<PAGE>
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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 OCTOBER 2, 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)
DELAWARE 04-3253301
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
November 1, 1999: 4,351,386
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SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
------------
<S> <C> <C>
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF OCTOBER 2, 1999, JANUARY 2, 1999 AND
OCTOBER 3, 1998, FOR THE THREE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 AND FOR
THE NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 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 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
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<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 NINE MONTHS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998 OCTOBER 2, 1999 OCTOBER 3, 1998
---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales..................................... $10,189,321 $11,011,492 $35,720,386 $37,583,250
Cost of sales (including buying, occupancy and
order fulfillment costs)................. 3,649,794 3,952,927 12,370,271 13,531,943
----------- ----------- ----------- -----------
Gross margin.................................. 6,539,527 7,058,565 23,350,115 24,051,307
Selling, general and administrative expenses.. 6,504,662 6,293,001 20,622,394 21,577,685
----------- ----------- ----------- -----------
Income from operations........................ 34,865 765,564 2,727,721 2,473,622
Interest expense, net......................... 188,336 208,185 553,446 633,420
----------- ----------- ----------- -----------
Income (loss) before income taxes............. (153,471) 557,379 2,174,275 1,840,202
Income tax provision (benefit)................ (78,945) 237,835 887,234 760,800
----------- ----------- ----------- -----------
Net income (loss)............................. (74,526) 319,544 1,287,041 1,079,402
Other comprehensive income (loss)............. 39,126 26,499 (11,578) 22,857
----------- ----------- ----------- -----------
Comprehensive income (loss)................... $ (35,400) $ 346,043 $ 1,275,463 $ 1,102,259
=========== =========== =========== ===========
Basic earnings per share:
Net income (loss) per share............. $(0.02) $0.06 $0.29 $0.21
=========== =========== =========== ===========
Weighted average shares outstanding..... 4,399,955 5,057,001 4,417,548 5,052,129
=========== =========== =========== ===========
Diluted earnings per share:
Net income (loss) per share............. $(0.02) $0.06 $0.27 $0.20
=========== =========== =========== ===========
Weighted average shares outstanding..... 4,684,655 5,517,927 4,700,615 5,520,309
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2, OCTOBER 3,
1999 1999 1998
----------------- ----------------- ----------------
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents......................................... $ 273,729 $ 721,949 $ 351,146
Accounts receivable, net.......................................... 1,639,414 1,220,741 1,315,704
Merchandise inventories........................................... 6,725,544 5,388,395 6,901,079
Prepaid expenses.................................................. 3,959,752 3,738,846 3,899,183
----------- ----------- -----------
Total current assets.................................... 12,598,439 11,069,931 12,467,112
Property, plant and equipment, net...................................... 4,217,286 2,946,112 2,862,838
Intangible assets, net.................................................. 4,575,949 3,678,158 3,846,436
Deferred income taxes................................................... 3,617,696 4,521,988 4,839,432
Other assets............................................................ 163,643 183,193 192,991
----------- ----------- -----------
Total assets............................................ $25,173,013 $22,399,382 $24,208,809
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................. $ 6,876,604 $ 5,097,067 $ 5,580,592
Accounts payable and accrued expenses............................. 3,895,973 3,403,414 2,712,098
Liabilities to customers.......................................... 1,486,928 676,447 1,024,418
Current portion of long-term debt................................. 1,512,539 1,963,319 1,277,122
----------- ----------- -----------
Total current liabilities............................... 13,772,044 11,140,247 10,594,230
Long-term debt.......................................................... 2,666,301 3,671,167 4,396,487
Other long-term liabilities............................................. 383,440 151,619 159,175
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value: 10,000,000 shares authorized;
4,378,386, 4,481,986 and 5,057,001 shares issued and
outstanding at October 2, 1999, January 2, 1999
and October 3, 1998, respectively............................ 52,397 52,397 50,570
Additional paid-in capital...................................... 16,159,570 16,159,570 15,916,252
Deferred compensation........................................... (35,238) (48,363) (52,738)
Accumulated other comprehensive income.......................... 4,348 15,926 26,352
Accumulated deficit............................................. (5,102,499) (6,389,540) (6,881,519)
----------- ----------- -----------
11,078,578 9,789,990 9,058,917
Less treasury stock, at cost, 861,388 shares at October 2, 1999,
757,788 shares at January 2, 1999 and no shares at October (2,727,350) (2,353,641) --
3, 1998..................................................... ----------- ----------- -----------
Total shareholders' equity 8,351,228 7,436,349 9,058,917
----------- ----------- -----------
Total liabilities and shareholders' equity..... $25,173,013 $22,399,382 $24,208,809
=========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SPECIALTY CATALOG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998
------------------------ -------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 1,287,041 $1,079,402
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 695,690 539,318
Amortization of deferred compensation....................... 13,125 13,124
Deferred income taxes....................................... 933,466 720,618
Changes in operating assets and liabilities:
Accounts receivable........................................ (375,265) (182,792)
Merchandise inventories.................................... (1,329,969) (621,425)
Prepaid expenses........................................... (205,193) (489,472)
Other assets............................................... 6,105 101,731
Accounts payable and accrued expenses...................... 557,429 (428,060)
Liabilities to customers................................... 526,353 27,475
Income taxes payable....................................... -- (282,329)
Other long-term liabilities................................ -- 37,503
----------- ----------
Net cash provided by operating activities....................... 2,108,782 515,093
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (1,395,404) (982,270)
Business acquisition...................................... (1,059,209) --
----------- ----------
Net cash used in investing activities........................... (2,454,613) (982,270)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on short-term borrowings, net................... 1,781,992 1,721,719
Repayment of long-term debt.............................. (1,439,375) (969,011)
Repayment of deferred purchase price obligation.......... -- (505,140)
Repurchase of treasury stock............................. (373,709) --
Issuance of common stock................................... -- 10,753
Repayment of capital lease obligations................... (58,968) (46,083)
----------- ----------
Net cash provided by (used in) financing activities............. (90,060) 212,238
----------- ----------
Effect of exchange rate changes on cash and cash equivalents.... (12,329) 2,245
----------- ----------
Decrease in cash and cash equivalents........................... (448,220) (252,694)
Cash and cash equivalents, beginning of year.................... 721,949 603,840
----------- ----------
Cash and cash equivalents, end of year.......................... $ 273,729 $ 351,146
=========== ==========
</TABLE>
SUMMARY OF NON-CASH TRANSACTIONS:
During the nine months ended October 2, 1999, the Company recorded capital
lease obligations of $100,257 related to the purchase of data processing
equipment and $190,532 related to the purchase of telecommunications equipment.
