<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 quarterly period ended July 1, 2000
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
August 1, 2000: 4,337,886.
==============================================================================
<PAGE>
SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
PAGE NO.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 1,
2000, JANUARY 1, 2000 AND JULY 3, 1999, FOR THE THIRTEEN
WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999 AND FOR THE
TWENTY-SIX WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Condensed Consolidated Statements of Operations 3-4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
JULY 1, 2000 JULY 3, 1999
---------------------- ------------------
<S> <C> <C>
Net sales................................................ $ 14,541,814 $ 12,264,398
Cost of sales (including buying, occupancy and order
fulfillment costs).................................. 4,876,715 4,160,051
---------------- ---------------
Gross profit............................................. 9,665,099 8,104,347
Operating expenses....................................... 7,728,666 6,244,889
Depreciation and amortization............................ 416,329 206,754
---------------- ---------------
Income from operations................................... 1,520,104 1,652,704
Interest expense, net.................................... 204,660 169,297
---------------- ---------------
Income before income taxes............................... 1,315,444 1,483,407
Income tax provision..................................... 539,329 619,009
---------------- ---------------
Net income............................................... 776,115 864,398
Other comprehensive loss................................. (81,204) (14,418)
---------------- ---------------
Comprehensive income..................................... $ 694,911 $ 849,980
================ ===============
Earnings per share - Basic EPS:
Net income per share............................... $ 0.18 $ 0.20
================ ===============
Weighted average shares outstanding................ 4,340,353 4,417,718
================ ===============
Earnings per share - Diluted EPS:
Net income per share............................... $ 0.17 $ 0.18
================ ===============
Weighted average shares outstanding................ 4,615,365 4,698,616
================ ===============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
JULY 1, 2000 JULY 3, 1999
------------------ -----------------
<S> <C> <C>
Net sales.............................................. $ 28,505,114 $ 25,531,066
Cost of sales (including buying, occupancy and order
fulfillment costs)................................ 9,744,564 8,720,478
------------------ -----------------
Gross profit........................................... 18,760,550 16,810,588
Operating expenses..................................... 16,277,025 13,713,042
Depreciation and amortization.......................... 816,030 404,690
------------------ -----------------
Income from operations................................. 1,667,495 2,692,856
Interest expense, net.................................. 419,240 365,110
------------------ -----------------
Income before income taxes............................. 1,248,255 2,327,746
Income tax provision................................... 511,769 966,179
------------------ -----------------
Net income............................................. 736,486 1,361,567
Other comprehensive loss............................... (76,537) (50,704)
------------------ -----------------
Comprehensive income................................... $ 659,949 $ 1,310,863
================== =================
Earnings per share - Basic EPS:
Net income per share............................. $ 0.17 $ 0.31
================== =================
Weighted average shares outstanding.............. 4,345,973 4,426,344
================== =================
Earnings per share - Diluted EPS:
Net income per share............................. $ 0.16 $ 0.29
================== =================
Weighted average shares outstanding.............. 4,631,735 4,708,514
================== =================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 1, JANUARY 1, JULY 3,
2000 2000 1999
----- ----- ----
ASSETS (unaudited) (audited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 608,112 $ 1,136,847 $ 1,576,722
Accounts receivable, net..................... 1,502,619 1,206,490 1,326,640
Inventories.................................. 5,667,516 5,626,304 4,574,730
Prepaid expenses............................. 4,458,275 4,012,538 3,443,426
------------ ------------ ------------
Total current assets................ 12,236,522 11,982,179 10,921,518
------------ ------------ ------------
Property, plant and equipment, net.................. 4,561,834 4,326,710 3,607,732
Intangible assets, net.............................. 4,172,925 4,563,627 3,344,187
Deferred income taxes............................... 4,001,199 4,338,843 3,922,564
Other assets........................................ 169,507 211,918 182,362
------------ ------------ ------------
Total assets........................ $ 25,141,987 $ 25,423,277 $ 21,978,363
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........ $ 4,953,065 $ 4,261,400 $ 2,788,959
Liabilities to customers..................... 1,163,359 1,169,256 975,783
Short-term borrowings........................ 5,426,132 6,401,238 4,276,098
Income taxes payable......................... 588,340 449,577 368,404
