted by the Y2K event, and whether the Company's non-retail customers
can continue to operate their businesses uninterrupted by the Y2K event. The
Company's suppliers, if they are unable to remediate their Y2K problems, may be
unable to produce or deliver goods ordered by the Company. The Company depends
significantly upon telephone orders; should the Company's telephone service be
adversely affected, the Company will be unable to receive a high percentage of
its retail orders. The Company also depends in large measure on delivery
services such as the United States Post Office, Federal Express and UPS to
deliver goods to retail customers; accordingly, should one or more of these
delivery services prove unable to make deliveries as a result of Y2K problems,
the Company's cash flow and business would be severely and adversely affected.
Although the state of readiness of the Company's suppliers, delivery services
and non-retail customers will be monitored and evaluated, and contingency plans
will be developed, no assurances can be given as to the eventual state of
readiness of the Company's suppliers and/or customers. Nor can any assurances
be given as to eventual effectiveness of the Company's contingency plans.
The preceding discussion contains forward-looking information within the
meaning of Section 21E of the Exchange Act. This disclosure is also subject to
protection under the Year 2000 Information and Readiness Disclosure Act of 1998,
Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein. Actual results may differ materially from such
projected information due to changes in the underlying assumptions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1 required
that costs incurred in the development of internal use software be capitalized
and amortized over a period of time. The Company adopted SOP 98-1 in the first
quarter of 1998. During the three months ended April 3, 1999 and April 4, 1998,
the Company capitalized approximately $260,000 and $130,000, respectively, of
costs associated with a new comprehensive catalog information system, of which
approximately $107,000 and $67,000, respectively, were internal payroll and
payroll related costs.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. The Company has not yet determined the effect, if any, of adopting
SFAS No. 133 on the condensed consolidated financial statements for the three
months ended April 3, 1999 and April 4, 1998.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risks include fluctuations in
interest rates on its short-term and long-term debt of $9.5 million as of April
3, 1999 and in foreign currency exchange rates. The Company does not use
derivative financial instruments. The Company is subject to interest rate risk
on its short-term borrowings under its credit facilities. Historically, the
Company has not experienced material gains or losses due to interest rate
changes. Management does not believe that the risk inherent in the variable-
rate nature of these instruments will have a material effect on the Company's
consolidated financial statements. However, no assurance can be given that such
a risk will not have a material adverse effect on the Company's financial
statements in the future.
The Company's US term loan and US line of credit bear interest rates based
on either a base rate or a LIBOR contract rate. The Company's UK term loan and
UK line of credit bear interest rates based on either a Sterling base rate or a
LIBOR contract rate. As of April 3, 1999, the US term loan was under a LIBOR
contract rate of 6.81% for $3.5 million and 6.86% for $500,000. As of April 3,
1999, $1.8 million of the US line of credit was under LIBOR contract rates
ranging from 6.90% to 7.00% and the remainder of the US line of credit was at
the base rate of 8.00%. As of April 3, 1999, a majority of both the UK term loan
and UK line of credit were under a LIBOR contract rate of 9.16%.
As of April 3, 1999, the outstanding balance on all of the Company's credit
facilities was $9,515,075. Based on this balance, an immediate change of one
percent in the interest rate would cause a change in interest expense of
approximately $95,000 on an annual basis. The Company's objective in
maintaining these variable rate borrowings is the flexibility obtained regarding
early repayment without penalties and lower overall cost as compared with fixed-
rate borrowings and longer term variable rate borrowings.
The foreign currencies to which the Company has the most significant
exchange rate exposure are the British Pound, Chinese Yuan and Indonesian
Rupiah. The Company currently expects that most of its wigs and hairpieces will
continue to be manufactured in China and Indonesia in the future. Accordingly,
the Company's operations are subject to fluctuations in the value of these
countries' currencies. Although to date such exchange rate exposures have not
had a significant effect on the Company's business operations, no assurance can
be given that such exchange rate exposures will not have a material adverse
effect on the Company's business operations in the future. Also, the
implementation of the Euro currency in 1999 is not expected to materially affect
the Company's operations, or its risk profile.
Based on a hypothetical ten percent adverse movement in interest rates and
foreign currency exchange rates, the potential losses in future earnings, fair
value of risk-sensitive financial instruments, and cash flows are not material,
although the actual effects may differ materially from the hypothetical
analysis.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (for EDGAR filing purposes only), Filed
herewith
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter ended April
3, 1999.
-12-
<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, THEREUNTO DULY AUTHORIZED.
SPECIALTY CATALOG CORP.
Dated: May 5, 1999 By: /s/ Steven L. Bock
------------------
STEVEN L. BOCK
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: May 5, 1999 By: /s/ J. William Heise
--------------------
J. WILLIAM HEISE
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
-13-
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