<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 September 30, 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
November 1, 2000: 4,337,886.
================================================================================
<PAGE>
SPECIALTY CATALOG CORP.
INDEX
PART I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Condensed Consolidated Financial Statements as of September 30, 2000, January 1, 2000 and
October 2, 1999, for the Thirteen Weeks Ended September 30, 2000 and October 2, 1999 and for the
Thirty-Nine Weeks Ended September 30, 2000 and October 2, 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 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Revenues:
Net sales ................................................................ $ 11,702,415 $ 10,131,275
Shipping & handling income ............................................... 1,737,723 1,483,292
Royalties ................................................................ 35,657 58,045
------------ ------------
Total revenues ................................................................. 13,475,795 11,672,612
Cost of sales (including buying, occupancy and order
fulfillment costs) ......................................................... 5,248,668 4,465,604
------------ ------------
Gross profit ................................................................... 8,227,127 7,207,008
Operating expenses ............................................................. 7,387,415 6,881,143
Depreciation and amortization .................................................. 437,633 291,000
------------ ------------
Income from operations ......................................................... 402,079 34,865
Interest expense, net .......................................................... 288,069 188,336
------------ ------------
Income (loss) before income taxes .............................................. 114,010 (153,471)
Income tax provision (benefit) ................................................. 46,738 (78,945)
------------ ------------
Net income (loss) .............................................................. 67,272 (74,526)
Other comprehensive income (loss) .............................................. (24,544) 39,126
------------ ------------
Comprehensive income (loss) .................................................... $ 42,728 $ (35,400)
============ ============
Earnings per share - Basic EPS:
Net income (loss) per share .............................................. $ 0.02 $ (0.02)
============ ============
Weighted average shares outstanding ...................................... 4,337,886 4,399,955
============ ============
Earnings per share - Diluted EPS:
Net income (loss) per share .............................................. $ 0.01 $ (0.02)
============ ============
Weighted average shares outstanding ...................................... 4,643,556 4,399,955
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Revenues:
Net sales .......................................................... $ 40,068,861 $ 35,476,487
Shipping & handling income ......................................... 5,964,446 5,139,027
Royalties .......................................................... 174,325 243,899
------------ ------------
Total revenues ........................................................... 46,207,632 40,859,413
Cost of sales (including buying, occupancy and order
fulfillment costs) ................................................... 17,317,930 15,196,736
------------ ------------
Gross profit ............................................................. 28,889,702 25,662,677
Operating expenses ....................................................... 25,566,465 22,239,266
Depreciation and amortization ............................................ 1,253,663 695,690
------------ ------------
Income from operations ................................................... 2,069,574 2,727,721
Interest expense, net .................................................... 707,309 553,446
------------ ------------
Income before income taxes ............................................... 1,362,265 2,174,275
Income tax provision ..................................................... 558,507 887,234
------------ ------------
Net income ............................................................... 803,758 1,287,041
Other comprehensive income (loss) ........................................ (101,081) (11,578)
------------ ------------
Comprehensive income ..................................................... $ 702,677 $ 1,275,463
============ ============
Earnings per share - Basic EPS:
Net income per share ............................................... $ 0.19 $ 0.29
============ ============
Weighted average shares outstanding ................................ 4,343,208 4,417,548
============ ============
Earnings per share - Diluted EPS:
Net income per share ............................................... $ 0.17 $ 0.27
============ ============
Weighted average shares outstanding ................................ 4,666,078 4,700,615
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, January 1, October 2,
2000 2000 1999
----- ----- ----