During the nine months ended October 3, 1998, 35,000 stock options were
exercised for which the Company recorded a deduction in its income taxes payable
and an increase in additional paid in capital of $67,024.
See notes to condensed consolidated financial statements.
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<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 January 2, 1999, 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 nine months ended
October 2, 1999 are not necessarily indicative of the results for the entire
fiscal year ending January 1, 2000.
The financial statements for the three and nine months ended October 2, 1999
and October 3, 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 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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 October 2, 1999 and
October 3, 1998, the Company capitalized approximately $341,000 and $97,000,
respectively, of costs associated with its new comprehensive catalog information
system, of which approximately $257,000 and $40,000, respectively, were internal
payroll and payroll related costs. During the nine months ended October 2, 1999
and October 3, 1998, the Company capitalized approximately $945,000 and
$314,000, respectively, of costs, of which approximately $508,000 and $156,000,
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, 2000. The Company has not yet determined the effect, if any, of adopting
SFAS No. 133 on the consolidated financial statements.
3. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
The following table (in thousands) shows the amounts used in computing basic
and diluted earnings per share for net income (loss) and the effects of
potentially dilutive options on the weighted average number of shares
outstanding.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998 OCTOBER 2, 1999 OCTOBER 3, 1998
----------------- ------------------ ------------------ ------------------
NET NET NET NET
LOSS SHARES INCOME SHARES INCOME SHARES INCOME SHARES
----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $(75) 4,400 $320 5,057 $1,287 4,418 $1,079 5,052
Effect of dilutive options -- 285 -- 461 -- 283 -- 468
---- ----- ---- ----- ------ ----- ------ -----
Diluted earnings per share $(75) 4,685 $320 5,518 $1,287 4,701 $1,079 5,520
==== ===== ==== ===== ====== ===== ====== =====
</TABLE>
Options to purchase 656,351 shares of common stock ranging in prices from
$5.33 to $7.15 per share were not included in computing diluted earnings
per share for the three and nine months ended October 2, 1999 because their
effects were anti-dilutive. Options to purchase 641,935 and 566,935 shares,
respectively, of common stock ranging in prices from $5.33 to $7.15 per share
and from $6.50 to $7.15 per share, respectively, were not included in computing
diluted earnings per share for the three and nine months ended October 3, 1998
because their effects were also anti-dilutive.
4. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In August 1999, the Company announced the resignation of its chief
executive officer. In connection with the resignation and search for a new
chief executive officer, the Company recorded a pre-tax charge of $500,000,
consisting of severance and other severance related benefits and recruiting
fees. Also, in September 1999, the Company recorded a pre-tax charge of
$276,946 related to costs incurred in connection with certain acquisitions that
the Company decided not to pursue. Accrued expenses at October 2, 1999 include
expenses accrued in connection with these charges of $447,789.
5. ACQUISITION OF AMERICAN HEALTHCARE INSTITUTE
On September 10, 1999, the Company acquired the assets and assumed certain
liabilities of American Healthcare Institute ("AHI"), a private Maryland-based
continuing-education seminar and conference provider for $1,059,209. This
transaction was accounted for as a purchase and, accordingly, the results of
operations of AHI for the period from September 10, 1999 through October 2, 1999
are included in the accompanying condensed consolidated financial statements.
The $1,150,639 excess of costs of net assets acquired was allocated to customer
lists and goodwill which are being amortized over 3 and 20 years, respectively.
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) catalog. 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. In October 1999, the Company decided to
discontinue circulation of the Paula's Hatbox(R) catalog effective December 31,
1999. SC Publishing distributes catalogs under its Western Schools(R) brand and
specializes in providing continuing education courses to nurses and CPAs. SC
Publishing also provides continuing-education seminars and conferences for
nurses and other health-care professionals under its American Healthcare
Institute tradename. Daxbourne International Limited is a retailer and
wholesaler of women's wigs, hairpieces and related products in the United
Kingdom.
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<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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.