Current portion of long-term debt............ 2,384,105 2,125,000 1,964,471
------------ ------------ ------------
Total current liabilities........... 14,515,001 14,406,471 10,373,715
------------ ------------ ------------
Long-term debt...................................... 1,959,053 2,900,000 2,880,049
Other long-term liabilities......................... 304,499 377,875 213,869
Commitments and contingencies
Shareholders' equity:
Common stock................................ 52,397 52,397 52,397
Additional paid-in capital.................. 16,159,570 16,159,570 16,159,570
Deferred compensation....................... -- -- (39,613)
Accumulated other comprehensive loss........ (127,787) (51,250) (34,778)
Accumulated deficit......................... (4,853,568) (5,590,054) (5,027,973)
------------ ------------ ------------
11,230,612 10,570,663 11,109,603
Less treasury stock, at cost, 901,388 shares
at July 1, 2000, 888,388 shares at
January 1, 2000 and 828,188 shares
at July 3, 1999......................... (2,867,178) (2,831,732) (2,598,873)
------------ ------------ ------------
Total shareholders' equity............. 8,363,434 7,738,931 8,510,730
------------ ------------ ------------
Total liabilities and
shareholders' equity............... $ 25,141,987 $ 25,423,277 $ 21,978,363
============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
JULY 1, 2000 JULY 3, 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 736,486 $ 1,361,567
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 816,030 404,690
Deferred income tax expense............................ 351,587 806,854
Amortization of deferred compensation.................. -- 8,750
Changes in operating assets and liabilities:
Accounts receivable, net............................. (321,096) (124,055)
Inventories.......................................... (89,503) 789,544
Prepaid expenses..................................... (455,066) 358,594
Other assets......................................... 23,388 (9,874)
Accounts payable and accrued expenses................ 734,685 (957,313)
Liabilities to customers............................. (5,897) 299,336
Income taxes payable................................. 155,487 104,326
Other long-term liabilities.......................... (16,668) --
------------ ------------
Net cash provided by operating activities..................... 1,929,433 3,042,419
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (862,648) (830,697)
------------ ------------
Net cash used in investing activities......................... (862,648) (830,697)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short-term borrowings, net............... (873,758) (730,389)
Purchases of treasury stock............................ (35,446) (245,232)
Repayments of long-term debt........................... (616,728) (713,164)
Repayments of capital lease obligations................ (67,138) (38,007)
------------ ------------
Net cash used in financing activities......................... (1,593,070) (1,726,792)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents.. (2,450) (6,079)
------------ ------------
Increase (decrease) in cash and cash equivalents.............. (528,735) 478,851
Cash and cash equivalents, beginning of year.................. 1,136,847 1,097,871
------------ ------------
Cash and cash equivalents, end of period...................... $ 608,112 $ 1,576,722
=========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the twenty-six weeks ended July 1, 2000 and July 3, 1999, the
Company received federal income tax refunds of $320,000 and $375,000,
respectively.
SUMMARY OF NON-CASH TRANSACTIONS:
During the twenty-six weeks ended July 1, 2000 and July 3, 1999, the
Company recorded capital lease obligations of $10,430 and $100,257, respectively
related to the purchase of data processing equipment.
See notes to condensed consolidated financial statements.
6
<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 Form 10-K of Specialty Catalog Corp. (the "Company") for
the fiscal year ended January 1, 2000, 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 thirteen weeks and twenty-six
weeks ended July 1, 2000 are not necessarily indicative of the results for the
entire fiscal year ending December 30, 2000.
The condensed consolidated financial statements for the thirteen weeks and
twenty-six weeks ended July 1, 2000 and July 3, 1999 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 condensed consolidated financial
statements are those set forth in Note 1 of the consolidated financial
statements included in the Company's Form 10-K for the fiscal year ended January
1, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 does not
use either derivative financial instruments or hedging activities and has
therefore determined that there should be no effect on the condensed
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
SAB 101 must be adopted in the quarter ended December 31, 2000 and requires
companies to report any changes in revenue recognition as a cumulative effect
from a change in accounting principle at the time of adoption. The Company is
currently assessing the impact of SAB No. 101 on its consolidated financial
statements.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
3. TREASURY STOCK
In December 1998, the Company's Board of Directors authorized the Company
to repurchase up to $1.0 million of the Company's common stock. As of July 1,
2000, the Company had repurchased 144,100 shares at an average price of $3.56
per share.