Assets (unaudited) (audited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 739,757 $ 1,136,847 $ 273,729
Accounts receivable, net ............................................ 1,461,900 1,206,490 1,639,414
Inventories ......................................................... 5,935,067 5,626,304 6,725,544
Prepaid expenses .................................................... 4,293,724 4,012,538 3,649,776
------------ ------------ ------------
Total current assets ...................................... 12,430,448 11,982,179 12,288,463
------------ ------------ ------------
Property, plant and equipment, net ........................................ 4,537,618 4,326,710 4,217,286
Intangible assets, net .................................................... 3,972,786 4,563,627 4,575,949
Deferred income taxes ..................................................... 4,433,416 4,338,843 4,302,828
Other assets .............................................................. 200,684 211,918 163,643
------------ ------------ ------------
Total assets .............................................. $ 25,574,952 $ 25,423,277 $ 25,548,169
============ ============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................... $ 5,394,205 $ 4,261,400 $ 3,895,973
Liabilities to customers ............................................ 1,352,320 1,169,256 1,486,928
Short-term borrowings ............................................... 6,213,482 6,401,238 6,876,604
Income taxes payable ................................................ 359,716 449,577 375,156
Current portion of long-term debt ................................... 1,788,653 2,125,000 1,512,539
------------ ------------ ------------
Total current liabilities ................................. 15,108,376 14,406,471 14,147,200
------------ ------------ ------------
Long-term debt ............................................................ 1,797,674 2,900,000 2,666,301
Other long-term liabilities ............................................... 262,056 377,875 383,440
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 ............................................... -- -- (35,238)
Accumulated other comprehensive income (loss) ....................... (152,331) (51,250) 4,348
Accumulated deficit ................................................. (4,785,612) (5,590,054) (5,102,499)
------------ ------------ ------------
11,274,024 10,570,663 11,078,578
Less treasury stock, at cost, 901,388 shares at September 30, 2000,
888,388 shares at January 1, 2000 and 861,388 shares at
October 2, 1999 .............................................. (2,867,178) (2,831,732) (2,727,350)
------------ ------------ ------------
Total shareholders' equity ................................ 8,406,846 7,738,931 8,351,228
------------ ------------ ------------
Total liabilities and shareholders' equity ....... $ 25,574,952 $ 25,423,277 $ 25,548,169
============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 803,758 $ 1,287,041
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................... 1,253,663 695,690
Deferred income tax expense ........................... (72,948) 445,620
Amortization of deferred compensation ................. -- 13,125
Changes in operating assets and liabilities:
Accounts receivable, net ............................ (294,342) (375,265)
Inventories ......................................... (378,852) (1,329,969)
Prepaid expenses .................................... (293,295) 207,535
Other assets ........................................ (17,336) 6,103
Accounts payable and accrued expenses ............... 1,196,499 181,509
Liabilities to customers ............................ 183,064 526,353
Income taxes payable ................................ (58,494) 75,118
Other long-term liabilities ......................... (29,169) --
----------- -----------
Net cash provided by operating activities ................... 2,292,548 1,732,860
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment ........... (1,189,923) (1,395,404)
Acquisition, net of liabilities assumed .............. -- (1,059,209)
----------- -----------
Net cash used in investing activities ....................... (1,189,923) (2,454,613)
----------- -----------
Cash flows from financing activities:
Advances (repayments) on short-term borrowings, net .. (26,198) 1,781,992
Purchases of treasury stock .......................... (35,446) (373,709)
Repayments of long-term debt ......................... (1,338,293) (1,439,375)
Repayments of capital lease obligations .............. (97,080) (58,968)
----------- -----------
Net cash used in financing activities ....................... (1,497,017) (90,060)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (2,698) (12,329)
----------- -----------
Decrease in cash and cash equivalents ....................... (397,090) (824,142)
Cash and cash equivalents, beginning of year ................ 1,136,847 1,097,871
----------- -----------
Cash and cash equivalents, end of period .................... $ 739,757 $ 273,729
=========== ===========
</TABLE>
Supplemental disclosures of cash flow information:
During the thirty-nine weeks ended September 30, 2000 and October 2, 1999,
the Company received federal income tax refunds of $320,000 and $375,000,
respectively.