A summary of the Company's operations by segment for the three and nine month
periods ended October 2, 1999 and October 3, 1998 follows (intersegment
eliminations are intercompany receivables and investments in subsidiaries):
<TABLE>
<CAPTION>
INTERSEGMENT
SC DIRECT SC PUBLISHING DAXBOURNE ELIMINATIONS TOTAL
------------ ------------- ---------- ------------- ------------
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 8,066,338 $ 835,588 $1,287,395 -- $10,189,321
Gross margin.............................. 5,033,162 601,076 905,289 -- 6,539,527
Selling, general and administrative (1)... 5,214,812 558,111 731,739 -- 6,504,662
Depreciation and amortization (1)......... 186,095 11,250 93,655 -- 291,000
Operating profit (loss)................... (181,650) 42,965 173,550 -- 34,865
Interest expense, net..................... 132,531 -- 55,805 -- 188,336
Income tax provision (benefit)............ (128,835) 17,600 32,290 -- (78,945)
Segment assets............................ 20,266,341 5,543,804 4,884,608 $(5,521,740) 25,173,013
Capital expenditures...................... 527,430 1,594 35,683 -- 564,707
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
Net sales................................. $ 8,933,620 $ 794,414 $1,283,458 -- $11,011,492
Gross margin.............................. 5,602,317 559,601 896,647 -- 7,058,565
Selling, general and administrative (1)... 5,082,753 531,011 679,237 -- 6,293,001
Depreciation and amortization (1)......... 81,592 6,804 98,845 -- 187,241
Operating profit.......................... 519,564 28,590 217,410 -- 765,564
Interest expense, net..................... 127,668 -- 80,517 -- 208,185
Income tax provision...................... 160,680 11,721 65,434 -- 237,835
Segment assets............................ 18,856,708 3,654,177 5,324,600 $(3,626,676) 24,208,809
Capital expenditures...................... 152,359 -- -- -- 152,359
</TABLE>
(1) Includes depreciation and amortization which is also included in selling,
general and administrative expenses in the condensed consolidated
statements of operations under "selling, general and administrative
expenses" for the three months ended October 2, 1999 and October 3, 1998.
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SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
INTERSEGMENT
SC DIRECT SC PUBLISHING DAXBOURNE ELIMINATIONS TOTAL
----------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
Net sales................................. $28,128,069 $3,670,959 $3,921,358 -- $35,720,386
Gross margin.............................. 17,823,709 2,757,404 2,769,002 -- 23,350,115
Selling, general and administrative (1)... 16,513,958 1,883,173 2,225,263 -- 20,622,394
Depreciation and amortization (1)......... 376,386 33,322 285,982 -- 695,690
Operating profit.......................... 1,309,751 874,231 543,739 -- 2,727,721
Interest expense, net..................... 374,871 -- 178,575 -- 553,446
Income tax provision...................... 383,301 358,435 145,498 -- 887,234
Segment assets............................ 20,266,341 5,543,804 4,884,608 $(5,521,740) 25,173,013
Capital expenditures...................... 1,334,338 8,661 52,405 -- 1,395,404
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
Net sales................................. $30,634,969 $3,075,410 $3,872,871 -- $37,583,250
Gross margin.............................. 19,152,178 2,161,759 2,737,370 -- 24,051,307
Selling, general and administrative (1)... 17,800,712 1,734,058 2,042,915 -- 21,577,685
Depreciation and amortization (1)......... 224,598 20,578 294,142 -- 539,318
Operating profit.......................... 1,351,466 427,701 694,455 -- 2,473,622
Interest expense, net..................... 388,124 -- 245,296 -- 633,420
Income tax provision...................... 394,970 175,356 190,474 -- 760,800
Segment assets............................ 18,856,708 3,654,177 5,324,600 $(3,626,676) 24,208,809
Capital expenditures...................... 959,021 -- 23,249 -- 982,270
</TABLE>
(1) Includes depreciation and amortization which is also included in selling,
general and administrative expenses in the condensed consolidated
statements of operations under "selling, general and administrative
expenses" for the nine months ended October 2, 1999 and October 3, 1998.
7. SUBSEQUENT EVENTS
In October 1999, the Company and its Board of Directors voted to cancel the
distribution of SC Direct's Paula's Hatbox(R) catalog at the end of 1999. This
catalog is being discontinued in order to allow the Company to dedicate its
focus and resources on the growth and development of the Company's core wig
businesses, as well as SC Publishing and Daxbourne. The Company anticipates
recording a pretax charge in the fourth quarter of 1999 to reflect this
decision.
Additionally, the Company amended its loan agreements to adjust certain
covenants and increase its long-term borrowings by $1 million.
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<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 ("Exchange
Act"), 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 OCTOBER 2, 1999 COMPARED TO THE THREE MONTHS ENDED OCTOBER 3,
1998
The Company's net sales decreased to $10.2 million for the three months ended
October 2, 1999 from $11.0 million for the three months ended October 3, 1998, a
decrease of approximately $822,000, or 7.5%. SC Direct's net sales were
approximately $867,000 lower than the prior year's third quarter net sales,
primarily due to (i) a decrease of approximately $439,000 in net sales from its
Paula Young(R) catalog, resulting from fewer new customers due to a planned
reduction in advertising expenditures in the first half of 1999, (ii) a decrease
of approximately $212,000 in net sales from the Christine Jordan(R) catalog as a
result of the Company's decision to no longer circulate the Christine Jordan(R)
catalog, but continue to sell Christine Jordan(R) branded products through its
Paula Young(R) catalog, and (iii) a decrease of approximately $255,000 in net
sales from its Paula's Hatbox(R) catalog. These net sales decreases were
offset by increases of approximately $39,000 and $42,000 in net sales from SC
Direct's Especially Yours(R) catalog and SC Publishing, respectively, primarily
due to improved customer response rates.
Gross margin as a percentage of net sales increased to 64.2% for the three
months ended October 2, 1999 from 64.1% for the three months ended October 3,
1998. Gross margin decreased to $6.5 million for the three months ended October
2, 1999 from $7.1 million for the three months ended October 3, 1998, a decrease
of approximately $519,000, or 7.3%, as a result of the reduction in net sales
discussed above.
Selling, general and administrative expenses ("SG&A") increased to $6.5
million for the three months ended October 2, 1999 from $6.3 million for the
three months ended October 3, 1998, an increase of approximately $212,000, or
3.4%. Included in SG&A for the three months ended October 2, 1999, is a pre-tax
charge of $500,000 consisting of severance, severance related benefits and
recruiting fees, recorded as a result of costs incurred in connection with the
resignation of the Company's chief executive officer and search for a
replacement. Also, in September 1999, the Company recorded a pre-tax charge of
$276,946 related to costs incurred in connection with certain acquisitions that
the Company decided not to pursue.