4. ADOPTION OF 2000 STOCK INCENTIVE PLAN
On June 22, 2000, the Company adopted the 2000 Stock Incentive Plan (the
"Plan") which authorizes the issuance of up to 750,000 shares of the Company's
common stock through the grant of stock options and awards of restricted stock.
Each option has a maximum term of ten years from the date of grant, subject to
early termination. On June 22, 2000, a total of 415,000 stock options were
granted to employees and directors of the Company at a price of $2.50 per share.
7
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
5. 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 and the effects of
potentially dilutive options on the weighted average number of shares
outstanding.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
JULY 1, 2000 JULY 3, 1999 JULY 1, 2000 JULY 3, 1999
------------ ------------ ------------ ------------
NET INCOME SHARES NET INCOME SHARES NET INCOME SHARES NET INCOME SHARES
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 776 4,340 $ 864 4,418 $ 736 4,346 $ 1,362 4,426
Effect of dilutive options -- 275 -- 281 -- 286 -- 282
----- ----- ----- ----- ----- ----- ------- -----
Diluted earnings per share $ 776 4,615 $ 864 4,699 $ 736 4,632 $ 1,362 4,708
===== ===== ===== ===== ===== ===== ======= =====
</TABLE>
Options to purchase 564,251 shares of common stock ranging from $5.33 to
$7.15 per share were not included in computing diluted EPS for the thirteen
weeks and twenty-six weeks ended July 1, 2000 because their effects were
antidilutive. Options to purchase 677,601 shares of common stock ranging from
$5.33 to $7.15 per share were not included in computing diluted EPS for the
thirteen weeks and twenty-six weeks ended July 3, 1999 because their effects
were antidilutive.
6. RIGHTS AGREEMENT
On April 11, 2000, the board of directors of the Company adopted a
stockholder rights plan pursuant to a Rights Agreement dated as of April 11,
2000, between the Company and Continental Stock Transfer and Trust Company, as
Rights Agent. The Rights Agreement is effective as of April 11, 2000 for all
shares of Common Stock outstanding on such date and for all shares of Common
Stock issued thereafter and prior to the earliest of the Distribution Date (as
defined in the Rights Agreement). Each Right shall be exercisable (as defined in
the Rights Agreement) by the registered holder of a Right Certificate to
purchase 1/1000th of a share of Series A Preferred Stock of the Company, subject
to adjustment, at an exercise price per 1/1000th of a share of Series A
Preferred Stock of $15, subject to adjustment. Each 1/1000th of a share of
Series A Preferred Stock will have economic attributes (i.e., participation in
dividends and voting rights) substantially equivalent to one whole share of the
common stock of the Company. The Rights expire on the tenth anniversary of the
date of the Rights Agreement unless earlier redeemed or exchanged by the Company
as provided in the Rights Agreement. For further information, a detailed
description of the Rights Agreement and a copy of the Rights Agreement were
included in a current report on Form 8-K, which was filed with the Securities
and Exchange Commission on April 13, 2000.
8
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
7. EXECUTIVE OFFICER APPOINTMENT
On May 9, 2000, the Company announced the appointment of Joseph J.
Grabowski (age 53) as president of the Company effective as of May 8, 2000. On
July 1, 2000, Mr. Grabowski assumed the title of CEO, replacing Steven L. Bock
whose resignation, effective June 30, 2000, was previously announced.
The term of the executive employment agreement (the "Employment
Agreement") between the Company and Mr. Grabowski commenced on May 8, 2000 and,
unless extended, terminates on May 7, 2002 (the "Initial Term"). Under this
Employment Agreement, Mr. Grabowski will receive an annual salary of $300,000,
along with other benefits. Mr. Grabowski will be eligible for a performance
bonus of up to 100 per cent of his annual salary, based upon the Company's
performance as compared against the annual performance plan. Upon executing this
agreement, Mr. Grabowski was granted options under the 2000 Stock Incentive Plan
to purchase 250,000 shares of common stock of the Company at $2.50 per share.
The Company may terminate Mr. Grabowski's employment upon his death or
permanent disability, or if he engages in conduct that constitutes "cause" under
the Employment Agreement. Mr. Grabowski may terminate his employment for "Good
Reason" as defined in the Employment Agreement. In the event Mr. Grabowski's
employment is terminated by the Company other than for "cause", Mr. Grabowski
will receive a "Termination Payment" as defined in the Employment Agreement. The
Employment Agreement contains non-competition and other restrictions effective
during the term of employment and for a one-year period thereafter.