Summary of non-cash transactions:
During the thirty-nine weeks ended September 30, 2000 and October 2, 1999,
the Company recorded capital lease obligations of $10,430 and $290,789,
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 or for the thirty-
nine weeks ended September 30, 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
thirty-nine weeks ended September 30, 2000 and October 2, 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 enter into hedging activities.
The Company has determined that there is no effect on its condensed consolidated
financial statements from SFAS No. 133.
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 has restated its condensed consolidated statements of
operations for the thirteen and thirty-nine weeks ended September 30, 2000 and
October 2, 1999 by reclassifying all shipping and handling income from cost of
sales and operating expenses to revenues.
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 September
30, 2000, the Company had repurchased 144,100 shares at an average price of
$3.56 per share.
7
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
4. Adoption of 2000 Stock Incentive Plan
On June 22, 2000, the Company adopted the 2000 Stock Incentive Plan (the
"Plan"). The Plan 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.
Options granted under the Company's 1996 Stock Incentive Plan, as amended
(the "1996 Plan"), before their termination will remain outstanding according to
their terms, but no further options will be granted under the 1996 Plan after
June 22, 2000.
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 thirty-nine weeks ended
September 30, October 2, September 30, October 2,
------------- --------- ------------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Net Net Net Net
Income Shares Loss Shares Income Shares Income Shares
------ ------ ---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 67 4,338 $ (75) 4,400 $ 804 4,343 $1,287 4,418
Effect of dilutive options -- 306 -- -- -- 323 -- 283
------ ------ ------ ------ ------ ------ ------ ------
Diluted earnings per share $ 67 4,644 $ (75) 4,400 $ 804 4,666 $1,287 4,701
====== ====== ====== ====== ====== ====== ===== ======
</TABLE>
Options to purchase 529,951 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 thirty-nine weeks ended September 30, 2000 because their effects were
antidilutive. Options to purchase 966,577 shares of common stock ranging from
$0.31 to $7.15 per share were not included in computing diluted EPS for the
thirteen weeks ended October 2, 1999 because their effects were antidilutive.
Options to purchase 656,351 shares of common stock ranging from $5.33 to $7.15
per share were not included in computing diluted EPS for the thirty-nine weeks
ended October 2, 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 1/1000/th/ of a share of Series A Preferred Stock of the Company,
subject to adjustment, at an exercise price per 1/1000/th/ of a share of Series
A Preferred Stock of $15, subject to adjustment. Each 1/1000/th/ 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 thirty-nine weeks ended October 2, 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
9
<PAGE>
SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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.
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
thirteen weeks ended September 30, 2000 and October 2, 1999 follows
(intersegment eliminations are intercompany receivables and investments in
subsidiaries):
<TABLE>
<CAPTION>
Paula Especially Paula's Corporate Total SC Western
Young Yours Hatbox Expenses Direct Schools AHI
----- ----- ------ -------- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
For the thirteen weeks
ended September 30, 2000
Net sales.......................... $6,818,273 $1,571,675 $ -- $ -- $ 8,389,948 $ 896,268 $1,128,474
Shipping & handling income......... 1,233,261 293,366 -- -- 1,526,627 179,571 --
---------- ---------- --------- ----------- ----------- ---------- ----------
Total revenues..................... 8,051,534 1,865,041 -- -- 9,916,575 1,075,839 1,128,474
Gross profit....................... 5,126,540 1,086,007 -- (234,817) 5,977,730 749,461 613,031