-10-
<PAGE>
Included in SG&A for the three months ended October 3, 1998, is a pre-tax
charge of $469,558, consisting of severance and other severance related
benefits, recorded in connection with a reorganization of certain management
positions in the Company.
Interest expense, net decreased to approximately $188,000 for the three months
ended October 2, 1999 from approximately $208,000 for the three months ended
October 3, 1998, a decrease of approximately $20,000, or 9.6%. The decrease in
interest expense, net reflects lower average principal amounts outstanding on
the Company's bank facility due to debt repayments.
NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO THE NINE MONTHS ENDED OCTOBER 3,
1998
Net sales decreased to $35.7 million for the nine months ended October 2, 1999
from $37.6 million for the nine months ended October 3, 1998, a decrease of $1.9
million, or 5.1%. SC Direct's net sales were $2.5 million lower than the prior
year's nine month's net sales, primarily due to (i) a decrease of $2.7 million
in net sales from its Paula Young(R) catalog, resulting from fewer new customers
due to a planned reduction in advertising expenditures in the first half of
1999, (ii) a decrease of approximately $689,000 in net sales from the Christine
Jordan(R) catalog as a result of the Company's decision to no longer circulate
the Christine Jordan(R) catalog, but continue to sell Christine Jordan(R)
branded products through its Paula Young(R) catalog, and (iii) a decrease of
approximately $204,000 in net sales from its Paula's Hatbox(R) catalog. These
net sales decreases were offset by increases of $1.2 million and approximately
$596,000 in net sales from SC Direct's Especially Yours(R) catalog and SC
Publishing, respectively, primarily due to improved customer response rates.
Gross margin as a percentage of net sales increased to 65.4% for the nine
months ended October 2, 1999 from 64.0% for the nine months ended October 3,
1998. This increase in the gross margin rate reflects 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 wigs containing human hair and human hair blends. Gross
margin decreased to $23.3 million for the nine months ended October 2, 1999 from
$24.0 million for the nine months ended October 3, 1998, a decrease of
approximately $701,000, or 2.9%, as a result of the reduction in net sales
discussed above, offset by the improvement in the gross margin rate discussed
above.
SG&A expenses decreased to $20.6 million for the nine months ended October 2,
1999 from $21.6 million for the nine months ended October 3, 1998, a decrease of
approximately $955,000 million, or 4.4%. The decrease in SG&A related to lower
advertising expenses of $1.2 million due to the Company's strategic decision to
eliminate certain marginal advertising programs which did not generate new
customers and sales at sufficient levels.
Interest expense, net decreased to approximately $553,000 for the nine months
ended October 2, 1999 from approximately $633,000 for the nine months ended
October 3, 1998, a decrease of approximately $80,000, or 12.6%. The decrease in
interest expense, net reflects lower average principal amounts outstanding on
the Company's bank facility due to debt repayments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used by the Company for the nine months ended October 2, 1999
were approximately $448,000, of which $2.5 million was used in investing
activities and approximately $90,000 was used in financing activities, offset by
$2.1 million provided by operating activities. The major factors that caused
the difference between net income and net cash flows provided by operations
were: decreases in non-cash working capital items of approximately $821,000,
offset by increases in depreciation and amortization of approximately
-11-
<PAGE>
$709,000 and deferred income taxes of approximately $933,000. The $2.5 million
in net cash used in investing activities was mainly due to the Company's
installation of its new catalog information system, which amounted to
approximately $945,000, the acquisition of American Healthcare Institute which
amounted to $1.1 million and equipment purchases of approximately $456,000. The
$90,000 in net cash used in financing activities was due to (i) the repayment of
$1.4 million of long-term debt and (ii) the Company's repurchase of
approximately $374,000 of common stock, offset by $1.8 million in advances from
short-term borrowings.
The Company has substantially completed the initial implementation of its new
catalog information system for its main operating subsidiary, SC Direct, in
August 1999. The Company's internal staff is currently creating and/or
modifying specific programs in the system to address the special processing
needs of SC Publishing. The entire cost of the new system incurred to date,
including new hardware, software and internal payroll and payroll related costs
is $2.1 million, of which approximately $341,000 was incurred during the three
months ended October 2, 1999. The Company capitalized these costs and began
depreciating them in August 1999 over 5 years.
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. In
November 1999, the Company amended its loan agreements to adjust certain
covenants and increase its long-term borrowings by $1 million.
YEAR 2000 ("Y2K") READINESS
The Company has formulated a Y2K Plan to address the Company's Y2K issues.
Based on its current assessments of the Y2K Plan, the Company does not expect at
present that it will experience a disruption of its operations.
The Company has substantially completed the initial implementation of its new
catalog information system for its main operating subsidiary, SC Direct, in
August 1999. The Company's internal staff is currently creating and/or
modifying specific programs in the system to address the special processing
needs of SC Publishing. The entire cost of the new system incurred to date,
including new hardware, software and internal payroll and payroll related costs
is $2.1 million, of which approximately $341,000 was incurred during the three
months ended October 2, 1999. 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.
The Company has assessed the state of readiness of its major suppliers and
customers. Alternate suppliers or service providers will be identified for
those suppliers or service providers that experience Y2K problems. The Company
continues to evaluate those business processes that are not related to
information systems, and will develop plans where such evaluations identify a
Y2K problem. The main risks associated with the Y2K problem are the
uncertainties as to whether the Company's suppliers and vendors can continue to
perform their services for the Company uninterrupted by the Y2K event, and
whether the Company can continue to access its database of customer and other
information. 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 are being monitored and evaluated, 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 response to any Y2K issues.