8. BUSINESS SEGMENTS AND FINANCIAL INFORMATION BY GEOGRAPHIC LOCATION
Specialty Catalog Corp. has six reportable segments: Paula Young(R),
Especially Yours(R) and Paula's Hatbox(R) under the SC Direct division, Western
Schools(R) and the American Healthcare Institute ("AHI") brand under the SC
Publishing division and Daxbourne International Limited. The SC Direct division
sells women's wigs and hairpieces using two distinct catalogs: Paula Young(R)
and Especially Yours(R). In addition, prior to the end of 1999, SC Direct sold
apparel, hats and other fashion accessories through its Paula's Hatbox(R)
catalog. The SC Publishing division distributes catalogs under its Western
Schools(R) brand and specializes in providing continuing education courses to
nurses and accounting professionals. SC Publishing's other segment, American
Healthcare Institute, which was acquired by the Company on September 10, 1999,
distributes catalogs under its own name and specializes in providing continuing
education seminars and conferences to nurses and other mental health
professionals. Daxbourne International Limited is a retailer and wholesaler of
women's wigs, hairpieces and related products in the United Kingdom.
Beginning in the second quarter of fiscal year 2000, the Company changed
its reportable segments from SC Direct, SC Publishing, AHI and Daxbourne
International Limited to Paula Young (R), Especially Yours(R), Paula's
Hatbox(R), Western Schools(R), AHI and Daxbourne International Limited. The
change was made to conform the Company's financial reporting to how it now
manages its business. As a result, the Company has restated the segment
reporting results for the thirteen weeks and twenty-six weeks ended July 3, 1999
to conform to its new segments.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the consolidated financial statements included in the
Company's Form 10-K for the fiscal year ended January 1, 2000. 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. The SC Direct and SC Publishing divisions 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.
9
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
A summary of information about the Company's operations by segment for the
thirteen weeks ended July 1, 2000 and July 3, 1999 follows (intersegment
eliminations are intercompany receivables and investments in subsidiaries):
<TABLE>
<CAPTION>
PAULA ESPECIALLY PAULA'S CORPORATE TOTAL SC WESTERN TOTAL SC
YOUNG YOURS HATBOX EXPENSES DIRECT SCHOOLS AHI PUBLISHING
----- ----- ------ -------- ------ ------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE THIRTEEN
WEEKS ENDED
JULY 1, 2000
Net sales............. $8,524,780 $2,011,122 -- $ -- $10,535,902 $1,060,013 $1,659,645 $2,719,658
Gross profit.......... 5,901,291 1,317,946 -- (235,063) 6,984,174 803,261 981,923 1,785,184
Operating expenses.... 3,341,794 1,045,441 -- 1,070,466 5,457,701 728,610 939,606 1,668,216
Depreciation and
amortization........ -- -- -- 280,422 280,422 10,180 35,473 45,653
Income from
operations.......... 2,559,497 272,505 -- (1,585,951) 1,246,051 64,471 6,844 71,315
Interest expense, net. -- -- -- 150,577 150,577 -- -- --
Income tax provision.. -- -- -- 443,823 443,823 26,431 2,657 29,088
Segment assets........ -- -- -- 20,005,506 20,005,506 4,712,666 2,420,950 7,133,616
Capital expenditures.. -- -- -- 401,551 401,551 -- 21,050 21,050
<CAPTION>
INTERSEGMENT
DAXBOURNE ELIMINATIONS TOTAL
--------- ------------ -----
<S> <C> <C> <C>
FOR THE THIRTEEN
WEEKS ENDED
JULY 1, 2000
Net sales............. $1,286,254 -- $14,541,814
Gross profit.......... 895,741 -- 9,665,099
Operating expenses.... 602,749 -- 7,728,666
Depreciation and