Operating expenses................. 3,305,541 1,195,979 -- 995,899 5,497,419 684,628 631,948
Depreciation and amortization...... -- -- -- 301,337 301,337 10,298 38,735
Income (loss) from operations...... 1,820,999 (109,972) -- (1,532,053) 178,974 54,535 (57,652)
Interest expense, net.............. -- -- -- 227,031 227,031 -- 1,239
Income tax provision (benefit)..... -- -- -- (19,709) (19,709) 22,361 (24,147)
Segment assets..................... -- -- -- 15,625,257 15,625,257 4,612,067 896,697
Capital expenditures............... -- -- -- 299,713 299,713 16,433 11,653
Paula Especially Paula's Corporate Total SC Western
Young Yours Hatbox Expenses Direct Schools AHI
----- ----- ------ -------- ------ ------- ---
For the thirteen weeks
ended October 2, 1999
Net sales........................... $6,653,843 $ 872,775 $ 539,719 $ -- $ 8,066,337 $ 835,588 $ --
Shipping & handling income.......... 1,094,414 160,548 70,618 -- 1,325,580 157,712 --
---------- ---------- --------- ----------- ----------- ---------- ----------
Total revenues...................... 7,748,257 1,033,323 610,337 -- 9,391,917 993,300 --
Gross profit........................ 4,996,128 613,175 263,715 (243,345) 5,629,673 672,045 --
Operating expenses.................. 2,846,568 683,599 555,319 1,539,742 5,625,228 617,830 --
Depreciation and Amortization....... -- -- -- 186,095 186,095 11,250 --
Income (loss) from Operations....... 2,149,560 (70,424) (291,604) (1,969,182) (181,650) 42,965 --
Interest expense, net............... -- -- -- 132,531 132,531 -- --
Income tax provision (benefit)...... -- -- -- (128,835) (128,835) 17,600 --
Segment assets...................... -- -- -- 16,392,745 16,392,745 4,208,440 406,547
Capital expenditures ............... -- -- -- 527,430 527,430 1,594 --
<CAPTION>
Total SC
Publishing Daxbourne Total
---------- --------- -----
<S> <C> <C> <C>
For the thirteen weeks
ended September 30, 2000
Net sales.......................... $2,024,742 $1,323,382 $11,738,072
Shipping & handling income......... 179,571 31,525 1,737,723
---------- ---------- -----------
Total revenues..................... 2,204,313 1,354,907 13,475,795
Gross profit....................... 1,362,492 886,905 8,227,127
Operating expenses................. 1,316,576 573,420 7,387,415
Depreciation and amortization...... 49,033 87,263 437,633
Income (loss) from operations...... (3,117) 226,222 402,079
Interest expense, net.............. 1,239 59,799 288,069
Income tax provision (benefit)..... (1,786) 68,233 46,738
Segment assets .................... 5,508,764 4,440,931 25,574,952
Capital expenditures .............. 28,086 (524) 327,275
Total SC
Publishing Daxbourne Total
---------- --------- -----
For the thirteen weeks
ended October 2, 1999
Net sales............................ $ 835,588 $1,287,395 $10,189,320
Shipping & handling income........... 157,712 -- 1,483,292
---------- ---------- -----------
Total revenues....................... 993,300 1,287,395 11,672,612
Gross profit......................... 672,045 905,290 7,207,008
Operating expenses................... 617,830 638,085 6,881,143
Depreciation and Amortization........ 11,250 93,655 291,000
Income (loss) from Operations........ 42,965 173,550 34,865
Interest expense, net................ -- 55,805 188,336
Income tax provision (benefit)....... 17,600 32,290 (78,945)
Segment assets ...................... 4,614,987 4,540,437 25,548,169
Capital expenditures ................ 1,594 35,683 564,707
</TABLE>
<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
thirty-nine weeks ended September 30, 2000 and October 2, 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
----- ----- ------ -------- ------ ------- --- ----------
For the thirty-nine
weeks ended
September 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $23,631,770 $5,298,768 $ -- $ -- $28,930,538 $3,657,563 $3,601,412 $7,258,975
Shipping & handling
income................ 4,254,044 972,345 -- -- 5,226,389 709,343 -- 709,343
----------- ---------- --------- ---------- ----------- ---------- ----------- ----------
Total revenues......... 27,885,814 6,271,113 -- -- 34,156,927 4,366,906 3,601,412 7,968,318