-12-
<PAGE>
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 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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 October 2, 1999 and
October 3, 1998, the Company capitalized approximately $341,000 and $97,000,
respectively, of costs associated with its new comprehensive catalog information
system, of which approximately $257,000 and $40,000, respectively, were internal
payroll and payroll related costs. During the nine months ended October 2, 1999
and October 3, 1998, the Company capitalized approximately $945,000 and
$314,000, respectively, of costs, of which approximately $508,000 and $156,000,
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, 2000. The Company has not yet determined the effect, if any, of adopting
SFAS No. 133 on the consolidated financial statements.
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 $11.1 million as of
October 2, 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 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 revolving line of credit bear interest rates
based on either a base rate or a LIBOR contract rate. As of October 2, 1999,
the US term loan was under a LIBOR contract rate of 7.26% for $3.0 million. As
of October 2, 1999, $4.0 million of the US revolving line of credit was under
LIBOR contract rates ranging from 7.16% to 7.26% and the remainder of the US
revolving line of credit was at the base rate of 8.50%. The Company's UK term
loan and UK revolving line of credit bear interest rates based on either a
Sterling base rate or a LIBOR contract rate. As of October 2, 1999, a majority
of both the UK term loan and UK revolving line of credit were under a LIBOR
contract rate of 9.48%.
As of October 2, 1999, the outstanding borrowings on the Company's credit
facilities were $11.1 million. Based on this balance, an immediate change of
one percent in the interest rate would cause a change in interest expense of
approximately $111,000 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, Indonesian Rupiah and the
Korean Won. The Company currently expects that most of its
-13-
<PAGE>
wigs and hairpieces will continue to be manufactured in China, Indonesia and
Korea in the future. Accordingly, the Company's operations are subject to
fluctuations in the value of these countries' currencies. Although to date these
exposures have not had a significant negative effect on the Company's business
operations, no assurance can be given that these 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 has not affected 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
10.1 Sixth Amendment to Credit and Guaranty Agreement and Fifth
Amendment to Credit Agreement Dated as of November 10, 1999
between Specialty Catalog Corp., SC Corporation, d/b/a SC Direct,
SC Publishing, Inc., Daxbourne International Limited and
BankBoston, N.A, filed herewith.
10.2 Fifth Amendment to Credit and Guaranty Agreement and Fourth
Amendment to Credit Agreement Dated as of August 10, 1999 between
Specialty Catalog Corp., SC Corporation, d/b/a SC Direct, SC
Publishing, Inc., Daxbourne International Limited and BankBoston,
N.A., filed herewith.
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 three and nine months
ended October 2, 1999.
-14-
<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: November 15, 1999 By: /s/ Steven L. Bock
--------------------------------
STEVEN L. BOCK
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: November 15, 1999 By: /s/ Thomas K. McCain
--------------------------------
THOMAS K. MCCAIN
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
-15-
<PAGE>
================================================================================
SIXTH AMENDMENT TO
CREDIT AND GUARANTY AGREEMENT
AND
FIFTH AMENDMENT TO
CREDIT AGREEMENT
Dated as of November 10, 1999
Between
SPECIALTY CATALOG CORP.
SC CORPORATION, d/b/a SC DIRECT
SC PUBLISHING, INC.
DAXBOURNE INTERNATIONAL LIMITED
and
BANKBOSTON, N.A.
================================================================================
<PAGE>
SIXTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT
AND
FIFTH AMENDMENT TO CREDIT AGREEMENT
This SIXTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT and FIFTH AMENDMENT
TO CREDIT AGREEMENT (this "Amendment") is entered into as of November 10, 1999
by and among SPECIALTY CATALOG CORP., a Delaware corporation (the "Company" or
the "Parent"), SC CORPORATION, a Delaware corporation d/b/a SC DIRECT ("SC
Direct"), and SC PUBLISHING, INC., a Delaware corporation ("SC Publishing")
(each a "U.S. Borrower" and collectively, the "U.S. Borrowers"), DAXBOURNE
INTERNATIONAL LIMITED, (Registered No. 3369640), a private company limited by
shares formed under the laws of England and Wales (the "U.K. Borrower") (the
U.S. Borrowers and U.K. Borrower each a "Borrower" and collectively, the
"Borrowers") and BANKBOSTON, N.A., a national banking association (the "Bank").
Recitals
--------
The Borrowers and the Bank are parties to a Credit and Guaranty Agreement
dated as of March 12, 1997 (as amended, the "U.S. Credit Agreement") and a
Credit Agreement dated as of October 3, 1997 (as amended, the "U.K. Credit
Agreement") (each a "Credit Agreement" and collectively, the "Credit
Agreements"). All capitalized terms used herein and not otherwise defined shall
have the meanings set forth in the Credit Agreements. The Borrowers desire to
amend the Credit Agreements in certain respects, including increasing the Term
Loan under the U.S. Credit Agreement, and the Bank is willing to agree to such
amendments on the terms and conditions set forth herein.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 4, the Borrowers and the Bank hereby amend
the Credit Agreements as follows:
Section 1. Amendment of Definitions.
------------------------
(a) Section 1.1 of the U.S. Credit Agreement is hereby amended by
deleting the definitions of "Term Loan" and "Term Note" in their entirety and
substituting therefor the following:
"'Term Loan' shall mean the term loan made by the Bank to the
Borrowers under Section 2.5 hereof as increased pursuant to Section 2
of the Sixth Amendment.
"'Term Note' shall mean the Amended and Restated Term Note
executed by the Borrowers, jointly and severally, in connection with
the Sixth Amendment substantially in the form of Exhibit B thereto."