amortization........ 90,254 -- 416,329
Income from
operations.......... 202,738 -- 1,520,104
Interest expense, net. 54,083 -- 204,660
Income tax provision.. 66,418 -- 539,329
Segment assets........ 4,691,803 $(6,688,938) 25,141,987
Capital expenditures.. 7,364 -- 429,965
</TABLE>
<TABLE>
<CAPTION>
PAULA ESPECIALLY PAULA'S CORPORATE TOTAL SC WESTERN TOTAL SC
YOUNG YOURS HATBOX EXPENSES DIRECT SCHOOLS AHI PUBLISHING
----- ----- ------ -------- ------ ------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE THIRTEEN
WEEKS ENDED
JULY 3, 1999
Net sales............. $7,423,350 $1,447,843 $ 890,209 $ -- $9,761,402 $1,258,202 -- $1,258,202
Gross profit.......... 5,133,808 918,902 456,438 (237,196) 6,271,952 953,908 -- 953,908
Operating expenses.... 2,468,634 808,242 788,127 857,756 4,922,759 682,727 -- 682,727
Depreciation and
amortization........ -- -- -- 98,766 98,766 11,145 -- 11,145
Income from
operations.......... 2,665,174 110,660 (331,689) (1,193,718) 1,250,427 260,036 -- 260,036
Interest expense, net. -- -- -- 112,488 112,488 -- -- --
Income tax provision.. -- -- -- 466,576 466,576 106,618 -- 106,618
Segment assets........ -- -- -- 17,315,976 17,315,976 4,121,403 -- 4,121,403
Capital expenditures.. -- -- -- 472,896 472,896 1,614 -- 1,614
<CAPTION>
INTERSEGMENT
DAXBOURNE ELIMINATIONS TOTAL
--------- ------------ -----
<S> <C> <C> <C>
FOR THE THIRTEEN
WEEKS ENDED
JULY 3, 1999
Net sales............. $ 1,244,794 -- $12,264,398
Gross profit.......... 878,487 -- 8,104,347
Operating expenses.... 639,403 -- 6,244,889
Depreciation and
amortization........ 96,843 -- 206,754
Income from
operations.......... 142,241 -- 1,652,704
Interest expense, net. 56,809 -- 169,297
Income tax provision.. 45,815 -- 619,009
Segment assets........ 5,077,823 $(4,536,839) 21,978,363
Capital expenditures.. 16,722 -- 491,232
</TABLE>
10
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
A summary of information about the Company's operations by segment for the
twenty-six weeks ended July 1, 2000 and July 3, 1999 follows (intersegment
eliminations are intercompany receivables and investments in subsidiaries):
<TABLE>
<CAPTION>
PAULA ESPECIALLY PAULA'S CORPORATE TOTAL SC WESTERN TOTAL SC
YOUNG YOURS HATBOX EXPENSES DIRECT SCHOOLS AHI PUBLISHING
----- ----- ------ -------- ------ ------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE TWENTY-SIX
WEEKS ENDED
JULY 1, 2000
Net sales............. $16,813,497 $3,727,093 -- $ -- $20,540,590 $2,761,295 $2,472,938 $5,234,233
Gross profit.......... 11,369,441 2,368,939 -- (467,599) 13,270,781 2,159,604 1,432,056 3,591,660
Operating expenses.... 7,254,404 2,408,544 -- 2,480,909 12,143,857 1,451,521 1,429,739 2,881,260
Depreciation and
amortization........ -- -- -- 542,172 542,172 20,852 69,318 90,170
Income from
operations.......... 4,115,037 (39,605) -- (3,490,680) 584,752 687,231 (67,001) 620,230
Interest expense, net -- -- -- 305,781 305,781 -- -- --
Income tax provision.. -- -- -- 114,363 114,363 281,763 (27,471) 254,292
Segment assets........ -- -- -- 20,005,506 20,005,506 4,712,666 2,420,950 7,133,616
Capital expenditures.. -- -- -- 781,601 781,601 -- 58,324 58,324
<CAPTION>
INTERSEGMENT
DAXBOURNE ELIMINATIONS TOTAL
--------- ------------ -----
<S> <C> <C> <C>
FOR THE TWENTY-SIX
WEEKS ENDED
JULY 1, 2000
Net sales............. $2,730,291 - $28,505,114
Gross profit.......... 1,898,109 - 18,760,550
Operating expenses.... 1,251,908 - 16,277,025
Depreciation and
amortization........ 183,688 - 816,030
Income from
operations.......... 462,513 - 1,667,495
Interest expense, net. 113,459 - 419,240
Income tax provision.. 143,114 - 511,769
Segment assets........ 4,691,803 $(6,688,938) 25,141,987