Gross profit........... 17,855,302 3,760,485 -- (702,383) 20,913,404 3,147,462 2,045,087 5,192,549
Operating expenses..... 11,917,753 3,911,601 -- 3,476,815 19,306,169 2,374,546 2,061,687 4,436,233
Depreciation and
amortization........... -- -- -- 843,509 843,509 31,150 108,053 139,203
Income (loss) from
operations............ 5,937,549 (151,116) -- (5,022,707) 763,726 741,766 (124,653) 617,113
Interest expense, net.. -- -- -- 532,812 532,812 -- 1,239 1,239
Income tax provision
(benefit)............. -- -- -- 94,654 94,654 304,124 (51,618) 252,506
Segment assets......... -- -- -- 15,625,257 15,625,257 4,612,067 896,697 5,508,764
Capital expenditures... -- -- -- 1,081,314 1,081,314 16,433 69,977 86,410
<CAPTION>
Daxbourne Total
--------- -----
For the thirty-nine
weeks ended
September 30, 2000
<S> <C> <C>
Net sales.............. $4,053,673 $40,243,186
Shipping & handling
income................ 28,714 5,964,446
----------- -----------
Total revenues......... 4,082,387 46,207,632
Gross profit........... 2,783,749 28,889,702
Operating expenses..... 1,824,063 25,566,465
Depreciation and
amortization.......... 270,951 1,253,663
Income (loss) from
operations............ 688,735 2,069,574
Interest expense, net.. 173,258 707,309
Income tax provision
(benefit)............. 211,347 558,507
Segment assets......... 4,440,931 25,574,952
Capital expenditures... 22,199 1,189,923
</TABLE>
<TABLE>
<CAPTION>
Paula Especially Paula's Corporate Total SC Western Total SC
Young Yours Hatbox Expenses Direct Schools AHI Publishing
----- ----- ------ -------- ------ ------- --- ----------
For the thirty-nine
weeks ended
October 2, 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $21,793,544 $3,990,812 $2,343,713 $ -- $28,128,069 $3,670,959 $ -- $3,670,959
Shipping & handling
income............... 3,558,718 588,535 331,895 -- 4,479,148 659,879 -- 659,879
----------- ---------- ---------- ----------- ----------- ---------- ----------- ----------
Total revenues........ 25,352,262 4,579,347 2,675,608 -- 32,607,217 4,330,838 -- 4,330,838
Gross profit.......... 16,544,516 2,753,820 1,263,076 (722,086) 19,839,326 3,054,350 -- 3,054,350
Operating expenses.... 10,012,973 2,763,873 2,038,154 3,338,189 18,153,189 2,146,797 -- 2,146,797
Depreciation and
amortization......... -- -- -- 376,386 376,386 33,322 -- 33,322
Income from
operations.......... 6,531,543 (10,053) (775,078) (4,436,661) 1,309,751 874,231 -- 874,231
Interest expense, net. -- -- -- 374,871 374,871 -- -- --
Income tax provision.. -- -- -- 383,301 383,301 358,435 -- 358,435
Segment assets........ -- -- -- 16,392,745 16,392,745 4,208,440 406,547 4,614,987
Capital expenditures.. -- -- -- 1,334,338 1,334,338 8,661 -- 8,661
<CAPTION>
Daxbourne Total
--------- -----
For the thirty-nine
weeks ended
October 2, 1999
<S> <C> <C>
Net sales............. $3,921,358 $35,720,386
Shipping & handling
income............... -- 5,139,027
---------- -----------
Total revenues........ 3,921,358 40,859,413
Gross profit.......... 2,769,001 25,662,677
Operating expenses.... 1,939,280 22,239,266
Depreciation and
amortization......... 285,982 695,690
Income from
operations.......... 543,739 2,727,721
Interest expense, net. 178,575 553,446
Income tax provision.. 145,498 887,234
Segment assets........ 4,540,437 25,548,169
Capital expenditures.. 52,405 1,395,404
</TABLE>
12
<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 September 30, 2000 Compared to the Thirteen Weeks Ended
October 2, 1999
Revenues increased to $13.5 million for the thirteen weeks ended September
30, 2000 from $11.7 million for the thirteen weeks ended October 2, 1999, an
increase of $1.8 million or 15.4 per cent. This increase was due to the addition
of $1.1 million in net sales from American Healthcare Institute ("AHI"), which
was acquired by the Company in September 1999, and increases in SC Direct's,
Western Schools(R) and Daxbourne's net sales of approximately $324,000, $61,000
and $36,000, respectively. The remainder of the revenue increase resulted from
the approximately proportionate increase in shipping & handling income of
approximately $254,000 due to the increase in Company net sales mentioned above.