(b) Section 1.1 of each of the Credit Agreements is hereby amended,
effective as of September 30, 1999, as follows:
<PAGE>
(i) The definition of "Consolidated EBITDA" is hereby deleted in
its entirety and a new definition substituted therefor as follows:
"'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 Net Income, the restructuring charge
incurred by the Company and its Subsidiaries relating to
severance packages for certain senior employees during the
quarter ended October 2, 1999, in an aggregate amount not to
exceed $600,000, shall not be treated as an expense during such
quarter but shall be treated as an expense in future quarters as
and when such severance amounts are paid in cash or property and
the charge incurred by the Company associated with the
termination of the "Paula's Hatbox" line of business during the
quarter ended January 1, 2000 up to $730,000, shall not be
treated as an expense; and provided, further, that in calculating
Consolidated EBITDA for any period through the third quarter of
2000 for the purposes of Sections 7.1 and 7.3 hereto, there shall
be included an assumed $125,000 of net income from operations of
American Healthcare Institute, Inc. ("AHI") for each quarter of
operations of AHI through the third quarter of 1999 of the
Borrowers."
(ii) The definition of "Excluded Capital Expenditures" is hereby
-------------------------------
deleted in its entirety and a new definition substituted therefor as
follows:
"'Excluded Capital Expenditures' shall mean Capital
Expenditures in the following amounts for the quarters indicated
for implementation of a new MIS system:
Q199 Q299 Q399
---- ---- ----
259,751 343,197 341,410"
(iii) The definition of "1997 Financial Statements" is hereby
---------------------------
deleted in its entirety and a new definition substituted therefor as
follows:
"'1998 Financial Statements' shall mean the Consolidated
Balance Sheet of the Company and its Subsidiaries as of January
2, 1999 and the related Consolidated Statements of Operations,
Stockholders' Equity (Deficit) and Cash Flows for the year then
ended and notes to such financial statements, audited by Deloitte
& Touche LLP."
(iv) A new definition of "Sixth Amendment" shall be added in
---------------
alphabetical order, as follows:
"'Sixth Amendment' shall mean the Sixth Amendment to Credit
and Guaranty Agreement and Fifth Amendment to Credit Agreement
<PAGE>
dated as of November 10, 1999 by and among the Borrowers and the
Bank."
Section 2. Amendment of Term Loan. On the date hereof, the Bank will make
----------------------
an additional loan to the U.S. Borrowers in the amount of $1,000,000 (the "1999
Term Loan Increase"). The 1999 Term Loan Increase shall be considered to be an
increase in the term loan made by the Bank to the Borrowers under Section 2.5 of
the U.S. Credit Agreement. On the date hereof the U.S. Borrowers, jointly will
execute and deliver to the Bank the Term Note in the form of Exhibit B hereto to
evidence the Term Loan as so increased. After giving effect to the 1999 Term
Loan Increase, the outstanding principal balance of the Term Loan is $4,000,000
and the principal amount thereof will be repaid in quarterly installments,
payable on the following dates and in the following amounts:
<TABLE>
<CAPTION>
Quarterly Payment Date Amount
---------------------- ------
<S> <C> <C>
January 2, 2000 $500,000
July 2, 2000 $500,000
October 1, 2000 $750,000
January 1, July 1 and October 3, 2001 $750,000
</TABLE>
The proceeds of the 1999 Term Loan Increase will be applied by the U.S.
Borrowers on the date hereof to repay Revolving Credit under the U.S. Credit
Agreement on the date hereof. Accrued interest on the U.S. Borrowers' Term Note
dated October 3, 1997 through the date hereof shall be paid at the times
provided under the Term Note. Promptly following the execution and delivery of
this Amendment and the Term Note, the Bank will return to the U.S. Borrowers for
cancellation the U.S. Borrowers' Term Note dated October 3, 1997.
Section 3. Amendment of Covenants.
----------------------
(a) Article 7 of each of the Credit Agreements is hereby amended by
deleting Section 7.3 thereof in its entirety and substituting therefor the
following:
"Section 7.3 Minimum Consolidated EBITDA.
---------------------------
"(a) The Company and its Subsidiaries shall earn
Consolidated EBITDA for each period of four consecutive fiscal
quarters, commencing with the period ending January 1, 2000, of not
less than $4,500,000.
(b) The Company and its Subsidiaries shall earn Consolidated
EBITDA of not less than (i) $250,000 in each first fiscal quarter,
commencing with the first fiscal quarter of 2000, and (ii) $750,000 in
each second, third and fourth fiscal quarter, commencing with the
fourth fiscal quarter of 1999."
<PAGE>
(b) Section 7.2 of each of the Credit Agreements is hereby amended by
adding the following proviso at the end thereof:
"provided, however, that for purposes of calculating Consolidated
Total Debt Service, the Company shall be presumed to have made the
required $500,000 principal payments on the Term Loan on January 4,
1999, July 1, 1999, and October 4, 1999 notwithstanding that such
payments may actually have been made prior to such dates or deemed to
have been made prior to such dates."
Section 4. Effectiveness; Conditions to Effectiveness. This Sixth
------------------------------------------
Amendment to Credit and Guaranty Agreement and Fifth Amendment to Credit
Agreement shall become effective as of the date set forth above upon execution
hereof by the Borrowers and the Bank and satisfaction of the following
conditions:
(a) Officers' Certificate. The Borrowers shall have delivered to the
Bank an Officers' Certificate in the form of Exhibit A hereto.
(b) Term Note. The U.S. Borrowers shall have delivered to the Bank an
Amended and Restated Term Note in the form of Exhibit B hereto.
(c) Opinion of Counsel. The Bank shall have received an opinion of
Bingham Dana LLP, counsel to the Parent and its Subsidiaries, with respect to
certain matters in connection with this Amendment and the Term Note, in form and
substance satisfactory to the Bank.
(d) Fee. The Borrowers shall have paid to the Bank a fee of $7,500,
which fee shall be earned in full by the Bank upon its execution hereof.