Capital expenditures.. 22,723 - 862,648
</TABLE>
<TABLE>
<CAPTION>
PAULA ESPECIALLY PAULA'S CORPORATE TOTAL SC WESTERN TOTAL SC
YOUNG YOURS HATBOX EXPENSES DIRECT SCHOOLS AHI PUBLISHING
----- ----- ------ -------- ------ ------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE TWENTY-SIX WEEKS ENDED
JULY 3, 1999
Net sales............. $15,139,701 $3,118,037 $1,803,994 $ -- $20,061,732 $2,835,371 -- $2,835,371
Gross profit.......... 10,439,449 1,948,050 881,786 (478,738) 12,790,547 2,156,329 -- 2,156,329
Operating expenses.... 6,062,340 1,882,851 1,365,261 1,798,403 11,108,855 1,302,991 -- 1,302,991
Depreciation and
amortization........ -- -- -- 190,291 190,291 22,072 -- 22,072
Income from
operations.......... 4,377,109 65,199 (483,475) (2,467,432) 1,491,401 831,266 -- 831,266
Interest expense, net. -- -- -- 242,340 242,340 -- -- --
Income tax provision.. -- -- -- 512,136 512,136 340,835 -- 340,835
Segment assets........ -- -- -- 17,315,976 17,315,976 4,121,403 -- 4,121,403
Capital expenditures.. -- -- -- 806,908 806,908 7,067 -- 7,067
<CAPTION>
INTERSEGMENT
DAXBOURNE ELIMINATIONS TOTAL
--------- ------------ -----
<S> <C> <C> <C>
FOR THE TWENTY-SIX
WEEKS ENDED
JULY 3, 1999
Net sales............. $2,633,963 -- $25,531,066
Gross profit.......... 1,863,712 -- 16,810,588
Operating expenses.... 1,301,196 -- 13,713,042
Depreciation and
amortization........ 192,327 -- 404,690
Income from
operations.......... 370,189 -- 2,692,856
Interest expense, net. 122,770 -- 365,110
Income tax provision.. 113,208 -- 966,179
Segment assets........ 5,077,823 $(4,536,839) 21,978,363
Capital expenditures.. 16,722 -- 830,697
</TABLE>
11
<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 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 and (x) the impact of acquisitions on the Company's
prospects. 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 fiscal year ended January 1, 2000. 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.
THIRTEEN WEEKS ENDED JULY 1, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED JULY 3,
1999
Net sales increased to $14.6 million for the thirteen weeks ended July 1,
2000 from $12.3 million for the thirteen weeks ended July 3, 1999, an increase
of $2.3 million, or 18.7 per cent. This increase was due to the addition of $1.7
million in net sales from American Healthcare Institute ("AHI"), which was
acquired by the Company in September 1999, and increases in SC Direct's and
Daxbourne's net sales of approximately $775,000 and $41,000, respectively,
offset by lower Western Schools(R) net sales of approximately $198,000. The
increase in SC Direct's net sales was primarily due to increases in the Paula
Young(R) and Especially Yours(R) catalogs of approximately $1.1 million and
$563,000, respectively, due primarily to increased number of orders from
increased circulation of its catalogs to new and expanded advertising channels
and sales over the Internet and to changes in the product mix in both catalogs.
The increase in SC Direct's net sales was offset by a decrease of approximately
$890,000 in net sales from its Paula Hatbox(R) catalog, as a result of the
Company's decision in the fourth quarter of 1999 to no longer circulate this
catalog.
Gross margin as a percentage of net sales increased to 66.5 per cent for
the thirteen weeks ended July 1, 2000 from 66.1 per cent for the thirteen weeks
ended July 3, 1999. Gross margin increased to $9.7 million for the thirteen
weeks ended July 1, 2000 from $8.1 million for the thirteen weeks ended July 3,
1999, an increase of $1.6 million, or 19.8 per cent, as a result of the
increases in net sales and gross margin rate discussed above.