The increase in SC Direct's net sales was primarily due to net sales increases
in the Paula Young(R) and Especially Yours(R) catalogs in the amount of
approximately $165,000 and $699,000, respectively, due primarily to increased
number of orders from increased circulation of its catalogs to existing
customers and to new customers generated by the Company's advertising programs
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
$540,000 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 revenues decreased to 61.1 per cent for the
thirteen weeks ended September 30, 2000 from 61.7 per cent for the thirteen
weeks ended October 2, 1999 due to minor merchandise mix changes. Gross margin
increased to $8.2 million for the thirteen weeks ended September 30, 2000 from
$7.2 million for the thirteen weeks ended October 2, 1999, an increase of $1.0
million or 13.9 per cent. This increase was due to the increase in revenues
discussed above, offset by the decrease in gross margin rate discussed above.
13
<PAGE>
Operating expenses increased to $7.8 million for the thirteen weeks ended
September 30, 2000 from $7.2 million for the thirteen weeks ended October 2,
1999, an increase of approximately $653,000 or 9.1 per cent. This increase was
due primarily to: (i) additional catalog production and advertising expenses of
approximately $681,000 and $346,000, respectively, mainly related to the
acquisition of AHI as well as increased circulation of catalogs mailed to the
Paula Young(R) and Especially Yours(R) customers and to inactive Paula Young(R)
customers in an effort to reactivate these names, (ii) increased depreciation
and amortization expense of approximately $147,000 related to the implementation
of the Company's catalog information system in August 1999, and (iii)
approximately $520,000 in additional payroll and benefit costs, mainly related
to the AHI acquisition as well as an increase in in-house telemarketing and
customer service personnel. The increase in operating expenses was offset by:
(i) a reduction in external telemarketing and customer service costs of
approximately $264,000, and (ii) a prior year's restructuring charge described
below.
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.
Interest expense, net of interest income, increased to approximately
$288,000 for the thirteen weeks ended September 30, 2000 from approximately
$188,000 for the thirteen weeks ended October 2, 1999, an increase of
approximately $100,000 or 53.2 per cent. The increase was attributable to higher
interest rates during the third quarter of 2000 compared to the third quarter of
1999, offset by lower average principal amounts outstanding on the Company's
bank facility.
Thirty-Nine Weeks Ended September 30, 2000 Compared to the Thirty-Nine Weeks
Ended October 2, 1999
Revenues increased to $46.2 million for the thirty-nine weeks ended
September 30, 2000 from $40.9 million for the thirty-nine weeks ended October 2,
1999, an increase of $5.3 million or 13.0 per cent. This increase was due to the
addition of $3.6 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 $802,000 and $132,000, respectively, offset by lower
Western Schools(R) net sales of approximately $13,000. The remainder of the
revenue increase resulted from the approximately proportionate increase in
shipping & handling income of approximately $825,000 due to the increase in
Company net sales mentioned above. The increase in SC Direct's net sales was
primarily due to net sales increases in the Paula Young(R) and Especially
Yours(R) catalogs in the amount of $1.8 million and $1.3 million, respectively,
due primarily to increased number of orders from increased circulation of its
catalogs to existing customers and to new customers generated by the Company's
advertising programs 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 $2.3 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 revenues decreased to 62.5 per cent for the
thirty-nine weeks ended September 30, 2000 from 62.8 per cent for the
thirty-nine weeks ended October 2, 1999 due to minor merchandise mix changes.