Section 5. Representations and Warranties; No Default. The U.S. Borrowers
------------------------------------------
hereby confirm to the Bank the representations and warranties of the U.S.
Borrowers set forth in Article 5 of the U.S. Credit Agreement as amended as of
the date hereof, as if set forth herein in full (provided, however, that
references therein to the 1996 Financial Statements, shall be deemed to refer to
the 1998 Financial Statements; and provided, further, that the representation
contained in Section 5.12 of the U.S. Credit Agreement is qualified to the
extent of the following changes which have been notified to the Bank prior to
the date hereof: (i) the acquisition of assets of American Healthcare Institute,
Inc., (ii) the closing of the "Paula's Hatbox" line of business, and (iii) the
notice of proposed resignation of Steven L. Bock as a full-time employee of the
Borrowers). The U.K. Borrower hereby confirms to the Bank the representations
and warranties of the U.K. Borrower set forth in Article 5 of the U.K. Credit
Agreement as amended as of the date hereof, as if set forth herein in full
(provided, however, that references therein to the 1996 Financial Statements,
shall be deemed to refer to the 1998 Financial Statements; and provided,
further, that the representation contained in Section 5.12 of the U.K. Credit
Agreement is qualified to the extent of the following changes which have been
notified to the Bank prior to the date hereof: (i) the acquisition of assets of
American Healthcare Institute, Inc., (ii) the closing of the "Paula's Hatbox"
line of business, and (iii) the notice of proposed resignation of Steven L. Bock
as a full-time employee of the Borrowers). The Borrowers acknowledge that if
Steven L. Bock ceases to serve actively as a full-time employee of the U.S.
Borrowers, it will constitute an Event of Default as provided in and in
accordance with Section 10.1(h) of each of the Credit Agreements unless
expressly waived in writing by the Bank within ninety (90) days of the
occurrence of such cessation of active full-time employment. The Borrowers
hereby certify that no Default exists under the Credit Agreements.
<PAGE>
Section 6. Miscellaneous. The U.K. Borrower, as guarantor to the Bank
-------------
pursuant to a Guarantee dated October 3, 1997, acknowledges and consents to the
1999 Term Loan Increase. The Borrowers agree to pay on demand all the Bank's
reasonable expenses in preparing, executing and delivering this Amendment, and
all related instruments and documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of the Bank's special counsel,
Goodwin, Procter & Hoar LLP. This Amendment shall be a Bank Agreement under
each of the Credit Agreements and shall be governed by and construed and
enforced under the laws of The Commonwealth of Massachusetts (except to the
extent it effects any amendment of the U.K. Credit Agreement, as to which
English law shall apply).
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the U.S. Borrowers, the U.K. Borrower and the Bank have
caused this Sixth Amendment to Credit and Guaranty Agreement and Fifth Amendment
to Credit Agreement to be executed by their duly authorized officers as of the
date first set forth above.
SPECIALTY CATALOG CORP.
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
SC CORPORATION d/b/a SC DIRECT
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
SC PUBLISHING, INC.
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
DAXBOURNE INTERNATIONAL LIMITED
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: Director
BANKBOSTON, N.A.
By: /s/ Andrew Stickney
-------------------
Name: Andrew Stickney
Title: Vice President
<PAGE>
ACKNOWLEDGMENT OF GUARANTOR
The undersigned, Guarantor of all Bank Obligations pursuant to an Unlimited
Guaranty dated as of December 30, 1997, hereby acknowledges and consents to the
foregoing.
SC LICENSING CORP.
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
<PAGE>
EXHIBIT 10.2
================================================================================
FIFTH AMENDMENT TO
CREDIT AND GUARANTY AGREEMENT
AND
FOURTH AMENDMENT TO
CREDIT AGREEMENT
Dated as of August 10, 1999
Between
SPECIALTY CATALOG CORP.
SC CORPORATION, d/b/a SC DIRECT
SC PUBLISHING, INC.
DAXBOURNE INTERNATIONAL LIMITED
and
BANKBOSTON, N.A.
================================================================================
<PAGE>
FIFTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT
AND
FOURTH AMENDMENT TO CREDIT AGREEMENT
This FIFTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT and FOURTH AMENDMENT
TO CREDIT AGREEMENT is entered into as of August 10, 1999 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 "U.S. Borrower" and collectively
the "U.S. Borrowers") and DAXBOURNE INTERNATIONAL LIMITED, (Registered No.
3369640), a private company limited by shares formed under the laws of England
and Wales (the "U.K. Borrower") (the U.S. Borrowers and U.K. Borrower each a
"Borrower" and collectively, the "Borrowers") and BANKBOSTON, N.A., a national
banking association (the "Bank").
Recitals
--------
The Borrowers and the Bank are parties to a Credit and Guaranty Agreement
dated as of March 12, 1997, as amended (the "U.S. Credit Agreement") and a
Credit Agreement dated as of October 3, 1997, as amended (the "U.K. Credit
Agreement") (each a "Credit Agreement" and collectively, the "Credit
Agreements"). All capitalized terms used herein and not otherwise defined shall
have the meanings set forth in the Credit Agreements. SC Publishing desires to
acquire all or substantially all of the assets of American Healthcare Institute,
Inc., a Maryland corporation (the "American Healthcare Acquisition"), and has
requested that the Bank waive the requirements of Section 9.7 of the Credit
Agreements to permit the American Healthcare Acquisition. The Bank is willing
to waive such requirements on the terms and conditions set forth herein.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 2, the Borrowers and the Bank hereby amend
the Credit Agreements as follows:
Section 1. Consent of Bank to Effect American Healthcare Acquisition.