Operating expenses increased to $8.1 million for the thirteen weeks ended
July 1, 2000 from $6.4 million for the thirteen weeks ended July 3, 1999, an
increase of $1.7 million, or 26.6 per cent. This increase was due primarily to:
(i) additional catalog production expenses of $1.0 million, mainly related to
the acquisition of AHI as well as increased circulation of catalogs mailed to
inactive Paula Young(R)
12
<PAGE>
customer files in an effort to reactivate these names, (ii) increased
depreciation and amortization of approximately $210,000 related to the
implementation of the Company's catalog information system in August 1999, and
(iii) approximately $479,000 in additional payroll, mainly related to the AHI
acquisition as well as an increase in telemarketing and customer service
personnel costs.
Interest expense, net of interest income, increased to approximately $205,000
for the thirteen weeks ended July 1, 2000 from approximately $169,000 for the
thirteen weeks ended July 3, 1999, an increase of approximately $36,000, or 21.3
per cent. The increase was attributable to higher average principal amounts
outstanding on the Company's bank facility as well as increased interest rates
during the second quarter of 2000 compared to the second quarter of 1999.
TWENTY-SIX WEEKS ENDED JULY 1, 2000 COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY
3, 1999
Net sales increased to $28.5 million for the twenty-six weeks ended July
1, 2000 from $25.5 million for the twenty-six weeks ended July 3, 1999, an
increase of $3.0 million, or 11.8 per cent. This increase was due to the
addition of $2.5 million in net sales from AHI, which was acquired by the
Company in September 1999, and increases in SC Direct's and Daxbourne's net
sales of approximately $479,000 and $96,000, respectively, offset by lower
Western Schools(R) net sales of approximately $74,000. The increase in SC
Direct's net sales was primarily due to increases in the Paula Young(R) and
Especially Yours(R) catalogs of approximately $1.7 million and $609,000,
respectively, due primarily to increased number of orders from increased
circulation of its catalogs to new and expanded advertising channels and sales
over the Internet as well as an increase in average order size, attributable to
changes in the product mix in both catalogs. The increase in SC Direct's net
sales was offset by a decrease of $1.8 million in net sales from its Paula
Hatbox(R) catalog, as a result of the Company's decision in the fourth quarter
of 1999 to no longer circulate this catalog.
Gross margin as a percentage of net sales remained unchanged at 65.8 per
cent for the twenty-six weeks ended July 1, 2000 and July 3, 1999. Gross margin
increased to $18.8 million for the twenty-six weeks ended July 1, 2000 from
$16.8 million for the twenty-six weeks ended July 3, 1999, an increase of $2.0
million, or 11.9 per cent, as a result of the increase in net sales discussed
above.
Operating expenses increased to $17.1 million for the twenty-six weeks
ended July 1, 2000 from $14.1 million for the twenty-six weeks ended July 3,
1999, an increase of $3.0 million, or 21.3 per cent. This increase was due
primarily to: (i) additional catalog production expenses of $1.3 million, mainly
related to the acquisition of AHI as well as increased circulation of catalogs
mailed to inactive Paula Young(R) customer files in an effort to reactivate
these names, (ii) approximately $439,000 related to costs incurred in connection
with the bonus paid to the former chief executive officer and the terminated
sale of the Company's common stock to Golub Associates, Inc., (iii) increased
depreciation and amortization of approximately $411,000 related to the
implementation of the Company's catalog information system in August 1999, and
(iv) approximately $908,000 in additional payroll costs, mainly related to the
AHI acquisition and an increase in telemarketing and customer service personnel
costs.
Interest expense, net of interest income, increased to approximately $419,000
for the twenty-six weeks ended July 1, 2000 from approximately $365,000 for the
twenty-six weeks ended July 3, 1999, an increase of approximately $54,000, or
14.8 per cent. The increase was attributable to higher average principal amounts
outstanding on the Company's bank facility as well as increased interest rates
during the twenty-six weeks ended July 1, 2000 compared to the twenty-six weeks
ended July 3, 1999.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow used by the Company for the twenty-six weeks ended July 1,
2000 was approximately $529,000. Cash flows provided by operating activities for
the twenty-six weeks ended July 1, 2000 was $1.9 million, offset by
approximately $863,000 in investing activities and $1.6 million in financing
activities. The major factors that caused the difference between net income and
net cash flows provided by operations for the twenty-six weeks ended July 1,
2000 were increases in: (i) cash working capital items of approximately
$25,000, (ii) depreciation and amortization expense of approximately $816,000
and (iii) deferred income tax expense of approximately $352,000. The Company
used approximately $862,000 in investing activities for computer and equipment
purchases. The $1.6 million in net cash used in financing activities was
primarily due to: (i) the repayment of approximately $874,000 in short-term
borrowings, (ii) the repayment of approximately $617,000 of long-term debt,
(iii) the repayment of approximately $67,000 of capital leases and (iv) the
purchase of approximately $35,000 in treasury stock.