Gross margin increased to $28.9 million for the thirty-nine weeks ended
September 30, 2000 from $25.7 million for the thirty-nine weeks ended October 2,
1999, an increase of $3.2 million or 12.5 per cent. This increase was due to the
increase in revenues discussed above, offset by the decrease in gross margin
rate discussed above.
14
<PAGE>
Operating expenses increased to $26.8 million for the thirty-nine weeks
ended September 30, 2000 from $22.9 million for the thirty-nine weeks ended
October 2, 1999, an increase of $3.9 million or 17.0 per cent. This increase was
due primarily to: (i) additional catalog production and advertising expenses of
approximately $2.0 million and $488,000, respectively, mainly related to the
acquisition of AHI as well as increased circulation of catalogs mailed to the
Paula Young(R) and Especially Yours(R) customers and to inactive Paula Young(R)
customers 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
$558,000 related to the implementation of the Company's catalog information
system in August 1999, and (iv) $1.4 million in additional payroll and benefit
costs, mainly related to the AHI acquisition and an increase in in-house
telemarketing and customer service personnel. The increase in operating expenses
was offset by: (i) a reduction in outside telemarketing and customer service
costs of approximately $245,000, and (ii) a prior year's restructuring charge
described below.
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.
Interest expense, net of interest income, increased to approximately
$707,000 for the thirty-nine weeks ended September 30, 2000 from approximately
$553,000 for the thirty-nine weeks ended October 2, 1999, an increase of
approximately $154,000 or 27.9 per cent. The increase was attributable to higher
interest rates during the thirty-nine weeks ended September 30, 2000 compared to
the thirty-nine weeks ended October 2, 1999, offset by lower average principal
amounts outstanding on the Company's bank facility.
Liquidity and Capital Resources
For the thirty-nine weeks ended September 30, 2000 net cash flow used by
the Company was approximately $397,000. Cash flows provided by operating
activities for the thirty-nine weeks ended September 30, 2000 was $2.3 million,
offset by $1.2 million in investing activities and $1.5 million in financing
activities. The major factors that caused the difference between net income and
net cash flows provided by operations for the thirty-nine weeks ended September
30, 2000 were increases in: (i) cash working capital items of approximately
$308,000, and (ii) depreciation and amortization expense of $1.3 million, offset
by a decrease in deferred income tax expense of approximately $73,000. The
Company used $1.2 million in investing activities for computer and equipment
purchases. The $1.5 million in net cash used in financing activities was
primarily due to: (i) the repayment of $1.3 million of long-term debt, (ii) the
repayment of approximately $97,000 of capital leases, (iii) the repayment of
approximately $35,000 of treasury stock, and (iv) the repayment of approximately
$26,000 of short-term borrowings.
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
15
<PAGE>
Company does not use either derivative financial instruments or enter into
hedging activities. The Company has determined that there is no effect on its
condensed consolidated financial statements from SFAS No. 133.
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 has restated its condensed consolidated statements of
operations for the thirteen and thirty-nine weeks ended September 30, 2000 and
October 2, 1999 by reclassifying all shipping and handling income from cost of
sales and operating expenses to revenue.
Item 3. 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
September 30, 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 September 30, 2000, the outstanding balance on all of the Company's
credit facilities was $9,799,809. 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.
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.
16
<PAGE>
PART II. OTHER INFORMATION
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 thirteen weeks ended September 30, 2000:
None.
17
<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 14, 2000 By: /s/ Joseph Grabowski
----------------------------
Joseph Grabowski
Chief Executive Officer
and President
Dated: November 14, 2000 By: /s/ Thomas McCain
----------------------------
Thomas McCain
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
18