---------------------------------------------------------
Notwithstanding Section 9.7 of the Credit Agreements, the Bank hereby consents
to the consummation of the American Healthcare Acquisition pursuant to the terms
and conditions of the Agreement of Purchase and Sale of Assets dated August 19,
1999 (the "American Healthcare Acquisition Agreement") by and among American
Healthcare Institute, Inc., SC Publishing and the parties thereto and waives the
provisions of said Section 9.7 of the Credit Agreements to the extent required
to permit the American Healthcare Acquisition. Schedule I to the Security
Agreement is hereby amended by adding the following location as an additional
location where SC Publishing conducts business and maintains inventory and
equipment: Silver Spring, Maryland.
Section 2. Effectiveness; Conditions to Effectiveness. This Fifth
------------------------------------------
Amendment to Credit and Guaranty Agreement and Fourth Amendment to Credit
Agreement shall become effective as of the date set forth above upon execution
hereof by the Borrowers and the Bank and satisfaction of the following
conditions:
2
<PAGE>
(a) Security Documents. SC Publishing shall have delivered to the
------------------
Bank a letter of confirmation in the form of Exhibit A hereto.
(b) Officers' Certificate. The Borrowers shall have delivered to the
---------------------
Bank an Officers' Certificate in the form of Exhibit B hereto.
(c) Acquisition Agreement. SC Publishing shall have delivered to the
---------------------
Bank a counterpart original of the American Healthcare Acquisition
Agreement and copies of all related documents and instruments delivered in
connection therewith.
(d) Perfection of Security Interests. The Bank shall have received
--------------------------------
evidence of the perfection of its security interest in all assets acquired
in connection with the American Healthcare Acquisition, including, without
limitation, the filing of Uniform Commercial Code financing statements in
all applicable filing officers where such assets are located.
(e) Waiver of Tax Liens. The Bank shall have received evidence that
-------------------
no governmental authority will assert any lien or other charge against the
assets acquired by SC Publishing in the American Healthcare Acquisition.
(f) Opinion of Counsel. The Bank shall have received an opinion of
------------------
Dennick & Heiman, special Maryland counsel to SC Publishing, with respect
to certain matters in connection with the American Healthcare Acquisition,
in form and substance satisfactory to the Bank.
(g) Fee. The Borrowers shall have paid to the Bank a fee of $2,000
---
for the Bank's consent contained herein, which fee shall be earned in full
by the Bank upon its execution hereof.
Section 3. Representations and Warranties; No Default. The U.S. Borrowers
------------------------------------------
hereby confirm to the Bank the representations and warranties of the U.S.
Borrowers set forth in Article 5 of the U.S. Credit Agreement as amended as of
the date hereof, as if set forth herein in full. The U.K. Borrower hereby
confirms to the Bank the representations and warranties of the U.K. Borrower set
forth in Article 5 of the U.K. Credit Agreement as amended as of the date
hereof, as if set forth herein in full. SC Publishing hereby confirms and
restates to the Bank as if set forth herein in full the representations and
warranties set forth in Section 5 of the American Healthcare Acquisition
Agreement. The Borrowers hereby certify that no Default exists under the Credit
Agreements.
Section 4. Miscellaneous. The Borrowers agree to pay on demand all the
-------------
Bank's reasonable expenses in preparing, executing and delivering this Fifth
Amendment to Credit and Guaranty Agreement and Fourth Amendment to Credit
Agreement, and all related instruments and documents, including, without
limitation, the reasonable fees and out-of-pocket expenses of the Bank's special
counsel, Goodwin, Procter & Hoar LLP. This Fifth Amendment to Credit and
Guaranty Agreement and Fourth Amendment to Credit Agreement shall be a Bank
Agreement under each of the Credit Agreements and shall be governed by and
construed and enforced under the laws of The Commonwealth of Massachusetts
(except to the extent it effects any amendment of the U.K. Credit Agreement, as
to which English law shall apply).
[Remainder of Page Intentionally Left Blank]
3
<PAGE>
IN WITNESS WHEREOF, the U.S. Borrowers, the U.K. Borrower and the Bank have
caused this Fifth Amendment to Credit and Guaranty Agreement and Fourth
Amendment to Credit Agreement to be executed by their duly authorized officers
as of the date first set forth above.
SPECIALTY CATALOG CORP.
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
SC CORPORATION d/b/a SC DIRECT
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
SC PUBLISHING, INC.
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: CEO
DAXBOURNE INTERNATIONAL LIMITED
By: /s/ Steven L. Bock
------------------
Name: Steven L. Bock
Title: Director
BANKBOSTON, N.A.
By: /s/ Andrew D. Stickney
----------------------
Name: Andrew D. Stickney
Title: Vice President
4
<PAGE>
ACKNOWLEDGMENT OF GUARANTOR
The undersigned, Guarantor of all Lender Obligations pursuant to a Guaranty
Agreement dated as of December 30, 1997, hereby acknowledges and consents to the
foregoing.
SC LICENSING CORP.
By: /s/ Kyle Gendreau
-----------------
Name: Kyle Gendreau
Title: CFO
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 273,729
<SECURITIES> 0
<RECEIVABLES> 1,704,612
<ALLOWANCES> (65,198)
<INVENTORY> 6,725,544
<CURRENT-ASSETS> 12,598,439
<PP&E> 7,906,111
<DEPRECIATION> (3,688,825)
<TOTAL-ASSETS> 25,173,013
<CURRENT-LIABILITIES> 13,772,044
<BONDS> 0
0
0
<COMMON> 52,397
<OTHER-SE> 8,298,831
<TOTAL-LIABILITY-AND-EQUITY> 25,173,013
<SALES> 35,720,386
<TOTAL-REVENUES> 35,720,386
<CGS> 12,370,271
<TOTAL-COSTS> 20,622,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553,446
<INCOME-PRETAX> 2,174,275
<INCOME-TAX> 887,234
<INCOME-CONTINUING> 1,287,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,287,041
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.27
</TABLE>