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 an additional significant acquisition, could require new external financing.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 does not
use either derivative financial instruments or hedging activities and has
therefore determined that there should be no effect on the condensed
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
SAB 101 must be adopted in the quarter ended December 31, 2000 and requires
companies to report any changes in revenue recognition as a cumulative effect
from a change in accounting principle at the time of adoption. The Company is
currently assessing the impact of SAB No. 101 on its 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 borrowings of $9.8 million as of
July 1, 2000 under its credit facility and in foreign currency exchange rates.
The Company does not use derivative financial instruments. 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 adverse 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 consolidated
financial statements in the future.
The Company's term loan and line of credit bear interest rates based on
either a base rate or a LIBOR contract rate. The Company's UK term loan and the
UK line of credit bear interest rates based on either a Sterling base rate or a
LIBOR contract rate.
As of July 1, 2000, the outstanding balance on all of the Company's credit
facilities was $9,769,290. Based on this balance, an immediate change of one per
cent in the interest rate would cause a change in interest expense of
approximately $98,000 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.
The foreign currencies to which the Company has the most significant
exchange rate exposure are the British Pound, Chinese Yuan, Indonesian Rupiah
and Korean Won. The Company expects that most of its wigs and hairpieces will
continue to be manufactured in China, Indonesia and Korea in the future.
14
<PAGE>
Although a substantial portion of the Company's transactions with these
countries occurs in US dollars, the Company's operations may be 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Thursday, June 22,
2000. The following represents the results of the voting on proposals submitted
to a vote of shareholders at such meeting:
a. Proposal to elect directors:
<TABLE>
<CAPTION>
NAME OF DIRECTOR NUMBER OF VOTES IN FAVOR NUMBER OF VOTES WITHHELD
---------------- ------------------------ ------------------------
<S> <C> <C>
David Cicurel 3,169,668 7,100
Martin E. Franklin 3,169,668 7,100
Samuel L. Katz 3,169,668 7,100
Guy Naggar 3,169,668 7,100
</TABLE>
All persons name above were re-elected as directors of the Company for a
term of office expiring on the date of the next annual meeting of shareholders,
or special meeting in lieu thereof, and until their respective successors are
duly elected and qualified.
b. Proposal to ratify and approve the Company's 2000 Stock Incentive Plan.
VOTES FOR VOTES AGAINST VOTES ABSTAINING NOT VOTED
1,989,058 160,998 0 1,026,712
c. Proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 30, 2000:
VOTES FOR VOTES AGAINST VOTES ABSTAINING
3,176,668 100 0
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of May 8, 2000 between the Registrant and
Joseph Grabowski. Filed as Exhibit 10.1 to Specialty Catalog Corp.'s
Form 10-Q for the Quarter Ended April 1, 2000.
10.2 Eighth Amendment to Credit and Guaranty Agreement and
Seventh Amendment to Credit Agreement dated as of May 12,
2000 between Fleet National Bank and the Registrant. Filed
as Exhibit 10.2 to Specialty Catalog Corp.'s Form 10-Q for
the Quarter Ended April 1, 2000.
10.3 Rights Agreement between Specialty Catalog Corp. and Continental Stock
Transfer and Trust Company, as Rights Agent. Filed as Exhibit 4.1 to
Specialty Catalog Corp.'s Form 8-K, dated April 11, 2000
27.1 Financial Data Schedule (for EDGAR filing purposes only). Filed
herewith.
(b) Reports on Form 8-K during the three months ended July 1, 2000:
April 11, 2000 - Rights Agreement between Specialty Catalog Corp. and
Continental Stock Transfer and Trust Company, as Rights Agent.
16
<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: August 14, 2000 By: /s/ Joseph Grabowski
-----------------------------
JOSEPH GRABOWSKI
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
Dated: August 14, 2000 By: /s/ Thomas McCain
-----------------------------
THOMAS MCCAIN
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
17
